PPG

PPG Industries Inc. - 10-Q Summary (Quarter Ended Sept. 30, 2008)

Business Context and Reporting Period

This Form 10-Q covers the three and nine months ended September 30, 2008. PPG Industries, Inc. is a multinational manufacturer of paints, coatings, and specialty materials. The reporting period is significantly impacted by the January 2008 acquisition of SigmaKalon Group (a $3.2 billion transaction) and the September 2008 divestiture of the automotive glass and services business to Kohlberg & Company.

Key Financial Metrics

Note: Cost of sales as a percentage of sales was 63.9% for the quarter and 64.2% for the nine-month period.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 37% in the quarter and 39% year-to-date compared to 2007. This growth was primarily driven by the SigmaKalon acquisition (approx. 30% of the increase), higher selling prices, and favorable currency translation.
• Profitability Decline: Despite revenue growth, Net Income decreased 39% in the quarter ($117M vs. $191M) and 26% year-to-date ($467M vs. $634M). This was largely due to a $163 million business restructuring charge and increased interest expense from acquisition financing.
• Segment Performance:
  • Performance Coatings: Sales up 28%; Income up 6%.
  • Industrial Coatings: Sales up 13%; Income down 46% due to volume declines in automotive OEM and inflation.
  • Architectural Coatings - EMEA: New segment formed from SigmaKalon; Sales $632M; Income $61M.
  • Glass: Sales flat; Income down 51% due to lower volumes and inflation.
• Debt Levels: Total debt increased significantly due to the SigmaKalon acquisition. The debt-to-total-capitalization ratio rose to 48% from 42% at year-end 2007.

Guidance, Outlook, and Risks

• Restructuring Plan: PPG finalized a global transformation and integration plan involving a $163 million charge. Actions include closing facilities in Canada and the Netherlands, idling a glass production line in Illinois, and workforce reductions. Additional costs of ~$15 million are expected in late 2009.
• Divestiture: The sale of the automotive glass business was completed on Sept 30, 2008, yielding $315 million in proceeds (cash and notes) and a 40% equity interest in the new entity. This resulted in a $15 million pretax gain.
• Asbestos Litigation: The PPG Settlement Arrangement remains pending. A third amended plan of reorganization is under negotiation. Management believes the outcome will not materially affect financial position but could impact results of operations in a specific period if the settlement fails.
• Environmental Contingencies: Reserves total $280 million. Unreserved reasonably possible losses range from $200 million to $300 million, primarily related to a former chromium plant in New Jersey and operating chemical sites.
• Market Risks: The company faces risks from the credit crisis affecting commercial paper availability, foreign currency fluctuations (USD strengthened in Q3), and declining automotive production in North America.

Investor Verification Checklist

• SigmaKalon Integration: Verify the realization of synergies and the finalization of the purchase price allocation, particularly regarding environmental reserves and goodwill.
• Restructuring Execution: Monitor the timeline and cost of facility closures and workforce reductions to ensure the $163 million charge is accurate and no further significant charges are needed.
• Asbestos Settlement Status: Track the progress of the third amended PC plan of reorganization; failure to confirm could expose PPG to significant future litigation costs.
• Environmental Liabilities: Review updates on the New Jersey chromium site remediation workplans, as final costs could exceed current reserves.
• Debt Servicing: Assess the impact of rising interest rates and credit market conditions on the company's ability to refinance debt and service the increased leverage from the acquisition.