PPG

PPG Industries Inc. - Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended March 31, 2009. PPG Industries, Inc. is a multinational manufacturer of paints, coatings, and specialty materials. The reporting period was significantly impacted by a severe global economic downturn, particularly in the automotive and construction sectors, leading to a substantial decline in sales volumes across all reportable segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 30% year-over-year. This was driven by a 20% volume decline, a 7% negative impact from foreign currency, and a 6% reduction due to the divestiture of the automotive glass business. A 3% price increase partially offset these declines.
• Restructuring Charge: The company recorded a $186 million business restructuring charge in Q1 2009, compared to none in Q1 2008. This included $154 million in severance and other costs and $32 million in asset write-offs to reduce the global cost structure.
• Profitability: The company swung from a net income of $100 million in Q1 2008 to a net loss of $111 million in Q1 2009. The effective tax rate dropped to 18% in 2009 (from 31% in 2008) due to tax benefits associated with the restructuring charge and asbestos settlement adjustments.
• Cash Flow: Operating cash flow turned negative, using $291 million. This was primarily due to a $176 million voluntary pension contribution and working capital changes driven by lower payables and rebate payments.

Guidance, Outlook, and Risks

• Restructuring Outlook: The Q1 2009 restructuring plan is expected to deliver pretax cost savings of approximately $60 million in 2009, growing to an annual run rate of about $140 million thereafter.
• Asbestos Settlement: A modified third amended plan of reorganization for Pittsburgh Corning Corporation (PC) was filed in January 2009. If approved, PPG's funding obligation is estimated at $825 million over 21 years. The company retains liability for non-PC relationship claims.
• Environmental Contingencies: Reserves for environmental matters totaled $292 million. The company estimates reasonably possible unreserved losses of $200 million to $300 million, largely related to the former chromium plant in New Jersey and chemical sites in Louisiana.
• Automotive Sector Risk: Production of automobiles and light trucks declined 47% in North America and 41% in Western Europe in Q1 2009. PPG has approximately $70 million in total asset exposure to General Motors and Chrysler. The company has applied to participate in the U.S. Auto Supplier Support Program for GM.
• Legal Proceedings: Ongoing investigations regarding potential U.S. export control law violations and antitrust class actions regarding flat glass pricing remain unresolved.

Investor Verification Checklist

• Verify the status and likelihood of approval for the third amended PC plan of reorganization regarding the asbestos settlement, as this impacts future cash outflows and liability recognition.
• Monitor the automotive industry recovery and the specific impact on PPG's Industrial Coatings segment, which recorded a segment loss of $16 million.
• Review the environmental remediation timeline for the Jersey City chromium site, as regulatory approvals could alter the $292 million reserve and future cash outlays.
• Assess the impact of the $186 million restructuring charge on future operating margins and the realization of the projected $140 million annual run-rate savings.
• Track the credit risk exposure to General Motors and Chrysler ($70 million total assets) amidst ongoing federal assistance negotiations.