PPG Industries (PPG) Q4 2005 earnings summary

Executive summary

• FY05 sales rose 7% to $10.2B, driven by higher prices and favorable currency; net income fell to $596M from $683M, with significant legal, hurricane, impairment and refinancing charges.

• Higher input costs pressured gross margin, while pricing and manufacturing efficiencies partly offset inflation; diluted EPS was $3.49 versus $3.95 in FY04.

Financial highlights

• Net sales were $10.201B versus $9.513B; sales growth reflected 6% higher selling prices and 1% favorable currency, while segment volume changes offset overall.

• Gross profit rose $214M to $3.728B; gross margin eased to 36.5% from 36.9%, as raw-material and energy inflation outweighed pricing and efficiency gains.

• Net income was $596M versus $683M; 2005 diluted EPS was $3.49 versus $3.95, including after-tax charges of $117M for legal settlements, $21M for hurricanes, $17M for impairment and $12M for refinancing.

• Other charges increased $284M, including $132M Marvin settlement net of insurance, $61M glass antitrust settlement, $34M hurricane costs, $27M fine-chemicals impairment and $19M debt refinancing costs.

Outlook and guidance

• FY06 sales growth is expected across businesses; cost pressure is expected from pensions, healthcare, natural gas and raw materials, partly offset by price increases and productivity initiatives.

• Workforce reductions and facility consolidation are expected to generate $50M-$70M of pretax charges in Q1 2006; 2006 pension and postretirement benefit costs are estimated to rise $40M.

• Q1 2006 natural gas cost was estimated at $10.00/MMBtu, up $3.50/MMBtu and over 50% YoY; each $1/MMBtu price change affects annual operating costs by ~$60M-$70M.

• FY06 capital spending, excluding acquisitions, is expected to be ~$385M; estimated effective tax rate is 31.5%, and environmental remediation charges are expected within the historical $10M-$49M range, subject to site developments.

• Fiber glass earnings are expected to improve in 2006 on stronger Asian electronics pricing, cost reductions and the China JV; North American automotive OEM glass faces continued competition and high energy costs.