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, 1996 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 31, 1996, 186,522,765 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
Part I. Financial Information Page(s)
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 - 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 Income (Unaudited)
(Millions, except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
1996 1995 1996 1995
Net sales....................... $1,913.6 $1,870.4 $3,662.4 $3,611.2
Cost of sales................... 1,127.9 1,109.3 2,195.1 2,137.4
Gross profit.................. 785.7 761.1 1,467.3 1,473.8
Other expenses:
Selling, general and
administrative.............. 252.7 258.2 491.6 489.7
Depreciation.................. 83.4 82.9 166.6 162.9
Research and development...... 58.2 59.3 116.8 116.2
Interest...................... 24.6 20.7 46.6 41.2
Other charges................. 17.8 32.1 34.6 70.1
Total other expenses.......... 436.7 453.2 856.2 880.1
Other earnings.................. 30.6 49.0 56.2 122.1
Income before income taxes
and minority interest......... 379.6 356.9 667.3 715.8
Income taxes.................... 144.3 135.6 253.6 272.0
Minority interest............... 6.8 4.5 12.9 7.8
Net income...................... $ 228.5 $ 216.8 $ 400.8 $ 436.0
Earnings per share.............. $ 1.20 $ 1.06 $ 2.10 $ 2.12
Dividends per share............. $ 0.32 $ 0.29 $ 0.62 $ 0.58
Average shares outstanding...... 188.6 205.2 190.5 205.8
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
1996 1995
(Millions)
Assets
Current assets:
Cash and cash equivalents.................. $ 121.9 $ 105.6
Receivables-net............................ 1,388.8 1,245.1
Inventories (Note 2)....................... 746.6 737.5
Other...................................... 195.0 187.3
Total current assets..................... 2,452.3 2,275.5
Property (less accumulated depreciation of
$3,739.8 million and $3,629.2 million)..... 2,863.5 2,834.8
Investments.................................. 215.1 223.8
Other assets................................. 970.7 860.2
Total.................................... $6,501.6 $6,194.3
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current
portion of long-term debt................ $ 761.2 $ 485.3
Accounts payable and accrued liabilities... 1,080.4 1,103.5
Income taxes............................... 18.6 40.6
Total current liabilities................ 1,860.2 1,629.4
Long-term debt (Note 6)...................... 848.6 735.5
Deferred income taxes........................ 371.6 354.9
Accumulated provisions....................... 346.1 319.7
Other postretirement benefits ............... 519.5 517.4
Minority interest............................ 74.6 68.2
Total liabilities........................ 4,020.6 3,625.1
Shareholders' equity:
Common stock............................... 484.3 484.3
Additional paid-in capital................. 90.9 81.3
Retained earnings.......................... 4,533.2 4,249.0
Treasury stock............................. (2,410.2) (2,059.6)
Unearned compensation...................... (191.7) (179.2)
Minimum pension liability adjustment....... (10.6) (10.4)
Currency translation adjustment............ (14.9) 3.8
Total shareholders' equity............... 2,481.0 2,569.2
Total.................................... $6,501.6 $6,194.3
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
1996 1995
(Millions)
Cash from operating activities............... $ 310.7 $ 462.2
Investing activities:
Capital spending.......................... (222.2) (164.5)
Reduction of investments.................. 12.3 117.0
Other..................................... 1.0 13.0
Cash used for investing activities... (208.9) (34.5)
Financing activities:
Net change in borrowings with
maturities of three months or less...... 366.2 (97.4)
Proceeds from other short-term debt....... 24.5 21.0
Repayment of other short-term debt........ (17.0) (45.9)
Proceeds from long-term debt.............. 155.4 8.1
Repayment of long-term debt............... (133.4) (25.8)
Loans to employee stock ownership plan.... (26.0) (25.0)
Repayment of loans by employee stock
ownership plan.......................... 14.4 15.7
Purchase of treasury stock, net........... (350.7) (119.1)
Dividends paid............................ (118.2) (117.8)
Cash used for financing activities... (84.8) (386.2)
Effect of currency exchange rate changes
on cash and cash equivalents............... (.7) (3.0)
Net increase in cash and
cash equivalents........................... 16.3 38.5
Cash and cash equivalents,
beginning of period........................ 105.6 62.1
Cash and cash equivalents,
end of period.............................. $ 121.9 $ 100.6
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
subsidiaries (the Company or PPG) at June 30, 1996, and the results of
their operations for the three- and six-month periods ended June 30,
1996 and 1995 and their cash flows for the six-month periods ended
June 30, 1996 and 1995. 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 Dec. 31, 1995.
The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
2. Inventories
Inventories at June 30, 1996, and Dec. 31, 1995, are detailed below.
June 30 Dec. 31
1996 1995
(Millions)
Finished products and work in process............ $498.3 $504.5
Raw materials.................................... 130.7 120.5
Supplies......................................... 117.6 112.5
Total.......................................... $746.6 $737.5
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 $204.5 million and $202.9 million higher at
June 30, 1996 and Dec. 31, 1995, respectively.
3. Cash Flow Information
Cash payments for interest for the six months ended June 30, 1996 and
1995 were $53.4 million and $45.9 million, respectively. Cash payments
for income taxes for the six months ended June 30, 1996 and 1995 were
$240.1 million and $186.5 million, respectively.
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4. Business Segment Information
Three Months Six Months
Ended June 30 Ended June 30
1996 1995 1996 1995
(Millions)
Net Sales:
Coatings and Resins... $ 771 $ 757 $1,463 $1,441
Glass................. 722 698 1,388 1,359
Chemicals............. 420 415 811 811
Total............... $1,913 $1,870 $3,662 $3,611
Operating Income:
Coatings and Resins... $ 166 $ 143 $ 281 $ 272
Glass................. 130 135 233 290
Chemicals............. 108 103 199 196
Total............... 404 381 713 758
Interest expense - net..... (22) (18) (42) (36)
Other unallocated corporate
expense - net............ (3) (6) (4) (6)
Income before income taxes
and minority interest.... $ 379 $ 357 $ 667 $ 716
5. Environmental Matters
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, 1996 and Dec. 31, 1995, PPG had
reserves for environmental contingencies totaling $98 million and $100
million, respectively. Charges against income for environmental
remediation costs for the six months ended June 30, 1996 and 1995 were
$14 million and $21 million, respectively. Related cash outlays
aggregated $16 million and $19 million for the six months ended June 30,
1996 and 1995, 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 1995. 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.
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In addition to the amounts currently reserved, the Company may be
subject to loss 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 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.
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.
6. Long-term Debt
On May 24, 1996, the Company issued $150 million of callable 7 3/8%
notes which are due June 1, 2016.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Performance in the Second Quarter of 1996 Compared to the Second Quarter of
1995
Performance Overview
Sales for the second quarter of 1996 and 1995 were $1.91 billion and $1.87
billion, respectively. Sales increased as a result of improved volumes in
each of our business segments and higher sales prices for our coatings and
resins segment. Lower sales prices for our chemical and glass segments, the
absence of sales from our European architectural coatings business divested in
the fourth quarter of 1995, and the unfavorable effects of foreign currency
translation partially offset these improvements.
The gross profit percentage increased to 41.1% from 40.7% in the prior year's
quarter primarily as a result of the benefits of improved manufacturing
efficiencies partially offset by lower overall sales prices. The net impact
of inflation on our gross profit percentage was slightly positive as the
favorable effect in our coatings and resins segment, principally as a result
of lower raw material costs, was almost totally offset by the unfavorable
impact in our glass segment.
Net income and earnings per share for the second quarter of 1996 were $228.5
million and $1.20, respectively. In the second quarter of 1995, net income
and earnings per share were $216.8 million and $1.06, respectively. Current
quarter net income was favorably impacted by higher overall sales volumes, the
factors that contributed to the gross profit percentage improvement, reduced
overhead costs, and decreased other charges due in part to lower environmental
expense. Partially offsetting these improvements were lower other earnings,
due to gains from legal settlements in the second quarter of 1995, and higher
income tax expense. Reduced average shares outstanding, due to repurchases of
PPG's common stock by the Company, also favorably impacted earnings per share
in the current quarter.
Performance of Business Segments
Coatings and resins sales increased to $771 million from $757 million in 1995.
Operating income for the same periods were $166 million and $143 million,
respectively. Sales increased as a result of improved volumes in North
America, particularly for our automotive original products, higher sales
prices in most of the segment's major businesses, and sales from several minor
1995 acquisitions. The absence of sales from our European architectural
coatings business divested in the fourth quarter of 1995 and lower volumes in
Europe partially offset these improvements. The increase in operating income
was the result of the factors that contributed to the sales increase, lower
raw material costs, reduced overhead costs, and improved manufacturing
efficiencies. Operating income in the second quarter of 1995 also included a
gain from a legal settlement.
Glass sales increased to $722 million in the second quarter of 1996 from $698
million in the prior year's quarter. Operating income decreased to $130
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million from $135 million in the corresponding 1995 period. Sales increased
as a result of increased North American volumes and higher fiber glass sales
prices and volumes, partially offset by lower worldwide flat glass prices and
European volumes and the unfavorable effects of foreign currency translation.
Operating income declined due to lower overall sales prices, particularly for
our flat glass products, and the negative effects of inflation. These
negative factors were only partially offset by increased volumes and improved
manufacturing efficiencies.
Chemicals sales increased to $420 million in the second quarter of 1996 from
$415 million in the prior year's quarter. Operating income increased to $108
million from $103 million for the corresponding 1995 period. Contributing to
the sales increase were volume improvements for specialty products,
particularly Transitions (registered trademark) optical lenses, and chlor-
alkali products, partially offset by lower prices for chlor-alkali products,
the absence of sales from our sodium chlorate business divested late in the
fourth quarter of 1995, and the unfavorable effects of foreign currency
translation. The increase in operating income was attributable to the
factors that contributed to the overall sales increase, lower environmental
expense, and improved manufacturing efficiencies, partially offset by
increased overhead costs.
Performance in the First Six Months of 1996 Compared to the First Six Months
of 1995
Performance Overview
Sales for the first six months of 1996 and 1995 were $3.66 billion and $3.61
billion, respectively. Sales increased slightly as a result of improved
volumes in each of our business segments, higher sales prices for our coatings
and resins segment, and sales from several minor 1995 acquisitions. The
absence of sales from our divested European architectural coatings business
and sodium chlorate business, lower sales prices for our chemicals segment,
and the unfavorable effects of foreign currency translation partially offset
these improvements.
The gross profit percentage decreased to 40.1% from 40.8% in the prior year
period due to the negative effects of inflation and slightly lower overall
sales prices, only partially offset by the benefits of improved manufacturing
efficiencies.
Net income and earnings per share for the current year period were $400.8
million and $2.10, respectively. In the prior year period, net income and
earnings per share 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. Current period net
income was unfavorably impacted by lower other earnings, attributable to gains
from legal settlements in the prior period, and the factors that contributed
to the gross profit percentage decrease described above. These negative
factors were partially offset by higher overall sales volumes, decreased other
charges due to a 1995 charge for a legal dispute and lower environmental
expense, and lower income tax expense. Additionally, the favorable impact of
overhead cost reduction actions were offset by the negative effects of
inflation. Reduced average shares outstanding, due to repurchases of PPG's
common stock by the Company, also favorably impacted earnings per share in the
current period.
- 9 -
Performance of Business Segments
Coatings and resins sales increased to $1.46 billion in the first six months
of 1996 from $1.44 billion in the prior year period. Operating income for the
corresponding periods was $281 million and $272 million, respectively. Sales
increased as a result of higher sales prices in most of the segment's major
businesses, improved volumes in North America, particularly for our automotive
original products, and sales from several minor acquisitions. The absence of
sales from our European architectural coatings business divested in the fourth
quarter of 1995 and lower volumes in Europe partially offset these
improvements. The increase in operating income was the result of the factors
that contributed to the sales increase, reduced overhead costs, improved
manufacturing efficiencies, and lower raw material costs. Operating income in
the 1995 period also included two gains from legal settlements.
Glass sales increased to $1.39 billion in the six-month period ended June 30,
1996, from $1.36 billion in the prior period. Operating income decreased to
$233 million from $290 million in the corresponding 1995 period. Sales
increased as a result of the benefits of higher fiber glass sales prices and
volumes and improved volumes in North America, particularly for our automotive
replacement glass products. Partially offsetting these improvements were
lower worldwide flat glass prices, lower European volumes, and the unfavorable
effects of foreign currency translation. Operating income in the first six
months of 1995 included the gain from the legal settlement with Pilkington.
Also contributing to the decline in operating income were lower sales prices
for our flat glass products and the negative effects of inflation. Increased
fiber glass sales prices and improved manufacturing efficiencies only
partially offset these improvements.
Chemicals sales for the six-month periods ended June 30, 1996 and 1995 were
$811 million. Operating income increased to $199 million from $196 million in
the corresponding 1995 period. Sales were flat as the benefits of volume
improvements for specialty products, particularly Transitions (registered
trademark) optical lenses, and silica products were offset by lower prices
for chlor-alkali products, the absence of sales from our sodium chlorate
business divested late in the fourth quarter of 1995, and the unfavorable
effects of foreign currency translation. Operating income in the first six
months of 1995 included a charge for a legal dispute. Also contributing to
the increase in operating income were the benefits of increased volumes for
specialty products and lower environmental expense. The effects of lower
prices for chlor-alkali products and increased overhead costs partially
offset these improvements.
Other Factors
The increase in accounts receivable was primarily the result of higher sales
in May and June of 1996 compared with those in November and December of 1995.
Pension plan contributions were the main factors contributing to the increase
in other assets and reduction in cash from operating activities.
The increase in short-term borrowings and current portion of long-term debt
was principally due to borrowings used to fund our repurchase of PPG common
stock and pension plan contributions.
- 10 -
The increase in long-term debt was principally due to the issuance of $150
million of callable 7 3/8% notes in May 1996.
The ten million share repurchase program approved by PPG's Board of Directors
in October 1995 has been completed. PPG's Board of Directors approved an
additional repurchase of ten million shares of PPG common stock in July 1996.
The shares may be repurchased in open market or private transactions and a
timetable for this additional repurchase program has not been established.
Accounting Standard
As noted in our Annual Report on Form 10-K for the year ended Dec. 31, 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), in October 1995 which encourages, but does not require, a fair value
method of accounting for employee stock-based transactions. PPG has decided
to adopt only the disclosure provisions of SFAS 123 and, accordingly, there
will be no impact on the Company's financial position, results of operations
or cash flows as a result of SFAS 123.
Environmental Matters
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, 1996 and Dec. 31, 1995, PPG had reserves for
environmental contingencies totaling $98 million and $100 million,
respectively. Charges against income for environmental remediation costs for
the six months ended June 30, 1996 and 1995 were $14 million and $21 million,
respectively. Related cash outlays aggregated $16 million and $19 million for
the six months ended June 30, 1996 and 1995, 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 1995. 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.
In addition to the amounts currently reserved, the Company may be subject to
loss 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 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
- 11 -
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.
The Company's assessment of the potential impact of these environmental
contingencies is subject to considerable uncertainty due to the complex,
ongoing and evolving process of investigation and remediation, if necessary,
of such environmental contingencies.
Foreign Currency 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 transaction 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 fair value of the forward and
option contracts purchased and outstanding as of June 30, 1996 and Dec. 31,
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, 1996 and
Dec. 31, 1995, the notional principal amount and fair value of interest rate
swaps held were not material.
The Company also uses commodity swap contracts to reduce its exposure to
fluctuations in prices for natural gas. The fair value of such swap contracts
purchased and outstanding as of June 30, 1996 and Dec. 31, 1995, was not
material.
PPG's policies do not permit active trading of, or speculation in, derivative
instruments.
- 12 -
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Description of Compensation Arrangement between PPG
Industries, Inc. and Robert D. Duncan
(11) Computation of Earnings Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on May 23, 1996, dated May 21,
1996, filing an exhibit to become, by way of incorporation by
reference, an exhibit to Registration Statement No. 33-04983 on
Form S-3 and Registration Statement No. 33-64081 on Form S-3.
No financial statements were filed.
The Company filed a Form 8-K on July 23, 1996. The report
indicated that on July 18, 1996 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.
- 13 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PPG INDUSTRIES, INC.
(Registrant)
Date: August 2, 1996 /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) Description of Compensation Arrangement between PPG Industries,
Inc. and Robert D. Duncan
(11) Computation of Earnings Per Share
(27) Financial Data Schedule