Business Context and Reporting Period
PPG Industries, Inc. filed its Form 10-K for the fiscal year ended December 31, 2009. The filing covers a global manufacturer of coatings, optical and specialty materials, commodity chemicals and glass, organized into six reportable segments: Performance Coatings, Industrial Coatings, Architectural Coatings—EMEA, Optical and Specialty Materials, Commodity Chemicals and Glass. The fourth-quarter 2009 results included in the filing were unaudited.
The filing was issued February 18, 2010, and received an unqualified audit opinion. Management and Deloitte & Touche concluded that internal control over financial reporting was effective as of December 31, 2009.
Financial Performance and Key Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net sales | $12.239 billion | $15.849 billion |
| Income from continuing operations attributable to PPG | $336 million | $538 million |
| Diluted EPS | $2.03 | $3.25 |
| Cash from operating activities | $1.345 billion | $1.437 billion |
| Cash and cash equivalents | $1.057 billion | $1.021 billion |
| Total debt, including capital leases | Approximately $3.078 billion | Approximately $3.128 billion |
| Total shareholders’ equity | $3.922 billion | $3.489 billion |
- Net sales declined 23%, primarily from lower volumes across all segments, unfavorable currency translation, the absence of divested automotive glass sales and lower selling prices.
- Cost of sales declined to $7.539 billion from $10.155 billion; cost of sales as a percentage of sales improved to 61.6% from 64.1%, implying an approximate gross margin of 38.4% versus 35.9%.
- Net income attributable to PPG represented an approximate 2.7% net margin, compared with approximately 3.4% in 2008.
- Fourth-quarter 2009 sales were $3.116 billion, net income attributable to PPG was $142 million and diluted EPS was $0.85. Fourth-quarter 2008 sales were $3.188 billion, net income was $71 million and diluted EPS was $0.43.
- Working-capital reductions generated $377 million of cash in 2009. Days sales outstanding improved to 65 days from 71 days, and inventory as a percentage of annualized fourth-quarter sales declined to 12.4% from 13.3%.
- Capital spending was $265 million, including $239 million for property and productivity projects and $26 million for acquisitions. Dividends paid were $353 million, and share repurchases totaled approximately $59 million.
- PPG repaid $646 million of debt during 2009. Debt-to-total-debt-and-equity declined to 47% from 54%. The company had no borrowings under its $1 billion committed revolving credit facility at year-end and was in compliance with debt covenants.
Segment Results
| Segment | 2009 Sales | 2009 Segment Income | Change in Segment Income |
|---|---|---|---|
| Performance Coatings | $4.095 billion | $551 million | Down $31 million |
| Industrial Coatings | $3.068 billion | $159 million | Down $53 million |
| Architectural Coatings—EMEA | $1.952 billion | $128 million | Down $13 million |
| Optical and Specialty Materials | $1.002 billion | $235 million | Down $9 million |
| Commodity Chemicals | $1.273 billion | $152 million | Down $188 million |
| Glass | $849 million | $(39) million | Down $109 million |
Material Changes Versus the Prior Comparable Period
- The global recession caused significant volume declines, particularly in automotive OEM, construction, housing and general industrial markets.
- Lower coatings raw-material costs benefited 2009 by approximately $150 million, while U.S. natural-gas costs declined approximately 33% from 2008. These benefits were partly offset by lower selling prices and weak volumes.
- PPG recorded a $186 million restructuring charge in 2009, compared with $163 million in 2008. The 2009 plan affected approximately 2,428 employees and included facility closures, staffing reductions and asset write-offs.
- Restructuring actions taken in 2008 and 2009 are expected to produce approximately $250 million of annual savings when fully implemented, including approximately $100 million of incremental savings in 2010.
- Research and development expense declined to $403 million from $468 million on a total-cost basis, while pension and postretirement benefit costs increased by approximately $100 million to $327 million.
- The 2008 divestiture of the automotive glass and services business materially reduced Glass segment sales. PPG retained an approximately 40% equity interest and certain pension and postretirement liabilities.
- Operating cash flow remained strong but declined $92 million because of lower earnings, higher pension contributions and increased restructuring cash spending, partly offset by working-capital improvements.
Guidance, Outlook, Risks and Unusual Items
- Management entered 2010 cautiously optimistic, expecting gradual demand recovery, stronger Asian markets, modest North American improvement and a slower European recovery. Management emphasized that the recovery remained fragile and that commercial construction and aerospace could remain weak.
- PPG expected moderate raw-material inflation in early 2010 and anticipated a 2010 tax rate of approximately 30%. It expected 2010 capital spending of approximately $350 million.
- Management expected 2010 pension contributions of approximately $240 million, including approximately $150 million to U.S. plans and $90 million to non-U.S. plans.
- Natural-gas prices remain material: each $1 per mmbtu change was estimated to affect annual operating costs by approximately $60 million to $70 million. PPG had hedged approximately 30% of first-quarter 2010 U.S. natural-gas purchases and approximately 25% of the remainder of 2010.
- The proposed asbestos settlement remained subject to court approval and appeals. If effective, PPG would contribute approximately $825 million in cash through 2023, plus PPG stock or cash valued at approximately $97 million. The recorded asbestos settlement obligation was $772 million at December 31, 2009, including $534 million current and $238 million noncurrent.
- Environmental remediation reserves totaled $287 million at year-end, with reasonably possible unreserved environmental losses estimated at $200 million to $300 million. Expected 2010 environmental cash outlays were approximately $70 million.
- Other significant risks include raw-material and energy-price volatility, foreign-exchange exposure, global recession, customer credit risk, competition from lower-cost regions, chemical and environmental regulation, business disruptions, litigation and the unresolved asbestos and export-control matters.
- PPG disclosed an ongoing U.S. government investigation into potential export-control violations involving protective coatings exported to Pakistan in 2006; the potential outcome and financial effect could not be determined.
- PPG recorded no material 2009 earnings charge from the Chrysler and General Motors bankruptcies because substantially all amounts due at filing had been collected.
Most Important Facts for Investors to Verify
- Whether the anticipated 2010 volume recovery materialized, particularly in automotive, construction, housing, industrial and European markets.
- The sustainability of 2009’s working-capital cash generation and whether lower costs and restructuring savings offset renewed raw-material and energy inflation.
- The timing and final terms of the Pittsburgh Corning asbestos plan, including PPG’s cash, stock and retained-claim obligations.
- Changes in environmental remediation estimates, especially for New Jersey chromium sites and the Calcasieu River Estuary, relative to the $287 million reserve and $200 million to $300 million unreserved exposure.
- Debt maturities, refinancing requirements and interest-rate exposure, including the $477 million of long-term debt scheduled to mature in 2012 and $605 million in 2013.
- Potential liabilities from pending antitrust, product-liability, export-control and other legal proceedings for which the filing does not provide a clear ultimate value.