UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 23, 2013
AXIALL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
|
1-09753 |
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58-1563799 |
(State or other jurisdiction of incorporation) |
|
(Commission File Number) |
|
(IRS Employer Identification No.) |
115 Perimeter Center Place, Suite 460, Atlanta, GA |
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30346 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrants telephone number, including area code: (770) 395 - 4500
N/A
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2 (b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4 (c))
Item 8.01. Other Items.
The information contained in Items 9.01(a) and 9.01(b) is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited combined balance sheets of the Acquired Business (as defined below) as of December 31, 2012 and 2011 and the audited combined statements of income, combined statements of comprehensive income and combined statements of cash flows of the Acquired Business for the years ended December 31, 2012, 2011 and 2010, and the notes related thereto, are filed as Exhibit 99.1 hereto and are incorporated herein by reference.
Acquired Business means the business and substantially all of the assets and liabilities of the business of PPG Industries, Inc. (PPG) relating to the production of chlorine, caustic soda and related chemicals, including, among other things, PPGs 60% interest in Taiwan Chlorine Industries, Ltd., a joint venture between PPG and China Petrochemical Development Corporation. The Acquired Business was transferred by PPG to its wholly-owned subsidiary, Eagle Spinco Inc. (Splitco), pursuant to the Separation Agreement, dated as of July 18, 2012, between PPG and Splitco. Thereafter, on January 28, 2013, pursuant to the Agreement and Plan of Merger, dated as of July 18, 2012, by and among Axiall Corporation (formerly known as Georgia Gulf Corporation) (the Company), PPG, Splitco and Grizzly Acquisition Sub, Inc., a wholly-owned subsidiary of the Company (Merger Sub), Merger Sub merged with and into Splitco, with Splitco continuing as the surviving company and as a wholly-owned subsidiary of the Company.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined statement of income of the Company for the year ended December 31, 2012 is filed as Exhibit 99.2 hereto and is incorporated herein by reference.
(d) Exhibits.
Number |
|
Exhibit |
|
|
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99.1 |
|
Audited combined balance sheets of the Acquired Business as of December 31, 2012 and 2011 and audited combined statements of income, combined statements of comprehensive income and combined statements of cash flows of the Acquired Business for the years ended December 31, 2012, 2011 and 2010, and the notes related thereto |
|
|
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99.2 |
|
Unaudited pro forma condensed combined statement of income of Axiall Corporation for the year ended December 31, 2012 |
Forward-Looking Statements
This Current Report on Form 8-K, together with the exhibits attached hereto, contains certain statements relating to future events and our intentions, beliefs, expectations, and predictions for the future. Any such statements other than statements of historical fact are forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Words or phrases such as will likely result, are expected to, will continue, is anticipated, we believe, we expect, estimate, project, may, will, intend, plan, believe, target, forecast, would or could (including the negative or variations thereof) or similar terminology generally identify forward-looking statements. These statements relate to, among other things, our outlook for future periods, supply and demand, pricing trends and market forces within the chemical and building industries, cost reduction strategies and their results, planned capital expenditures, long-term objectives of management, expected benefits of Axialls merger with the chlor-alkali and derivatives business of PPG Industries, Inc. (the Transactions), integration plans and expected synergies therefrom and other statements of expectations concerning matters that are not historical facts. These statements are based on the current expectations of our management.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements included in this presentation. These risks and uncertainties include, among other things: the integration of the merged business with the businesses we operated prior to the Transactions not being successful; changes, seasonality and/or cyclicality in the industries in which our products are sold and changes in demand for our products or increases in overall industry capacity that could affect production volumes and/or pricing; risks, costs, liabilities, unexpected delays and operating restrictions associated with integrating the merged business; the costs and operating restrictions associated with compliance with current and future environmental, health and safety laws and regulations; the significant restrictions on our business operations set forth in the agreements governing the Transactions; the availability and pricing of energy and raw materials; changes in the general economy, including the impacts of the current, and any potential future, economic uncertainties in the housing and construction markets; risks, hazards and potential liabilities associated with manufacturing chemicals and building products; our ability to continue to comply with the covenants in the our debt documents and our substantial amount of indebtedness and significant debt service obligations; competition within our industry; difficulties in product transportation; complications resulting from our multiple Enterprise Resource Planning (ERP) systems and the implementation of our new ERP systems; strikes and work stoppages; any impairment of goodwill, indefinite-lived intangible assets or other intangible assets; the failure to realize the benefits of, and/or disruptions resulting from, any asset dispositions, asset acquisitions, joint ventures, business combinations or other transactions; risks associated with any potential failures of our joint venture partners to fulfill their obligations; changes in foreign currency exchange and interest rates; and our substantial amount of indebtedness and significant debt service obligations.
In light of these risks, uncertainties, assumptions, and other factors, the forward-looking events discussed in this Current Report on Form 8-K, together with the exhibits attached hereto, may not occur. Other unknown or unpredictable factors could also have a material adverse effect on Axialls actual future results, performance, or achievements. For a further discussion of these and other risks and uncertainties applicable to Axiall and its business, see Axialls Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and subsequent filings with the Securities and Exchange Commission. As a result of the foregoing, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this communication. Axiall does not undertake, and expressly disclaims, any duty to update any forward-looking statement whether as a result of new information, future events, or changes in its expectations, except as required by law.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
AXIALL CORPORATION | |
|
| |
|
| |
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By: |
/s/ GREGORY C. THOMPSON |
|
Name: |
Gregory C. Thompson |
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Title: |
Chief Financial Officer |
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| |
Date: May 23, 2013 |
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EXHIBIT INDEX
Number |
|
Exhibit |
|
|
|
99.1 |
|
Audited combined balance sheets of the Acquired Business as of December 31, 2012 and 2011 and audited combined statements of income, combined statements of comprehensive income and combined statements of cash flows of the Acquired Business for the years ended December 31, 2012, 2011 and 2010, and the notes related thereto |
|
|
|
99.2 |
|
Unaudited pro forma condensed combined statement of income of Axiall Corporation for the year ended December 31, 2012 |
Exhibit 99.1
PPG Chlor-alkali and
Derivatives Business
Combined Financial Statements as of December 31, 2012 and 2011, and for Each of the Three Years in the Period Ended December 31, 2012 and Independent Auditors Report
PPG Chlor-alkali and Derivatives Business
Combined Financial Statements
Years Ended December 31, 2012 and 2011
|
|
Page(s) |
|
|
|
Report of Independent Registered Public Accounting Firm |
|
1 |
Audited Combined Financial Statements |
|
|
Combined Statement of Income for the years ended December 31, 2012, 2011 and 2010 |
|
2 |
Combined Statement of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 |
|
2 |
Combined Balance Sheet as of December 31, 2012 and 2011 |
|
3 |
Combined Statement of Cash Flows for the years ended December 31, 2012, 2011 and 2010 |
|
4 |
Combined Statement of Changes in Parent Company Equity for the years ended December 31, 2012, 2011 and 2010 |
|
5 |
Notes to Combined Financial Statements |
|
6-30 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Axiall Corporation:
We have audited the accompanying combined balance sheets of the chlor-alkali and derivatives business of PPG Industries, Inc. (the PPG Chlor-alkali and Derivatives Business) as of December 31, 2012 and 2011, and the related combined statements of income, comprehensive income, cash flows, and changes in parent company equity for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the PPG Chlor-alkali and Derivatives Businesss management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The PPG Chlor-alkali and Derivatives Business is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the PPG Chlor-alkali and Derivatives Businesss internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined statements present fairly, in all material respects, the financial position of the PPG Chlor-alkali and Derivatives Business as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 and Note 13, the accompanying combined financial statements of the PPG Chlor-alkali and Derivatives Business have been prepared from the separate records maintained by the PPG Chlor-alkali and Derivatives Business and include allocations of certain costs from PPG Industries, Inc. These allocations may not be reflective of the actual expense which would have been incurred had the PPG Chlor-alkali and Derivatives Business operated as a separate entity apart from PPG Industries, Inc.
As discussed in Note 21, PPG Industries, Inc. completed the separation of the PPG Chlor-alkali and Derivatives Business and the merger of the subsidiary holding the PPG Chlor-alkali and Derivatives Business with a subsidiary of Georgia Gulf Corporation on January 28, 2013. The combined company is named Axiall Corporation.
/s/ Deloitte & Touche LLP |
|
|
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Pittsburgh, Pennsylvania |
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May 14, 2013 |
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PPG Chlor-alkali and Derivatives Business
Combined Statement of Income
(in millions)
|
|
For the Years Ended December 31 |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Net sales |
|
$ |
1,700 |
|
$ |
1,741 |
|
$ |
1,441 |
|
Cost of sales, exclusive of depreciation and amortization |
|
1,178 |
|
1,224 |
|
1,117 |
| |||
Selling, general and administrative (See Note 13) |
|
127 |
|
123 |
|
102 |
| |||
Depreciation and amortization |
|
43 |
|
41 |
|
39 |
| |||
Research and development |
|
2 |
|
2 |
|
2 |
| |||
Other charges (See Note 16) |
|
8 |
|
10 |
|
11 |
| |||
Other earnings (See Note 19) |
|
(12 |
) |
(27 |
) |
(7 |
) | |||
|
|
|
|
|
|
|
| |||
Income before income taxes |
|
354 |
|
368 |
|
177 |
| |||
|
|
|
|
|
|
|
| |||
Income tax expense (See Note 14) |
|
114 |
|
122 |
|
65 |
| |||
|
|
|
|
|
|
|
| |||
Net income attributable to the controlling and noncontrolling interests |
|
240 |
|
246 |
|
112 |
| |||
|
|
|
|
|
|
|
| |||
Less: net income attributable to noncontrolling interests |
|
(13 |
) |
(13 |
) |
(7 |
) | |||
|
|
|
|
|
|
|
| |||
Net income (attributable to the PPG Chlor-alkali and Derivatives Business) |
|
$ |
227 |
|
$ |
233 |
|
$ |
105 |
|
The accompanying notes to the combined financial statements are an integral part of this combined statement.
PPG Chlor-alkali and Derivatives Business
Combined Statement of Comprehensive Income
(in millions)
|
|
For the Years Ended December 31 |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
|
|
|
|
|
|
|
| |||
Net income attributable to the controlling and noncontrolling interests |
|
$ |
240 |
|
$ |
246 |
|
$ |
112 |
|
Other comprehensive income (loss), net of tax (See Note 17): |
|
|
|
|
|
|
| |||
Unrealized currency translation adjustment |
|
7 |
|
(2 |
) |
(2 |
) | |||
Defined benefit pension and other postretirement benefit adjustments (See Note 15) |
|
20 |
|
(27 |
) |
(20 |
) | |||
Net change derivatives (See Note 12) |
|
4 |
|
9 |
|
8 |
| |||
Other comprehensive income (loss), net of tax |
|
31 |
|
(20 |
) |
(14 |
) | |||
Total comprehensive income |
|
$ |
271 |
|
$ |
226 |
|
$ |
98 |
|
Less: amounts attributable to noncontrolling interests: |
|
|
|
|
|
|
| |||
Net income |
|
(13 |
) |
(13 |
) |
(7 |
) | |||
Unrealized currency translation adjustment |
|
(1 |
) |
|
|
(1 |
) | |||
Comprehensive income (attributable to the PPG Chlor-alkali and Derivatives Business) |
|
$ |
257 |
|
$ |
213 |
|
$ |
90 |
|
The accompanying notes to the combined financial statements are an integral part of this combined statement.
PPG Chlor-alkali and Derivatives Business
Combined Balance Sheet
(in millions)
|
|
December 31 |
| ||||
|
|
2012 |
|
2011 |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
29 |
|
$ |
31 |
|
Receivables-net (See Note 6) |
|
247 |
|
224 |
| ||
Inventories (See Note 6) |
|
75 |
|
59 |
| ||
Cash held in escrow (See Note 4) |
|
3 |
|
|
| ||
Other |
|
20 |
|
21 |
| ||
Total current assets |
|
374 |
|
335 |
| ||
|
|
|
|
|
| ||
Property (See Note 7) |
|
1,940 |
|
1,888 |
| ||
Less accumulated depreciation |
|
(1,571 |
) |
(1,523 |
) | ||
Property net |
|
369 |
|
365 |
| ||
Investments (See Note 8) |
|
21 |
|
15 |
| ||
Cash held in escrow (See Note 4) |
|
|
|
3 |
| ||
Identifiable intangible assets (See Note 9) |
|
5 |
|
6 |
| ||
Other assets |
|
11 |
|
10 |
| ||
Total |
|
$ |
780 |
|
$ |
734 |
|
|
|
|
|
|
| ||
Liabilities and Parent Company Equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable, trade |
|
$ |
101 |
|
$ |
115 |
|
Accrued payroll |
|
35 |
|
30 |
| ||
Other current liabilities (See Note 6) |
|
63 |
|
71 |
| ||
Total current liabilities |
|
199 |
|
216 |
| ||
|
|
|
|
|
| ||
Accrued pensions (See Note 15) |
|
73 |
|
79 |
| ||
Accrued other postretirement benefits (See Note 15) |
|
163 |
|
168 |
| ||
Accrued environmental contingencies (See Note 16) |
|
28 |
|
29 |
| ||
Other liabilities |
|
47 |
|
44 |
| ||
Total liabilities |
|
510 |
|
536 |
| ||
|
|
|
|
|
| ||
Commitments and contingent liabilities (See Note 16) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Parent company equity: |
|
|
|
|
| ||
Parent company investment (See Note 13) |
|
423 |
|
382 |
| ||
Accumulated other comprehensive loss (See Note 17) |
|
(171 |
) |
(201 |
) | ||
Total parent company equity |
|
252 |
|
181 |
| ||
|
|
|
|
|
| ||
Noncontrolling interests |
|
18 |
|
17 |
| ||
Total equity |
|
270 |
|
198 |
| ||
|
|
|
|
|
| ||
Total |
|
$ |
780 |
|
$ |
734 |
|
The accompanying notes to the combined financial statements are an integral part of this combined statement.
PPG Chlor-alkali and Derivatives Business
Combined Statement of Cash Flows
(in millions)
|
|
For the Years Ended December 31 |
| |||||||
|
|
2012 |
|
2011 |
|
2010 |
| |||
Operating activities: |
|
|
|
|
|
|
| |||
Net income attributable to the controlling and noncontrolling interests |
|
$ |
240 |
|
$ |
246 |
|
$ |
112 |
|
Adjustments to reconcile cash from operations: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
43 |
|
41 |
|
39 |
| |||
Pension expense (See Note 15) |
|
17 |
|
13 |
|
15 |
| |||
Pension cash contribution (See Note 15) |
|
(1 |
) |
(8 |
) |
(38 |
) | |||
Restructuring cash spending (See Note 10) |
|
|
|
|
|
(3 |
) | |||
Charge related to change in U.S. tax law (See Note 14) |
|
|
|
|
|
12 |
| |||
Bargain purchase gain, net (See Note 4) |
|
|
|
(9 |
) |
|
| |||
Equity affiliate (earnings) loss |
|
(2 |
) |
(1 |
) |
1 |
| |||
Change in certain asset and liability accounts: |
|
|
|
|
|
|
| |||
Increase in receivables |
|
(22 |
) |
(26 |
) |
(18 |
) | |||
(Increase) / decrease in inventories |
|
(16 |
) |
(4 |
) |
1 |
| |||
(Increase) / decrease in other current assets |
|
(3 |
) |
(2 |
) |
1 |
| |||
(Decrease) / increase in accounts payable and accrued liabilities |
|
(11 |
) |
14 |
|
20 |
| |||
Decrease / (increase) in noncurrent assets |
|
1 |
|
(2 |
) |
7 |
| |||
Increase / (decrease) in noncurrent liabilities |
|
|
|
6 |
|
(11 |
) | |||
Change in accrued tax and interest accounts |
|
(11 |
) |
11 |
|
18 |
| |||
Other |
|
9 |
|
(3 |
) |
(14 |
) | |||
Cash from operating activities |
|
244 |
|
276 |
|
142 |
| |||
|
|
|
|
|
|
|
| |||
Investing activities: |
|
|
|
|
|
|
| |||
Additions to property |
|
(48 |
) |
(64 |
) |
(40 |
) | |||
Business acquisitions, net of cash balances acquired |
|
|
|
(25 |
) |
(3 |
) | |||
Deposits placed in escrow |
|
|
|
(3 |
) |
|
| |||
Proceeds from sale of property and investments |
|
3 |
|
6 |
|
|
| |||
Cash used for investing activities |
|
(45 |
) |
(86 |
) |
(43 |
) | |||
|
|
|
|
|
|
|
| |||
Financing activities: |
|
|
|
|
|
|
| |||
Net cash remitted to PPG Industries, Inc. |
|
(188 |
) |
(166 |
) |
(89 |
) | |||
Dividends paid on subsidiary common stock to noncontrolling interests |
|
(13 |
) |
(8 |
) |
(6 |
) | |||
Cash used for financing activities |
|
(201 |
) |
(174 |
) |
(95 |
) | |||
|
|
|
|
|
|
|
| |||
Effect of currency exchange rate changes on cash and cash equivalents |
|
|
|
|
|
1 |
| |||
|
|
|
|
|
|
|
| |||
Net (decrease) / increase in cash and cash equivalents |
|
(2 |
) |
16 |
|
5 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents, beginning of period |
|
31 |
|
15 |
|
10 |
| |||
Cash and cash equivalents, end of period |
|
$ |
29 |
|
$ |
31 |
|
$ |
15 |
|
The accompanying notes to the combined financial statements are an integral part of this combined statement.
PPG Chlor-alkali and Derivatives Business
Combined Statement of Changes in Parent Company Equity
(In millions)
For the Years ended December 31, 2012, 2011 and 2010
|
|
Parent |
|
Accumulated |
|
Total |
|
Non- |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance Jan. 1, 2010 |
|
$ |
296 |
|
$ |
(167 |
) |
$ |
129 |
|
$ |
10 |
|
$ |
139 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income attributable to controlling and noncontrolling interests |
|
105 |
|
|
|
105 |
|
7 |
|
112 |
| |||||
Other comprehensive (loss) income, net of tax |
|
|
|
(14 |
) |
(14 |
) |
1 |
|
(13 |
) | |||||
Stock-based compensation expense, net of tax |
|
1 |
|
|
|
1 |
|
|
|
1 |
| |||||
Dividends paid on subsidiary common stock to noncontrolling interests |
|
|
|
|
|
|
|
(6 |
) |
(6 |
) | |||||
Net cash remitted to PPG Industries, Inc. |
|
(89 |
) |
|
|
(89 |
) |
|
|
(89 |
) | |||||
Balance Dec. 31, 2010 |
|
$ |
313 |
|
$ |
(181 |
) |
$ |
132 |
|
$ |
12 |
|
$ |
144 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income attributable to controlling and noncontrolling interests |
|
233 |
|
|
|
233 |
|
13 |
|
246 |
| |||||
Other comprehensive (loss), net of tax |
|
|
|
(20 |
) |
(20 |
) |
|
|
(20 |
) | |||||
Stock-based compensation expense, net of tax |
|
2 |
|
|
|
2 |
|
|
|
2 |
| |||||
Dividends paid on subsidiary common stock to noncontrolling interests |
|
|
|
|
|
|
|
(8 |
) |
(8 |
) | |||||
Net cash remitted to PPG Industries, Inc. |
|
(166 |
) |
|
|
(166 |
) |
|
|
(166 |
) | |||||
Balance Dec. 31, 2011 |
|
$ |
382 |
|
$ |
(201 |
) |
$ |
181 |
|
$ |
17 |
|
$ |
198 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income attributable to controlling and noncontrolling interests |
|
227 |
|
|
|
227 |
|
13 |
|
240 |
| |||||
Other comprehensive income, net of tax |
|
|
|
30 |
|
30 |
|
1 |
|
31 |
| |||||
Stock-based compensation expense, net of tax |
|
2 |
|
|
|
2 |
|
|
|
2 |
| |||||
Dividends paid on subsidiary common stock to noncontrolling interests |
|
|
|
|
|
|
|
(13 |
) |
(13 |
) | |||||
Net cash remitted to PPG Industries, Inc. |
|
(188 |
) |
|
|
(188 |
) |
|
|
(188 |
) | |||||
Balance Dec. 31, 2012 |
|
$ |
423 |
|
$ |
(171 |
) |
$ |
252 |
|
$ |
18 |
|
$ |
270 |
|
The accompanying notes to the combined financial statements are an integral part of this combined statement.
PPG Chlor-alkali and Derivatives Business
Notes to Combined Financial Statements
Note 1. Description of Business
The accompanying combined financial statements present the historical financial position, results of operations and cash flows of the chlor-alkali and derivatives business of PPG Industries, Inc. (the PPG Chlor-alkali and Derivatives Business) in accordance with U.S. generally accepted accounting principles (U.S. GAAP).
The PPG Chlor-alkali and Derivatives Business produces chlor-alkali and derivative products, including chlorine, caustic soda, vinyl chloride monomer, chlorinated solvents, calcium hypochlorite, ethylene dichloride, hydrochloric acid and phosgene derivatives. Most of these products are sold directly to manufacturing companies in the chemical processing, plastics, including polyvinyl chloride (PVC), paper, minerals, metals and water treatment industries. The PPG Chlor-alkali and Derivatives Business operates manufacturing facilities in the United States (U.S.), Canada, and Taiwan. The PPG Chlor-alkali and Derivatives Business consists of one operating and one reportable segment.
On January 28, 2013, PPG Industries, Inc. (PPG or the Parent company) completed the separation of the PPG Chlor-alkali and Derivatives Business and the merger of the subsidiary holding the PPG Chlor-alkali and Derivatives Business with a subsidiary of Georgia Gulf Corporation (Georgia Gulf). The combined company formed by uniting Georgia Gulf with PPGs former Chlor-alkali and Derivatives Business is named Axiall Corporation. Refer to Note 21, Separation and Merger Transaction for additional information relating to this transaction.
Note 2. Basis of Presentation
These combined financial statements include the results of Taiwan Chlorine Industries, Ltd. (TCI), a subsidiary which is controlled by PPG and in which PPG holds a 60 percent ownership interest. In the accompanying combined financial statements, the outside shareholders interests are shown as noncontrolling interests. The accompanying combined financial statements also include investments in certain companies in which PPG owns 20 percent to 50 percent of the voting stock and has the ability to exercise significant influence over the operating and financial policies of the investee, which are accounted for using the equity method of accounting. As a result, PPGs share of the earnings or losses of such equity affiliates is included in the accompanying combined statement of income and PPGs share of these companies shareholders equity is included in Investments in the accompanying combined balance sheet.
During the periods presented, the PPG Chlor-alkali and Derivatives Business was under the control of PPG. The combined financial statements have been prepared from the separate records maintained by the PPG Chlor-alkali and Derivatives Business and include all direct costs of the PPG Chlor-alkali and Derivatives Business and costs allocated from PPG (see Note 13, Related Party Transactions). However, the combined financial statements are not necessarily indicative of the financial position, results of operations and cash flows that would have existed if the PPG Chlor-alkali and Derivatives Business had operated as a stand-alone entity during the periods presented. Had the PPG Chlor-alkali and Derivatives Business existed as a separate entity, its combined results of operations and financial position could have differed materially from those presented in the combined financial statements included herein.
In North America, PPG uses a centralized approach to managing its cash and financing its operations. Cash deposits from the PPG Chlor-alkali and Derivatives Businesss operations in North America are transferred to PPG on a regular basis and are netted against the Parent company investment component of Total parent company equity. TCI does not participate in any centralized PPG cash management program, maintains cash and cash equivalent balances to fund its local operations and periodically remits excess funds via dividends to the owners. There are no intercompany loan arrangements between TCI and PPG. Consequently, none of PPGs cash, cash equivalents, or debt has been allocated to the PPG Chlor-alkali and Derivatives Business in the accompanying combined financial statements. Cash and cash equivalents included in the accompanying combined balance sheet are primarily held at TCI at December 31, 2012 and 2011, as the PPG Chlor-alkali and Derivatives Businesss operations in U.S. and Canadian locations participate in centralized cash management programs.
All PPG Chlor-alkali and Derivatives Business intra-company transactions have been eliminated in the preparation of the accompanying combined financial statements.
Note 3. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual outcomes could differ from those estimates.
Revenue Recognition
Revenue from sales is recognized when goods are shipped and title to inventory and risk of loss passes to the customer or when services have been rendered.
Shipping and Handling Costs
Amounts billed to customers for shipping and handling are reported in Net sales in the accompanying combined statement of income. Shipping and handling costs incurred by the PPG Chlor-alkali and Derivatives Business for the delivery of goods to customers are included in Cost of sales, exclusive of depreciation and amortization in the accompanying combined statement of income.
Selling, General and Administrative Costs
Amounts presented as Selling, general and administrative in the accompanying combined statement of income are comprised of selling, customer service, and distribution costs, as well as the costs of providing functional support in such areas as finance, law, human resources and planning (See Note 13, Related Party Transactions). Distribution costs pertain to the movement to and storage of finished goods inventory at company-owned and leased warehouses, terminals and other distribution facilities. Certain of these costs may be included in cost of sales by other companies, resulting in a lack of comparability with other companies.
Legal Costs
Legal costs are expensed as incurred.
Foreign Currency Translation
The functional currency of the non-U.S. operations of the PPG Chlor-alkali and Derivatives Business is their local currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Unrealized currency translation adjustments are deferred in accumulated other comprehensive loss, a separate component of Total parent company equity.
Cash Equivalents
Cash equivalents are highly liquid investments (valued at cost, which approximates fair value) acquired with an original maturity of three months or less.
Allowance for Doubtful Accounts
The PPG Chlor-alkali and Derivatives Business provides an allowance for doubtful accounts to reduce receivables to their estimated net realizable value when it is probable that a loss will be incurred. Those estimates are based on historical collection experience, current economic and market conditions, a review of the aging of accounts receivable and the assessments of current creditworthiness of customers.
Inventories
U.S. inventories are stated at cost, using the last-in, first-out (LIFO) method, which does not exceed market. The PPG Chlor-alkali and Derivatives Businesss U.S. inventory is part of the applicable PPG LIFO pool. In the accompanying combined financial statements, the applicable PPG LIFO pool has been apportioned to the PPG Chlor-alkali and Derivatives Business utilizing the ratio of gross carrying value of the inventory associated with the PPG Chlor-alkali and Derivatives Business, in base dollars, as a percentage of the applicable PPG LIFO pools total base dollar inventory, as of the applicable year-end date.
All non-U.S. inventories are stated at cost, using the first-in, first-out (FIFO) method, which does not exceed market. Cost is determined using standard factory costs, which approximate actual costs, excluding certain fixed costs such as depreciation and property taxes.
Marketable Equity Securities
The PPG Chlor-alkali and Derivatives Businesss investments in marketable equity securities are recorded at fair market value and reported in Other current assets and Investments on the accompanying combined balance sheet with changes in fair market value recorded in income for those securities designated as trading securities.
Property
Property is recorded at cost. The PPG Chlor-alkali and Derivatives Business computes depreciation by the straight-line method based on the estimated useful lives of depreciable assets. Additional expense is recorded when facilities or equipment are subject to abnormal economic conditions or obsolescence. Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the original cost and related accumulated depreciation balance are removed from the accounts and any related gain or loss is included in income. Property and other long-lived assets are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable.
Identifiable Intangible Assets
Identifiable intangible assets acquired in business combinations are recorded based upon their fair value at the date of acquisition.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives (10 years) and are reviewed for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable.
Pensions and Other Postretirement Benefits
Most of the PPG Chlor-alkali and Derivatives Businesss employees are covered by PPGs defined benefit pension plans, and most of the PPG Chlor-alkali and Derivatives Businesss employees in the U.S. and Canada are covered by PPGs welfare benefit plans that provide postretirement medical and life insurance benefits for those employees and their respective dependents. The liability and expense for these plans is calculated for each PPG operating location. For operating locations representing more than one PPG business, pension and postretirement medical expense and liabilities are allocated between those businesses based on the related headcount and salary costs. These costs are included in Cost of sales, exclusive of depreciation and amortization, Selling, general and administration and Research and development in the accompanying combined statement of income.
Income Taxes
The PPG Chlor-alkali and Derivatives Businesss U.S., Canadian and certain other non-U.S. operating results are included in the income tax returns of PPG. The PPG Chlor-alkali and Derivatives Business accounts for income taxes under the separate return method. Under this approach, the PPG Chlor-alkali and Derivatives Business determines its current tax liability and deferred tax assets and liabilities and related tax expense as if it were filing a separate tax return.
Asset Retirement Obligations
An asset retirement obligation represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development or normal operation of that long-lived asset. The PPG Chlor-alkali and Derivatives Business recognizes asset retirement obligations in the period in which they are incurred, if a reasonable estimate of fair value can be made. The asset retirement obligation is subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life. The PPG Chlor-alkali and Derivatives Businesss asset retirement obligations are primarily associated with closure of certain assets used in the chemicals manufacturing process.
The accrued asset retirement obligation was $10 million as of December 31, 2012 and $9 million as of December 31, 2011.
The PPG Chlor-alkali and Derivatives Businesss only conditional asset retirement obligation relates to the possible future abatement of asbestos contained in certain of the PPG Chlor-alkali and Derivatives Business production facilities. The asbestos in the PPG Chlor-alkali and Derivatives Businesss production facilities arises from the application of normal and customary building practices in the past when the facilities were constructed. This asbestos is encapsulated in place and, as a result, there is no current legal requirement to abate it. Inasmuch as there is no requirement to abate, the PPG Chlor-alkali and Derivatives Business does not have any current plans or intentions to abate and therefore the timing, method and cost of future abatement, if any, are not known. The PPG Chlor-alkali and Derivatives Business has not recorded an asset retirement obligation associated with asbestos abatement, given the uncertainty concerning the timing of future abatement, if any.
New Accounting Standards Adopted in 2012
In May 2011, the Financial Accounting Standards Board (FASB) issued an amendment to the fair value measurement guidance and disclosure requirements that established common U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) measurement and reporting requirements. The new requirements were effective for the first interim or annual period beginning after December 15, 2011 and were to be applied prospectively. The PPG Chlor-alkali and Derivatives Business adopted the new requirements in 2012; however, the adoption of this guidance did not have a material effect on its combined financial position, results of operations or cash flows.
Note 4. Acquisitions
In May 2011, the PPG Chlor-alkali and Derivatives Business acquired the assets of Equa-Chlor, Inc. for $28 million, of which $3 million is held in escrow pending satisfaction of any PPG indemnity claims through May of 2013. The assets, liabilities, results of operations and cash flows of Equa-Chlor are included within the PPG Chlor-alkali and Derivatives Business financial statements from the date of acquisition. The excess fair value of the assets acquired and liabilities assumed, which consisted principally of property and operating working capital, over the purchase price resulted in a bargain purchase gain of $10 million. This gain was partially offset by a $1 million loss related to the step up to fair value of acquired inventory. The gain is reported in Other earnings in the accompanying combined statement of income for the year ended December 31, 2011.
In early 2006, the PPG Chlor-alkali and Derivatives Business acquired the North American beaded caustic soda business of Oxy Vinyls, LP, which was principally comprised of customer contracts. The purchase price of the business included contingent payments which were payable, if earned, over a five year period following the date of acquisition. These payments totaled $6 million, and the final such payment was made in the first quarter of 2011. The PPG Chlor-alkali and Derivatives Businesss intangible assets are principally related to this acquisition.
Note 5. Fair Value Measurement
The accounting guidance on fair value measurement establishes a hierarchy with three levels of inputs used to determine fair value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities, are considered to be the most reliable evidence of fair value, and should be used whenever available. Level 2 inputs are observable prices that are not quoted on active exchanges. Level 3 inputs are unobservable inputs used for measuring the fair value of assets or liabilities.
Assets and liabilities reported at fair value on a recurring basis:
(Millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
At December 31, 2012 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Investments: |
|
|
|
|
|
|
|
|
| ||||
Marketable equity securities |
|
$ |
5 |
|
$ |
|
|
$ |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other current assets: |
|
|
|
|
|
|
|
|
| ||||
Marketable equity securities |
|
$ |
1 |
|
|
|
|
|
$ |
1 |
| ||
Investments: |
|
|
|
|
|
|
|
|
| ||||
Marketable equity securities |
|
4 |
|
|
|
|
|
4 |
| ||||
Accounts payable and accrued liabilities: |
|
|
|
|
|
|
|
|
| ||||
Natural gas swap contracts(a) |
|
|
|
6 |
|
|
|
6 |
|
(a) This entire balance is designated as a hedging instrument under U.S. GAAP.
6. Working Capital Detail
|
|
December 31, |
| ||||
(Millions) |
|
2012 |
|
2011 |
| ||
Receivables |
|
|
|
|
| ||
Trade-net (a) |
|
$ |
228 |
|
$ |
201 |
|
Equity affiliates |
|
9 |
|
4 |
| ||
Other-net |
|
10 |
|
19 |
| ||
Total |
|
$ |
247 |
|
$ |
224 |
|
Inventories (b) |
|
|
|
|
| ||
Finished products |
|
$ |
50 |
|
$ |
52 |
|
Raw materials |
|
19 |
|
12 |
| ||
Supplies |
|
47 |
|
45 |
| ||
LIFO Reserve |
|
(41 |
) |
(50 |
) | ||
Total |
|
$ |
75 |
|
$ |
59 |
|
Other current liabilities |
|
|
|
|
| ||
Customer rebates |
|
$ |
18 |
|
$ |
14 |
|
Other postretirement benefits |
|
10 |
|
10 |
| ||
Taxes payable |
|
5 |
|
9 |
| ||
Fair value derivative |
|
|
|
6 |
| ||
Environmental remediation |
|
4 |
|
6 |
| ||
Payable, equity affiliate |
|
2 |
|
3 |
| ||
Contingent liability, Equa-Chlor |
|
3 |
|
|
| ||
Other |
|
21 |
|
23 |
| ||
Total |
|
$ |
63 |
|
$ |
71 |
|
(a) The allowance for doubtful accounts was $1 million and $2 million as of December 31, 2012 and 2011, respectively.
(b) Inventories valued using the LIFO method of inventory valuation comprised 91 percent and 92 percent of total gross inventory values as of December 31, 2012 and 2011, respectively.
7. Property
|
|
Useful |
|
December 31, |
| ||||
(Millions) |
|
(years) |
|
2012 |
|
2011 |
| ||
Land and land improvements |
|
5-30 |
|
$ |
67 |
|
$ |
63 |
|
Buildings |
|
20-40 |
|
99 |
|
93 |
| ||
Machinery and equipment |
|
5-25 |
|
1,701 |
|
1,646 |
| ||
Furniture, fixtures and other and |
|
3-20 |
|
47 |
|
34 |
| ||
Construction in process |
|
|
|
26 |
|
52 |
| ||
Total |
|
|
|
$ |
1,940 |
|
$ |
1,888 |
|
8. Investments
(Millions) |
|
2012 |
|
2011 |
| ||
Equity affiliates |
|
$ |
16 |
|
$ |
11 |
|
Marketable equity securities |
|
5 |
|
4 |
| ||
Total |
|
$ |
21 |
|
$ |
15 |
|
The PPG Chlor-alkali and Derivatives Business includes PPGs 50 percent ownership interest in RS Cogen, L.L.C. (RS Cogen), which toll produces electricity and steam primarily for the PPG Chlor-alkali and Derivatives Business and PPGs joint venture partner. The joint venture was formed with a wholly-owned subsidiary of Entergy Corporation (Entergy) in 2000 for the construction and operation of a $300 million process steam, natural gas-fired cogeneration facility in Lake Charles, LA, the majority of which was financed by a syndicate of banks. As of December 31, 2012 and 2011, RS Cogen had bank debt outstanding of $173 million and $183 million, respectively. The PPG Chlor-alkali and Derivatives Businesss future commitment to purchase electricity and steam from the joint venture approximates $23 million per year subject to contractually defined inflation adjustments for the next 10 years. The purchases for the years ended December 31, 2012, 2011 and 2010 were $25 million, $23 million and $23 million respectively.
RS Cogen is a variable interest entity under U.S. accounting guidance. The joint ventures critical operations are overseen by a management committee, which has equal representation from both PPG and Entergy. With the power to direct the activities of RS Cogen equally shared between RS Cogens two owners, PPG did not consider itself to be the joint ventures primary beneficiary. Accordingly, PPG accounted for its investment in RS Cogen as an equity method investment.
The following table summarizes the PPG Chlor-alkali and Derivatives Businesss maximum exposure to loss associated with RS Cogen:
(Millions) |
|
|
| |
Investment in and advances to RS Cogen |
|
$ |
19 |
|
Take-or-pay obligation under power tolling arrangement |
|
234 |
| |
Maximum exposure to loss as of December 31, 2012 |
|
$ |
253 |
|
The equity affiliates have accumulated net losses; accordingly, the PPG Chlor-alkali and Derivatives Business has no share of undistributed net earnings related to these affiliates as of December 31, 2012 and 2011. There were no dividends received from these equity affiliates in 2012, 2011 or 2010.
Note 9. Identifiable Intangible Assets
The PPG Chlor-alkali and Derivatives Businesss identifiable intangible assets with finite lives relate to customer relationships and are being amortized over their estimated useful lives (10 years). At December 31, 2012, the gross carrying amount of these identifiable intangible assets was $10 million and the accumulated amortization was $5 million.
|
|
December 31, 2012 |
|
December 31, 2011 |
| ||||||||||||
(Millions) |
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
| ||||
Customer-related intangibles |
|
$ |
10 |
|
(5 |
) |
$ |
5 |
|
$ |
10 |
|
(4 |
) |
$ |
6 |
|
Amortization expense was $1 million in 2012, 2011 and 2010, respectively. The estimated future amortization expense of identifiable intangible assets is approximately $1 million per year, through 2016.
Note 10. Business Restructuring
In March 2012, PPG finalized a restructuring plan to reduce PPGs cost structure. As a result of this restructuring plan, in March of 2012 a charge of $1 million for severance costs associated with 22 employees was recorded by the PPG Chlor-alkali and Derivatives Business. In the fourth quarter of 2012, management decided not to proceed with the PPG Chlor-alkali and Derivatives Business severance actions and the $1 million charge was reversed.
During the year-ended December 31, 2010, there was restructuring spending of $3 million related to a 2009 restructuring program. All actions related to the 2009 restructuring program were completed in 2010.
Note 11. Financial Instruments, Excluding Derivative Financial Instruments
Included in the PPG Chlor-alkali and Derivatives Businesss financial instrument portfolio are cash, cash held in escrow and marketable equity securities. The fair values of these financial instruments approximated their carrying values at December 31, 2012 and December 31, 2011, in the aggregate.
Note 12. Derivative Financial Instruments and Hedge Activities
The PPG Chlor-alkali and Derivatives Business recognizes all derivative financial instruments as either assets or liabilities at fair value on the combined balance sheet. The accounting for changes in the fair value of a derivative depends on the use of the instrument. To the extent that a derivative is effective as a hedge of an exposure to future changes in cash flows, the change in fair value of the instrument is deferred in accumulated other comprehensive income (loss) (AOCI). Any portion considered to be ineffective is reported in earnings immediately, including changes in value related to credit risk. The PPG Chlor-alkali and Derivatives Business had only cash flow hedging relationships during the three-year period ended December 31, 2012.
The PPG Chlor-alkali and Derivatives Businesss policies do not permit speculative use of derivative financial instruments. The PPG Chlor-alkali and Derivatives Business historically entered into derivative financial instruments with high credit quality counterparties and diversified its positions among such counterparties in order to reduce its exposure to credit losses. The PPG Chlor-alkali and Derivatives Business did not realize a credit loss on derivatives during the three-year period ended December 31, 2012.
Derivative instruments were used to manage the PPG Chlor-alkali and Derivatives Businesss exposure to fluctuating natural gas prices through the use of natural gas swap contracts. There were no natural gas swap contracts outstanding as of December 31, 2012 as the price of natural gas has declined for the past four years and is not expected to be as volatile over the next 12 to 18 months as continued development of shale oil and gas reserves are expected to maintain downward pressure on the price of natural gas. The natural gas swap contracts outstanding at December 31, 2011 matured over the next 9 months. To the extent that these instruments were effective in hedging the PPG Chlor-alkali and Derivatives Businesss exposure to price changes, changes in the fair values of the hedge contracts were deferred in AOCI and reclassified to Cost of sales, exclusive of depreciation and amortization as the natural gas was purchased. The amount of ineffectiveness was reported in Other charges in the accompanying condensed combined statement of income immediately. As of December 31, 2011, the fair value of these contracts was a liability of $6 million.
No derivative instrument initially designated as a hedge instrument was undesignated or discontinued as a hedging instrument during 2011 or 2010. Nor were any amounts deferred in AOCI reclassified to earnings during the three-year period ended December 31, 2012 related to hedges of anticipated transactions that were no longer expected to occur.
Refer to Note 5, Fair Value Measurement, for additional disclosures related to the PPG Chlor-alkali and Derivatives Businesss derivative instruments outstanding as of December 31, 2011.
For the year ended December 31, 2012, Other comprehensive income / (loss) included a net pretax gain due to cash flow hedge derivatives of $7 million ($4 million, net of tax). This gain was comprised of realized losses of $9 million and unrealized losses of $2 million. The realized losses related to the settlement during the period of natural gas swap contracts and interest rate swaps owned by RS Cogen (Refer to Note 8, Investments for a discussion regarding this equity method investment). The unrealized losses related to the change in fair value of the natural gas swap contracts and the interest rate swaps owned by RS Cogen.
For the year ended December 31, 2011, Other comprehensive income / (loss) included a net pretax gain due to cash flow hedge derivatives of $14 million ($9 million, net of tax). This gain was comprised of realized losses of $24 million and unrealized losses of $10 million. The realized losses related to the settlement during the period of natural gas swap contracts and interest rate swaps owned by RS Cogen (Refer to Note 8, Investments for a discussion regarding this equity method investment). The unrealized losses related to the change in fair value of the natural gas swap contracts and the interest rate swaps owned by RS Cogen.
For the year ended December 31, 2010, Other comprehensive income / (loss) included a net pretax gain due to cash flow hedge derivatives of $14 million ($8 million, net of tax). This gain was comprised of realized losses of $41 million and unrealized losses of $27 million. The realized losses related to the settlement during the period of natural gas swap contracts and interest rate swaps owned by RS Cogen (Refer to Note 8, Investments for a discussion regarding this equity method investment). The unrealized losses related to the change in fair value of the natural gas swap contracts and the interest rate swaps owned by RS Cogen.
The following tables provide details for the years ended December 31, 2012 and 2011 related to the PPG Chlor-alkali and Derivatives Businesss hedges by type of derivative. All amounts are pretax:
(Millions) |
|
Gain (Loss) |
|
Gain (Loss) Recognized |
| ||||
Hedge Type |
|
Deferred in OCI |
|
Amount |
|
Caption |
| ||
Year Ended December 31, 2012 |
|
|
|
|
|
|
| ||
Cash Flow |
|
|
|
|
|
|
| ||
Natural gas swaps (a) |
|
$ |
(1 |
) |
$ |
(7 |
) |
Cost of sales |
|
Interest rate swaps of RS Cogen |
|
(1 |
) |
(2 |
) |
Other earnings |
| ||
Year Ended December 31, 2011 |
|
|
|
|
|
|
| ||
Cash Flow |
|
|
|
|
|
|
| ||
Natural gas swaps (b) |
|
$ |
(8 |
) |
$ |
(22 |
) |
Cost of sales |
|
Interest rate swaps of RS Cogen |
|
(2 |
) |
(2 |
) |
Other earnings |
|
(a) The ineffective portion related to this item was less than $0.1 million of expense.
(b) The ineffective portion related to this item was less than $0.1 million of income.
Note 13. Related Party Transactions
Certain services are provided to the PPG Chlor-alkali and Derivatives Business by PPG, including legal, accounting, tax, treasury, payroll and benefits administration, risk management, information technology and purchasing. Expenses for such services totaled $23 million, $24 million, and $23 million for the years ended December 31, 2012, 2011 and 2010, respectively. These expenses are included in Selling, general and administrative in the accompanying combined statement of income. These costs are charged by PPG to the PPG Chlor-alkali and Derivatives Business using a direct identification approach where possible. Costs for such services which cannot be directly attributed to the PPG Chlor-alkali and Derivatives Business are allocated from PPG to the PPG Chlor-alkali and Derivatives Business using a three-factor formula based on the PPG Chlor-alkali and Derivatives Businesss proportionate share of North American PPG sales, assets, and payroll.
The costs of PPG corporate staff functions not directly associated with the PPG businesses, the cost of PPG corporate legal cases, net of related insurance recoveries, and the cost of certain PPG insurance and employee benefit programs were allocated to the PPG Chlor-alkali and Derivatives Business for the years ended December 31, 2012, 2011 and 2010 on a pro rata basis as if these costs were shared equally by the PPG Chlor-alkali and Derivatives Business and each of PPGs other 12 strategic business units. The allocated costs include an allocation of PPG corporate stock based compensation, bonus, pension and other postretirement benefit expenses. These allocated costs to the PPG Chlor-alkali and Derivatives Business totaled $13 million, $11 million, and $10 million for the years ended December 31, 2012, 2011 and 2010, respectively.
In accordance with U.S. GAAP, related party transactions cannot be presumed to be carried out on an arms-length basis as the requisite conditions of competitive, free-market dealing may not exist. These combined financial statements may not necessarily be indicative of the conditions that would have existed, or the results of operations that would have resulted, had the PPG Chlor-alkali and Derivatives Business been operated as a separate standalone company.
Note 14. Income Taxes
The PPG Chlor-alkali and Derivatives Businesss U.S., Canadian and certain other non-U.S. operating results are included in the income tax returns of PPG. The PPG Chlor-alkali and Derivatives Business accounts for income taxes under the separate return method. Under this approach, the PPG Chlor-alkali and Derivatives Business determines its current tax liability, deferred tax assets and liabilities and related tax expense as if it were filing separate tax returns in each tax jurisdiction.
The following table presents a reconciliation of the statutory U.S. corporate federal income tax rate to the PPG Chlor-alkali and Derivatives Businesss effective income tax rate:
|
|
Year-ended December 31, |
| ||||
|
|
2012 |
|
2011 |
|
2010 |
|
U.S. federal income tax rate |
|
35.00 |
% |
35.00 |
% |
35.00 |
% |
Changes in rate due to: |
|
|
|
|
|
|
|
U.S. state and local taxes |
|
2.18 |
|
2.29 |
|
2.07 |
|
U.S. tax cost on foreign dividends |
|
1.20 |
|
1.73 |
|
0.67 |
|
PPG dividends paid to the ESOP |
|
(0.47 |
) |
(0.51 |
) |
(1.29 |
) |
U.S. tax incentives |
|
(3.67 |
) |
(2.47 |
) |
(4.72 |
) |
Taxes on non-U.S. earnings |
|
(2.58 |
) |
(2.22 |
) |
(2.80 |
) |
Non taxable bargain purchase gain |
|
|
|
(0.92 |
) |
|
|
One-time charge, tax law change |
|
|
|
|
|
6.57 |
|
Other |
|
0.54 |
|
0.25 |
|
1.22 |
|
Effective income tax rate |
|
32.20 |
% |
33.15 |
% |
36.72 |
% |
U.S. tax incentives include the R&D credit, the U.S. manufacturing deduction and the statutory depletion of salt. The increase of the impact of U.S. tax incentives in 2012 can be explained by an increase in the manufacturing deduction which more than offset the absence of the R&D credit in 2012. The higher 2012 impact from taxes on non-U.S. earnings is due largely to higher non-U.S. earnings as a percentage of total earnings.
The 2010 effective tax rate was increased because the PPG Chlor-alkali and Derivatives Business recorded a one-time, after tax charge in the first quarter of 2010 of $12 million as a result of a change in U.S. tax law included in the U.S. Patient Protection and Affordable Care Act enacted in March 2010. Under the prior tax law, the total amount paid for prescription drug costs for retirees over the age of 65 was tax deductible. Beginning in 2013, however, these costs will only be deductible to the extent they exceed the amount of the annual subsidy the PPG Chlor-alkali and Derivatives Business receives from the U.S. government under Medicare Part D. As a result of this change, the deferred tax asset of the PPG Chlor-alkali and Derivatives Business, which reflects the future tax deductibility of these postretirement benefit costs, had to be reduced in the first quarter of 2010, the period that the change in the tax law was enacted, as required by the accounting guidance for income taxes.
Income before income taxes of the PPG Chlor-alkali and Derivatives Businesss non-U.S. operations for 2012, 2011 and 2010 was $64 million, $60 million and $35 million, respectively.
The following table gives details of income tax expense reported in the accompanying combined statement of income:
|
|
Year-ended December 31, |
| |||||||
(Millions) |
|
2012 |
|
2011 |
|
2010 |
| |||
Current income tax expense |
|
|
|
|
|
|
| |||
U.S. federal |
|
$ |
100 |
|
$ |
84 |
|
$ |
34 |
|
Non-U.S. |
|
13 |
|
13 |
|
8 |
| |||
U.S. state and local |
|
14 |
|
12 |
|
5 |
| |||
Total current income tax |
|
127 |
|
109 |
|
47 |
| |||
Deferred income tax expense |
|
|
|
|
|
|
| |||
U.S. federal |
|
(12 |
) |
13 |
|
6 |
| |||
Non-U.S. |
|
|
|
(1 |
) |
(1 |
) | |||
U.S. state and local |
|
(1 |
) |
1 |
|
1 |
| |||
One-time charge, tax law change |
|
|
|
|
|
12 |
| |||
Total deferred income tax |
|
(13 |
) |
13 |
|
18 |
| |||
Total |
|
$ |
114 |
|
$ |
122 |
|
$ |
65 |
|
The PPG Chlor-alkali and Derivatives Business made income tax payments totaling $8 million, $5 million and $4 million in 2012, 2011 and 2010, respectively, in Taiwan. In addition, current tax expense attributed to the PPG Chlor-alkali and Derivatives Business by the separate return method in the U.S. and Canada was paid to PPG in the year the tax expense was recognized. These payments are included as a component of the net cash activity in the accompanying combined statement of changes in parent company equity.
Net deferred income tax assets and liabilities as of December 31, 2012 and 2011 were as follows:
|
|
|
|
|
| ||
(Millions) |
|
2012 |
|
2011 |
| ||
Deferred income tax assets related to |
|
|
|
|
| ||
Employee benefits |
|
$ |
103 |
|
$ |
104 |
|
Contingent and accrued liabilities |
|
24 |
|
5 |
| ||
Operating loss and other carry-forwards |
|
1 |
|
1 |
| ||
Derivatives |
|
2 |
|
5 |
| ||
Other |
|
1 |
|
1 |
| ||
Valuation allowance |
|
(1 |
) |
(1 |
) | ||
Total |
|
130 |
|
115 |
| ||
Deferred income tax liabilities related to |
|
|
|
|
| ||
Property |
|
98 |
|
86 |
| ||
Other |
|
20 |
|
20 |
| ||
Total |
|
118 |
|
106 |
| ||
Deferred income tax assets net |
|
$ |
12 |
|
$ |
9 |
|
As of December 31, 2012, the PPG Chlor-alkali and Derivatives Business had available net operating loss carryforwards of approximately $3 million for income tax purposes, which expire in 2018. The tax effected amount of the net operating loss carryforwards is $1 million. A valuation allowance has been established for carryforwards at December 31, 2012 since the ability to utilize them is not likely.
No deferred U.S. income taxes have been provided on undistributed earnings of non-U.S. subsidiaries of $43 million as of December 31, 2012 and $25 million as of December 31, 2011 as these earnings are considered to be reinvested for an indefinite period of time or will be repatriated when it is tax effective to do so. It is not practicable to determine the deferred tax liability on these undistributed earnings.
Note 15. Pensions and Other Postretirement Benefits
Defined Benefit Plans
Other than in Taiwan, the PPG Chlor-alkali and Derivatives Business sponsors no defined benefit pension plans; however, certain employees of the PPG Chlor-alkali and Derivatives Business participate in PPGs defined benefit pension and welfare benefit plans, which are referred to collectively, with the plan in Taiwan, in this footnote as the defined benefit pension and welfare benefit plans related to the PPG Chlor-alkali and Derivatives Business. PPG has defined benefit pension plans that cover certain employees worldwide. PPG also sponsors welfare benefit plans that provide postretirement medical and life insurance benefits for certain U.S. and Canadian employees and their dependents. The postretirement medical and life insurance programs require retiree contributions based on retiree-selected coverage levels for certain retirees and their dependents and provide for sharing of future benefit cost increases between PPG and participants based on management discretion. PPG has the right to modify or terminate certain of these benefit plans in the future. Salaried and certain hourly employees hired on or after Oct. 1, 2004, are not eligible for postretirement medical benefits. Salaried employees hired, rehired, or transferred to salaried status on or after Jan. 1, 2006, and certain hourly employees hired in 2006 or thereafter are eligible to participate in a defined contribution retirement plan. These employees are not eligible for defined benefit pension plan benefits.
Plan Design Changes
In January 2011, PPG approved an amendment to one of its U.S. defined benefit pension plans that represented 77 percent of the total U.S. projected benefit obligation at December 31, 2012 and 2011. This change results in employees no longer accruing benefits under this plan either as of December 31, 2011 or December 31, 2020 depending upon the employees combined age and years of service to PPG. The affected employees will participate in PPGs defined contribution retirement plan from the date their benefit under the defined benefit plan is frozen. PPG remeasured the projected benefit obligation of the amended plan, which resulted in an approximate $6 million reduction in the liability related to the PPG Chlor-alkali and Derivatives Business and lowered the PPG Chlor-alkali and Derivatives Businesss 2011 pension expense by approximately $0.2 million. PPG made similar changes to certain other U.S. defined benefit pension plans in 2011. The PPG Chlor-alkali and Derivatives Business recognized a curtailment loss and special termination benefits associated with these plan amendments of $0.5 million in 2011.
Separation and Merger of the PPG Chlor-alkali and Derivatives Business
On January 28, 2013, PPG completed the separation of the PPG Chlor-alkali and Derivatives Business and the merger of the subsidiary holding the PPG Chlor-alkali and Derivatives Business with a subsidiary of Georgia Gulf, as discussed in Note 21, Separation and Merger Transaction. PPG transferred the defined benefit pension and other postretirement benefit liabilities for the affected employees in the U.S., Canada, and Taiwan to a subsidiary of Georgia Gulf in the separation. PPG also transferred pension assets to the newly formed company.
Postretirement Medical
The PPG Chlor-alkali and Derivatives Business has no postretirement medical plans; however, certain employees of the PPG Chlor-alkali and Derivatives Business participate in PPGs postretirement medical plans. Beginning in 2004, PPGs other postretirement benefit plan provided a retiree prescription drug benefit which was at least actuarially equivalent to Medicare Part D. Therefore, PPG received the federal subsidy provided for under the Medicare Act of 2003. The federal subsidy is not subject to U.S. federal income tax and is recorded as a reduction in annual net periodic benefit cost of other postretirement benefits. Since 2004, PPG has made periodic amendments to its U.S. other postretirement benefit plan; however, from January 1, 2010 to December 31, 2012 PPG has provided a self-insured plan for certain retirees and their dependents that was at least actuarially equivalent to Medicare Part D and has received the subsidy under the Medicare Act of 2003 for those retirees and their dependents.
In October 2012, PPG decided, effective January 1, 2013, to move to an Employee Group Waiver Plan (EGWP) for certain Medicare-eligible retirees and their dependents. The EGWP includes a fully-insured Medicare Part D prescription drug plan. As such, beginning in 2013 PPG is no longer eligible to receive the federal subsidy provided under the Medicare Act of 2003 for these retirees and their dependents.
The following table sets forth the changes in the projected benefit obligation (PBO) (calculated as of December 31), plan assets, the funded status and the amounts recognized in the accompanying combined balance sheet for the portion of the PPG defined benefit pension and other postretirement benefit plans related to the PPG Chlor-alkali and Derivatives Business:
|
|
Pensions |
|
Other Postretirement |
| ||||||||
(Millions) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Projected benefit obligation, Jan. 1 |
|
$ |
548 |
|
$ |
491 |
|
$ |
178 |
|
$ |
158 |
|
Service cost |
|
6 |
|
6 |
|
3 |
|
3 |
| ||||
Interest cost |
|
24 |
|
25 |
|
7 |
|
8 |
| ||||
Plan amendments |
|
|
|
1 |
|
(3 |
) |
3 |
| ||||
Actuarial losses |
|
29 |
|
61 |
|
(6 |
) |
16 |
| ||||
Benefits paid |
|
(32 |
) |
(29 |
) |
(9 |
) |
(11 |
) | ||||
Foreign currency translation adjustments |
|
1 |
|
(1 |
) |
|
|
|
| ||||
Curtailment and special termination benefits |
|
|
|
(7 |
) |
|
|
|
| ||||
Other |
|
|
|
1 |
|
3 |
|
|
| ||||
Projected benefit obligation, Dec. 31 |
|
$ |
576 |
|
$ |
548 |
|
$ |
173 |
|
$ |
177 |
|
Market value of plan assets, Jan. 1 |
|
$ |
468 |
|
$ |
439 |
|
|
|
|
| ||
Actual return on plan assets |
|
63 |
|
49 |
|
|
|
|
| ||||
Company contributions |
|
1 |
|
8 |
|
|
|
|
| ||||
Benefits paid |
|
(31 |
) |
(28 |
) |
|
|
|
| ||||
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
| ||||
Market value of plan assets, Dec. 31 |
|
$ |
501 |
|
$ |
468 |
|
|
|
|
| ||
Funded Status |
|
$ |
(75 |
) |
$ |
(80 |
) |
$ |
(173 |
) |
$ |
(177 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Amounts recognized in the Combined Balance Sheet: |
|
|
|
|
|
|
|
|
| ||||
Other current liabilities |
|
(2 |
) |
(1 |
) |
(10 |
) |
(9 |
) | ||||
Accrued pensions |
|
(73 |
) |
(79 |
) |
|
|
|
| ||||
Accrued other postretirement benefits |
|
|
|
|
|
(163 |
) |
(168 |
) | ||||
Net liability recognized |
|
$ |
(75 |
) |
$ |
(80 |
) |
$ |
(173 |
) |
$ |
(177 |
) |
The PBO is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future pay increases. The accumulated benefit obligation (ABO) is the actuarial present value of benefits attributable to employee service rendered to date, but does not include the effects of estimated future pay increases. The ABO for the portion of the PPG defined benefit pension plans related to the PPG Chlor-alkali and Derivatives Business as of December 31, 2012 and 2011 was $562 million and $530 million, respectively.
The aggregate PBO and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $576 million and $501 million, respectively, as of December 31, 2012, and $548 million and $468 million, respectively, as of December 31, 2011. The aggregate ABO and fair value of plan assets for the pension plans with ABO in excess of plan assets were $551 million and $491 million, respectively, as of December 31, 2012, and $530 million and $468 million, respectively, as of December 31, 2011.
Amounts (pretax) not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss as of December 31, 2012 consist of:
|
|
Pensions |
|
Other |
| ||||||||
(Millions) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Accumulated net actuarial losses |
|
$ |
229 |
|
$ |
247 |
|
$ |
72 |
|
$ |
81 |
|
Accumulated prior service cost |
|
|
|
1 |
|
(7 |
) |
(5 |
) | ||||
Total |
|
$ |
229 |
|
$ |
248 |
|
$ |
65 |
|
$ |
76 |
|
The accumulated net actuarial losses for pensions relate primarily to the actual return on plan assets being less than the expected return on plan assets in 2000-2002, and 2008 and a decline in the discount rate since 1999. The accumulated net actuarial losses for other postretirement benefits relate primarily to actual healthcare costs increasing at a higher rate than assumed during the 2001-2003 period and the decline in the discount rate. Since the accumulated net actuarial losses exceed 10 percent of the higher of the market value of plan assets or the PBO at the beginning of the year, amortization of such excess over the average remaining service period of active employees expected to receive benefits has been included in net periodic benefit costs for pension and other postretirement benefits in each of the last three years. The decrease in 2012 of the accumulated prior service credit for other postretirement benefits relates to several amendments to these plans approved by PPG during 2011. Accumulated prior service cost (credit) is amortized over the future service periods of those employees who are active at the dates of the plan amendments and who are expected to receive benefits.
The net pre-tax gain in accumulated other comprehensive loss in 2012 relating to the plans consists of:
(Millions) |
|
Pensions |
|
Other |
| ||
|
|
|
|
|
| ||
Net actuarial loss arising during the year |
|
$ |
1 |
|
$ |
(6 |
) |
New prior service (credit) |
|
|
|
(3 |
) | ||
Amortization of actuarial loss |
|
(20 |
) |
(5 |
) | ||
Amortization of prior service cost |
|
|
|
2 |
| ||
Foreign currency translation adjustments and other |
|
|
|
1 |
| ||
Net pre-tax gain |
|
$ |
(19 |
) |
$ |
(11 |
) |
The net actuarial loss arising during 2012 related to PPGs pension plans was primarily due to a decrease in the discount rate, partially offset by actual plan asset returns exceeding expected returns. The net actuarial loss arising during 2012 related to PPGs other postretirement benefit plans resulted from a decrease in the discount rate.
As of December 31, 2012, the estimated amounts of accumulated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2013 are $17 million and $1 million, respectively. The estimated amounts of accumulated net actuarial loss and prior service (credit) for the other postretirement benefit plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2013 are $4 million and $(1) million, respectively.
Net periodic benefit cost for the three years ended December 31, 2012 includes the following:
|
|
Pensions |
|
Other |
| ||||||||||||||
(Millions) |
|
2012 |
|
2011 |
|
2010 |
|
2012 |
|
2011 |
|
2010 |
| ||||||
Service cost |
|
$ |
6 |
|
$ |
6 |
|
$ |
5 |
|
$ |
3 |
|
$ |
3 |
|
$ |
2 |
|
Interest cost |
|
24 |
|
25 |
|
25 |
|
7 |
|
8 |
|
8 |
| ||||||
Expected return on plan assets |
|
(33 |
) |
(35 |
) |
(31 |
) |
|
|
|
|
|
| ||||||
Amortization of prior service cost (credit) |
|
|
|
1 |
|
1 |
|
(2 |
) |
(2 |
) |
(1 |
) | ||||||
Amortization of actuarial losses |
|
20 |
|
15 |
|
15 |
|
5 |
|
4 |
|
3 |
| ||||||
Curtailments and special termination benefits |
|
|
|
1 |
|
|
|
|
|
|
|
|
| ||||||
Net periodic benefit cost |
|
$ |
17 |
|
$ |
13 |
|
$ |
15 |
|
$ |
13 |
|
$ |
13 |
|
$ |
12 |
|
Assumptions
The following weighted average assumptions were used to determine the benefit obligation for the defined benefit pension and other postretirement plans related to the PPG Chlor-alkali and Derivatives Business as of December 31, 2012 and 2011:
|
|
2012 |
|
2011 |
|
Discount rate |
|
4.1 |
% |
4.6 |
% |
Rate of compensation increase |
|
4.0 |
% |
3.9 |
% |
The following weighted average assumptions were used to determine the net periodic benefit cost for the defined benefit pension and other postretirement benefit plans related to the PPG Chlor-alkali and Derivatives Business for the three years ended December 31, 2012:
|
|
2012 |
|
2011 |
|
2010 |
|
Discount rate |
|
4.6 |
% |
5.3 |
% |
5.7 |
% |
Expected return on assets |
|
7.0 |
% |
7.6 |
% |
7.8 |
% |
Rate of compensation increase |
|
3.9 |
% |
3.8 |
% |
3.9 |
% |
These assumptions are reviewed on an annual basis. In determining the expected return on plan asset assumption, PPG evaluates the mix of investments that comprise plan assets and external forecasts of future long-term investment returns.
At December 31, 2010, PPG updated the mortality table used to calculate its U.S. defined benefit pension and other postretirement benefit liabilities. Previously, PPG had used the mortality table known as RP 2000, projected to 2006, and now uses the RP 2000 table projected to 2017. This updated table reflects improvements in mortality rates.
The weighted-average healthcare cost trend rate (inflation) used for 2012 was 6.3 percent declining to 4.5 percent in the year 2024. For 2013, the assumed weighted-average healthcare cost trend rate used will be 6.4 percent declining to 4.5 percent in the year 2024. These assumptions are reviewed on an annual basis. In selecting rates for current and long-term health care cost assumptions, PPG takes into consideration a number of factors including PPGs actual health care cost increases, the design of PPGs benefit programs, the demographics of PPGs active and retiree populations and external expectations of future medical cost inflation rates. If these 2013 health care cost trend rates were increased or decreased by one percentage point per year, such increase or decrease would have the following effects:
|
|
One-Percentage Point |
| ||||
|
|
Increase |
|
Decrease |
| ||
Increase (decrease) in the aggregate of service and interest cost components of annual expense |
|
$ |
1 |
|
$ |
(1 |
) |
Increase (decrease) in the benefit obligation |
|
$ |
20 |
|
$ |
(13 |
) |
Contributions
On August 17, 2006, the Pension Protection Act of 2006 (PPA) was signed into law, changing the funding requirements for PPGs U.S. defined benefit pension plans beginning in 2008. In July 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) was signed into law. MAP-21 included discount-rate stabilization rules that reduce the funding targets required on an ERISA basis for the U.S. defined benefit pension plans. As a result, PPG did not have to make a mandatory contribution to these plans in 2012 and does not expect to have to make a mandatory contribution in 2013.
PPG did not make a voluntary contribution to these plans in 2012. PPG made a voluntary contribution to its U.S. defined benefit pension plans of $50 million in 2011 of which $7 million related to the PPG Chlor-alkali and Derivatives Business. PPG made contributions to its non-U.S. defined benefit pension plans in 2012 of $81 million and $71 million in 2011, some of which were required by local funding requirements. Of these contributions, $1 million related to the PPG Chlor-alkali and Derivatives Business in 2012 and 2011, respectively. PPG does not expect to make any voluntary contributions in 2013 to its U.S. plans but will make mandatory contributions to its non-U.S. plans of approximately $77 million, of which $1 million would relate to the PPG Chlor-alkali and Derivatives Business.
Benefit Payments
The estimated pension benefits to be paid by the defined benefit pension plans related to the PPG Chlor-alkali and Derivatives Business during the next five years are (in millions) $33 in 2013, $33 in 2014, $33 in 2015, $34 in 2016 and $34 in 2017 and are expected to aggregate $179 million for the five years thereafter. PPGs estimated other postretirement benefits to be paid related to the PPG Chlor-alkali and Derivatives Business during the next five years are $10 million per year through 2016 and are expected to aggregate $49 million for the five years thereafter.
Plan Assets
Each PPG sponsored defined benefit pension plan is managed in accordance with the requirements of local laws and regulations governing defined benefit pension plans for the exclusive purpose of providing pension benefits to participants and their beneficiaries. Investment committees comprised of PPG managers have fiduciary responsibility to oversee the management of pension plan assets by third party asset managers. Pension plan assets are held in trust by financial institutions and managed on a day-to-day basis by the asset managers. The asset managers receive a mandate from each investment committee that is aligned with the asset allocation targets established by each investment committee to achieve the plans investment strategies. The performance of the asset managers is monitored and evaluated by the investment committees throughout the year. Pension plan assets are invested to generate investment earnings over an extended time horizon to help fund the cost of benefits promised under the plans while mitigating investment risk. The assets allocation targets established for each pension plan are intended to diversify the investments among a variety of asset categories and among a variety of individual securities within each asset category to mitigate investment risk and provide each plan with sufficient liquidity to fund the payment of pension benefits to current retirees.
The following summarizes the weighted average target pension plan asset allocation for the PPG pension plans related to the PPG Chlor-alkali and Derivatives Business as of December 31, 2012 and 2011:
|
|
December 31, |
| ||
Asset Category |
|
2012 |
|
2011 |
|
Equity securities |
|
3570% |
|
40-75% |
|
Debt securities |
|
3065% |
|
25-60% |
|
Real estate |
|
010% |
|
0-10% |
|
Other |
|
010% |
|
0-10% |
|
The fair values of pension plan assets of the PPG pension plans related to the PPG Chlor-alkali and Derivatives Business at December 31, 2012, by asset category, were as follows:
(Millions) |
|
Level 1(1) |
|
Level 2(1) |
|
Level 3(1) |
|
Total |
| ||||
Asset Category |
|
|
|
|
|
|
|
|
| ||||
Equity securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. |
|
|
|
|
|
|
|
|
| ||||
Large cap |
|
$ |
|
|
$ |
20 |
|
$ |
|
|
$ |
20 |
|
Small cap |
|
|
|
23 |
|
|
|
23 |
| ||||
PPG common stock |
|
32 |
|
|
|
|
|
32 |
| ||||
Non-U.S. |
|
|
|
|
|
|
|
|
| ||||
Developed and emerging markets(2) |
|
|
|
43 |
|
|
|
43 |
| ||||
Debt securities: |
|
|
|
|
|
|
|
|
| ||||
Money market |
|
|
|
75 |
|
|
|
75 |
| ||||
Corporate(3) |
|
|
|
|
|
|
|
|
| ||||
U.S. (4) |
|
|
|
142 |
|
12 |
|
154 |
| ||||
Developed and emerging markets |
|
|
|
9 |
|
|
|
9 |
| ||||
Diversified(5) |
|
|
|
40 |
|
|
|
40 |
| ||||
Government |
|
|
|
|
|
|
|
|
| ||||
U.S. |
|
30 |
|
11 |
|
|
|
41 |
| ||||
Developed markets |
|
|
|
15 |
|
|
|
15 |
| ||||
Other(6) |
|
|
|
24 |
|
|
|
24 |
| ||||
Real estate(7) |
|
|
|
|
|
25 |
|
25 |
| ||||
Total |
|
$ |
62 |
|
$ |
402 |
|
$ |
37 |
|
$ |
501 |
|
(1) These levels refer to the accounting guidance on fair value measurement described in Note 5, Fair Value Measurement.
(2) These amounts represent holdings in investment grade debt or equity securities of issuers in both developed markets and emerging economies.
(3) This category represents investment grade debt securities from a diverse set of industry issuers.
(4) These investments are primarily long duration fixed income securities.
(5) This category represents commingled funds invested in diverse portfolios of debt securities.
(6) This category includes mortgage-backed and asset backed debt securities, municipal bonds and other debt securities.
(7) This category represents commingled funds which invest directly in a diversified group of office, residential, industrial and retail properties which are appraised at least annually by reputable, independent appraisal firms.
The fair values of pension plan assets of the PPG pension plans related to the PPG Chlor-alkali and Derivatives Business at December 31, 2011, by asset category, were as follows:
(Millions) |
|
Level 1(1) |
|
Level 2(1) |
|
Level 3(1) |
|
Total |
| ||||
Asset Category |
|
|
|
|
|
|
|
|
| ||||
Equity securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. |
|
|
|
|
|
|
|
|
| ||||
Large cap |
|
$ |
|
|
$ |
37 |
|
$ |
|
|
$ |
37 |
|
Small cap |
|
19 |
|
12 |
|
|
|
31 |
| ||||
PPG common stock |
|
20 |
|
|
|
|
|
20 |
| ||||
Non-U.S. |
|
|
|
|
|
|
|
|
| ||||
Developed and emerging markets(2) |
|
|
|
56 |
|
|
|
56 |
| ||||
Debt securities: |
|
|
|
|
|
|
|
|
| ||||
Money market |
|
|
|
26 |
|
|
|
26 |
| ||||
Corporate(3) |
|
|
|
|
|
|
|
|
| ||||
U.S. (4) |
|
|
|
103 |
|
10 |
|
113 |
| ||||
Developed and emerging markets |
|
|
|
24 |
|
|
|
24 |
| ||||
Diversified(5) |
|
|
|
28 |
|
|
|
28 |
| ||||
Government |
|
|
|
|
|
|
|
|
| ||||
U.S. |
|
61 |
|
17 |
|
|
|
78 |
| ||||
Developed markets. |
|
|
|
6 |
|
|
|
6 |
| ||||
Other(6) |
|
1 |
|
25 |
|
|
|
26 |
| ||||
Real estate(7) |
|
|
|
|
|
23 |
|
23 |
| ||||
Total |
|
$ |
101 |
|
$ |
334 |
|
$ |
33 |
|
$ |
468 |
|
(1) These levels refer to the accounting guidance on fair value measurement described in Note 5, Fair Value Measurement.
(2) These amounts represent holdings in investment grade debt or equity securities of issuers in both developed markets and emerging economies.
(3) This category represents investment grade debt securities from a diverse set of industry issuers.
(4) These investments are primarily long duration fixed income securities.
(5) This category represents commingled funds invested in diverse portfolios of debt securities.
(6) This category includes mortgage-backed and asset backed debt securities, municipal bonds and other debt securities.
(7) This category represents commingled funds which invest directly in a diversified group of office, residential, industrial and retail properties which are appraised at least annually by reputable, independent appraisal firms.
During 2012, PPG determined that certain pension assets at December 31, 2011 were previously presented in the Level 1 category and should have been presented in the Level 2 category and certain pension assets presented in Level 2 should have been presented in the Level 3 category based on the inputs used to value the securities. Accordingly, the 2011 presentation of pension assets has been revised in the table above and in the Level 3 table below. This revision had no impact on the PPG Chlor-alkali and Derivative Businesss combined balance sheet, statement of income or statement of cash flows.
The change in the fair value of PPGs Level 3 pension assets for the years ended December 31, 2012 and 2011 was as follows:
(Millions) |
|
Real |
|
Other |
|
Total |
| |||
Balance, January 1, 2011 |
|
$ |
16 |
|
$ |
|
|
$ |
16 |
|
Realized gain |
|
1 |
|
(1 |
) |
|
| |||
Unrealized gain for positions still held |
|
3 |
|
1 |
|
4 |
| |||
Transfers in |
|
3 |
|
10 |
|
13 |
| |||
Balance, December 31, 2011 |
|
$ |
23 |
|
$ |
10 |
|
$ |
33 |
|
Realized gain |
|
1 |
|
3 |
|
4 |
| |||
Unrealized gain for positions still held |
|
1 |
|
(1 |
) |
|
| |||
Transfers in |
|
|
|
|
|
|
| |||
Balance, December 31, 2012 |
|
$ |
25 |
|
$ |
12 |
|
$ |
37 |
|
Real estate properties are externally appraised at least annually by reputable, independent appraisal firms. Property valuations are also reviewed on a regular basis and are adjusted if there has been a significant change in circumstances related to the property since the last valuation. Value adjustments for interim capital expenditures are only recognized to the extent that the valuation process acknowledges a corresponding increase in fair value.
Other Plans
The PPG Chlor-alkali and Derivatives Business recognized expense for defined contribution pension plans in 2012 and 2011 of $3 million and $1 million, respectively, and no expense in 2010. As of December 31, 2012 and 2011, the PPG Chlor-alkali and Derivatives Business recorded no liability for contributions to be made to the defined contribution pension plans.
The PPG Chlor-alkali and Derivatives Business does not have a separate deferred compensation plan; however, certain employees of the PPG Chlor-alkali and Derivatives Business participate in PPGs deferred compensation plan. PPG has a deferred compensation plan for certain key managers which allows them to defer a portion of their compensation in a phantom PPG stock account or other phantom investment accounts. The amount deferred earns a return based on the investment options selected by the participant. The amount owed to participants is an unfunded and unsecured general obligation of the PPG Chlor-alkali and Derivatives Business. Upon retirement, death, disability, termination of employment, scheduled payment or unforeseen emergency, the compensation deferred and related accumulated earnings are distributed in accordance with the participants election in cash or in PPG stock, based on the accounts selected by the participant.
The plan provides participants with investment alternatives and the ability to transfer amounts between the phantom non-PPG stock investment accounts. To mitigate the impact on compensation expense of changes in the market value of the liability, PPG has purchased a portfolio of marketable securities that mirror the phantom non-PPG stock investment accounts selected by the participants, except the money market accounts. These investments are carried at fair market value, and the changes in market value of these securities are also
included in earnings. Trading will occur in this portfolio to align the securities held with the participants phantom non-PPG stock investment accounts, except the money market accounts.
The cost of the deferred compensation plan for PPG Chlor-alkali and Derivatives Business employees, comprised of dividend equivalents accrued on the phantom PPG stock account, investment income and the change in market value of the liability, was less than $1 million in 2012, 2011, and 2010. The increase in the market value of the investment portfolio in 2012 was income of $1 million and income of less than $1 million and $1 million in 2011 and 2010, respectively.
The PPG Chlor-alkali and Derivatives Businesss obligation under this plan, which is included in Accrued payroll and Other liabilities in the accompanying combined balance sheet, totaled $8 million and $7 million as of December 31, 2012 and 2011, respectively, and the investments in marketable securities, which are included in Investments and in Other current assets in the accompanying combined balance sheet, were $5 million as of December 31, 2012 and 2011.
16. Commitments and Contingent Liabilities
Operating Leases
The PPG Chlor-alkali and Derivatives Business leases certain facilities and equipment for use in its operations under operating leases. Rent expense under these operating leases was approximately $32 million, $36 million, and $28 million during the years ended December 31, 2012, 2011, and 2010, respectively.
Scheduled lease payments due under noncancelable operating leases as of December 31, 2012, are as follows (in millions):
Year Ending |
|
|
| |
2013 |
|
$ |
12 |
|
2014 |
|
8 |
| |
2015 |
|
6 |
| |
2016 |
|
4 |
| |
2017 |
|
2 |
| |
After 2017 |
|
2 |
| |
Guarantee
As of December 31, 2012 and 2011, a $10 million guarantee related to credit risk on interest rate swaps of RS Cogen was outstanding. The carrying value of this guarantee was zero as of December 31, 2012 and 2011, and the fair value was negligible and $2 million, as of December 31, 2012 and 2011, respectively. The fair value of the guarantee was estimated by comparing the net present value of two hypothetical cash flow streams, one based on the PPG incremental borrowing rate and the other based on the RS Cogen incremental borrowing rate, as of the effective date of the guarantee. Both streams were discounted at a risk free rate of return. Management does not believe any loss related to this guarantee is likely.
Legal Matters
The PPG Chlor-alkali and Derivatives Business is involved in a number of lawsuits and claims incidental to the normal conduct of its business. The results of these lawsuits and claims and of any future litigation are inherently unpredictable. However, management believes that, in the aggregate, the outcome of all known lawsuits and claims involving the PPG Chlor-alkali and Derivatives Business will not have a material effect on the PPG Chlor-alkali and Derivatives Businesss combined financial position or liquidity; however, such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
The PPG Chlor-alkali and Derivatives Business is a defendant in a matter in the California State Court in San Francisco in which the City of Modesto and its Redevelopment Authority claim that the PPG Chlor-alkali and Derivatives Business and other defendants manufactured a defective product, the dry cleaning solvent perchloroethylene (PCE), and failed to provide adequate warnings regarding the environmental risks associated with the use of PCE. The plaintiffs claimed the defendants are responsible for remediation of soil and
groundwater contamination at numerous dry cleaner sites in Modesto, California. In 2006, a Phase 1 trial was conducted as to four sites. The jury returned a verdict in the amount of $3.1 million against the PPG Chlor-alkali and Derivatives Business, The Dow Chemical Company, Vulcan, Oxy, and R.R. Street. The verdict was not apportioned.
Subsequent to the Phase 1 verdict, Vulcan and Oxy settled. In 2008, trial commenced on 18 Phase 2 Sites. Prior to submission of the case to the jury, the Court granted motions that limited the PPG Chlor-alkali and Derivatives Businesss potential liability to one of the 18 sites. The damages sought from this one site totaled $27 million. A jury verdict in the amount of $18 million was returned against the PPG Chlor-alkali and Derivatives Business and The Dow Chemical Company on May 18, 2009. The verdict was not apportioned. The jury was not able to reach a verdict on the statute of limitations issue with respect to the site in question. However, on August 24, 2009, the trial court issued an opinion finding that the Citys claims were barred by the statute of limitations. The effect of the ruling was to nullify the jurys Phase 2 damage award. In October 2009, the trial court held a non-jury trial of the Redevelopment Authoritys damage claims under the Polanco Act. On November 11, 2011, the court entered a final judgment consistent with all of the above results finding that prior settlements offset the $3.1 million verdict against the PPG Chlor-alkali and Derivatives Business and others. In May 2012, requests for costs and fees based on whether the City or defendants were prevailing parties were resolved almost entirely in favor of the PPG Chlor-alkali and Derivatives Business. On September 24, 2012, the Court ordered the City to pay PPG $0.3 million. Appeals are expected.
Environmental Matters
It is the PPG Chlor-alkali and Derivatives Businesss policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Environmental reserves associated with existing chlor-alkali manufacturing locations are recorded on the PPG Chlor-alkali and Derivatives Businesss financial statements. Reserves for environmental contingencies are exclusive of claims against third parties. Reserves for monitoring and operation of certain groundwater wells are measured on a present value basis. In managements opinion, the PPG Chlor-alkali and Derivatives Business operates in an environmentally sound manner and the outcome of the PPG Chlor-alkali and Derivatives Businesss environmental contingencies will not have a material effect on the PPG Chlor-alkali and Derivatives Businesss financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution of the PPG Chlor-alkali and Derivatives Businesss environmental contingencies will occur over an extended period of time.
As of December 31, 2012 and 2011, the PPG Chlor-alkali and Derivatives Business had reserves for environmental contingencies totaling $32 million and $35 million, respectively, of which $4 million and $6 million, respectively, were classified as current liabilities. The reserve at December 31, 2012 included $31 million for environmental contingencies associated with the Calcasieu River Estuary located near the Lake Charles, La. chlor-alkali plant and two operating plant site locations of the PPG Chlor-alkali and Derivatives Business and $1 million for other environmental contingencies. The reserve at December 31, 2011 included $34 million for environmental contingencies associated with the Calcasieu River Estuary located near the Lake Charles, La. chlor-alkali plant and two operating plant site locations of the PPG Chlor-alkali and Derivatives Business and $1 million for other environmental contingencies. Pretax charges against income for environmental remediation costs in 2012, 2011 and 2010 totaled $1 million, $7 million and $9 million, respectively, and are included in Other charges in the accompanying combined statement of income. Cash outlays related to such environmental remediation aggregated $4 million, $11 million, and $6 million in 2012, 2011 and 2010, respectively. The impact of foreign currency was negligible for all years presented.
Remediation: Calcasieu River Estuary
In Lake Charles, La. the U.S. Environmental Protection Agency (USEPA) completed an investigation of contamination levels in the Calcasieu River Estuary and issued a Final Remedial Investigation Report in September 2003, which incorporates the Human Health and Ecological Risk Assessments, indicating that elevated levels of risk exist in the estuary. The PPG Chlor-alkali and Derivatives Business and other potentially responsible parties have completed a feasibility study under the authority of the Louisiana Department of Environmental Quality (LDEQ). The PPG Chlor-alkali and Derivatives Businesss exposure with respect to the Calcasieu River Estuary is focused on the lower few miles of Bayou dInde, a small tributary to the Calcasieu River Estuary near the PPG Chlor-alkali and Derivatives Businesss Lake Charles facility, and about 150 to 200 acres of adjacent marshes. The PPG Chlor-alkali and Derivatives Business and three other potentially
responsible parties submitted a draft remediation feasibility study report to the LDEQ in October 2006. The proposed remedial alternatives include sediment dredging, sediment capping, and biomonitoring of fish and shellfish. Principal contaminants of concern which may require remediation include various metals, dioxins and furans, and polychlorinated biphenyls. In response to agency comments on the draft study, the potentially responsible parties conducted additional investigations and submitted a revised feasibility report to the agencies in the third quarter of 2008. Government officials have indicated that a U.S. Army Corps of Engineers study has concluded that the proposed remedy will not adversely affect drainage in communities adjacent to Bayou dInde. In response to the revised feasibility study, the LDEQ issued a draft decision document for the Bayou dInde area in February 2010. The decision document includes the LDEQs selection of remedial alternatives for the Bayou dInde area and is in accordance with those recommended in the revised feasibility study. LDEQ held a public hearing on March 23, 2010 and subsequently issued its final decision document in March 2011. As in its draft document, LDEQs selection of remedial approaches is in accordance with those proposed in the feasibility study.
On June 10, 2011, LDEQ met with the representatives of the PPG Chlor-alkali and Derivatives Business and the three other potentially responsible parties to discuss implementation of a remedy for Bayou dInde based on the final decision document. The agency proposed entering into a new Cooperative Agreement with the four companies and on July 12, 2011 transmitted a draft document for the companies consideration. At the same time, the companies initiated discussions among themselves on allocation of costs associated with remedy implementation. On October 20, 2011, one of the three other potentially responsible parties that had participated in funding the remedial feasibility report withdrew from further participation regarding implementation of the remedy. The withdrawal of this party did not have an effect on the cost to PPG to complete this remedy implementation. On November 5, 2012, the PPG Chlor-alkali and Derivatives Business and the two remaining parties submitted a revised Cooperative Agreement to LDEQ and are awaiting LDEQs response. The estimated costs associated with the PPG Chlor-alkali and Derivatives Businesss responsibility with respect to this Cooperative Agreement are consistent with the amounts currently reserved by the PPG Chlor-alkali and Derivatives Business for this project.
Multiple future events, such as remedy design and remedy implementation involving agency action or approvals related to the Calcasieu River Estuary will be required and considerable uncertainty exists regarding the timing of these future events. Final resolution of these events is expected to occur over an extended period of time. However, LDEQ approved the remedial design submittal in late 2012, and the remedy implementation could occur during 2013 to 2015, with some period of long-term monitoring for remedy effectiveness to follow. In addition, the PPG Chlor-alkali and Derivatives Businesss obligation related to any potential remediation will be dependent in part upon the final allocation of responsibility among the potentially responsible parties. Negotiations with respect to this allocation are ongoing, but the outcome is uncertain.
Remediation: Reasonably Possible Matters
In addition to the amounts currently reserved for environmental remediation, the PPG Chlor-alkali and Derivatives Business may be subject to loss contingencies related to environmental matters estimated to be as much as $15 million to $60 million. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. This range of reasonably possible unreserved loss relates to environmental matters at several sites; however, this range primarily relates to the Calcasieu River Estuary and two PPG Chlor-alkali and Derivatives Business plant sites. The loss contingencies related to these sites include unresolved issues such as the nature and extent of contamination at these sites and the methods that may have to be employed to remediate them.
The status of the remediation activity at the Calcasieu River Estuary and the factors that could result in the need for additional environmental remediation reserves at that site are described above. Initial remedial actions are occurring at the two PPG Chlor-alkali and Derivatives Business plant sites. These two PPG Chlor-alkali and Derivatives Business plant sites are in Lake Charles, Louisiana and Natrium, West Virginia. At Lake Charles, PPG has completed a Facility Investigation and Corrective Measure Study (CMS) under USEPAs Resource Conservation and Recycling Act (RCRA) Corrective Action Program under the oversight of the LDEQ. The LDEQ has accepted the proposed remedial alternatives. The PPG Chlor-alkali and Derivatives Business received notice of the LDEQs issuance of the final Hazardous Waste Post-Closure/HSWA Permit on June 28, 2010. The Permit was issued in final form on September 23, 2010. Planning for implementation of these proposed alternatives is in progress. At Natrium, a facility investigation has been completed and initial interim remedial measures have been implemented to mitigate soil impacts. There is additional investigation of groundwater contamination ongoing which may indicate the need for further remedial actions to address specific
areas of the facility. Installation of a groundwater treatment system has been completed. As part of the ongoing RCRA Corrective Action investigation for groundwater, the West Virginia Department of Environmental Protection and the United States Environmental Protection Agency Region III have requested that PPG perform sampling of sediment pore-water in the adjacent Ohio River to assess the potential for offsite migration of contaminated groundwater. The Agencies have approved PPGs investigation work plan, sampling was performed in August 2012 and the results are currently being analyzed. The results were submitted to the West Virginia Department of Environmental Protection and the United States Environmental Protection Agency Region III on December 31, 2012.
The impact of evolving programs, such as natural resource damage claims, industrial site reuse initiatives and state remediation programs, also adds to the present uncertainties with regard to the ultimate resolution of this unreserved exposure to future loss. The PPG Chlor-alkali and Derivatives Businesss assessment of the potential impact of these environmental contingencies is subject to uncertainty due to the complex, ongoing and evolving process of investigation and remediation, if necessary, of such environmental contingencies, and the potential for technological and regulatory developments.
Management expects cash outlays for environmental remediation to range from $10 million to $20 million per year, through 2015 and $3 million to $5 million per year from 2016 through 2017.
17. Accumulated Other Comprehensive Loss
(Millions) |
|
Unrealized |
|
Pension and |
|
Unrealized |
|
Accumulated |
| ||||
Balance, Jan. 1, 2010 |
|
$ |
3 |
|
$ |
(145 |
) |
$ |
(25 |
) |
$ |
(167 |
) |
Net change |
|
(2 |
) |
(20 |
) |
8 |
|
(14 |
) | ||||
Balance, Dec. 31, 2010 |
|
$ |
1 |
|
$ |
(165 |
) |
$ |
(17 |
) |
$ |
(181 |
) |
Net change |
|
(2 |
) |
(27 |
) |
9 |
|
(20 |
) | ||||
Balance, Dec. 31, 2011 |
|
$ |
(1 |
) |
$ |
(192 |
) |
$ |
(8 |
) |
$ |
(201 |
) |
Net change |
|
6 |
|
20 |
|
4 |
|
30 |
| ||||
Balance, Dec. 31, 2012 |
|
$ |
5 |
|
$ |
(172 |
) |
$ |
(4 |
) |
$ |
(171 |
) |
With the exception of unrealized currency translation adjustments, all other components of accumulated other comprehensive loss are reported net of tax.
Unrealized currency translation adjustments related to translation of foreign denominated balance sheets are not presented net of tax given that no deferred U.S. income taxes have been provided on undistributed earnings of non-U.S. subsidiaries because they are deemed to be reinvested for an indefinite period of time.
The tax benefit related to the adjustment for pension and other postretirement benefits for the years ended December 31, 2012, 2011 and 2010 was $(10) million, $16 million and $12 million, respectively. The cumulative tax benefit related to the adjustment for pension and other postretirement benefits at December 31, 2012 and 2011 was $122 million and $132 million, respectively. The tax benefit related to the change in the unrealized gain on derivatives for the years ended December 31, 2012, 2011 and 2010 was $3 million, $5 million and $6 million, respectively.
18. Employee Savings Plan
The PPG Chlor-alkali and Derivatives Business has no employee savings plan; however, the PPG Employee Savings Plan (Savings Plan) covers substantially all U.S. employees of the PPG Chlor-alkali and Derivatives Business. PPG generally makes matching contributions to the Savings Plan based upon participants savings, subject to certain limitations. For most participants not covered by a collective bargaining agreement, PPG-matching contributions are established each year at the discretion of PPG and are applied to employee contributions up to a maximum of 6 percent of eligible participant compensation. For those participants whose employment is covered by a collective bargaining agreement, the level of PPG-matching contribution, if any, is determined by the relevant collective bargaining agreement.
The PPG-matching contribution was 100 percent for the first two months of 2009. The PPG-matching contribution was suspended from March 2009 through June 2010 as a cost savings measure in recognition of the adverse impact of the global recession. Effective July 1, 2010, the PPG match was reinstated at 50 percent on the first 6 percent of compensation contributed for most employees eligible for the PPG-matching contribution feature. This included the union represented employees in accordance with their collective bargaining agreements. On January 1, 2011, the PPG match was increased to 75 percent on the first 6 percent of compensation contributed by these eligible employees.
Compensation expense and cash contributions related to the PPG match of the PPG Chlor-alkali and Derivatives Business participant contributions to the Savings Plan for 2012, 2011 and 2010 totaled $2 million, $2 million and $1 million, respectively. A portion of the Savings Plan qualifies under the Internal Revenue Code as an Employee Stock Ownership Plan. As a result, the tax deductible dividends on PPG shares held by the Savings Plan related to the PPG Chlor-alkali and Derivatives Business were $5 million, $5 million and $6 million for 2012, 2011 and 2010, respectively.
19. Other Earnings
|
|
Year-ended December 31, |
| |||||||
(Millions) |
|
2012 |
|
2011 |
|
2010 |
| |||
Share of net earnings of equity affiliates (See Note 8) |
|
$ |
2 |
|
$ |
1 |
|
$ |
(1 |
) |
Refunds received |
|
|
|
6 |
|
4 |
| |||
Profit on sale of assets |
|
1 |
|
5 |
|
|
| |||
Bargain purchase gain (See Note 4) |
|
|
|
10 |
|
|
| |||
Other |
|
9 |
|
5 |
|
4 |
| |||
Total |
|
$ |
12 |
|
$ |
27 |
|
$ |
7 |
|
20. Stock-Based Compensation
The PPG Chlor-alkali and Derivatives Business has no stock-based compensation plans; however, certain employees of the PPG Chlor-alkali and Derivatives Business are eligible to participate in PPGs stock-based compensation plans, which include stock options, restricted stock units (RSUs) and grants of contingent shares that are earned based on achieving targeted levels of total shareholder return. All current grants of stock options, RSUs and contingent shares are made under the PPG Industries, Inc. Amended and Restated Omnibus Incentive Plan (PPG Amended Omnibus Plan), which was amended and restated effective April 21, 2011. Shares available for future grants under the PPG Amended Omnibus Plan were 8.3 million as of December 31, 2012.
Total stock-based compensation cost related to the PPG Chlor-alkali and Derivatives Business was $3 million, $2 million, and $2 million in 2012, 2011, and 2010 respectively. The income tax benefit recognized in the accompanying combined income statement related to the stock-based compensation was $1 million in each of the years ended December 31, 2012, 2011 and 2010, respectively.
Stock Options
Certain employees of the PPG Chlor-alkali and Derivatives Business have been granted stock option awards under two stock option plans: the PPG Industries, Inc. Stock Plan (PPG Stock Plan) and the PPG Amended Omnibus Plan whereby these employees can purchase shares of common stock at prices equal to the fair market value of the shares on the date the options were granted. The options are generally exercisable beginning from six to 48 months after being granted and have a maximum term of 10 years. Upon exercise of a stock option, shares of PPG stock are issued from treasury stock. The PPG Stock Plan includes a restored option provision for options originally granted prior to January 1, 2003 allows an optionee to exercise options and satisfy the option cost by certifying ownership of mature shares of PPG common stock with a market value equal to the option cost.
The fair value of stock options issued to employees is measured on the date of grant and is recognized as expense over the requisite service period. The PPG Chlor-alkali and Derivatives Business estimates the fair value of stock options using the Black-Scholes option pricing model. The risk-free interest rate is determined by using the U.S. Treasury yield curve at the date of the grant and using a maturity equal to the expected life of the
option. The expected life of options is calculated using the average of the vesting term and the maximum term, as prescribed by accounting guidance on the use of the simplified method for determining the expected term of an employee share option. This method is used as the vesting term of stock options was changed to three years in 2004 and, as a result, the historical exercise data does not provide a reasonable basis upon which to estimate the expected life of options. The expected dividend yield and volatility are based on historical stock prices and dividend amounts over past time periods equal in length to the expected life of the options.
The following weighted average assumptions were used to calculate the fair values of stock option grants in each year:
|
|
2012 |
|
2011 |
|
2010 |
|
Risk free interest rate |
|
1.3 |
% |
2.9 |
% |
2.8 |
% |
Expected life of option in years |
|
6.5 |
|
6.4 |
|
5.9 |
|
Expected dividend yield |
|
3.3 |
% |
3.3 |
% |
3.4 |
% |
Expected volatility |
|
29.4 |
% |
28.0 |
% |
28.5 |
% |
The weighted average fair value of options granted was $17.97 per share, $19.00 per share, and $13.45 per share for the years ended Dec. 31, 2012, 2011, and 2010, respectively.
A summary of the stock options outstanding and exercisable related to the PPG Chlor-alkali and Derivatives Business and activity for the year ended December 31, 2012 is presented below:
|
|
Number of |
|
Weighted |
|
Weighted |
|
Intrinsic Value |
| ||
Outstanding, Dec. 31, 2011 |
|
183,870 |
|
$ |
61.92 |
|
7.9 |
|
$ |
6 |
|
Granted |
|
44,644 |
|
89.94 |
|
|
|
|
| ||
Exercised |
|
(66,432 |
) |
51.06 |
|
|
|
|
| ||
Outstanding, Dec. 31, 2012 |
|
162,082 |
|
$ |
75.18 |
|
7.6 |
|
$ |
10 |
|
Vested or expected to vest, Dec. 31, 2012 |
|
158,072 |
|
$ |
74.90 |
|
7.6 |
|
$ |
10 |
|
Exercisable, Dec. 31, 2012 |
|
28,790 |
|
$ |
51.03 |
|
5.2 |
|
$ |
2 |
|
At December 31, 2012, there was $0.4 million of total unrecognized compensation cost related to outstanding stock options that had not yet vested. This cost is expected to be recognized as expense over a weighted average period of 1.5 years.
The following table presents the PPG Chlor-alkali and Derivatives Businesss stock option activity for the years ended December 31, 2012, 2011, and 2010:
(Millions) |
|
2012 |
|
2011 |
|
2010 |
| |||
Total intrinsic value of stock options exercised |
|
$ |
4 |
|
$ |
1 |
|
$ |
1 |
|
Cash received from stock option exercises |
|
3 |
|
2 |
|
2 |
| |||
Restricted Stock Units
Long-term incentive value is delivered to selected key PPG Chlor-alkali and Derivatives Business management employees by granting RSUs, which have either time or performance-based vesting features. The fair value of an RSU is equal to the market value of a share of PPG stock on the date of grant. Time-based RSUs vest over the three-year period following the date of grant, unless forfeited, and will be paid out in the form of PPG stock, cash or a combination of both at PPGs discretion at the end of the three year vesting period. Performance-based RSUs vest based on achieving specific annual performance targets for PPG earnings per share growth
and PPG cash flow return on capital over the three calendar year-end periods following the date of grant. Unless forfeited, the performance-based RSUs will be paid out in the form of PPG stock, cash or a combination of both at PPGs discretion at the end of the three-year performance period if PPG meets the performance targets. The amount paid for performance-based awards may range from 0% to 180% of the original grant, based upon the frequency with which the annual earnings per share growth and cash flow return on capital performance targets are met over the three calendar year periods. For the purposes of expense recognition, PPG has assumed that performance-based RSUs granted in 2009 will vest at 150% and those granted in 2010 and 2011 will vest at the 100% level. Five of the six performance targets were met during the performance vesting period of the 2009 grant. At December 31, 2011, four of the four possible performance targets had been met for the 2010 grant, and two of the two possible performance targets had been met for the 2011 grants.
The following table summarizes the RSU activity related to the PPG Chlor-alkali and Derivatives Business for the year ended Dec. 31, 2012:
|
|
Number of |
|
Weighted |
|
Intrinsic Value |
| ||
Outstanding, Jan. 1, 2012 |
|
42,415 |
|
$ |
48.33 |
|
$ |
4 |
|
Granted |
|
11,851 |
|
85.08 |
|
|
| ||
Additional shares vested |
|
9,912 |
|
55.26 |
|
|
| ||
Released from restriction |
|
(18,670 |
) |
27.66 |
|
|
| ||
Outstanding, Dec. 31, 2012 |
|
45,508 |
|
$ |
68.83 |
|
$ |
6 |
|
Vested or expected to vest, Dec. 31, 2012 |
|
45,063 |
|
$ |
68.74 |
|
$ |
6 |
|
There was $0.6 million of total unrecognized compensation cost related to nonvested RSUs outstanding as of Dec. 31, 2012. This cost is expected to be recognized as expense over a weighted average period of 1.4 years.
Contingent Share Grants
Grants of contingent shares to selected key executives of the PPG Chlor-alkali and Derivatives Business have been provided by PPG and may be earned based on PPG total shareholder return over the three-year period following the date of grant. Contingent share grants (referred to as TSR awards) are made annually and are paid out at the end of each three-year period based on PPGs performance. Performance is measured by determining the percentile rank of the total shareholder return of PPG common stock in relation to the total shareholder return of the S&P 500 for the three-year period following the date of grant. The payment of awards following the three-year award period will be based on performance achieved in accordance with the scale set forth in the plan agreement and may range from 0 percent to 220 percent of the initial grant. A payout of 100 percent is earned if the target performance is achieved. Contingent share awards for the 2010-2012, 2011-2013, and 2012-2014 periods earn dividend equivalents for the award period, which will be paid to participants with the award payout at the end of the period based on the actual number of contingent shares that are earned. Any payments made at the end of the award period may be in the form of stock, cash or a combination of both. The TSR awards qualify as liability awards, and compensation expense is recognized over the three-year award period based on the fair value of the awards (giving consideration to PPGs percentile rank of total shareholder return) remeasured in each reporting period until settlement of the awards.
As of December 31, 2012, there was $4 million of total unrecognized compensation cost related to outstanding TSR awards based on the current estimate of fair value. This cost is expected to be recognized as expense over a weighted average period of 1.8 years.
21. Separation and Merger Transaction
On January, 28, 2013, PPG completed the separation of the PPG Chlor-alkali and Derivatives Business and merger of its wholly-owned subsidiary, Eagle Spinco Inc., with a subsidiary of Georgia Gulf Corporation in a tax efficient Reverse Morris Trust transaction (the Transaction). Pursuant to the merger, Eagle Spinco, the entity holding the former PPG Chlor-alkali and Derivatives Business, is now a wholly-owned subsidiary of Georgia Gulf. The closing of the merger followed the expiration of the related exchange offer and the satisfaction of certain other conditions. The combined company formed by uniting Georgia Gulf with the former PPG Chlor-alkali and Derivatives Business is named Axiall Corporation (Axiall). PPG holds no ownership interest in Axiall. PPG received the necessary ruling from the Internal Revenue Service and as a result, this Transaction was generally tax free to PPG and its shareholders.
Under the terms of the exchange offer, 35,249,104 shares of Eagle Spinco common stock were available for distribution in exchange for shares of PPG common stock accepted in the offer. Following the merger, each share of Eagle Spinco common stock automatically converted into the right to receive one share of Axiall Corporation common stock. Accordingly, PPG shareholders who tendered their shares of PPG common stock as part of this offer received 3.2562 shares of Axiall common stock for each share of PPG common stock accepted for exchange.
Under the terms of the Transaction, PPG received approximately $900 million of cash and 35.2 million shares of Axiall common stock (market value of $1.8 billion on January 25, 2013) which were distributed to PPG shareholders by the exchange offer as described above. The cash consideration is subject to customary post-closing adjustment, including a working capital adjustment. In the Transaction, PPG transferred environmental remediation liabilities, defined benefit pension plan assets and liabilities and other post-employment benefit liabilities related to the PPG Chlor-alkali and Derivatives Business to Axiall.
22. Subsequent Events
Except for the events described in Note 1 and Note 21, management of the PPG Chlor-alkali and Derivatives Business has determined that there were no subsequent events that would require disclosure in or adjustment to the accompanying financial statements through May 14, 2013.
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME OF AXIALL CORPORATION
The following Unaudited Pro Forma Condensed Combined Statement of Income of Axiall Corporation (formerly known as Georgia Gulf Corporation) presents the combination of the historical income statements of Axiall and the PPG Chlor-alkali and Derivatives Business adjusted to give effect to: (1) the Merger and (2) all related transactions, including borrowings under the Term Facility, the issuance of the Splitco notes and the Distribution contemplated by the Merger Agreement and the Separation Agreement (collectively, the Financing Transactions). Capitalized terms used herein are defined below under the caption Helpful Definitions.
The Unaudited Pro Forma Condensed Combined Statement of Income for the year ended December 31, 2012 combines the historical Consolidated Statement of Income of Axiall and the historical Combined Statement of Income for the PPG Chlor-alkali and Derivatives Business, giving effect to the Merger as if it had been consummated on January 1, 2012.
The Unaudited Pro Forma Condensed Combined Statement of Income was prepared using the acquisition method of accounting with Axiall considered the acquirer of the PPG Chlor-alkali and Derivatives Business. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values with any excess purchase price allocated to goodwill. The pro forma purchase price allocation was based on an estimate of the fair market values of the tangible and intangible assets and liabilities related to the PPG Chlor-alkali and Derivatives Business. In arriving at the estimated fair market values, Axiall has considered the appraisals of independent consultants which were based on a preliminary review of the assets related to the PPG Chlor-alkali and Derivatives Business that were transferred. Axiall expects to complete the purchase price allocation after considering the appraisal of the PPG Chlor-alkali and Derivatives Businesss assets at the level of detail necessary to finalize the required purchase price allocation. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.
The PPG Chlor-alkali and Derivatives Businesss historical combined financial statements have been carved-out from PPGs consolidated financial statements and reflect certain assumptions and allocations. The PPG Chlor-alkali and Derivatives Businesss historical combined financial statements include all revenues, costs, assets and liabilities that are directly attributable to the PPG Chlor-alkali and Derivatives Business. In addition, certain expenses reflected in the PPG Chlor-alkali and Derivatives Businesss combined financial statements are an allocation of corporate expenses from PPG. Such expenses include, but are not limited to, centralized PPG support functions including legal, accounting, tax, treasury, payroll and benefits administration, information technology and purchasing. The actual costs that may have been incurred if the PPG Chlor-alkali and Derivatives Business had been a stand-alone company would be dependent on a number of factors including the chosen organizational structure and strategic decisions made as to information technology and infrastructure requirements. As such, the PPG Chlor-alkali and Derivatives Businesss combined financial statements do not necessarily reflect what the PPG Chlor-alkali and Derivatives Businesss financial condition and results of operations would have been had the PPG Chlor-alkali and Derivatives Business operated as a stand-alone company during the periods or at the date presented.
The Unaudited Pro Forma Condensed Combined Statement of Income does not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies expected to result from the Merger.
The Unaudited Pro Forma Condensed Combined Statement of Income should be read in conjunction with:
· the accompanying notes to the Unaudited Pro Forma Condensed Combined Statement of Income;
· Axialls audited historical consolidated financial statements and related notes for the year ended December 31, 2012, which are included in Axialls Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (filed with the SEC on February 28, 2013); and
· the PPG Chlor-alkali and Derivatives Businesss audited historical combined financial statements for the three years ended December 31, 2012 (included in this Current Report on Form 8-K).
AXIALL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Year ended December 31, 2012
(In millions)
|
|
Historical |
|
Pro Forma Adjustments |
|
|
|
Axiall |
| |||||||||||
|
|
Axiall |
|
PPG Chlor- |
|
Acquisition |
|
|
|
Financing |
|
|
|
Corporation |
| |||||
Net Sales |
|
$ |
3,325.8 |
|
$ |
1,700.0 |
|
$ |
(48.4 |
) |
A |
|
$ |
|
|
|
|
$ |
4,977.4 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of sales |
|
2,865.4 |
|
1,178.0 |
|
53.2 |
|
B |
|
|
|
|
|
4,096.6 |
| |||||
Selling, general and administrative |
|
203.5 |
|
127.0 |
|
73.8 |
|
C |
|
|
|
|
|
404.3 |
| |||||
Transaction related costs, restructuring and other, net |
|
38.8 |
|
|
|
(18.3 |
) |
D |
|
|
|
|
|
20.5 |
| |||||
Gain on sale of assets |
|
(19.3 |
) |
|
|
|
|
|
|
|
|
|
|
(19.3 |
) | |||||
Long-lived asset recoveries, net |
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
(0.8 |
) | |||||
Depreciation and amortization |
|
|
|
43.0 |
|
(42.0 |
) |
B |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
(1.0 |
) |
C |
|
|
|
|
|
|
| |||||
Research and development |
|
|
|
2.0 |
|
(0.5 |
) |
B |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
(1.5 |
) |
C |
|
|
|
|
|
|
| |||||
Other charges |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
8.0 |
| |||||
Other earnings |
|
|
|
(12.0 |
) |
|
|
|
|
|
|
|
|
(12.0 |
) | |||||
Total operating costs and expenses |
|
3,087.6 |
|
1,346.0 |
|
63.7 |
|
|
|
|
|
|
|
4,497.3 |
| |||||
Operating income (loss) |
|
238.2 |
|
354.0 |
|
(112.1 |
) |
|
|
|
|
|
|
480.1 |
| |||||
Interest expense |
|
(57.5 |
) |
|
|
|
|
|
|
(44.6 |
) |
A |
|
(102.7 |
) | |||||
Loss on redemption and other debt costs |
|
(2.7 |
) |
|
|
|
|
|
|
(11.0 |
) |
B |
|
(13.7 |
) | |||||
Foreign exchange loss |
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
(0.6 |
) | |||||
Interest income |
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
| |||||
Income before income taxes |
|
177.8 |
|
354.0 |
|
(112.1 |
) |
|
|
(55.6 |
) |
|
|
364.1 |
| |||||
Provision (benefit) for income taxes |
|
57.2 |
|
114.0 |
|
(42.0 |
) |
E |
|
(20.9 |
) |
C |
|
108.3 |
| |||||
Net income (loss) |
|
120.6 |
|
240.0 |
|
(70.1 |
) |
|
|
(34.7 |
) |
|
|
255.8 |
| |||||
Less: net income attributable to noncontrolling interest |
|
|
|
13.0 |
|
(3.2 |
) |
F |
|
|
|
|
|
9.8 |
| |||||
Net income attributable to Axiall shareholders |
|
$ |
120.6 |
|
$ |
227.0 |
|
$ |
(66.9 |
) |
|
|
$ |
(34.7 |
) |
|
|
$ |
246.0 |
|
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Statement of Income.
AXIALL CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
(In millions, except per share data and percentages)
Note 1. Basis of Presentation
The accompanying Unaudited Pro Forma Condensed Combined Statement of Income of Axiall Corporation (formerly known as Georgia Gulf Corporation) presents the pro forma consolidated results of operations of the combined company based upon the historical financial statements of each of Axiall and the PPG Chlor-alkali and Derivatives Business, after giving effect to the Merger and all related transactions, including the Financing Transactions and adjustments described in these notes, and are intended to reflect the impact of the Merger and the Financing Transactions on Axialls consolidated results of operations. The accompanying Unaudited Pro Forma Condensed Combined Statement of Income has been prepared using and should be read in conjunction with the respective audited financial statements of each of Axiall and the PPG Chlor-alkali and Derivatives Business for the year ended December 31, 2012. The accompanying Unaudited Pro Forma Condensed Combined Statement of Income is presented for illustrative purposes only and does not reflect the costs of any integration activities or benefits that may result from realization of future costs savings due to operating efficiencies or revenue synergies expected to result from the Merger. In addition, throughout the period presented in the Unaudited Pro Forma Condensed Combined Statement of Income, the operations of the PPG Chlor-alkali and Derivatives Business were conducted and accounted for as part of PPG. The PPG Chlor-alkali and Derivatives Businesss condensed financial statements have been derived from the PPG Chlor-alkali and Derivatives Businesss historical accounting records and reflect significant allocations of direct costs and expenses. All of the allocations and estimates in such financial statements are based on assumptions that the management of PPG believes are reasonable. The PPG Chlor-alkali and Derivatives Businesss financial statements do not necessarily represent the financial position of the PPG Chlor-alkali and Derivatives Business had it been operated as a separate independent entity.
The Unaudited Pro Forma Condensed Combined Statement of Income of Axiall combine the historical Consolidated Statements of Income of Axiall and the historical Combined Statement of Income of the PPG Chlor-alkali and Derivatives Business for the year ended December 31, 2012, to reflect the Merger and all related transactions, including the Financing Transactions, as if they had occurred as of January 1, 2012.
The Unaudited Pro Forma Condensed Combined Statement of Income was prepared using the acquisition method of accounting with Axiall considered the acquirer of the PPG Chlor-alkali and Derivatives Business. The audited historical combined financial statements of the PPG Chlor-alkali and Derivatives Business have been adjusted to reflect certain reclassifications in order to conform to Axialls financial statement presentation.
Note 2. Acquisition Adjustments
The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect the preliminary allocation of the purchase price to identifiable assets acquired and liabilities assumed, with the excess recorded as goodwill. The purchase price of approximately $2.7 billion consists of: (i) shares of our common stock received by PPG shareholders valued at approximately $1.8 billion, based on the closing stock sale price of $50.24 on the last trade date prior to the closing date of the Transactions; (ii) debt assumed of approximately $967.0 million; and (iii) the assumption of other liabilities, including pension liabilities and other post-retirement obligations.
The Unaudited Pro Forma Condensed Combined Statement of Income reflects the following adjustments:
(A) Revenue from intercompany sales between the PPG Chlor-alkali and Derivatives Business and Axiall of $48.4 was eliminated.
(B) Cost of sales was adjusted as follows:
· An increase to reflect reclassification of the PPG Chlor-alkali and Derivatives Businesss historical depreciation cost from the depreciation and amortization line item of $42.0.
· An increase in depreciation expense of $53.6 resulting from an increase in the estimated fair value of the PPG Chlor-alkali and Derivatives Businesss property, plant and equipment. For purposes of determining the impact on the Unaudited Pro Forma Condensed Combined Statements of Income, the fair value of property, plant and equipment is being depreciated over an estimated weighted-average useful life of ten years.
· An estimated $13.4 increase in cost of sales related to the estimated fair market value step-up adjustment of the PPG Chlor-alkali and Derivatives Businesss inventory for the year ended December 31, 2012.
· A decrease due to the removal of historical amortization of prior service cost and actuarial losses related to the PPG Chlor-alkali and Derivatives Businesss defined benefit pension plans and other postretirement benefit plans of $17.7. This decrease is included in the approximately $115.0 of annualized cost synergies expected to be realized in the first two years following the Merger
· An decrease related to the elimination to remove the cost associated with sales between the PPG Chlor-alkali and Derivatives Business and Axiall of $48.4. An increase related to the elimination of intercompany profit in ending inventory of $0.8.
· An increase to reflect the reclassification of the PPG Chlor-alkali and Derivatives Businesss historical research and development costs from the research and development line item of $0.5.
· An increase of $9.0 to adjust for changes in the PPG Chlor-alkali and Derivatives Businesss LIFO inventory reserve resulting from the conformance of the PPG Chlor-alkali and Derivatives Businesss inventory methodology of LIFO to FIFO.
(C) Selling, general and administrative expenses were adjusted as follows:
· An increase related to the PPG Chlor-alkali and Derivatives Businesss historical amortization of intangible assets of $1.0 which was reclassified from the depreciation and amortization line item.
· An increase in amortization expense of $63.4 resulting from an increase in the fair value of the identifiable intangible assets.
· A decrease due to the removal of historical amortization of prior service cost and actuarial losses related to the PPG Chlor-alkali and Derivatives Businesss defined benefit pension plans and other postretirement benefit plans of $5.3.
· An increase to reflect the reclassification of the PPG Chlor-alkali and Derivatives Businesss historical research and development costs from the research and development line item of $1.5.
· An increase to reflect $13.2 in estimable and factually supportable costs associated with the Transition Services Agreement, the Shared Facilities, Services and Supply Agreement and other Additional Agreements, professional fees, consultants, information technology implementation, relocation and severance incurred in connection with the integration of Axiall and the PPG Chlor-alkali and Derivatives Business.
(D) Direct, incremental deal related costs of $18.3 reflected in the historical financial statements of Axiall were removed due to their non-recurring nature. These costs primarily consist of professional and legal fees.
(E) For purposes of this Unaudited Pro Forma Condensed Combined Statement of Income, a global blended statutory tax rate of 37.5% has been used. This does not reflect Axialls effective tax rate, which will include other tax items such as state and foreign taxes as well as other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.
(F) Net income attributable to noncontrolling interests was decreased by $3.2 to reflect depreciation and
amortization of fair value adjustments attributable to the noncontrolling interest in Taiwan Chlorine Industries, Ltd., a joint venture between with China Petrochemical Development Corporation.
Note 3. Financing Adjustments
Upon consummation of the Merger and the Financing Transactions contemplated as a part of the Transactions, on a pro forma consolidated basis, Axiall assumed $967.0 in additional debt, comprised of the $279.0 Term Facility and $688.0 aggregate principal amount of the Splitco notes. The proceeds of the Term Facility and the Splitco notes were transferred to PPG as part of the Distribution. In connection therewith, the shares of Splitco common stock then outstanding were automatically converted into the greater of 35.2 shares of Axiall common stock and at least 50.5 percent of outstanding Axiall common stock after giving effect to such issuance. Following the Merger, Axialls pre-Merger stockholders continued to hold the remaining approximately 49.5 percent of Axialls common stock.
The Unaudited Pro Forma Condensed Combined Statement of Income reflects the following adjustments:
(A) To include interest expense on additional debt issued in connection with the Transactions.
|
|
Rate |
|
Principal |
|
Interest expense |
| ||
Term Facility |
|
3.750 |
% |
$ |
279.0 |
|
$ |
10.5 |
|
Splitco notes |
|
4.625 |
% |
688.0 |
|
31.8 |
| ||
Total new debt |
|
|
|
$ |
967.0 |
|
42.3 |
| |
Amortization of new debt issuance costs |
|
|
|
|
|
2.3 |
| ||
Total interest expense |
|
|
|
|
|
$ |
44.6 |
|
(B) To include the $11.0 related to financing fees for a bridge loan that was used to finance the Transactions and was retired with the proceeds from $688.0 aggregate principal amount of the Splitco notes.
(C) For purposes of this Unaudited Pro Forma Condensed Combined Statement of Income, a global blended statutory tax rate of 37.5% has been used. This does not reflect Axialls effective tax rate, which will include other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.
Note 4. Items Not Included
The following expected material nonrecurring charges related to the Merger and all related transactions, including the Financing Transactions, are not included or provided for in the Unaudited Pro Forma Condensed Combined Statement of Income:
· Prior to the Merger, Axiall and the PPG Chlor-alkali and Derivatives Business each owned a fifty percent interest in PHH Monomer LLC (PHH), a manufacturing joint venture, which Axiall accounted for using the equity method. As a result of the Merger, Axiall obtained control of PHH. A pre-tax gain of $23.5 was recorded to reflect the remeasurement of Axialls previously held equity interest in PHH as a result of Axiall obtaining control of PHH through the Merger.
· Certain other costs associated with the Transition Services Agreement, the Shared Facilities, Services and Supply Agreement and other Additional Agreements, professional fees, consultants fees, information technology implementation, relocation and severance not quantified in Note 2(C) above which will be incurred in connection with the integration of Axiall and the PPG Chlor-alkali and Derivatives Business. These agreements will have an impact on the statement of income, but such amounts are not currently estimable or factually supportable as they are primarily based upon the variable usage of certain services over time.
Axiall increased availability under the New ABL Revolver by $200.0, subject to applicable borrowing base
availability and other conditions. At the Companys election, with respect to U.S. borrowings under the New ABL Revolver, the New ABL Revolver will bear interest at a rate equal to either: (i) the higher of certain U.S. index rates; or (ii) three-month London Interbank Offered Rate (LIBOR), in each case, plus an applicable margin based on the Companys utilization under the New ABL Revolver. At the election of the Company, with respect to Canadian borrowings under the New ABL Revolver, the New ABL Revolver will bear interest at a rate equal to either: (i) the higher of certain Canadian index rates; or (ii) three-month LIBOR, in each case, plus an applicable margin based on the Companys utilization under the New ABL Revolver.
Other than the $23.0 combined decrease in the cost of sales and selling, general and administrative expense related to the PPG Chlor-Alkali and Derivative Businesss defined benefit pension plans and other post-retirement benefit plans, the Unaudited Pro Forma Condensed Combined Statement of Income also does not reflect benefits that may result from the realization of approximately $115.0 of annualized cost synergies expected to be fully realized in the first two years following the Merger
As of December 31, 2012, Axiall had a valuation allowance of $105.3 recorded on its deferred tax assets. This valuation allowance relates predominately to Axialls Canadian deferred tax assets. As part of the purchase price allocation process resulting from the Merger, it is possible that deferred tax liabilities will be recorded in the Canadian jurisdiction that, if recorded, could result in a release of a portion of the valuation allowance. Any release of a valuation allowance on Axialls pre-Merger deferred tax assets will be recorded in the income statement in the period that the Merger is completed; however no such adjustment is included in the Unaudited Pro Forma Condensed Combined Financial Statements due to its nonrecurring nature.
HELPFUL DEFINITIONS
· Additional Agreements means the Employee Matters Agreement, the Tax Matters Agreement, the Shared Facilities, Services and Supply Agreement, the Transition Services Agreement, the Servitude Agreement, the Electric Generation, Distribution and Transmission Facilities Lease, the Chlorine, Liquid Caustic Soda and Hydrochloric Acid Sales Agreements and the Real Property Agreement;
· Axiall, we, us and our refer to Axiall Corporation (formerly known as Georgia Gulf Corporation) and its consolidated subsidiaries;
· Axiall common stock means the common stock, par value $0.01 per share, of Axiall;
· Chlorine, Liquid Caustic Soda and Hydrochloric Acid Sales Agreements means those certain agreements entered into at the date of the Separation between PPG and Axiall;
· Debt Exchange means the transfer of all or a portion of the Splitco notes by PPG on the closing date of the Merger to the initial purchasers or their affiliates that acted as selling securityholders in the Transactions in satisfaction of all or a portion of the PPG Debt held by affiliates of the initial purchasers;
· Distribution means the distribution by PPG of its shares of Splitco common stock to the holders of shares of PPG common stock by way of an exchange offer;
· The Electric Generation, Distribution and Transmission Facilities Lease means the Generation, Distribution and Transmission Facilities Lease entered into at the date of the Separation between PPG and Splitco;
· Employee Matters Agreement means the Employee Matters Agreement, dated as of July 18, 2012, by and among Axiall, PPG and Splitco;
· Merger means the combination of Axialls pre-Merger business and the PPG Chlor-alkali and Derivatives Business through the merger of Merger Sub with and into Splitco, whereby the separate corporate existence of Merger Sub ceased and Splitco continued as the surviving company and as a
wholly-owned subsidiary of Axiall;
· Merger Agreement means the Agreement and Plan of Merger, dated as of July 18, 2012, by and among PPG, Splitco, Axiall and Merger Sub, as amended by Amendment No. 1 to the Merger Agreement, dated as of August 31, 2012;
· Merger Sub means Grizzly Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Axiall, and, unless the context otherwise requires, its subsidiaries;
· PPG means PPG Industries, Inc., a Pennsylvania corporation, and, unless stated otherwise or the context otherwise requires, its subsidiaries, other than Splitco and any of its subsidiaries;
· PPG Chlor-alkali and Derivatives Business means substantially all of the assets and liabilities of the business of PPG relating to the production of chlorine, caustic soda and related chemicals that were transferred to Splitco in the Separation;
· PPG common stock means the common stock, par value $1.66 2/3 per share, of PPG;
· PPG Debt means the senior unsecured bridge loans in the amount of $688.0 incurred by PPG on January 3, 2013 pursuant to that certain 180-day credit agreement among PPG, the lenders from time to time party thereto and Barclays Bank plc, as administrative agent;
· Real Property Agreement means the Real Property Agreement entered into at the date of the Separation, between PPG and Eagle Natrium LLC;
· SEC means the United States Securities and Exchange Commission;
· Separation means the transfer by PPG of the assets and liabilities related to the PPG Chlor-alkali and Derivatives Business, including certain subsidiaries of PPG, to Splitco;
· Separation Agreement means the Separation Agreement, dated as of July 18, 2012, between PPG and Splitco;
· Servitude Agreement means the Servitude Agreement entered into at the date of the Separation between PPG and Splitco;
· Shared Facilities, Services and Supply Agreement means the Shared Facilities, Services and Supply Agreement entered into at the date of the Separation between PPG and Splitco;
· Splitco means Eagle Spinco Inc., a Delaware corporation, and, prior to the Merger, a wholly-owned subsidiary of PPG, and, unless stated otherwise or the context otherwise requires, its subsidiaries;
· Splitco common stock means the common stock, par value $0.001 per share, of Splitco;
· Splitco notes means $688.0 in aggregate principal amount of 4.625% Senior Notes due 2021 issued by Splitco that are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of the existing and future domestic subsidiaries of Splitco and, upon consummation of the Merger, became guaranteed by Axiall and each of its existing and future domestic subsidiaries (other than certain excluded subsidiaries);
· Tax Matters Agreement means the Tax Matters Agreement entered into at the date of the Separation by and among Axiall, PPG and Splitco;
· Term Facility means the $279.0 in new bank debt incurred by Splitco under a senior secured term loan
facility, which are obligations of Splitco and its subsidiaries and, upon consummation of the Transactions, became guaranteed by Axiall and each of its existing and future domestic subsidiaries (other than certain excluded subsidiaries);
· Transactions means the transactions contemplated by the Merger Agreement and the Separation Agreement, which provided for, among other things, the Separation, the Term Facility, the Splitco notes, the Debt Exchange, the Distribution and the Merger; and
· Transition Services Agreement means the Transition Services Agreement entered into at the date of the Separation between PPG and Splitco.