<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 Commission File Number 1-1687
----------------------- ---------
PPG INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 25-0730780
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
One PPG Place, Pittsburgh, Pennsylvania 15272
(Address of principal executive offices) (Zip Code)
</TABLE>
(412) 434-3131
(Registrant's telephone number, including area code)
As of September 30, 1998, 177,188,827 shares of the Registrant's common stock,
par value $1.66-2/3 per share, were outstanding.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------ ------
<PAGE>
PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Condensed Statement of Income................................................ 2
Condensed Balance Sheet...................................................... 3
Condensed Statement of Cash Flows............................................ 4
Notes to Condensed Financial Statements...................................... 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 10-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 18
Part II. Other Information
Item 1. Legal Proceedings...................................................... 19
Item 2. Change in Securities and Use of Proceeds............................... 19
Item 6. Exhibits and Reports on Form 8-K....................................... 20
Signature......................................................................... 21
</TABLE>
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Income (Unaudited)
-----------------------------------------
(Millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
----------------------------- -----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales........................................... $1,804 $1,812 $5,721 $5,533
Cost of sales....................................... 1,082 1,079 3,413 3,312
------ ------ ------ ------
Gross profit...................................... 722 733 2,308 2,221
------ ------ ------ ------
Other expenses (earnings):
Selling, general and administrative............... 282 266 838 788
Depreciation...................................... 87 88 265 261
Research and development.......................... 68 63 202 182
Interest.......................................... 27 25 85 76
Business divestitures and
realignments (Note 3)............................ - - 15 -
Other charges..................................... 22 31 56 63
Other earnings (Note 3)........................... (141) (24) (194) (74)
------ ------ ------ ------
Total other expenses - net...................... 345 449 1,267 1,296
------ ------ ------ ------
Income before income taxes and minority
interest.......................................... 377 284 1,041 925
Income taxes........................................ 124 108 380 352
Minority interest................................... 5 5 22 18
------ ------ ------ ------
Net income.......................................... $ 248 $ 171 $ 639 $ 555
====== ====== ====== ======
Earnings per common share (Note 2).................. $ 1.40 $ 0.96 $ 3.61 $ 3.08
====== ====== ====== ======
Earnings per common share - assuming
dilution (Note 2)............................... $ 1.39 $ 0.95 $ 3.57 $ 3.05
====== ====== ====== ======
Dividends per share................................. $ 0.36 $ 0.33 $ 1.06 $ 0.99
====== ====== ====== ======
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-2-
<PAGE>
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Balance Sheet (Unaudited)
-----------------------------------
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
1998 1997
------------------ ------------------
(Millions)
<S> <C> <C>
Assets
- -------
Current assets:
Cash and cash equivalents...................................... $ 264 $ 129
Receivables-net................................................ 1,354 1,353
Inventories (Note 4)........................................... 870 863
Other.......................................................... 228 239
-------- --------
Total current assets....................................... 2,716 2,584
Property (less accumulated depreciation of
$3,742 million and $3,903 million)............................. 2,806 2,855
Investments....................................................... 241 219
Other assets...................................................... 1,370 1,210
-------- --------
Total...................................................... $ 7,133 $ 6,868
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Short-term borrowings and current
portion of long-term debt.................................. $ 335 $ 444
Accounts payable and accrued liabilities....................... 1,164 1,210
Income taxes................................................... 31 8
-------- --------
Total current liabilities.................................. 1,530 1,662
Long-term debt.................................................... 1,203 1,257
Deferred income taxes............................................. 429 406
Accumulated provisions............................................ 424 421
Other postretirement benefits..................................... 540 531
-------- --------
Total liabilities.......................................... 4,126 4,277
-------- --------
Commitments and contingent liabilities (Note 9)..................
Minority interest................................................. 86 82
-------- --------
Shareholders' equity:
Common stock................................................... 484 484
Additional paid-in capital..................................... 108 99
Retained earnings.............................................. 5,692 5,239
Treasury stock................................................. (3,060) (2,990)
Unearned compensation.......................................... (158) (162)
Accumulated other comprehensive loss (Note 6).................. (145) (161)
-------- --------
Total shareholders' equity................................. 2,921 2,509
-------- --------
Total...................................................... $ 7,133 $ 6,868
======== ========
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-3-
<PAGE>
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Cash Flows (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
Sept. 30
------------------------------------
1998 1997
------------------ ----------------
(Millions)
<S> <C> <C>
Cash from operating activities.................................... $ 715 $ 724
------ ------
Investing activities:
Capital spending
Additions to property and investments...................... (332) (277)
Business acquisitions, net of cash balances
acquired............................................... (198) (58)
Proceeds from business divestitures............................ 278 -
Reduction of investments....................................... 15 22
Other.......................................................... 11 3
------ ------
Cash used for investing activities......................... (226) (310)
------ ------
Financing activities:
Net change in borrowings with
maturities of three months or less......................... (55) (85)
Proceeds from other short-term debt............................ 101 65
Repayment of other short-term debt............................. (92) (61)
Proceeds from long-term debt................................... 8 217
Repayment of long-term debt.................................... (61) (52)
Loans to employee stock ownership plan......................... (26) (27)
Repayment of loans by employee stock
ownership plan............................................. 31 25
Purchase of treasury stock, net................................ (70) (294)
Dividends paid................................................. (188) (179)
------ ------
Cash used for financing activities......................... (352) (391)
------ ------
Effect of currency exchange rate changes
on cash and cash equivalents................................... (2) (3)
------ ------
Net increase in cash and cash equivalents......................... 135 20
Cash and cash equivalents, beginning of period.................... 129 70
------ ------
Cash and cash equivalents, end of period.......................... $ 264 $ 90
====== ======
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-4-
<PAGE>
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Financial Statements (Unaudited)
---------------------------------------------------
1. Financial Statements
--------------------
The condensed financial statements included herein are unaudited. In the
opinion of management, these statements include all adjustments, consisting
only of normal, recurring adjustments, necessary for a fair presentation of
the financial position of PPG Industries, Inc. and subsidiaries (the
Company or PPG) at September 30, 1998, and the results of their operations
and their cash flows for the three- and nine-month periods ended September
30, 1998 and 1997. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto incorporated by
reference in PPG's Annual Report on Form 10-K for the year ended December
31, 1997.
The results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full year.
2. Earnings Per Share
------------------
The following table reflects the earnings per share calculations for the
three and nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
(Millions, except per share amounts)
Earnings per common share
Net income.......................................... $ 248 $ 171 $ 639 $ 555
------ ------ ------ ------
Weighted average common shares
outstanding........................................ 177.0 178.8 177.2 180.4
------ ------ ------ ------
Earnings per common share........................... $ 1.40 $ 0.96 $ 3.61 $ 3.08
====== ====== ====== ======
Earnings per common share -
assuming dilution
Net income.......................................... $ 248 $ 171 $ 639 $ 555
------ ------ ------ ------
Weighted average common shares
outstanding........................................ 177.0 178.8 177.2 180.4
Effect of dilutive securities:
Stock options...................................... 0.6 1.0 0.8 0.9
Other stock compensation plans..................... 1.1 1.0 1.0 0.9
------ ------ ------ ------
Potentially dilutive common shares.................. 1.7 2.0 1.8 1.8
------ ------ ------ ------
Adjusted common shares
outstanding........................................ 178.7 180.8 179.0 182.2
------ ------ ------ ------
Earnings per common share -
assuming dilution.................................. $ 1.39 $ 0.95 $ 3.57 $ 3.05
====== ====== ====== ======
</TABLE>
-5-
<PAGE>
3. Business Acquisitions and Divestitures
--------------------------------------
On September 25, 1998, the Company completed the acquisition of the
technical coatings business of Orica Ltd. of Melbourne, Australia for
approximately $132 million. The purchase of certain additional assets
related to this business is expected to be completed during the fourth
quarter of 1998. The purchase included Orica's automotive refinish,
automotive original equipment, coil, packaging and industrial coatings
businesses. A preliminary purchase price allocation for this acquisition
was used in preparing the September 30, 1998 condensed balance sheet and is
subject to adjustment.
Effective July 31, 1998, the Company completed the sale of its European
flat and automotive glass businesses to Glaverbel S.A. of Brussels, Belgium
for $266 million in cash plus the assumption of certain indebtedness. The
sale resulted in a pre-tax gain of approximately $85 million which has been
included in other earnings in the condensed statement of income. The
annual sales generated by these businesses totaled approximately $450
million. Also in the third quarter, the Company sold the European
decorative coatings business previously acquired in the 1997 acquisition of
Max Meyer Duco S.p.A. The selling price approximated the carrying value of
the net assets sold.
In January 1998, the Company completed the purchase of the automotive
coatings business of Helios-Lacke Bollig & Kemper GmbH & Co. KG of Cologne,
Germany, and the purchase of the assets of an automotive glass plant in
Evart, Michigan, from Chrysler Corporation. The Company has completed
final purchase price allocations for these acquisitions and the operating
activity associated with these acquisitions has been included in the
Company's operations from the acquisition dates.
Based on the current status of the Company's discussions to dispose of its
equity interests in two Asian float glass plants, the Company performed a
reassessment of the loss expected to be realized on the disposition of
these equity interests. This reassessment resulted in the recognition of
an additional $15 million pre-tax charge during the nine months ended
September 30, 1998.
4. Inventories
-----------
Inventories at September 30, 1998 and December 31, 1997 are detailed below.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
1998 1997
-------------- --------------
(Millions)
<S> <C> <C>
Finished products and work in process........................... $ 605 $ 608
Raw materials................................................... 160 141
Supplies........................................................ 105 114
----- -----
Total..................................................... $ 870 $ 863
===== =====
</TABLE>
-6-
<PAGE>
Most domestic and certain foreign inventories are valued using the last-in,
first-out method. If the first-in, first-out method had been used,
inventories would have been $182 million and $191 million higher at
September 30, 1998 and December 31, 1997, respectively.
5 . Challenge 2000 Stock Plan
-------------------------
On July 1, 1998, the Company granted to substantially all active employees
of the Company and its majority owned subsidiaries, subject to statutory
and regulatory requirements, including but not limited to approvals
required by securities and labor laws, the option to purchase 100 shares
of common stock at its fair market value of $70 per share. Options are
exercisable beginning July 1, 2003 and expire on June 30, 2008. If the
Company's earnings per common share for the year ended December 31, 2000 is
$7.00 or more, the options become exercisable beginning January 31, 2001.
6. Comprehensive Income
--------------------
Total comprehensive income for the three and nine months ended September
30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
---------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------ -------------
(Millions)
<S> <C> <C> <C> <C>
Net income......................................... $ 248 $ 171 $ 639 $ 555
Other comprehensive income (loss):
Unrealized currency translation
adjustment...................................... 26 (10) 16 (89)
Minimum pension liability
adjustment...................................... - - - (2)
----- ----- ----- -----
26 (10) 16 (91)
----- ----- ----- -----
Total comprehensive income....................... $ 274 $ 161 $ 655 $ 464
===== ===== ===== =====
</TABLE>
As of September 30, 1998 and December 31, 1997, accumulated other
comprehensive loss, as reflected on the condensed balance sheet, was
comprised of the following:
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
1998 1997
------------- -------------
(Millions)
<S> <C> <C>
Minimum pension liability adjustment......................................... $ (25) $ (25)
Currency translation adjustment.............................................. (120) (136)
------ ------
Accumulated other comprehensive loss....................................... $(145) $(161)
====== ======
</TABLE>
7. Cash Flow Information
---------------------
Cash payments for interest were $84 million and $74 million for the nine
months ended September 30, 1998 and 1997, respectively. Net cash payments
for income taxes for the nine months ended September 30, 1998 and 1997 were
$292 million and $339 million, respectively.
-7-
<PAGE>
8. Business Segment Information
----------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(Millions)
Net sales:
Coatings................................... $ 824 $ 737 $2,545 $2,259
Glass...................................... 601 658 1,994 2,024
Chemicals.................................. 379 417 1,182 1,250
------ ------ ------ ------
Total................................... $1,804 $1,812 $5,721 $5,533
====== ====== ====== ======
Operating income:
Coatings................................... $ 127 $ 124 $ 418 $ 419
Glass (a).................................. 186 99 416 304
Chemicals.................................. 87 83 295 274
------ ------ ------ ------
Total................................... 400 306 1,129 997
Interest expense - net....................... (25) (24) (77) (71)
Other unallocated corporate income
(expense) - net (b)........................ 2 2 (11) (1)
------ ------ ------ ------
Income before income taxes and
minority interest.......................... $ 377 $ 284 $1,041 $ 925
====== ====== ====== ======
</TABLE>
(a) Includes in both 1998 periods presented, a pre-tax gain of $85 million
related to the sale of the European flat and automotive glass businesses.
(b) Includes for the nine months ended September 30, 1998, a pre-tax
charge of $15 million related to the divestiture of equity interests in two
Asian float glass plants.
9. Commitments and Contingent Liabilities
--------------------------------------
PPG is involved in a number of lawsuits and claims, both actual and
potential, including some which it has asserted against others, in which
substantial money damages are sought. These lawsuits and claims relate to
product liability, contract, patent, antitrust, environmental and other
matters arising out of the conduct of PPG's business. PPG's lawsuits and
claims against others include claims against insurers and other third
parties with respect to actual and contingent losses related to
environmental matters. Management believes that the outcome of all lawsuits
and claims involving PPG, in the aggregate, will not have a material effect
on PPG's consolidated financial position, results of operations, or
liquidity.
It is PPG's policy to accrue expenses for environmental contingencies when
it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. Reserves for environmental contingencies are
exclusive of claims against third parties and are not discounted. As of
September 30, 1998 and December 31,
-8-
<PAGE>
1997, PPG had reserves for environmental contingencies totaling $94 million
and $100 million, respectively. Pre-tax charges against income for
environmental remediation costs for the nine months ended September 30,
1998 and 1997 were $7 million and $26 million, respectively. Cash outlays
related to such charges for the nine months ended September 30, 1998 and
1997 aggregated $13 million and $22 million, respectively.
Management anticipates that the resolution of the Company's environmental
contingencies, which will occur over an extended period of time, will not
result in future annual charges against income that are significantly
greater than those recorded in recent years. It is possible, however, that
technological, regulatory and enforcement developments, the results of
environmental studies and other factors could alter this expectation. In
management's opinion, the Company operates in an environmentally sound
manner and the outcome of the Company's environmental contingencies will
not have a material effect on PPG's financial position or liquidity.
In addition to the amounts currently reserved, the Company may be subject
to loss contingencies related to environmental matters estimated to be as
much as $200 million to $400 million, which range is unchanged from
December 31, 1997. Such unreserved losses are reasonably possible but are
not currently considered to be probable of occurrence. Although insurers
and other third parties may cover a portion of these costs, to the extent
they are incurred, any potential recovery is not included in this
unreserved exposure to future loss. The Company's environmental
contingencies are expected to be resolved over an extended period of time.
Although the unreserved exposure to future loss relates to all sites, a
significant portion of such exposure involves three operating plant sites
and one closed plant site. Initial remedial actions are occurring at these
sites. Studies to determine the nature of the contamination are reaching
completion and the need for additional remedial actions, if any, is
presently being evaluated. The loss contingencies related to the remaining
portion of such unreserved exposure include significant unresolved issues
such as the nature and extent of contamination, if any, at sites and the
methods that may have to be employed should remediation be required.
With respect to certain waste sites, the financial condition of any other
potentially responsible parties also contributes to the uncertainty of
estimating PPG's final costs. Although contributors of waste to sites
involving other potentially responsible parties may face governmental
agency assertions of joint and several liability, in general, final
allocations of costs are made based on the relative contributions of wastes
to such sites. PPG is generally not a major contributor to such sites.
The impact of evolving programs, such as natural resource damage claims,
industrial site reuse initiatives and state voluntary remediation programs,
also adds to the present uncertainties with regard to the ultimate
resolution of this unreserved exposure to future loss. The Company's
assessment of the potential impact of environmental contingencies is
subject to considerable uncertainty due to the complex, ongoing and
evolving process of investigation and remediation, if necessary, of such
environmental contingencies.
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
Performance in the Third Quarter of 1998 Compared to the Third Quarter of 1997
Performance Overview
Sales decreased slightly during the third quarter of 1998 to $1.80 billion
compared to $1.81 billion in the third quarter of 1997. Overall, the reduced
sales levels resulted from a 5% decline due to the absence of sales from our
divested surfactants and European flat and automotive glass businesses, and a 2%
decline due to weaker commodity chemical prices. These unfavorable factors were
partially offset by a 7% improvement in volumes, including sales related to
several acquisitions made in late 1997 and early 1998, principally in our
coatings segment.
The gross profit percentage declined to 40.0% in the third quarter of 1998
compared to 40.5% in the same quarter of 1997. The combination of unfavorable
sales mix changes in our coatings segment and weaker commodity chemical prices
in our chemicals segment more than offset the favorable effects of lower raw
materials costs in our chemicals segment, improved manufacturing efficiencies
within our glass segment, and the elimination of the lower gross margin sales
associated with our recently divested European flat and automotive glass
businesses.
Net income and earnings per share for the third quarter of 1998 were $248
million and $1.40, respectively, compared to net income and earnings per share
of $171 million and $0.96, respectively, for the third quarter of 1997. The
increase in net income in the third quarter of 1998 is principally attributable
to an $82 million after-tax gain from the sale of our European flat and
automotive glass businesses, an insurance recovery of certain past environmental
costs, and lower overall environmental expenses. In addition to the factors
which contributed to a lower gross profit percentage, net income was adversely
affected by higher selling, general and administrative expenses due principally
to acquisitions and growth initiatives in the coatings segment, the negative
effects of inflation in certain business segments, the General Motors strike,
and the impact of the current economic conditions in Asia.
Performance of Business Segments
Coatings sales increased 12% to $824 million in the third quarter of 1998
compared to $737 million in the same quarter of 1997. The increase in sales in
the third quarter of 1998 is attributable to volume gains, a substantial portion
of which related to recent acquisitions, and moderately higher demand for
worldwide industrial coatings, automotive refinish, and North American
architectural coatings products. Operating income increased to $127 million in
the third quarter of 1998 compared to $124 million in the same quarter of 1997.
The increase in operating income is attributable to higher sales volumes, as
previously discussed, an insurance recovery of certain past environmental costs,
and lower legal expenses. These favorable factors were partially offset by
higher manufacturing costs, the negative effects of inflation, and the General
Motors strike.
Glass sales decreased 9% to $601 million in the third quarter of 1998 compared
to $658 million in the same quarter of 1997. The combination of a 9% decline
from the absence of sales associated with our European flat and automotive glass
businesses, a 3% decrease in volumes related to fiber glass products, and a 1%
decline due to the unfavorable effects of foreign currency translation were
offset in part by a 4% sales volume increase, principally from North American
automotive replacement glass and aircraft products and from an early 1998
-10-
<PAGE>
acquisition. Operating income increased to $186 million in the third quarter of
1998 compared to $99 million in the same quarter of 1997. An $85 million pre-
tax gain from the sale of our European flat and automotive glass businesses and
the benefits of improved manufacturing efficiencies at our North American glass
operations were offset in part by the overall decline in volumes previously
discussed and the General Motors strike.
Chemicals sales decreased 9% to $379 million in the third quarter of 1998
compared to $417 million in the same quarter of 1997. A 7% decline associated
with the divestiture of the surfactants business in late 1997, a 7% decline in
sales prices, principally for chlor-alkali products, and a 1% reduction due to
the unfavorable impact of foreign currency translation were partially offset by
a 6% sales volume increase, principally due to a recent acquisition and
increased demand over the prior year's third quarter for our optical products,
including Transitions(Registered Trademark) optical lenses. Operating income
increased slightly in the current quarter to $87 million compared to $83 million
in the same quarter of 1997. The favorable impact of an insurance recovery of
certain past environmental costs, lower overall environmental costs, and lower
prices for certain raw materials more than offset the lower sales prices
realized for chlor-alkali products.
Performance in the First Nine Months of 1998 Compared to the First Nine Months
of 1997
Performance Overview
Sales increased 3% for the first nine months of 1998 to $5.72 billion compared
to $5.53 billion for the first nine months of 1997. The increase in sales in the
current nine-month period results from an overall 9% improvement in volumes,
across all our business segments, including sales related to several
acquisitions made in late 1997 and early 1998, primarily in our coatings
segment. These improvements were partially offset by the effects of a 3%
decline from the absence of sales related to our European flat and automotive
glass businesses divested in the third quarter of 1998 and our surfactants
business divested in the fourth quarter of 1997, a 2% decline from foreign
currency translation, and a 1% decline due to weaker prices, principally in our
chemicals segment.
The gross profit percentage improved slightly to 40.3% in the 1998 nine-month
period compared to 40.1% in the same prior-year period. The benefits realized
from favorable sales mix changes, principally in our glass segment, improved
manufacturing efficiencies within our glass segment, and lower raw materials
costs in our chemicals segment were almost fully offset by the negative effects
of lower commodity chemical sales prices in our chemicals segment and the
effects of inflation in our coatings and glass segments.
Net income and earnings per share for the current nine-month period were $639
million and $3.61, respectively, compared to net income and earnings per share
of $555 million and $3.08, respectively, for the same period of the prior year.
The increase in the current period's net income is attributable to the same
factors that contributed to the increased sales levels and the gross profit
percentage increase described above, an $82 million after-tax gain from the sale
of our European flat and automotive glass businesses, and an insurance recovery
of certain past environmental costs. These improvements were offset in part by
higher selling, general and administrative expenses associated with growth
initiatives, an additional $15 million provision for the estimated loss on the
disposition of equity interests in two Asian float glass plants, higher income
tax expense due to increased pre-tax earnings, the effects of the General Motors
strike, and the impact of the current economic conditions in Asia.
-11-
<PAGE>
Performance of Business Segments
Coatings sales increased 13% to $2.55 billion in the current nine-month period
from $2.26 billion in the comparable nine-month period of 1997. The higher
sales levels resulted from a 15% increase in volumes, including sales from
recent acquisitions, slightly offset by a 2% decline from foreign currency
translation. Sales generated from several acquisitions in late 1997 and early
1998 contributed substantially to the segment's sales growth in the current
nine-month period. Sales also increased due to the impact of volume gains across
all product lines, with the largest increases experienced in our worldwide
industrial and refinish businesses and our North American architectural coatings
business. The unfavorable effects of the General Motors strike partially offset
these improvements. Operating income decreased slightly to $418 million for the
nine months ended September 30, 1998 compared to $419 million in the same period
of 1997. The reduction in operating income was principally due to higher
selling, general and administrative expenses associated with growth initiatives
in all product lines, the negative effects of inflation, the impact of the
General Motors strike, and higher legal expenses. These reductions were
partially offset by the previously discussed volume improvements and the
favorable effect of earnings from recently acquired businesses.
Glass sales decreased 1% to $1.99 billion in the nine-month period ended
September 30, 1998 from $2.02 billion in the same period of 1997. The effects
of a 5% sales volume increase, principally from North American automotive
replacement glass and aircraft products, and from a recent acquisition, were
more than offset by a 3% decline from the absence of sales from our divested
European flat and automotive glass businesses, a 2% decline from lower fiber
glass product volumes, and a 1% decline from the unfavorable effects of foreign
currency translation. Additionally, worldwide sales price improvements for fiber
glass products were more than offset by lower sales prices for North American
glass products. The increase in operating income to $416 million in the current
nine-month period compared to $304 million in last year's nine-month period is
attributable to an $85 million pre-tax gain from the sale of our European flat
and automotive glass businesses, improved manufacturing efficiencies, lower
selling, general and administrative expenses, and higher equity earnings. These
favorable factors were partially offset by the negative effects of inflation and
the effect of the General Motors strike.
Chemicals sales decreased 5% to $1.18 billion in the nine months ended September
30, 1998 from $1.25 billion in the same period of 1997. The decrease in chemical
sales in the current nine-month period is attributable to a 7% sales reduction
associated with the divestiture of the surfactants business in late 1997, a 3%
decline related to lower selling prices for chlor-alkali products, and a 1%
decline from foreign currency translation. These unfavorable factors were
partially offset by a 6% sales volume increase. The majority of the increased
sales volume related to our specialty chemicals business, specifically
Transitions(Registered Trademark) optical lenses. Operating income increased in
the current year's nine-month period to $295 million from $274 million in the
same nine-month period of a year ago. The improvement in operating income
related to lower raw material costs within our chlor-alkali and derivatives
business, the sales volume increase within specialty chemicals, an insurance
recovery of certain past environmental costs, and lower environmental costs.
These favorable factors were offset in part by the decline in sales prices for
chlor-alkali products, the negative effect on earnings of PPG's late 1997
surfactants business divestiture, and the negative impact of inflation on
overhead costs.
Other Factors
The increase in cash and cash equivalents principally results from proceeds
generated from the sale of the European flat and automotive glass businesses, a
portion of which were held in
-12-
<PAGE>
escrow until certain post-closing conditions were satisfied by the parties.
These escrowed funds were released on September 30, 1998.
The decrease in short-term borrowings principally results from repayments of
commercial paper debt, principally in the third quarter of 1998.
The increase in income tax expense in the current quarter and nine-month period
is the result of higher pre-tax earnings and the taxes on the gain on the sale
of the European flat and automotive glass businesses, which was partially offset
by the utilization of capital loss carryforwards for which a valuation allowance
had been previously established. The pre-tax gain from the sale of the European
flat and automotive glass businesses was almost entirely offset by the
utilization of capital loss carryforwards.
Other assets increased principally from goodwill and intangible assets resulting
from 1998 acquisition activities. Also contributing to the overall increase was
the higher prepaid pension balance which was due to the recognition of net
periodic pension income.
The increase in capital spending for the nine-month period ended September 30,
1998 was primarily the result of business acquisitions.
Business Acquisitions and Divestitures
On September 25, 1998, the Company completed the acquisition of the technical
coatings business of Orica Ltd. of Melbourne, Australia for approximately $132
million. The purchase of certain additional assets related to this business is
expected to be completed during the fourth quarter of 1998. The purchase
included Orica's automotive refinish, automotive original equipment, coil,
packaging and industrial coatings businesses. A preliminary purchase price
allocation for this acquisition was used in preparing the September 30, 1998
condensed balance sheet and is subject to adjustment.
Effective July 31, 1998, the Company completed the sale of its European flat and
automotive glass businesses to Glaverbel S.A. of Brussels, Belgium for $266
million in cash plus the assumption of certain indebtedness. The sale resulted
in a pre-tax gain of approximately $85 million which has been included in other
earnings in the condensed statement of income. The annual sales generated by
these businesses totaled approximately $450 million. Also in the third quarter,
the Company sold the European decorative coatings business previously acquired
in the 1997 acquisition of Max Meyer Duco S.p.A. The selling price approximated
the carrying value of the net assets sold.
In January 1998, the Company completed the purchase of the automotive coatings
business of Helios-Lacke Bollig & Kemper GmbH & Co. KG of Cologne, Germany, and
the purchase of the assets of an automotive glass plant in Evart, Michigan, from
Chrysler Corporation. The Company has completed final purchase price
allocations for these acquisitions and the operating activity associated with
these acquisitions has been included in the Company's operations from the
acquisition dates.
Based on the current status of the Company's discussions to dispose of its
equity interests in two Asian float glass plants, the Company performed a
reassessment of the loss expected to be realized on the disposition of these
equity interests. This reassessment resulted in the recognition of an
additional $15 million pre-tax charge during the nine months ended September 30,
1998.
-13-
<PAGE>
Conversion to the Euro
On January 1, 1999, eleven of the member countries of the European Union will
convert from their sovereign currencies to a common currency, the euro. At that
time fixed conversion rates between the legacy currencies and the euro will be
set. The legacy currencies will remain legal tender from January 1, 1999
through July 1, 2002. Beginning January 1, 2002, euro-denominated currency will
be issued. No later than July 1, 2002, the participating countries will
withdraw all bills and coins so that the legacy currency will no longer be
considered legal tender.
PPG is in the early stages of developing plans to identify and address issues
that may result from the euro conversion such as increased competitive pressures
from greater price transparency, changes to information systems to accommodate
various aspects of the new currency, and exposure to market risk with respect to
financial instruments. Although PPG has not completed its assessment of the
conversion's potential impact on its operating results or financial condition,
it does not expect the impact to be material.
Year 2000 Readiness Disclosure
Background. Many existing information technology ("IT") products and systems,
and non-IT products and systems containing embedded microchip processors, were
originally programmed to represent any calendar dates by using six digits (e.g.,
12/31/99), as opposed to eight digits (e.g., 12/31/1999). Accordingly, such
products and systems may experience miscalculations, malfunctions or disruptions
when attempting to process information containing dates that fall after December
31, 1999 or other dates which could cause computer malfunctions. These potential
problems are collectively referred to as the "Year 2000" problem.
State of Readiness. Recognizing the importance of Year 2000 issues, the Company
has established a corporate-wide Year 2000 Steering Committee made up of certain
senior executives of the Company. The Committee is responsible for overseeing
the Company's efforts to assess and address the Year 2000 problem as it may
affect the Company. The scope of the Company's efforts includes: (i) an
assessment, and where needed a remediation, of both IT and non-IT elements of
its business information, computing, telecommunications, and process control
systems, (ii) an assessment, and remediation, as necessary, of equipment with
embedded computer chips, and (iii) an evaluation of the Company's
relationships with material third parties as they may be impacted by the Year
2000 problem.
The phases of the Company's Year 2000 compliance plan are: (1) Internal
Assessment - a detailed evaluation of the potential Year 2000 effects on the
Company's IT and non-IT systems and on its equipment with embedded computer
chips, (2) Remediation - corrective action including code enhancements, hardware
and software upgrades, system replacements, vendor certification, equipment
repair or replacement, and other associated changes to achieve Year 2000
compliance, (3) Testing - the verification that remediation actions are
effective, (4) Third Party Evaluation - an evaluation of the Year 2000 readiness
of key suppliers of goods and services and of key customers, and (5) Contingency
Planning - the development of detailed procedures to be put in place should the
Company or key suppliers or customers experience a significant Year 2000
problem. These phases sometimes overlap.
The assessment phase is substantially complete and the Company expects
assessment to be fully complete by December 31, 1998. The remediation effort is
well underway on all critical IT and non-IT systems, and the Company presently
anticipates that it will substantially complete remediation of such critical
systems by June 30, 1999 and that remediation and testing of all remaining
systems will be completed by December 31, 1999. Once systems undergo
-14-
<PAGE>
remediation, they are tested for Year 2000 compliance. The testing process
usually involves subjecting the remediated system to a simulated change of date
from the year 1999 to the year 2000 using, in many cases, computer resources
dedicated to that purpose so that normal computing activity is not interrupted
or adversely affected by the testing. The Company is currently in the process of
testing a number of the most critical IT and non-IT systems and expects to
complete, in all material respects, all testing of internal systems prior to the
year 2000. The Company's Year 2000 Steering Committee will continue to review
Year 2000 compliance efforts on an ongoing basis.
In the third party evaluation phase, the Company has identified, and is in the
process of contacting, materially-significant suppliers of goods or services in
an effort to determine the state of readiness of these important third parties.
Materially-significant suppliers for this purpose are considered to be those
from whom the Company purchases a significant dollar amount of goods or
services, those who supply goods or services which are critical to uninterrupted
production by the Company of the Company's products, and those who are sole-
source suppliers of important goods or services. Written assurances that these
materially-significant suppliers are progressing toward timely Year 2000
compliance have been received from approximately 40% of the Company's
materially-significant suppliers. The Company also intends to identify and
investigate the Year 2000 readiness of its materially-significant customers.
Materially-significant customers for this purpose are considered to be those to
which the Company sells a significant dollar amount of goods.
If materially-significant suppliers or customers or a number of less substantial
suppliers or customers do not convert their systems in a timely manner, or are
themselves adversely affected by a lack of Year 2000 readiness on the part of
their suppliers or customers, it could have a material adverse effect on the
Company's operations, liquidity or consolidated financial condition. The
Company believes that its continuing efforts to gain assurances of Year 2000
compliance from materially-significant suppliers and its planned efforts to
investigate the readiness of materially-significant customers will minimize
these risks. Nonetheless, the actual readiness of these third parties is beyond
the Company's control.
Costs. The Company is using both internal and external resources to execute its
Year 2000 compliance plan. The Company currently estimates the incremental cost
of resolving the Year 2000 issue at approximately $20 to $25 million. Of this
amount, the Company anticipates the expenditure of $9 to $11 million by the end
of 1998. Approximately 40% to 50% of the total Year 2000 costs are expected to
be expended on equipment or software replacement and the remainder on
remediation and testing expense.
All Year 2000 costs are expected to be funded out of the Company's operating
cash flow. The Company is expensing as incurred all costs related to the
assessment, remediation and testing of the Year 2000 issue, unless new systems
or equipment are purchased, in which case such costs will be capitalized and
charged to expense over the useful lives of those assets in accordance with the
Company's existing policy. These cost estimates are based on currently
available information, and may be subject to change.
Risks. If needed modifications and conversions of computer systems are not made
on a timely basis by the Company or its materially-significant suppliers or
customers, the Company could be affected by business disruption, operational
problems, financial loss, legal liability to third parties and similar risks,
any of which could have a material adverse effect on the Company's operations,
liquidity or consolidated financial condition. Although not anticipated, the
most reasonably likely worst case scenario of failure by the Company or its key
suppliers or
-15-
<PAGE>
customers to resolve the Year 2000 issue would be a short-term slowdown or
cessation of manufacturing operations at one or more of the Company's facilities
and a short-term inability on the part of the Company to process orders and
billings in a timely manner, and to deliver product to customers.
Contingency Planning. While the Company continues to focus on solutions for
Year 2000 issues, and expects to be Year 2000 compliant in a timely manner, the
Company will, in the fourth quarter of 1998, begin development of a contingency
plan. Such a plan will set forth the Company's responses should the Company or
materially-significant third parties with which it has relationships fail to
achieve Year 2000 compliance in a timely manner. The Company expects to
finalize its contingency plan by June 30, 1999.
Forward-Looking Statements. The foregoing discussion regarding Year 2000
issues, including the discussion of the timing and effectiveness of
implementation and the estimated cost of the Company's Year 2000 efforts,
contains forward-looking statements derived using various assumptions of future
events. These forward-looking statements involve inherent risks and
uncertainties, and the actual results could differ materially from those
contemplated by such statements.
Factors which could cause material differences in results (many of which are
outside the control of the Company) include, but are not limited to:
. the Company's ability to locate and correct all relevant computer
software;
. the accuracy of representations by manufacturers of the Company's
computer systems and software that their products are Year 2000
compliant;
. the ability of the Company's suppliers, customers and other
counterparties to identify and resolve their own Year 2000 obligations in
such a way as to allow them to continue normal business operations or
furnish products, services or data to the Company without disruption; and
. the Company's ability to respond to unforeseen Year 2000 complications.
The consequences of material differences in the results as compared to those
anticipated in the forward-looking statements could include, among other things,
business disruption, operational problems, financial loss, legal liability to
third parties and similar risks, any of which could have a material adverse
effect on the Company's operations, liquidity or consolidated financial
condition.
Accounting Standards
On March 4, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. The adoption of this new standard will not have a material effect on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for fiscal years beginning after
June 15, 1999. The Company is currently in
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<PAGE>
the process of evaluating the prospective impact of this standard on its
financial position and results of operations.
Commitments and Contingent Liabilities, including Environmental Matters
PPG is involved in a number of lawsuits and claims, both actual and potential,
including some which it has asserted against others, in which substantial money
damages are sought. These lawsuits and claims relate to product liability,
contract, patent, antitrust, environmental and other matters arising out of the
conduct of PPG's business. PPG's lawsuits and claims against others include
claims against insurers and other third parties with respect to actual and
contingent losses related to environmental matters. Management believes that the
outcome of all lawsuits and claims involving PPG, in the aggregate, will not
have a material effect on PPG's consolidated financial position, results of
operations or liquidity.
It is PPG's policy to accrue expenses for environmental contingencies when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Reserves for environmental contingencies are exclusive of
claims against third parties and are not discounted. As of September 30, 1998
and December 31, 1997, PPG had reserves for environmental contingencies totaling
$94 million and $100 million, respectively. Pre-tax charges against income for
environmental remediation costs for the nine months ended September 30, 1998 and
1997 were $7 million and $26 million, respectively. Cash outlays related to
such charges for the nine months ended September 30, 1998 and 1997 aggregated
$13 million and $22 million, respectively.
Management anticipates that the resolution of the Company's environmental
contingencies, which will occur over an extended period of time, will not result
in future annual charges against income that are significantly greater than
those recorded in recent years. It is possible, however, that technological,
regulatory and enforcement developments, the results of environmental studies
and other factors could alter this expectation. In management's opinion, the
Company operates in an environmentally sound manner and the outcome of the
Company's environmental contingencies will not have a material effect on PPG's
financial position or liquidity.
In addition to the amounts currently reserved, the Company may be subject to
loss contingencies related to environmental matters estimated to be as much as
$200 million to $400 million, which range is unchanged from December 31, 1997.
Such unreserved losses are reasonably possible but are not currently considered
to be probable of occurrence. Although insurers and other third parties may
cover a portion of these costs, to the extent they are incurred, any potential
recovery is not included in this unreserved exposure to future loss. The
Company's environmental contingencies are expected to be resolved over an
extended period of time.
Although the unreserved exposure to future loss relates to all sites, a
significant portion of such exposure involves three operating plant sites and
one closed plant site. Initial remedial actions are occurring at these sites.
Studies to determine the nature of the contamination are reaching completion and
the need for additional remedial actions, if any, is presently being evaluated.
The loss contingencies related to the remaining portion of such unreserved
exposure include significant unresolved issues such as the nature and extent of
contamination, if any, at sites and the methods that may have to be employed
should remediation be required.
With respect to certain waste sites, the financial condition of any other
potentially responsible parties also contributes to the uncertainty of
estimating PPG's final costs. Although contributors
-17-
<PAGE>
of waste to sites involving other potentially responsible parties may face
governmental agency assertions of joint and several liability, in general, final
allocations of costs are made based on the relative contributions of wastes to
such sites. PPG is generally not a major contributor to such sites.
The impact of evolving programs, such as natural resource damage claims,
industrial site reuse initiatives and state voluntary remediation programs, also
adds to the present uncertainties with regard to the ultimate resolution of this
unreserved exposure to future loss. The Company's assessment of the potential
impact of environmental contingencies is subject to considerable uncertainty due
to the complex, ongoing and evolving process of investigation and remediation,
if necessary, of such environmental contingencies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There were no material changes in the Company's exposure to market risk from
December 31, 1997.
-18-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In September 1998, PPG received a Notification of Potential Enforcement Action
from the United States Environmental Protection Agency, Region IX (USEPA) which
alleges that the Torrance facility failed to submit a timely Toxic Chemical
Release Inventory Form for calendar year 1995 in violation of Section 313 of the
Emergency Planning and Community Right-to-know Act. PPG has responded to the
notification and plans to meet with the USEPA in November to commence settlement
negotiations. PPG anticipates its maximum exposure to be $132,000.
Item 2. Change in Securities and Use of Proceeds
- -------------------------------------------------
Directors who are not also Officers of the Company receive Common Stock
Equivalents pursuant to the Deferred Compensation Plan for Directors and the
Directors' Common Stock Plan. Common Stock Equivalents are hypothetical shares
of Common Stock having a value on any given date equal to the value of a share
of Common Stock. Common Stock Equivalents earn dividend equivalents which are
converted into additional Common Stock Equivalents but carry no voting rights or
other rights of a holder of Common Stock. The Common Stock Equivalents credited
to Directors under both plans are exempt from registration under Section 4(2) of
the Securities Act of 1933 as private offerings made only to Directors of the
Company in accordance with the provisions of the plans.
Under the Company's Deferred Compensation Plan for Directors, each Director must
defer receipt of such compensation as the Board mandates. Currently, the Board
mandates deferral of one-third of each payment of the basic annual retainer of
each Director. Each Director may also elect to defer the receipt of (i) an
additional one-third of each payment of the basic annual retainer, (ii) all of
the basic annual retainer, or (iii) all compensation. All deferred payments are
held in the form of Common Stock Equivalents. Payments out of the deferred
accounts are made in the form of Common Stock of the Company (and cash as to any
fractional Common Stock Equivalent). In the third quarter of 1998, the
Directors, as a group, were credited with 1,829 Common Stock Equivalents under
this Plan. The values of the Common Stock Equivalents, when credited, ranged
from $51.00 to $63.38.
Under the Directors' Common Stock Plan, each Director who neither is nor was an
employee of the Company is credited annually with Common Stock Equivalents worth
one-half of the Director's basic annual retainer. No more than 10 years of
credits may be made for the account of any Director. Upon termination of
service, the Common Stock Equivalents held in a Director's account are converted
to and paid in Common Stock of the Company (and cash as to any fractional Common
Stock Equivalent). In the third quarter of 1998, the Directors, as a group,
received 250 Common Stock Equivalents under this Plan. The value of each Common
Stock Equivalent, when credited, was $52.50.
-19-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
(1) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1998.
-20-
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PPG INDUSTRIES, INC.
-----------------------------
(Registrant)
Date: November 5, 1998 By /s/ W. H. Hernandez
-----------------------------
W. H. Hernandez
Senior Vice President, Finance
Principal Financial and
Accounting Officer and
Duly Authorized Officer)
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<PAGE>
Exhibit 12
PPG INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
Computation of Ratio Of Earnings to Fixed Charges
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31 Nine Months
--------------------------------------------------- Ended
1993 1994 1995 1996 1997 Sept. 30, 1998
---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Earnings before income taxes $ 531 $ 840 $ 1,247 $ 1,215 $ 1,149 $ 1,019
Plus:
Fixed charges exclusive of capitalized interest 128 108 113 124 136 108
Amortization of capitalized interest 11 11 12 13 13 9
Adjustments for equity affiliates and minority interest (1) (2) (4) (3) 0 (2)
--------------------------------------------------------------
Total $ 669 $ 957 $ 1,368 $ 1,349 $ 1,298 $ 1,134
==============================================================
Fixed Charges:
Interest expense including amortization of debt
discount/premium and debt expense $ 108 $ 88 $ 91 $ 102 $ 113 $ 89
Rentals - portion representative of interest 20 20 22 22 23 19
--------------------------------------------------------------
Fixed charges exclusive of capitalized interest 128 108 113 124 136 108
Capitalized interest 6 5 9 12 10 7
--------------------------------------------------------------
Total $ 134 $ 113 $ 122 $ 136 $ 146 $ 115
==============================================================
Ratio of earnings to fixed charges 5.0 8.4 11.3 9.9 8.9 9.9
==============================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PPG
INDUSTRIES, INC., SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 264
<SECURITIES> 0
<RECEIVABLES> 1,354
<ALLOWANCES> 0
<INVENTORY> 870
<CURRENT-ASSETS> 2,716
<PP&E> 6,548
<DEPRECIATION> 3,742
<TOTAL-ASSETS> 7,133
<CURRENT-LIABILITIES> 1,530
<BONDS> 1,203
0
0
<COMMON> 484
<OTHER-SE> 2,437
<TOTAL-LIABILITY-AND-EQUITY> 7,133
<SALES> 5,721
<TOTAL-REVENUES> 5,721
<CGS> 3,413
<TOTAL-COSTS> 3,413
<OTHER-EXPENSES> 538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> 1,041
<INCOME-TAX> 380
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 639
<EPS-PRIMARY> 3.61
<EPS-DILUTED> 3.57
</TABLE>
