Fitch affirms A- rating for PPG's long-term IDR, senior unsecured debt due to its heightened focus on coatings, consistent strong earnings, excellent cash flow; rating outlook stable
January 12, 2012
– Fitch Ratings has affirmed its ratings for PPG Industries, Inc. (NYSE: PPG - News), including the company's Issuer Default Rating (IDR) at 'A-'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
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 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 Stable Outlook reflects the company's strong liquidity position and Fitch's forecast of moderate growth in the global economy as well as a number of PPG's end-markets in 2012. PPG ended the September 2011 quarter with cash of $1.3 billion and no borrowings under its $1.2 billion revolving credit facility that matures in August 2013. The company's debt maturities are also well-laddered, with $102 million of short-term debt and no major debt maturities until 2013, when $600 million of senior notes become due.
The company continues to generate significant free cash flow (FCF), reporting FCF of $647 million for the latest 12 month (LTM) period ending Sept. 30, 2011. This compares to FCF of $643 million during fiscal 2010 and $753 million during fiscal 2009. Fitch expects PPG will continue to generate strong FCF this year, although it will likely be lower compared to previous years due to higher capital expenditures. Capital expenditures are expected to be greater due to organic growth initiatives the company has pursued in light of fewer acquisition opportunities.
PPG increased its share repurchases during 2011 as the company did not find suitable acquisition opportunities last year. The company spent $633 million on share repurchases through the first nine months of 2011. By comparison, share repurchases totaled $586 million in 2010 and $59 million in 2009. Fitch is comfortable with this strategy given the company's strong liquidity position and FCF generation. Furthermore, the company remains disciplined in prioritizing the use of its cash and FCF. Fitch expects PPG to moderate its share repurchases this year, particularly if the company finds substantial acquisition opportunities.
The company continues to lower its leverage levels from the highs seen following its acquisition of SigmaKalon (SK) in 2008. PPG's leverage (Fitch-calculated ratio of debt to earnings before interest, taxes, depreciation and amortization) declined from 2.8 times (x) at March 31, 2008 to 2.2x at year-end 2010 and 1.7x for the LTM period ending Sept. 30, 2011. Fitch expects this ratio to be between 1.5x and 2x during 2012.
Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. The acquisition of SK and the company's completed asset divestitures further reflect PPG's transformation into primarily a coatings and specialty products company. Furthermore, the SK acquisition also enhanced the company's geographic footprint. Sales to North America now represent less than 50% of total revenues compared with 65% in 2006 and as high as 81% in 1996. Sales from emerging regions have also increased dramatically, accounting for about 26% of current global sales compared with 8% in 2001. Fitch expects management to remain disciplined in its growth strategy and continue to make selective acquisitions, largely to grow its coatings and optical businesses as well as target emerging regions.
Fitch's rating takes into account the cyclicality of many of PPG's end-markets. Construction and automotive original equipment manufacturers (OEM) typically account for between 35%-45% of its end-markets' sales. Fitch currently expects global auto demand to remain strong in 2012 following record worldwide sales in 2011. Further growth in emerging markets will likely offset potential sales decline in some other markets, including Europe. Fitch also forecasts modest improvement in overall U.S. construction spending this year. Fitch projects total U.S. housing starts to increase 6.7% in 2012, while home improvement spending is projected to grow 4% this year. Private non-residential construction spending in the U.S. is projected to advance about 4% in 2012.
Two important categories of cost to PPG are coatings raw materials and energy (largely natural gas). Coatings raw material costs escalated in 2011 and Fitch expects cost inflation to moderate somewhat this year. PPG implemented pricing increases last year for its coatings products to offset the escalation of input costs. The company and the coatings industry have historically been successful in achieving selling price increases when raw materials costs inflate. The company's commodity chemicals business also provides some hedge against rising raw materials costs. During periods of escalating paint input costs, selling prices for its commodity chemicals products have also tended to be higher. PPG's gross margins through the first nine months of 2011 are 30 basis points higher compared to the same period in 2010. The company has also benefited from lower natural gas prices during the past few years. PPG uses 60 to 70 trillion BTUs of natural gas each year to generate power for the production of chlorine and caustic soda and to produce glass and fiber glass. Fitch expects that natural gas prices are likely to be lower in 2012 compared to 2011.
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. Under the terms of the current settlement arrangement, PPG would make aggregate cash payments of approximately $825 million (payable according to a fixed payment schedule over a period ending 2023), 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. The company has taken charges totaling $812 million for the estimated cost of the settlement arrangement, including an initial charge of $772 million during the second quarter of 2002. If the asbestos settlement becomes effective, Fitch believes that the company has sufficient cash and CP/bank revolver availability to meet the required cash payments.
In addition, the company also has $162 million of reserves for asbestos-related claims that will not be channeled to the trust. PPG currently does not have sufficient current claim information or settlement history on which to base a better estimate of this liability. The current settlement agreement also does not cover 'premises' claims, which comprise less than 2% of the total asbestos related claims against PPG.
Fitch has affirmed the following ratings for PPG with a Stable Outlook:
--Long-term IDR at 'A-';
--Senior unsecured debt at 'A-';
--Unsecured revolving credit facility at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers
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