What drove the decline in PPG's 2005 net income despite higher sales?

Net income fell to $596 million from $683 million even though sales rose 7%. The decrease came mainly from $284 million higher other charges, including the Marvin legal settlement, the federal glass antitrust settlement, hurricane-related costs, and a fine chemicals asset impairment, along with inflation in raw materials and energy costs.

What are the main uncertainties in the asbestos settlement?

The PPG Settlement Arrangement remains subject to confirmation of the Pittsburgh Corning plan of reorganization by the Bankruptcy Court, which management expected to render a decision on in the first quarter of 2006. The arrangement will not take effect until 30 days after the plan is finally approved and no longer subject to appellate review. If it is not implemented, the outcome of asbestos litigation could be material to results of operations in a given period.

How exposed is PPG to natural gas price changes?

Management estimates that each one-dollar change in the price of natural gas per mmbtu would directly affect annual operating costs by about $60 million to $70 million. The company expects first-quarter 2006 natural gas costs of about $10.00 per mmbtu, which is $3.50 higher than the first quarter of 2005.

What is the outlook for PPG's cost structure and workforce in 2006?

Management expects continued cost pressures from pensions, healthcare, natural gas and raw materials. It plans additional workforce reductions and facility consolidations, with pretax charges of $50 million to $70 million expected in the first quarter of 2006. The company also expects the European coatings business process redesign to produce net cost savings that will not be significant in 2006 but will grow through 2008.

How is PPG managing its capital and shareholder returns?

PPG generated $1,065 million from operations in 2005 and spent $379 million on capital expenditures. It paid $316 million in dividends, marking 34 consecutive years of increased dividends, and repurchased $607 million of its common stock. Total debt as a share of total debt and equity increased to 29% from 27% at year-end 2004, mainly because of the decline in equity caused by the share repurchases.

PPG 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 16, 2006. Cited figures are marked; the original filing is the authoritative source.

PPG Industries, Inc. reported 2005 net sales of $10.2 billion^a, up 7% from $9.5 billion in 2004, with sales growth driven mainly by higher selling prices in chemicals and coatings.

Net income fell to $596 million^b, or $3.49 per share assuming dilution, from $683 million and $3.95 in 2004. The decline reflects a series of charges in "Other charges," which rose $284 million, including a $132 million Marvin legal settlement net of insurance, a $61 million federal glass class action antitrust settlement, $34 million of hurricane-related direct costs, a $27 million fine chemicals asset impairment, and $19 million in debt refinancing costs. Inflation, particularly raw material costs in coatings and natural gas and energy costs in glass and chemicals, further pressured margins, and the gross profit percentage slipped to 36.5% from 36.9%.

Looking ahead, management expects continued cost pressures in 2006 from pensions, healthcare, natural gas and raw materials, and plans to record pretax restructuring charges of $50 million to $70 million^c in the first quarter of 2006 tied to workforce reductions and facility consolidation. Management also expects chlor-alkali pricing to remain strong entering 2006, and estimates the first-quarter 2006 natural gas cost at about $10.00 per mmbtu. The company generated $1,065 million in operating cash flow in 2005 and repurchased $607 million of its common stock, while total debt as a share of total debt and equity rose to 29% from 27%.

Significant contingent exposures remain. The asbestos settlement arrangement, tied to the Pittsburgh Corning bankruptcy, is still subject to bankruptcy court confirmation, and PPG carries $94 million^d in environmental reserves against possible additional losses of $200 million to $400 million. The company is also defending automotive refinish antitrust cases, and it states that it believes these matters will not have a material effect on its financial position or liquidity, although results in any given period could be affected.

02—Key points

Key Highlights

Net sales rose 7% to $10.2 billion in 2005, with 6 points from higher selling prices and 1 point from currency translation.
Net income declined to $596 million ($3.49 per diluted share) from $683 million ($3.95) in 2004, after aftertax legal settlement charges of $117 million, or 68 cents per share.
Operating income by segment: coatings $609 million (vs. $777 million), glass $56 million (vs. $169 million), chemicals $451 million (vs. $291 million).
Other charges rose $284 million, including $132 million for the Marvin settlement net of insurance and $61 million for the federal glass antitrust settlement.
Management expects 2006 pension and postretirement costs to rise by $40 million, and each one-dollar change in natural gas prices per mmbtu would affect annual operating costs by about $60 million to $70 million.
Pretax restructuring charges of $50 million to $70 million are expected in the first quarter of 2006.
Operating cash flow was $1,065 million in 2005, and the company repurchased $607 million of common stock during the year.

03—Questions

Frequently Asked Questions

What drove the decline in PPG's 2005 net income despite higher sales?
Net income fell to $596 million from $683 million even though sales rose 7%. The decrease came mainly from $284 million higher other charges, including the Marvin legal settlement, the federal glass antitrust settlement, hurricane-related costs, and a fine chemicals asset impairment, along with inflation in raw materials and energy costs.
What are the main uncertainties in the asbestos settlement?
The PPG Settlement Arrangement remains subject to confirmation of the Pittsburgh Corning plan of reorganization by the Bankruptcy Court, which management expected to render a decision on in the first quarter of 2006. The arrangement will not take effect until 30 days after the plan is finally approved and no longer subject to appellate review. If it is not implemented, the outcome of asbestos litigation could be material to results of operations in a given period.
How exposed is PPG to natural gas price changes?
Management estimates that each one-dollar change in the price of natural gas per mmbtu would directly affect annual operating costs by about $60 million to $70 million. The company expects first-quarter 2006 natural gas costs of about $10.00 per mmbtu, which is $3.50 higher than the first quarter of 2005.
What is the outlook for PPG's cost structure and workforce in 2006?
Management expects continued cost pressures from pensions, healthcare, natural gas and raw materials. It plans additional workforce reductions and facility consolidations, with pretax charges of $50 million to $70 million expected in the first quarter of 2006. The company also expects the European coatings business process redesign to produce net cost savings that will not be significant in 2006 but will grow through 2008.
How is PPG managing its capital and shareholder returns?
PPG generated $1,065 million from operations in 2005 and spent $379 million on capital expenditures. It paid $316 million in dividends, marking 34 consecutive years of increased dividends, and repurchased $607 million of its common stock. Total debt as a share of total debt and equity increased to 29% from 27% at year-end 2004, mainly because of the decline in equity caused by the share repurchases.

04—Continue

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