Fitch Ratings has affirmed the issuer default rating
(IDR) and senior unsecured debt rating (including revolving credit
facility) of PPG Industries, Inc. (PPG) at 'A'. The commercial paper
rating of 'F1' is also affirmed. The Rating Outlook is Stable.
The rating is based on PPG's strong balance sheet and supported by consistent strong earnings and excellent cash flow. Risk factors include the cyclicality of many of PPG's end markets, currently increasing raw material costs, and the company's exposure to asbestos litigation. The Stable Outlook reflects Fitch's expectation that PPG will be able to maintain (or improve) its credit profile, while executing a disciplined growth strategy and generating consistent free cash flow.
PPG maintains a strong balance sheet with a debt to capitalization ratio of 28.7% at the end of 2005, which is below the company target range of 30%-40%. Total adjusted debt to adjusted capital was 49.7% at year-end 2005 compared to 46.5% at year-end 2004. This takes into account $1 billion of off-balance sheet debt (8 times 2004 gross rent) and $856 million of asbestos liability (present value of asbestos settlement payments as reported on PPG's balance sheet). PPG does have substantial goodwill and other intangibles of $1.65 billion at year-end 2005 (representing 54.2% of shareholders equity) as a result of its past acquisitions.
The company generates significant free cash flow, over $400 million in each of the past three fiscal years. PPG also maintains ample liquidity with $466 million of cash and $1 billion of availability under its revolving credit agreement. We expect PPG to continue its disciplined approach in prioritizing the uses of its cash/cash flow: to prudently fund its business, pay dividends, manage its debt (including its pension and asbestos liabilities), fund acquisitions, and repurchase stock. The company's EBITDA-to-interest incurred ratio improved from 16.6 times (x) at the end of 2004 to 20.3x at the conclusion of fiscal year 2005. Funds flow from operations-to-interest incurred improved to 14.6x for fiscal year 2005 compared to 13.1x for fiscal year 2004.
Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. Management's strategy is to grow its coatings, optical, and insurance and service businesses while producing considerable cash from all the other business segments. Fitch expects that management will continue to redeploy cash generated by its supporting segments (most of chemicals and glass) to prudently fund its core businesses and may make selective acquisitions (primarily focused on coatings and optical companies/assets).
Fitch's rating takes into account the cyclicality of many of PPG's end markets. Construction and automotive OEM account for approximately 48% of its end markets' sales. However, it is important to note that about 10% of sales are directed to the more resilient construction remodeling market. Also, about 19% of the company's sales are to the automotive aftermarket. Fitch expects 2006 domestic vehicle production volume to be in a range of flat to negative 2%. Similarly, Fitch expects modest declines in single and multifamily housing starts, along with new home sales, in 2006. Fitch expects that PPG's strong balance sheet and continued focus on cost reduction will allow the company to navigate through a somewhat more challenging economic environment in 2006.
The increase in raw material costs continues to negatively impact PPG's margins. Two important categories of cost to PPG are energy (largely for natural gas) and coatings raw materials. Combined, PPG's natural gas and coatings raw material costs increased about $420 million in 2005 compared to 2004. For its coatings business, PPG has been successful in implementing pricing increases to offset these elevated costs. While operating margins for its coatings business were 380 basis points lower for all of 2005 compared to 2004, PPG restored margins during the fourth quarter of 2005 to the previous year levels. Fitch expects coatings raw material prices to increase slightly in the short term as energy prices stay high. Fitch also expects that the company will continue to work on a variety of action plans (including selling price increases, manufacturing efficiencies and global sourcing) to offset the margin impact of these cost increases.
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. The settlement agreement is still pending. If the asbestos settlement becomes effective in 2006, PPG will make a $375 million payment to satisfy the payment schedule outlined in the settlement. The company clearly has sufficient cash flow and liquidity to meet its asbestos liability payments.
Founded in 1883, PPG is a global supplier of coatings, glass, fiberglass, and chemicals. The company has 108 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.
The rating is based on PPG's strong balance sheet and supported by consistent strong earnings and excellent cash flow. Risk factors include the cyclicality of many of PPG's end markets, currently increasing raw material costs, and the company's exposure to asbestos litigation. The Stable Outlook reflects Fitch's expectation that PPG will be able to maintain (or improve) its credit profile, while executing a disciplined growth strategy and generating consistent free cash flow.
PPG maintains a strong balance sheet with a debt to capitalization ratio of 28.7% at the end of 2005, which is below the company target range of 30%-40%. Total adjusted debt to adjusted capital was 49.7% at year-end 2005 compared to 46.5% at year-end 2004. This takes into account $1 billion of off-balance sheet debt (8 times 2004 gross rent) and $856 million of asbestos liability (present value of asbestos settlement payments as reported on PPG's balance sheet). PPG does have substantial goodwill and other intangibles of $1.65 billion at year-end 2005 (representing 54.2% of shareholders equity) as a result of its past acquisitions.
The company generates significant free cash flow, over $400 million in each of the past three fiscal years. PPG also maintains ample liquidity with $466 million of cash and $1 billion of availability under its revolving credit agreement. We expect PPG to continue its disciplined approach in prioritizing the uses of its cash/cash flow: to prudently fund its business, pay dividends, manage its debt (including its pension and asbestos liabilities), fund acquisitions, and repurchase stock. The company's EBITDA-to-interest incurred ratio improved from 16.6 times (x) at the end of 2004 to 20.3x at the conclusion of fiscal year 2005. Funds flow from operations-to-interest incurred improved to 14.6x for fiscal year 2005 compared to 13.1x for fiscal year 2004.
Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. Management's strategy is to grow its coatings, optical, and insurance and service businesses while producing considerable cash from all the other business segments. Fitch expects that management will continue to redeploy cash generated by its supporting segments (most of chemicals and glass) to prudently fund its core businesses and may make selective acquisitions (primarily focused on coatings and optical companies/assets).
Fitch's rating takes into account the cyclicality of many of PPG's end markets. Construction and automotive OEM account for approximately 48% of its end markets' sales. However, it is important to note that about 10% of sales are directed to the more resilient construction remodeling market. Also, about 19% of the company's sales are to the automotive aftermarket. Fitch expects 2006 domestic vehicle production volume to be in a range of flat to negative 2%. Similarly, Fitch expects modest declines in single and multifamily housing starts, along with new home sales, in 2006. Fitch expects that PPG's strong balance sheet and continued focus on cost reduction will allow the company to navigate through a somewhat more challenging economic environment in 2006.
The increase in raw material costs continues to negatively impact PPG's margins. Two important categories of cost to PPG are energy (largely for natural gas) and coatings raw materials. Combined, PPG's natural gas and coatings raw material costs increased about $420 million in 2005 compared to 2004. For its coatings business, PPG has been successful in implementing pricing increases to offset these elevated costs. While operating margins for its coatings business were 380 basis points lower for all of 2005 compared to 2004, PPG restored margins during the fourth quarter of 2005 to the previous year levels. Fitch expects coatings raw material prices to increase slightly in the short term as energy prices stay high. Fitch also expects that the company will continue to work on a variety of action plans (including selling price increases, manufacturing efficiencies and global sourcing) to offset the margin impact of these cost increases.
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. The settlement agreement is still pending. If the asbestos settlement becomes effective in 2006, PPG will make a $375 million payment to satisfy the payment schedule outlined in the settlement. The company clearly has sufficient cash flow and liquidity to meet its asbestos liability payments.
Founded in 1883, PPG is a global supplier of coatings, glass, fiberglass, and chemicals. The company has 108 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.