PPG Industries, Inc. — Form 10-Q Summary
Business context and reporting period
PPG Industries is a multinational manufacturer of coatings, optical and specialty materials, commodity chemicals, and glass products. This unaudited Form 10-Q covers the three months ended March 31, 2010, compared with the three months ended March 31, 2009. Results for the quarter are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 |
|---|
| Net sales | $3,126 million | $2,783 million |
| Income before income taxes | $206 million | $(111) million |
| Net income attributable to PPG | $30 million | $(111) million |
| Diluted EPS | $0.18 | $(0.68) |
| Cash used in operating activities | $54 million | $291 million |
| Dividends per common share | $0.54 | $0.53 |
- Sales increased 12%, driven by 12% higher volumes and a 5% favorable foreign-currency effect, partly offset by 5% lower selling prices, primarily in Commodity Chemicals.
- Gross margin was approximately 37.8% versus 38.3% in the prior-year quarter; cost of sales increased to 62.2% of sales from 61.7%.
- SG&A was 23.3% of sales versus 25.7% in Q1 2009. Pretax margin was approximately 6.6%; net margin attributable to PPG was approximately 1.0%.
- Cash and cash equivalents were $689 million at March 31, 2010, down from $1,057 million at December 31, 2009. Current assets were $5,922 million and current liabilities were $3,418 million.
- Total debt, including current and long-term debt, was approximately $3,163 million. Long-term debt had a carrying value of $3,023 million and a fair value of $3,315 million. PPG had no amounts outstanding under its €650 million revolving credit facility after repaying $106 million during the quarter; the facility expires in December 2010.
- The ratio of total debt to total debt and equity was 47% at March 31, 2010.
- Operating cash flow improved primarily because pension contributions fell to $20 million from $176 million in Q1 2009 and earnings increased. Investing cash use was $93 million, including $45 million of capital spending and $16 million for acquisitions. Financing cash use was $225 million, including $90 million of dividends and debt repayments.
Material changes versus the prior comparable period
| Reportable segment | Q1 2010 sales | Q1 2009 sales | Q1 2010 segment income/(loss) | Q1 2009 segment income/(loss) |
|---|
| Performance Coatings | $965 million | $928 million | $127 million | $89 million |
| Industrial Coatings | $893 million | $644 million | $101 million | $(16) million |
| Architectural Coatings—EMEA | $436 million | $409 million | $11 million | $3 million |
| Optical and Specialty Materials | $284 million | $245 million | $82 million | $60 million |
| Commodity Chemicals | $328 million | $361 million | $3 million | $83 million |
| Glass | $220 million | $196 million | $(3) million | $(27) million |
- Q1 2010 income benefited from the absence of the $186 million pretax business-restructuring charge recorded in Q1 2009. Restructuring actions are expected to generate approximately $250 million of annual pretax savings when completed; substantially all remaining actions were expected to be completed in Q2 2010.
- Industrial Coatings returned to profitability as volumes improved and manufacturing and overhead costs declined. Performance Coatings and Optical and Specialty Materials also delivered higher segment income.
- Commodity Chemicals experienced a significant earnings decline because of lower selling prices and higher input costs, despite improved volumes.
- Glass reduced its operating loss through lower manufacturing and energy costs, higher volumes, and increased equity earnings and royalty income.
- SG&A increased in absolute dollars but declined as a percentage of sales, reflecting cost-reduction measures. Interest expense declined from $48 million to $45 million as debt balances fell.
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 U.S. pension contributions in 2010 and approximately $90 million of mandatory non-U.S. contributions, of which $20 million had been made by March 31, 2010.
- A one-time $85 million after-tax charge, or $0.51 per share, resulted from the March 2010 U.S. health-care legislation reducing the future tax deductibility of retiree prescription-drug costs. The charge had no 2010 cash impact; PPG estimated an approximately $4 million after-tax cash impact in 2013, with additional impacts thereafter.
- The proposed asbestos settlement remained subject to bankruptcy-court confirmation and appeals. If effective, PPG would contribute approximately $825 million in cash through 2023, plus specified stock and other assets. The recorded asbestos obligation was $785 million at March 31, 2010, including $544 million current and $241 million non-current.
- Environmental reserves were $286 million at March 31, 2010. Management expected approximately $60 million of environmental cash outlays in 2010 and $50 million to $70 million annually through 2014. Additional reasonably possible, unreserved environmental losses were estimated at $200 million to $300 million.
- PPG was subject to antitrust, asbestos, environmental, product-liability, and other litigation. It also faced an ongoing U.S. government investigation into potential export-control violations involving coatings exported to Pakistan; the outcome and possible effect were not determinable.
- Other risks identified by management included global economic conditions, raw-material costs and availability, pricing pressure, foreign-exchange movements, integration of acquired businesses, realization of restructuring savings, environmental regulation, business disruptions, and unpredictable litigation.
- There were no material changes in market-risk exposure from December 31, 2009. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the proposed asbestos plan receives final, non-appealable approval and the timing and amount of required contributions.
- Progress and realized savings from the restructuring program, including completion of remaining actions.
- Commodity Chemicals pricing, input-cost trends, and their effect on consolidated margins.
- Cash generation after planned pension contributions, environmental spending, dividends, debt service, and asbestos-related payments.
- Refinancing or replacement of the revolving credit facility expiring in December 2010.
- Changes in environmental reserves and the $200 million to $300 million range of reasonably possible unreserved losses.
- Resolution of the export-control investigation and other significant legal and regulatory matters.
