Business & Finance
Business and Finance
Business and Finance
Thu, January 29, 2009 Fitch Affirms PPG Industries' IDR at 'A-'; Outlook to Negative
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed its ratings on PPG Industries, Inc. (NYSE: PPG) as follows:
--Long-Term Issuer Default Rating (IDR) at 'A-';
--Senior unsecured debt at 'A-';
--Short-Term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook has been revised to Negative from Stable.
The rating affirmations reflect a geographically well-balanced company with a heightened focus on its coatings and optical businesses, consistent strong earnings, and excellent cash flow. Risk factors include a higher leverage profile, the cyclicality of certain of PPG's end-markets, often volatile raw materials and energy costs, and the company's exposure to asbestos litigation.
The Negative Outlook reflects the impact of weakening global economies on PPG's end-markets, particularly construction and the auto industry. The company experienced significant volume declines in several of its industrial end-use markets in the fourth quarter of 2008 due to the deterioration in the overall global economy. These conditions are likely to persist at least through the first half of 2009 as global demand remains weak. PPG will likely not be able to fully offset lower revenues in 2009 with the combination of overhead reduction, materials cost relief and decreased energy costs, to the detriment of profitability.
PPG generates significant cash flow from operations - over $850 million in each of the past nine fiscal years. For the full year of 2008, the company had $1.4 billion of cash flow from operations. The company has a strong liquidity position, ending the year with about $1 billion of cash on the balance sheet. The company has been consistent in prioritizing the uses of its cash and cash flow: - to prudently fund its business, pay dividends, manage its debt (including its pension and asbestos liabilities), and fund acquisitions and stock repurchases. In 2008, share repurchases were minimal as the company focused on conserving its cash position amid the global credit turmoil.
Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. The acquisition of SigmaKalon and the company's completed asset divestitures further reflect PPG's transformation into primarily a coatings and specialty products company. Fitch expects management to remain disciplined in its growth strategy and continue to make selective acquisitions, largely to grow its coatings and optical businesses.
PPG's leverage increased in 2008 as a result of the SigmaKalon acquisition. The company had a debt to capitalization ratio of 47.5% at Sept. 30, 2008, compared with 41.3% at the end of 2007 and 27.7% at the conclusion of 2006. The company has a target gross debt-to-cap ratio range of 30%-40%. So far, the company is ahead of its debt reduction target. PPG has committed to reduce debt by more than $600 million by the end of 2009. PPG has paid down debt by about $532 million since the first quarter of 2008. The company has $116 million of debt maturing in 2009 and no other long-term debt maturities until 2012. (The company had about $200 million of commercial paper and $550 million of short-term debt outstanding at the end of 2008.) Given the company's strong liquidity position, PPG may become more aggressive in reducing its debt this year if the credit markets ease or if there are signs of stability in the company's global end-markets.
Fitch's rating takes into account the cyclicality of many of PPG's end-markets. Construction and automotive OEM account for between 30%-40% of its end-markets' sales. Fitch estimates North American light vehicle sales to decline about 10.7% in 2009. Fitch also forecasts total housing starts to decline approximately 22%, while private non-residential construction spending is projected to fall about 5% in 2009. Fitch expects that PPG's strong liquidity and continued focus on cost reduction will allow the company to navigate through a more challenging economic environment in 2009.
Two important categories of cost to PPG are coatings raw materials and energy (largely for natural gas). Coatings raw material costs increased significantly in 2004, 2005, and 2006. In 2008, the industry experienced further escalation in such costs, increasing by approximately 9% during the year. PPG reported that its raw material costs increased roughly 6% during the third quarter and slightly above 6% during the fourth quarter of 2008. On the energy side, the average natural gas costs in 2008 were approximately 22% higher versus 2007. For all of 2008, cost inflation for energy, freight, and raw material costs totaled about $465 million, all of which were offset by selling price increases. In 2009, PPG should benefit from lower coatings raw material and energy costs. Given the drop in oil prices, combined with the expected lower global demand for commodities, PPG should see continued abatement in raw materials pricing. PPG has also hedged one-half of its first-quarter 2009 natural gas purchases at a price of $8.50 per million BTU.
The company has been a defendant in lawsuits involving asbestos claims for over 30 years, mostly related to its 50% ownership of Pittsburgh Corning Corporation (PC), a 50-50 venture owned by PPG and Corning Incorporated. In May 2002, PPG agreed to a $2.7 billion settlement agreement of outstanding asbestos claims against PPG and PC. Under the settlement agreement, PPG would make aggregate cash payments of approximately $998 million (payable according to a fixed payment schedule over 21 years), contribute 1.4 million shares of its stock, and convey the stock it owns in PC to a trust. PPG's participating historical insurance carriers would make cash payments to the trust of approximately $1.7 billion. In December 2006, the U.S. Bankruptcy Court for the Western District of Pennsylvania issued a decision denying confirmation of the most recent amended PC plan of reorganization. Management is currently analyzing its options, which may include plan modifications.
Founded in 1883, PPG is a global supplier of coatings, glass, fiberglass, and chemicals. The company has manufacturing facilities and equity affiliates in more than 20 countries. PPG is the world's largest producer of transportation coatings and a leading maker of industrial and packaging coatings, architectural coatings, aircraft transparencies, flat and fabricated glass, continuous-strand fiberglass, and chlor-alkali and specialty chemicals.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, [ www.fitchratings.com ]. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
