PPG INDUSTRIES INC quarterly report, Q3 FY2010

PPG Industries, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2010. The filing is unaudited and covers PPG’s coatings, optical and specialty materials, commodity chemicals, and glass businesses.

Financial performance and position

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Net sales	$3,460 million	$3,225 million	$10,044 million	$9,123 million
Income before taxes	$386 million	$275 million	$1,004 million	$417 million
Net income attributable to PPG	$262 million	$159 million	$564 million	$194 million
Diluted EPS	$1.58	$0.96	$3.39	$1.17
Operating cash flow	Not separately provided	Not separately provided	$698 million	$760 million

Q3 pretax margin was approximately 11.2%, compared with 8.5% in the prior-year quarter; net margin was approximately 7.6%, compared with 4.9%.
Nine-month pretax margin was approximately 10.0%, compared with 4.6% in 2009; net margin was approximately 5.6%, compared with 2.1%.
Cost of sales was 61% of sales in both the quarter and nine-month period. Selling, general and administrative expense declined to 21.4% of sales in Q3 from 22.7% and to 22.0% for nine months from 23.9%.
Cash and cash equivalents were $930 million at September 30, 2010, versus $1,057 million at December 31, 2009. Net cash decreased $127 million during the first nine months.
Total debt, including current and long-term debt, was approximately $3.1 billion. The debt-to-total-debt-and-equity ratio improved to 45% from 47% at year-end 2009.
PPG had no borrowings under its new $1.2 billion unsecured revolving credit facility at September 30, 2010. The facility matures August 5, 2013 and may be increased by up to $300 million, subject to conditions.
Capital spending was $158 million and acquisition spending was $18 million during the first nine months. Dividends paid were $270 million and share repurchases totaled $275 million.

Material changes versus the prior comparable period

Q3 sales rose 7%, with volume contributing 6%; pricing gains were largely offset by unfavorable foreign currency translation.
Nine-month sales rose 10%, primarily from a 9% volume increase and a slight favorable currency effect.
Q3 segment income increased to $484 million from $352 million. Nine-month segment income increased to $1,312 million from $881 million.
Industrial Coatings, Optical and Specialty Materials, Commodity Chemicals, and Glass reported substantial year-over-year improvement. Glass returned to segment income of $32 million in Q3 from a $6 million loss.
Architectural Coatings—EMEA weakened, with Q3 sales down 8% and segment income down to $50 million from $59 million, primarily because of currency and lower volumes.
Commodity Chemicals segment income declined for the first nine months to $116 million from $144 million because of lower selling prices and higher input costs, despite higher volumes.
The nine-month 2009 results included a $186 million restructuring charge, whereas no restructuring charge was recorded in the 2010 period. Remaining restructuring reserves totaled $41 million at September 30, 2010, with completion expected in the fourth quarter of 2010.
Operating cash flow declined to $698 million from $760 million, partly reflecting approximately $220 million of 2010 pension contributions versus $210 million in 2009.

Guidance, outlook, commentary, risks and unusual items

Management stated that operating cash flow and debt capacity are expected to fund operations, capital spending, acquisitions, dividends, debt service, asbestos obligations, share repurchases, and pension contributions.
The nine-month 2010 effective tax rate was 35%, including an $85 million after-tax charge, or $0.51 per share, from U.S. health-care legislation reducing the future deductibility of retiree prescription-drug costs. The charge had no 2010 cash impact; estimated after-tax cash impact begins at approximately $4 million in 2013, with additional effects thereafter.
PPG made a voluntary $150 million contribution to U.S. defined-benefit pension plans in September 2010 and expected approximately $90 million of mandatory non-U.S. contributions for 2010, of which $67 million had been paid by September 30.
The proposed asbestos settlement remained subject to final court approval and appeals. The recorded obligation was $803 million, including $563 million current and $240 million non-current. If effective, PPG would make approximately $825 million of cash payments through 2023 and transfer 1,388,889 shares of PPG stock or equivalent cash.
If the asbestos plan is not implemented, the stay on many claims could expire and PPG could face renewed litigation. Management stated that aggregate litigation outcomes are not expected to materially affect financial position or liquidity, but individual periods could be materially affected.
Environmental reserves were $282 million at September 30, 2010. Reasonably possible unreserved environmental losses were estimated at $200 million to $300 million. Expected environmental cash outlays were approximately $35 million in 2010 and $50 million to $70 million annually through 2014.
PPG agreed in principle to pay approximately $6 million to resolve flat-glass antitrust matters. It also faced an ongoing U.S. export-control investigation involving coatings exported to Pakistan; the outcome and potential effect were not determinable.
Market risk was generally unchanged, except for cross-currency swaps. A 10% increase in the euro against the U.S. dollar would have increased the swap liability by approximately $157 million at September 30, 2010.
Management identified risks involving global economic conditions, raw-material costs and availability, foreign exchange, competition, restructuring execution, acquisitions, environmental regulation, litigation, asbestos claims, and business disruptions.

Most important facts for investors to verify

Whether the proposed asbestos plan ultimately received final, non-appealable approval and the timing and amount of required funding.
Actual cash requirements for asbestos obligations, pensions, environmental remediation, capital spending, dividends, and share repurchases.
The development of the $200 million to $300 million range of reasonably possible unreserved environmental losses.
Whether volume growth and pricing can offset raw-material inflation, particularly in coatings and commodity chemicals.
The status and potential financial impact of the export-control investigation, antitrust settlement, California PCE litigation, and other environmental or legal proceedings.
Future tax effects from the retiree medical deduction change and the sustainability of the lower projected effective tax rate.
Completion of restructuring actions and realization of related cost savings.