SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1995 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 (I.R.S. Employer
incorporation or organization) Identification No.)
One PPG Place, Pittsburgh, Pennsylvania 15272
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 434-3131
As of July 27, 1995, 202,841,950 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 CONSOLIDATED SUBSIDIARIES
=============================
Index
Part I. Financial Information Page(s)
Item 1. Financial Statements:
Condensed Statement of Operations................................ 2
Condensed Balance Sheet.......................................... 3
Condensed Statement of Cash Flows................................ 4
Notes to Condensed Financial Statements.......................... 5 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8 - 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.......................... 13
Signature............................................................ 14
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Operations (Unaudited)
(Millions, except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
1995 1994 1995 1994
Net sales....................... $1,870.4 $1,619.3 $3,611.2 $3,096.2
Cost of sales................... 1,109.3 987.9 2,137.4 1,899.7
Gross profit.................. 761.1 631.4 1,473.8 1,196.5
Other expenses:
Selling, general and
administrative.............. 258.2 223.4 489.7 439.5
Depreciation.................. 82.9 79.0 162.9 157.5
Research and development...... 59.3 54.5 116.2 103.4
Interest...................... 20.7 22.4 41.2 44.2
Business divestiture (Note 3). - 85.0 - 85.0
Other charges................. 32.1 28.5 70.1 43.6
Total other expenses.......... 453.2 492.8 880.1 873.2
Other earnings.................. 49.0 22.6 122.1 47.5
Income before income taxes
and minority interest......... 356.9 161.2 715.8 370.8
Income taxes.................... 135.6 60.9 272.0 144.7
Minority interest............... 4.5 4.1 7.8 8.0
Net income...................... $ 216.8 $ 96.2 $ 436.0 $ 218.1
Earnings per share.............. $ 1.06 $ 0.46 $ 2.12 $ 1.03
Dividends per share............. $ 0.29 $ 0.28 $ 0.58 $ 0.55
Average shares outstanding...... 205.2 212.4 205.8 212.7
The accompanying notes to the condensed financial statements are an integral
part of this statement.
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PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Balance Sheet (Unaudited)
June 30 Dec. 31
1995 1994
(Millions)
Assets
Current assets:
Cash and cash equivalents................... $ 100.6 $ 62.1
Receivables-net............................. 1,402.6 1,228.9
Inventories (Note 2)........................ 760.4 686.4
Other....................................... 188.4 190.8
Total current assets...................... 2,452.0 2,168.2
Property (less accumulated depreciation of
$3,590.3 million and $3,420.4 million)...... 2,757.8 2,742.3
Investments................................... 200.1 277.4
Other assets.................................. 767.5 706.0
Total..................................... $6,177.4 $5,893.9
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current
portion of long-term debt................. $ 370.0 $ 370.7
Accounts payable and accrued liabilities.... 1,077.9 1,034.4
Income taxes................................ 64.8 19.4
Total current liabilities................. 1,512.7 1,424.5
Long-term debt................................ 652.8 773.4
Deferred income taxes......................... 317.4 302.7
Accumulated provisions........................ 290.6 260.5
Other postretirement benefits................. 511.4 505.5
Minority interest............................. 76.8 70.3
Total liabilities......................... 3,361.7 3,336.9
Shareholders' equity:
Common stock (Note 7)....................... 484.3 484.3
Additional paid-in capital.................. 70.0 67.5
Retained earnings........................... 4,036.9 3,717.1
Treasury stock.............................. (1,605.0) (1,488.6)
Unearned compensation....................... (192.2) (183.0)
Minimum pension liability adjustment........ (1.7) (1.7)
Currency translation adjustment............. 23.4 (38.6)
Total shareholders' equity................ 2,815.7 2,557.0
Total..................................... $6,177.4 $5,893.9
The accompanying notes to the condensed financial statements are an integral
part of this statement.
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PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Cash Flows (Unaudited)
Six Months Ended June 30
1995 1994
(Millions)
Cash from operating activities............... $ 462.2 $ 241.0
Investing activities:
Capital spending.......................... (164.5) (136.8)
Reduction of investments.................. 117.0 --
Other..................................... 13.0 9.0
Cash used for investing activities... (34.5) (127.8)
Financing activities:
Net change in borrowings with
maturities of three months or less...... (97.4) 9.3
Proceeds from other short-term debt....... 21.0 19.1
Repayment of other short-term debt........ (45.9) (12.6)
Proceeds from long-term debt.............. 8.1 3.8
Repayment of long-term debt............... (25.8) (18.7)
Loans to employee stock ownership plan.... (25.0) (11.0)
Repayment of loans by employee stock
ownership plan.......................... 15.7 9.3
Purchase of treasury stock, net........... (119.1) (56.7)
Dividends paid............................ (117.8) (116.9)
Cash used for financing activities... (386.2) (174.4)
Effect of currency exchange rate changes
on cash and cash equivalents............... (3.0) 1.8
Net increase (decrease) in cash
and cash equivalents....................... 38.5 (59.4)
Cash and cash equivalents,
beginning of period........................ 62.1 111.9
Cash and cash equivalents,
end of period.............................. $ 100.6 $ 52.5
The accompanying notes to the condensed financial statements are an integral
part of this statement.
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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
consolidated subsidiaries (the Company or PPG) at June 30, 1995, and the
results of their operations for the three- and six-month periods ended
June 30, 1995 and 1994 and their cash flows for the six-month periods
ended June 30, 1995 and 1994. 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, 1994.
The results of operations for the six months ended June 30, 1995
are not necessarily indicative of the results to be expected for the full
year.
2. Inventories
Inventories at June 30, 1995, and December 31, 1994, are detailed
below.
June 30 Dec. 31
1995 1994
(Millions)
Finished products and work in process............ $513.7 $462.7
Raw materials.................................... 132.5 111.9
Supplies......................................... 114.2 111.8
Total.......................................... $760.4 $686.4
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 $212.5 million and $199.2 million
higher at June 30, 1995 and December 31, 1994, respectively.
3. Business Divestiture
PPG's operating results reflect the impact of the Company's programs to
divest businesses and activities not meeting strategic or performance
objectives. The 1994 charge pertains to the divestiture of the
Biomedical Systems Division. Refer to Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
details regarding this charge.
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4. Cash Flow Information
Cash payments for interest for the six months ended June 30, 1995 and
1994 were $45.9 million and $49.9 million, respectively. Cash payments
for income taxes for the six months ended June 30, 1995 and 1994 were
$186.5 million and $143.9 million, respectively.
5. Business Segment Information
Three Months Six Months
Ended June 30 Ended June 30
1995 1994 1995 1994
(Millions)
Net Sales:
Coatings and Resins $ 757 $ 695 $1,441 $1,316
Glass 698 617 1,359 1,185
Chemicals 415 307 811 595
Total $1,870 $1,619 $3,611 $3,096
Operating Income (Loss):
Coatings and Resins $ 143 $ 143 $ 272 $ 267
Glass 135 93 290 169
Chemicals 103 35 196 71
Other (1) - (85) - (85)
Total operating
income 381 186 758 422
Interest expense - net (18) (20) (36) (40)
Other unallocated corporate
expense - net (6) (5) (6) (11)
Income before income taxes
and minority interest $ 357 $ 161 $ 716 $ 371
(1) Loss in 1994 represents the charge to divest the
Biomedical Systems Division (see Note 3).
6. Environmental Matters
Management of the Company anticipates that the resolution of the
environmental contingencies discussed below, which will occur over an
extended period of time, will not result in future annual charges to
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
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Company operates in an environmentally sound manner and the outcome of
these environmental matters will not have a material effect on PPG's
financial position or liquidity. To date, compliance with federal,
state and local requirements has not had a material impact on PPG's
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 exists and the amount of loss can
be reasonably estimated. As of June 30, 1995 and December 31, 1994, PPG
had environmental reserves totaling $92 million and $90 million,
respectively. Charges against income for environmental remediation
costs for the six month periods ended June 30, 1995 and 1994 were
$21 million and $13 million, respectively.
In addition to the amounts accrued, the Company may be subject to
contingencies related to environmental matters estimated at the high end
to be as much as $200 million to $400 million. Such aggregate losses
are reasonably possible but not currently considered to be probable of
occurrence. The Company's current environmental contingencies are
expected to be resolved over a period of 20 years or more. These loss
contingencies 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. Although insurance
may cover a portion of these costs, to the extent they are incurred, any
potential recovery is not included in this unrecorded exposure to future
loss. 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. Although the unrecorded exposure to future
loss relates to all sites, a significant portion of such unrecorded
exposure involves three operating plant sites and one closed plant site.
Two of the sites are in the early stages of study, while the remaining
two are further into the study phase. All four sites require additional
study to assess the magnitude of contamination, if any, and the
remediation alternatives.
7. Common Stock
On April 20, 1995, the Company's Restated Articles of Incorporation were
amended to increase the number of authorized shares of common stock from
300 million to 600 million.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Performance in the Second Quarter of 1995 Compared to the Second Quarter of
1994
Performance Overview
Sales for the second quarter of 1995 and 1994 were $1.87 billion and $1.62
billion, respectively. The sales increase was attributable to higher prices
in all product lines, particularly for our chlor-alkali and derivative, fiber
glass, and flat glass products, higher volumes in each of the business
segments, and the favorable effects of foreign currency translation.
The gross profit percentage increased to 40.7% from 39.0% in the prior year's
quarter primarily due to higher sales prices in all business segments. The
negative effects of inflation partially offset these gains.
Net income and earnings per share for the 1995 quarter were $216.8 million and
$1.06, respectively. In the second quarter of 1994, net income and earnings
per share were $96.2 million and $0.46, respectively, which included a $52
million ($0.24 per share) after-tax charge to divest the Biomedicals Systems
Division. Current period net income was favorably impacted by the factors
that contributed to the gross profit percentage improvement, higher sales
volumes, the absence of the business divestiture charge, and increased other
earnings which were attributable to gains from legal settlements. Partially
offsetting these gains was higher income tax expense.
Performance of Business Segments
Coatings and resins sales increased to $757 million from $695 million in the
second quarter of 1994. Operating earnings for both periods were
$143 million. The increase in sales was primarily attributable to higher
volumes in all European product lines, particularly automotive products, the
favorable effects of translating European currencies, higher volumes for North
American architectural coatings, and stronger prices worldwide for our
automotive refinish products. The effect of lower North American automotive
refinish volume partially offset these improvements. Despite higher sales,
operating earnings remained flat as the favorable effects of volume
improvements and manufacturing efficiencies, combined with a gain from a legal
settlement, were offset by the negative effects of inflation, particularly on
raw material costs.
Glass sales increased to $698 million in the second quarter of 1995 from $617
million in the prior year's quarter. Operating income increased to $135
million from $93 million in the corresponding 1994 period. Contributing to
the sales increase were higher sales prices, principally for worldwide flat
glass and fiber glass products and North American automotive replacement
glass, the favorable effects of translating European currencies, and higher
fiber glass volume. The effect of lower North American automotive replacement
glass volume partially offset these improvements. Increased operating
earnings were primarily the result of the factors that contributed to the
sales increase, partially offset by the negative effects of inflation.
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Chemicals sales increased to $415 million from $307 million in the second
quarter of 1994. Operating earnings for the corresponding periods were $103
million and $35 million, respectively. The increase in sales was primarily
attributable to substantial price gains for chlor-alkali and derivative
products and higher volumes for Transitions optical lenses. The increase in
operating earnings was attributable to the factors that contributed to the
sales increase, partially offset by the negative effects of inflation,
particularly on ethylene costs, and higher overhead costs.
The "other" segment's 1994 operating loss represents the charge to divest the
Biomedical Systems Division.
Performance in the First Six Months of 1995 Compared to the First Six Months
of 1994
Performance Overview
Sales for the first six months of 1995 and 1994 were $3.61 billion and $3.10
billion, respectively. The sales increase was attributable to higher prices
in all product lines, particularly for our chlor-alkali and derivative, fiber
glass, and flat glass products, higher volumes in each of the business
segments, and the favorable effects of foreign currency translation.
The gross profit percentage increased to 40.8% from 38.6% in the prior year
primarily due to higher sales prices in all business segments. The negative
effects of inflation partially offset these gains.
Net income and earnings per share for the current year period were $436.0
million and $2.12, respectively, which included a $24.2 million after-tax gain
($0.12 per share) from a legal settlement of a glass technology dispute with
Pilkington plc of England. In the prior year period, net income and earnings
per share were $218.1 million and $1.03, respectively, including a $52 million
($0.24 per share) after-tax charge to divest the Biomedical Systems Division.
Current period earnings were favorably impacted by the factors that
contributed to the gross profit percentage improvement, higher sales volumes,
the absence of the business divestiture charge, and increased other earnings
which were attributable to several gains from legal settlements. Partially
offsetting these items were higher income tax expense and increased other
charges. The majority of the increase in other charges was the result of a
charge for a legal dispute and higher environmental expense.
Performance of Business Segments
Coatings and resins sales increased to $1.44 billion from $1.32 billion in the
first six months of 1994. Operating earnings for the corresponding periods
were $272 million and $267 million, respectively. Contributing to the sales
increase were higher volumes in all European product lines, particularly
automotive products, the favorable effects of translating European currencies,
higher volumes in North American industrial and architectural coatings, and
stronger prices in our automotive refinish products. The effect of lower
North American automotive refinish volume partially offset these improvements.
- 9 -
Despite higher sales, operating earnings remained relatively flat as the
effects of higher volumes, combined with gains from legal settlements, were
substantially offset by the negative effects of inflation, particularly on raw
material costs.
Glass sales increased to $1.36 billion in the sixth-month period ended June
30, 1995, from $1.19 billion in the prior year period. Operating income
increased to $290 million from $169 million in the corresponding 1994 period.
Contributing to the sales increase were higher sales prices, principally for
worldwide fiber glass and flat glass products, higher volumes in most of the
segment's major businesses, principally worldwide fiber glass and automotive
original, and the favorable effects of translating European currencies. The
effect of lower volume in North American automotive replacement glass
partially offset these improvements. Increased operating earnings were
primarily the result of the factors that contributed to the sales increase and
the gain from the first quarter legal settlement with Pilkington. The
negative effects of inflation and higher overhead costs partially offset these
improvements.
Chemicals sales increased to $811 million from $595 million for the six-month
period ended June 30, 1995. Operating income increased to $196 million from
$71 million for the corresponding prior year period. The increase in sales
was primarily attributable to substantial price gains for chlor-alkali and
derivative products and volume improvements for specialty products,
particularly Transitions optical lenses. The increase in operating earnings
was attributable to the factors that contributed to the sales increase.
Partially offsetting these improvements were the negative effects of
inflation, particularly on ethylene costs, a charge for a legal dispute,
increased environmental expenses, and higher overhead costs.
The "other" segment's 1994 operating loss represents the charge to divest the
Biomedical Systems Division.
Other Factors
The increase in income tax expense was principally due to significantly higher
pre-tax earnings.
The increase in accounts receivable was the result of higher sales in May and
June of 1995 as compared with those in November and December of 1994, seasonal
extended credit terms to certain customers, and the strengthening of certain
European currencies against the U.S. dollar.
Higher inventories were mainly due to a build-up in our coatings and resins
segment, primarily in Europe, to support stronger sales volumes. Also
contributing to the increase was the strengthening of certain European
currencies against the U.S. dollar.
The decline in investments was principally due to a loan taken against the
cash surrender value of an investment in company-owned life insurance.
A pension plan contribution was the main factor contributing to the increase
in other assets.
- 10 -
Environmental Matters
Management of the Company anticipates that the resolution of the environmental
contingencies discussed below, which will occur over an extended period of
time, will not result in future annual charges to 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 these environmental matters
will not have a material effect on PPG's financial position or liquidity. To
date, compliance with federal, state and local requirements has not had a
material impact on PPG's 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 exists and the amount of loss can be reasonably
estimated. As of June 30, 1995 and December 31, 1994, PPG had environmental
reserves totaling $92 million and $90 million, respectively. Charges against
income for environmental remediation costs for the six month periods ended
June 30, 1995 and 1994 were $21 million and $13 million, respectively.
In addition to the amounts accrued, the Company may be subject to
contingencies related to environmental matters estimated at the high end to be
as much as $200 million to $400 million. Such aggregate losses are reasonably
possible but not currently considered to be probable of occurrence. The
Company's current environmental contingencies are expected to be resolved over
a period of 20 years or more. These loss contingencies 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. Although insurance may cover a portion of these costs, to the
extent they are incurred, any potential recovery is not included in this
unrecorded exposure to future loss. 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. Although the unrecorded exposure to future loss
relates to all sites, a significant portion of such unrecorded exposure
involves three operating plant sites and one closed plant site. Two of the
sites are in the early stages of study, while the remaining two are further
into the study phase. All four sites require additional study to assess the
magnitude of contamination, if any, and the remediation alternatives.
- 11 -
Business Divestiture
PPG's operating results reflect the impact of the Company's programs to divest
businesses and activities not meeting strategic or performance objectives.
The 1994 charge pertains to the divestiture of the Biomedicals System
Division. The majority of the charge was comprised of the reversal of a $60
million gain originally anticipated from divestiture of the division's sensors
business at the time the decision was made to dispose of the division and
reflects the general decline in health-care and related markets. Also, a $13
million charge was taken for additional operating losses anticipated because
of extension of the expected disposal date as well as actual operating losses
exceeding those originally estimated. With the sale of the sensors business
in January 1995, the divestiture of the Biomedical Systems Division is
complete.
Foreign Currency and Interest Rate Risk
As a multinational company, PPG manages its transaction exposure to foreign
currency risk to minimize the volatility of cash flows caused by currency
fluctuations. The Company manages its foreign currency exposures principally
through the purchase of forward and option contracts. It does not manage its
exposure to translation gains and losses; however, by borrowing in local
currencies it reduces such exposure. The market value of the forward and
option contracts purchased and outstanding as of June 30, 1995, was not
material.
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 June 30, 1995 and
December 31, 1994, the notional principal amounts and fair values of interest
rate swaps held were immaterial.
PPG's policies do not permit active trading of currency or interest rate
derivatives.
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Settlement Agreement
(11) Computation of Earnings Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on April 7, 1995, dated April 4, 1995,
attaching a press release. The release indicated that the glass
technology dispute with Pilkington plc of England had been settled.
Both companies dismissed all actions on the basis of no finding of
fault on either side. Pilkington plc is to pay PPG $50 million,
being reimbursement of $36 million paid by PPG to Pilkington after
an earlier litigation and a contribution toward balancing of legal
costs. This settlement eliminates all existing claims between PPG
and Pilkington and those companies agreed generally not to file any
future claims against each other, or their subsidiaries or
licensees, concerning float-process technology for making flat
glass.
The Company filed a Form 8-K on April 24, 1995, dated April 20,
1995. The report indicated that on April 20, 1995 the Board of
Directors approved the repurchase of ten million shares of the
Company's outstanding common stock, par value $1.66 2/3 per share.
The shares may be repurchased in open market or private
transactions and a timetable was not established for the
repurchase.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PPG INDUSTRIES, INC.
(Registrant)
Date: July 31, 1995 /s/ W. H. Hernandez
W. H. Hernandez
Senior Vice President, Finance
(Principal Financial and
Accounting Officer and
Duly Authorized Officer)
- 14 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
No. Description
(10) Settlement Agreement
(11) Computation of Earnings Per Share
(27) Financial Data Schedule