<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> <C>
For Quarter Ended June 30, 2000 Commission File Number 1-1687
---------------------------- ---------------
</TABLE>
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 June 30, 2000, 173,939,368 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.............................. 12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 17
Part II. Other Information
Item 1. Legal Proceedings................................................. 18
Item 2. Change in Securities and Use of Proceeds.......................... 18
Item 6. Exhibits and Reports on Form 8-K.................................. 19
Signature.................................................................... 20
</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 Six Months
Ended June 30 Ended June 30
------------------ ---------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales............................................................ $2,210 $1,947 $4,297 $3,750
Cost of sales........................................................ 1,327 1,165 2,581 2,268
------ ------ ------ ------
Gross profit....................................................... 883 782 1,716 1,482
------ ------ ------ ------
Other expenses (earnings):
Selling, general and administrative................................ 343 307 670 593
Depreciation....................................................... 94 87 187 178
Research and development........................................... 70 67 140 134
Interest........................................................... 44 29 87 55
Amortization....................................................... 18 8 37 17
Business divestitures and
realignments (Note 3)............................................. (1) - - 24
Other charges...................................................... 20 23 73 35
Other earnings..................................................... (48) (43) (77) (66)
------ ------ ------ ------
Total other expenses - net....................................... 540 478 1,117 970
------ ------ ------ ------
Income before income taxes and minority
interest........................................................... 343 304 599 512
Income taxes......................................................... 132 116 241 195
Minority interest.................................................... 6 4 14 10
------ ------ ------ ------
Net income........................................................... $ 205 $ 184 $ 344 $ 307
====== ====== ====== ======
Earnings per common share (Note 2)................................... $ 1.18 $ 1.06 $ 1.98 $ 1.77
====== ====== ====== ======
Earnings per common share - assuming
dilution (Note 2).................................................. $ 1.17 $ 1.05 $ 1.96 $ 1.75
====== ====== ====== ======
Dividends per common share........................................... $ 0.40 $ 0.38 $ 0.80 $ 0.76
====== ====== ====== ======
</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>
June 30 Dec. 31
2000 1999
------- -------
(Millions)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents...................................... $ 144 $ 158
Receivables-net................................................ 1,724 1,594
Inventories (Note 4)........................................... 1,067 1,016
Other.......................................................... 256 294
------- -------
Total current assets....................................... 3,191 3,062
Property (less accumulated depreciation of
$4,042 million and $3,926 million)............................. 2,920 2,933
Investments....................................................... 234 261
Goodwill (less accumulated amortization of
$114 million and $100 million)................................. 1,056 1,002
Identifiable intangible assets (less accumulated
amortization of $81 million and $63 million)................... 640 660
Other assets...................................................... 1,060 996
------- -------
Total...................................................... $ 9,101 $ 8,914
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term borrowings and current
portion of long-term debt.................................. $ 1,018 $ 954
Accounts payable and accrued liabilities....................... 1,463 1,430
------- -------
Total current liabilities.................................. 2,481 2,384
Long-term debt.................................................... 1,824 1,836
Deferred income taxes............................................. 461 520
Accumulated provisions............................................ 459 422
Other postretirement benefits..................................... 545 548
------- -------
Total liabilities.......................................... 5,770 5,710
------- -------
Commitments and contingent liabilities (Note 8)..................
Minority interest................................................. 105 98
------- -------
Shareholders' equity:
Common stock................................................... 484 484
Additional paid-in capital..................................... 107 104
Retained earnings.............................................. 6,303 6,098
Treasury stock................................................. (3,263) (3,268)
Unearned compensation.......................................... (135) (134)
Accumulated other comprehensive loss (Note 5).................. (270) (178)
------- -------
Total shareholders' equity................................. 3,226 3,106
------- -------
Total...................................................... $ 9,101 $ 8,914
======= =======
</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>
Six Months Ended
June 30
-----------------------
2000 1999
----- ------
(Millions)
<S> <C> <C>
Cash from operating activities.................................................. $ 363 $ 389
----- ------
Investing activities:
Capital spending
Additions to property and investments.................................... (232) (206)
Business acquisitions, net of cash balances
acquired............................................................. (109) (113)
Reduction of property and investments........................................ 23 16
Other........................................................................ - 19
----- ------
Cash used for investing activities....................................... (318) (284)
----- ------
Financing activities:
Net change in borrowings with
maturities of three months or less....................................... 99 111
Proceeds from other short-term debt.......................................... 139 137
Repayment of other short-term debt........................................... (135) (138)
Proceeds from long-term debt................................................. 7 6
Repayment of long-term debt.................................................. (29) (43)
Loans to employee stock ownership plan....................................... (24) (24)
Repayment of loans by employee stock
ownership plan........................................................... 23 24
Issuance (purchase) of treasury stock, net................................... 3 (76)
Dividends paid............................................................... (139) (132)
----- ------
Cash used for financing activities....................................... (56) (135)
----- ------
Effect of currency exchange rate changes
on cash and cash equivalents................................................. (3) (2)
----- ------
Net decrease in cash and cash equivalents....................................... (14) (32)
Cash and cash equivalents, beginning of period.................................. 158 128
----- ------
Cash and cash equivalents, end of period........................................ $ 144 $ 96
===== ======
</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 June 30, 2000, and the results of their operations and
their cash flows for the three- and six-month periods ended June 30, 2000
and 1999. 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, 1999.
The results of operations for the six months ended June 30, 2000 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 common share calculations for
the three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
-------------------- ---------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
(Millions, except per share amounts)
Earnings per common share
Net income.......................................... $ 205 $ 184 $ 344 $ 307
------ ------ ------ ------
Weighted average common shares
outstanding........................................ 173.9 173.5 174.0 173.9
------ ------ ------ ------
Earnings per common share........................... $ 1.18 $ 1.06 $ 1.98 $ 1.77
====== ====== ====== ======
Earnings per common share -
assuming dilution
Net income.......................................... $ 205 $ 184 $ 344 $ 307
------ ------ ------ ------
Weighted average common shares
outstanding........................................ 173.9 173.5 174.0 173.9
Effect of dilutive securities:
Stock options...................................... 0.2 0.5 0.2 0.4
Other stock compensation plans..................... 1.3 1.2 1.3 1.2
------ ------ ------ ------
Potentially dilutive common shares.................. 1.5 1.7 1.5 1.6
------ ------ ------ ------
Adjusted common shares
outstanding........................................ 175.4 175.2 175.5 175.5
------ ------ ------ ------
Earnings per common share -
assuming dilution.................................. $ 1.17 $ 1.05 $ 1.96 $ 1.75
====== ====== ====== ======
</TABLE>
- 5 -
<PAGE>
3. Acquisitions and Business Realignments
--------------------------------------
Acquisitions
In February 2000, the Company acquired Monarch Paint Co. (Monarch), an
architectural coatings producer. The Company has completed a preliminary
purchase price allocation for this acquisition and the operating activity
associated with Monarch has been included in the Company's results of
operations from the acquisition date. The preliminary purchase price
allocation is subject to adjustment later in 2000 when finalized.
In June 2000, the Company and Apogee Enterprises, Inc. agreed to combine
their U.S. automotive replacement glass distribution businesses into a new
entity, PPG Auto Glass L.L.C. The Company will have a 66 percent ownership
interest in PPG Auto Glass L.L.C., which is expected to commence operations
early in the third quarter of 2000.
Business Realignments
In June 2000, the Company continued to refine the restructuring plans for
certain locations related to the integration of the global automotive
refinish, automotive and industrial coatings businesses of Imperial
Chemical Industries PLC (the ICI businesses). These restructuring plans
were originally developed at the acquisition dates (July and November
1999). The current plans include severance benefits for 335 employees and
resulted in an increase in goodwill of $4 million.
These amounts are in addition to amounts recorded in the first quarter of
2000, which covered 241 employees and resulted in an increase in goodwill
of $12 million and a pretax charge of $1 million. As of June 30, 2000, $7
million had been paid to 150 employees and the remaining reserve of $10
million, which covers 426 employees, is expected to be paid by the second
quarter of 2001.
The Company also completed the sale of its equity interest in an Asian
float glass plant and two Asian downstream fabrication facilities during
the six months ended June 30, 2000.
During 1999, the Company approved restructuring plans associated with the
integration of the packaging coatings acquisitions and cost reduction
activities across all of its businesses that resulted in pretax charges of
$47 million. The components of the plans included severance benefits for
519 employees and estimated losses of $17 million on the disposal of a
redundant European facility and the disposition of the assets of a U.S.
coatings facility. As of June 30, 2000, $15 million had been paid under
the plans to 310 employees. In addition, fixed asset write-offs and other
spending totaled $19 million at June 30, 2000. At June 30, 2000, the
remaining reserves associated with the 1999 restructuring plans covered 209
employees. PPG anticipates that the remaining severance benefits will be
paid and the asset dispositions will be completed during 2000. In 1999,
the Company also recorded a reversal of $1 million related to reserves
established in 1999 for cost reduction initiatives in its glass and
coatings businesses.
During 1998, the Company recorded a pretax charge of $19 million in
connection with a restructuring plan to reduce costs in its glass and
coatings businesses. The components of the plan included severance
benefits for 283 employees. As of June 30,
- 6 -
<PAGE>
2000, approximately $16 million has been paid out under the restructuring
plan and $1 million was reversed in 1999 for amounts that will not be paid
under the plan. The remaining reserves associated with the 1998
restructuring plan are designated to cover 44 employees.
At June 30, 2000, the remaining reserves associated with the 1999 and 1998
restructuring plans totaled $14 million and are expected to be paid in
2000.
In 1997, the Company recorded a pretax restructuring charge of $102 million
related to certain glass businesses that were not meeting strategic
performance objectives. The principal components of this program included
the closure of the Perry, Ga., flat glass plant and the disposition of our
equity interests in two Asian float glass plants. The pretax restructuring
charge in 1997 included $61 million of asset write-offs and $41 million
associated with cash outlays primarily for severance costs for 317
employees, a proportionate share of equity investee indebtedness and
demolition and environmental costs, net of proceeds from sale. An
additional $15 million pretax restructuring charge was recorded in 1998
related to a reassessment of the proceeds expected to be realized on the
dispositions and additional asset write-offs. As of June 30, 2000, cash
outlays and asset write-offs associated with both the 1997 restructuring
program and the additional restructuring charge recorded in 1998 related to
this program totaled $108 million. We also reversed $1 million, $3 million
and $3 million of these restructuring charges in 2000, 1999 and 1998,
respectively. At June 30, 2000, approximately $2 million of reserves
related to the 1997 restructuring program are outstanding and will be paid
out during 2000 or early in 2001.
4. Inventories
-----------
Inventories at June 30, 2000 and December 31, 1999 are detailed below.
<TABLE>
June 30 Dec. 31
2000 1999
--------- ---------
(Millions)
<S> <C> <C>
Finished products and work in process....... $ 742 $ 716
Raw materials............................... 212 189
Supplies.................................... 113 111
--------- ---------
Total.................................. $ 1,067 $ 1,016
========= =========
</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 $162 million and $164 million higher at June
30, 2000 and December 31, 1999, respectively.
- 7 -
<PAGE>
5. Comprehensive Income
--------------------
Total comprehensive income for the three and six months ended June 30, 2000
and 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
-------------------- ------------------
2000 1999 2000 1999
----- ----- ----- -----
(Millions)
<S> <C> <C> <C> <C>
Net income.......................................... $ 205 $ 184 $ 344 $ 307
Other comprehensive (loss) income, net of
tax:
Currency translation adjustment................. (33) 21 (89) (50)
Minimum pension liability adjustment............ - - 2 (1)
Unrealized gains (losses) on
marketable securities......................... - 8 (5) 3
----- ----- ----- -----
(33) 29 (92) (48)
----- ----- ----- -----
Total comprehensive income.................... $ 172 $ 213 $ 252 $ 259
===== ===== ===== =====
</TABLE>
As of June 30, 2000 and December 31, 1999, accumulated other comprehensive
loss, as reflected on the condensed balance sheet, was comprised of the
following:
<TABLE>
<CAPTION>
June 30 Dec. 31
2000 1999
--------- ------------
(Millions)
<S> <C> <C>
Currency translation adjustment............................ $ (251) $ (162)
Minimum pension liability adjustment....................... (11) (13)
Unrealized losses on marketable securities................. (8) (3)
--------- ------------
Accumulated other comprehensive loss................. $ (270) $ (178)
========= ============
</TABLE>
6. Cash Flow Information
---------------------
Cash payments for interest were $98 million and $56 million for the six
months ended June 30, 2000 and 1999, respectively. Net cash payments for
income taxes for the six months ended June 30, 2000 and 1999 were $170
million and $134 million, respectively.
- 8 -
<PAGE>
7. Business Segment Information
----------------------------
Business segment net sales and operating income for the three and six
months ended June 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------------------- ---------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
(Millions)
<S> <C> <C> <C> <C>
Net sales:
Coatings (a)............................. $ 1,186 $ 1,005 $ 2,314 $ 1,917
Glass.................................... 615 586 1,186 1,143
Chemicals (b)............................ 413 359 804 696
Intersegment net sales................... (4) (3) (7) (6)
------------ ----------- ----------- -----------
Total................................. $ 2,210 $ 1,947 $ 4,297 $ 3,750
============ =========== =========== ===========
Operating income:
Coatings (c)............................. $ 198 $ 179 $ 358 $ 280
Glass (d)................................ 119 116 224 213
Chemicals................................ 50 42 124 78
------------ ----------- ----------- -----------
Total................................. 367 337 706 571
Interest expense - net...................... (41) (27) (81) (52)
Other unallocated corporate
income (expense) - net (e)............... 17 (6) (26) (7)
------------ ----------- ----------- -----------
Income before income taxes and
minority interest........................ $ 343 $ 304 $ 599 $ 512
============ =========== =========== ===========
</TABLE>
(a) Includes intersegment net sales of $1 million for each of the three
months ended June 30, 2000 and 1999 and $2 million for each of the six
months ended June 30, 2000 and 1999.
(b) Includes intersegment net sales of $3 million and $2 million for the
three months ended June 30, 2000 and 1999, respectively, and $5 million and
$4 million for the six months ended June 30, 2000 and 1999, respectively.
(c) Includes for the six months ended June 30, 2000, pretax charges of $2
million representing the fair-market-value adjustment of acquired
inventories that have been sold and $1 million related to cost reduction
initiatives associated with the integration of the ICI businesses acquired
in 1999.
Includes for the six months ended June 30, 1999, a pretax restructuring
charge of $24 million associated with the integration of the packaging
coatings acquisitions, including the disposal of a redundant European
facility and work-force reductions.
(d) Includes in each 2000 period presented, a $1 million reversal of
previously established restructuring reserves.
-9-
<PAGE>
(e) Includes in each 2000 period presented, a $9 million pretax gain from
the sales of corporate assets and net insurance recoveries of $4 million.
Includes for the six months ended June 30, 2000, a pretax charge of $39
million representing the write-off of an equity investment in Pittsburgh
Corning Corporation, which has filed for reorganization under the federal
bankruptcy code.
Includes in each 1999 period presented, a $3 million pretax loss from
foreign currency hedge contracts related to the acquisition of the ICI
businesses.
8. 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. For over 30 years, the
Company has been a defendant in lawsuits involving claims alleging personal
injury from exposure to asbestos. Aggregate settlements by PPG to date
have been immaterial. Over the past few years, the number of asbestos-
related claims against the Company, as well as numerous other defendants,
has increased. At June 30, 2000, the Company was one of many defendants in
numerous asbestos-related lawsuits involving approximately 110,000 claims.
In many of the cases, the plaintiffs allege that the Company should be
liable for injuries from products manufactured and distributed by
Pittsburgh Corning Corporation ("PC"). The Company and Corning
Incorporated are each 50% shareholders of PC. The Company believes it is
not responsible for any injuries caused by PC products and intends to
defend against such claims. PPG has successfully defended such claims in
the past. In January 2000, for the first time, a trial court found PPG
liable for injuries to five plaintiffs alleged to be caused by PC products.
The Company intends to appeal that verdict. On April 16, 2000, PC filed
for Chapter 11 Bankruptcy in the Federal Bankruptcy Court in Pittsburgh,
Pennsylvania. In connection with that filing, the Federal Bankruptcy Court
issued a Temporary Restraining Order staying the prosecution of all
asbestos claims against PC and its two shareholders, PPG and Corning
Incorporated. That stay has been extended to August 21, 2000 and may be
extended further. Accordingly, during the six months ended June 30, 2000,
the Company recorded an after-tax charge of $35 million for the write-off
of its investment in PC. The Company and others are also defendants in
three cases involving claims alleging injury from exposure to lead. PPG
believes it has adequate insurance for the personal injury and property
damage claims against the Company described above. 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, asbestos and other 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
June 30, 2000 and December 31, 1999, PPG
-10-
<PAGE>
had reserves for environmental contingencies totaling $81 million and $82
million, respectively. Pretax charges against income for environmental
remediation costs for the six months ended June 30, 2000 and 1999 totaled
$6 million and $5 million, respectively, and are included in "Other
charges" in the condensed statement of income. Cash outlays related to such
environmental remediation for the six months ended June 30, 2000 and 1999
aggregated $7 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, 1999. 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 Second Quarter of 2000 Compared to Second Quarter of 1999
Performance Overview
Sales increased 14% in the second quarter of 2000 to $2.21 billion from $1.95
billion in the second quarter of 1999. Sales increased 9% from acquisitions
within our coatings segment, 3% from sales volume improvements in our coatings
and glass segments and 3% from higher selling prices within our chemicals
segment. These sales increases more than offset a 1% decline due to the
negative effects of foreign currency translation on all of our business
segments.
The gross profit percentage decreased to 40.0% during the second quarter of 2000
from 40.2% in the same quarter of 1999. The decrease in the gross profit
percentage was due to increased raw material and energy costs primarily within
our chemicals segment which was substantially offset by higher selling prices
for commodity chemicals in our chemicals segment and favorable sales mix changes
in our coatings segment.
Net income and earnings per share, diluted, for the second quarter of 2000
increased to $205 million and $1.17, respectively, compared to $184 million and
$1.05, respectively, in the same quarter of 1999. The increase in net income
and earnings per share resulted from the selling price, volume and sales mix
improvements previously discussed, earnings generated from acquisitions, lower
selling, general and administrative expenses and gains on the sales of corporate
assets. These favorable factors more than offset the higher raw material and
energy costs primarily within our chemicals segment, increased income tax
expense from improved pretax earnings and higher interest expense as a result of
debt issued in 1999 to fund acquisition activity.
Performance of Business Segments
Coatings sales increased 18% to $1.19 billion from $1.0 billion in the second
quarter of 1999. Sales increased 18% primarily from the acquisitions of the ICI
businesses and PRC-DeSoto International, Inc. (PRC-DeSoto) in the third quarter
of 1999 and of Monarch in the first quarter of 2000 and 4% from sales volume
improvements in our North American and European automotive original and
industrial businesses. These sales increases were offset in part by a 3%
decline from foreign currency translation and a 1% decline from lower selling
prices. Operating income increased to $198 million in the second quarter of 2000
from $179 million in the same quarter of 1999. Operating income in the second
quarter of 2000 improved due to increased sales volumes and favorable sales mix
changes in certain businesses, as previously discussed, and earnings from
acquisitions. These favorable factors were partially offset by higher raw
material costs and the decline in selling prices previously discussed.
Glass sales increased 5% to $615 million from $586 million in the second quarter
of 1999. The combination of an increase in sales volumes of 4%, primarily in our
North American fiber glass and automotive original businesses, and a 2% increase
from higher selling prices for our reinforcement fiber glass and automotive
replacement glass products more than offset a 1% decline from the negative
effects of foreign currency translation. Operating income increased to $119
million in the second quarter of 2000 from $116 million in the same quarter of
1999. The increase in operating income is attributable to the same factors that
contributed to higher sales
-12-
<PAGE>
and improved manufacturing efficiencies principally in our fiber glass
reinforcement business. These favorable factors were partially offset by higher
raw material and energy costs.
Chemicals sales increased 15% to $410 million compared to $357 million in the
same quarter of 1999. A sales increase of 16% from significantly higher selling
prices for our chlorine and other chlor-alkali products was offset slightly by a
1% decline from the negative effect of foreign currency translation. Operating
income increased to $50 million in the second quarter of 2000 from $42 million
in the same quarter of 1999 due to the same factors that contributed to the
overall sales increase. These favorable factors were partially offset by higher
raw material and energy costs and the absence of a second quarter 1999 insurance
recovery of certain past environmental costs.
Performance in the First Six Months of 2000 Compared to the First Six Months of
1999
Performance Overview
Sales increased 15% in the first six months of 2000 to $4.30 billion from $3.75
billion in the first six months of 1999. Sales increased 14% from acquisitions
within the coatings segment and improved sales volumes across all of our
business segments and 3% from higher selling prices within our chemicals and
glass segments. A 2% decline due to foreign currency translation partially
offset these favorable factors.
The gross profit percentage increased to 39.9% during the first six months of
2000 from 39.5% in first six months of 1999. The combination of higher selling
prices previously discussed, improved manufacturing efficiencies within our
glass and chemicals segments and favorable sales mix changes in our coatings
segment more than offset the effects of higher raw material and energy costs
across all of our business segments.
Net income and earnings per share, diluted, for the first six months of 2000
increased to $344 million and $1.96, respectively, compared to $307 million and
$1.75, respectively, in the same period of 1999. Net income and earnings per
share for the first six months of 2000 increased due to the same factors that
contributed to the increase in sales and gross profit percentage and the absence
of a first quarter 1999 after-tax restructuring charge of $20 million related to
the integration of packaging coatings acquisitions. These favorable factors
were partially offset by higher raw material and energy costs across all of our
business segments, increased income tax expense from improved pretax earnings, a
first quarter 2000 after-tax charge of $35 million for the write-off of an
equity investment and higher interest expense as a result of debt issued in 1999
to fund acquisition activity. Excluding the write-off of the equity investment
and the restructuring charges, net income and earnings per share, diluted, were
$379 million and $2.16 in first six months of 2000, respectively, compared to
$327 million and $1.86 in the first six months of 1999, respectively.
Performance of Business Segments
Coatings sales increased 21% to $2.31 billion from $1.92 billion in the first
six months of 1999. A 25% sales increase resulted primarily from the
acquisitions of the ICI businesses, PRC-DeSoto and Monarch and sales volume
improvements in our worldwide automotive original and industrial coatings
businesses. These favorable factors were partially offset by a 3% decline from
foreign currency translation and a 1% decrease from lower selling prices.
Operating income increased to $358 million in the first six months of 2000 from
$280 million in the same period of 1999. Operating income in the first six
months of 2000 improved due to increased sales volumes, as previously discussed,
earnings from acquisitions, favorable sales mix changes and a reduction in
pretax restructuring charges as discussed below. Operating income
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in the first six months of 2000 included pretax restructuring charges of
$1 million related to the integration of the ICI businesses and operating income
in the same period of 1999 included $24 million of restructuring charges for the
integration of packaging coatings acquisitions. The factors which contributed to
the increase in operating income more than offset the effects of higher raw
material costs and lower selling prices, as previously discussed. Excluding the
pretax restructuring charges, operating income increased to $359 million in the
first six months of 2000 as compared to $304 million in the same period of 1999.
Glass sales increased 4% to $1.19 billion from $1.14 billion in the first six
months of 1999. The increase is attributable primarily to a 3% increase from
sales volume improvements in our North American automotive original glass and
electronic and specialty materials fiber glass businesses and a 1% increase from
higher selling prices in our worldwide fiber glass businesses. Operating income
increased to $224 million in the first six months of 2000 from $213 million in
the first six months of 1999. Improved manufacturing efficiencies in our North
American automotive original glass and fiber glass reinforcement businesses and
higher selling prices and volumes, as previously discussed, more than offset
higher raw material and energy costs.
Chemicals sales increased 15% to $799 million compared to $692 million in the
first six months of 1999. Sales increases of 14% from substantially higher
selling prices for our chlorine and other chlor-alkali products and 2% from
sales volume improvements for certain chlor-alkali products were offset slightly
by a 1% decline from the negative effect of foreign currency translation.
Operating income increased to $124 million in the first six months of 2000 from
$78 million in the first six months of 1999 due to the same factors that
contributed to the overall sales increase, manufacturing efficiencies within our
optical products business and lower selling costs. These favorable factors were
partially offset by higher raw material and energy costs.
Other Factors
The change in other unallocated corporate income (expense) - net for second
quarter of 2000 as compared to the same quarter of 1999 is principally due to
gains from the sales of corporate assets, net insurance recoveries in the second
quarter of 2000 and the absence of a second quarter 1999 loss from foreign
currency hedge contracts related to the acquisition of the ICI business.
Additionally, other unallocated corporate income (expense) - net for the six
months ended June 30, 2000 includes a pretax charge of $39 million representing
the write-off of an equity investment.
The Company's pretax earnings for the first six months of 2000 and 1999 included
net periodic pension income of $42 million and $36 million, respectively,
related to its U.S. defined benefit pension plans.
Interest expense increased during the first six months of 2000 as compared to
the same period in 1999 due to the issuance of $800 million aggregate principal
amount of long-term debt securities in August 1999 to repay a substantial
portion of the short-term debt issued to finance the acquisitions of the ICI
businesses and PRC-DeSoto.
The increase in the overall effective tax rate is principally due to the impact
of the write-off of the equity investment in the first six months of 2000.
In June 2000, the Company and Apogee Enterprises, Inc. agreed to combine their
U.S. automotive replacement glass distribution businesses into a new entity, PPG
Auto Glass L.L.C. The Company will have a 66 percent ownership interest in PPG
Auto Glass L.L.C., which is
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expected to commence operations early in the third quarter of 2000. In September
2000, it is anticipated that PPG Auto Glass L.L.C. will record a $10 million to
$15 million pretax charge for the estimated costs to rationalize the business.
After income taxes and minority interest, this charge is expected to be
equivalent to diluted earnings per common share of two to three cents for PPG.
The increase in receivables-net is due primarily to increased sales in our
coatings segment.
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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 - Revenue Recognition in Financial Statements (SAB No. 101).
The implementation date of SAB No. 101 has been delayed to the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company is
currently evaluating the impact of SAB No. 101 on its financial position and
results of operations.
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 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 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.
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.
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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.
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 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.
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. See Note 8, "Commitments and Contingent
Liabilities," to the condensed financial statements in this Form 10-Q for an
expanded description of certain of these lawsuits. 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 and other
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 June 30, 2000 and
December 31, 1999, PPG had reserves for environmental contingencies totaling $81
million and $82 million, respectively. Pretax charges against income for
environmental remediation costs for the six months ended June 30, 2000 and 1999
totaled $6 million and $5 million, respectively, and are included in "Other
charges" in the condensed statement of income. Cash outlays related to such
environmental remediation for the six months ended June 30, 2000 and 1999
aggregated $7 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
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$400 million, which range is unchanged from December 31, 1999. 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.
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, 1999.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
In the Company's Form 10-K for the year ended December 31, 1999, it was reported
that the Company has been a defendant in lawsuits involving claims alleging
personal injury from exposure to asbestos. In many of the cases, the plaintiffs
allege that the Company should be liable under various theories for injuries
involving asbestos-containing thermal insulation products manufactured and
distributed by Pittsburgh Corning Corporation (PC). The Company and Corning
Incorporated are each 50% shareholders of PC. The Company's Form 10-Q for the
quarter end March 31, 2000 reported that on April 16, 2000, PC filed a petition
for reorganization under the federal bankruptcy code. In connection with PC's
Chapter 11 Bankruptcy filing, the Federal Bankruptcy Court in Pittsburgh,
Pennsylvania issued a Temporary Restraining Order staying the prosecution of all
asbestos claims against PC and its two shareholders, PPG and Corning
Incorporated. That stay has been extended to August 21, 2000 and may be
extended further. During the six months ended June 30, 2000, the Company
recorded an after-tax charge of $35 million for the write-off of its equity
investment in PC.
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 second quarter of 2000, the
Directors, as a group, were credited with 5,258 Common Stock Equivalents under
this Plan. The values of the Common Stock Equivalents, when credited, ranged
from $48.63 to $54.38.
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. 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 second quarter of 2000, the Directors, as a group, received
2,589 Common Stock Equivalents under this Plan. The value of each Common Stock
Equivalent, when credited, ranged from $48.63 to $52.25.
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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 on April 17, 2000 reporting
the write-off of its equity investment in Pittsburgh
Corning Corporation.
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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: July 28, 2000 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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PPG INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
