SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997March 31, 1998 Commission File Number 1-1687
-------------------- --------------------------- ----------
PPG INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0730780
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
One PPG Place, Pittsburgh, Pennsylvania 15272
(Address of principal executive offices) (Zip Code)
(412) 434-3131
(Registrant's telephone number, including area code)
As of September 30, 1997, 178,125,965March 31, 1998, 177,363,906 shares of the Registrant's common stock, par
value $1.66-2/3 per share, were outstanding.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--------- ----------------
PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE(S)
Part I. Financial Information
Item 1. Financial Statements:
Condensed Statement of Income...................................Income.................................... 2
Condensed Balance Sheet.........................................Sheet.......................................... 3
Condensed Statement of Cash Flows...............................Flows................................ 4
Notes to Condensed Financial Statements......................... 5-7Statements.......................... 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8-13Operations........................ 9-12
Part II. Other Information
Item 2. Change in Securities and Use of Proceeds................... 13
Item 4. Submission of Matters to a Vote of Security Holders........13-14
Item 6. Exhibits and Reports on Form 8-K..........................8-K........................... 14
Signature............................................................Signature............................................................. 15
-1-- 1 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Income (Unaudited)
-----------------------------------------
(Millions, except per share amounts)
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------------------- -------------------------March 31
------------------------------------------
1998 1997
1996 1997 1996
------------ ------------ ----------- -------------------------------- --------------------
Net sales....................................... $1,812 $1,802 $5,533 $5,464sales.......................................................... $1,913 $1,777
Cost of sales................................... 1,079 1,073 3,312 3,268
------ ------sales...................................................... 1,145 1,087
------ ------
Gross profit................................. 733 729 2,221 2,196
------ ------profit.................................................... 768 690
------ ------
Other expenses:expenses (earnings):
Selling, general and administrative.......... 266 249 788 740
Depreciation................................. 88administrative............................. 263 248
Depreciation.................................................... 89 85 261 252
Research and development..................... 63 59 182 176
Interest.....................................development........................................ 67 58
Interest........................................................ 30 25
25 76 72
Other charges................................ 31 31 63 65
------ ------charges................................................... 18 20
Other earnings.................................................. (27) (25)
------ ------
Total other expenses..................... 473 449 1,370 1,305
------ ------ ------ ------
Other earnings.................................. 24 38 74 94
------ ------expenses - net.................................. 440 411
------ ------
Income before income taxes and minority interest............................. 284 318 925 985interest................... 328 279
Income taxes.................................... 108 121 352 374taxes....................................................... 126 106
Minority interest............................... 5 6 18 19
------ ------interest.................................................. 10 7
------ ------
Net income......................................income......................................................... $ 171192 $ 191 $ 555 $ 592
====== ======166
====== ======
Earnings per share..............................share (Note 2)........................................ $ 0.961.08 $ 1.030.91
====== ======
Earnings per share - assuming dilution (Note 2).................... $ 3.081.07 $ 3.13
====== ======0.90
====== ======
Dividends per share.............................share................................................ $ 0.330.34 $ 0.32 $ 0.99 $ 0.94
====== ====== ====== ======
Average shares outstanding...................... 178.8 186.5 180.4 189.2
====== ======0.33
====== ======
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-2-- 2 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Balance Sheet (Unaudited)
-----------------------------------
Sept. 30March 31 Dec. 31
1998 1997
1996
-------- --------------------------- -------------------
Assets (Millions)
- ------
Assets
- ------
Current assets:Assets:
Cash and cash equivalents.............................................equivalents....................................... $ 90141 $ 70
Receivables-net....................................................... 1,301 1,226129
Receivables-net................................................. 1,443 1,353
Inventories (Note 2).................................................. 819 797
Other................................................................. 201 2033)............................................ 898 863
Other........................................................... 247 239
-------- --------
Total current assets.............................................. 2,411 2,296assets........................................ 2,729 2,584
Property (less accumulated depreciation of
$3,870$3,938 million and $3,775$3,903 million)..................................... 2,846 2,913
Investments.............................................................. 234 254.............................. 2,878 2,855
Investments........................................................ 249 219
Other assets............................................................. 1,047 978assets....................................................... 1,250 1,210
-------- --------
Total.............................................................Total....................................................... $ 6,5387,106 $ 6,4416,868
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Short-term borrowings and current
portion of long-term debt...........................................debt................................... $ 566522 $ 648444
Accounts payable and accrued liabilities.............................. 1,081 1,106liabilities........................ 1,212 1,210
Income taxes.......................................................... 9 15taxes.................................................... 84 8
-------- --------
Total current liabilities......................................... 1,656 1,769liabilities................................... 1,818 1,662
Long-term debt (Note 5).................................................. 990 834debt..................................................... 1,230 1,257
Deferred income taxes.................................................... 411 419taxes.............................................. 409 406
Accumulated provisions................................................... 386 339provisions............................................. 421 421
Other postretirement benefits............................................ 530 521benefits...................................... 534 531
-------- --------
Total liabilities................................................. 3,973 3,882liabilities........................................... 4,412 4,277
-------- --------
Commitments and contingent liabilities (Note 6).........................7)...................
Minority interest........................................................interest.................................................. 87 82 76
-------- --------
Shareholders' equity:
Common stock..........................................................stock.................................................... 484 484
Additional paid-in capital............................................ 101 97capital...................................... 103 99
Retained earnings..................................................... 5,139 4,760earnings............................................... 5,371 5,239
Treasury stock........................................................ (2,957) (2,667)stock.................................................. (3,029) (2,990)
Unearned compensation................................................. (173) (171)
Minimum pension liability adjustment.................................. (12) (10)
Currency translation adjustment....................................... (99) (10)compensation........................................... (150) (162)
Accumulated other comprehensive loss (Note 4)................... (172) (161)
-------- --------
Total shareholders' equity........................................ 2,483 2,483equity.................................. 2,607 2,509
-------- --------
Total.............................................................Total....................................................... $ 6,5387,106 $ 6,4416,868
======== ========
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-3-- 3 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Cash Flows (Unaudited)
---------------------------------------------
NineThree Months Ended Sept. 30
--------------------------March 31
-------------------------------------------
1998 1997
1996
------ ------
(Millions)-------------------- ---------------------
(Millions)
Cash from operating activities.............................................activities.................................... $ 724219 $ 701163
------ ------
Investing activities:
Capital spending........................................................ (335) (330)spending............................................... (180) (103)
Reduction of investments................................................ 22 14
Other...................................................................investments....................................... 1 3
2Other.......................................................... 1 1
------ ------
Cash used for investing activities.................................. (310) (314)activities......................... (178) (99)
------ ------
Financing activities:
Net change in borrowings with
maturities of three months or less.................................... (85) 186less......................... 78 (63)
Proceeds from other short-term debt..................................... 65 32debt............................ 40 26
Repayment of other short-term debt...................................... (61) (28)debt............................. (31) (23)
Proceeds from long-term debt............................................ 217 159debt................................... 4 203
Repayment of long-term debt............................................. (52) (142)
Loans to employee stock ownership plan.................................. (27) (26)debt.................................... (32) (24)
Repayment of loans by employee stock
ownership plan........................................................ 25 20plan............................................. 13 12
Purchase of treasury stock, net......................................... (294) (411)net................................ (41) (94)
Dividends paid.......................................................... (179) (178)paid................................................. (60) (60)
------ ------
Cash used for financing activities.................................. (391) (388)activities......................... (29) (23)
------ ------
Effect of currency exchange rate changes
on cash and cash equivalents............................................. (3)equivalents................................... - (1)
------ ------
Net increase (decrease) in cash and cash equivalents....................... 20 (2)equivalents......................... 12 40
Cash and cash equivalents, beginning of period.............................period.................... 129 70 106
------ ------
Cash and cash equivalents, end of period...................................period.......................... $ 90141 $ 104110
====== ======
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-4-- 4 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Financial Statements (Unaudited)
---------------------------------------------------
1. Financial Statements
--------------------
The condensed financial statements included herein are unaudited. In the
opinion of management, these statements include all adjustments, consisting
only of normal, recurring adjustments, necessary for a fair presentation of
the financial position of PPG Industries, Inc. and subsidiaries (the
Company or PPG) at September 30, 1997,March 31, 1998, and the results of their operations and
their cash flows for the three-three months ended March 31, 1998 and nine-month periods ended September
30, 1997 and 1996.1997. These
condensed financial statements should be read in conjunction with the
financial statements and notes thereto incorporated by reference in PPG's
Annual Report on Form 10-K for the year ended December 31, 1996.1997.
The results of operations for the ninethree months ended September 30, 1997March 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
2. Earnings Per Share
------------------
The following table reflects the earnings per share calculations for the
three months ended March 31, 1998 and 1997.
March 31
(Millions, except per share amounts) 1998 1997
------------------- --------------------
Earnings per common share
Net income.............................................. $ 192 $ 166
------ ------
Weighted average common shares outstanding.............. 177.5 182.3
------ ------
Earnings per common share............................... $ 1.08 $ 0.91
====== ======
Earnings per common share - assuming dilution
Net income.............................................. $ 192 $ 166
------ ------
Weighted average common shares outstanding.............. 177.5 182.3
Effect of dilutive securities
Stock options......................................... 0.9 0.9
Other stock compensation plans........................ 1.0 1.0
------ ------
Potentially dilutive common shares...................... 1.9 1.9
------ ------
Adjusted common shares outstanding...................... 179.4 184.2
------ ------
Earnings per common share - assuming dilution........... $ 1.07 $ 0.90
====== ======
- 5 -
3. Inventories
-----------
Inventories at September 30, 1997March 31, 1998 and December 31, 19961997 are detailed below.
Sept. 30March 31 Dec. 31
1998 1997
1996
-------- -------------------------- --------------------
(Millions)
Finished products and work in process...............................process...................... $ 559625 $ 548608
Raw materials....................................................... 146 134
Supplies............................................................materials.............................................. 159 141
Supplies................................................... 114 115114
----- -----
Total............................................................Total.................................................. $ 819898 $ 797863
===== =====
Most domestic and certain foreign inventories are valued using the last-in,
first-out method. If the first-in, first-out method had been used,
inventories would have been $194$187 million and $204$191 million higher at September 30, 1997March
31, 1998 and December 31, 1996,1997, respectively.
3.4. Comprehensive Income
--------------------
During the three months ended March 31, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." Total comprehensive income for the three
months ended March 31, 1998 and 1997 was as follows:
Three Months Ended March 31
-------------------------------------------
1998 1997
-------------------- ---------------------
(Millions)
Net income................................................. $ 192 $ 166
Other comprehensive income
Unrealized currency translation loss.................... (11) (58)
----- -----
Total comprehensive income............................. $ 181 $ 108
===== =====
As of March 31, 1998 and December 31, 1997, accumulated other comprehensive
loss, as reflected on the condensed balance sheet, was comprised of the
following:
March 31 Dec. 31
1998 1997
-------------------- ---------------------
(Millions)
Minimum pension liability adjustment....................... $ (25) $ (25)
Currency translation adjustment............................ (147) (136)
----- -----
Accumulated other comprehensive loss................... $(172) $(161)
===== =====
- 6 -
5. Cash Flow Information
---------------------
Cash payments for interest were $74$23 million and $19 million for each of the ninethree
months ended September 30,March 31, 1998 and 1997, and 1996, respectively. Net cash payments for
income taxes for the ninethree months ended September 30,March 31, 1998 and 1997 and 1996 were $339$44
million and $328$46 million, respectively.
-5-
4.6. Business Segment Information
----------------------------
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
------------------ ------------------March 31
------------------------------------------
1998 1997
1996 1997 1996
------- ------- ------- --------------------------- --------------------
(Millions)
Net sales:
Coatings..........................................Coatings.................................................... $ 737821 $ 712 $2,259 $2,175
Glass............................................. 658 678 2,024 2,066
Chemicals......................................... 417 412 1,250 1,223713
Glass....................................................... 687 659
Chemicals................................................... 405 405
------ ------
------ ------
Total.......................................... $1,812 $1,802 $5,533 $5,464
====== ======Total.................................................... $1,913 $1,777
====== ======
Operating income:
Coatings..........................................Coatings.................................................... $ 130 $ 124
$ 132 $ 419 $ 413
Glass............................................. 99 114 304 347
Chemicals......................................... 83 97 274 296Glass....................................................... 109 89
Chemicals................................................... 111 89
------ ------
------ ------
Total........................................... 306 343 997 1,056Total.................................................... 350 302
Interest expense - net............................... (24)net........................................ (27) (23) (71) (65)
Other unallocated corporate income (expense) - net.................................... 2 (2) (1) (6)
------ ------net...................... 5 -
------ ------
Income before income taxes and minority interest..............................interest.............. $ 284328 $ 318 $ 925 $ 985
====== ======279
====== ======
5. Long-term Debt
--------------
On February 21, 1997, the Company issued $100 million of non-redeemable
6-1/4% notes due February 15, 2002 and $100 million of redeemable 6-7/8%
notes due February 15, 2012.
6.7. Commitments and Contingent Liabilities
--------------------------------------
PPG is involved in a number of lawsuits and claims, both actual and
potential, including some which it has asserted against others, in which
substantial money damages are sought. These lawsuits and claims relate to
product liability, contract, patent, antitrust, environmental and other
matters arising out of the conduct of PPG's business. PPG's lawsuits and
claims against others include claims against insurers and other third
parties with respect to actual and contingent losses related to
environmental matters. Management believes that the outcome of all
lawsuits and claims involving PPG, in the aggregate, will not have a
material effect on PPG's consolidated financial position, results of
operations or liquidity.
It is PPG's policy to accrue expenses for environmental contingencies when
it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. Reserves for environmental contingencies are
exclusive of claims against third parties and are not discounted. As of
September 30, 1997March 31, 1998 and December
- 7 -
31, 1996,1997, PPG had reserves for environmental contingencies totaling $95$98
million and $91 million,
respectively.$100 million. Pre-tax charges against income for environmental
remediation costs for the ninethree months ended September 30,March 31, 1998 and 1997
and 1996 were $26totaled $3 million and -6-
$22$7 million, respectively. Cash outlays related to
such charges aggregated $5 million and $7 million for the ninethree months
ended September 30,March 31, 1998 and 1997, and 1996 aggregated $22 million and
$27 million, respectively.
Management anticipates that the resolution of the Company's environmental
contingencies, which will occur over an extended period of time, will not
result in future annual charges against income that are significantly
greater than those recorded in recent years. It is possible, however, that
technological, regulatory and enforcement developments, the results of
environmental studies and other factors could alter this expectation. In
management's opinion, the Company operates in an environmentally sound
manner and the outcome of the Company's environmental contingencies will
not have a material effect on PPG's financial position or liquidity.
In addition to the amounts currently reserved, the Company may be subject
to loss contingencies related to environmental matters estimated to be as
much as $200 million to $400 million, which range is unchanged from
December 31, 1996.1997. Such unreserved losses are reasonably possible but are
not currently considered to be probable of occurrence. Although insurers
and other third parties may cover a portion of these costs, to the extent
they are incurred, any potential recovery is not included in this
unreserved exposure to future loss. The Company's environmental
contingencies are expected to be resolved over an extended period of time.
Although the unreserved exposure to future loss relates to all sites, a
significant portion of such exposure involves three operating plant sites
and one closed plant site. Initial remedial actions are occurring at these
sites. Studies to determine the nature of the contamination are reaching
completion and the need for additional remedial actions, if any, is
presently being evaluated. The loss contingencies related to the remaining
portion of such unreserved exposure include significant unresolved issues
such as the nature and extent of contamination, if any, at sites and the
methods that may have to be employed should remediation be required.
With respect to certain waste sites, the financial condition of any other
potentially responsible parties also contributes to the uncertainty of
estimating PPG's final costs. Although contributors of waste to sites
involving other potentially responsible parties may face governmental
agency assertions of joint and several liability, in general, final
allocations of costs are made based on the relative contributions of
wastes to such sites. PPG is generally not a major contributor to such
sites.
The impact of evolving programs, such as natural resource damage claims,
industrial site reuse initiatives and state voluntary remediation
programs, also adds to the present uncertainties with regard to the
ultimate resolution of this unreserved exposure to future loss. Although insurers and other third parties may cover a portion of
these costs, to the extent they are incurred, any potential recovery is not
included in this unreserved exposure to future loss.
The
Company's 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.
-7-- 8 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Performance inOverview
Sales increased 8% during the Third Quarter of 1997 Compared to the Third Quarter of 1996
Performance Overview
During the thirdfirst quarter of 1997, sales increased slightly1998 to $1.81$1.91 billion compared to
$1.80$1.78 billion in the thirdfirst quarter of 1996. The current quarter
increase is attributable1997. Overall, sales increased as a
result of a 12% improvement in volumes, including sales related to improved volumesseveral
acquisitions made in all of our business segmentslate 1997 and sales associated with several acquisitionsearly 1998, primarily in our coatings
segment. These improvements were partially offset by the unfavorable effects ofa 3% decline from foreign
currency translation due to the strong U.S. dollar and a 1% decline due to the
absence of sales from our surfactants business which was divested late in both our coatings and glass segments, lower worldwide
sales prices in our glass segment, and lower sales prices for caustic soda
products in our chemicals segment.1997.
The gross profit percentage when comparingincreased to 40.1% compared to 38.8% in the third quarter of 1997 and 1996
remained constant at 40.5%.prior
year's quarter. The benefits realized from continuedfavorable sales mix changes in all
our segments, improved manufacturing efficiencies within the glass segment, and
favorable sales mix changeslower raw materials and energy costs in our coatings and chemicals segmentssegment were fullypartially
offset by the negative effects of
lower worldwide sales prices in thewithin our glass segment, lower prices for caustic soda
products, and the negative effects
of inflation.
Net income and earnings per share for the thirdfirst quarter of 19971998 were $171$192
million and $0.96,$1.08, respectively, compared to net income and earnings per share
of $191$166 million and $1.03,$0.91, respectively, for the samefirst quarter of 1996.1997. The
decreaseincrease in net income in the thirdcurrent quarter of 1997 is attributable to the same
factors that contributed to the gross profit percentage increase described
above, offset in part by higher selling, general and administrative expenses relatedin
our coatings segment as a result of increased sales volume, the negative effects
of inflation on overhead costs in all our segments, increased interest costs due
to growth initiatives and
increased advertising costs, higher environmental expenses,outstanding indebtedness, and higher legal
expenses. The current quarter's slightly higher sales levels and lower income tax expense partially offset these negative factors. The third quarter of 1996
also included the favorable impact of higher other earnings associated with the
recovery through insurance of certain past costs.expense. Reduced
average shares outstanding, due to repurchases of PPG's common stock by the
Company, favorably impacted earnings per share in the current quarter.
Performance of Business Segments
Coatings sales increased 15% to $737$821 million in the thirdfirst quarter of 19971998
compared to $712$713 million in the comparablesame quarter of 1996.1997. A 19% sales volume
increase, including sales from recent acquisitions, was partially offset by a 4%
decline from foreign currency translation. Sales increased as a result
of sales associated withgenerated from several
acquisitions in late 1997 and early 1998 contributed substantially to the
segment's sales growth in the quarter. Sales also increased due to the impact
of worldwide volume improvements for
original equipment automotive coatings, higher volumesgains for industrial coatings and automotive refinish
products, volume increases in the North America,American architectural coatings
business, and improved sales prices in bothEuropean and North America and Europe forAmerican automotive refinish products.products volumes.
These sales improvements were partially offset by the unfavorable effects of
foreign currency translation, reduced volumes for
architectural coatings products in North America, and lower worldwide original
equipment automotive coatings sales prices.translation. Operating income decreasedincreased to $124$130 million from
$132$124 million when comparing the thirdfirst quarter of 19971998 and 1996.1997. The declineimprovement
in operating income resulted fromwas due to the improved worldwide volumes for automotive
refinish products, volume increases for our North American architectural
coatings, industrial coatings and automotive products businesses, and the
favorable impact of recent acquisitions. Partially offsetting these positive
factors were higher overhead costsselling, general and administrative expenses principally
associated with the increased worldwide sales levels in the original equipment automotive coatings
business, higher overhead costs related to the increasedour North American sales
levels for industrial
coatings, growth initiatives in South Americaautomotive products, and Asia,
lower worldwide sales prices for original equipment automotivearchitectural coatings businesses, and the
negative effects of inflation. These negative factors were offset in part by
the previously discussed volume improvements for original equipment automotive
coatings and industrial coatings, and slightly higher
sales prices for
automotive refinish products in North America and Europe.
-8-legal expenses.
- 9 -
Glass sales decreasedincreased 4% to $658$687 million in the thirdfirst quarter of 1997 from $6781998 compared
to $659 million in the thirdfirst quarter of 1996. The effect of1997. An 8% sales volume improvementsincrease,
including sales associated with an acquisition, was partially offset by a 1%
decline in worldwide fiber glass sales prices in certain businesses, and a 3% decline due to foreign
currency translation. Volume increases for our North American automotive
replacement and automotive original glass products, in Europe, and
flatEuropean glass products, in North Americaand
worldwide fiber glass products were more thanpartially offset by lower worldwide selling prices for
our fiber glass and most other glass products, lower volumes
for North American automotive originalreplacement glass and European flat glass products,
and the unfavorable effects of foreign currency translation.products.
Operating income decreasedincreased to $99$109 million in the 1997 thirdfirst quarter of 1998 compared
to $114$89 million in the corresponding 1996prior year's quarter. The declineincrease in operating income was
due to the same factors that contributed to the lower overallhigher sales levels, theimproved
manufacturing efficiencies, and increased equity earnings. The negative effects
of inflation and slightly higher overhead costs principally due to
legal expenses. Global manufacturing efficiencies at our glass and fiber glass
operationsforeign currency translation only partially offset these unfavorable factors.
Chemicals sales increased to $417 million in the third quarter of 1997 compared
to $412 million in the same quarter of the prior fiscal year principally due to
higher volumes for chlorine and caustic soda, increased volumes in the specialty
chemicals business for Transitions optical lenses, and higher selling prices
for chlorine products. Significantly lower selling prices for caustic soda partially offset these
favorable factors.
Chemicals sales remained constant at $405 million when comparing the first
quarter of 1998 and the first quarter of 1997. A 7% sales volume increase was
fully offset by a 6% reduction associated with the divestiture of the
surfactants business in late 1997 and a 1% decline from foreign currency
translation. Sales volume increases were principally related to our optical
products business and, to a lesser degree, chlor-alkali and derivative products.
Operating income decreasedincreased to $111 million in the current quarter to $83 million compared to $97versus $89
million in the comparable quarter of the prior year. The favorable impact of increased volumes discussed above,
improved chlor-alkali manufacturing efficiencies, and slightly higher selling
prices for specialty chemicals in the current quarter were more than offset by
the decline in selling prices for caustic soda, higher environmental expenses,
increased advertising and selling expenses for Transitions optical lenses,
higher manufacturing costs for specialty chemicals, and the negative effects of
inflation.
Performance in the First Nine Months of 1997 Compared to the First Nine Months
of 1996
Performance Overview
Sales for the first nine months of 1997 and 1996 were $5.53 billion and $5.46
billion, respectively. The increase in sales in the current nine-month period
results from improved volumes in each of our business segments, sales related to
several acquisitions in our coatings segment, and slightly higher sales prices
for certain products in our chemicals and coatings segments. These improvements
were partially offset by lower sales prices for caustic soda in our chemicals
segment, lower worldwide sales prices for fiber glass and glass products, and
the unfavorable effects of foreign currency translation in both our coatings and
glass segments.
The gross profit percentage remained relatively constant in each of the 1997 and
1996 nine-month periods. The benefits realized from manufacturing efficiencies
within the glass and chemicals segments, slightly higher prices and lower raw
materials costs within the coatings segment, and favorable sales mix changes in
our coatings and chemicals segments were offset by the negative effects of lower
overall sales prices and inflation in our glass and chemicals segments.
Net income and earnings per share for the current nine-month period were $555
million and $3.08, respectively, compared to net income and earnings per share
of $592 million and $3.13, respectively, for the same period of the prior fiscal
year. Current period net income was adversely impacted by higher overhead costs
associated with growth initiatives in the coatings segment, increased
advertising, selling, and environmental expenses in the chemicals segment, the
negative effects of inflation, and slightly higher interest costs associated
with higher outstanding borrowings. These negative factors were offset in part
by higher overall sales volumes within all three segments, manufacturing
efficiencies within the glass segment,
-9-
higher sales prices for certain products within the coatings and chemicals
segments, and lower income tax expense. Reduced average shares outstanding, due
to repurchases of common stock by the Company, also favorably impacted earnings
per share in the current nine-month period.
Performance of Business Segments
Coatings sales increased to $2.26 billion in the current nine-month period from
$2.17 billion in the comparable nine-month period of 1996. The increase in the
current nine-month period is attributable to worldwide volume increases for
original equipment automotive coatings, automotive refinish and industrial
coatings products, sales related to several acquisitions, and improved sales
prices for automotive refinish products in North America and Europe and
industrial coatings in North America. These improvements were partially offset
by the unfavorable effects of foreign currency translation and lower sales
prices for our original equipment automotive coatings products in North America
and Europe. Operating income increased to $419 million for the 1997 nine-month
period compared to $413 million in the prior year's nine-month period. The
improvement in
operating income iswas due to the samefavorable volume and price factors that
contributed to the sales increase combined withincreases in our optical
products business previously discussed, lower raw material costs. These
improvements were offset in part by higher overheadand energy costs
associated with growth
initiatives in South America, Asiawithin our chlor-alkali and in the industrial coatingsderivatives business, and the negative effects of inflation.
Glass sales decreased to $2.02 billion in the first nine months of 1997 from
$2.07 billion in the same nine months of 1996. Volume increases for our fiber
glass, automotive original glass, and flat glass products in North America and
Europe were more than offset by lower sales prices for North American
and European fiber glass, flat glass and automotive original glass products and
the unfavorable effects of foreign currency translation. Operating income
decreased to $304 million in the current nine-month period compared to $347
million in last year's nine-month period due to the same price and volume
factors that contributed to the lower sales levels, the negative effects of
inflation, slightly higher overhead costs associated with the expansion of our
LYNX Services business, and higher legal expenses. Improved worldwide
manufacturing efficiencies only partially offset these unfavorable factors.
For the nine-month periods ended September 30, 1997 and 1996, chemicals sales
were $1.25 billion and $1.22 billion, respectively. The increase in chemicals
sales in the current nine months is attributable to volume increases for
chlorine and caustic soda products and certain specialty chemical products,
including sales of Transitions optical lenses, and higher selling prices for
vinyl chloride monomer and other chlorine products. These favorable factors
were offset in part by significantly lower selling prices for caustic soda and
reduced volumes for vinyl chloride monomers. Operating income decreased in the
current nine-month period to $274 million from $296 million in the same period
last year. The favorable effects of volume increases for specialty chemicals
and chlor-alkali products and improved manufacturing efficiencies associated
with chlor-alkali products were more than offset by the decline in sales prices
for caustic soda, increased advertising and selling expenses, principally for
Transitions optical lenses, the negative effects of inflation on raw material
costs, and higher environmental expenses.costs.
Other Factors
The increase in accounts receivable principally results from higher sales in August and Septemberthe
first quarter of 19971998 compared with November and Decemberthe fourth quarter of 1996.
-10-
1997.
The increase in accumulated provisions relates to accruals for income taxes,
deferred compensation and environmental matters.
Cash flowshort-term borrowings principally results from operating activities increasedthe issuance of
commercial paper in the current nine-month period
primarily due to a reduction in pension plan contributions.first quarter of 1998.
The reductionincrease in income tax expense in the current nine-month periodquarter is the result of
lowerhigher pre-tax earnings as thewell as an increased effective income tax rate, remained at
38%which
increased to 38.5% during the first quarter of 1998 compared to 38.0% in eachthe
first quarter of the periods. Income1997, due to higher anticipated taxes on foreign earnings. The
increase in income taxes payable experienced a decrease due towas principally the result of the timing of
estimated tax payments.
The increase in long-term debt in the 1997 nine-month period results from the
issuance of $100 million of non-redeemable 6-1/4% notes due February 15, 2002Acquisitions and $100 million of redeemable 6-7/8% notes due February 15, 2012. The proceeds
from the issuance of the notes were used for general corporate purposes,
including the repayment of commercial paper borrowings.
At the end of the third quarter of 1997,Divestitures
In January, 1998, the Company completed the purchase of the pretreatment and process lubricant chemicalsautomotive coatings
business of Man-Gill ChemicalHelios-Lacke Bollig & Kemper GmbH & Co. KG of Cologne, Germany, and
the purchase from Chrysler Corporation of certain assets of an automotive glass
plant in Evart, Michigan. The Company has completed aperformed preliminary purchase price
allocationallocations as of September 30, 1997,March 31, 1998 and the operating activity associated with
this acquisition
will bethese acquisitions has been reflected in the Company's results of operations beginning October 1,
1997. Additionally,from the
Company has entered into an agreement to acquire Max
Meyer Duco S.p.A. of Milan, Italy, a supplier ofacquisition dates.
PPG's European flat and automotive refinishes, fleet
finishes and decorative coatings. The acquisition, which is subject to
government approvals, is expected to be completed by December 31, 1997. The
annual revenues associated with these twoglass businesses total approximately $150
million.
The Company has also entered into an agreement whereby it will acquire the
worldwide packaging coatings businesses of BASF Lacke + Farben AG. The
agreement also includes the divestiture of PPG's surfactants business which is
anticipated to result in a gain to PPG. Each of the respective businesses has
annual revenues of approximately $150 million. The Company anticipates that the
transactions, which are subject to government approvals, will be completed by
December 31, 1997.
Certain components of the Company's worldwide Glass business are not performing at levels
that meet the Company's strategic and performance expectations. As a result,
managementobjectives. Therefore, the
Company is actively engaged in the process of evaluating available optionsdiscussions to restructuresell these businesses. The annual
sales generated by these businesses to improve future competitiveness and profitability. This
process is expected to be completed in the next several months and certain
charges may result.total approximately $450 million.
- 10 -
Accounting Standards
During the first quarter ofIn June 1997, the Company adopted the provisions ofFinancial Accounting Standards Board issued Statement of
Position ("SOP")Financial Accounting Standard No. 96-1, "Environmental Remediation Liabilities.130, "Reporting Comprehensive Income." The
adoption of SOP No. 96-1 did not have a materialthis standard by the Company during the three months ended March 31,
1998 had no impact on the Company's financial position, or results of operations inor
cash flows.
On March 4, 1998, the three- or nine-month periods
ended September 30, 1997. Further, the adoption of SOP No. 96-1 did not affect
the Company's cash flow. In February 1997, the Financial Accounting Standards Board ("FASB")Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share." The impact onPosition 98-1,
"Accounting for the Company's 1997 reported earnings per
shareCosts of adopting this new standard will not be material.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,Computer Software Developed or Obtained for
Internal Use," which is effective for -11-
periodsfiscal years beginning after December 15,
1997.1998. The Company is currently in the process of evaluating the impact of this
new standard on its current reportingfinancial position and results of operating segment information
in both its interim and annual financial statements.operations.
Commitments and Contingent Liabilities, including Environmental Matters
PPG is involved in a number of lawsuits and claims, both actual and potential,
including some which it has asserted against others, in which substantial money
damages are sought. These lawsuits and claims relate to product liability,
contract, patent, antitrust, environmental and other matters arising out of the
conduct of PPG's business. PPG's lawsuits and claims against others include
claims against insurers and other third parties with respect to actual and
contingent losses related to environmental matters. Management believes that the
outcome of all lawsuits and claims involving PPG, in the aggregate, will not
have a material effect on PPG's consolidated financial position, results of
operations or liquidity.
It is PPG's policy to accrue expenses for environmental contingencies when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Reserves for environmental contingencies are exclusive of
claims against third parties and are not discounted. As of September 30, 1997March 31, 1998 and
December 31, 1996,1997, PPG had reserves for environmental contingencies totaling $95$98
million and $91 million, respectively.$100 million. Pre-tax charges against income for environmental
remediation costs for the ninethree months ended September 30,March 31, 1998 and 1997 and
1996 were $26totaled $3
million and $22$7 million, respectively. Cash outlays related to such charges
aggregated $5 million and $7 million for the ninethree months ended September 30,March 31, 1998
and 1997, and 1996 aggregated
$22 million and $27 million, respectively.
Management anticipates that the resolution of the Company's environmental
contingencies, which will occur over an extended period of time, will not result
in future annual charges against income that are significantly greater than
those recorded in recent years. It is possible, however, that technological,
regulatory and enforcement developments, the results of environmental studies
and other factors could alter this expectation. In management's opinion, the
Company operates in an environmentally sound manner and the outcome of the
Company's environmental contingencies will not have a material effect on PPG's
financial position or liquidity.
In addition to the amounts currently reserved, the Company may be subject to
loss contingencies related to environmental matters estimated to be as much as
$200 million to $400 million, which range is unchanged from December 31, 1996.1997.
Such unreserved losses are reasonably possible but are not currently considered
to be probable of occurrence. Although insurers and other third parties may
cover a portion of these costs, to the extent they are incurred, any potential
recovery is not included in this unreserved
- 11 -
exposure to future loss. The Company's environmental contingencies are expected
to be resolved over an extended period of time.
Although the unreserved exposure to future loss relates to all sites, a
significant portion of such exposure involves three operating plant sites and
one closed plant site. Initial remedial actions are occurring at these sites.
Studies to determine the nature of the contamination are reaching completion and
the need for additional remedial actions, if any, is presently being evaluated.
The loss contingencies related to the remaining portion of such unreserved
exposure include significant unresolved issues such as the nature and extent of
contamination, if any, at sites and the methods that may have to be employed
should remediation be required.
With respect to certain waste sites, the financial condition of any other
potentially responsible parties also contributes to the uncertainty of
estimating PPG's final costs. Although contributors of waste to sites involving
other potentially responsible parties may face governmental agency assertions of
joint and several liability, in general, final allocations of costs are made
based on the relative contributions of wastes to such sites. PPG is generally
not a major contributor to such sites.
The impact of evolving programs, such as natural resource damage claims,
industrial site reuse initiatives and state voluntary remediation programs, also
adds to the present uncertainties with regard to the ultimate resolution of this
unreserved exposure to future -12-
loss. Although insurers and other third parties may cover a portion of these
costs, to the extent they are incurred, any potential recovery is not included
in this unreserved exposure to future loss. The Company's 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.
Foreign Currency, Interest Rate and Commodity PriceMarket Risk
As a multinational company, PPG manages its transactionThere were no material changes in the Company's exposure to foreign
currencymarket risk from
December 31, 1997.
- 12 -
PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
- --------------------------------------------------
Directors who are not also Officers of the Company receive Common Stock
Equivalents pursuant to minimizeThe Deferred Compensation Plan for Directors and The
Directors' Common Stock Plan. Common Stock Equivalents are hypothetical shares
of Common Stock having a value on any given date equal to the volatility of cash flows caused by currency
fluctuations. The Company manages its foreign currency transaction exposures
principally through the purchase of forward and option contracts. It does not
hedge its exposure to translation gains and losses; however, by borrowing in
local currencies it reduces such exposure. The fair value of a share
of Common Stock. Common Stock Equivalents earn dividend equivalents which are
converted into additional Common Stock Equivalents but carry no voting rights or
other rights of a holder of Common Stock. The Common Stock Equivalents credited
to Directors under both plans are exempt from registration under Section 4(2) of
the forwardSecurities Act of 1933 as private offerings made only to Directors of the
Company in accordance with the provisions of the plans.
Under the Company's Deferred Compensation Plan for Directors, each Director must
defer receipt of such compensation as the Board mandates. Currently, the Board
mandates deferral of one-third of each payment of the basic annual retainer of
each Director. Each Director may also elect to defer the receipt of (i) an
additional one-third of each payment of the basic annual retainer, (ii) all of
the basic annual retainer, or (iii) all compensation. All deferred payments are
held in the form of Common Stock Equivalents. Payments out of the deferred
accounts are made in the form of Common Stock of the Company (and cash as to any
fractional Common Stock Equivalent). In the first quarter of 1998, the
Directors, as a group, were credited with 1,826 Common Stock Equivalents under
this Plan. The values of the Common Stock Equivalents, when credited, ranged
from $53.375 to $67.938.
Under the Directors' Common Stock Plan, each Director who neither is nor was an
employee of the Company is credited annually with Common Stock Equivalents worth
one-half of the Director's basic annual retainer. No more than 10 years of
credits may be made for the account of any director. Upon termination of
service, the Common Stock Equivalents held in a Director's account are converted
to and option contracts purchased and outstandingpaid in Common Stock of the Company (and cash as to any fractional Common
Stock Equivalent). In the first quarter of September 30, 1997 and December
31, 1996, was not material.1998, the Directors, as a group,
received 200 Common Stock Equivalents under this Plan. The Company manages its interest rate risk in order to balance its exposure
between fixed and variable rates while attempting to minimize its interest
costs. PPG principally manages its interest rate risk by retiring and issuing
debt from time to time. To a limited extent, PPG manages its interest rate risk
through the purchase of interest rate swaps. As of September 30, 1997 and
December 31, 1996, the notional principal amount and fair value of interest rate
swapseach Common
Stock Equivalent, when credited, was $65.438.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
At the Company's Annual Meeting of Shareholders held on April 16, 1998 (the
"Annual Meeting"), the shareholders voted on the following matters with the
results shown below.
1. On the matter of the election of four directors to serve for the terms
indicated in the proxy statement relating to the Annual Meeting, the vote
was as follows:
Nominees Votes For Votes Withheld
------------------------- ----------------------- -----------------------
Erroll B. Davis, Jr. 142,104,178 3,232,008
Allen J. Krowe 142,076,695 3,259,491
Robert Mehrabian 142,112,295 3,223,891
Ned C. Lautenbach 142,111,862 3,224,324
- 13 -
There were not material.
Theno broker nonvotes with respect to this matter.
Each of the nominees was therefore elected a director to serve for the
terms indicated in the proxy statement relating to the Annual Meeting.
2. On the matter of the election of Deloitte & Touche LLP as auditors for the
Company also uses commodity swap contractsfor the year 1998, the vote was as follows:
For: 144,125,857 Against: 633,500 Abstain: 564,918
There were no broker nonvotes with respect to reduce its exposure to
fluctuations in pricesthis matter.
Therefore, Deloitte & Touche LLP were elected auditors for natural gas. The fair value of such swap contracts
purchased and outstanding as of September 30, 1997 and December 31, 1996 was not
material.
PPG's policies do not permit active trading of, or speculation in, derivative
instruments.
-13-
the Company for
1998.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
(11) Computation of Earnings Per Share.(3) PPG Industries, Inc. By-Laws
(12) Computation of Ratio of Earnings to Fixed Charges
(Exhibit 12 is
filed hereby so as to become, by way of incorporation by
reference, an exhibit to Registration Statement No. 33-64081
on Form S-3.)
(27) Financial Data Schedule.Schedule
(b) Reports on Form 8-K
(1) The Company filed a Form 8-K on September 22, 1997,January 16, 1998, dated September 19, 1997, which included as an exhibitJanuary
15, 1998, whereby the Company's press release reporting fourth
quarter 1997 earnings was filed as an exhibit.
(2) The Company filed a Form 8-K on March 4, 1998, dated February 19,
1998, to report the designationdeclaration of Raymond W. LeBoeuf as
Chairman-electa dividend of preferred share
purchase rights to stockholders of record on April 6, 1998 and further indicating that he will become Board
Chairman and Chief Executive Officer when Chairman Jerry E.
Dempsey retires fromto
file the Company on November 1, 1997.
-14-related exhibits.
- 14 -
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PPG INDUSTRIES, INC.
-----------------------------------------------------------------------
(Registrant)
Date: OctoberApril 28, 19971998 By /s/ W. H. Hernandez
------------------------------------------------------------------
W. H. Hernandez
Senior Vice President, Finance
(Principal Financial and
Accounting Officer and
Duly Authorized Officer)
-15-- 15 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
INDEX TO EXHIBITS
Exhibit
No.Number Description
-------- ------ -----------
(11)(3) PPG Industries, Inc. By-Laws
(12) Statements Re Computation of Earnings Per Share
(12) Computation of Ratio of Earnings to Fixed ChargesRatios
(27) Financial Data Schedule