<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
<TABLE>
<S> <C>
For Quarter Ended September 30, 1999 Commission File Number 1-1687
---------------------------- ---------------
</TABLE>
PPG INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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)
(412) 434-3131
(Registrant's telephone number, including area code)
As of September 30, 1999, 173,795,741 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.......................................... 5-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 12- 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 20
Part II. Other Information
Item 1. Legal Proceedings.......................................................... 21
Item 2. Change in Securities and Use of Proceeds................................... 21
Item 6. Exhibits and Reports on Form 8-K........................................... 22
Signature............................................................................. 23
</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
----------------------------- -------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales........................................... $1,954 $1,804 $5,704 $5,721
Cost of sales....................................... 1,206 1,082 3,474 3,413
------ ------ ------ ------
Gross profit...................................... 748 722 2,230 2,308
------ ------ ------ ------
Other expenses (earnings):
Selling, general and administrative............... 315 282 908 838
Depreciation...................................... 92 87 270 265
Research and development.......................... 72 68 206 202
Interest.......................................... 35 27 90 85
Purchased in-process research and
development (Note 3)........................... 40 - 40 -
Business divestitures and
realignments (Note 3)............................ 19 - 43 15
Other charges..................................... 15 22 67 56
Other earnings.................................... (24) (141) (90) (194)
------ ------ ------ ------
Total other expenses - net...................... 564 345 1,534 1,267
------ ------ ------ ------
Income before income taxes and minority
interest......................................... 184 377 696 1,041
Income taxes........................................ 77 124 272 380
Minority interest................................... 8 5 18 22
------ ------ ------ ------
Net income.......................................... $ 99 $ 248 $ 406 $ 639
====== ====== ====== ======
Earnings per common share (Note 2).................. $ 0.57 $ 1.40 $ 2.34 $ 3.61
====== ====== ====== ======
Earnings per common share - assuming $ 0.56 $ 1.39 $ 2.31 $ 3.57
dilution (Note 2)................................ ====== ====== ====== ======
Dividends per share................................. $ 0.38 $ 0.36 $ 1.14 $ 1.06
====== ====== ====== ======
</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
1999 1998
---------- ----------
(Millions)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents (Note 3)................................ $ 164 $ 128
Receivables-net................................................... 1,592 1,366
Inventories (Note 4).............................................. 1,020 917
Other............................................................. 365 249
-------- --------
Total current assets.......................................... 3,141 2,660
Property (less accumulated depreciation of
$3,896 million and $3,834 million)................................ 2,861 2,905
Investments.......................................................... 256 263
Goodwill (less accumulated amortization of
$99 million and $84 million)...................................... 911 576
Other assets (Note 5)................................................ 1,581 983
-------- --------
Total......................................................... $ 8,750 $ 7,387
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Short-term borrowings and current
portion of long-term debt..................................... $ 872 $ 637
Accounts payable and accrued liabilities.......................... 1,379 1,264
Income taxes...................................................... 40 11
-------- --------
Total current liabilities..................................... 2,291 1,912
Long-term debt (Note 3).............................................. 1,849 1,081
Deferred income taxes................................................ 495 440
Accumulated provisions............................................... 459 444
Other postretirement benefits........................................ 554 543
-------- --------
Total liabilities............................................. 5,648 4,420
-------- --------
Commitments and contingent liabilities (Note 9).....................
Minority interest.................................................... 101 87
-------- --------
Shareholders' equity:
Common stock...................................................... 484 484
Additional paid-in capital........................................ 105 105
Retained earnings................................................. 6,001 5,791
Treasury stock.................................................... (3,269) (3,198)
Unearned compensation............................................. (144) (149)
Accumulated other comprehensive loss (Note 6)..................... (176) (153)
-------- --------
Total shareholders' equity.................................... 3,001 2,880
-------- --------
Total......................................................... $ 8,750 $ 7,387
======== ========
</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
--------
1999 1998
------- -------
(Millions)
<S> <C> <C>
Cash from operating activities......................................... $ 718 $ 715
------- ------
Investing activities:
Capital spending
Additions to property and investments........................... (336) (332)
Business acquisitions, net of cash balances
acquired.................................................... (1,290) (198)
Proceeds from business divestitures................................. - 278
Reduction of property and investments............................... 187 15
Other............................................................... - 11
------- ------
Cash used for investing activities.............................. (1,439) (226)
------- ------
Financing activities:
Net change in borrowings with
maturities of three months or less.............................. 277 (55)
Proceeds from other short-term debt................................. 205 101
Repayment of other short-term debt.................................. (211) (92)
Proceeds from long-term debt........................................ 821 8
Repayment of long-term debt......................................... (67) (61)
Loans to employee stock ownership plan.............................. (24) (26)
Repayment of loans by employee stock
ownership plan.................................................. 30 31
Purchase of treasury stock, net..................................... (74) (70)
Dividends paid...................................................... (198) (188)
------- ------
Cash provided by (used for) financing activities................ 759 (352)
------- ------
Effect of currency exchange rate changes
on cash and cash equivalents........................................ (2) (2)
------- ------
Net increase in cash and cash equivalents.............................. 36 135
Cash and cash equivalents, beginning of period......................... 128 129
------- ------
Cash and cash equivalents, end of period............................... $ 164 $ 264
======= ======
</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, 1999 and the results of their operations and their
cash flows for the three- and nine-month periods ended September 30, 1999
and 1998. 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, 1998.
The results of operations for the nine months ended September 30, 1999 are
not necessarily indicative of the results to be expected for the full year.
2. Earnings Per Common Share
-------------------------
The following table reflects the earnings per share calculations for the
three and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
(Millions, except per share amounts)
Earnings per common share
Net income.......................................... $ 99 $ 248 $ 406 $ 639
------ ------ ------ ------
Weighted average common shares
outstanding........................................ 173.7 177.0 173.8 177.2
------ ------ ------ ------
Earnings per common share........................... $ 0.57 $ 1.40 $ 2.34 $ 3.61
====== ====== ====== ======
Earnings per common share -
assuming dilution
Net income.......................................... $ 99 $ 248 $ 406 $ 639
------ ------ ------ ------
Weighted average common shares
outstanding........................................ 173.7 177.0 173.8 177.2
Effect of dilutive securities:
Stock options...................................... 0.5 0.6 0.5 0.8
Other stock compensation plans..................... 1.2 1.1 1.2 1.0
------ ------ ------ ------
Potentially dilutive common shares.................. 1.7 1.7 1.7 1.8
------ ------ ------ ------
Adjusted common shares
outstanding........................................ 175.4 178.7 175.5 179.0
------ ------ ------ ------
Earnings per common share -
assuming dilution.................................. $ 0.56 $ 1.39 $ 2.31 $ 3.57
====== ====== ====== ======
</TABLE>
-5-
<PAGE>
3. Acquisitions and Business Realignments
--------------------------------------
Acquisitions
In January 1999, the Company completed the acquisition of the remaining
portion of the global packaging coatings business formerly owned by
Courtaulds plc (Courtaulds) from Akzo Nobel N.V. and completed the purchase
of certain leased assets in connection with its 1998 acquisition of the
technical coatings business of Orica Ltd. (Orica). In February 1999, the
Company acquired the commercial transport refinish coatings business of
Sigma Coatings B.V., (Sigma Coatings) a subsidiary of Belgian refiner
PetroFina S.A. The Company has completed preliminary purchase price
allocations for the Courtaulds and Sigma Coatings acquisitions, which are
subject to adjustment in 1999 when finalized. The final purchase price
allocation for the Orica acquisition has been completed. The operating
activity associated with these acquisitions has been included in the
Company's results of operations from the acquisition dates.
On July 30, 1999, the Company completed the acquisition of the global
automotive refinish and industrial coatings businesses of Imperial Chemical
Industries PLC (ICI), with the exception of the businesses in the Indian
subcontinent, for approximately $677 million. Although the ICI businesses in
France and Asia were included as part of the July 30, 1999 acquisition, the
Company will not finalize the purchase of these businesses until the fourth
quarter of 1999.
On July 30, 1999, the Company substantially completed the acquisition of
coatings and sealants maker PRC DeSoto International, Inc. (PRC DeSoto) from
Akzo Nobel N.V. for approximately $524 million, including cash balances
acquired. The portion of the purchase price related to the PRC DeSoto
business in France of approximately $24 million has been paid into an escrow
account, pending approval of the transaction by the regulatory authorities
in that country. The cash held in the escrow account is included in the
Company's cash and cash equivalents balance on the September 30, 1999,
condensed balance sheet.
The ICI and PRC DeSoto acquisitions were initially funded through short-term
borrowings. In August 1999, the Company issued $800 million of long-term
debt to replace a substantial portion of the short-term borrowings.
The Company has completed preliminary purchase price allocations for the ICI
and PRC DeSoto acquisitions and the operating activity associated with these
acquisitions has been included in the Company's results of operations from
the acquisition dates with the exception of the ICI business in Asia and the
PRC DeSoto business in France. In each of these acquisitions, the
preliminary allocation resulted in an excess of purchase price over the fair
value of net assets acquired being allocated to goodwill, which is being
amortized on a straight-line basis over 40 years. Additionally, based upon
an independent valuation, approximately $21 million of the PRC DeSoto
purchase price and $19 million of the ICI purchase price was allocated to
purchased in-process research and development, which was recorded as a pre-
tax charge in the third quarter of 1999. The preliminary purchase price
allocations are subject to adjustment in 1999 and 2000 when finalized.
Plans are currently in development to integrate the operations of these
recent acquisitions within the Company, which will likely result in certain
severance costs. These costs, once determinable, could result in an
increase in goodwill.
The following pro forma information presents the consolidated results of
operations of the Company, ICI and PRC DeSoto, with the exception of the
ICI businesses in Asia
-6-
<PAGE>
and the PRC DeSoto business in France, as if the ICI and PRC DeSoto
acquisitions had been completed on January 1, 1998 and excludes after-tax
charges of $33 million for purchased in-process research and development and
$12 million for the fair-market-value adjustment of acquired inventories
that have been sold. The following pro forma information also excludes the
effects of synergies and cost reduction initiatives directly related to
these acquisitions. These actions have already commenced and are expected to
continue in the year 2000.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Sept. 30
--------
1999 1998
------ ------
<S> <C> <C>
(Millions, except per share amounts)
Net sales................................................................... $ 6,042 $ 6,173
Earnings before interest, income taxes and
minority interest......................................................... 863 1,150
Net income.................................................................. 429 614
Earnings per common share................................................... 2.47 3.46
Earnings per common share -
assuming dilution......................................................... 2.45 3.43
</TABLE>
These pro forma consolidated results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the
results of operations which would have actually resulted had the
acquisitions occurred on January 1, 1998, or which may result in the
future.
Business Realignments
In March 1999, the Company approved a restructuring plan associated with
the integration of recent packaging coatings acquisitions, which resulted
in a pre-tax charge of $24 million. The components of the plan included
severance benefits for 182 employees and an estimated loss of $14 million
on the disposal of a redundant European facility. As of September 30,
1999, $2 million of severance benefits had been paid under the plan. It is
anticipated that the asset disposition and the payment of the remaining
severance benefits will be substantially completed by March 31, 2000.
In July 1999, the Company completed the sale of its Pittsburgh headquarters
complex for $186 million. Concurrent with the sale, the Company entered
into a long-term operating lease for the portion of the complex occupied by
the Company. The pre-tax gain of $7 million on the sale was deferred and
will be amortized over the term of the long-term operating lease.
In September 1999, the Company approved a restructuring plan related to
cost reduction initiatives which resulted in a pre-tax charge of $19
million. The plan includes an estimated loss of $3 million related to the
disposal of assets of a coatings facility and severance benefits for 373
employees. It is anticipated that the asset disposition and the payment of
severance benefits will be completed by September 30, 2000.
The Company has previously reserved for the estimated loss on the
disposition of its equity interests in two Asian float glass plants and two
downstream fabrication facilities. At September 30, 1999, the reserve
totaled approximately $38 million and $2 million had been paid under the
plan during the nine months ended September 30, 1999. Negotiations related
to these disposals are ongoing and the Company anticipates completion of
the sales of these facilities by the end of 1999.
-7-
<PAGE>
4. Inventories
-----------
Inventories at September 30, 1999 and December 31, 1998 are detailed below.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
1999 1998
-------- -------
(Millions)
<S> <C> <C>
Finished products and work in process.................................... $ 719 $ 638
Raw materials............................................................ 187 174
Supplies................................................................. 114 105
------ -----
Total............................................................... $1,020 $ 917
====== =====
</TABLE>
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 $165 million and $183 million higher at
September 30, 1999 and December 31, 1998, respectively.
5. Other Assets
------------
Other assets at September 30, 1999 and December 31, 1998 are detailed
below.
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
1999 1998
-------- -------
(Millions)
<S> <C> <C>
Prepaid pension cost..................................................... $ 780 $ 707
Identifiable intangible assets - net..................................... 662 148
Other assets............................................................. 139 128
------ -----
Total............................................................... $1,581 $ 983
====== =====
</TABLE>
Identifiable intangible assets consist primarily of developed technology,
trademarks, and customer lists acquired in recent acquisitions which are
being amortized on a straight-line basis over the estimated useful lives of
the assets.
6. Comprehensive Income
--------------------
Total comprehensive income for the three and nine months ended September
30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
----------------------------- -------------------------
1999 1998 1999 1998
-------------- ------------- ------------ -----------
(Millions)
<S> <C> <C> <C> <C>
Net income......................................... $ 99 $ 248 $ 406 $ 639
Other comprehensive income (loss), net of tax:
Currency translation adjustment.................. 29 26 (21) 16
Minimum pension liability adjustment............. - - (1) -
Unrealized losses on marketable
securities..................................... (4) - (1) -
----- ----- ----- -----
25 26 (23) 16
----- ----- ----- -----
Total comprehensive income...................... $ 124 $ 274 $ 383 $ 655
===== ===== ===== =====
</TABLE>
-8-
<PAGE>
As of September 30, 1999 and December 31, 1998, accumulated other
comprehensive loss, as reflected on the condensed balance sheet, was
comprised of the following:
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
1999 1998
-------- -------
(Millions)
<S> <C> <C>
Currency translation adjustment................................... $ (143) $ (122)
Minimum pension liability adjustment.............................. (32) (31)
Unrealized losses on marketable securities........................ (1) -
------ ------
Accumulated other comprehensive loss............................ $ (176) $ (153)
====== ======
</TABLE>
7. Cash Flow Information
---------------------
Cash payments for interest were $79 million and $84 million for the nine
months ended September 30, 1999 and 1998, respectively. Net cash payments
for income taxes for the nine months ended September 30, 1999 and 1998 were
$245 million and $292 million, respectively.
8. Business Segment Information
----------------------------
Effective December 31, 1998, PPG adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Segment operating income and other unallocated corporate
(expense) income for the three and nine months ended September 30, 1998
have been restated to conform with the current year presentation format.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
1999 1998 1999 1998
------ ------ ------ ------
(Millions)
<S> <C> <C> <C> <C>
Net sales:
Coatings (a).................................... $1,028 $ 825 $2,945 $2,547
Glass........................................... 565 601 1,708 1,994
Chemicals (b)................................... 363 381 1,059 1,189
Intersegment net sales.......................... (2) (3) (8) (9)
------ ------ ------ ------
Total........................................ $1,954 $1,804 $5,704 $5,721
====== ====== ====== ======
Operating income:
Coatings (c).................................... $ 64 $ 124 $ 344 $ 411
Glass (d)....................................... 90 186 303 403
Chemicals (e)................................... 43 86 121 293
------ ------ ------ ------
Total........................................ 197 396 768 1,107
Interest expense - net............................ (33) (25) (85) (77)
Other unallocated corporate
income - net.................................... 20 6 13 11
------ ------ ------ ------
Income before income taxes and
minority interest............................... $ 184 $ 377 $ 696 $1,041
====== ====== ====== ======
</TABLE>
-9-
<PAGE>
(a) Includes intersegment net sales of $1 million for the three months
ended September 30, 1998 and $2 million for each of the nine-month periods
ended September 30, 1999 and 1998.
(b) Includes intersegment net sales of $2 million for each of the three-
month periods ended September 30, 1999 and 1998 and $6 million and $7
million for the nine months ended September 30, 1999 and 1998,
respectively.
(c) Includes in each 1999 period presented, pre-tax charges of $40 million
for purchased in-process research and development, $19 million representing
the fair-market-value adjustment of acquired ICI and PRC DeSoto inventories
that have been sold, $15 million of restructuring charges related to cost
reduction initiatives and the closure of a facility and $6 million related
to the recent bankruptcy of an architectural coatings customer. The nine
months ended September 30, 1999 also includes a pre-tax restructuring charge
of $24 million for disposal of a redundant European packaging coatings
facility and work force reductions.
(d) Includes in each 1999 period presented, a pre-tax restructuring charge
of $3 million related to cost reduction initiatives. Each 1998 period
presented includes a pre-tax gain of $85 million related to the sale of our
European flat and automotive glass businesses. 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 and two
Asian downstream fabrication facilities.
(e) Includes in each 1999 period presented, a pre-tax restructuring charge
of $1 million related to cost reduction initiatives.
9. Commitments and Contingent Liabilities
--------------------------------------
PPG is involved in a number of lawsuits and claims, both actual and
potential, including some that it has asserted against others, in which
substantial money damages are sought. These lawsuits and claims relate to
product liability, contract, patent, environmental, antitrust and other
matters arising out of the conduct of PPG's business. The Company has been
named in a number of antitrust lawsuits alleging that PPG acted with
competitors to fix prices and allocate markets for certain glass products.
These antitrust proceedings are in an early stage. 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, in the aggregate, the outcome of all lawsuits and
claims involving PPG 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, 1999 and December 31, 1998, PPG had reserves for environmental
contingencies totaling $84 million and $94 million, respectively. Pre-tax
charges against income for environmental remediation costs for the nine
months ended September 30, 1999 and 1998 totaled $8 million and $7 million,
respectively, and are included in "Other Charges" in the condensed statement
of income. Cash outlays related to such charges for the nine months ended
September 30, 1999 and 1998 aggregated $18 million and $13 million,
respectively.
-10-
<PAGE>
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,
1998. 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.
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 these 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.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
Performance in the Third Quarter of 1999 Compared to the Third Quarter of 1998
Performance Overview
Sales increased 8% to $1.95 billion in the third quarter of 1999 from $1.80
billion in the third quarter of 1998. Acquisitions within the coatings segment
and higher volumes across all of our business segments increased sales by 16%
from the year ago quarter. These favorable factors were partially offset by
sales declines of 5% due to lower selling prices in all our business segments,
2% due to the absence of sales from our European flat and automotive glass
businesses, which were divested in July 1998, and 1% from the negative effects
of foreign currency translation.
The gross profit percentage decreased to 38.3% in the third quarter of 1999 from
40.0% in the third quarter of 1998. The combination of lower selling prices
discussed above and a pre-tax charge of $19 million representing the fair-
market-value adjustment of acquired ICI and PRC DeSoto inventories that have
been sold, was partially offset by manufacturing efficiencies across all
segments.
Net income and earnings per share, diluted, for the third quarter of 1999 were
$99 million and $0.56, respectively, compared to $248 million and $1.39 in the
same quarter of 1998. Net income for the third quarter of 1999 was negatively
impacted by the absence of a third quarter 1998 $82 million after-tax gain from
the sale of our European flat and automotive glass businesses, lower selling
prices as discussed above and after-tax charges of $45 million for purchased in-
process research and development and the fair-market-value adjustment of
acquired inventories that have been sold. In addition, net income in the 1999
third quarter was adversely affected by lower insurance recoveries of certain
past environmental costs and after-tax restructuring charges of $12 million
related to ongoing cost reduction initiatives and the closure of a coatings
facility. These unfavorable factors were partially offset by improved
manufacturing efficiencies across all of our segments, increased volumes
principally within our coatings and chemicals segments and lower income tax
expense due to the reduction in pre-tax earnings, which more than offset a
higher effective income tax rate. Excluding the after-tax acquisition related
and restructuring charges in the third quarter of 1999 and the after-tax gain
from the sale of our European flat and automotive glass businesses in the third
quarter of 1998, net income and earnings per share, diluted, for the third
quarter of 1999 were $156 million and $0.89, respectively, compared to $166
million or $0.93 in the same quarter of 1998.
Performance of Business Segments
Coatings sales increased 25% to $1.03 billion in the third quarter of 1999
compared to $824 million in the same quarter of 1998. A 28% sales increase
resulted primarily from several acquisitions made in late 1998 and 1999 and an
improvement in sales volumes in our North American and European automotive
original and North American industrial businesses as the comparable quarter of
1998 was adversely affected by the General Motors strike. These favorable
factors were partially offset by sales declines of 2% from lower selling prices,
primarily within our North American and European automotive original businesses
and 1% from the negative effects of foreign currency translation. Operating
income decreased to $64 million in the third quarter of 1999 from $124 million
in the same quarter of 1998. Third quarter 1999 operating income was negatively
impacted by pre-tax acquisition related charges of $40 million and $19 million,
respectively, related to purchased in-process research and development and the
fair-market-value adjustment of acquired ICI and PRC DeSoto inventories that
have been sold. In addition, pre-tax restructuring charges of $15 million
related to ongoing cost reduction efforts, including the closure of a facility,
lower selling prices,
-12-
<PAGE>
as previously discussed, and a charge related to the recent bankruptcy of an
architectural coatings customer also contributed to the decrease in operating
income. These negative factors were partially offset by improved manufacturing
efficiencies across all of our coatings businesses and the sales volume
increases noted above. Excluding the acquisition related and restructuring pre-
tax charges, operating income for the third quarter of 1999 increased to $138
million as compared to $124 million in the third quarter of 1998.
Glass sales decreased 6% to $565 million in the third quarter of 1999 from $601
million in the same quarter of 1998. Sales declined 7% due to the absence of
sales from our European flat and automotive glass businesses divested in July
1998 and 4% from lower selling prices for our fiber glass products as well as
for our automotive replacement and original glass products. A 5% increase in
sales from improved volumes for our North American automotive original glass
products and our worldwide fiber glass reinforcement products partially offset
these negative factors. The 1998 quarter included the adverse effects of the
General Motors strike. Operating income decreased to $90 million in the third
quarter of 1999 as compared to $186 million in the same quarter of 1998. The
absence of a third quarter 1998 $85 million pre-tax gain from the sale of our
European flat and automotive glass businesses and the negative effects of lower
selling prices previously discussed were only partially offset by improved
manufacturing efficiencies within our worldwide fiber glass and North American
automotive original businesses. In addition, operating income for the third
quarter of 1999 included a $3 million pre-tax restructuring charge related to
cost reduction initiatives. Excluding the pre-tax restructuring charge and the
pre-tax gain from the sale of our European flat and automotive glass businesses,
operating income for third quarter of 1999 was $93 million compared to $101
million in the same prior-year quarter.
Chemicals sales decreased 5% to $361 million in the third quarter of 1999 from
$379 million in the same period of 1998. Sales declined 12% as a result of
lower selling prices for our chlorine and caustic soda products, due in part to
worldwide competitive pricing pressures, which was offset by a 7% increase in
volumes. Operating income decreased to $43 million in the third quarter of 1999
compared to $86 million in the same quarter of 1998. The significant reduction
in selling prices discussed above, higher raw material and energy costs and
lower insurance recoveries of certain past environmental costs were only
partially offset by the volume improvements discussed above and a slight
improvement in manufacturing efficiencies in our chlor-alkali and derivatives
business.
Performance in the First Nine Months of 1999 Compared to the First Nine Months
of 1998
Performance Overview
Sales decreased slightly during the first nine months of 1999 to $5.70 billion
compared to $5.72 billion for the first nine months of 1998. A 9% increase in
sales as a result of acquisitions in the coatings segment and volume increases
across all of our business segments were offset by a 5% decrease due to the
absence of sales from our European flat and automotive glass businesses, which
were divested in July 1998, and a 4% decrease due to lower selling prices in all
of our business segments.
The gross profit percentage decreased to 39.1% in the first nine months of 1999
compared to 40.3% in the same prior-year period. Lower selling prices across
all of our business segments, and a pre-tax charge of $19 million representing
the fair-market-value adjustment of acquired ICI and PRC DeSoto inventories that
have been sold more than offset the benefits realized from improved
manufacturing efficiencies across all of our segments.
Net income and earnings per share, diluted, for the first nine months of 1999
were $406 million and $2.31, respectively, compared to $639 million and $3.57 in
the first nine months of 1998. The decrease in net income for the first nine
months of 1999 was attributable to lower selling prices, the absence of a third
quarter 1998 $82 million after-tax gain from the sale of our European flat and
-13-
<PAGE>
automotive glass businesses and after-tax acquisition related charges of $45
million for purchased in-process research and development and the fair-market-
value adjustment of acquired ICI and PRC DeSoto inventories that have been sold.
In addition, after-tax restructuring charges of $32 million for the first nine
months of 1999 related to the integration of recent packaging coatings
acquisitions and ongoing cost reduction efforts exceeded after-tax restructuring
charges in the year ago nine-month period for the estimated loss on the
divestiture of our equity interests in Asian glass operations. These
unfavorable factors were partially offset by lower income tax expense due to the
reduction in pre-tax earnings, improved manufacturing efficiencies across all of
our segments, and increased sales volumes principally within our coatings and
chemicals segments. Excluding the after-tax acquisition related and
restructuring charges and the after-tax gain from the sale of our European flat
and automotive glass businesses, net income and earnings per share, diluted, for
the first nine months of 1999 were $483 million and $2.75, respectively,
compared to $566 million or $3.16 in the same prior-year period.
Performance of Business Segments
Coatings sales increased 16% to $2.94 billion during the first nine months of
1999 from $2.55 billion in the comparable nine-month period of 1998. Sales
increased 18% primarily from acquisitions made within all of our coatings
businesses and volume increases in our North American automotive original and
industrial businesses as sales for the second and third quarters of 1998 were
adversely affected by the General Motors strike. Sales declines of 1% from the
negative effects of foreign currency translation and 1% from lower selling
prices, principally within our North American and European automotive original
business slightly offset these favorable factors. Operating income decreased to
$344 million in the first nine months of 1999 from $411 million in the same 1998
period. Operating income in the 1999 nine-month period was negatively impacted
by pre-tax acquisition related charges of $40 million for purchased in-process
research and development and $19 million for the fair-market-value adjustment of
acquired ICI and PRC DeSoto inventories that have been sold. Additional factors
contributing to the 1999 reduction in operating income were $39 million of
restructuring charges related to the integration of recent packaging
acquisitions and on-going cost reduction efforts, and lower selling prices as
discussed above. These negative factors were partially offset by improved
manufacturing efficiencies, primarily within our North American and European
automotive original and industrial businesses, and the sales volume increases
discussed above. Excluding the pre-tax acquisition related and restructuring
charges, operating income for the first nine months of 1999 increased to $442
million as compared to $411 million in the first nine months of 1998.
Glass sales decreased 14% to $1.71 billion in the first nine months of 1999 from
$1.99 billion in the same period of 1998. Sales declined 14% as a result of the
divestiture of our European flat and automotive glass businesses in July 1998
and 3% principally from lower selling prices for our worldwide fiber glass
products and our North American automotive original and replacement glass
products. These negative factors were slightly offset by a 3% increase in sales
volumes primarily related to our North American automotive original glass
business as the 1998 comparable period was adversely affected by the General
Motors strike. Automotive replacement glass volumes also improved in the nine
months of 1999. Operating income decreased to $303 million in the first nine
months of 1999 from $403 million in the same nine-month period of 1998. The
absence of a third quarter 1998 $85 million pre-tax gain from the sale of our
European flat and automotive glass businesses and the related operating profits,
lower prices for our fiber glass and automotive glass products discussed above
and unfavorable sales mix changes in certain businesses were partially offset by
manufacturing efficiencies in our automotive original glass and fiber glass
reinforcements businesses. In addition, the 1999 period includes pre-tax
restructuring charges of $3 million related to cost reduction initiatives
compared to an additional $15 million provision for the estimated loss on the
divestiture of our equity interests in Asian glass operations in the 1998
period. Excluding the pre-tax restructuring charges and pre-tax gain from the
sale of our European flat and automotive
-14-
<PAGE>
glass businesses, operating income for the first nine months of 1999 was $306
million as compared to $333 million in the same prior-year period.
Chemicals sales decreased 11% to $1.05 billion in the first nine months of 1999
from $1.18 billion in the same period of 1998. Sales declined 14% as a result
of lower selling prices for our chlorine and caustic soda products, due in part
to worldwide competitive pricing pressures, which was offset slightly by a 3%
increase in volumes. Operating income decreased to $121 million in the first
nine months of 1999 compared to $293 million in the same period of 1998. The
significant reduction in selling prices discussed above, higher raw material and
energy costs and lower insurance recoveries of certain past environmental costs
were only partially offset by manufacturing efficiencies in our chlor-alkali and
derivatives business, and the volume improvements discussed above.
Other Factors
The increase in the effective tax rate in the third quarter of 1999 and the
first nine months of 1999 as compared to the same periods of 1998 is principally
due to the third quarter 1998 pre-tax gain from the sale of the European flat
and automotive glass businesses being almost entirely offset by the utilization
of capital loss carryforwards. The 1999 third quarter and nine-month periods
also experienced an increase in the effective tax rate due to the non-
deductibility of certain in-process research and development charges.
Other unallocated corporate income - net increased by approximately $14 million
for the three months ended September 30, 1999, primarily due to a gain on the
appreciation of British pounds sterling purchased to fund the acquisition of
ICI.
The increase in receivables-net principally results from acquisitions and higher
sales volumes in the third quarter of 1999 as compared with the fourth quarter
of 1998.
Goodwill and other long-term assets increased principally due to the recent
acquisitions of ICI and PRC DeSoto.
Total assets of the Coatings segment increased to $4.3 billion as of September
30, 1999, from $3.0 billion as of December 31, 1998, principally due to
acquisitions, including the recent acquisitions of ICI and PRC DeSoto.
Long-term debt increased due to the issuance of $800 million aggregate principal
amount of debt securities in August 1999 to repay a substantial portion of the
short-term debt issued to finance the acquisitions of ICI and PRC DeSoto.
Conversion to the Euro
On January 1, 1999, eleven of the member countries of the European Monetary
Union converted from their sovereign currencies to a common currency, the euro.
At that time, fixed conversion rates between the legacy currencies and the euro
were 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 their legacy currencies will no longer be
considered legal tender.
PPG has identified and has substantially addressed the significant issues that
may have resulted from the euro conversion. These issues include 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. The impact on PPG's
operating results and financial condition from the conversion to the euro has
not been, and is not expected to be, material.
-15-
<PAGE>
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of the Company. Management's
Discussion and Analysis and other sections of this Form 10-Q contain forward-
looking statements that reflect the Company's current views with respect to
future events and financial performance.
Forward-looking statements are identified by the use of the words "aim,"
"believe," "expect," "anticipate," "intend," "estimate" and other expressions
that indicate future events and trends. Any forward-looking statement speaks
only as of the date on which such statement is made and the Company undertakes
no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise. You are advised, however, to
consult any further disclosures we make on related subjects in our reports to
the Securities and Exchange Commission. Also, note the following cautionary
statements.
Many factors could cause actual results to differ materially from the Company's
forward-looking statements. Among these factors are increasing price and
product competition by foreign and domestic competitors, fluctuations in the
cost and availability of raw materials, the ability to maintain favorable
supplier relationships and arrangements, economic and political conditions in
international markets, the ability to penetrate existing, developing and
emerging foreign and domestic markets, which also depends on economic and
political conditions, foreign exchange rates and fluctuations in those rates and
the uncertainties regarding the Year 2000 problem discussed below. Further, it
is not possible to predict or identify all such factors. Consequently, while the
list of factors presented here is considered representative, no such list should
be considered to be a complete statement of all potential risks and
uncertainties. Unlisted factors may present significant additional obstacles to
the realization of forward-looking statements.
The following 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 that 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 issues so as to allow them to
continue normal business operations or furnish products, services or data
to the Company without disruption.
. 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 consolidated financial condition, operations or
liquidity.
-16-
<PAGE>
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 (for
example, 12/31/99), as opposed to eight digits (for example, 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 that 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: (1) an
assessment, and where needed a remediation, of both IT and non-IT elements of
its business information, computing, telecommunications and process control
systems; (2) an assessment, and remediation, as necessary, of equipment with
embedded computer chips and (3) 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 testing phase of the Company's Year 2000 compliance plan 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. As of September 30, 1999, the Company has substantially completed the
remediation and testing of all critical IT and non-IT systems. The Company
anticipates that the remediation and testing of all remaining systems will be
completed by December 31, 1999. The Year 2000 Steering Committee will continue
to review Year 2000 compliance efforts on an ongoing basis.
The Company substantially completed the acquisitions of PRC DeSoto and certain
businesses of ICI in the third quarter of 1999. The Company has reviewed the
status of the Year 2000 compliance plans of the critical IT and non-IT systems
of these businesses and anticipates that the remediation and testing of all
critical systems will be completed by December 31, 1999.
In the third-party evaluation phase, the Company has identified and contacted
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 and those who supply
goods or services that are critical to uninterrupted production by the Company
of its products, including 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 more than 95% of the Company's
-17-
<PAGE>
materially significant suppliers. The Company has investigated the Year 2000
readiness of its materially significant customers through review of publicly
issued statements concerning Year 2000 readiness. The Company believes that its
materially significant customers are progressing toward timely Year 2000
compliance. Through review of their statements regarding Year 2000 readiness, no
significant concerns have been identified to date. Materially significant
customers for this purpose are considered to be those to whom 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 investigative efforts
with respect to 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 $18 million. The Company
spent a total of $16 million during 1998 and the nine months ended September 30,
1999, representing the incremental cost of resolving the Year 2000 issue and
anticipates the expenditure of an additional $1 to $2 million during the fourth
quarter of 1999. Approximately 50% of the total Year 2000 costs are expected to
be expended on equipment or software replacement and the remainder on
remediation and testing of existing systems. These cost estimates are based on
currently available information and may be subject to change.
All Year 2000 costs are expected to be funded from 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 those instances, such costs are capitalized and charged to
expense over the useful lives of those assets in accordance with the Company's
existing policy.
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 consolidated
financial condition, results of operations or liquidity. Although not
anticipated, the most reasonably likely worst-case scenario of failure by the
Company or its key suppliers or 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. Although the Company expects to be Year 2000 compliant by
December 31, 1999, contingency plans to address the most reasonably likely worst
case scenario have been completed for substantially all of the Company's
locations as of September 30, 1999. The main focus of the contingency plans is
to outline the procedures and necessary resources for the safe shutdown of
manufacturing and other processes in the event of a business disruption due to a
Year 2000 event. The contingency plans will continue to be reviewed and
modified as required during the remainder of 1999.
-18-
<PAGE>
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The effective date of this standard has been delayed to
fiscal years beginning after June 15, 2000. The Company is currently 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 that it has asserted against others, in which substantial money
damages are sought. These lawsuits and claims relate to product liability,
contract, patent, environmental, antitrust and other matters arising out of the
conduct of PPG's business. The Company has been named in a number of antitrust
lawsuits alleging that PPG acted with competitors to fix prices and allocate
markets for certain glass products. These antitrust proceedings are in an early
stage. 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, in the aggregate, the outcome
of all lawsuits and claims involving PPG 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, 1999
and December 31, 1998, PPG had reserves for environmental contingencies totaling
$84 million and $94 million, respectively. Pre-tax charges against income for
environmental remediation costs for the nine months ended September 30, 1999 and
1998 totaled $8 million and $7 million, respectively, and are included in "Other
Charges" in the condensed statement of income. Cash outlays related to such
charges for the nine months ended September 30, 1999 and 1998 aggregated $18
million and $13 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, 1998.
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.
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
-19-
<PAGE>
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 these 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
- -------------------------------------------------------------------
With the exception of a $96 million increase in the present value of the
Company's fixed rate debt that would occur as a result of a 10% reduction in
interest rates, there were no material changes in the Company's exposure to
market risk from December 31, 1998. The increase in the present value of this
debt was primarily due to the issuance of $800 million of long-term debt in the
third quarter of 1999.
-20-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In the Company's Form 10-K for the year ended December 31, 1998, it was reported
that the Company had been named in a number of antitrust lawsuits alleging PPG
was involved with competitors in fixing prices and allocating markets for
certain glass products. The Company's Form 10-Q for the quarter ended June 30,
1999 reported that three of the named defendants in those cases, Pilkington plc,
Libbey-Owens Ford Co., Inc. and AFG Industries, Inc. have entered into
preliminary settlement agreements with the plaintiffs. An additional defendant,
Guardian Industries Corp., entered into a preliminary settlement agreement
during the quarter ended September 30, 1999. Otherwise, the status of those
cases remains as reported in the Company's 1998 Form 10-K.
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 that 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 (1) an
additional one-third of each payment of the basic annual retainer, (2) all of
the basic annual retainer, or (3) 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 1999, the
Directors, as a group, were credited with 523 Common Stock Equivalents under
this Plan. The values of the Common Stock Equivalents, when credited, ranged
from $59.63 to $64.13.
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. Upon termination of service
and attaining 70 years of age, 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 1999, the
Directors, as a group, received 215 Common Stock Equivalents under this Plan.
The value of each Common Stock Equivalent, when credited, was $64.13.
-21-
<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 filed a Form 8-K, dated August 18, 1999, to
incorporate by reference an underwriting agreement dated as of
August 18, 1999, as an exhibit to Registration No. 333-83019 on
Form S-3.
-22-
<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 9, 1999 By /s/ W. H. Hernandez
--------------------------------
W. H. Hernandez
Senior Vice President, Finance
(Principal Financial and
Accounting Officer and
Duly Authorized Officer)
-23-
<PAGE>
PPG INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
<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
1994 1995 1996 1997 1998 Sept. 30, 1999
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Earnings before income taxes $ 840 $ 1,247 $ 1,215 $ 1,149 $ 1,267 $ 678
Plus:
Fixed charges exclusive of capitalized interest 108 113 124 136 139 116
Amortization of capitalized interest 11 12 13 13 12 8
Adjustments for equity affiliates and minority interest (2) (4) (3) 0 (2) (1)
------------------------------------------------------------------
Total $ 957 $ 1,368 $ 1,349 $ 1,298 $ 1,416 $ 801
==================================================================
Fixed Charges:
Interest expense including amortization of debt
discount/premium and debt expense $ 88 $ 91 $ 102 $ 113 $ 114 $ 94
Rentals - portion representative of interest 20 22 22 23 25 22
-------------------------------------------------------------------
Fixed charges exclusive of capitalized interest 108 113 124 136 139 116
Capitalized interest 5 9 12 10 9 8
-------------------------------------------------------------------
Total $ 113 $ 122 $ 136 $ 146 $ 148 $ 124
===================================================================
Ratio of earnings to fixed charges 8.4 11.3 9.9 8.9 9.6 6.5
===================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PPG
INDUSTRIES, INC. SEPTEMBER 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 164
<SECURITIES> 0
<RECEIVABLES> 1,592
<ALLOWANCES> 0
<INVENTORY> 1,020
<CURRENT-ASSETS> 3,141
<PP&E> 6,757
<DEPRECIATION> 3,896
<TOTAL-ASSETS> 8,750
<CURRENT-LIABILITIES> 2,291
<BONDS> 1,849
0
0
<COMMON> 484
<OTHER-SE> 2,517
<TOTAL-LIABILITY-AND-EQUITY> 8,750
<SALES> 5,704
<TOTAL-REVENUES> 5,704
<CGS> 3,474
<TOTAL-COSTS> 3,474
<OTHER-EXPENSES> 626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> 696
<INCOME-TAX> 272
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 406
<EPS-BASIC> 2.34
<EPS-DILUTED> 2.31
</TABLE>
