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, 1999          Commission File Number     1-1687
                    ----------------------------                          ---------------
For Quarter Ended March 31, 2000 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, 1999, 173,795,741March 31, 2000, 174,146,678 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.................................................... 2 Condensed Balance Sheet.......................................................... 3 Condensed Statement of Cash Flows................................................ 4 Notes to Condensed Financial Statements.......................................... 5-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 12- 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 20 Part II. Other Information Item 1. Legal Proceedings.......................................................... 21 Item 2. Change in Securities and Use of Proceeds................................... 21 Item 6. Exhibits and Reports on Form 8-K........................................... 22 Signature............................................................................. 23
-1-PAGE(S) Part I. Financial Information Item 1. Financial Statements: Condensed Statement of Income........................................... 2 Condensed Balance Sheet..................................................3 Condensed Statement of Cash Flows........................................4 Notes to Condensed Financial Statements...............................5-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................12-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......16 Part II. Other Information Item 1. Legal Proceedings................................................17 Item 2. Change in Securities and Use of Proceeds.........................17 Item 4. Submission of Matters to a Vote of Security Holders..............18 Item 6. Exhibits and Reports on Form 8-K.................................18 Signature....................................................................19 - 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 --------------------------- 2000 1999 1998 1999 1998 -------------- ------------- -------------- --------------------- ------ Net sales........................................... $1,954 $1,804 $5,704 $5,721sales......................................................... $2,087 $1,803 Cost of sales....................................... 1,206 1,082 3,474 3,413 ------ ------sales..................................................... 1,254 1,103 ------ ------ Gross profit...................................... 748 722 2,230 2,308 ------ ------profit................................................... 833 700 ------ ------ Other expenses (earnings): Selling, general and administrative............... 315 282 908 838 Depreciation...................................... 92 87 270 265administrative............................ 327 286 Depreciation................................................... 93 91 Research and development.......................... 72 68 206 202 Interest.......................................... 35 27 90 85 Purchased in-process research and development (Note 3)........................... 40 - 40 -development....................................... 70 67 Interest....................................................... 43 26 Amortization................................................... 19 9 Business divestitures and realignments (Note 3)............................ 19 - 43 15........................................ 1 24 Other charges..................................... 15 22 67 56charges.................................................. 53 12 Other earnings.................................... (24) (141) (90) (194) ------ ------earnings................................................. (29) (23) ------ ------ Total other expenses - net...................... 564 345 1,534 1,267 ------ ------net................................. 577 492 ------ ------ Income before income taxes and minority interest......................................... 184 377 696 1,041interest....................................................... 256 208 Income taxes........................................ 77 124 272 380taxes...................................................... 109 79 Minority interest...................................interest................................................. 8 5 18 22 ------ ------6 ------ ------ Net income..........................................income........................................................ $ 99139 $ 248 $ 406 $ 639 ====== ======123 ====== ====== Earnings per common share (Note 2).................................................. $ 0.570.80 $ 1.40 $ 2.34 $ 3.61 ====== ======0.71 ====== ====== Earnings per common share - assuming $ 0.56 $ 1.39 $ 2.31 $ 3.57 dilution (Note 2)................................ ====== ======.............................................. $ 0.79 $ 0.70 ====== ====== Dividends per share.................................common share........................................ $ 0.380.40 $ 0.36 $ 1.14 $ 1.06 ====== ======0.38 ====== ======
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 2000 1999 1998 ---------- ------------------ -------- Assets (Millions) - ------ Assets - ------ Current assets: Cash and cash equivalents (Note 3)................................equivalents...................................... $ 164145 $ 128 Receivables-net................................................... 1,592 1,366158 Receivables-net................................................ 1,713 1,594 Inventories (Note 4).............................................. 1,020 917 Other............................................................. 365 249........................................... 1,067 1,016 Other.......................................................... 252 294 -------- -------- Total current assets.......................................... 3,141 2,660assets....................................... 3,177 3,062 Property (less accumulated depreciation of $3,896$3,983 million and $3,834$3,926 million)................................ 2,861 2,905 Investments.......................................................... 256 263............................. 2,918 2,933 Investments....................................................... 227 261 Goodwill (less accumulated amortization of $99$106 million and $84$100 million)...................................... 911 576................................. 1,066 1,002 Identifiable intangible assets (less accumulated amortization of $71 million and $63 million)................... 656 660 Other assets (Note 5)................................................ 1,581 983assets...................................................... 1,028 996 -------- -------- Total.........................................................Total...................................................... $ 8,7509,072 $ 7,3878,914 ======== ======== Liabilities and Shareholders' Equity - ------------------------------------ Current liabilities: Short-term borrowings and current portion of long-term debt.....................................debt.................................. $ 8721,105 $ 637954 Accounts payable and accrued liabilities.......................... 1,379 1,264 Income taxes...................................................... 40 11liabilities....................... 1,403 1,430 -------- -------- Total current liabilities..................................... 2,291 1,912liabilities.................................. 2,508 2,384 Long-term debt (Note 3).............................................. 1,849 1,081debt.................................................... 1,825 1,836 Deferred income taxes................................................ 495 440taxes............................................. 490 520 Accumulated provisions............................................... 459 444provisions............................................ 463 422 Other postretirement benefits........................................ 554 543benefits..................................... 547 548 -------- -------- Total liabilities............................................. 5,648 4,420liabilities.......................................... 5,833 5,710 -------- -------- Commitments and contingent liabilities (Note 9).....................8).................. Minority interest.................................................... 101 87interest................................................. 102 98 -------- -------- Shareholders' equity: Common stock......................................................stock................................................... 484 484 Additional paid-in capital........................................ 105 105capital..................................... 107 104 Retained earnings................................................. 6,001 5,791earnings.............................................. 6,168 6,098 Treasury stock.................................................... (3,269) (3,198)stock................................................. (3,264) (3,268) Unearned compensation............................................. (144) (149)compensation.......................................... (121) (134) Accumulated other comprehensive loss (Note 6)..................... (176) (153)5).................. (237) (178) -------- -------- Total shareholders' equity.................................... 3,001 2,880equity................................. 3,137 3,106 -------- -------- Total.........................................................Total...................................................... $ 8,7509,072 $ 7,3878,914 ======== ========
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 -------- 2000 1999 1998 ------- ------------- ------ (Millions) Cash from operating activities.........................................activities.................................... $ 71890 $ 715 -------125 ------ ------ Investing activities: Capital spending Additions to property and investments........................... (336) (332)investments...................... (118) (120) Business acquisitions, net of cash balances acquired.................................................... (1,290) (198) Proceeds from business divestitures................................. - 278acquired............................................... (106) (89) Reduction of property and investments............................... 187 15 Other...............................................................investments.......................... 11 12 Other.......................................................... - 11 ------------- ------ Cash used for investing activities.............................. (1,439) (226) -------activities......................... (213) (186) ------ ------ Financing activities: Net change in borrowings with maturities of three months or less.............................. 277 (55)less......................... 186 175 Proceeds from other short-term debt................................. 205 101debt............................ 67 69 Repayment of other short-term debt.................................. (211) (92)debt............................. (73) (68) Proceeds from long-term debt........................................ 821 8debt................................... 1 1 Repayment of long-term debt......................................... (67) (61) Loans to employee stock ownership plan.............................. (24) (26)debt.................................... (13) (28) Repayment of loans by employee stock ownership plan.................................................. 30 31 Purchaseplan............................................. 13 13 Issuance (purchase) of treasury stock, net..................................... (74)net..................... 2 (79) Dividends paid................................................. (70) Dividends paid...................................................... (198) (188) -------(66) ------ ------ Cash provided by (used for) financing activities................ 759 (352) -------activities...................... 113 17 ------ ------ Effect of currency exchange rate changes on cash and cash equivalents........................................equivalents................................... (3) (2) (2) ------------- ------ Net increasedecrease in cash and cash equivalents.............................. 36 135equivalents......................... (13) (46) Cash and cash equivalents, beginning of period.........................period.................... 158 128 129 ------------- ------ Cash and cash equivalents, end of period...............................period.......................... $ 164145 $ 264 =======82 ====== ======
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, 1999March 31, 2000 and the results of their operations and their cash flows for the three-three months ended March 31, 2000 and nine-month periods ended September 30, 1999 and 1998.1999. These condensed financial statements should be read in conjunction with the financial statements and notes thereto incorporated by reference in PPG's Annual Report on Form 10-K for the year ended December 31, 1998.1999. The results of operations for the ninethree months ended September 30, 1999March 31, 2000 are not necessarily indicative of the results to be expected for the full year. 2. Earnings Per Common Share ------------------------- The following table reflects the earnings per common share calculations for the three and nine months ended September 30, 1999March 31, 2000 and 1998.1999.
Three Months Nine Months Ended Sept. 30 Ended Sept. 30 --------------------------March 31 --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------- (Millions, except per share amounts) 2000 1999 ------ ------ Earnings per common share Net income..........................................income.............................................. $ 99139 $ 248 $ 406 $ 639 ------ ------123 ------ ------ Weighted average common shares outstanding........................................ 173.7 177.0 173.8 177.2 ------ ------outstanding........................................... 174.1 174.2 ------ ------ Earnings per common share...........................share............................... $ 0.570.80 $ 1.40 $ 2.34 $ 3.61 ====== ======0.71 ====== ====== Earnings per common share - assuming dilution Net income..........................................income.............................................. $ 99139 $ 248 $ 406 $ 639 ------ ------123 ------ ------ Weighted average common shares outstanding........................................ 173.7 177.0 173.8 177.2outstanding........................................... 174.1 174.2 Effect of dilutive securities: Stock options...................................... 0.5 0.6 0.5 0.8options......................................... 0.3 0.4 Other stock compensation plans.....................plans........................ 1.3 1.2 1.1 1.2 1.0 ------ ------ ------ ------ Potentially dilutive common shares.................. 1.7 1.7 1.7 1.8 ------ ------shares...................... 1.6 1.6 ------ ------ Adjusted common shares outstanding........................................ 175.4 178.7 175.5 179.0 ------ ------outstanding........................................... 175.7 175.8 ------ ------ Earnings per common share - assuming dilution..................................dilution..................................... $ 0.560.79 $ 1.39 $ 2.31 $ 3.57 ====== ======0.70 ====== ======
-5-- 5 - 3. Acquisitions and Business Realignments -------------------------------------- Acquisitions In January 1999, the Company completed the acquisition of the remaining portion of the global packaging coatings business formerly owned by Courtaulds plc (Courtaulds) from Akzo Nobel N.V. and completed the purchase of certain leased assets in connection with its 1998 acquisition of the technical coatings business of Orica Ltd. (Orica).Acquisition In February 1999,2000, the Company acquired the commercial transport refinishMonarch Paint Co. (Monarch), an architectural coatings business of Sigma Coatings B.V., (Sigma Coatings) a subsidiary of Belgian refiner PetroFina S.A.producer. The Company has completed a preliminary purchase price allocations for the Courtaulds and Sigma Coatings acquisitions, which are subject to adjustment in 1999 when finalized. The final purchase price allocation for the Oricathis acquisition has been completed. Theand the operating activity associated with these acquisitionsMonarch has been included in the Company's results of operations from the acquisition dates. On July 30, 1999,date. The preliminary purchase price allocation is subject to adjustment later in 2000 when finalized. Business Realignments In March 2000, the Company completedrefined the acquisitionrestructuring plans for certain locations related to the integration of the global automotive refinish, automotive and industrial coatings businesses of Imperial Chemical Industries PLC (ICI), with(the ICI business). These restructuring plans were originally developed at the exceptionacquisition date (July 1999). The restructuring plans include severance benefits for 241 employees and resulted in an increase in goodwill of $12 million and a pretax charge of $1 million. As of March 31, 2000, $2 million had been paid to 53 employees and the businessesremaining reserve of $11 million, which covered 188 employees, is expected to be paid by the end of 2000. The Company also completed the sale of its equity interest in the Indian subcontinent, for approximately $677 million. Although the ICI businesses in Francean Asian float glass plant and Asia were included as part of the July 30, 1999 acquisition, the Company will not finalize the purchase of these businesses until the fourth quarter of 1999. On July 30, 1999,one Asian downstream fabrication facility. In addition, the Company substantially completed the acquisitionsale of coatings and sealants maker PRC DeSoto International, Inc. (PRC DeSoto) from Akzo Nobel N.V. for approximately $524 million, including cash balances acquired. The portion of the purchase price related to the PRC DeSoto businessits equity interest in France of approximately $24 million has been paid into an escrow account,another Asian downstream fabrication facility, pending approval of the transaction by the regulatory authorities in that country.authorities. The cash heldregulatory approval is expected to be received in the escrow account is included in the Company's cash and cash equivalents balance on the September 30, 1999, condensed balance sheet. The ICI and PRC DeSoto acquisitions were initially funded through short-term borrowings. In August 1999, the Company issued $800 million of long-term debt to replace a substantial portion of the short-term borrowings. The Company has completed preliminary purchase price allocations for the ICI and PRC DeSoto acquisitions and the operating activity associated with these acquisitions has been included in the Company's results of operations from the acquisition dates with the exception of the ICI business in Asia and the PRC DeSoto business in France. In each of these acquisitions, the preliminary allocation resulted in an excess of purchase price over the fair value of net assets acquired being allocated to goodwill, which is being amortized on a straight-line basis over 40 years. Additionally, based upon an independent valuation, approximately $21 million of the PRC DeSoto purchase price and $19 million of the ICI purchase price was allocated to purchased in-process research and development, which was recorded as a pre- tax charge in the thirdsecond quarter of 1999. The preliminary purchase price allocations are subject to adjustment in 1999 and 2000 when finalized. Plans are currently in development to integrate the operations of these recent acquisitions within the Company, which will likely result in certain severance costs. These costs, once determinable, could result in an increase in goodwill. The following pro forma information presents the consolidated results of operations of the Company, ICI and PRC DeSoto, with the exception of the ICI businesses in Asia -6- and the PRC DeSoto business in France, as if the ICI and PRC DeSoto acquisitions had been completed on January 1, 1998 and excludes after-tax charges of $33 million for purchased in-process research and development and $12 million for the fair-market-value adjustment of acquired inventories that have been sold. The following pro forma information also excludes the effects of synergies and cost reduction initiatives directly related to these acquisitions. These actions have already commenced and are expected to continue in the year 2000.
Nine Months Ended ----------------- Sept. 30 -------- 1999 1998 ------ ------ (Millions, except per share amounts) Net sales................................................................... $ 6,042 $ 6,173 Earnings before interest, income taxes and minority interest......................................................... 863 1,150 Net income.................................................................. 429 614 Earnings per common share................................................... 2.47 3.46 Earnings per common share - assuming dilution......................................................... 2.45 3.43
These pro forma consolidated results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the acquisitions occurred on January 1, 1998, or which may result in the future. Business Realignments In MarchDuring 1999, the Company approved a restructuring planplans associated with the integration of recentthe packaging coatings acquisitions whichand cost reduction activities across all of its businesses that resulted in pre-tax charges of $47 million. The components of the plans included severance benefits for 519 employees and estimated losses of $17 million on the disposal of a pre-taxredundant European facility and the disposition of the assets of a U.S. coatings facility. As of March 31, 2000, $12 million had been paid under the plans to 293 employees. In addition, fixed asset write-offs totaling $1 million were recorded in the first quarter of 2000. At March 31, 2000, the remaining reserves associated with the 1999 restructuring plans covered 226 employees. PPG anticipates that the remaining severance benefits will be paid and the asset dispositions will be completed during 2000. In 1999, the Company also recorded a reversal of $1 million related to reserves established in 1999 for cost reduction initiatives in its glass and coatings businesses. During 1998, the Company recorded a pretax charge of $24 million.$19 million in connection with a restructuring plan to reduce costs in its glass and coatings businesses. The components of the plan included severance benefits for 182 employees and an estimated loss of $14 million on the disposal of a redundant European facility.283 employees. As of September 30,March 31, 2000, approximately $15 million has been paid out under the restructuring plan and $1 million was reversed in 1999 $2 million of severance benefits had beenfor amounts that will not be paid under the plan. It is anticipated thatThe remaining reserves associated with the asset disposition and the payment of1998 restructuring plan are designated to cover 66 employees. - 6 - At March 31, 2000, the remaining severance benefits willreserves associated with the 1999 and 1998 restructuring plans totaled $19 million and are expected to be substantially completed by March 31,paid in 2000. In July 1999,1997, the Company completed the sale of its Pittsburgh headquarters complex for $186 million. Concurrent with the sale, the Company entered into a long-term operating lease for the portion of the complex occupied by the Company. The pre-tax gain of $7 million on the sale was deferred and will be amortized over the term of the long-term operating lease. In September 1999, the Company approved a restructuring plan related to cost reduction initiatives which resulted inrecorded a pre-tax restructuring charge of $19 million. The plan includes an estimated loss of $3$102 million related to certain glass businesses that were not meeting strategic performance objectives. The principal components of this program included the disposalclosure of assets of a coatings facilitythe Perry, Ga., flat glass plant and severance benefits for 373 employees. It is anticipated that the asset disposition and the payment of severance benefits will be completed by September 30, 2000. The Company has previously reserved for the estimated loss on the disposition of itsour equity interests in two Asian float glass plantsplants. The pre-tax restructuring charge in 1997 included $61 million of asset write-offs and two downstream fabrication facilities. At September 30, 1999, the reserve totaled approximately $38$41 million associated with cash outlays primarily for severance costs for 317 employees, a proportionate share of equity investee indebtedness and $2demolition and environmental costs, net of proceeds from sale. An additional $15 million had been paid under the plan during the nine months ended September 30, 1999. Negotiationspretax restructuring charge was recorded in 1998 related to these disposals are ongoinga reassessment of the proceeds expected to be realized on the dispositions and additional asset write-offs. As of March 31, 2000, cash outlays and asset write-offs associated with both the 1997 restructuring program and the Company anticipates completionadditional restructuring charge recorded in 1998 related to this program totaled $108 million. We also reversed $3 million of these restructuring charges in each of the salesyears 1999 and 1998, respectively. At March 31, 2000, approximately $3 million of these facilities byreserves related to the end of 1999. -7- 1997 restructuring program are outstanding and will be paid out during 2000 or early in 2001. 4. Inventories ----------- Inventories at September 30, 1999March 31, 2000 and December 31, 19981999 are detailed below.
Sept. 30March 31 Dec. 31 2000 1999 1998 -------- ------- (Millions) Finished products and work in process....................................process........................ $ 719743 $ 638716 Raw materials............................................................ 187 174 Supplies................................................................. 114 105materials................................................ 211 189 Supplies..................................................... 113 111 ------ ----- Total............................................................... $1,020 $ 917------ Total.................................................... $1,067 $1,016 ====== ===========
Most domestic and certain foreign inventories are valued using the last-in, first-out method. If the first-in, first-out method had been used, inventories would have been $165$158 million and $183$164 million higher at September 30, 1999March 31, 2000 and December 31, 1998,1999, respectively. - 7 - 5. Other Assets ------------ Other assets at September 30, 1999 and December 31, 1998 are detailed below.
Sept. 30 Dec. 31 1999 1998 -------- ------- (Millions) Prepaid pension cost..................................................... $ 780 $ 707 Identifiable intangible assets - net..................................... 662 148 Other assets............................................................. 139 128 ------ ----- Total............................................................... $1,581 $ 983 ====== =====
Identifiable intangible assets consist primarily of developed technology, trademarks, and customer lists acquired in recent acquisitions which are being amortized on a straight-line basis over the estimated useful lives of the assets. 6. Comprehensive Income -------------------- Total comprehensive income for the three and nine months ended September 30,March 31, 2000 and 1999 and 1998 was as follows:
Three Months Nine Months Ended Sept. 30 Ended Sept. 30 ----------------------------- -------------------------March 31 --------------------------- 2000 1999 1998 1999 1998 -------------- ------------- ------------ ---------------- ----- (Millions) Net income.........................................income................................................. $ 99139 $ 248 $ 406 $ 639123 ----- ----- Other comprehensive income (loss),loss, net of tax: Currency translation adjustment.................. 29 26 (21) 16adjustment......................... (56) (71) Minimum pension liability adjustment............. - -adjustment.................... 2 (1) - Unrealized losses on marketable securities..................................... (4) - (1) -securities.............. (5) (5) ----- ----- ----- ----- 25 26 (23) 16 ----- -----(59) (77) ----- ----- Total comprehensive income......................income........................... $ 12480 $ 274 $ 383 $ 655 ===== =====46 ===== =====
-8- As of September 30, 1999March 31, 2000 and December 31, 1998,1999, accumulated other comprehensive loss, as reflected on the condensed balance sheet, was comprised of the following:
Sept. 30March 31 Dec. 31 2000 1999 1998 -------- ------- (Millions) Currency translation adjustment...................................adjustment................................. $ (143)(218) $ (122)(162) Minimum pension liability adjustment.............................. (32) (31)adjustment............................ (11) (13) Unrealized losses on marketable securities........................ (1) -securities...................... (8) (3) ------ ------ Accumulated other comprehensive loss............................loss.......................... $ (176)(237) $ (153)(178) ====== ======
7.6. Cash Flow Information --------------------- Cash payments for interest were $79$54 million and $84$20 million for the ninethree months ended September 30,March 31, 2000 and 1999, and 1998, respectively. Net cash payments for income taxes for the ninethree months ended September 30,March 31, 2000 and 1999 and 1998 were $245$19 million and $292$17 million, respectively. 8.- 8 - 7. Business Segment Information ---------------------------- Effective December 31, 1998, PPG adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an EnterpriseBusiness segment net sales and Related Information." Segment operating income and other unallocated corporate (expense) income for the three and nine months ended September 30, 1998 have been restated to conform with the current year presentation format.March 31, 2000 and 1999 were as follows:
Three Months Nine Months Ended Sept. 30 Ended Sept. 30 -------------- --------------March 31 --------------------------- 2000 1999 1998 1999 1998 ------ ------ ------ ------ (Millions) Net sales: Coatings (a).................................... $1,028.................................................. $1,128 $ 825 $2,945 $2,547 Glass........................................... 565 601 1,708 1,994912 Glass......................................................... 571 557 Chemicals (b)................................... 363 381 1,059 1,189................................................. 391 337 Intersegment net sales.......................... (2)sales........................................ (3) (8) (9)(3) ------ ------ ------ ------ Total........................................ $1,954 $1,804 $5,704 $5,721 ====== ======Total...................................................... $2,087 $1,803 ====== ====== Operating income: Coatings (c)...................................................................................... $ 64160 $ 124 $ 344 $ 411 Glass (d)....................................... 90 186 303 403 Chemicals (e)................................... 43 86 121 293101 Glass......................................................... 105 97 Chemicals..................................................... 74 36 ------ ------ ------ ------ Total........................................ 197 396 768 1,107Total...................................................... 339 234 Interest expense - net............................ (33)net.......................................... (40) (25) (85) (77) Other unallocated corporate incomeexpense - net.................................... 20 6 13 11 ------ ------net (d)................... (43) (1) ------ ------ Income before income taxes and minority interest...............................interest............................................. $ 184256 $ 377 $ 696 $1,041 ====== ======208 ====== ======
-9- (a) Includes intersegment net sales of $1 million for the three months ended September 30, 1998 and $2 million for each of the nine-month periods ended September 30, 1999 and 1998.three- month periods. (b) Includes intersegment net sales of $2 million for each of the three- month periods ended September 30, 1999 and 1998 and $6 million and $7 millionperiods. (c) Includes for the ninethree months ended September 30, 1999 and 1998, respectively. (c) Includes in each 1999 period presented, pre-taxMarch 31, 2000, pretax charges of $40 million for purchased in-process research and development, $19$2 million representing the fair-market-value adjustment of acquired ICI and PRC DeSoto inventories that have been sold $15 million of restructuring charges related to cost reduction initiatives and the closure of a facility and $6 million related to the recent bankruptcy of an architectural coatings customer. The nine months ended September 30, 1999 also includes a pre-tax restructuring charge of $24 million for disposal of a redundant European packaging coatings facility and work force reductions. (d) Includes in each 1999 period presented, a pre-tax restructuring charge of $3 million related to cost reduction initiatives. Each 1998 period presented includes a pre-tax gain of $85 million related to the sale of our European flat and automotive glass businesses. Includes for the nine months ended September 30, 1998, a pre-tax charge of $15 million related to the divestiture of equity interests in two Asian float glass plants and two Asian downstream fabrication facilities. (e) Includes in each 1999 period presented, a pre-tax restructuring charge of $1 million related to cost reduction initiatives. 9.initiatives associated with the integration of the ICI business acquired in 1999. Includes for the three months ended March 31, 1999, a pretax restructuring charge of $24 million associated with the integration of the packaging coatings acquisitions, including the disposal of a redundant European facility and work-force reductions. (d) Includes for the three months ended March 31, 2000, a pretax charge of $39 million representing the write-off of an equity investment in Pittsburgh Corning Corporation, which has filed for reorganization under the federal bankruptcy code. - 9 - 8. Commitments and Contingent Liabilities -------------------------------------- PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial money damages are sought. These lawsuits and claims relate to product liability, contract, patent, environmental, antitrust and other matters arising out of the conduct of PPG's business. The Company has been named in a number of antitrust lawsuits alleging that PPG acted with competitors to fix prices and allocate markets for certain glass products. These antitrust proceedings are in an early stage. For over 30 years, the Company has been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. Aggregate settlements by PPG to date have been immaterial. Over the past few years, the number of asbestos- related claims against the Company, as well as numerous other defendants, has increased. At March 31, 2000, the Company was one of many defendants in numerous asbestos-related lawsuits involving approximately 110,000 claims. In many of the cases, the plaintiffs allege that the Company should be liable for injuries from products manufactured and distributed by Pittsburgh Corning Corporation ("PC"). The Company and Corning Incorporated are each 50% shareholders of PC. The Company believes it is not responsible for any injuries caused by PC products and intends to defend against such claims. PPG has successfully defended such claims in the past. In January 2000, for the first time, a trial court found PPG liable for injuries to five plaintiffs alleged to be caused by PC products. The Company intends to appeal that verdict. On April 16, 2000, PC filed a petition for reorganization under the federal bankruptcy code. Accordingly, during the three months ended March 31, 2000, the Company recorded an after-tax charge of $35 million for the write-off of its investment in PC. The Company and others are also defendants in three cases involving claims alleging injury from exposure to lead. PPG believes it has adequate insurance for the personal injury and property damage claims against the Company described above. PPG's lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental, asbestos and other matters. Management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG will not have a material effect on PPG's consolidated financial position, results of operations or liquidity. It is PPG's policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are not discounted. As of September 30, 1999March 31, 2000 and December 31, 1998,1999, PPG had reserves for environmental contingencies totaling $84$79 million and $94$82 million, respectively. Pre-tax charges against income for environmental remediation costs for the ninethree months ended September 30,March 31, 2000 and 1999 and 1998 totaled $8$1 million and $7$2 million, respectively, and are included in "Other Charges"charges" in the condensed statement of income. Cash outlays related to such chargesenvironmental remediation for the ninethree months ended September 30,March 31, 2000 and 1999 and 1998 aggregated $18$4 million and $13$6 million, respectively. -10- 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 - 10 - sound manner and the outcome of the Company's environmental contingencies will not have a material effect on PPG's financial position or liquidity. In addition to the amounts currently reserved, the Company may be subject to loss contingencies related to environmental matters estimated to be as much as $200 million to $400 million, which range is unchanged from December 31, 1998.1999. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. Although insurers and other third parties may cover a portion of these costs, to the extent they are incurred, any potential recovery is not included in this unreserved exposure to future loss. The Company's environmental contingencies are expected to be resolved over an extended period of time. Although the unreserved exposure to future loss relates to all sites, a significant portion of such exposure involves three operating plant sites. Initial remedial actions are occurring at these sites. Studies to determine the nature of the contamination are reaching completion and the need for additional remedial actions, if any, is presently being evaluated. The loss contingencies related to the remaining portion of such unreserved exposure include significant unresolved issues such as the nature and extent of contamination, if any, at sites and the methods that may have to be employed should remediation be required. With respect to certain waste sites, the financial condition of any other potentially responsible parties also contributes to the uncertainty of estimating PPG's final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agency assertions of joint and several liability, in general, final allocations of costs are made based on the relative contributions of wastes to such sites. PPG is generally not a major contributor to such sites. The impact of evolving programs, such as natural resource damage claims, industrial site reuse initiatives and state voluntary remediation programs, also adds to the present uncertainties with regard to the ultimate resolution of this unreserved exposure to future loss. The Company's assessment of the potential impact of these environmental contingencies is subject to considerable uncertainty due to the complex, ongoing and evolving process of investigation and remediation, if necessary, of such environmental contingencies. -11-- 11 - Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------------------------------------------------------------------------------- Results of Operations --------------------- Performance in the Third Quarter of 1999 Compared to the Third Quarter of 1998 Performance Overview Sales increased 8% to $1.95 billion16% in the thirdfirst quarter of 19992000 to $2.09 billion from $1.80 billion in the thirdsame quarter of 1998. Acquisitions1999. First quarter 2000 sales increased 10% due to acquisitions within theour coatings segment, and higher volumes6% from sales volume improvements across all of our business segments increasedand 2% from higher selling prices within our chemicals segment. These sales increases were partially offset by 16%a 2% decline due to foreign currency translation primarily from the year ago quarter.weaker euro currency that principally affected our coatings segment. The gross profit percentage increased to 39.9% during the first quarter of 2000 from 38.8% in the same quarter of 1999. The increase in the gross profit percentage is due to higher selling prices for commodity chemicals in our chemicals segment, improved manufacturing efficiencies in our chemicals and glass segments, and favorable sales mix changes in our coatings segment. These favorable factors were partially offset by sales declines of 5% due to lower selling prices in all our business segments, 2% due to the absence of sales from our European flat and automotive glass businesses, which were divested in July 1998, and 1% from the negative effects of foreign currency translation. The gross profit percentage decreased to 38.3% in the third quarter of 1999 from 40.0% in the third quarter of 1998. The combination of lower selling prices discussed above and a pre-tax charge of $19 million representing the fair- market-value adjustment of acquired ICI and PRC DeSoto inventories that have been sold, was partially offset by manufacturing efficiencies across all segments. Net income and earnings per share, diluted, for the third quarter of 1999 were $99 million and $0.56, respectively, compared to $248 million and $1.39 in the same quarter of 1998. Net income for the third quarter of 1999 was negatively impacted by the absence of a third quarter 1998 $82 million after-tax gain from the sale of our European flat and automotive glass businesses, lower selling prices as discussed above and after-tax charges of $45 million for purchased in- process research and development and the fair-market-value adjustment of acquired inventories that have been sold. In addition, net income in the 1999 third quarter was adversely affected by lower insurance recoveries of certain past environmental costs and after-tax restructuring charges of $12 million related to ongoing cost reduction initiatives and the closure of a coatings facility. These unfavorable factors were partially offset by improved manufacturing efficiencies across all of our segments, increased volumes principally within our coatings and chemicals segments and lower income tax expense due to the reduction in pre-tax earnings, which more than offset a higher effective income tax rate. Excluding the after-tax acquisition related and restructuring charges in the third quarter of 1999 and the after-tax gain from the sale of our European flat and automotive glass businesses in the third quarter of 1998, net income and earnings per share, diluted, for the third quarter of 1999 were $156 million and $0.89, respectively, compared to $166 million or $0.93 in the same quarter of 1998. Performance of Business Segments Coatings sales increased 25% to $1.03 billion in the third quarter of 1999 compared to $824 million in the same quarter of 1998. A 28% sales increase resulted primarily from several acquisitions made in late 1998 and 1999 and an improvement in sales volumes in our North American and European automotive original and North American industrial businesses as the comparable quarter of 1998 was adversely affected by the General Motors strike. These favorable factors were partially offset by sales declines of 2% from lower selling prices, primarily within our North American and European automotive original businesses and 1% from the negative effects of foreign currency translation. Operating income decreased to $64 million in the third quarter of 1999 from $124 million in the same quarter of 1998. Third quarter 1999 operating income was negatively impacted by pre-tax acquisition related charges of $40 million and $19 million, respectively, related to purchased in-process research and development and the fair-market-value adjustment of acquired ICI and PRC DeSoto inventories that have been sold. In addition, pre-tax restructuring charges of $15 million related to ongoing cost reduction efforts, including the closure of a facility, lower selling prices, -12- as previously discussed, and a charge related to the recent bankruptcy of an architectural coatings customer also contributed to the decrease in operating income. These negative factors were partially offset by improved manufacturing efficiencies across all of our coatings businesses and the sales volume increases noted above. Excluding the acquisition related and restructuring pre- tax charges, operating income for the third quarter of 1999 increased to $138 million as compared to $124 million in the third quarter of 1998. Glass sales decreased 6% to $565 million in the third quarter of 1999 from $601 million in the same quarter of 1998. Sales declined 7% due to the absence of sales from our European flat and automotive glass businesses divested in July 1998 and 4% from lower selling prices for our fiber glass products as well as for our automotive replacement and original glass products. A 5% increase in sales from improved volumes for our North American automotive original glass products and our worldwide fiber glass reinforcement products partially offset these negative factors. The 1998 quarter included the adverse effects of the General Motors strike. Operating income decreased to $90 million in the third quarter of 1999 as compared to $186 million in the same quarter of 1998. The absence of a third quarter 1998 $85 million pre-tax gain from the sale of our European flat and automotive glass businesses and the negative effects of lower selling prices previously discussed were only partially offset by improved manufacturing efficiencies within our worldwide fiber glass and North American automotive original businesses. In addition, operating income for the third quarter of 1999 included a $3 million pre-tax restructuring charge related to cost reduction initiatives. Excluding the pre-tax restructuring charge and the pre-tax gain from the sale of our European flat and automotive glass businesses, operating income for third quarter of 1999 was $93 million compared to $101 million in the same prior-year quarter. Chemicals sales decreased 5% to $361 million in the third quarter of 1999 from $379 million in the same period of 1998. Sales declined 12% as a result of lower selling prices for our chlorine and caustic soda products, due in part to worldwide competitive pricing pressures, which was offset by a 7% increase in volumes. Operating income decreased to $43 million in the third quarter of 1999 compared to $86 million in the same quarter of 1998. The significant reduction in selling prices discussed above, higher raw material and energy costs and lower insurance recoveries of certain past environmental costs were only partially offset by the volume improvements discussed above and a slight improvement in manufacturing efficiencies in our chlor-alkalichemicals and derivatives business. Performance in the First Nine Months of 1999 Compared to the First Nine Months of 1998 Performance Overview Sales decreased slightly during the first nine months of 1999 to $5.70 billion compared to $5.72 billion for the first nine months of 1998. A 9% increase in sales as a result of acquisitions in the coatings segment and volume increases across all of our business segments were offset by a 5% decrease due to the absence of sales from our European flat and automotive glass businesses, which were divested in July 1998, and a 4% decrease due to lower selling prices in all of our business segments. The gross profit percentage decreased to 39.1% in the first nine months of 1999 compared to 40.3% in the same prior-year period. Lower selling prices across all of our business segments, and a pre-tax charge of $19 million representing the fair-market-value adjustment of acquired ICI and PRC DeSoto inventories that have been sold more than offset the benefits realized from improved manufacturing efficiencies across all of our segments. Net income and earnings per share, diluted, for the first nine monthsquarter of 1999 were $4062000 increased to $139 million and $2.31,$0.79, respectively, compared to $639$123 million and $3.57$0.70, respectively, in the first nine monthssame quarter of 1998.1999. The decreaseincrease in net income and earnings per share for the first nine monthsquarter of 1999 was attributable2000 resulted from the sales volume improvements previously discussed, the same factors that contributed to lower selling prices,an improvement in the gross profit percentage, the absence of a thirdfirst quarter 1998 $82 million after-tax gain from the sale of our European flat and -13- automotive glass businesses and after-tax acquisition related charges of $45 million for purchased in-process research and development and the fair-market- value adjustment of acquired ICI and PRC DeSoto inventories that have been sold. In addition,1999 after-tax restructuring chargescharge of $32$20 million for the first nine months of 1999 related to the integration of recent packaging coatings acquisitions and ongoing cost reduction efforts exceededearnings from acquisitions. These favorable factors more than offset a first quarter 2000 after-tax charge of $35 million for the write-off of an equity investment, increased income tax expense from improved pretax earnings and higher interest expense as a result of acquisition activity. Excluding the write-off of the equity investment in the first quarter of 2000 and the restructuring charges in the year ago nine-month period for the estimated loss on the divestiturefirst quarter of our equity interests in Asian glass operations. These unfavorable factors were partially offset by lower income tax expense due to the reduction in pre-tax earnings, improved manufacturing efficiencies across all of our segments, and increased sales volumes principally within our coatings and chemicals segments. Excluding the after-tax acquisition related and restructuring charges and the after-tax gain from the sale of our European flat and automotive glass businesses,1999, net income and earnings per share, diluted, for the first nine months of 1999 were $483$174 million and $2.75,$0.99, respectively, compared to $566$143 million or $3.16 in the same prior-year period.and $0.81, respectively. Performance of Business Segments Coatings sales increased 16%24% to $2.94$1.13 billion during the first nine months of 1999 from $2.55 billion in the comparable nine-month period of 1998. Sales increased 18% primarily from acquisitions made within all of our coatings businesses and volume increases in our North American automotive original and industrial businesses as sales for the second and third quarters of 1998 were adversely affected by the General Motors strike. Sales declines of 1% from the negative effects of foreign currency translation and 1% from lower selling prices, principally within our North American and European automotive original business slightly offset these favorable factors. Operating income decreased to $344$911 million in the first nine monthsquarter of 19991999. Sales increased 20% primarily from $411 million in the same 1998 period. Operating income inacquisitions of the 1999 nine-month period was negatively impacted by pre-tax acquisition related charges of $40 million for purchased in-process research and development and $19 million for the fair-market-value adjustment of acquired ICI and PRC DeSoto inventories that have been sold. Additional factors contributing to the 1999 reduction in operating income were $39 million of restructuring charges related to the integration of recent packaging acquisitions and on-going cost reduction efforts, and lower selling prices as discussed above. These negative factors were partially offset by improved manufacturing efficiencies, primarily within our North American and European automotive original and industrial businesses and the sales volume increases discussed above. Excluding the pre-tax acquisition related and restructuring charges, operating income for the first nine months of 1999 increased to $442 million as compared to $411 million in the first nine months of 1998. Glass sales decreased 14% to $1.71 billion in the first nine months of 1999 from $1.99 billion in the same period of 1998. Sales declined 14% as a result of the divestiture of our European flat and automotive glass businesses in July 1998 and 3% principally from lower selling prices for our worldwide fiber glass products and our North American automotive original and replacement glass products. These negative factors were slightly offset by a 3% increase in sales volumes primarily related to our North American automotive original glass business as the 1998 comparable period was adversely affected by the General Motors strike. Automotive replacement glass volumes also improved in the nine months of 1999. Operating income decreased to $303 million in the first nine months of 1999 from $403 million in the same nine-month period of 1998. The absence of a third quarter 1998 $85 million pre-tax gain from the sale of our European flat and automotive glass businesses and the related operating profits, lower prices for our fiber glass and automotive glass products discussed above and unfavorable sales mix changes in certain businesses were partially offset by manufacturing efficiencies in our automotive original glass and fiber glass reinforcements businesses. In addition, the 1999 period includes pre-tax restructuring charges of $3 million related to cost reduction initiatives compared to an additional $15 million provision for the estimated loss on the divestiture of our equity interests in Asian glass operations in the 1998 period. Excluding the pre-tax restructuring charges and pre-tax gain from the sale of our European flat and automotive -14- glass businesses, operating income for the first nine months of 1999 was $306 million as compared to $333 million in the same prior-year period. Chemicals sales decreased 11% to $1.05 billion in the first nine months of 1999 from $1.18 billion in the same period of 1998. Sales declined 14% as a result of lower selling prices for our chlorine and caustic soda products, due in part to worldwide competitive pricing pressures, which was offset slightly by a 3% increase in volumes. Operating income decreased to $121 million in the first nine months of 1999 compared to $293 million in the same period of 1998. The significant reduction in selling prices discussed above, higher raw material and energy costs and lower insurance recoveries of certain past environmental costs were only partially offset by manufacturing efficiencies in our chlor-alkali and derivatives business, and the volume improvements discussed above. Other Factors The increase in the effective tax ratePRC-DeSoto International, Inc. (PRC-DeSoto) in the third quarter of 1999 and 9% from volume improvements in our worldwide automotive original and industrial businesses and, to a lesser extent, our automotive refinish and packaging coatings businesses. These sales increases were offset in part by a 4% decline from foreign currency translation principally from the weaker euro currency which affected all of our coatings businesses and a 1% decrease in overall selling prices for our automotive original products in North America and Europe. Operating income increased to $160 million in the first nine monthsquarter of 2000 from $101 million in the same quarter of 1999. Operating income in the first quarter of 2000 improved due to increased sales volumes, as previously discussed, favorable sales mix changes in certain businesses, a reduction in pretax restructuring charges as discussed below and earnings from acquisitions. First quarter 2000 operating income included pretax restructuring charges of $1 million related to the integration of the ICI businesses and operating income for the first quarter of 1999 included $24 million of restructuring charges for the integration of packaging coatings acquisitions. The factors which contributed to the increase in operating income more than offset the effects of lower selling prices, as previously discussed, and higher raw material and energy costs in our North American automotive refinish, automotive original and industrial - 12 - businesses. Excluding the pretax restructuring charges, operating income increased to $161 million in the first quarter of 2000 as compared to $125 million in the same quarter of 1999. Glass sales increased 3% to $571 million from $557 million in the first quarter of 1999. The increase is attributable primarily to sales volume improvements in our North American automotive original, fiber glass and flat glass businesses. Operating income increased to $105 million in the first quarter of 2000 from $97 million in the same quarter of 1999. Improved manufacturing efficiencies in our North American automotive original, fiber glass reinforcement and flat glass businesses and lower selling and administrative expenses in our North American automotive replacement and electronic and specialty fiber glass businesses more than offset the slightly higher raw material and energy costs in our flat and fiber glass reinforcement businesses. Chemicals sales increased 16% to $389 million compared to $335 million in the same quarter of 1999. Substantial increases in selling prices for our chlorine and other chlor-alkali products contributed 12% to sales growth and volume improvements of 5% for certain chlor-alkali and specialty chemical products were offset slightly by a 1% decline from the negative effect of foreign currency translation principally on our European optical products business. Operating income increased to $74 million in the first quarter of 2000 from $36 million in the same quarter of 1999 due to the same factors that contributed to the overall sales increase and manufacturing efficiencies in our chlor-alkali and optical products businesses. These favorable factors were partially offset by higher raw material and energy costs. Other Factors The Company recorded a pretax charge of $39 million in the first quarter of 2000, which is included in other unallocated corporate expense, representing the write-off of an equity investment. The Company's pretax earnings for the first quarter of 2000 and 1999 included net periodic pension income of $21 million and $15 million, respectively, related to its U.S. defined benefit pension plans. Interest expense increased during the first quarter of 2000 as compared to the same periods of 1998 is principally due to the third quarter 1998 pre-tax gain from the sale of the European flat and automotive glass businesses being almost entirely offset by the utilization of capital loss carryforwards. Thein 1999 third quarter and nine-month periods also experienced an increase in the effective tax rate due to the non- deductibility of certain in-process research and development charges. Other unallocated corporate income - net increased by approximately $14 million for the three months ended September 30, 1999, primarily due to a gain on the appreciation of British pounds sterling purchased to fund the acquisition of ICI. The increase in receivables-net principally results from acquisitions and higher sales volumes in the third quarter of 1999 as compared with the fourth quarter of 1998. Goodwill and other long-term assets increased principally due to the recent acquisitions of ICI and PRC DeSoto. Total assets of the Coatings segment increased to $4.3 billion as of September 30, 1999, from $3.0 billion as of December 31, 1998, principally due to acquisitions, including the recent acquisitions of ICI and PRC DeSoto. Long-term debt increased due to the issuance of $800 million aggregate principal amount of debt securities in August 1999 to repay a substantial portion of the short-term debt issued to finance the acquisitions of the ICI businesses and PRC DeSoto.PRC-DeSoto. The increase in the overall effective tax rate is due to the impact of the write-off of the equity investment in the first quarter of 2000. The increase in receivables-net is due primarily to increased sales in our coatings and glass segments. The increase in short-term borrowings is due in part to the issuance of commercial paper to finance certain acquisitions. - 13 - Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". The effective date of this standard has been delayed to fiscal years beginning after June 15, 2000. The Company is currently evaluating the prospective impact of this standard on its financial position and results of operations. Conversion to the Euro On January 1, 1999, eleven of the member countries of the European Monetary Union converted from their sovereign currencies to a common currency, the euro. At that time, fixed conversion rates between the legacy currencies and the euro were set. The legacy currencies will remain legal tender from January 1, 1999, through July 1, 2002. Beginning January 1, 2002, euro-denominated currency will be issued. No later than July 1, 2002, the participating countries will withdraw all bills and coins so that their legacy currencies will no longer be considered legal tender. PPG has identified and has substantially addressed the significant issues that may have resulted from the euro conversion. These issues include increased competitive pressures from greater price transparency, changes to information systems to accommodate various aspects of the new currency and exposure to market risk with respect to financial instruments. The impact on PPG's operating results and financial condition from the conversion to the euro has not been, and is not expected to be, material. -15- Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. Management's Discussion and Analysis and other sections of this Form 10-Q contain forward- looking statements that reflect the Company's current views with respect to future events and financial performance. Forward-looking statements are identified by the use of the words "aim," "believe," "expect," "anticipate," "intend," "estimate" and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission. Also, note the following cautionary statements. Many factors could cause actual results to differ materially from the Company's forward-looking statements. Among these factors are increasing price and product competition by foreign and domestic competitors, fluctuations in the cost and availability of raw materials, the ability to maintain favorable supplier relationships and arrangements, economic and political conditions in international markets, the ability to penetrate existing, developing and emerging foreign and domestic markets, which also depends on economic and political conditions, foreign exchange rates and fluctuations in those rates and the uncertainties regarding the Year 2000 problem discussed below.rates. Further, it is not possible to predict or identify all such factors. Consequently, while the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. The following discussion regarding Year 2000 issues, including the discussion of the timing and effectiveness of implementation and the estimated cost of the Company's Year 2000 efforts, contains forward-looking statements derived using various assumptions of future events. These forward-looking statements involve inherent risks and uncertainties and the actual results could differ materially from those contemplated by such statements. Factors that could cause material differences in results - many of which are outside the control of the Company - include, but are not limited to: . The Company's ability to locate and correct all relevant computer software. . The accuracy of representations by manufacturers of the Company's computer systems and software that their products are Year 2000 compliant. . The ability of the Company's suppliers, customers and other counterparties to identify and resolve their own Year 2000 issues so as to allow them to continue normal business operations or furnish products, services or data to the Company without disruption. . The Company's ability to respond to unforeseen Year 2000 complications. The consequences of material differences in the results as compared to those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which - 14 - could have a material adverse effect on the Company's consolidated financial condition, operations or liquidity. -16- Year 2000 Readiness Disclosure Background. Many existing information technology (IT) products and systems and non-IT products and systems containing embedded microchip processors, were originally programmed to represent any calendar dates by using six digits (for example, 12/31/99), as opposed to eight digits (for example, 12/31/1999). Accordingly, such products and systems may experience miscalculations, malfunctions or disruptions when attempting to process information containing dates that fall after December 31, 1999, or other dates that could cause computer malfunctions. These potential problems are collectively referred to as the "Year 2000" problem. State of Readiness. Recognizing the importance of Year 2000 issues, the Company has established a corporate-wide Year 2000 Steering Committee made up of certain senior executives of the Company. The Committee is responsible for overseeing the Company's efforts to assess and address the Year 2000 problem as it may affect the Company. The scope of the Company's efforts includes: (1) an assessment, and where needed a remediation, of both IT and non-IT elements of its business information, computing, telecommunications and process control systems; (2) an assessment, and remediation, as necessary, of equipment with embedded computer chips and (3) an evaluation of the Company's relationships with material third parties as they may be impacted by the Year 2000 problem. The phases of the Company's Year 2000 compliance plan are: (1) Internal Assessment - a detailed evaluation of the potential Year 2000 effects on the Company's IT and non-IT systems and on its equipment with embedded computer chips; (2) Remediation - corrective action including code enhancements, hardware and software upgrades, system replacements, vendor certification, equipment repair or replacement and other associated changes to achieve Year 2000 compliance; (3) Testing - the verification that remediation actions are effective; (4) Third-Party Evaluation - an evaluation of the Year 2000 readiness of key suppliers of goods and services and of key customers and (5) Contingency Planning - the development of detailed procedures to be put in place should the Company or key suppliers or customers experience a significant Year 2000 problem. These phases sometimes overlap. The testing phase of the Company's Year 2000 compliance plan involves subjecting the remediated system to a simulated change of date from the year 1999 to the year 2000 using, in many cases, computer resources dedicated to that purpose so that normal computing activity is not interrupted or adversely affected by the testing. As of September 30, 1999, the Company has substantially completed the remediation and testing of all critical IT and non-IT systems. The Company anticipates that the remediation and testing of all remaining systems will be completed by December 31, 1999. The Year 2000 Steering Committee will continue to review Year 2000 compliance efforts on an ongoing basis. The Company substantially completed the acquisitions of PRC DeSoto and certain businesses of ICI in the third quarter of 1999. The Company has reviewed the status of the Year 2000 compliance plans of the critical IT and non-IT systems of these businesses and anticipates that the remediation and testing of all critical systems will be completed by December 31, 1999. In the third-party evaluation phase, the Company has identified and contacted materially significant suppliers of goods or services in an effort to determine the state of readiness of these important third parties. Materially significant suppliers for this purpose are considered to be those from whom the Company purchases a significant dollar amount of goods or services and those who supply goods or services that are critical to uninterrupted production by the Company of its products, including those who are sole-source suppliers of important goods or services. Written assurances that these materially significant suppliers are progressing toward timely Year 2000 compliance have been received from more than 95% of the Company's -17- materially significant suppliers. The Company has investigated the Year 2000 readiness of its materially significant customers through review of publicly issued statements concerning Year 2000 readiness. The Company believes that its materially significant customers are progressing toward timely Year 2000 compliance. Through review of their statements regarding Year 2000 readiness, no significant concerns have been identified to date. Materially significant customers for this purpose are considered to be those to whom the Company sells a significant dollar amount of goods. If materially significant suppliers or customers or a number of less substantial suppliers or customers do not convert their systems in a timely manner, or are themselves adversely affected by a lack of Year 2000 readiness on the part of their suppliers or customers, it could have a material adverse effect on the Company's operations, liquidity or consolidated financial condition. The Company believes that its continuing efforts to gain assurances of Year 2000 compliance from materially significant suppliers and its investigative efforts with respect to the readiness of materially significant customers will minimize these risks. Nonetheless, the actual readiness of these third parties is beyond the Company's control. Costs. The Company is using both internal and external resources to execute its Year 2000 compliance plan. The Company currently estimates the incremental cost of resolving the Year 2000 issue at approximately $18 million. The Company spent a total of $16 million during 1998 and the nine months ended September 30, 1999, representing the incremental cost of resolving the Year 2000 issue and anticipates the expenditure of an additional $1 to $2 million during the fourth quarter of 1999. Approximately 50% of the total Year 2000 costs are expected to be expended on equipment or software replacement and the remainder on remediation and testing of existing systems. These cost estimates are based on currently available information and may be subject to change. All Year 2000 costs are expected to be funded from the Company's operating cash flow. The Company is expensing as incurred all costs related to the assessment, remediation and testing of the Year 2000 issue, unless new systems or equipment are purchased. In those instances, such costs are capitalized and charged to expense over the useful lives of those assets in accordance with the Company's existing policy. Risks. If needed modifications and conversions of computer systems are not made on a timely basis by the Company or its materially significant suppliers or customers, the Company could be affected by business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. Although not anticipated, the most reasonably likely worst-case scenario of failure by the Company or its key suppliers or customers to resolve the Year 2000 issue would be a short-term slowdown or cessation of manufacturing operations at one or more of the Company's facilities and a short-term inability on the part of the Company to process orders and billings in a timely manner and to deliver product to customers. Contingency Planning. Although the Company expects to be Year 2000 compliant by December 31, 1999, contingency plans to address the most reasonably likely worst case scenario have been completed for substantially all of the Company's locations as of September 30, 1999. The main focus of the contingency plans is to outline the procedures and necessary resources for the safe shutdown of manufacturing and other processes in the event of a business disruption due to a Year 2000 event. The contingency plans will continue to be reviewed and modified as required during the remainder of 1999. -18- Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". The effective date of this standard has been delayed to fiscal years beginning after June 15, 2000. The Company is currently evaluating the prospective impact of this standard on its financial position and results of operations. Commitments and Contingent Liabilities, including Environmental Matters PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial money damages are sought. These lawsuits and claims relate to product liability, contract, patent, environmental, antitrust and other matters arising out of the conduct of PPG's business. The Company has been namedSee Note 8, "Commitments and Contingent Liabilities," to the condensed financial statements in a numberthis Form 10-Q for an expanded description of antitrust lawsuits alleging that PPG acted with competitors to fix prices and allocate markets for certain glass products. These antitrust proceedings are in an early stage.of these lawsuits. PPG's lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental and other matters. Management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG will not have a material effect on PPG's consolidated financial position, results of operations or liquidity. It is PPG's policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are not discounted. As of September 30, 1999March 31, 2000 and December 31, 1998,1999, PPG had reserves for environmental contingencies totaling $84$79 million and $94$82 million, respectively. Pre-tax charges against income for environmental remediation costs for the ninethree months ended September 30,March 31, 2000 and 1999 and 1998 totaled $8$1 million and $7$2 million, respectively, and are included in "Other Charges"charges" in the condensed statement of income. Cash outlays related to such chargesenvironmental remediation for the ninethree months ended September 30,March 31, 2000 and 1999 and 1998 aggregated $18$4 million and $13$6 million, respectively. Management anticipates that the resolution of the Company's environmental contingencies, which will occur over an extended period of time, will not result in future annual charges against income that are significantly greater than those recorded in recent years. It is possible, however, that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter this expectation. In management's opinion, the Company operates in an environmentally sound manner and the outcome of the Company's environmental contingencies will not have a material effect on PPG's financial position or liquidity. In addition to the amounts currently reserved, the Company may be subject to loss contingencies related to environmental matters estimated to be as much as $200 million to $400 million, which range is unchanged from December 31, 1998.1999. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. Although insurers and other third parties may cover a portion of these costs, to the extent they are incurred, any potential recovery is not included in this unreserved exposure to future loss. The Company's environmental contingencies are expected to be resolved over an extended period of time. Although the unreserved exposure to future loss relates to all sites, a significant portion of such exposure involves three operating plant sites. Initial remedial actions are occurring at these sites. Studies to determine the nature of the contamination are reaching completion and the need for additional remedial actions, if any, is presently being evaluated. The loss contingencies related to the remaining portion of such unreserved exposure include significant -19- 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. - 15 - With respect to certain waste sites, the financial condition of any other potentially responsible parties also contributes to the uncertainty of estimating PPG's final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agency assertions of joint and several liability, in general, final allocations of costs are made based on the relative contributions of wastes to such sites. PPG is generally not a major contributor to such sites. The impact of evolving programs, such as natural resource damage claims, industrial site reuse initiatives and state voluntary remediation programs, also adds to the present uncertainties with regard to the ultimate resolution of this unreserved exposure to future loss. The Company's assessment of the potential impact of these environmental contingencies is subject to considerable uncertainty due to the complex, ongoing and evolving process of investigation and remediation, if necessary, of such environmental contingencies. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- With the exception of a $96 million increase in the present value of the Company's fixed rate debt that would occur as a result of a 10% reduction in interest rates, there-------------------------------------------------------------------- There were no material changes in the Company's exposure to market risk from December 31, 1998. The increase in the present value of this debt was primarily due to the issuance of $800 million of long-term debt in the third quarter of 1999. -20-- 16 - PART II. OTHER INFORMATION Item 1. Legal Proceedings - ----------------------------------------------------- In the Company's Form 10-K for the year ended December 31, 1998,1999, it was reported that the Company hadhas been nameda defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. In many of the cases, the plaintiffs allege that the Company should be liable under various theories for injuries involving asbestos-containing thermal insulation products manufactured and distributed by Pittsburgh Corning Corporation (PC). The Company and Corning Incorporated are each 50% shareholders of PC. On April 16, 2000, PC filed a numberpetition for reorganization under the federal bankruptcy code. During the three months ended March 31, 2000, the Company recorded an after-tax charge of antitrust lawsuits alleging PPG was involved with competitors in fixing prices and allocating markets for certain glass products. The Company's Form 10-Q$35 million for the quarter ended June 30, 1999 reported that threewrite-off of the named defendantsits equity investment in those cases, Pilkington plc, Libbey-Owens Ford Co., Inc. and AFG Industries, Inc. have entered into preliminary settlement agreements with the plaintiffs. An additional defendant, Guardian Industries Corp., entered into a preliminary settlement agreement during the quarter ended September 30, 1999. Otherwise, the status of those cases remains as reported in the Company's 1998 Form 10-K.PC. Item 2. Change in Securities and Use of Proceeds - --------------------------------------------------------------------------------------------------- Directors who are not also Officers of the Company receive Common Stock Equivalents pursuant to the Deferred Compensation Plan for Directors and the Directors' Common Stock Plan. Common Stock Equivalents are hypothetical shares of Common Stock having a value on any given date equal to the value of a share of Common Stock. Common Stock Equivalents earn dividend equivalents that are converted into additional Common Stock Equivalents but carry no voting rights or other rights of a holder of Common Stock. The Common Stock Equivalents credited to Directors under both plans are exempt from registration under Section 4(2) of the Securities Act of 1933 as private offerings made only to Directors of the Company in accordance with the provisions of the plans. Under the Company's Deferred Compensation Plan for Directors, each Director must defer receipt of such compensation as the Board mandates. Currently, the Board mandates deferral of one-third of each payment of the basic annual retainer of each Director. Each Director may also elect to defer the receipt of (1) an additional one-third of each payment of the basic annual retainer, (2) all of the basic annual retainer, or (3) all compensation. All deferred payments are held in the form of Common Stock Equivalents. Payments out of the deferred accounts are made in the form of Common Stock of the Company (and cash as to any fractional Common Stock Equivalent). In the thirdfirst quarter of 1999,2000, the Directors, as a group, were credited with 523776 Common Stock Equivalents under this Plan. The values of the Common Stock Equivalents, when credited, ranged from $59.63$46.69 to $64.13.$55.06. Under the Directors' Common Stock Plan, each Director who neither is nor was an employee of the Company is credited annually with Common Stock Equivalents worth one-half of the Director's basic annual retainer. Upon termination of service, and attaining 70 years of age, the Common Stock Equivalents held in a Director's account are converted to and paid in Common Stock of the Company (and cash as to any fractional Common Stock Equivalent). In the thirdfirst quarter of 1999,2000, the Directors, as a group, received 215314 Common Stock Equivalents under this Plan. The value of each Common Stock Equivalent, when credited, was $64.13. -21-$46.69. - 17 - Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- At the Company's Annual Meeting of Shareholders held on April 20, 2000 (the Annual Meeting), the shareholders voted on the election of three 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 -------- --------- -------------- Steven C. Mason 138,786,304 3,100,359 Thomas J. Usher 138,791,974 3,094,689 David R. Whitwam 138,859,974 3,026,689 There were no broker non-votes with respect to this matter. Each of the nominees was elected to serve as a director for the terms indicated in the proxy statement relating to the Annual Meeting. Item 6. Exhibits and Reports on Form 8-K - ------------------------------------------ (a) Exhibits (3) Bylaws of PPG Industries, Inc. (10) Directors' Common Stock Plan (10.1) PPG Industries, Inc. Incentive Compensation and Deferred Income Plan for Key Employees (12) Computation of Ratio of Earnings to Fixed Charges.Charges (27) Financial Data Schedule.Schedule (b) Reports on Form 8-K (1) The Company filed a Form 8-K dated Auguston April 17, 2000 reporting the write-off of its equity investment in Pittsburgh Corning Corporation. - 18 1999, to incorporate by reference an underwriting agreement dated as of August 18, 1999, as an exhibit to Registration No. 333-83019 on Form S-3. -22-- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PPG INDUSTRIES, INC. --------------------------------------------------------------------- (Registrant) Date: November 9, 1999May 5, 2000 By /s/ W. H. Hernandez --------------------------------------------------------------------- W. H. Hernandez Senior Vice President, Finance (Principal Financial and Accounting Officer and Duly Authorized Officer) -23-- 19 - PPG INDUSTRIES, INC. AND SUBSIDIARIES ------------------------------------- INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- (3) Bylaws of PPG Industries, Inc. (10) Directors' Common Stock Plan. (10.1) PPG Industries, Inc. Incentive Compensation and Deferred Income Plan for Key Employees. (12) Computation of Ratio of Earnings to Fixed Charges. (27) Financial Data Schedule.