PPG INDUSTRIES INC quarterly report, Q2 FY2009

PPG Industries, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2009. Financial statements are unaudited. PPG is a multinational manufacturer of coatings, optical and specialty materials, commodity chemicals and glass products. The filing was issued July 27, 2009.

Financial performance and position

Metric	Q2 2009	Q2 2008	Six months 2009	Six months 2008
Net sales	$3,115 million	$4,474 million	$5,898 million	$8,436 million
Income before taxes	$253 million	$394 million	$142 million	$577 million
Net income attributable to PPG	$146 million	$250 million	$35 million	$350 million
Diluted EPS	$0.89	$1.51	$0.21	$2.12
Dividends per share	$0.53	$0.52	$1.06	$1.04

Q2 sales declined approximately 30%, primarily from an 18% volume reduction, a 6% foreign-currency impact and a 6% reduction from the divested automotive glass and services business. Six-month sales also declined approximately 30%.
Q2 net income fell 42% and diluted EPS fell 41%. Six-month net income fell 90%, reflecting the severe economic downturn, lower volumes and the $186 million restructuring charge recorded in the first quarter.
Q2 cost of sales declined to 60.9% of sales from 63.2%; six-month cost of sales declined to 61.3% from 64.3%. Lower raw-material costs, pricing and mix supported margins.
Approximate net margin was 4.7% in Q2 2009 versus 5.6% in Q2 2008, and 0.6% for the first six months versus 4.1% in the comparable period.
Cash from operating activities was $106 million for the first six months, down from $402 million. The decline reflected lower earnings and approximately $190 million of pension contributions, including a $160 million voluntary U.S. pension contribution.
Capital spending was $103 million, compared with $146 million in the prior-year period. Cash used for investing activities was $132 million, compared with $4 million in 2008, which benefited from acquisition-related escrow activity.
Cash and cash equivalents were $1,052 million at June 30, 2009, versus $1,021 million at December 31, 2008. Total current assets were $6,422 million and current liabilities were $4,102 million.
Short-term debt and current maturities totaled $896 million; long-term debt totaled $3,306 million. Total debt-to-debt-plus-equity was 57%, compared with 53% at year-end 2008.
PPG entered into a $400 million unsecured three-year term loan in June 2009. Proceeds were used to repay revolving credit borrowings and were expected to fund repayment of 7.05% bonds maturing in August 2009.

Material changes versus the prior comparable period

All reportable segments experienced lower sales and generally lower earnings. Industrial Coatings sales declined 36% in Q2 and segment income declined to $28 million from $109 million. Glass reported a $7 million segment loss versus $30 million of income, partly because the automotive glass business was divested in September 2008.
Performance Coatings remained the largest segment, with Q2 sales of $1,066 million and segment income of $158 million, compared with $1,269 million and $171 million, respectively.
PPG recorded a $186 million restructuring charge in the first quarter, consisting of $154 million of severance and other costs and $32 million of asset write-offs. The plan affected 2,428 employees initially; 1,286 remained in the reserve activity at June 30.
Management expects the restructuring actions to produce approximately $60 million of pretax savings in 2009 and an annual run rate of approximately $140 million in 2010. Additional restructuring-related costs of approximately $12 million and $10 million were expected in the second half of 2009 for the 2009 and 2008 plans, respectively.
The 2008 comparison included $23 million of in-process research and development expense and $94 million of acquired-inventory fair-value step-up costs related to the SigmaKalon acquisition.
Interest expense declined to $49 million in Q2 and $97 million for the six months, from $65 million and $131 million, respectively, due to lower debt balances and interest rates.

Outlook, risks, contingencies and unusual items

Management stated that operating cash flow and debt capacity were expected to be sufficient to fund operations, capital spending, dividends, debt service, proposed asbestos-settlement payments, share repurchases and pension contributions. The filing did not provide formal revenue or EPS guidance.
PPG expected mandatory 2009 contributions to non-U.S. pension plans of approximately $60 million, of which approximately $50 million had been contributed by June 30. It also expected an additional $55 million voluntary contribution to U.S. plans, expected to be made in PPG stock.
The proposed 2009 asbestos settlement required approximately $825 million of PPG cash payments through 2023, plus 1,388,889 PPG shares or equivalent cash. The recorded asbestos obligation was $745 million at June 30, including $514 million current and $231 million noncurrent. The plan remained subject to creditor approval, confirmation and appeals; a confirmation hearing was scheduled for January 2010.
PPG reported environmental reserves of $292 million and estimated reasonably possible unreserved environmental losses of $200 million to $300 million. Expected environmental cash outlays were approximately $35 million in 2009 and $45 million to $75 million annually through 2013.
PPG was cooperating with government investigations concerning potential U.S. export-control violations involving protective coatings exported to Pakistan. The outcome and potential financial effect were not determinable.
A California jury returned an $18 million verdict against PPG and another defendant concerning alleged PCE contamination. A statute-of-limitations issue was scheduled for retrial, and the verdict could be nullified or reduced.
Automotive demand was a significant risk: Q2 2009 production of automobiles and light trucks declined 49% in North America and 26% in Western Europe. PPG reported approximately $52 million of Q2 sales to General Motors and Chrysler and approximately $51 million of related asset exposure, including $6 million of trade receivables; no reserves were recorded.
Other key risks included raw-material costs and availability, foreign exchange, global economic conditions, acquisition integration, environmental regulation, litigation and the ability to achieve restructuring savings.
PPG stated that there were no material changes in market-risk exposures from December 31, 2008, and that disclosure controls were effective.

Important facts for investors to verify

Whether the restructuring savings materialize as projected and whether additional restructuring costs remain within estimates.
The timing and final approval of the asbestos plan, required cash and share contributions, and exposure to claims not covered by the proposed channeling injunction.
Liquidity after repayment of the 7.05% bonds, use of the new term loan and any changes in revolving-credit availability.
Automotive, construction and industrial demand trends, including credit exposure to major OEM customers and the performance of PPG’s retained interest in Pittsburgh Glass Works.
Changes in environmental reserves, remediation schedules and the $200 million to $300 million range of possible unreserved losses.
Resolution of the California PCE verdict, export-control investigation and other legal and regulatory proceedings.