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EX-12 - EXHIBIT 12 - PPG INDUSTRIES INCppg630201510qex12.htm
EX-31.1 - EXHIBIT 31.1 - PPG INDUSTRIES INCppg630201510qex311.htm
EX-32.1 - EXHIBIT 32.1 - PPG INDUSTRIES INCppg630201510qex321.htm
EX-32.2 - EXHIBIT 32.2 - PPG INDUSTRIES INCppg630201510qex322.htm
EX-31.2 - EXHIBIT 31.2 - PPG INDUSTRIES INCppg630201510qex312.htm


UNITED STATES
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, 2015
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 or organization)
 
(I.R.S. Employer
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)
–––––––––––––––––––––––––––––––––––––––––––––––––––––– 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of June 30, 2015, 270,721,376 shares of the Registrant’s common stock, par value $1.66-2/3 per share, were outstanding.

 



PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
 

1



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Income (Unaudited)
($ in millions, except per share amounts)
 
 
Three Months
Ended June 30
 
Six Months
Ended June 30
 
2015
 
2014
 
2015
 
2014
Net sales
$
4,100

 
$
4,082

 
$
7,762

 
$
7,718

Cost of sales, exclusive of depreciation and amortization
2,283

 
2,306

 
4,348

 
4,397

Selling, general and administrative
954

 
985

 
1,867

 
1,885

Depreciation
92

 
84

 
179

 
173

Amortization
33

 
31

 
66

 
61

Research and development, net
123

 
126

 
242

 
246

Interest expense
34

 
48

 
63

 
95

Interest income
(10
)
 
(13
)
 
(21
)
 
(25
)
Business restructuring
140

 

 
140

 

Asbestos settlement, net
3

 
3

 
6

 
6

Other charges
34

 
19

 
59

 
40

Other income
(38
)
 
(31
)
 
(69
)
 
(56
)
Income from continuing operations before income taxes
452

 
524

 
882

 
896

Income tax expense
110

 
125

 
214

 
214

Income from continuing operations
342

 
399

 
668

 
682

(Loss) Income from discontinued operations, net of tax

 
(7
)
 
1

 
1,011

Net income attributable to the controlling and noncontrolling interests
342

 
392

 
669

 
1,693

Less: Net income attributable to noncontrolling interests
(5
)
 
(6
)
 
(10
)
 
(45
)
Net income (attributable to PPG)
$
337

 
$
386

 
$
659

 
$
1,648

Amounts attributable to PPG:
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
337

 
$
393

 
$
658

 
$
670

(Loss) Income from discontinued operations, net of tax

 
(7
)
 
1

 
978

Net income (attributable to PPG)
$
337

 
$
386

 
$
659

 
$
1,648

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
1.24

 
$
1.41

 
$
2.41

 
$
2.41

(Loss) Income from discontinued operations, net of tax

 
(0.02
)
 
0.01

 
3.52

Net income (attributable to PPG)
$
1.24

 
$
1.39

 
$
2.42

 
$
5.93

Earnings per common share – assuming dilution:
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
1.23

 
$
1.40

 
$
2.39

 
$
2.38

(Loss) Income from discontinued operations, net of tax

 
(0.02
)
 
0.01

 
3.49

Net income (attributable to PPG)
$
1.23

 
$
1.38

 
$
2.40

 
$
5.87

 
 
 
 
 
 
 
 
Dividends per common share
$
0.36

 
$
0.33

 
$
0.69

 
$
0.64

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

2



PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Comprehensive Income (Unaudited)
($ in millions)
 
Three Months
Ended June 30
 
Six Months
Ended June 30
 
2015
 
2014
 
2015
 
2014
Net income attributable to the controlling and noncontrolling interests
$
342

 
$
392

 
$
669

 
$
1,693

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Defined benefit pension and other postretirement benefits
6

 
14

 
74

 
25

Unrealized foreign currency translation adjustments
(27
)
 
41

 
(299
)
 
58

Derivative financial instruments, net
(2
)
 
(3
)
 
4

 

Other comprehensive (loss) income, net of tax
(23
)
 
52

 
(221
)
 
83

Total comprehensive income
$
319

 
$
444

 
$
448

 
$
1,776

Less: amounts attributable to noncontrolling interests:
 
 
 
 
 
 
 
Net income
(5
)
 
(6
)
 
(10
)
 
(45
)
Unrealized foreign currency translation adjustments

 
(3
)
 
5

 
(4
)
Comprehensive income attributable to PPG
$
314

 
$
435

 
$
443

 
$
1,727

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

3



PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
($ in millions)
 
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
707

 
$
686

Short-term investments
475

 
497

Receivables (less allowance for doubtful accounts of $59 and $87)
3,286

 
2,815

Inventories
1,861

 
1,825

Deferred income taxes
394

 
406

Other
651

 
621

Total current assets
7,374

 
6,850

Property, plant and equipment (net of accumulated depreciation of $4,402 and $4,378)
2,917

 
3,092

Goodwill
3,621

 
3,801

Identifiable intangible assets, net
2,260

 
2,411

Deferred income taxes
404

 
505

Investments
459

 
443

Other assets
561

 
481

Total
$
17,596

 
$
17,583

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
3,590

 
$
3,548

Asbestos settlement
840

 
821

Restructuring reserves
102

 
26

Short-term debt and current portion of long-term debt
293

 
481

Total current liabilities
4,825

 
4,876

Long-term debt
4,222

 
3,544

Accrued pensions
676

 
995

Other postretirement benefits
1,122

 
1,132

Asbestos settlement
245

 
259

Deferred income taxes
501

 
702

Other liabilities
749

 
810

Total liabilities
12,340

 
12,318

Commitments and contingent liabilities (Note 15)

 

Shareholders’ equity:
 
 
 
Common stock
969

 
484

Additional paid-in capital
612

 
1,028

Retained earnings
14,966

 
14,498

Treasury stock, at cost
(9,044
)
 
(8,714
)
Accumulated other comprehensive loss
(2,332
)
 
(2,116
)
Total PPG shareholders’ equity
5,171

 
5,180

Noncontrolling interests
85

 
85

Total shareholders’ equity
5,256

 
5,265

Total
$
17,596

 
$
17,583

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

4



PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited)
($ in millions)
 
Six Months
Ended June 30
 
2015
 
2014
Operating activities:
 
 
 
Net income attributable to controlling and noncontrolling interests
$
669

 
$
1,693

Less: Income from discontinued operations
(1
)
 
(1,011
)
Income from continuing operations
668

 
682

Adjustments to reconcile net income to cash from operations:
 
 
 
Depreciation and amortization
245

 
234

Pension expense
49

 
41

Stock-based compensation expense
40

 
38

Business restructuring
140

 

Equity affiliate (earnings) losses, net of distributions received
(13
)
 
7

Deferred income taxes
(46
)
 
27

Cash contributions to pension plans
(283
)
 
(10
)
Restructuring cash spending
(22
)
 
(32
)
Change in certain asset and liability accounts:
 
 
 
Receivables
(591
)
 
(531
)
Inventories
(80
)
 
(203
)
Other current assets
(84
)
 
(75
)
Accounts payable and accrued liabilities
20

 
314

Taxes and interest payable
136

 
12

Noncurrent assets and liabilities, net
27

 
(59
)
Other
(20
)
 
67

Cash from operating activities - continuing operations
186

 
512

Cash used for operating activities - discontinued operations

 
(111
)
Cash from operating activities
186

 
401

Investing activities:
 
 
 
Capital expenditures
(162
)
 
(232
)
Business acquisitions, net of cash balances acquired
(26
)
 
(24
)
Proceeds from the disposition of PPG's interest in the Transitions Optical joint venture and sunlens business
47

 
1,625

Purchase of short-term investments
(97
)
 
(838
)
Proceeds from maturity of short-term investments
107

 
509

Payments on cross currency swap contracts
(34
)
 
(45
)
Proceeds from cross currency swap and foreign currency contracts
38

 
19

Other
19

 
9

Cash (used for) / from investing activities - continuing operations
(108
)
 
1,023

Cash used for investing activities - discontinued operations

 
(1
)
Cash (used for) / from investing activities
(108
)
 
1,022

Financing activities:
 
 
 
Net change in borrowing with maturities of three months or less
(12
)
 
(16
)
Net payments on commercial paper and short-term debt
(432
)
 

Proceeds from the issuance of debt
1,242

 
2

Repayment of long-term debt
(338
)
 
(4
)
Purchase of treasury stock
(351
)
 
(300
)
Issuance of treasury stock
50

 
41

Dividends paid on PPG common stock
(189
)
 
(177
)
Acquisition of noncontrolling interest

 
(35
)
Other
(12
)
 
(17
)
Cash used for financing activities - continuing operations
(42
)
 
(506
)
Cash used for financing activities - discontinued operations

 
(40
)
Cash used for financing activities
(42
)
 
(546
)
Effect of currency exchange rate changes on cash and cash equivalents
(15
)
 
(7
)
Net increase in cash and cash equivalents
21

 
870

Cash and cash equivalents, beginning of period
686

 
1,116

Cash and cash equivalents, end of period
$
707

 
$
1,986

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid, net of amount capitalized
$
60

 
$
106

Taxes paid, net of refunds
$
158

 
$
308

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

5



PPG INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
1.
Basis of Presentation
The condensed consolidated financial statements included herein are unaudited and have been prepared following the requirements of the Securities and Exchange Commission and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim reporting. Under these rules, certain footnotes and other financial information that are normally required for annual financial statements can be condensed or omitted. 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 its subsidiaries (the "Company" or "PPG") as of June 30, 2015, and the results of their operations for the three and six months ended June 30, 2015 and 2014 and their cash flows for the six months then ended. All intercompany balances and transactions have been eliminated. Material subsequent events are evaluated through the report issuance date and disclosed where applicable. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in PPG’s Annual Report on Form 10-K for the year ended December 31, 2014.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results of operations for the three and six months ended June 30, 2015 and the trends in these unaudited condensed consolidated financial statements may not necessarily be indicative of the results to be expected for the full year.
On April 16, 2015, the PPG Board of Directors approved a 2-for-1 split of the company's common stock for all shareholders of record as of the close of business May 11, 2015. On June 12, 2015, following payment of the quarterly per-share dividend, each shareholder received a stock dividend of one additional share of common stock for each share held on the record date. PPG common stock began trading on a split-adjusted basis on June 15, 2015. Historical per share and share data (except for shares on the balance sheet) in this Form 10-Q give retroactive effect to the stock split. These reclassifications had no impact on our previously reported net income, total assets, cash flows or shareholders' equity.
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on our previously reported net income, total assets, cash flows or shareholders' equity.
2.
New Accounting Standards
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-11, “Simplifying the measurement of inventory.” This ASU simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016 and for interim periods therein. Adoption of this ASU will not have a material impact on PPG's consolidated financial position.
In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The new guidance requires the accounting for the cost of licenses to be recognized separately from the fees for computing services. The guidance is effective for annual periods beginning after December 15, 2015. The provisions of the guidance may be applied prospectively or retrospectively. PPG is in the process of evaluating the impact the adoption of the ASU will have on its consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued ASU No. 2015-03, "Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." This ASU simplifies the presentation of debt issuance costs by requiring that such costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt instrument, consistent with debt discounts. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015 and for interim periods therein. Adoption of this ASU will not have a material impact on PPG's consolidated financial position.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. This standard is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. PPG is in the process of assessing the impact the adoption of this ASU will have on its consolidated financial position, and results of operations.


6



3.
Acquisitions and Dispositions
Acquisitions
Comex
In November 2014, PPG finalized the acquisition of Consorcio Comex, S.A. de C.V. (“Comex”), an architectural coatings company with headquarters in Mexico City, Mexico for $1.95 billion, net of cash acquired of $69 million. PPG also repaid $280 million of third-party debt assumed in the acquisition. Comex manufactures coatings and related products in Mexico and sells them in Mexico and Central America principally through more than 3,800 stores that are independently owned and operated by more than 700 concessionaires (as of November 2014). Comex also sells its products through regional retailers and wholesalers and directly to customers. As of the acquisition date, the company had approximately 3,900 employees, eight manufacturing facilities and six distribution centers. The acquisition further expands PPG's global coatings business and adds a leading architectural coatings business in Mexico and Central America. Since the acquisition, the results of this acquired business have been principally included in the results of the architectural coatings - Americas and Asia Pacific business, within the Performance Coatings reportable segment. Comex's net sales were approximately $218 million and $433 million for the three and six month periods ended June 30, 2015, respectively. Comex's income from continuing operations for both the three and six months ended June 30, 2015 was a mid-teen percentage return on sales.
The purchase price related to the Comex acquisition was allocated based on information available at the acquisition date and is subject to customary post-closing adjustments. During the second quarter of 2015, PPG obtained a valuation of property, plant and equipment acquired in the Comex acquisition which resulted in adjustments to property, plant and equipment, non-current deferred tax liabilities and goodwill. During the six-months ended June 30, 2015, PPG has recorded remeasurement period adjustments, which have reduced goodwill by a net, aggregate amount of $11 million. These preliminary remeasurement period adjustments are not considered material individually or in the aggregate, therefore prior periods have not been revised. Certain other preliminary purchase price allocation estimates will be finalized in the second half of 2015. The following table summarizes the estimated fair value of assets acquired and liabilities assumed as reflected in the preliminary purchase price allocation for Comex.
 ($ in millions)
 
Current assets
$
366

Property, plant, and equipment
230

Trademarks with indefinite lives
1,022

Identifiable intangible assets with finite lives
281

Goodwill
1,074

Other non-current assets
34

Total assets
$
3,007

Current liabilities
(321
)
Non-current deferred tax liabilities
(407
)
Long-term debt
(280
)
Accrued pensions
(20
)
Other long-term liabilities
(29
)
Total liabilities
$
(1,057
)
Total purchase price, net of cash acquired
$
1,950

The identifiable intangible assets with finite lives in the table above, which consist primarily of customer relationships and acquired technology, are subject to amortization over a weighted average period of 24 years. See Note 5, "Goodwill and Other Identifiable Intangible Assets" for further details regarding PPG's intangible assets.
The following information reflects the net sales of PPG for the period ended June 30, 2014 on a pro forma basis as if the transaction for the Comex acquisition had been completed on January 1, 2014.

7



Condensed Consolidated Pro Forma information (unaudited)
 
 
 
Three Months
Ended June 30
 
Six Months
Ended June 30
($ in millions)
2014
 
2014
Net sales
$
4,279

 
$
8,089

The pro forma impact on PPG's results of operations, including the pro forma effect of events that are directly attributable to the acquisition, was not significant to the consolidated results for the three or six months ended June 30, 2014. While calculating this impact, no cost savings or operating synergies that may result from the acquisition were included.
Other Acquisitions
Acquisition spending during the six months ended June 30, 2015 totaled $52 million, net of $79 million of cash acquired and other post-closing adjustments.
On July 1, 2015, PPG acquired Cuming Microwave Corporation based in Avon, Massachusetts, and its wholly-owned subsidiary Cuming-Lehman Chambers, Inc., based in Chambersburg, Pennsylvania. The acquisition enhances PPG’s portfolio of aerospace coatings with specialty coatings and materials that absorb microwaves and radio waves such as radar. The products are used for military aircraft and also have applications in electronics, telecommunications, medical and automotive end-uses.
On June 2, 2015, PPG acquired Consorcio Latinoamericano, which operates a network of 57 paint stores in Central America. With this acquisition, PPG will operate 87 company-owned stores across Belize, El Salvador, Guatemala, Honduras, Costa Rica, Nicaragua and Panama. PPG plans to brand stores in Panama with the Glidden brand, which is well recognized in the region, and to offer products from its protective and marine coatings business in stores throughout Central America. Consorcio Latinoamericano operated as a concessionaire network for PPG-Comex, the Company’s architectural paint and coatings business in Mexico and Central America. PPG reports the sales and income from operations from Consorcio Latinamericano as part of the architectural coatings - Americas and Asia Pacific business in the Performance Coatings segment.
On April 1, 2015, PPG completed the acquisition of Revocoat from the Axson Group. Revocoat, headquartered in France, is a world leader in automotive adhesives and sealants and offers a range of automotive assembly products such as complementary epoxy-based products, polyurethanes and water-based emulsions. Revocoat employs more than 500 people and operates eight manufacturing facilities and one research and development center. PPG reports the sales and income from operations from Revocoat as part of the automotive OEM business in the Industrial Coatings segment.
Dispositions
In March 2014, the Company completed the sale of its 51% ownership interest in its Transitions Optical joint venture and 100% of its optical sunlens business to Essilor International (Compagnie Generale D'Optique) SA ("Essilor"). PPG received cash at closing of $1.735 billion pretax (approximately $1.5 billion after-tax). The cash consideration was subject to certain post-closing adjustments and transaction costs, all of which have been settled. The sale of these businesses, which were previously reported in the former Optical and Specialty Materials segment, resulted in a pretax gain of $1,468 million ($946 million after-tax) reported in discontinued operations. During the first quarter of 2014, the Company recognized $522 million of tax expense on the sale, of which $262 million was deferred U.S. income tax on the foreign earnings of the sale, as PPG does not consider these earnings to be reinvested for an indefinite period of time. The pretax gain on this sale reflects the excess of the sum of the cash proceeds received over the net book value of the net assets of PPG's former Transitions Optical and sunlens business. The Company also incurred $55 million of pretax expense, primarily for professional services related to the sale, post-closing adjustments, costs and other contingencies under the terms of the agreements. The net gain on the sale includes these related losses and expenses. During 2015 and 2014, revisions to estimated tax liabilities associated with the transaction were recorded to discontinued operations.
The results of operations and cash flows of these businesses and the net gain on the sale, are reported as results from discontinued operations for the six months ending June 30, 2014.
Essilor has also entered into multi-year agreements with PPG for the continued supply of photochromic materials and for research and development services for a period of 5 years, subject to renewal. PPG considered the significance of the revenues associated with the agreements compared to total operating revenues of the disposed businesses and determined that they were not significant.

8



Net sales and income from discontinued operations related to the Transitions Optical and sunlens transaction are presented in the table below for the three and six months ended June 30, 2015 and 2014:
 
Three Months
Ended June 30
 
Six Months
Ended June 30
($ in millions)
2015
 
2014
 
2015
 
2014
Net sales
$

 
$

 
$

 
$
247

Income from operations
$

 
$

 
$

 
$
104

Net gain from divestiture of PPG's interest in the Transitions Optical joint venture and sunlens business

 

 

 
1,468

Income tax (expense) benefit

 
(7
)
 
1

 
(561
)
(Loss)/Income from discontinued operations, net of tax

 
(7
)
 
1

 
1,011

Less: Net income attributable to non-controlling interests, discontinued operations

 

 

 
(33
)
Net income from discontinued operations (attributable to PPG)
$

 
$
(7
)
 
$
1

 
$
978

4.
Inventories
Inventories include:
($ in millions)
June 30, 2015
 
December 31, 2014
Finished products
$
1,202

 
$
1,169

Work in process
160

 
157

Raw materials
445

 
439

Supplies
54

 
60

Total
$
1,861

 
$
1,825

Most U.S. inventories are valued using the last-in, first-out method. These inventories represented approximately 39% and 40% of total inventories at June 30, 2015 and December 31, 2014, respectively. If the first-in, first-out method of inventory valuation had been used, inventories would have been $175 million and $182 million higher as of June 30, 2015 and December 31, 2014, respectively.
5.
Goodwill and Other Identifiable Intangible Assets
The change in the carrying amount of goodwill attributable to each reportable segment for the six months ended June 30, 2015 was as follows:
($ in millions)
Performance
Coatings
 
Industrial
Coatings
 
Glass
 
Total
Balance, December 31, 2014
$
3,267

 
$
486

 
$
48

 
$
3,801

Acquisitions
(10
)
 
12

 

 
2

Currency
(157
)
 
(22
)
 
(3
)
 
(182
)
Balance, June 30, 2015
$
3,100

 
$
476

 
$
45

 
$
3,621

The carrying amount of acquired trademarks with indefinite lives as of June 30, 2015 and December 31, 2014 totaled $1.3 billion and $1.4 billion, respectively.

9



The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and are detailed below:
 
June 30, 2015
 
December 31, 2014
($ in millions)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Acquired technology
$
562

 
$
(405
)
 
$
157

 
$
560

 
$
(394
)
 
$
166

Customer-related intangibles
1,249

 
(577
)
 
672

 
1,302

 
(570
)
 
732

Trade names
140

 
(60
)
 
80

 
134

 
(60
)
 
74

Other
41

 
(26
)
 
15

 
42

 
(24
)
 
18

Balance
$
1,992

 
$
(1,068
)
 
$
924

 
$
2,038

 
$
(1,048
)
 
$
990

Aggregate amortization expense related to these identifiable intangible assets for the three and six months ended June 30, 2015 was $33 million and $66 million, respectively, and for the three and six months ended June 30, 2014 was $31 million and $61 million, respectively.
As of June 30, 2015, estimated future amortization expense of identifiable intangible assets is as follows:
($ in millions)
Remaining six months of 2015
2016
2017
2018
2019
2020
Estimated future amortization expense
$70
$120
$115
$110
$95
$90
6.
Business Restructuring
The Company records restructuring liabilities that represent charges incurred in connection with consolidations of certain operations, including operations from acquisitions, as well as headcount reduction programs. These charges consist primarily of severance costs and asset write-downs.
On April 15, 2015, the Company approved a business restructuring plan which includes actions necessary to achieve cost synergies related to recent acquisitions. In addition, the program aims to further align employee levels and production capacity in certain businesses and regions with current product demand, as well as reductions in various global administrative functions. A pretax restructuring charge of $140 million was recorded in PPG's second quarter 2015 financial results, of which about 85% represents employee severance and other cash costs. The restructuring actions are expected to be substantially completed during 2016.
The following table summarizes the 2015 restructuring charge and the reserve activity through the quarter ended June 30, 2015:
($ in millions, except for employees impacted)
Severance
and Other
Costs
 
Asset
Write-offs
 
Total
Reserve
 
Employees
Impacted
Performance Coatings
$
71

 
$
6

 
$
77

 
1,259

Industrial Coatings
42

 
13

 
55

 
534

Glass
4

 

 
4

 
33

Corporate
4

 

 
4

 
27

Total second quarter 2015 restructuring charge
$
121

 
$
19

 
$
140

 
1,853

Activity to date
(9
)
 
(19
)
 
(28
)
 
(476
)
Foreign currency impact
1

 

 
1

 

Balance as of June 30, 2015
$
113

 
$

 
$
113

 
1,377

In July 2013, the Company approved a business restructuring plan that resulted in a pretax charge of $98 million. The approved actions were focused on achieving cost synergies, through improved productivity and efficiencies, related to the 2013 North American architectural coatings business, as well as in PPG's legacy architectural coatings businesses. Additionally, smaller targeted actions were approved for other businesses, most notably protective and marine coatings and certain European businesses such as architectural coatings and fiber glass. As of March 31, 2015, substantially all actions in the 2013 restructuring program were complete.

10



7.
Borrowings
In June 2015, PPG's €300 million Euro-denominated notes matured, and PPG paid $336 million to settle this obligation.
In March 2015, PPG completed a public offering of €600 million of 0.875% Notes due 2022 and €600 million of 1.400% Notes due 2027 (together, the "Notes”), or $1.26 billion in aggregate principal amount.  These Notes were issued pursuant to PPG’s existing shelf registration statement and pursuant to an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented (the "Indenture"). The Indenture governing these notes contains covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets. The terms of these Notes also require the Company to make an offer to repurchase Notes upon a Change of Control Triggering Event (as defined in the Indenture) at a price equal to 101% of their principal amount plus accrued and unpaid interest. The Company may issue additional debt from time to time pursuant to the Indenture.
The aggregate cash proceeds from the Notes, net of discounts and fees, was $1.24 billion.  The Notes are denominated in Euro and have been designated as hedges of net investments in the Company’s European operations. For more information, refer to Note 13 "Financial Instruments, Hedging Activities and Fair Value Measurements."
8.
Earnings Per Common Share
Historical per share and share data (except for shares on the balance sheet) give retroactive effect to the 2-for-1 stock split discussed in Note 1, "Basis of Presentation."
The following table presents the effect of dilutive securities on the weighted average common shares outstanding included in the calculation of earnings per common share for the three and six months ended June 30, 2015 and 2014:
 
Three Months
Ended June 30
 
Six Months
Ended June 30
(number of shares in millions)
2015
 
2014
 
2015
 
2014
Weighted average common shares outstanding
272.5

 
277.2

 
272.8

 
277.8

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
1.1

 
1.4

 
1.1

 
1.4

Other stock compensation plans
1.1

 
1.6

 
1.2

 
1.6

Potentially dilutive common shares
2.2

 
3.0

 
2.3

 
3.0

Adjusted weighted average common shares outstanding
274.7

 
280.2

 
275.1

 
280.8

There were no antidilutive outstanding stock options for the three and six-month periods ended June 30, 2015 and 2014.
9.    Income Taxes
The following table presents the effective tax rate on pretax income from continuing operations for the six months ended June 30, 2015 and 2014:
 
Six Months Ended June 30
 
2015
 
2014
Effective tax rate
24.3
%
 
23.9
%
The effective tax rate for each period presented is lower than the U.S. federal statutory rate primarily due to earnings in foreign jurisdictions which are taxed at rates lower than the U.S. statutory rate, the U.S. tax benefit on foreign dividends paid and the impact of certain U.S. tax incentives.
The Company files federal, state and local income tax returns in numerous domestic and foreign jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is no longer subject to examinations by tax authorities in any major tax jurisdiction for years before 2006. In addition, the Internal Revenue Service (“IRS”) has completed its examination of the Company’s U.S. federal income tax returns filed for years through 2011. The IRS is currently conducting its examination of the Company's U.S. federal income tax return for 2012 and 2013.

11



10.
Pensions and Other Postretirement Benefits
Net periodic pension and other post-retirement benefit costs are included in "Cost of sales, exclusive of depreciation and amortization," "Selling, general and administrative" and "Research and development" in the accompanying condensed consolidated statement of income.
The net periodic pension and other post-retirement benefit costs for the three and six months ended June 30, 2015 and 2014 were as follows:
 
Pensions
 
Three Months
Ended June 30
 
Six Months
Ended June 30
($ in millions)
2015
 
2014
 
2015
 
2014
Service cost
$
15

 
$
14

 
$
30

 
$
27

Interest cost
53

 
59

 
103

 
118

Expected return on plan assets
(69
)
 
(74
)
 
(139
)
 
(148
)
Amortization of actuarial losses
25

 
20

 
55

 
40

Amortization of prior service credit

 
(1
)
 
(1
)
 
(1
)
Settlement losses

 
5

 

 
5

Curtailments and special termination benefits
1

 

 
1

 

Net periodic pension benefit cost
$
25

 
$
23

 
$
49

 
$
41

 
Other Postretirement Benefits
 
Three Months
Ended June 30
 
Six Months
Ended June 30
($ in millions)
2015
 
2014
 
2015
 
2014
Service cost
$
5

 
$
5

 
$
10

 
$
9

Interest cost
12

 
13

 
24

 
25

Amortization of actuarial losses (gains)
8

 
(3
)
 
16

 
(5
)
Amortization of prior service (credit) cost
(2
)
 
3

 
(5
)
 
7

Net periodic other postretirement benefit cost
$
23

 
$
18

 
$
45

 
$
36

PPG is not required to make any mandatory contributions to its U.S. defined benefit pension plans in 2015. PPG made pretax, voluntary contributions in the six months-ended June 30, 2015 to its U.S. and non-U.S. pension plans totaling $250 million and $21 million, respectively. PPG made mandatory contributions to its non-U.S. pension plans totaling $12 million for the six months-ended June 30, 2015 and expects to make additional mandatory contributions to these plans in the range of $5 million to $15 million in the second half of 2015. PPG expects its net periodic pension and other post-retirement benefit cost, excluding settlement losses, for 2015 to be approximately $170 million, with pension and other post-retirement benefit cost each representing approximately $85 million.
Retained Liabilities and Legacy Settlement Charges
PPG has retained certain liabilities for pension and post-retirement benefits earned for service up to the date of sale of its former automotive glass and service business for employees who were active as of the divestiture date and for individuals who were retirees of the business as of the divestiture date. There have been multiple PPG facilities closures in Canada related to the former automotive glass and services business as well as other PPG businesses. These various plant closures have resulted in partial and full windups, and related settlement charges, of pension plans for various hourly and salary employees employed by these locations. The charges are recorded for the individual plans when a particular windup is approved by the Canadian pension authorities and the Company has made all contributions to the individual plan. The Company recorded a settlement charge of $2 million in 2014. There will be additional windup charges of $55 million to $70 million related to these plant closures in the second half of 2015 and during 2016. Cash contributions related to these windups are expected to be $10 million to $20 million.

12



11.
Shareholders’ Equity
The following tables present the change in total shareholders’ equity for the six months ended June 30, 2015 and 2014, respectively:
($ in millions)
Total PPG
Shareholders’
Equity
 
Non-
controlling
Interests
 
Total
Balance, January 1, 2015
$
5,180

 
$
85

 
$
5,265

Net income
659

 
10

 
669

Other comprehensive income, net of tax
(216
)
 
(5
)
 
(221
)
Cash dividends
(189
)
 

 
(189
)
Issuance of treasury stock
65

 

 
65

Stock repurchase program
(351
)
 

 
(351
)
Stock-based compensation activity
23

 

 
23

Other

 
(5
)
 
(5
)
Balance, June 30, 2015
$
5,171

 
$
85

 
$
5,256

($ in millions)
Total PPG
Shareholders’
Equity
 
Non-
controlling
Interests
 
Total
Balance, January 1, 2014
$
4,932

 
$
266

 
$
5,198

Net income
1,648

 
45

 
1,693

Other comprehensive income, net of tax
79

 
4

 
83

Cash dividends
(177
)
 

 
(177
)
Issuance of treasury stock
52

 

 
52

Stock repurchase program
(300
)
 

 
(300
)
Stock-based compensation activity
24

 

 
24

Reduction in noncontrolling interests (Note 3)
(26
)
 
(180
)
 
(206
)
Distribution to noncontrolling interests

 
(46
)
 
(46
)
Balance, June 30, 2014
$
6,232

 
$
89

 
$
6,321


13



12.
Accumulated Other Comprehensive Loss
($ in millions)
Unrealized Foreign
Currency
Translation Adjustments
 
Pension and Other Postretirement Benefit Adjustments, net of tax
 
Unrealized Gain (Loss) on Derivatives, net of tax
 
Accumulated
Other Comprehensive
(Loss) Income
Balance, January 1, 2014
 
 
$
(38
)
 
 
 
$
(1,157
)
 
 
 
$
(65
)
 
 
 
$
(1,260
)
Current year deferrals to AOCI
14

(a) 
 
 

 
 
 

 
 
 
14

 
 
Current year deferrals to AOCI, tax effected
40

(b) 
 
 
(1
)
(c) 
 
 
(7
)
(d) 
 
 
32

 
 
Reclassifications from AOCI to net income

 
 
 
26

(c) 
 
 
7

(d) 
 
 
33

 
 
Net change
 
 
$
54

 
 
 
$
25

 
 
 
$

 
 
 
$
79

Balance, June 30, 2014
 
 
$
16

 
 
 
$
(1,132
)
 
 
 
$
(65
)
 
 
 
$
(1,181
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
 
 
$
(628
)
 
 
 
$
(1,492
)
 
 
 
$
4

 
 
 
$
(2,116
)
Current year deferrals to AOCI
(387
)
(a) 
 
 

 
 
 

 
 
 
(387
)
 
 
Current year deferrals to AOCI, tax effected
93

(b) 
 
 
32

(c) 
 
 
(23
)
(d) 
 
 
102

 
 
Reclassifications from AOCI to net income

 
 
 
42

(c) 
 
 
27

(d) 
 
 
69

 
 
Net change
 
 
$
(294
)
 
 
 
$
74

 
 
 
$
4

 
 
 
$
(216
)
Balance, June 30, 2015
 
 
$
(922
)
 
 
 
$
(1,418
)
 
 
 
$
8

 
 
 
$
(2,332
)
(a) - Unrealized foreign currency translation adjustments related to the translation of foreign denominated balance sheet account balances are not presented net of tax given that no deferred U.S. income taxes have been provided on the undistributed earnings of non-U.S. subsidiaries because they are deemed to be reinvested for an indefinite period of time.
(b) - The tax cost (benefit) related to unrealized foreign currency translation adjustments on tax inter-branch transactions and net investment hedges for the six months ended June 30, 2015 and 2014 was $20 million and ($39) million, respectively. In 2015, the balance also includes a remeasurement of the tax cost on certain foreign proceeds which have not been permanently reinvested.
(c) - The tax cost related to the adjustment for pension and other postretirement benefits for the six months ended June 30, 2015 and 2014 was $31 million and $15 million, respectively. Reclassifications from AOCI are included in the computation of net periodic pension and other post-retirement benefit costs (See Note 10, "Pensions and Other Postretirement Benefits").
(d) - The tax cost related to the change in the unrealized gain on derivatives for the period ended June 30, 2015 was $1 million. Reclassifications from AOCI are included in the gain or loss recognized on cash flow hedges (See Note 13, "Financial Instruments, Hedging Activities and Fair Value Measurements").
13.
Financial Instruments, Hedging Activities and Fair Value Measurements
Financial instruments include cash and cash equivalents, short-term investments, cash held in escrow, marketable equity securities, accounts receivable, company-owned life insurance, accounts payable, short-term and long-term debt instruments, and derivatives. The fair values of these financial instruments approximated their carrying values at June 30, 2015 and December 31, 2014, in the aggregate, except for long-term debt instruments.
Hedging Activities
The Company has exposure to market risk from changes in foreign currency rates, PPG's stock price and interest rates. As a result, financial instruments, including derivatives, may be used to hedge these underlying economic exposures. Certain of these instruments qualify as cash flow, fair value and net investment hedges upon meeting the requisite criteria, including effectiveness of offsetting hedged or underlying exposures. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in income from continuing operations in the period incurred.
PPG’s policies do not permit speculative use of derivative financial instruments. PPG enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company did not realize a credit loss on derivatives during the three and six month periods ended June 30, 2015 and 2014.
All of PPG's outstanding derivative instruments are subject to accelerated settlement in the event of PPG’s failure to meet its debt or payment obligations under the terms of the instruments’ contractual provisions. In addition, should the Company be acquired and its payment obligations under the derivative instruments’ contractual arrangements not be assumed by the acquirer, or should PPG enter into bankruptcy, receivership or reorganization proceedings, the instruments would also be subject to accelerated settlement.

14



Fair Value Hedges
PPG designates certain foreign currency forward contracts as hedges against the Company’s exposure to future changes in fair value of certain firm sales commitments denominated in foreign currencies. As of June 30, 2015 and 2014, the fair value of these contracts was insignificant.
Interest rate swaps have been used from time to time to manage the Company's exposure to changing interest rates. When outstanding, the interest rate swaps were designated as hedges of certain outstanding debt obligations of the Company and were recorded at fair value. There were no interest rate swaps outstanding as of June 30, 2015 and December 31, 2014. However, in prior years, PPG settled interest rate swaps and received cash. The fair value adjustment of the debt at the time the interest rate swaps were settled is still being amortized as a reduction to interest expense over the remaining term of the related debt.
PPG has entered into renewable equity forward arrangements to hedge the impact to PPG's income from continuing operations for changes in the fair value of 1,388,889 shares of PPG stock (before giving effect to the 2-for-1 stock split) that are to be contributed to the asbestos settlement trust as discussed in Note 15, “Commitments and Contingent Liabilities.” This financial instrument is recorded at fair value as an asset or liability and changes in the fair value of this financial instrument are reflected in the “Asbestos settlement – net” caption of the accompanying condensed consolidated statement of income. The total principal amount payable for these shares is $62 million. PPG will pay to the counterparty interest based on the principal amount and the counterparty will pay to PPG an amount equal to the dividends paid on these shares during the period this financial instrument is outstanding. The difference between the principal amount and any amounts related to unpaid interest or dividends and the current market price for these shares, adjusted for credit risk, represents the fair value of the financial instrument as well as the amount that PPG would pay or receive if the counterparty chose to net settle the financial instrument. Alternatively, the bank may, at its option, require PPG to purchase the shares covered by the arrangement at the principal amount adjusted for unpaid interest and dividends as of the date of settlement. As of June 30, 2015 and December 31, 2014, the fair value of this contract was an asset of $267 million and $268 million, respectively.
Cash Flow Hedges
PPG designates certain foreign currency forward contracts as cash flow hedges of the Company’s exposure to variability in exchange rates on intercompany and third party transactions denominated in foreign currencies. As of June 30, 2015 and December 31, 2014, the fair value of all foreign currency forward contracts designated as cash flow hedges was a net asset of $30 million and $46 million, respectively.
Net Investment Hedges
PPG uses cross currency swaps, foreign currency forward contracts and Euro-denominated debt to hedge a portion of its net investment in its European operations. As of June 30, 2015, U.S. dollar to Euro cross currency swap contracts with a total notional amount of $560 million were outstanding and are scheduled to expire in March 2018. On settlement of the outstanding contracts, PPG will receive $560 million U.S. dollars and pay Euros to the counterparties. During the term of these contracts, PPG will receive semiannual payments in March and September of each year based on a U.S. dollar, long-term interest rate fixed as of the contract inception date, and PPG will make annual payments in March of each year to the counterparties based on a Euro, long-term interest rate fixed as of the contract inception date. As of June 30, 2015 and December 31, 2014, the fair value of these contracts was a net asset of $45 million and a net liability of $32 million, respectively.
At June 30, 2015 and December 31, 2014, PPG had designated €1.9 billion and €1 billion, respectively, of euro-denominated borrowings as hedges of a portion of its net investment in the Company's European operations. The carrying value of these instruments at June 30, 2015 and December 31, 2014 was $2.1 billion and $1.2 billion, respectively.
In March 2015, the Company issued two Euro-denominated notes with an aggregate principal amount of €1.2 billion. Refer to Note 7, "Borrowings" for more information. The Company has designated these notes as hedges of a portion of its net investment in its European operations and, as a result, mark to market rate adjustments of the outstanding debt balances have been and will be recorded as a component of "Other comprehensive income."
Also, in March 2015, PPG de-designated €300 million of Euro-denominated borrowings originally issued in June 2005 and designated as a net investment hedge of a portion of PPG's net investment in the Company's European operations. There was no financial statement impact as a result of the de-designation. This borrowing matured and was repaid in June 2015.

15



Gains/Losses Deferred in AOCI
As of June 30, 2015 and December 31, 2014, the Company had accumulated pretax unrealized translation gains in AOCI related to the euro-denominated borrowings, foreign currency forward contracts and the cross currency swaps of $282 million and $169 million, respectively.
The following table summarizes the location and amount of gains (losses) related to derivative financial instruments for the six months ended June 30, 2015. All dollar amounts are shown on a pretax basis.
($ in millions)
June 30, 2015

Hedge Type
Gain
Deferred in
OCI
 
Gain (Loss) Recognized
Amount
 
Caption
Fair Value
 
 
 
 
 
Equity forward arrangements
Not applicable
 
(1
)
 
Asbestos - net
Total Fair Value
 
 
$
(1
)
 
 
Cash Flow
 
 
 
 
 
Foreign currency forward contracts (a)
$
39

 
$
34

 
Other charges
Total Cash Flow
$
39


$
34

 
 
Net Investment
 
 
 
 
 
Cross currency swaps
$
61

 


 
 
Foreign currency forward contracts
19

 


 
 
Foreign denominated debt
33

 
 
 
 
Total Net Investment
$
113

 


 
 
Economic
 
 
 
 
 
Foreign currency forward contracts
 
 
$
18

 
Other charges
 
 
 
 
 
 
(a) The ineffective portion related to this item was $4 million of expense.

16



The following table summarizes the location and amount of gains (losses) related to derivative financial instruments for the six months ended June 30, 2014. All amounts are shown on a pretax basis:
($ in millions)
June 30, 2014

Hedge Type
Gain (Loss)
Deferred in OCI
 
Gain (Loss) Recognized
Amount
 
Caption
Fair Value
 
 
 
 
 
Interest rate swaps
Not applicable
 
$
4

 
Interest expense
Foreign currency forward contracts
Not applicable
 
1

 
Sales
Equity forward arrangements
Not applicable
 
29

 
Asbestos - net
Total Fair Value
 
 
$
34

 
 
Cash Flow
 
 
 
 
 
Forward starting swaps
$

 
$
(6
)
 
Interest expense
Foreign currency forward contracts (a)
(12
)
 
(5
)
 
Other charges
Total Cash Flow
$
(12
)
 
$
(11
)
 
 
Net Investment
 
 
 
 
 
Cross currency swaps
$
(6
)
 


 
 
Foreign currency forward contracts
5

 
 
 
 
Foreign denominated debt
2

 
 
 
 
Total Net Investment
$
1

 


 
 
(a) The ineffective portion related to this item was $4 million of expense.
Fair Value Measurements
The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of June 30, 2015 and December 31, 2014, the assets and liabilities measured at fair value on a recurring basis were cash equivalents, equity securities and derivatives. In addition, the Company measures its pension plan assets at fair value (see Item 8. Financial Statements and Supplementary Data - Note 12, "Employee Benefit Plans" in the Company's 2014 Annual Report on Form 10-K for further details). The Company's financial assets and liabilities are measured using inputs from the following three levels:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level 1 inputs are considered to be the most reliable evidence of fair value as they are based on unadjusted quoted market prices from various financial information service providers and securities exchanges.
Level 2 inputs are directly or indirectly observable prices that are not quoted on active exchanges, which include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of the derivative instruments reflect the instruments' contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including forward curves.
Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities. The Company does not have any recurring financial assets or liabilities that are recorded in its consolidated balance sheets as of June 30, 2015 and December 31, 2014 that are classified as Level 3 inputs.

17



Assets and liabilities reported at fair value on a recurring basis:
 
June 30, 2015
($ in millions)
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Other current assets:
 
 
 
 
 
Marketable equity securities
$
5

 
$

 
$

Foreign currency forward contracts

 
37

 

Equity forward arrangement

 
267

 

Investments:
 
 
 
 
 
Marketable equity securities
77

 

 

Other Assets:
 
 
 
 
 
 Cross currency swaps

 
45

 

Liabilities:
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
Foreign currency forward contracts

 
7

 

 
 
 
December 31, 2014
($ in millions)
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
Other current assets:
 
 
 
 
 
Marketable equity securities
$
5

 
$

 
$

Foreign currency forward contracts

 
52

 

Equity forward arrangement

 
268

 

Investments:
 
 
 
 
 
Marketable equity securities
74

 

 

Other assets:
 
 
 
 
 
Foreign currency forward contracts

 
16

 

Liabilities:
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
Foreign currency forward contracts

 
23

 

Other liabilities:
 
 
 
 
 
Cross currency swaps

 
32

 

Long-Term Debt
PPG's long-term debt (excluding capital lease obligations) had carrying and fair values totaling $4,449 million and $4,564 million, respectively, as of June 30, 2015. Long-term debt (excluding capital lease obligations) had carrying and fair values totaling $3,877 million and $4,164 million, respectively, as of December 31, 2014. The fair values of the debt instruments were based on discounted cash flows and interest rates then currently available to the Company for instruments of the same remaining maturities and were measured using level 2 inputs.
Assets and liabilities reported at fair value on a nonrecurring basis:
In conjunction with the restructuring actions approved in the second quarter of 2015, certain nonmonetary assets were written down to their fair value. Refer to Note 6, "Business Restructuring."
There were no significant adjustments to the fair value of nonmonetary assets or liabilities for the year ended December 31, 2014.
14.
Stock-Based Compensation
The Company’s stock-based compensation includes stock options, restricted stock units (“RSUs”) and grants of contingent shares that are earned based on achieving targeted levels of total shareholder return. All current grants of stock options, RSUs and contingent shares are made under the PPG Industries, Inc. Amended and Restated Omnibus Incentive Plan (the “PPG Amended Omnibus Plan”), which was amended and restated effective April 21, 2011. Shares available for future grants under the PPG Amended Omnibus Plan were 10 million as of June 30, 2015.

18



 
Three Months
Ended June 30
 
Six Months
Ended June 30
($ in millions)
2015
 
2014
 
2015
 
2014
Total stock-based compensation
$
25

 
$
20

 
$
40

 
$
38

Income tax benefit recognized
$
9

 
$
7

 
$
14

 
$
13

The following are the details of grants of stock-based compensation during the six months ended June 30, 2015 and 2014:
 
 
Six Months Ended June 30
 
 
2015
 
2014
Grant Details
 
Shares
 
Fair Value
 
Shares
 
Fair Value
Stock options
 
583,172

 
$
26.98

 
716,102

 
$
21.53

Restricted stock units
 
193,990

 
$
114.02

 
253,492

 
$
90.19

Contingent shares (a)
 
63,308

 
$
118.12

 
77,642

 
$
93.53

(a) The number of contingent shares represents the target value of the award.
Stock options are generally exercisable 36 months after being granted and have a maximum term of 10 years. Compensation expense for stock options is recorded over the vesting period based on the fair value on the date of grant. The fair value of the stock option grants issued in the six months ended June 30, 2015 was calculated with the following weighted average assumptions:
Weighted average exercise price
$
118.12

Risk-free interest rate
1.9
%
Expected life of option in years
6.5

Expected dividend yield
2.7
%
Expected volatility
29.2
%
The risk-free interest rate is determined by using the U.S. Treasury yield curve at the date of the grant and using a maturity equal to the expected life of the option. The expected life of options is calculated using the average of the vesting term and the maximum term, as prescribed by accounting guidance on the use of the simplified method for determining the expected term of an employee share option. The expected dividend yield and volatility are based on historical stock prices and dividend amounts over past time periods equal in length to the expected life of the options.
Time-based RSUs generally vest over the three-year period following the date of grant, unless forfeited, and will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the vesting period. Performance-based RSUs vest based on achieving specific annual performance targets for earnings per share growth and cash flow return on capital over the three calendar year-end periods following the date of grant. Unless forfeited, the performance-based RSUs will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the three-year performance period if PPG meets the performance targets.
Contingent share grants (referred to as “TSR awards”) are made annually and are paid out at the end of each three-year period following the date of grant based on PPG's performance. Performance is measured by determining the percentile rank of the total shareholder return of PPG common stock in relation to the total shareholder return of the S&P 500 as it existed at the beginning of the three-year performance period excluding any companies that have been removed from the index because they ceased to be publicly traded during the performance period. Any payments made at the end of the award period may be in the form of stock, cash or a combination of both. The TSR awards qualify as liability awards, and compensation expense is recognized over the three-year award period based on the fair value of the awards (giving consideration to the Company’s percentile rank of total shareholder return) remeasured in each reporting period until settlement of the awards.

19



15.
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 may relate to contract, patent, environmental, product liability, antitrust and other matters arising out of the conduct of PPG’s current and past business activities. 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 results of any current or future litigation and claims are 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.
Foreign Tax Matter
In June 2014, PPG received a notice from a Foreign Tax Authority (“FTA”) inviting the Company to pay interest totaling approximately $70 million for failure to withhold taxes on a 2009 intercompany dividend. Prior to the payment of the dividend, PPG obtained a ruling from the FTA which indicated that the dividend was tax-exempt and eligible for a simplified no-withholding procedure provided that certain administrative criteria were met. The FTA is now asserting that PPG did not meet all of the administrative criteria for the simplified procedure, and consequently taxes should have been withheld by the dividend payer, which would have made the dividend recipient eligible for a refund.  The Company disagrees with the FTA's assertion. In March 2015, PPG received a formal assessment from the FTA. PPG plans to vigorously defend against the assessment.
Asbestos Matters
For over 30 years, PPG 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 PPG should be liable for injuries involving asbestos-containing thermal insulation products, known as Unibestos, 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. As of the April 16, 2000 order which stayed and enjoined asbestos claims against PPG (as discussed below), PPG was one of many defendants in numerous asbestos-related lawsuits involving approximately 114,000 claims served on PPG. During the period of the stay, PPG generally has not been aware of the dispositions, if any, of these asbestos claims.
Background of PC Bankruptcy Plan of Reorganization
On April 16, 2000, PC filed for Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the Western District of Pennsylvania located in Pittsburgh, Pa. 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 the bankruptcy filing and 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 30 days after the effective date of a confirmed plan of reorganization for PC substantially in accordance with the settlement arrangement among PPG and several other parties discussed below. By its terms, the stay may be terminated if 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, and the legal representatives of future asbestos claimants appointed in the PC bankruptcy, on the terms of a settlement arrangement relating to certain asbestos claims against PPG and PC (the “2002 PPG Settlement Arrangement”).
On March 28, 2003, Corning Incorporated announced that it had separately reached its own arrangement with the representatives of asbestos claimants for the settlement of certain asbestos claims against Corning Incorporated and PC (the “2003 Corning Settlement Arrangement”).
The terms of the 2002 PPG Settlement Arrangement and the 2003 Corning Settlement Arrangement were incorporated into a bankruptcy reorganization plan for PC along with a disclosure statement describing the plan, which PC filed with the Bankruptcy Court on April 30, 2003. Amendments to the plan and disclosure statement were subsequently filed. On November 26, 2003, after considering objections to the second amended disclosure statement and plan of

20



reorganization, the Bankruptcy Court entered an order approving such disclosure statement and directing that it be sent to creditors, including asbestos claimants, for voting. In March 2004, the second amended PC plan of reorganization (the “second amended PC plan of reorganization”) received the required votes to approve the plan with a channeling injunction for present and future asbestos claimants under §524(g) of the Bankruptcy Code. After voting results for the second amended PC plan of reorganization were received, the Bankruptcy Court judge conducted a 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 (the “Trust”) to be established as part of the second amended PC plan of reorganization. At that hearing, creditors and other parties in interest raised objections to the second amended PC plan of reorganization. Following that hearing, the Bankruptcy Court scheduled oral arguments for the contested items.
The Bankruptcy Court heard oral arguments on the contested items on November 17-18, 2004. At the conclusion of the hearing, the Bankruptcy Court agreed to consider certain post-hearing written submissions. In a further development, on February 2, 2005, the Bankruptcy Court established a briefing schedule to address whether certain aspects of a decision of the U.S. Third Circuit Court of Appeals in an unrelated case had any applicability to the second amended PC plan of reorganization. Oral arguments on these matters were subsequently held in March 2005. During an omnibus hearing on February 28, 2006, the Bankruptcy Court judge stated that she was prepared to rule on the PC plan of reorganization in the near future, provided certain amendments were made to the plan. Those amendments were filed, as directed, on March 17, 2006. After further conferences and supplemental briefings, in December 2006, the court denied confirmation of the second amended PC plan of reorganization, on the basis that the plan was too broad in the treatment of allegedly independent asbestos claims not associated with PC.
Terms of 2002 PPG Settlement Arrangement
PPG had no obligation to pay any amounts under the 2002 PPG Settlement Arrangement until 30 days after the second amended PC plan of reorganization was finally approved by an appropriate court order that was no longer subject to appellate review (the “Effective Date”). If the second amended PC plan of reorganization had been approved as proposed, PPG and certain of its insurers (along with PC) would have made payments on the Effective Date to the Trust, which would have provided 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 have conveyed the following assets to the Trust: (i) the stock it owns in PC and Pittsburgh Corning Europe, (ii) 1,388,889 shares of PPG’s common stock (before giving effect to the 2-for-1 stock split) and (iii) 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 had 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 as of the prepayment date. In addition to the conveyance of these assets, PPG would have paid $30 million in legal fees and expenses on behalf of the Trust to recover proceeds from certain historical insurance assets, including policies issued by certain insurance carriers that were not participating in the settlement, the rights to which would have been assigned to the Trust by PPG.
Under the proposed 2002 PPG Settlement Arrangement, PPG’s participating historical insurance carriers would have made cash payments to the Trust of approximately $1.7 billion between the Effective Date and 2023. These payments could also have been prepaid to the Trust at any time at a discount rate of 5.5% per annum as of the prepayment date. In addition, as referenced above, PPG would have assigned to the Trust its rights, insofar as they related to the asbestos claims to have been resolved by the Trust, to the proceeds of policies issued by certain insurance carriers that were not participating in the 2002 PPG Settlement Arrangement and from the estates of insolvent insurers and state insurance guaranty funds.
Under the proposed 2002 PPG Settlement Arrangement, PPG would have granted asbestos releases to all participating insurers, subject to a coverage-in-place agreement with certain insurers for the continuing coverage of premises claims (discussed below). PPG would have granted certain participating insurers full policy releases on primary policies and full product liability releases on excess coverage policies. PPG would have also granted certain other participating excess insurers credit against their product liability coverage limits.
If the second amended PC plan of reorganization incorporating the terms of the 2002 PPG Settlement Arrangement and the 2003 Corning Settlement Arrangement had been approved by the Bankruptcy Court, the Court would have entered a channeling injunction under §524(g) and other provisions of the Bankruptcy Code, prohibiting present and future claimants from asserting bodily injury claims after the Effective Date 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 have also prohibited codefendants in those cases from asserting claims against PPG for contribution,

21



indemnification or other recovery. All such claims would have been filed with the Trust and only paid from the assets of the Trust.
Modified Third Amended PC Plan of Reorganization
To address the issues raised by the Bankruptcy Court in its December 2006 ruling, the interested parties engaged in extensive negotiations regarding the terms of a third amended PC plan of reorganization, including modifications to the 2002 PPG Settlement Arrangement. A modified third amended PC plan of reorganization (the “third amended PC plan of reorganization”), including a modified PPG settlement arrangement (the “2009 PPG Settlement Arrangement”), was filed with the Bankruptcy Court on January 29, 2009. The parties also filed a disclosure statement describing the third amended PC plan of reorganization with the court. The third amended PC plan of reorganization also includes a modified settlement arrangement of Corning Incorporated.
Several creditors and other interested parties filed objections to the disclosure statement. Those objections were overruled by the Bankruptcy Court by order dated July 6, 2009 approving the disclosure statement. The third amended PC plan of reorganization and disclosure statement were then sent to creditors, including asbestos claimants, for voting. The report of the voting agent, filed on February 18, 2010, revealed that all voting classes, including asbestos claimants, voted overwhelmingly in favor of the third amended PC plan of reorganization, which included the 2009 PPG Settlement Arrangement. In light of the favorable vote on the third amended PC plan of reorganization, the Bankruptcy Court conducted a hearing regarding the fairness of the proposed plan, including whether (i) the plan would be fair with respect to present and future claimants, (ii) such claimants would be treated in substantially the same manner, and (iii) the protection provided to PPG and its participating insurers would be fair in view of the assets they would convey to the Trust to be established as part of the third amended PC plan of reorganization. The hearing was held in June of 2010. The remaining objecting parties (a number of objections were resolved through plan amendments and stipulations filed before the hearing) appeared at the hearing and presented their cases. At the conclusion of the hearing, the Bankruptcy Court established a briefing schedule for its consideration of confirmation of the plan and the objections to confirmation. That briefing was completed and final oral arguments held in October 2010. On June 16, 2011 the Bankruptcy Court issued a decision denying confirmation of the third amended PC plan of reorganization.
Following the June 16, 2011 ruling, the third amended PC plan of reorganization was the subject of negotiations among the parties in interest, amendments, proposed amendments and hearings. PC then filed an amended PC plan of reorganization on August 17, 2012. Objections to the plan, as amended, were filed by three entities. One set of objections was resolved by PC, and another set merely restated for appellate purposes objections filed by a party that the Bankruptcy Court previously overruled. The Bankruptcy Court heard oral argument on the one remaining set of objections filed by the remaining affiliated insurer objectors on October 10, 2012. At the conclusion of that argument, the Bankruptcy Court set forth a schedule for negotiating and filing language that would resolve some, but not all, of the objections to confirmation advanced by the insurer objectors. On October 25, 2012, PC filed a notice regarding proposed confirmation order language that resolved those specific objections. Following additional hearings and status conferences, technical amendments to the PC plan of reorganization were filed on May 15, 2013. On May 16, 2013, the Bankruptcy Court issued a memorandum opinion and interim order confirming the PC plan of reorganization, as amended, and setting forth a schedule for motions for reconsideration. Following the filing of motions for reconsideration, the Bankruptcy Court, on May 24, 2013, issued a revised memorandum opinion and final order confirming the modified third amended plan of reorganization and issuing the asbestos permanent channeling injunction. The remaining insurer objectors filed a motion for reconsideration on June 6, 2013. On November 12, 2013, the Bankruptcy Court issued an order granting in part (by clarifying the scope of the channeling injunction in accordance with the agreement of the parties as expressed at the time of final argument on the motion for reconsideration) and otherwise denying the motion for reconsideration. Notices of appeal to the U. S. District Court for the Western District of Pennsylvania were filed by the remaining objecting parties. On March 17, 2014, the appeal of the remaining non-insurer objecting party was dismissed voluntarily, leaving only two affiliated insurance companies as appellants.
On September 30, 2014, the District Court issued a memorandum opinion and order affirming the confirmation order.  On October 28, 2014, the remaining insurance company objectors filed a Notice of Appeal with the U.S. Third Circuit Court of Appeals challenging the affirmance order.  The opening brief of the objecting parties and response briefs have been filed. In addition to the appeal, the objecting insurers have a motion pending with the District Court, which is opposed by PPG and the other plan proponents and plan supporters, that seeks relief from the confirmation order based on alleged misconduct by members of the plaintiffs’ bar in the prosecution of certain asbestos claims in the tort system. If the District Court opinion and order are affirmed by the U.S. Third Circuit Court of Appeals, the remaining objectors subsequently could seek review by the U.S. Supreme Court.
The 2009 PPG Settlement Arrangement will not become effective until certain conditions precedent are satisfied or waived and the amended PC plan of reorganization is finally approved by an appropriate court order that is no longer

22



subject to appellate review, and PPG’s initial contributions will not be due until 30 business days thereafter (the “Funding Effective Date”).
Asbestos Claims Subject to Bankruptcy Court’s Channeling Injunction
The Bankruptcy Court's channeling injunction, entered under §524(g) of the Bankruptcy Code and which will become effective after the order confirming the modified third amended plan of reorganization is no longer subject to appellate review, will prohibit present and future claimants from asserting asbestos claims against PC. With regard to PPG, the channeling injunction by its terms will prohibit present and future claimants from asserting claims against PPG that arise, in whole or in part, out of exposure to Unibestos, or any other asbestos or asbestos-containing products manufactured, sold and/or distributed by PC, or asbestos on or emanating from any PC premises. The injunction by its terms will also prohibit codefendants in these cases that are subject to the channeling injunction from asserting claims against PPG for contribution, indemnification or other recovery. Such injunction will also preclude the prosecution of claims against PPG arising from alleged exposure to asbestos or asbestos-containing products to the extent that a claimant is alleging or seeking to impose liability, directly or indirectly, for the conduct of, claims against or demands on PC by reason of PPG’s: (i) ownership of a financial interest in PC; (ii) involvement in the management of PC, or service as an officer, director or employee of PC or a related party; (iii) provision of insurance to PC or a related party; or (iv) involvement in a financial transaction affecting the financial condition of PC or a related party. The foregoing PC related claims are referred to as “PC Relationship Claims” and constitute, in PPG management’s opinion, the vast majority of the pending asbestos personal injury claims against PPG. All claims channeled to the Trust will be paid only from the assets of the Trust. 
Asbestos Claims Retained by PPG
The channeling injunction will not extend to any claim against PPG that arises out of exposure to any asbestos or asbestos-containing products manufactured, sold and/or distributed by PPG or its subsidiaries, or for which they are otherwise alleged to be liable, that is not a PC Relationship Claim, and in this respect differs from the channeling injunction contemplated by the second amended PC plan of reorganization filed in 2003. While management believes that the vast majority of the approximately 114,000 claims against PPG alleging personal injury from exposure to asbestos relate to products manufactured, distributed or sold by PC, the potential liability for any non-PC Relationship Claims will be retained by PPG. Because a determination of whether an asbestos claim is a non-PC Relationship Claim would typically not be known until shortly before trial and because the filing and prosecution of asbestos claims (other than certain premises claims) against PPG has been enjoined since April 2000, the actual number of non-PC Relationship Claims that may be pending at the expiration of the stay or the number of additional claims that may be filed against PPG in the future cannot be determined at this time. PPG intends to defend against all such claims vigorously and their ultimate resolution in the court system is expected to occur over a period of years.
In addition, similar to what was contemplated by the second amended PC plan of reorganization, the channeling injunction will not extend to claims against PPG alleging personal injury caused by asbestos on premises owned, leased or occupied by PPG (so called “premises claims”), which generally have been subject to the stay imposed by the Bankruptcy Court, although motions to lift the stay as to individual premises claims have been granted from time to time. Historically, a small proportion of the claims against PPG and its subsidiaries have been premises claims, and based upon review and analysis, PPG believes that the number of premises claims currently comprises less than 2% of the total asbestos related claims against PPG. Beginning in late 2006, the Bankruptcy Court lifted the stay with respect to certain premises claims against PPG. As a result, PPG and its primary insurers have settled approximately 580 premises claims. PPG’s insurers agreed to provide insurance coverage for a major portion of the payments made in connection with the settled claims, and PPG accrued the portion of the settlement amounts not covered by insurance. Primarily as a result of motions practice in the Bankruptcy Court with respect to the application of the stay to premises claims, PPG faces approximately 320 active premises claims. PPG is currently engaged in the process of settling or otherwise resolving approximately 80 of these claims. Of the remaining 240 active premises claims, approximately 110 such claims have been initiated in lawsuits filed in various state courts, primarily in Louisiana, West Virginia, Ohio, Illinois, and Pennsylvania, and are the subjects of active litigation and are being defended by PPG. PPG believes that any financial exposure resulting from such premises claims, taking into account available insurance coverage, will not have a material adverse effect on PPG’s consolidated financial position, liquidity or results of operations.
PPG’s Funding Obligations
PPG has no obligation to pay any amounts under the third amended PC plan of reorganization, as amended, until the Funding Effective Date. On the Funding Effective Date, PPG will relinquish any claim to its equity interest in PC, convey the stock it owns in Pittsburgh Corning Europe and transfer 1,388,889 shares of PPG’s common stock (before giving effect to the 2 for 1 stock split) or cash equal to the fair value of such shares as defined in the 2009 PPG Settlement Arrangement. PPG will make aggregate pretax cash payments to the Trust of approximately $825 million, payable

23



according to a fixed payment schedule over a period ending in 2023. The first payment is due on the Funding Effective Date. PPG would have the right, in its sole discretion, to prepay these pretax cash payments to the Trust at any time at a discount rate of 5.5% per annum as of the prepayment date. PPG’s historical insurance carriers participating in the third amended PC plan of reorganization will also make cash payments to the Trust of approximately $1.7 billion between the Funding Effective Date and 2027. 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. PPG will grant asbestos releases and indemnifications to all participating insurers, subject to amended coverage-in-place arrangements with certain insurers for remaining coverage of premises claims. PPG will grant certain participating insurers full policy releases on primary policies and full product liability releases on excess coverage policies. PPG will also grant certain other participating excess insurers credit against their product liability coverage limits.
PPG’s obligation under the 2009 PPG Settlement Arrangement at December 31, 2008 was $162 million less than the amount that would have been due under the 2002 PPG Settlement Arrangement. This reduction is attributable to a number of negotiated provisions in the 2009 PPG Settlement Arrangement, including the provisions relating to the channeling injunction under which PPG retains liability for any non-PC Relationship Claims. PPG will retain such amount as a reserve for asbestos-related claims that will not be channeled to the Trust, as this amount represents PPG’s best estimate of its liability for these claims. PPG does not have sufficient current claim information or settlement history on which to base a better estimate of this liability, in light of the fact that the Bankruptcy Court’s stay has been in effect since 2000. As a result, PPG’s reserve at June 30, 2015 and December 31, 2014 for asbestos-related claims that will not be channeled to the Trust is $162 million. This amount is included within "Other liabilities" on the accompanying consolidated balance sheets. In addition, under the 2009 PPG Settlement Arrangement, PPG will retain for its own account rights to recover proceeds from certain historical insurance assets, including policies issued by non-participating insurers. Rights to recover these proceeds would have been assigned to the Trust by PPG under the 2002 PPG Settlement Arrangement.
Following the effective date of the third amended PC plan of reorganization, as amended, and the lifting of the Bankruptcy Court stay, PPG will monitor the activity associated with asbestos claims which are not channeled to the Trust pursuant to the third amended PC plan of reorganization, and evaluate its estimated liability for such claims and related insurance assets then available to the Company as well as underlying assumptions on a periodic basis to determine whether any adjustment to its reserve for these claims is required.
Of the total obligation of $1.1 billion under the 2009 PPG Settlement Arrangement at June 30, 2015, $840 million is reported as a current liability and $245 million is reported as a non-current liability in the accompanying condensed consolidated balance sheet. The future accretion of the noncurrent portion of the liability will total $75 million and be reported as expense in the condensed consolidated statement of income over the period through 2023, as follows (in millions):
Remainder of 2015
$
8

2016
14

2017 – 2023
53

Total
$
75

The following table summarizes the impact on PPG’s financial statements for the three and six months ended June 30, 2015 and 2014 resulting from the 2009 PPG Settlement Arrangement including the change in fair value of the stock to be transferred to the Trust and the equity forward instrument (see Note 13, “Financial Instruments, Hedging Activities and Fair Value Measurements”) and the increase in the net present value of the future payments to be made to the Trust.
($ in millions)
Three Months
Ended June 30
 
Six Months
Ended June 30
Increase (decrease) in expense
2015
 
2014
 
2015
 
2014
Change in fair value:
 
 
 
 
 
 
 
PPG stock
$
6

 
$
23

 
$
(2
)
 
$
28

Equity forward instrument
(6
)
 
(23
)
 
1

 
(29
)
Accretion of asbestos liability
3

 
3

 
7

 
7

Asbestos settlement – net expense
$
3

 
$
3

 
$
6

 
$
6

The fair value of the equity forward instrument is included as an "Other current asset" as of June 30, 2015 and December 31, 2014 in the accompanying condensed consolidated balance sheet. Payments under the fixed payment

24



schedule require annual payments that are due each June. The current portion of the asbestos settlement liability included in the accompanying condensed consolidated balance sheet as of June 30, 2015 consists of all such payments required through June 2016, the fair value of PPG’s common stock and the value of PPG’s investment in Pittsburgh Corning Europe. The net present value of the remaining payments due is included in the long-term asbestos settlement liability in the accompanying condensed consolidated balance sheet as of June 30, 2015.
Enjoined Claims
If the 2009 PPG Settlement Arrangement is not implemented, for any reason, and the Bankruptcy Court stay expires, PPG intends to defend vigorously the pending and any future asbestos claims, including PC Relationship Claims, asserted against it and its subsidiaries. PPG continues to assert that it is not responsible for any injuries caused by PC products, which it believes account for the vast majority of the pending claims against PPG. Prior to 2000, PPG had never been found liable for any PC-related claims. In numerous cases, PPG was dismissed on motions prior to trial, and in others PPG was released as part of settlements by PC. PPG was found not responsible for PC-related claims at trial in two cases. In January 2000, one jury found PPG, for the first time, partly responsible for injuries to five plaintiffs alleged to be caused by PC products. The plaintiffs holding the judgment on that verdict moved to lift the injunction as applied to their claims. Before the hearing on that motion, PPG entered into a settlement with those claimants in the second quarter of 2010 to avoid the costs and risks associated with the possible lifting of the stay and appeal of the adverse 2000 verdict. The settlement resolved both the motion to lift the injunction and the judgment against PPG. The cost of this settlement was not significant to PPG’s results of operations for the second quarter of 2010 and was fully offset by prior insurance recoveries. Although PPG has successfully defended asbestos claims brought against it in the past, in view of the number of claims, and the significant verdicts that other companies have experienced in asbestos litigation, the result of any future litigation of such claims is inherently unpredictable.
Environmental Matters
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. 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; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution of the Company’s environmental contingencies will occur over an extended period of time.
As of June 30, 2015 and December 31, 2014, PPG had reserves for environmental contingencies associated with PPG’s former chromium manufacturing plant in Jersey City, N.J. and associated sites (“New Jersey Chrome”) and for other environmental contingencies, including National Priority List sites and legacy glass and chemical manufacturing sites. These reserves are reported as "Accounts payable and accrued liabilities" and "Other liabilities" in the accompanying condensed consolidated balance sheet.
Environmental Reserves
($ in millions)
June 30, 2015
 
December 31, 2014
New Jersey Chrome
$
160

 
$
211

Other contingencies
107

 
106

Total
$
267

 
$
317

Current portion
$
122

 
$
141

Pretax charges against income for environmental remediation costs are included in "Other charges" in the accompanying condensed consolidated statement of income. The pretax charges and cash outlays related to such environmental remediation for the three and six months-ended June 30, 2015 and 2014 were as follows:
Pretax charges against income for environmental remediation
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
($ in millions)
2015
 
2014
 
2015
 
2014
Legacy glass, chemical and coatings sites
$
1

 
$
3

 
$
6

 
$
5

Total
$
1

 
$
3

 
$
6

 
$
5

Cash outlays for environmental spending
$
20

 
$
48

 
$
56

 
$
75


25



Remediation: New Jersey Chrome
Since 1990, PPG has remediated 47 of 61 residential and nonresidential sites under the 1990 Administrative Consent Order (“ACO”) with the New Jersey Department of Environmental Protection (“NJDEP”). The most significant of the 14 remaining sites is the former chromium manufacturing location in Jersey City, New Jersey. The principal contaminant of concern is hexavalent chromium. A settlement agreement among PPG, NJDEP and Jersey City (which had asserted claims against PPG for lost tax revenue) was reached in the form of a Judicial Consent Order (the “JCO”) that was entered by the court on June 26, 2009. PPG’s remedial obligations under the ACO were incorporated into the JCO. A new process was established for the review of PPG submitted technical reports for investigation and remedy selection for the 14 ACO sites and an additional six sites, which PPG accepted sole responsibility under the terms of a September 2011 agreement with NJDEP (“The Orphan Sites Settlement”) pursuant to the JCO. The JCO also provided for the appointment of a court-approved Site Administrator who is responsible for establishing a master schedule for the remediation of the 20 PPG sites. The JCO parties established a new master schedule in 2014 based upon current knowledge of site conditions and the experience gained since 2011, which was approved by the court, and extended the goal for cleanup of soils and sources of contamination to December 1, 2015. The NJDEP can seek stipulated civil penalties if PPG fails to complete soil and source remediation of JCO sites by the December 2015 goal or perform certain other tasks under the master schedule unless litigation was undertaken to gain access to properties for remediation or by mutual consent of the JCO parties.
Several remedial alternatives were assessed which included, but were not limited to, soil excavation and offsite disposal in a licensed disposal facility, in situ chemical stabilization of soil and groundwater, and in situ solidification of soils. A final draft soil remedial action work plan for the former Garfield Avenue chromium-manufacturing site and five adjacent sites (the “Garfield Avenue Group”) was submitted to NJDEP in May 2012. NJDEP completed a review of the technical aspects of PPG's proposed soil remedial action work plan and expressed its support of the remediation activities identified therein which PPG uses as a basis for the remediation work being performed. PPG is working with NJDEP and Jersey City regarding PPG’s proposed approach to obtain land use limitations, which require property owner consent for the remediated properties and must be implemented before the work plan can be formally approved by NJDEP.
The most significant assumptions underlying the estimate of remediation costs for all New Jersey Chrome sites are those related to the extent and concentration of chromium impacts in the soil, as these determine the quantity of soil that must be treated in place, the quantity that will have to be excavated and transported for offsite disposal, and the nature of disposal required. During the third quarters of 2014 and 2013, PPG completed updated assessments of costs incurred to date versus current progress and the potential cost impacts of the most recent information, including the extent of impacted soils, percentage of hazardous versus non-hazardous soils, daily soil excavation rates, and engineering, administrative and other associated costs. Based on these assessments, reserve adjustments of $136 million and $89 million were recorded in the third quarters of 2014 and 2013, respectively. Principal factors affecting costs included refinements in the estimate of the mix of hazardous to non-hazardous soils to be excavated, an overall increase in soil volumes to be excavated, enhanced water management requirements, decreased daily soil excavation rates due to site conditions, initial estimates for remedial actions related to groundwater, and increased oversight and management costs. The reserve adjustments for the estimated costs to remediate all New Jersey Chrome sites are exclusive of any third party indemnification, as the recovery of any such amounts is uncertain.
PPG has completed all remedial activities at three sites and has received "No Further Action" determinations from the NJDEP on these sites. PPG has, or is in the process of, completing soil remedial activities at ten sites with completion of field activities expected by the December 1, 2015 deadline. Soil remedial activities for six sites will extend beyond the end of 2015. One site was removed from the JCO process during 2014 and will be remediated separately at a future date. A total of 19 sites remain subject to the JCO process.
PPG’s financial reserve for remediation of all New Jersey Chrome sites is $160 million at June 30, 2015. The major cost components of this liability continue to be related to transportation and disposal of impacted soil, as well as construction services. These components each account for approximately 38% and 35% of the accrued amount, respectively. Although the majority of PPG’s remedial responsibilities for source removal and soil remediation will be satisfied by the December 1, 2015 deadline under the JCO, there will be remedial activity continuing beyond 2015 at the six JCO sites and the additional site that was removed from the JCO process. There are also 10 sewer sites for which responsibility is shared jointly between PPG and Honeywell International Inc. and two sites located within a former Exxon Mobil Corporation oil refinery. A final draft groundwater remedial action work plan for the Garfield Avenue group is expected to be submitted to NJDEP in late 2015 or 2016. Groundwater remediation at the Garfield Avenue group is expected to occur over several years after NJDEP approval of the work plan. Groundwater at the remaining JCO sites or other sites for which PPG has some responsibility is not expected to be a significant issue. There are multiple, future events yet to occur, including further remedy selection and design, remedy implementation and

26



execution and applicable governmental agency or community organization approvals. Considerable uncertainty exists regarding the timing of these future events for the New Jersey Chrome sites. Final resolution of these events is expected to occur over the next several years. As these events occur and to the extent that the cost estimates of the environmental remediation remedies change, the existing reserve for this environmental remediation matter will be adjusted.
Remediation: Other Sites
Among other sites at which PPG is managing environmental liabilities, remedial actions are occurring at a legacy chemical manufacturing site in Barberton, Ohio, where PPG has completed a Facility Investigation and Corrective Measure Study (“CMS”) under USEPA’s Resource Conservation and Recovery Act (“RCRA”) Corrective Action Program. PPG has also been addressing the impacts from a legacy plate glass manufacturing site in Kokomo, Indiana under the Voluntary Remediation Program of the Indiana Department of Environmental Management. PPG is currently performing additional investigation activities at this location.
With respect to certain waste sites, the financial condition of 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.
Separation and Merger of the Commodity Chemicals Business
As a result of the commodity chemicals business separation transaction, PPG has retained responsibility for potential environmental liabilities that may result from future Natural Resource Damage claims and any potential tort claims at the Calcasieu River Estuary associated with activities and historical operations of the Lake Charles, La. facility. PPG will additionally retain responsibility for all liabilities relating to, arising out of or resulting from sediment contamination in the Ohio River resulting from historical activities and operations at the Natrium, W.Va. facility, exclusive of remedial activities, if any, required to be performed on-site at the Natrium facility. PPG's obligations with respect to Ohio River sediment will terminate on December 30, 2017 unless within five years from December 30, 2012 PPG is required to further assess or to remediate sediment contamination caused by PPG's operation of the Natrium facility prior to the separation of the commodity chemicals business from PPG in which event PPG's obligations with respect to sediment in the Ohio River will continue for five years beyond the time that PPG is required to further assess or remediate sediment in the Ohio River.
Remediation: Reasonably Possible Matters
In addition to the amounts currently reserved for environmental remediation, the Company may be subject to loss contingencies related to environmental matters estimated to be as much as $75 million to $200 million. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. These reasonably possible unreserved losses relate to environmental matters at a number of sites. The loss contingencies related to these sites include significant unresolved issues such as the nature and extent of contamination at these sites and the methods that may have to be employed to remediate them.
The impact of evolving programs, such as natural resource damage claims, industrial site re-use initiatives and domestic and international 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, and the potential for technological and regulatory developments.
Other Matters
The Company had outstanding letters of credit and surety bonds of $148 million and guarantees of $26 million as of June 30, 2015. The Company does not believe any loss related to such guarantees is likely.
16.
Reportable Business Segment Information
PPG is a multinational manufacturer with 11 operating segments that are organized based on the Company’s major product lines. These operating segments are also the Company’s reporting units for purposes of testing goodwill for impairment. The operating segments have been aggregated based on economic similarities, the nature of their products, production processes, end-use markets and methods of distribution into three reportable business segments.
The Performance Coatings reportable segment is comprised of the refinish, aerospace, architectural coatings – Americas and Asia Pacific, architectural coatings - EMEA, and protective and marine coatings operating segments.

27



This reportable segment primarily supplies a variety of protective and decorative coatings, sealants and finishes along with paint strippers, stains and related chemicals, as well as transparencies and transparent armor.
The Industrial Coatings reportable segment is comprised of the automotive original equipment manufacturer (“OEM”) coatings, industrial coatings, packaging coatings, and the specialty coatings and materials operating segments. This reportable segment primarily supplies a variety of protective and decorative coatings and finishes along with adhesives, sealants, metal pretreatment products, optical monomers and coatings, precipitated silicas, Teslin® and other specialty materials.
The Glass reportable segment is comprised of the flat glass and fiber glass operating segments. This reportable segment primarily supplies flat glass and continuous-strand fiber glass products.
Reportable segment net sales and segment income for the three and six months ended June 30, 2015 and 2014 were as follows: 
 
Three Months
Ended June 30
 
Six Months
Ended June 30
($ in millions)
2015
 
2014
 
2015
 
2014
Net sales:
 
 
 
 
 
 
 
Performance Coatings
$
2,410

 
$
2,343

 
$
4,465

 
$
4,350

Industrial Coatings
1,411

 
1,450

 
2,751

 
2,813

Glass
279

 
289

 
546

 
555

Total
$
4,100

 
$
4,082

 
$
7,762

 
$
7,718

Segment income:
 
 
 
 
 
 
 
Performance Coatings
$
411

 
$
373

 
$
673

 
$
621

Industrial Coatings
260

 
257

 
504

 
488

Glass
37

 
11

 
67

 
15

Total
708

 
641

 
1,244

 
1,124

Legacy items (a)
(6
)
 
(11
)
 
(18
)
 
(21
)
Business restructuring
(140
)
 

 
(140
)
 

Transaction-related costs (b)
(21
)
 
(3
)
 
(30
)
 
(6
)
Interest expense, net of interest income
(24
)
 
(35
)
 
(42
)
 
(70
)
Other corporate expense
(65
)
 
(68
)
 
(132
)
 
(131
)
Income from continuing operations before income taxes
$
452

 
$
524

 
$
882

 
$
896

(a)
Legacy items include current costs related to former operations of the Company, including pension and other postretirement benefit costs, certain charges for legal matters and environmental remediation costs, and certain charges which are considered to be unusual or non-recurring, including the earnings impact of the proposed asbestos settlement. Legacy items also include equity earnings from PPG’s approximate 38% investment in the former automotive glass and services business.
(b)
Transaction-related costs include advisory, legal, accounting, valuation and other professional or consulting fees incurred to effect significant acquisitions, as well as similar fees and other costs to effect disposals not classified as discontinued operations. These costs also include the flow-through cost of sales of the step up to fair value of inventory acquired in acquisitions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Discontinued Operations
In March 2014, the Company completed the sale of its 51% ownership interest in its Transitions Optical joint venture and 100% of its sunlens business to Essilor International (Compagnie Generale D'Optique) SA ("Essilor"). The results of operations and cash flows of these businesses for the 2014 period prior to the sale and the net gain on the sale are reported as results from discontinued operations for the six months ended June 30, 2014.
See Note 3, "Acquisitions and Dispositions" in Item 1 - Financial Statements, for additional information relating to this transaction.

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Performance in the Second Quarter of 2015 Compared to the Second Quarter of 2014
Performance Overview
Net sales increased $18 million, or approximately 1% from the second quarter of 2014, to $4,100 million primarily due to sales from acquired businesses (7%) and higher sales volumes (1%). Acquired businesses added about $290 million of sales in 2015, primarily due to sales of Consorcio Comex, S.A. de C.V. (“Comex”), which we acquired in the fourth quarter of 2014, supplemented by several other smaller acquisitions made in the second half of 2014 and the first half of 2015. Sales volume growth was modest during the second quarter of 2015 compared to the second quarter of 2014 where sales volume growth was 3%. The volume growth in the second quarter of 2015 was driven primarily by PPG’s automotive original equipment manufacturer (OEM) and packaging coatings businesses. Currency translation negatively impacted sales by $318 million (8%) and segment income by $40 million (6%), as the U.S. dollar strengthened against most other currencies versus the prior year, including an appreciation of approximately 19% year-over-year versus the three month average Euro exchange rate.
Year-over-year sales volumes, excluding acquisitions, increased 1% overall, consistent with the first quarter 2015 performance.  Sales volume growth during the second quarter of 2015 was positive across all regions and built upon prior year second quarter sales growth of 3% to 4% in all regions. In the U.S. and Canada, sales volumes were up 1% year-over-year, as results were favorable in most businesses led by the automotive refinish and packaging coatings businesses. Regional sales were stronger year-over-year in June versus May, and we believe that overall business and economic trends point to continued regional growth. In the second quarter of 2015, sales volumes in the Europe, Middle-East and Africa (EMEA) region advanced 2% year-over-year and improved upon the 2015 first quarter growth rate of 1%. Overall demand remained mixed within the region, with growth in certain countries or end-use markets offset by persistent weakness in others. From an end-use market perspective, European automotive OEM and packaging coatings delivered the highest growth, while automotive refinish and protective and marine coatings sales volumes also grew and industrial coatings volumes declined modestly. Emerging region sales volumes in the second quarter of 2015 increased 1% year-over-year and sequentially versus the first quarter of 2015. Sales volumes in Asia-Pacific advanced 1%, led by automotive OEM coatings improvement primarily in China, coupled with stronger protective and marine coatings demand.  Latin America sales volume growth declined modestly by 1% year-over-year, excluding acquisitions, however, performance was mixed by country.
Cost of sales, exclusive of depreciation and amortization, decreased $23 million, or 1% from the second quarter of 2014, to $2,283 million primarily due to foreign currency translation impacts and lower manufacturing costs more than offsetting the inclusion of cost of sales from acquired businesses and increased sales volumes. Cost of sales as a percentage of sales was flat at 56% in the second quarter of 2015 and 2014, respectively.
Selling, general and administrative expenses decreased $31 million, or 3% from the second quarter of 2014, to $954 million primarily due to favorable foreign currency translation partly offset by increased costs related to acquisitions and overhead cost inflation. Selling, general and administrative expenses as a percentage of sales was 23%&#