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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 Commission File Number 1-1687
------------------- ----------
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 July 31, 2002, 169,355,532 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 _______
-----
PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE(S)
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Statement of Income (Loss) ....................................... 2
Condensed Balance Sheet .................................................... 3
Condensed Statement of Cash Flows .......................................... 4
Notes to Condensed Financial Statements .................................... 5-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 17-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............ 22
Part II. Other Information
Item 1. Legal Proceedings ..................................................... 23
Item 2. Change in Securities and Use of Proceeds .............................. 23-24
Item 6. Exhibits and Reports on Form 8-K ...................................... 24-26
Signature ........................................................................... 27
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Income (Loss) (Unaudited)
(Millions, except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
----------- ----------- ------------ ----------
Net sales .......................................................... $ 2,134 $ 2,164 $ 4,009 $ 4,263
Cost of sales ...................................................... 1,325 1,342 2,514 2,666
---------- ---------- ----------- -----------
Gross profit ................................................... 809 822 1,495 1,597
---------- ---------- ----------- -----------
Other expenses (earnings):
Selling, general and administrative ............................ 359 342 701 693
Depreciation ................................................... 92 94 183 188
Research and development ....................................... 68 67 134 134
Interest ....................................................... 33 46 66 94
Amortization ................................................... 9 18 17 36
Asbestos settlement (Note 11) .................................. 772 - 772 -
Business realignments (Note 4) ................................. (4) - 77 101
Other, net ..................................................... (2) (6) (21) (24)
---------- ---------- ----------- -----------
Total other expenses - net ................................. 1,327 561 1,929 1,222
---------- ---------- ----------- -----------
(Loss) income before income taxes, minority interest and
cumulative effect of accounting change ......................... (518) 261 (434) 375
Income tax (benefit) expense ....................................... (186) 94 (153) 142
Minority interest .................................................. 13 12 21 22
---------- ---------- ----------- -----------
(Loss) income before cumulative effect of accounting change ........ (345) 155 (302) 211
Cumulative effect of accounting change, net of tax (Note 2) ........ - - (9) -
---------- ---------- ----------- -----------
Net (loss) income .................................................. $ (345) $ 155 $ (311) $ 211
========== ========== =========== ===========
(Loss) earnings per common share (Note 3):
(Loss) income before cumulative effect of accounting change .... $ (2.04) $ 0.92 $ (1.79) $ 1.25
Cumulative effect of accounting change, net of tax.............. - - (0.05) -
---------- ---------- ----------- -----------
(Loss) earnings per common share ................................... $ (2.04) $ 0.92 $ (1.84) $ 1.25
========== ========== =========== ===========
(Loss) earnings per common share - assuming dilution (Note 3):
(Loss) income before cumulative effect of accounting change .... $ (2.03) $ 0.92 $ (1.78) $ 1.25
Cumulative effect of accounting change, net of tax ............. - - (0.05) -
---------- ---------- ----------- -----------
(Loss) earnings per common share - assuming dilution ............... $ (2.03) $ 0.92 $ (1.83) $ 1.25
========== ========== =========== ===========
Dividends per common share ......................................... $ 0.42 $ 0.42 $ 0.84 $ 0.84
========== ========== =========== ===========
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-2-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Balance Sheet (Unaudited)
June 30 Dec. 31
2002 2001
--------- ----------
Assets (Millions)
- ------
Current assets:
Cash and cash equivalents ....................... $ 136 $ 108
Receivables-net ................................. 1,640 1,416
Inventories (Note 5) ............................ 962 904
Deferred income taxes ........................... 222 155
Other ........................................... 134 120
--------- ----------
Total current assets ........................ 3,094 2,703
Property (less accumulated depreciation of
$4,610 million and $4,401 million) .............. 2,674 2,752
Investments .......................................... 294 305
Goodwill (Notes 2 and 6) ............................. 1,023 972
Identifiable intangible assets (Notes 2 and 6) ....... 526 570
Prepaid pension asset ................................ 980 982
Other assets ......................................... 162 168
--------- ----------
Total ....................................... $ 8,753 $ 8,452
========= ==========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Short-term debt and current
portion of long-term debt ................... $ 627 $ 696
Asbestos settlement (Note 11) ................... 206 -
Accounts payable and accrued liabilities ........ 1,411 1,259
--------- ----------
Total current liabilities ................... 2,244 1,955
Long-term debt ....................................... 1,690 1,699
Asbestos settlement (Note 11) ........................ 566 -
Deferred income taxes ................................ 349 552
Accumulated provisions ............................... 524 530
Other postretirement benefits ........................ 521 514
--------- ----------
Total liabilities ........................... 5,894 5,250
--------- ----------
Commitments and contingent liabilities (Note 11)
Minority interest .................................... 134 122
--------- ----------
Shareholders' equity:
Common stock .................................... 484 484
Additional paid-in capital ...................... 120 109
Retained earnings ............................... 6,099 6,551
Treasury stock .................................. (3,479) (3,496)
Unearned compensation ........................... (94) (108)
Accumulated other comprehensive loss (Note 8) (405) (460)
--------- ----------
Total shareholders' equity .................. 2,725 3,080
--------- ----------
Total ....................................... $ 8,753 $ 8,452
========= ==========
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-3-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Cash Flows (Unaudited)
Six Months Ended June 30
------------------------
2002 2001
--------- ---------
(Millions)
Cash from operating activities .................................... $ 361 $ 391
--------- ---------
Investing activities:
Capital spending
Additions to property and investments .................... (91) (126)
Business acquisitions, net of cash balances
acquired ............................................. (9) (8)
Other ........................................................ 6 10
--------- ----------
Cash used for investing activities ....................... (94) (124)
--------- ----------
Financing activities:
Net change in borrowings with
maturities of three months or less ....................... (30) (74)
Proceeds from other short-term debt .......................... 52 78
Repayment of other short-term debt ........................... (38) (111)
Proceeds from long-term debt ................................. 1 23
Repayment of long-term debt .................................. (118) (30)
Loans to employee stock ownership plan ....................... - (32)
Repayment of loans by employee stock
ownership plan ........................................... 14 22
Issuance of treasury stock, net .............................. 20 8
Dividends paid ............................................... (142) (141)
--------- ----------
Cash used for financing activities ....................... (241) (257)
--------- ----------
Effect of currency exchange rate changes
on cash and cash equivalents ................................. 2 (3)
--------- ----------
Net increase in cash and cash equivalents ......................... 28 7
Cash and cash equivalents, beginning of period .................... 108 111
--------- ---------
Cash and cash equivalents, end of period .......................... $ 136 $ 118
========= =========
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-4-
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, 2002, and the results of their operations for the three and six month
periods ended June 30, 2002 and 2001 and their cash flows for the six month
periods then ended. 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,
2001.
The results of operations for the six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
2. Changes in Method of Accounting
Effective January 1, 2002, PPG adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
This standard changes the accounting for goodwill and certain other intangible
assets from an amortization method to an impairment only approach. The standard
also requires a reassessment of the useful lives of identifiable intangible
assets other than goodwill and at least an annual test for impairment of
goodwill and intangibles with indefinite lives. Note 6, "Goodwill and Other
Identifiable Intangible Assets" provides additional information concerning
goodwill and other identifiable intangible assets.
In accordance with the requirements of SFAS No. 142, the Company tested the
goodwill attributable to each of our reporting units for impairment as of
January 1, 2002 and concluded that none of its goodwill was impaired. The
Company's reporting units are the major product lines comprising our reportable
business segments. Fair value was estimated using discounted cash flow
methodologies and market comparable information. The Company will test goodwill
of each of our reporting units for impairment annually in connection with our
strategic planning process.
In addition, the Company reassessed the useful lives of its identifiable
intangible assets and determined that the lives were appropriate other than for
the Company's trademarks, which were concluded to have indefinite useful lives.
As a result, the Company ceased amortization of the cost of its trademarks as of
January 1, 2002. Also, in accordance with the requirements of SFAS No. 142, the
Company tested each of its trademarks for impairment by comparing the fair value
of each trademark to its carrying value as of January 1, 2002. Fair value was
estimated by using the relief from royalty method (a discounted cash flow
methodology.) Based on these impairment tests, PPG recognized an adjustment of
$14 million ($9 million or $0.05 per share, net of tax) in the first quarter of
2002 to reduce the carrying value of certain trademarks within our coatings
segment to their estimated fair value as the level of future cash flows from
sales of certain brands are expected to be less than originally anticipated.
Under SFAS No. 142, this impairment adjustment has been reported as the
cumulative effect of an accounting change in our first quarter 2002 income
statement. The Company will test the carrying value of trademarks for impairment
at least annually.
-5-
Had the Company been accounting for its goodwill and certain other intangible
assets under SFAS No. 142 for all prior periods presented, the Company's net
income and earnings per common share would have been as follows for the three
and six months ended June 30, 2001:
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2001 2001
(Millions, except per share amounts)
Net income
Reported net income ................................. $ 155 $ 211
Add back amortization expense, net of tax ........... 8 16
------------ ------------
Adjusted net income ................................. $ 163 $ 227
============ ============
Earnings per common share
Reported earnings ................................... $ 0.92 $ 1.25
Impact of amortization expense, net of tax .......... 0.05 0.10
------------ ------------
Adjusted earnings per common share .................. $ 0.97 $ 1.35
============ ============
Earnings per common share -
assuming dilution
Reported earnings ................................... $ 0.92 $ 1.25
Impact of amortization expense, net of tax .......... 0.05 0.10
------------ ------------
Adjusted earnings per common share -
assuming dilution ............................. $ 0.97 $ 1.35
============ ============
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," which requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. All of the
Company's acquisitions have been accounted for using the purchase method. Also,
in accordance with the transition provisions of SFAS No. 141, the carrying
amount of the intangible asset related to the acquired assembled workforce, net
of related tax effects, which totaled $15 million, was reclassified from
identifiable intangible assets to goodwill effective January 1, 2002, as this
intangible asset no longer meets the criteria for recognition apart from
goodwill.
-6-
3. (Loss) Earnings Per Common Share
The following table presents the (loss) earnings per common share calculations
for the three and six months ended June 30, 2002 and 2001.
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(Millions, except per share amounts)
(Loss) earnings per common share
(Loss) income before cumulative effect of
accounting change .................................... $ (345) $ 155 $ (302) $ 211
Cumulative effect of accounting change,
net of tax ........................................... - - (9) -
---------- ---------- ---------- ----------
Net (loss) income ...................................... $ (345) $ 155 $ (311) $ 211
---------- ---------- ---------- ----------
Weighted average common shares
outstanding .......................................... 168.9 168.3 168.8 168.3
---------- ---------- ---------- ----------
(Loss) income before cumulative effect of
accounting change .................................... $ (2.04) $ 0.92 $ (1.79) $ 1.25
Cumulative effect of accounting change,
net of tax ........................................... - - (0.05) -
---------- ---------- ---------- ----------
(Loss) earnings per common share ....................... $ (2.04) $ 0.92 $ (1.84) $ 1.25
========== ========== ========== ==========
(Loss) earnings per common share -
assuming dilution
(Loss) income before cumulative effect of
accounting change .................................... $ (345) $ 155 $ (302) $ 211
Cumulative effect of accounting change,
net of tax ........................................... - - (9) -
---------- ---------- ---------- ----------
(Loss) net income ...................................... $ (345) $ 155 $ (311) $ 211
---------- ---------- ---------- ----------
Weighted average common shares
outstanding .......................................... 168.9 168.3 168.8 168.3
Effect of dilutive securities:
Stock options ........................................ 0.6 0.2 0.3 0.1
Other stock compensation plans ....................... 0.6 0.8 0.6 0.7
---------- ---------- ---------- ----------
Potentially dilutive common shares ..................... 1.2 1.0 0.9 0.8
---------- ---------- ---------- ----------
Adjusted weighted average
common shares outstanding ............................ 170.1 169.3 169.7 169.1
---------- ---------- ---------- ----------
(Loss) income before cumulative effect of
accounting change .................................... $ (2.03) $ 0.92 $ (1.78) $ 1.25
Cumulative effect of accounting change,
net of tax ........................................... - - (0.05) -
---------- ---------- ---------- ----------
(Loss) earnings per common share -
assuming dilution .................................... $ (2.03) $ 0.92 $ (1.83) $ 1.25
========== ========== ========== ==========
-7-
4. Business Realignments
During the first quarter of 2002, the Company finalized plans to reduce costs,
increase efficiencies and accelerate performance improvement and took a charge
of $81 million for restructuring and other related activities, including
severance and other costs of $66 million and asset dispositions of $15 million.
It is expected that these activities will be completed by June 2003.
Severance and Asset Total Employees
Other Costs Dispositions Charge Covered
----------- ------------ ------ -------
(Millions, except employee amounts)
Coatings ............................... $ 62 $ 15 $ 77 1,004
Glass .................................. 1 - 1 22
Chemicals .............................. 1 - 1 20
Corporate .............................. 2 - 2 20
----------- ---------- ---------- --------
Total .............................. $ 66 $ 15 $ 81 1,066
Activity ........................... (10) (15) (25) (315)
----------- ---------- ---------- --------
Balance, end of period ............. $ 56 $ - $ 56 751
=========== ========== ========== ========
During the first quarter of 2001, the Company finalized plans to reduce costs,
increase efficiencies and accelerate performance improvement and took a charge
of $101 million for restructuring and other related activities, including
severance and other costs of $67 million and asset dispositions of $34 million.
During the second quarter of 2002, $4 million of the initial $101 million charge
related to the coatings segment was reversed to income. It is expected that the
remaining activities will be substantially completed by September 2002.
Severance and Asset Total Employees
Other Costs Dispositions Charge Covered
----------- ------------ ------ -------
(Millions, except employee amounts)
Coatings ............................... $ 60 $ 23 $ 83 1,072
Glass .................................. 4 6 10 254
Chemicals .............................. 2 5 7 23
Corporate .............................. 1 - 1 18
----------- ----------- ----------- ---------
Total .............................. $ 67 $ 34 $ 101 1,367
Activity ........................... (63) (34) (97) (1,309)
---------- ---------- ---------- ---------
Balance, end of period ............. $ 4 $ - $ 4 58
========== ========== ========== =========
5. Inventories
Inventories at June 30, 2002 and December 31, 2001 are detailed below.
June 30 Dec. 31
2002 2001
---- ----
(Millions)
Finished products and work in process ....... $ 675 $ 622
Raw materials ............................... 166 166
Supplies .................................... 121 116
---------- ----------
Total ................................... $ 962 $ 904
========== ==========
-8-
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 $160 million and $180 million higher at June 30, 2002 and
December 31, 2001, respectively.
6. Goodwill and Other Identifiable Intangible Assets
The change in the carrying amount of goodwill attributable to each business
segment for the six months ended June 30, 2002 was as follows:
Coatings Glass Chemicals Total
-------- ----- --------- -----
(Millions)
Balance, December 31, 2001 ........................ $ 873 $ 79 $ 20 $ 972
Reclass assembled workforce, net of taxes
(See Note 2) ............................... 15 - - 15
----------- ----------- ------------ ----------
Balance, January 1, 2002 .......................... $ 888 $ 79 $ 20 $ 987
Goodwill acquired ............................. 8 - - 8
Currency translation .......................... 23 3 2 28
----------- ----------- ------------ ----------
Balance, June 30, 2002 ............................ $ 919 $ 82 $ 22 $ 1,023
=========== =========== ============ ==========
The change in the carrying amount of trademarks for the six months ended June
30, 2002 was as follows:
Balance, December 31, 2001 ......................... $ 158
Cumulative effect of accounting change -
impairment adjustment ....................... (14)
----------
Balance, June 30, 2002 and January 1, 2002 ......... $ 144
==========
The Company's identifiable intangible assets with finite lives are being
amortized over their estimated useful lives and are detailed below.
June 30, 2002 December 31, 2001
------------- -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
(Millions)
Acquired technology .......... $ 349 $ (72) $ 277 $ 348 $ (60) $ 288
Assembled workforce .......... - - - 29 (10) 19
Other......................... 162 (57) 105 147 (42) 105
---------- --------- -------- --------- --------- --------
Balance .................. $ 511 $ (129) $ 382 $ 524 $ (112) $ 412
========= ========= ======== ======== ========= ========
Aggregate amortization expense for the three and six months ended June 30, 2002
related to these identifiable intangible assets, was $9 million and $17 million,
respectively, and $10 million and $20 million, respectively, for the three and
six months ended June 30, 2001. At June 30, 2002, estimated future amortization
expense of identifiable intangible assets is as follows: $17 million for the
remaining two quarters of 2002 and $31 million, $30 million, $29 million, $28
million and $27 million in 2003, 2004, 2005, 2006 and 2007, respectively.
-9-
7. Business Segment Information
Business segment net sales and operating (loss) income for the three and six
months ended June 30, 2002 and 2001 were as follows:
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(Millions)
Net sales:
Coatings .......................................... $ 1,187 $ 1,166 $ 2,240 $ 2,272
Glass ............................................. 577 608 1,065 1,191
Chemicals ......................................... 394 394 730 807
Intersegment net sales (a) ........................ (24) (4) (26) (7)
--------- ---------- --------- ---------
Total ........................................ $ 2,134 $ 2,164 $ 4,009 $ 4,263
========= ========== ========= =========
Operating income:
Coatings .......................................... $ 211 $ 175 $ 282 $ 236
Glass ............................................. 49 99 69 184
Chemicals ......................................... 22 26 49 49
--------- ---------- --------- ---------
Total ........................................ 282 300 400 469
Interest expense - net ................................ (31) (44) (62) (87)
Asbestos settlement ................................... (772) - (772) -
Other unallocated corporate
income (expense) - net ............................ 3 5 - (7)
--------- ---------- --------- ---------
(Loss) income before income taxes, minority interest
and cumulative effect of accounting change (b) .... $ (518) $ 261 $ (434) $ 375
========= ========== ========= =========
(a) Includes intersegment net sales of $23 million for the three months and
six months ended June 30, 2002 related to the glass segment.
(b) Includes for the six months ended June 30, 2002, a pretax charge of $81
million for restructuring and other related activities, including
severance and other costs of $66 million and asset dispositions of $15
million. The three months and six months ended June 30, 2002 also include
a reversal of $4 million of coatings restructuring reserve originally
recorded in 2001. Includes for the six months ended June 30, 2001, a
pretax charge of $101 million for restructuring and other related
activities, including severance and other costs of $67 million and asset
dispositions of $34 million. See Note 4, "Business Realignments," for
amounts by business segment.
-10-
8. Comprehensive (Loss) Income
Total comprehensive (loss) income for the three and six months ended June 30,
2002 and 2001 was as follows:
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(Millions)
Net (loss) income ........................................ $ (345) $ 155 $ (311) $ 211
Other comprehensive income (loss), net of tax:
Currency translation adjustment ...................... 89 (18) 47 (101)
Minimum pension liability adjustment ................. - - - (6)
Unrealized (losses) gains on
marketable securities .............................. (9) 4 (11) 8
Net change - derivatives (Note 9) .................... - (12) 19 (57)
Transition adjustment on derivatives (Note 9) ........ - - - 43
--------- --------- ---------- ----------
80 (26) 55 (113)
--------- --------- ---------- ----------
Total comprehensive (loss) income .................. $ (265) $ 129 $ (256) $ 98
========= ========= ========== ==========
9. Derivative Financial Instruments
PPG uses derivative instruments to manage its exposure to fluctuating natural
gas prices through the use of natural gas swap and option contracts and forward
currency contracts as hedges against its exposure to variability in exchange
rates on short-term intercompany borrowings denominated in foreign currencies.
The Company recognizes all derivative instruments as either assets or
liabilities at fair value. The unrealized change in the fair value of these
instruments is deferred in accumulated other comprehensive income (loss) and
subsequently recognized, when realized, by reclassification of the gain or loss
into cost of sales, as natural gas is purchased, and into other earnings or
charges, as foreign exchange gains and losses are recognized on the related
intercompany borrowings.
During the first six months of 2002, the other comprehensive income due to
derivatives was $19 million, net of tax. It was comprised of realized losses of
$8 million that were reclassified into earnings and unrealized gains of $11
million. The realized losses relate to the settlement during the period of
natural gas swap and forward currency contracts. The unrealized gains during the
period relate primarily to the changes in fair value of the natural gas
contracts outstanding as of June 30, 2002.
During the first six months of 2001, the other comprehensive loss due to
derivatives was $57 million, net of tax. It was comprised of realized gains of
$26 million that were reclassified into earnings and unrealized losses of $31
million. The majority of the realized gains related to the settlement during the
period of natural gas swap and option contracts. The unrealized losses related
primarily to the changes in fair value of the natural gas contracts outstanding
as of June 30, 2001.
The transition adjustment on derivatives of $43 million represents the
unrealized gain, net of tax, on the derivatives held at January 1, 2001, the
date of our adoption of SFAS No. 133, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", as amended by SFAS No. 138.
-11-
10. Cash Flow Information
Cash payments for interest were $68 million and $101 million for the six months
ended June 30, 2002 and 2001, respectively. Net cash payments for income taxes
for the six months ended June 30, 2002 and 2001 were $78 million and $108
million, respectively.
11. 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
monetary damages are sought. These lawsuits and claims, some of which are
described below, relate to product liability, contract, patent, environmental,
antitrust and other matters arising out of the conduct of PPG's business. To the
extent that these lawsuits and claims involve personal injury and property
damage, PPG believes it has adequate insurance; however, certain of PPG's
insurers are contesting coverage with respect to some of these claims, and other
insurers, as they had prior to the asbestos settlement described below, may
contest coverage with respect to some of the asbestos claims if the settlement
is not implemented. 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.
The result of any future litigation of such lawsuits and claims is inherently
unpredictable. However, management believes that, in the aggregate, the outcome
of all lawsuits and claims involving PPG, including asbestos-related claims in
the event the settlement described below does not become effective, will not
have a material effect on PPG's consolidated financial position or liquidity;
however, such outcome may be material to the results of operations of any
particular period in which costs, if any, are recognized.
The Company has been named in a number of antitrust lawsuits, including suits
alleging that PPG acted with competitors to fix prices and allocate markets in
the automotive refinish industry and a class action relating to certain glass
products. The automotive refinish claims have been consolidated, but the
proceedings are still at an early stage. All of the initial defendants in the
glass class action antitrust case other than PPG, have settled. PPG believes it
has meritorious defenses to these claims.
The Company has been a defendant since April 1994 in a suit filed by Marvin
Windows and Doors (Marvin) alleging numerous claims, including breach of
warranty. All of the plaintiff's claims, other than breach of warranty, have
been dismissed. However, on February 14, 2002, a federal jury awarded Marvin
$136 million on the remaining claim. Subsequently, the court added $20 million
for interest bringing the total judgment to $156 million. PPG filed an appeal on
July 8, 2002. PPG believes it has meritorious defenses to the plaintiff's claims
and has reasonable prospects of prevailing on appeal.
For over thirty years, PPG has been a defendant in lawsuits involving claims
alleging personal injury from exposure to asbestos. Aggregate settlements by PPG
to date have been immaterial. At June 30, 2002, PPG was one of many defendants
in numerous asbestos-related lawsuits involving approximately 116,000 claims.
Most of PPG's potential exposure relates to allegations by plaintiffs that PPG
should be liable for injuries involving asbestos-containing thermal insulation
products manufactured and distributed by Pittsburgh Corning Corporation (PC).
PPG and Corning Incorporated are each 50% shareholders of PC. PPG has denied
responsibility for, and has defended, all claims for any injuries caused by PC
products.
On April 16, 2000, PC filed for Chapter 11 Bankruptcy in the Federal Bankruptcy
Court in Pittsburgh, Pennsylvania. Accordingly, in the first quarter of 2000,
PPG recorded an after-tax charge of $35 million for the write-off of all of its
investment in PC. As a consequence of
-12-
the bankruptcy filing and the various motions and orders in that proceeding, the
asbestos litigation against PPG (as well as against PC) has been stayed and the
filing of additional asbestos suits against them has been enjoined, until thirty
days after the effective date of a confirmed plan of reorganization for PC
substantially in accordance with the settlement arrangement discussed below. The
stay may be terminated if the Bankruptcy Court determines that such a plan will
not be confirmed, or the settlement arrangement set forth below is not likely to
be consummated.
On May 14, 2002, PPG announced that it had agreed with several other parties,
including certain of its insurance carriers, the official committee representing
asbestos claimants in the PC bankruptcy (ACC), and the legal representatives of
future asbestos claimants appointed in the PC bankruptcy, on the terms of a
settlement arrangement relating to asbestos claims against PPG and PC.
The parties to the settlement arrangement intend to have the settlement terms
incorporated into a bankruptcy reorganization plan for PC. The parties to the
settlement expect that PC will file the plan of reorganization, along with a
disclosure statement describing the plan, with the Bankruptcy Court. Other
parties with an interest in the bankruptcy proceeding may file objections to the
plan of reorganization. After considering any objections at a hearing, the
Bankruptcy Court, if it approves the disclosure statement, would permit the plan
of reorganization and a disclosure statement to be sent to PC's creditors for
voting. In order to approve the plan, at least two-thirds in amount and more
than one-half in number of the allowed creditors in a given class must vote in
favor of the plan, and for a plan to contain a channeling injunction for present
and future asbestos claims under ss.524(g) of the Bankruptcy Code, as described
below, seventy-five percent of the asbestos claimants voting must vote in favor
of the plan. Assuming that the plan receives the requisite votes, the judge
would conduct another hearing regarding the fairness of the settlement,
including whether the plan would be fair with respect to present and future
claimants, whether such claimants would be treated in substantially the same
manner, and whether the protection provided to PPG and its participating
insurers would be fair in view of the assets they would convey to the asbestos
settlement trust ("Trust") to be established as part of the settlement
arrangement. At that hearing, other parties in interest could raise objections
to the plan. Following that hearing, the Bankruptcy Court would enter a
confirmation order if all requirements to confirm a plan of reorganization under
the Bankruptcy Code, including the requirements described above, have been
satisfied; this order may be appealed to the District Court. (The District Court
may join the Bankruptcy Court in the confirmation order, in which case an appeal
to the District Court would not be necessary.) Assuming that the District Court
approves the confirmation order, interested parties could appeal the order to
the U.S. Circuit Court and subsequently to the U. S. Supreme Court. The
settlement would not become effective until 30 days after the plan of
reorganization was finally approved by an appropriate court order that was no
longer subject to appeal (the "Effective Date").
If the PC plan of reorganization incorporating the settlement terms were
approved by the Bankruptcy Court and all legal requirements under the Bankruptcy
Code or otherwise were satisfied, the Court would enter a channeling injunction
under ss. 524(g) of the Bankruptcy Code, prohibiting present and future
claimants from asserting bodily injury claims against PPG or its subsidiaries or
PC relating to the manufacture, distribution or sale of asbestos-containing
products by PC or PPG or its subsidiaries. The injunction would also prohibit
co-defendants in those cases from asserting claims against PPG or its
subsidiaries for contribution, indemnification or other recovery. All such
claims would have to be filed with the Trust and only paid from the assets of
the Trust.
The channeling injunction would not extend to claims against PPG alleging injury
caused by asbestos on premises owned, leased or occupied by PPG (so called
"premises claims"), or claims alleging property damage resulting from asbestos.
Approximately 9,000 of the 116,000
-13-
claims pending against PPG and its subsidiaries are premises claims. Many of
PPG's premises claims have been resolved without payment from PPG. To date, PPG
has paid about $7 million to settle approximately 1,100 premises claims,
virtually all of which has been covered by PPG's insurers. There are no property
damage claims pending against PPG or its subsidiaries. PPG believes that it has
adequate insurance for the asbestos claims not covered by this injunction and
that any financial exposure resulting from such claims will not have a material
effect on PPG's consolidated financial position, liquidity or results of
operations.
PPG has no obligation to pay any amounts under the settlement until the
Effective Date. PPG and certain of its insurers (along with PC) would then fund
the Trust, which would provide the sole source of payment for all present and
future asbestos bodily injury claims against PPG, its subsidiaries or PC alleged
to be caused by the manufacture, distribution or sale of asbestos products by
these companies. PPG would convey the following assets to the Trust. First, PPG
would convey the stock it owns in PC and Pittsburgh Corning Europe. Second, PPG
would transfer 1,388,889 shares of PPG's common stock. Third, PPG would make
aggregate cash payments to the Trust of approximately $998 million, payable
according to a fixed payment schedule over 21 years, beginning on June 30, 2003,
or, if later, the Effective Date. PPG would have the right, in its sole
discretion, to prepay these cash payments to the Trust at any time at a discount
rate of 5.5% per annum. In addition to the conveyance of these assets, PPG would
pay, up to a capped amount, any legal fees and expenses incurred by the Trust to
recover proceeds from certain historical insurance assets, including policies
issued by certain insurance carriers that are not participating in the
settlement, the rights to which would be assigned to the Trust.
PPG's participating historical insurance carriers would make cash payments to
the Trust of approximately $1.7 billion between the Effective Date and 2023.
These payments could also be prepaid to the Trust at any time at a discount rate
of 5.5% per annum as of the prepayment date. In addition, PPG would assign to
the Trust its rights, insofar as they relate to the asbestos claims to be
resolved by the Trust, to the proceeds of policies issued by certain insurance
carriers that are not participating in the settlement and from the estates of
insolvent insurers and state insurance guaranty funds.
PPG would grant asbestos releases to all participating insurers, subject to a
coverage-in-place agreement with certain insurers for the continuing coverage of
premises claims (discussed above). PPG would grant certain participating
insurers full policy releases on primary policies and full product liability
releases on excess coverage policies. PPG would also grant certain other
participating excess insurers credit against their product liability coverage
limits.
In the second quarter of 2002, PPG recorded a pretax charge of $772 million, or
$495 million after-tax, reflecting the estimated cost of this settlement. The
amount includes the net present value, using a discount rate of 5.5%, of the
aggregate cash payments of approximately $998 million which will be made by PPG
to the Trust. This amount also includes the carrying value of PPG's stock in PC
and Pittsburgh Corning Europe, the fair value as of June 30, 2002 of 1,388,889
shares of PPG common stock and the estimated legal fees of the Trust to be paid
by PPG, which together with the first payment scheduled to be made to the Trust
on June 30, 2003, have been reflected in the current liability for asbestos
settlement in the accompanying balance sheet. The net present value of the
remaining payments of $566 million has been recorded in the noncurrent liability
for asbestos settlement in the accompanying balance sheet.
Because the filing of asbestos claims against the Company has been enjoined
since April 2000, a significant number of additional claims may be filed against
the Company if the Bankruptcy Court stay were to expire. If the settlement is
not implemented, for any reason, and the Bankruptcy Court stay expires, the
Company intends to vigorously defend the pending and any
-14-
future asbestos claims against it and its subsidiaries. The Company believes
that it is not responsible for any injuries caused by PC products, which
represent the preponderance of the pending bodily injury claims against it.
Prior to 2000, PPG had never been found liable for any such claims, and in
numerous cases PPG had been dismissed on motions prior to trial. In January
2000, in a trial in a state court in Texas involving six plaintiffs, the jury
found PPG not liable. However, a week later in a separate trial also in a state
court in Texas, another jury found PPG, for the first time, partly responsible
for injuries to five plaintiffs alleged to be caused by PC products. PPG intends
to appeal the adverse verdict in the event the settlement does not become
effective. Although PPG has successfully defended asbestos claims brought
against it in the past, in view of the number of claims, and the questionable
verdicts and awards that other companies have experienced in asbestos
litigation, the result of any future litigation of such claims is inherently
unpredictable.
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 generally not discounted. As of June 30,
2002 and December 31, 2001, PPG had reserves for environmental contingencies
totaling $91 million and $94 million, respectively. Pretax charges against
income for environmental remediation costs for the three and six months ended
June 30, 2002 totaled $5 million and $8 million, respectively, and $3 million
and $7 million, respectively, for the three and six months ended June 30, 2001,
and are included in "Other, net" in the condensed statement of income. Cash
outlays related to such environmental remediation for the six months ended June
30, 2002 and 2001 aggregated $11 million and $7 million, respectively.
Management anticipates that the resolution of the Company's environmental
contingencies will occur over an extended period of time. Over the past 10 years
the pretax charges against income have ranged between $10 million and $49
million. We anticipate that charges against income in 2002 will be within that
range. 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, 2001.
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 in our
chemicals segment. 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
-15-
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.
A major customer of one of the Company's Asian coatings joint ventures is
experiencing financial difficulties. Should this customer be unable to pay the
amounts owed to our investee or cease operations, our loss would be limited to
the carrying value of the Company's investment in the joint venture which was
approximately $19 million as of June 30, 2002.
-16-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Performance in Second Quarter of 2002 Compared to Second Quarter of 2001
Performance Overview
Sales decreased 1% for the second quarter of 2002 to $2.1 billion compared to
$2.2 billion for the second quarter of 2001. The decline in sales price of 3% in
our glass and chemicals segments was offset by a 2% increase in volume in our
coatings and chemicals business segments.
The gross profit percentage decreased slightly to 37.9% for the second quarter
of 2002 compared to 38.0% for the second quarter of 2001. The decrease in the
gross profit percentage was due to lower selling prices primarily in our glass
and chemicals segments offset, in part, by improved manufacturing efficiencies
across all of our business segments, lower energy costs and lower raw material
costs in our coatings segment.
As a result of a charge for the asbestos settlement discussed in Note 11,
"Commitments and Contingent Liabilities," to the condensed financial statements,
PPG had a net loss of $345 million, or a loss per share - diluted, of $2.03 for
the second quarter of 2002 compared to net income of $155 million, or earnings
per share - diluted, of $0.92 for the same quarter in 2001. The net loss for the
second quarter of 2002 included an after-tax charge of $495 million, or $2.92
per share, for the asbestos settlement. Excluding this charge, net income and
earnings per share - diluted, for the second quarter of 2002 were $150 million
and $0.89, respectively. The reversal in the second quarter of 2002 of a portion
of the coatings restructuring reserve recorded in 2001 amounted to $4 million or
$0.02 a share. The decrease in net income was due to lower selling prices in
our glass and chemicals segments and an increase in pension and postretirement
medical benefit costs of approximately $30 million offset, in part, by improved
manufacturing efficiencies and lower overhead costs across all of our business
segments and the benefit of goodwill and certain trademarks no longer being
amortized due to the Company's adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which reduced
2001 second quarter earnings by $8 million after-tax, or $0.05 a share.
Performance of Business Segments
Coatings sales increased 2% to $1.19 billion compared to $1.17 billion for the
second quarter of 2001. The combination of an increase in sales volume,
primarily in our architectural, industrial and North American automotive
original equipment businesses, increases in selling prices and the positive
effects of foreign currency translation resulted in the sales improvement.
Operating income was $211 million for the second quarter of 2002 compared to
$175 million for the same quarter of 2001. The increase in operating income is
attributable to higher selling prices and volume, lower raw material and
overhead costs, improved manufacturing efficiencies, the benefit of goodwill and
certain trademarks no longer being amortized due to the Company's adoption of
SFAS No. 142 and the reversal of a previously recorded restructuring reserve.
Glass sales decreased 9% to $554 million compared to $608 million for the second
quarter of 2001. The combination of a decrease in sales volume of 6%, primarily
in our automotive replacement glass, flat glass and fiber glass businesses and a
3% decline from lower selling prices across all of our glass businesses
contributed to the sales decline. Operating income was $49 million for the
second quarter of 2002 compared to $99 million for the same quarter of 2001. The
decrease in operating income is attributable to lower sales volumes and prices,
a shift in sales mix to lower margin products, lower equity earnings and higher
pension and postretirement medical benefit costs offset, in part, by improved
manufacturing efficiencies.
-17-
Chemicals sales of $393 million were comparable to $391 million for the second
quarter of 2001. Sales increased 16% due to improved sales volume across all of
our businesses offset by a 15% decline due to lower selling prices for our
chlorine and other chlor-alkali products. Operating income was $22 million for
the second quarter of 2002 compared to $26 million for the same quarter of 2001.
The decrease in operating income is attributable to lower selling prices for our
chlorine and other chlor-alkali products offset, in part, by lower energy costs,
improved volume, particularly in our optical business and improved manufacturing
efficiencies.
Performance in the First Six Months of 2002 Compared to the First Six Months of
2001
Performance Overview
Sales decreased 6% for the first six months of 2002 to $4.0 billion compared to
$4.3 billion for the first six months of 2001. The combination of a decline in
sales price of 4% primarily in our glass and chemicals segments, a 1% decrease
in volume primarily in our glass segment and a 1% decline due to the negative
effects of foreign currency translation contributed to the sales decline.
The gross profit percentage decreased slightly to 37.3% for the first six months
of 2002 compared to 37.5% for the first six months of 2001. The decrease in the
gross profit percentage was due to lower selling prices offset, in part, by
improved manufacturing efficiencies across all of our business segments, lower
energy costs and lower raw material costs in our coatings segment.
As a result of a charge for the asbestos settlement discussed in Note 11, PPG
had a net loss of $311 million, or a loss per share - diluted, of $1.83 for the
first six months of 2002 compared to net income of $211 million, or earnings per
share - diluted, of $1.25 for the first six months of 2001. The net loss for the
first six months of 2002 included an after-tax charge of $495 million, or $2.92
per share, for the asbestos settlement, an after-tax charge of $55 million, or
$0.33 a share, for restructuring and other related activities and an after-tax
charge of $9 million, or $0.05 a share, for the cumulative effect of an
accounting change. Net income for the first six months of 2001 included an
after-tax charge of $71 million, or $0.42 a share, for restructuring and other
related activities. Excluding these charges, net income and earnings per share -
diluted, for the first six months of 2002 were $248 million and $1.47,
respectively, compared to $282 million and $1.67, respectively, for the first
six months of 2001. The reversal in the second quarter of 2002 of a portion of
the coatings restructuring reserve recorded in 2001 amounted to $4 million or
$0.02 a share. Also, in the first six months of 2002, the Company adopted the
provisions of SFAS No. 142, resulting in a cumulative effect of an accounting
change of $9 million after-tax to reflect an impairment in the carrying value of
certain trademarks within the coatings segment. Also, in accordance with this
new standard, the carrying value of goodwill and trademarks will no longer be
amortized and will instead be tested for impairment annually. Such amortization
reduced earnings for the first six months of 2001 by $16 million after-tax, or
$0.10 a share. Aside from the factors described above, the decrease in net
income was due to lower selling prices in our glass and chemicals segments and
an increase in pension and postretirement medical benefit costs of approximately
$60 million offset, in part, by improved manufacturing efficiencies and lower
overhead costs across all of our business segments.
Performance of Business Segments
Coatings sales decreased 1% to $2.24 billion compared to $2.27 billion for the
first six months of 2001. The sales decrease relates primarily to lower sales
volume in our aerospace and refinish businesses. Operating income was $282
million for the first six months of 2002 compared to $236 million for the first
six months of 2001. Operating income for the first six
-18-
months of 2002 and 2001 included pretax restructuring and other costs of $73
million and $83 million, respectively. Excluding these charges, operating income
for the first six months of 2002 and 2001 was $355 million and $319 million,
respectively. The increase in operating income is attributable to lower raw
material and overhead costs, improved manufacturing efficiencies, the benefit of
goodwill and certain trademarks no longer being amortized due to the Company's
adoption of SFAS No. 142 and the reversal of a previously recorded restructuring
reserve.
Glass sales decreased 12% to $1.04 billion compared to $1.19 billion for the
first six months of 2001. The combination of a decrease in sales volume of 9%,
primarily in our automotive replacement glass, flat glass and fiber glass
businesses and a 3% decline from lower selling prices across all of our
businesses contributed to the sales decline. Operating income was $69 million
for the first six months of 2002 compared to $184 million for the first six
months of 2001. Operating income for the first six months of 2002 and 2001
included pretax restructuring and other costs of $1 million and $10 million,
respectively. Excluding these charges, operating income for the first six months
of 2002 and 2001 was $70 million and $194 million, respectively. The decrease in
operating income is attributable to lower sales volumes and selling prices, a
shift in sales mix to lower margin products, lower equity earnings and higher
pension and postretirement medical benefit costs offset, in part, by improved
manufacturing efficiencies and lower overhead costs.
Chemicals sales decreased 9% to $728 million compared to $802 million for the
first six months of 2001. The combination of lower selling prices of 16%,
primarily of our chlorine and other chlor-alkali products and a 1% decline due
to the negative effects of foreign currency translation were offset, in part, by
the 8% increase in sales volumes in our optical business. Operating income was
$49 million for both the first six months of 2002 and 2001. Operating income for
the first six months of 2002 and 2001 included pretax restructuring and other
costs of $1 million and $7 million, respectively. Excluding these charges,
operating income for the first six months of 2002 and 2001 was $50 million and
$56 million, respectively. The decrease in operating income is attributable to
lower selling prices for our chlorine and other chlor-alkali products offset, in
part, by lower energy costs, improved volumes in our optical business, improved
manufacturing efficiencies and lower overhead costs.
Other Factors
The reduction in other unallocated corporate expense - net for the first six
months of 2002 as compared to the first six months of 2001 is principally due to
the receipt of increased insurance litigation recoveries in 2002.
The Company's pretax loss for the first six months of 2002 included net periodic
pension expense of $16 million as compared to net periodic pension income of $30
million for the comparable 2001 period. This trend will continue for the second
half of 2002. The increase in pension costs is due principally to lower pension
assets resulting from lower than expected investment returns in 2001. The low
investment returns have continued in 2002 and, as a result, pension costs could
rise an additional $40 million in 2003 if the investment returns do not improve
in the second half of this year. Additionally, if the fair market value of
pension plan assets is less than the accumulated benefit obligation at December
31, 2002, PPG would be required to record a minimum pension liability adjustment
equal to the pension asset shortfall plus the amount of the related prepaid
pension asset. The minimum pension liability adjustment would be determined
separately for each pension plan and recorded net of tax by a direct charge to
shareholders' equity. The fair market value of plan assets for all of the
Company's defined benefit pension plans at June 30, 2002, was approximately $2.2
billion.
The Company has no mandatory pension funding requirements under existing
regulations but may choose to make a contribution in the second half of 2002.
For our two principal U.S.
-19-
defined benefit pension plans, the tax deductible contribution limit for 2002
under the Internal Revenue Code is approximately $160 million.
The tax rate on earnings, excluding charges for restructuring and the asbestos
settlement, was 36% for the first six months of 2002 and 2001. For the first six
months of 2002, the tax benefit of the restructuring charges and the asbestos
settlement were 33.0% and 35.9%, respectively, which resulted in an overall
effective tax benefit for the period at a rate of 35.2%. The overall effective
tax rate for the first six months of 2001 was 37.9%, reflecting the impact of a
lower tax benefit on restructuring charges.
PPG's net investment in Argentina was $68 million at December 31, 2001. As a
result of the continuing devaluation of the Argentine peso during the first six
months of 2002, the net investment declined to $26 million at June 30, 2002,
resulting in an unrealized currency translation loss of $42 million reported as
a direct charge to the accumulated other comprehensive loss component of
shareholders' equity. The total unrealized currency translation loss related to
Argentina at June 30, 2002 is $71 million and is included in "Accumulated other
comprehensive loss" in the accompanying condensed balance sheet.
Accounting Standards
Note 2, "Changes in Method of Accounting" describes and quantifies the impact of
the Company's adoption, effective January 1, 2002, of the provisions of the
Financial Accounting Standards Board's new standards on the accounting for
goodwill and intangible assets.
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
monetary damages are sought. See Note 11 in this Form 10-Q for an expanded
description of certain of these lawsuits, including the proposed settlement of
asbestos claims announced on May 14, 2002. As discussed in Note 11, although the
result of any future litigation of such lawsuits and claims is inherently
unpredictable, management believes that, in the aggregate, the outcome of all
lawsuits and claims involving PPG, including asbestos-related claims in the
event the settlement described in Note 11 does not become effective, will not
have a material effect on PPG's consolidated financial position or liquidity;
however, such outcome may be material to the results of operations of any
particular period in which the costs, if any, are recognized.
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 generally not discounted. As of June 30,
2002 and December 31, 2001, PPG had reserves for environmental contingencies
totaling $91 million and $94 million, respectively. Pretax charges against
income for environmental remediation costs for the three and six months ended
June 30, 2002 totaled $5 million and $8 million, respectively, and $3 million
and $7 million, respectively, for the three and six months ended June 30, 2001,
and are included in "Other, net" in the condensed statement of income. Cash
outlays related to such environmental remediation for the six months ended June
30, 2002 and 2001 aggregated $11 million and $7 million, respectively.
Management anticipates that the resolution of the Company's environmental
contingencies will occur over an extended period of time. Over the past 10 years
the pretax charges against income have ranged between $10 million and $49
million. We anticipate that charges against income in 2002 will be within that
range. 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.
-20-
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, 2001.
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 in our
chemicals segment. 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.
A major customer of one of the Company's Asian coatings joint ventures is
experiencing financial difficulties. Should this customer be unable to pay the
amounts owed to our investee or cease operations, our loss would be limited to
the carrying value of the Company's investment in the joint venture which was
approximately $19 million as of June 30, 2002.
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
-21-
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 unpredictability of
possible future litigation, including litigation that could result if the
asbestos settlement does not become effective. 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 with 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.
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, 2001.
-22-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the Company's Form 10-K for the year ended December 31, 2001, it was reported
the Company has been a defendant since April 1994 in a suit filed in the Federal
District Court in St. Paul, Minnesota, by Marvin Windows and Doors (Marvin)
alleging numerous claims, including breach of warranty. The district court
dismissed the plaintiff's claims in 1999, but certain of the claims were
reinstated on appeal. The Eighth Circuit U.S. Court of Appeals dismissed 12 of
13 claims, but allowed the plaintiff to proceed to trial on a breach of warranty
claim. On February 14, 2002, the federal jury awarded Marvin $136 million on the
remaining claim. Subsequently, the court added $20 million for interest bringing
the total judgment to $156 million. PPG filed an appeal on July 8, 2002. PPG
believes it has meritorious defenses to the plaintiff's claims and has
reasonable prospects of prevailing on appeal.
In the Company's Form 10-K for the year ended December 31, 2001, it was reported
that the Company has been a defendant in lawsuits involving claims alleging
personal injury from exposure to asbestos. Most of PPG's potential exposure
relates to allegations by plaintiffs that the Company should be liable 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. On April 16, 2000, PC filed for
Chapter 11 Bankruptcy in the Federal Bankruptcy Court in Pittsburgh,
Pennsylvania. As a consequence of the bankruptcy filing and the various motions
and orders in that proceeding, the asbestos litigation against PPG (as well as
against PC) has been stayed and the filing of additional asbestos suits against
them has been enjoined, until thirty days after the effective date of a
confirmed plan of reorganization for PC substantially in accordance with the
settlement arrangement discussed in Note 11, "Commitments and Contingent
Liabilities" to the condensed financial statements in this Form 10-Q. In the
event such a plan is not confirmed, or PPG or the official committee
representing asbestos claimants in the PC bankruptcy (ACC) concludes that the
settlement arrangement set forth in Note 11 is not likely to be consummated,
then either PPG or the ACC may move for an order terminating the stay. The stay
will remain in effect, however, until the Bankruptcy Court resolves the motion
if the motion is opposed by the non-moving party.
On May 14, 2002, PPG announced that it has agreed with several other parties,
including certain of its insurance carriers, the ACC, and the legal
representatives of future asbestos claimants appointed in the PC bankruptcy, on
the terms of a settlement arrangement relating to asbestos claims against PPG
and PC. The proposed terms of the settlement arrangement, and the process and
legal requirements for incorporating the settlement into a plan of
reorganization in PC's bankruptcy, are discussed in more detail under Note 11 to
the condensed financial statements in this Form 10-Q.
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.
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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 2002, the
Directors, as a group, were credited with 5,410 Common Stock Equivalents under
this Plan. The values of the Common Stock Equivalents, when credited, ranged
from $52.31 to $57.68.
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 2002, the Directors, as a group, received
2,473 Common Stock Equivalents under this Plan. The value of each Common Stock
Equivalent, when credited, ranged from $54.28 to $57.68.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3 The Restated Articles of Incorporation, as amended, were filed as
Exhibit 3 to the Registrant's Form 10-Q for the quarter ended
March 31, 1995, which exhibit is incorporated herein by reference.
3.1 Statement with Respect to Shares, amending the Restated Articles
of Incorporation effective April 21, 1998 was filed as Exhibit 3.1
to the Registrant's Form 10-K for the year ended December 31,
1998, which exhibit is incorporated herein by reference.
3.2 The Bylaws, as amended, were filed as Exhibit 3.2 to the
Registrant's Form 10-Q for the quarter ended March 31, 2002, which
exhibit is incorporated herein by reference.
4 The Shareholders' Rights Plan was filed as Exhibit 4 on the
Registrant's Form 8-K, dated February 19, 1998, which exhibit is
incorporated herein by reference.
4.1 Indenture, dated as of August 1, 1982, was filed as Exhibit 4.1 to
PPG's Registration Statement on Form S-3 (No. 333-44397) dated
January 16, 1998 (the "1998 Form S-3"), which exhibit is
incorporated herein by reference.
4.2 First Supplemental Indenture, dated as of April 1, 1986, was filed
as Exhibit 4.2 to the 1998 Form S-3, which exhibit is incorporated
herein by reference.
4.3 Second Supplemental Indenture, dated as of October 1, 1989, was
filed as Exhibit 4.3 to the 1998 Form S-3, which exhibit is
incorporated herein by reference.
4.4 Third Supplemental Indenture, dated as of November 1, 1995, was
filed as Exhibit 4.4 to the 1998 Form S-3, which exhibit is
incorporated herein by reference.
*10 The Supplemental Executive Retirement Plan II, as amended, and the
Change in Control Employment Agreement were filed as Exhibits 10.2
and 10.5, respectively, to
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the Registrant's Form 10-Q for the quarter ended September 30,
1995, which exhibit is incorporated herein by reference. PPG
Industries, Inc. Deferred Compensation Plan for Directors was
filed as Exhibit 10.3 to the Registrant's Form 10-K for the year
ended December 31, 1997, which exhibit is incorporated herein by
reference. PPG Industries, Inc. Incentive Compensation and
Deferred Income Plan for Key Employees, as amended, was filed as
Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended
March 31, 2000, which exhibit is incorporated herein by reference.
PPG Industries, Inc. Directors' Common Stock Plan, as amended
April 19, 2000, was filed as Exhibit 10.1 to the Registrant's Form
10-K for the year ended December 31, 2000, which exhibit is
incorporated herein by reference. PPG Industries, Inc. Executive
Officers Annual Incentive Compensation Plan, dated as of April 19,
2001, was filed as Exhibit 10.3 to the Registrant's Form 10-K for
the year ended December 31, 2000, which exhibit is incorporated
herein by reference.
*10.1 PPG Industries, Inc. Nonqualified Retirement Plan dated as of
January 1, 1989, as amended February 21, 2002, was filed as
Exhibit 10.1 to the Registrant's Form 10-K for the year ended
December 31, 2001, which exhibit is incorporated herein by
reference.
*10.2 PPG Industries, Inc. Deferred Compensation Plan, as amended
effective February 21, 2002, was filed as Exhibit 10.2 to the
Registrant's Form 10-K for the year ended December 31, 2001, which
exhibit is incorporated herein by reference.
*10.3 PPG Industries, Inc. Stock Plan, dated as of April 17, 1997, as
amended April 18, 2002, was filed as Exhibit 10.3 to the
Registrant's Form 10-K for the year ended December 31, 2001, which
exhibit is incorporated herein by reference.
*10.4 PPG Industries, Inc. Total Shareholder Return Plan for Key
Employees, as amended effective April 18, 2002, was filed as
Exhibit 10.4 to the Registrant's Form 10-K for the year ended
December 31, 2001, which exhibit is incorporated herein by
reference.
*10.5 PPG Industries, Inc. Executive Officers' Total Shareholder Return
Plan, as amended effective April 18, 2002, was filed as Exhibit
10.5 to the Registrant's Form 10-K for the year ended December 31,
2001, which exhibit is incorporated herein by reference.
12 Computation of Ratio of Earnings to Fixed Charges for the Six
Months Ended June 30, 2002 and for the Five Years Ended December
31, 2001.
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Items referred to in Exhibit 10, 10.1, 10.2, 10.3, 10.4 and 10.5
and incorporated by reference are either management contracts,
compensatory plans or arrangements required to be filed as an
exhibit hereto pursuant to Item 601 of Regulation S-K.
b. Reports on Form 8-K
1. The Company filed a Form 8-K issuing a press release dated May 14,
2002. The press release announced that the Company, participating
insurers and representatives of claimants have reached agreement
for the settlement of all current and future
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personal injury claims against PPG and Pittsburgh Corning
Corporation for asbestos products manufactured, distributed or
sold by the companies.
2. The Company filed a Form 8-K issuing a press release dated July
18, 2002. The press release announced that Charles E. (Chuck)
Bunch, president and chief operating officer, has been elected a
member of PPG's Board of Directors.
3. On August 6, 2002, the Company filed a Current Report on Form 8-K
announcing that on August 5, 2002, each of the Principal Executive
Officer, Raymond W. LeBoeuf, and Principal Financial Officer,
William H. Hernandez, signed and submitted to the Securities and
Exchange Commission sworn statements pursuant to Securities and
Exchange Commission Order No. 4-460.
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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: August 12, 2002 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 for the Six
Months Ended June 30, 2002 and for the Five Years Ended December
31, 2001.
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.