PPG Industries Inc. 10-Q Summary: Quarter Ended June 30, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly and six-month periods ended June 30, 2007, for PPG Industries, Inc., a multinational manufacturer of paints, coatings, and specialty materials. The company operates through five reportable segments: Performance and Applied Coatings, Industrial Coatings, Optical and Specialty Materials, Commodity Chemicals, and Glass. The financial statements are unaudited and include restatements related to the adoption of SFAS No. 158 regarding pension and postretirement benefits.
Key Financial Metrics
| Metric (Millions) | Q2 2007 | Q2 2006 | YTD 2007 | YTD 2006 |
|---|---|---|---|---|
| Net Sales | $3,173 | $2,824 | $6,090 | $5,462 |
| Net Income | $249 | $280 | $443 | $464 |
| Diluted EPS | $1.50 | $1.68 | $2.67 | $2.79 |
| Operating Cash Flow (YTD) | $229 (2007) vs $333 (2006) | |||
| Cash and Equivalents | $197 (June 30, 2007) | |||
| Total Debt (Short + Long Term) | $1,367 (June 30, 2007) |
Margins: Net income margin for Q2 2007 was approximately 7.8% ($249M / $3,173M), down from 9.9% in Q2 2006. Segment income totaled $446 million for Q2 2007 compared to $449 million in Q2 2006.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 12% in Q2 2007 and 12% YTD 2007. Growth was driven by acquisitions (7% impact), volume increases (3% impact), and favorable foreign currency translation (2-3% impact).
- Profitability Decline: Net income decreased 11% in Q2 2007 and 5% YTD 2007. The decline was attributed to inflation (higher raw material costs), lower selling prices in the Glass and Commodity Chemicals segments, and a higher effective tax rate.
- Segment Performance:
- Performance and Applied Coatings: Sales up 26% (Q2) and 26% (YTD) due to acquisitions and volume growth.
- Industrial Coatings: Sales up 16% (Q2) and 15% (YTD) driven by acquisitions and volume.
- Commodity Chemicals: Sales flat (Q2) and down 3% (YTD) due to lower selling prices offsetting volume gains. Segment income dropped significantly (Q2: $57M vs $86M; YTD: $101M vs $173M) due to lower prices and higher maintenance/natural gas costs.
- Glass: Sales down 4% (Q2) and 4% (YTD) due to lower volumes in automotive OEM glass and lower pricing.
- One-Time Items: Q2 2006 included $12 million in litigation-related insurance recoveries not present in 2007. Q2 2007 included a $10 million charge for the write-off of a Venezuelan joint venture investment.
Guidance, Outlook, and Risks
- Acquisitions: On July 19, 2007, PPG announced an offer to acquire SigmaKalon Group for approximately $3.0 billion (€2.2 billion). The company secured a €2.2 billion loan facility commitment from Credit Suisse to fund the transaction. PPG also agreed to acquire Barloworld Coatings Australia (approx. $155M sales in 2006).
- Asbestos Litigation: PPG remains subject to a proposed settlement arrangement regarding asbestos claims. The settlement is contingent on the confirmation of a bankruptcy reorganization plan for Pittsburgh Corning Corporation (PC). If the plan is not confirmed, the stay on litigation could expire, potentially exposing PPG to significant claims. Current quarterly expense related to the settlement was $8 million (Q2) and $17 million (YTD).
- Environmental Contingencies: Reserves for environmental remediation totaled $277 million as of June 30, 2007. Management anticipates cash outlays of approximately $30 million in 2007, with a reasonably possible unreserved loss range of $200 million to $300 million.
- Pension Funding: Under the Pension Protection Act of 2006, PPG is not required to make mandatory contributions to U.S. defined benefit plans in 2007. The company made $102 million in voluntary contributions YTD 2007.
- Strategic Review: Management continues to explore strategic alternatives, including potential sales, for the automotive OEM glass, automotive replacement glass, and fine chemicals operating segments.
Investor Verification Checklist
- SigmaKalon Acquisition Status: Verify the progress of regulatory approvals and the finalization of the €2.2 billion financing for the SigmaKalon Group acquisition.
- Asbestos Settlement Confirmation: Monitor the status of the Pittsburgh Corning Corporation bankruptcy plan confirmation, as failure to confirm could lift the litigation stay and materially impact future earnings.
- Environmental Remediation Costs: Track the feasibility study approvals and remedy selection for the Jersey City, NJ chromium site and the Calcasieu River Estuary, which represent significant portions of the unreserved loss contingency.
- Commodity Chemicals Margins: Assess the sustainability of margins in the Commodity Chemicals segment given the volatility in natural gas costs and selling prices.
- Foreign Currency Exposure: Evaluate the impact of the weakening U.S. dollar on future earnings, particularly regarding the Euro-denominated SigmaKalon purchase price.