PPG INDUSTRIES INC quarterly report, Q3 FY2009

PPG Industries, Inc. — 2009 Q3 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2009. The unaudited filing covers PPG Industries and subsidiaries. Results were materially affected by the global recession, lower industrial and automotive demand, restructuring actions, foreign exchange, and the 2008 divestiture of the automotive glass and services business.

Financial performance and position

Metric	Q3 2009	Q3 2008	9M 2009	9M 2008
Net sales	$3,225 million	$4,225 million	$9,123 million	$12,661 million
Income before taxes	$275 million	$203 million	$417 million	$780 million
Net income attributable to PPG	$159 million	$117 million	$194 million	$467 million
Diluted EPS	$0.96	$0.70	$1.17	$2.82
Operating cash flow	Not separately provided	Not separately provided	$760 million	$868 million

Q3 sales declined 24%; nine-month sales declined 28%. Management attributed the nine-month decline to lower volumes in all segments, weaker foreign currency, and the absence of automotive glass and services sales.
Q3 pretax margin was approximately 8.5%, compared with 4.8% in the prior-year quarter. Q3 net margin was approximately 4.9%, compared with 2.8%. The improvement reflected lower input and energy costs, favorable mix, cost reductions, and the absence of the 2008 restructuring charge.
Nine-month pretax margin was approximately 4.6%, compared with 6.2% in 2008. Nine-month net margin was approximately 2.1%, compared with 3.7%.
Cost of sales as a percentage of sales improved to 61.7% in Q3 and 61.4% for nine months, versus 63.9% and 64.2%, respectively, in the comparable periods.
Cash from operations decreased to $760 million, principally because of lower earnings and approximately $210 million of pension contributions, partly offset by improved working-capital cash generation.
Cash and cash equivalents were $898 million at September 30, 2009, compared with $1,021 million at December 31, 2008. Total current assets were $6,248 million and total current liabilities were $3,869 million.
Debt comprised $455 million of short-term and current maturities and $3,082 million of long-term debt. The debt-to-total-capital ratio was 50%, down from 54% at December 31, 2008.
PPG entered into a $400 million, three-year unsecured term loan. It used $116 million to retire 7.05% notes due in 2009 and approximately $284 million to repay revolving-credit borrowings. Approximately $271 million remained outstanding under the euro-denominated revolving facility.
PPG paid $262 million in dividends during the first nine months and declared dividends of $0.53 per common share for Q3, compared with $0.52 in Q3 2008.

Segment and operational developments

Performance Coatings: Q3 sales fell 13% to $1,075 million, while segment income increased to $155 million from $148 million, as cost reductions and lower input costs more than offset volume declines.
Industrial Coatings: Q3 sales fell 19% to $824 million; segment income rose to $58 million from $48 million because of overhead, manufacturing, and input-cost reductions.
Architectural Coatings—EMEA: Sales declined 12% to $559 million and segment income declined to $59 million from $61 million.
Optical and Specialty Materials: Sales declined 11% to $257 million, but segment income increased to $67 million from $61 million.
Commodity Chemicals: Sales fell 43% to $287 million and segment income fell to $19 million from $116 million, primarily because of lower selling prices and volumes.
Glass: Sales fell to $223 million from $552 million, including the effect of the 2008 automotive glass divestiture. The segment recorded a $6 million loss versus $17 million of income in Q3 2008.

Material changes and unusual items

PPG recorded a $186 million business restructuring charge in March 2009, including $154 million of severance and other costs and $32 million of asset write-offs. The program affected approximately 2,428 employees; the remaining restructuring reserve was $119 million at September 30, 2009.
The nine-month 2009 results included a $141 million after-tax restructuring impact, or $0.86 per diluted share. The comparable 2008 period included after-tax effects from restructuring, SigmaKalon acquisition-related costs, automotive glass divestiture-related items, and a divestiture gain.
PPG’s 2009 restructuring plan includes closing the Saultain, France paint facility and several smaller facilities and reducing global staffing. Management expected approximately $10 million of additional direct restructuring costs in Q4 2009.
The proposed asbestos settlement liability totaled $768 million at September 30, 2009, including $534 million current and $234 million non-current. The arrangement remained subject to bankruptcy-court confirmation and appellate resolution.
If effective, PPG would contribute approximately $825 million in cash through 2023, plus 1,388,889 shares of PPG common stock or their cash value. The filing states that PPG retained potential liability for non-PC-related asbestos claims.
Environmental reserves totaled $291 million, including $189 million related to the former Jersey City chromium plant. Additional reasonably possible but unreserved environmental losses were estimated at $200 million to $300 million.

Outlook, risks, and contingencies

Management did not provide a quantified earnings or revenue forecast in the filing. It stated that operating cash flow and debt capacity were expected to be sufficient to fund operations, capital spending, dividends, debt service, asbestos obligations, share repurchases, and pension contributions. The filing cautions that nine-month results are not necessarily indicative of full-year results.

Key operating risks include global economic conditions, automotive and construction demand, raw-material and energy prices, foreign exchange, competition, restructuring execution, acquisition integration, and realization of expected cost savings.
PPG expects approximately $35 million of environmental remediation cash outlays in 2009 and $50 million to $70 million annually through 2013, subject to regulatory and technical developments.
PPG faces ongoing asbestos litigation and an unresolved bankruptcy-plan approval process. Failure of the settlement could expose the company to renewed litigation and potentially significant period-specific earnings impacts.
The company was cooperating with U.S. authorities regarding a potential export-control violation involving protective coatings exported for possible use in Pakistan. The outcome and financial effect were not determinable.
PPG had $96 million of letters of credit and $73 million of guarantees outstanding. Management did not believe losses under the guarantees were likely.
Automotive customer bankruptcies involving Chrysler and General Motors did not result in material 2009 earnings charges, but automotive credit and demand remain risks.
Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.

Investor verification points

Verify the sustainability of margin improvement, particularly whether lower energy and raw-material costs can offset continued volume pressure.
Reconcile reported earnings with restructuring, asbestos, divestiture, and other unusual items when assessing underlying profitability.
Review debt maturities, variable-rate exposure, revolving-facility availability, and the effect of the $400 million term loan on future interest expense.
Monitor asbestos settlement confirmation, required funding dates, retained non-PC claims, and potential changes to the $768 million recorded liability.
Evaluate environmental reserves and the $200 million–$300 million range of reasonably possible unreserved losses.
Assess pension funding requirements and the effect of additional contributions on free cash flow.
Track automotive, construction, industrial, and commodity-chemical demand trends, as all major reportable segments experienced volume or pricing pressure.