PPG INDUSTRIES INC quarterly report, Q2 FY2010

Business Context and Reporting Period

PPG Industries, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2010. PPG is a multinational manufacturer operating across Performance Coatings, Industrial Coatings, Architectural Coatings–EMEA, Optical and Specialty Materials, Commodity Chemicals, and Glass.

Key Financial Metrics

Metric	Three Months Ended June 30, 2010	Three Months Ended June 30, 2009	Six Months Ended June 30, 2010	Six Months Ended June 30, 2009
Net sales	$3,458 million	$3,115 million	$6,584 million	$5,898 million
Income before taxes	$412 million	$253 million	$618 million	$142 million
Net income attributable to PPG	$272 million	$146 million	$302 million	$35 million
Diluted EPS	$1.63	$0.89	$1.81	$0.21
Cash from operating activities	Not provided	Not provided	$367 million	$106 million

Second-quarter net margin was approximately 7.9%, compared with approximately 4.7% in the prior-year quarter. Six-month net margin was approximately 4.6%, compared with approximately 0.6% in 2009. Cost of sales was 60% of sales in the second quarter and approximately 61% for the six-month period. Selling, general and administrative expense was 21.5% of second-quarter sales and 22.4% of six-month sales.

Cash and cash equivalents were $784 million at June 30, 2010, compared with $1.057 billion at December 31, 2009.
Total debt, including capital leases, represented 47% of total debt and equity at June 30, 2010 and December 31, 2009. Balance-sheet debt consisted of $59 million of short-term debt and current maturities and $3.017 billion of long-term debt.
PPG had no borrowings outstanding under its €650 million revolving credit facility at June 30, 2010; the facility expires in December 2010.
Six-month capital spending was $93 million, acquisitions used $18 million, dividends paid were $180 million, and treasury-stock purchases were $105 million.
Cash decreased by $273 million during the first six months, primarily reflecting financing outflows of $476 million, including debt repayments, dividends, and share repurchases.

Material Changes Versus the Prior Comparable Period

Second-quarter sales increased 11%, with higher volumes contributing 10%. Six-month sales increased 12%, with volumes contributing 11%.
Second-quarter net income attributable to PPG increased 86% to $272 million; diluted EPS increased to $1.63 from $0.89.
Six-month net income increased to $302 million from $35 million, and diluted EPS increased to $1.81 from $0.21.
The six-month comparison benefited materially from the absence of the $186 million business-restructuring charge recorded in the first quarter of 2009. The 2009 charge reduced after-tax income by approximately $141 million, or $0.86 per diluted share.
Six-month operating cash flow increased by $261 million. Management attributed the improvement to higher earnings and pension contributions of approximately $50 million in 2010 versus approximately $190 million in the first half of 2009.
Interest expense declined to $46 million in the second quarter and $91 million for six months, from $49 million and $97 million, respectively, due to lower debt balances.
Industrial Coatings was the largest earnings contributor to the improvement: second-quarter segment income rose to $112 million from $28 million, while six-month segment income rose to $213 million from $12 million.
Glass improved from a $7 million second-quarter loss to $16 million of income and from a $34 million six-month loss to $13 million of income.
Commodity Chemicals was weaker for the six months, with segment income declining to $56 million from $125 million because of lower selling prices and inflationary pressures.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management stated that operating cash flow and debt capacity were expected to be sufficient to fund operations, capital spending, acquisitions, dividends, debt service, proposed asbestos-settlement payments, share repurchases, and pension contributions.
PPG expected approximately $150 million of voluntary contributions to U.S. pension plans in 2010 and approximately $90 million of mandatory contributions to non-U.S. plans, of which approximately $50 million had been paid by June 30.
All remaining actions under the 2008 and 2009 restructuring plans were expected to be completed in the second half of 2010. Restructuring reserves totaled $52 million at June 30, 2010, including $15 million related to the 2008 plan and $37 million related to the 2009 plan.
A one-time $85 million after-tax charge, or $0.51 per share, was recorded in the first quarter because of U.S. health-care legislation reducing the future tax deductibility of retiree prescription-drug costs. The charge had no 2010 cash impact; management estimated an approximately $4 million after-tax cash impact in 2013, with additional impacts over subsequent years.
The proposed asbestos settlement remained subject to bankruptcy-court confirmation and appeals. If implemented, PPG would contribute approximately $825 million in cash through 2023, plus shares or cash and certain other assets. The recorded asbestos obligation was $781 million at June 30, 2010, including $545 million current and $236 million non-current.
Environmental reserves were $282 million at June 30, 2010. Management expected environmental cash outlays of approximately $60 million in 2010 and $50 million to $70 million annually through 2014. Additional reasonably possible but unreserved environmental losses were estimated at $200 million to $300 million.
PPG was cooperating with a U.S. government investigation into potential export-control violations involving coatings exported to Pakistan in 2006; the outcome and potential effect were not determinable.
Risks included global economic conditions, raw-material availability and inflation, competition, foreign-exchange movements, integration of acquisitions, restructuring execution, environmental regulation, litigation, and the possibility that the asbestos settlement would not become effective.
Market risk was generally unchanged, except for cross-currency swaps. Their net liability declined to $14 million from $308 million at December 31, 2009.
Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Confirm the final status, timing, funding requirements, and appeals associated with the proposed Pittsburgh Corning asbestos reorganization and settlement.
Monitor cash generation against planned dividends, share repurchases, debt maturities, pension contributions, and asbestos payments.
Assess whether volume recovery and cost reductions are sustainable, particularly in Industrial Coatings and Glass, and whether raw-material inflation or pricing pressure reverses margin gains.
Review the December 2010 expiration of the €650 million revolving credit facility and PPG’s refinancing or liquidity plans.
Track environmental remediation developments in New Jersey and Louisiana, including potential costs beyond the $282 million reserve and the $200 million to $300 million unreserved exposure.
Evaluate the recurring tax effects of the health-care legislation change and the company’s projected effective tax rate.
Follow the export-control investigation, antitrust proceedings, environmental proceedings, and other litigation for potential penalties or changes in reserves.