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 March 31, 2001 Commission File Number 1-1687
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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 March 31, 2001, 168,397,460 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 ____
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PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE(S)
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Statement of Income....................................... 2
Condensed Balance Sheet............................................. 3
Condensed Statement of Cash Flows................................... 4
Notes to Condensed Financial Statements............................. 5-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 14-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 18
Part II. Other Information
Item 1. Legal Proceedings............................................ 19
Item 2. Change in Securities and Use of Proceeds..................... 19-20
Item 4. Submission of Matters to a Vote of Security Holders.......... 20-21
Item 6. Exhibits and Reports on Form 8-K............................. 21
Signature................................................................. 22
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Income (Unaudited)
-----------------------------------------
(Millions, except per share amounts)
Three Months Ended March 31
-------------------------------
2001 2000
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Net sales......................................................... $2,099 $2,152
Cost of sales..................................................... 1,324 1,319
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Gross profit................................................... 775 833
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Other expenses (earnings):
Selling, general and administrative............................ 351 327
Depreciation................................................... 94 93
Research and development....................................... 67 70
Interest....................................................... 48 43
Amortization................................................... 18 19
Business realignments (Note 3)................................. 101 1
Other, net..................................................... (18) 24
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Total other expenses - net................................. 661 577
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Income before income taxes and minority
interest....................................................... 114 256
Income taxes...................................................... 48 109
Minority interest................................................. 10 8
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Net income........................................................ $ 56 $ 139
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Earnings per common share (Note 2)................................ $ 0.33 $ 0.80
====== ======
Earnings per common share - assuming
dilution (Note 2).............................................. $ 0.33 $ 0.79
====== ======
Dividends per common share........................................ $ 0.42 $ 0.40
====== ======
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-2-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Balance Sheet (Unaudited)
-----------------------------------
March 31 Dec. 31
2001 2000
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(Millions)
Assets
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Current assets:
Cash and cash equivalents...................................... $ 78 $ 111
Receivables-net................................................ 1,617 1,563
Inventories (Note 4)........................................... 1,141 1,121
Other.......................................................... 325 298
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Total current assets....................................... 3,161 3,093
Property (less accumulated depreciation of
$4,223 million and $4,148 million)............................. 2,849 2,941
Investments....................................................... 331 320
Goodwill (less accumulated amortization of
$131 million and $128 million)................................. 997 1,032
Identifiable intangible assets (less accumulated
amortization of $110 million and $102 million)................. 598 616
Prepaid pension asset............................................. 927 919
Other assets...................................................... 198 204
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Total...................................................... $ 9,061 $ 9,125
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Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Short-term debt and current
portion of long-term debt.................................. $ 1,284 $ 1,161
Accounts payable and accrued liabilities....................... 1,374 1,382
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Total current liabilities.................................. 2,658 2,543
Long-term debt.................................................... 1,701 1,810
Deferred income taxes............................................. 547 543
Accumulated provisions............................................ 484 475
Other postretirement benefits..................................... 526 529
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Total liabilities.......................................... 5,916 5,900
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Commitments and contingent liabilities (Note 9)..................
Minority interest................................................. 131 128
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Shareholders' equity:
Common stock................................................... 484 484
Additional paid-in capital..................................... 106 102
Retained earnings.............................................. 6,430 6,444
Treasury stock................................................. (3,505) (3,508)
Unearned compensation.......................................... (103) (114)
Accumulated other comprehensive loss (Note 5).................. (398) (311)
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Total shareholders' equity................................. 3,014 3,097
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Total...................................................... $ 9,061 $ 9,125
======= =======
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-3-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Cash Flows (Unaudited)
---------------------------------------------
Three Months Ended
------------------
March 31
---------
2001 2000
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(Millions)
Cash from operating activities.................................... $ 50 $ 90
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Investing activities:
Capital spending
Additions to property and investments...................... (57) (118)
Business acquisitions, net of cash balances acquired....... (8) (106)
Reduction of property and investments.......................... (2) 11
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Cash used for investing activities......................... (67) (213)
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Financing activities:
Net change in borrowings with maturities of three months or
less......................................................... 50 186
Proceeds from other short-term debt............................ 55 67
Repayment of other short-term debt............................. (45) (73)
Proceeds from long-term debt................................... 2 1
Repayment of long-term debt.................................... (16) (13)
Repayment of loans by employee stock ownership plan............ 11 13
Issuance of treasury stock, net................................ - 2
Dividends paid................................................. (71) (70)
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Cash (used for) provided by financing activities........... (14) 113
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Effect of currency exchange rate changes on cash and cash
equivalents.................................................. (2) (3)
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Net decrease in cash and cash equivalents......................... (33) (13)
Cash and cash equivalents, beginning of period.................... 111 158
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Cash and cash equivalents, end of period.......................... $ 78 $ 145
===== ======
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-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 March 31, 2001 and the results of their operations and their cash
flows for the three months ended March 31, 2001 and 2000. 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, 2000.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year. In
the fourth quarter of 2000 the Company changed its policy for classifying
freight costs from a deduction in arriving at net sales to an expense in
cost of sales as required by Emerging Issues Task Force 00-10, "Accounting
for Shipping and Handling Fees and Costs." As a result, sales and cost of
sales have been restated by an equal amount for each prior period
presented.
Change in Method of Accounting
Effective January 1, 2001, PPG adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities." These
standards require the Company to recognize all derivatives as either assets
or liabilities at fair value in its balance sheet. The accounting for
changes in the fair value of a derivative depends on the use of the
derivative. To the extent that a derivative is effective as a hedge of a
future exposure to changes in value, the fair value of the derivative is
deferred in other comprehensive income. Any portion considered to be
ineffective is reported in earnings immediately.
Adoption of these new standards on January 1, 2001 resulted in an increase
to current assets and current liabilities of $70 million and $26 million,
respectively, and transition adjustments of $43 million in other
comprehensive income and in net income of less than $1 million.
-5-
2. Earnings Per Common Share
-------------------------
The following table reflects the earnings per common share calculations for
the three months ended March 31, 2001 and 2000.
Three Months Ended March 31
---------------------------
(Millions, except per share amounts) 2001 2000
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Earnings per common share
Net income.............................................. $ 56 $ 139
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Weighted average common shares
outstanding........................................... 168.3 174.1
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Earnings per common share............................... $ 0.33 $ 0.80
====== ======
Earnings per common share -
assuming dilution
Net income.............................................. $ 56 $ 139
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Weighted average common shares
outstanding........................................... 168.3 174.1
Effect of dilutive securities:
Stock options......................................... 0.1 0.3
Other stock compensation plans........................ 0.7 1.3
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Potentially dilutive common shares...................... 0.8 1.6
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Adjusted common shares
outstanding........................................... 169.1 175.7
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Earnings per common share -
assuming dilution..................................... $ 0.33 $ 0.79
====== ======
3. Business Realignments
---------------------
During the first quarter of 2001, the Company finalized plans to reduce costs,
increase efficiencies and accelerate performance improvement and took a charge
of $101 million for restructuring and other related activities, including
severance and other costs of $67 million and asset dispositions of $34 million.
It is expected that these activities will be completed by March 2002.
Severance and Asset Total Employees
Other Costs Dispositions Charge Covered
----------- ------------ ------ -------
(Millions)
Coatings..................... $ 60 $ 23 $ 83 1,072
Glass........................ 4 6 10 254
Chemicals.................... 2 5 7 23
Corporate.................... 1 - 1 18
------ ------- ------ -----
Total PPG................. $ 67 $ 34 $ 101 1,367
First Quarter Activity.... (11) (11) (22) (293)
------ ------- ------ -----
Balance, end of period...... $ 56 $ 23 $ 79 1,074
====== ======= ====== =====
-6-
During 2000, the Company finalized restructuring plans for certain locations
related to the integration of the automotive and industrial coatings businesses
of Imperial Chemical Industries PLC (the ICI business) and PRC-DeSoto
International, Inc. (PRC-DeSoto). These restructuring plans were originally
developed at the acquisition date (principally July 1999). The plans cover
severance benefits for 618 employees, as well as other costs, and resulted in an
increase to goodwill of $24 million and a charge of $1 million in 2000. As of
March 31, 2001, $18 million has been paid to 605 employees, and the remaining
reserve of $7 million, which covers 13 employees and other exit costs, is
expected to be utilized in 2001.
During 2000, PPG Auto Glass L.L.C. (PPG Auto Glass) accrued severance and other
restructuring related costs of $10 million, resulting in an increase to goodwill
of $6 million and a pre-tax charge of $4 million. In addition, PPG Auto Glass
incurred one-time integration costs of $2 million. The restructuring plans
include severance benefits for 133 employees and other exit costs. As of March
31, 2001, $6 million has been paid, including $2 million to 113 employees. The
remaining reserve of $4 million, which includes severance for 20 employees and
other restructuring costs, is expected to be paid by the end of 2001.
In the fourth quarter of 2000, the Company took charges of $3 million related to
work force reductions in the coatings business for 65 people. As of March 31,
2001, $2 million has been paid to 63 employees. The remaining reserve will be
paid by mid-2001.
During 1999, the Company approved restructuring plans associated with the
integration of the packaging coatings acquisition and cost reduction activities
across all of the businesses that resulted in charges of $47 million. The
components of the plans included severance benefits for 519 employees and
estimated losses of $17 million on the disposition of a redundant European
facility and the disposition of the assets of a U.S. coatings facility.
Additionally in 2000, severance reserves for 121 people totaling $5 million were
reversed due to changes in estimates. As of March 31, 2001, the asset
dispositions are complete and $22 million has been paid under the plans to 379
employees and to cover other exit costs. The remaining balance of $3 million
will be substantially utilized by mid-2001.
4. Inventories
-----------
Inventories at March 31, 2001 and December 31, 2000 are detailed below.
March 31 Dec. 31
2001 2000
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(Millions)
Finished products and work in process.......... $ 819 $ 807
Raw materials.................................. 207 198
Supplies....................................... 115 116
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Total...................................... $1,141 $1,121
====== ======
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 $181 million and $183 million higher at March
31, 2001 and December 31, 2000, respectively.
-7-
5. Comprehensive Income
--------------------
Total comprehensive (loss) income for the three months ended March 31, 2001
and 2000 was as follows:
Three Months Ended March 31
2001 2000
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(Millions)
Net income................................................. $ 56 $ 139
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Other comprehensive loss, net of tax:
Currency translation adjustment......................... (83) (56)
Minimum pension liability adjustment.................... (6) 2
Unrealized gains (losses) on marketable securities...... 4 (5)
Transition adjustment on derivatives (Note 1)........... 43 -
Net change - derivatives (Note 8)....................... (45) -
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(87) (59)
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Total comprehensive (loss) income.................... $ (31) $ 80
===== =====
As of March 31, 2001 and December 31, 2000, accumulated other comprehensive
loss, as reflected on the condensed balance sheet, was comprised of the
following:
March 31 Dec. 31
2001 2000
---- ----
(Millions)
Accumulated derivative loss (Note 8)......................... $ (2) $ -
Currency translation adjustment.............................. (365) (282)
Minimum pension liability adjustment......................... (35) (29)
Unrealized gains on marketable securities.................... 4 -
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Accumulated other comprehensive loss....................... $(398) $(311)
===== =====
6. Cash Flow Information
---------------------
Cash payments for interest were $58 million and $54 million for the three
months ended March 31, 2001 and 2000, respectively. Net cash payments for
income taxes for the three months ended March 31, 2001 and 2000 were $35
million and $19 million, respectively.
-8-
7. Business Segment Information
----------------------------
Business segment net sales and operating income for the three months ended
March 31, 2001 and 2000 were as follows:
Three Months Ended March 31
-------------------------------
2001 2000
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(Millions)
Net sales:
Coatings (a).................................................. $1,106 $1,178
Glass......................................................... 583 565
Chemicals (b)................................................. 413 412
Intersegment net sales........................................ (3) (3)
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Total...................................................... $2,099 $2,152
====== ======
Operating income:
Coatings...................................................... $ 61 $ 167
Glass......................................................... 85 98
Chemicals..................................................... 23 74
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Total...................................................... 169 339
Interest expense - net.......................................... (43) (40)
Other unallocated corporate expense - net (c)................... (12) (43)
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Income before income taxes and
minority interest (d)......................................... $ 114 $ 256
====== ======
(a) Includes intersegment net sales of $1 million for each of the three-month
periods.
(b) Includes intersegment net sales of $2 million for each of the three-month
periods.
(c) Includes for the three months ended March 31, 2000, a pre-tax charge of $39
million representing the write-off of an equity investment in Pittsburgh
Corning Corporation, which filed for reorganization under the federal
bankruptcy code.
(d) Includes for the three months ended March 31, 2001, a pre-tax charge of
$101 million for restructuring and other related activities, including
severance and other costs of $67 million and asset dispositions of $34
million. See Note 3, "Business Realignments," for amounts by business
segment.
8. Derivative Financial Instruments
--------------------------------
PPG is exposed to certain market risks arising from transactions that are
entered into in the normal course of business. The Company may enter into
derivative financial instrument transactions in order to manage or reduce
this market risk. PPG's policies do not permit active trading of, or
speculation in, derivative financial instruments.
-9-
PPG manages its foreign currency transaction risk to minimize the
volatility of cash flows caused by currency fluctuations by forecasting
foreign currency-denominated cash flows of each subsidiary for a 12-month
period and aggregating these cash inflows and outflows in each currency to
determine the overall net transaction exposures. Decisions on whether to
use derivative financial instruments to hedge the net transaction exposures
are made based on the amount of those exposures, by currency, and an
assessment of the near-term outlook for each currency. The Company's
policy permits the use of foreign currency forward and option contracts to
hedge up to 70% of its anticipated net foreign currency cash flows over the
next 12-month period. These contracts are not designated as hedging
instruments. Therefore, the change in the fair value of these instruments
is recorded in earnings in the period of change in "Other, net" in the
condensed statement of income. Such amount was not material for the
quarter ended March 31, 2001.
The sales, costs, assets and liabilities of our non-U.S. operations must be
reported in U.S. dollars in order to prepare consolidated financial
statements which gives rise to translation risk. The Company monitors its
exposure to translation risk and enters into derivative foreign currency
contracts to hedge its exposure, as deemed appropriate. This risk
management strategy does not qualify for hedge accounting under the
provisions of SFAS No. 133; therefore, the change in the fair value of
these instruments is recorded in earnings in the period of change in
"Other, net" in the condensed statement of income. Such amount was not
material for the quarter ended March 31, 2001.
PPG designates forward currency contracts as hedges against the Company's
exposure to variability in exchange rates on intercompany borrowings
denominated in foreign currencies. To the extent effective, changes in
the fair value of these instruments are deferred in other comprehensive
income and subsequently reclassified to "Other, net" in the condensed
statement of income as foreign exchange gains and losses are recognized
on the intercompany borrowings. The portion of the change in fair value
considered to be ineffective is reported in "Other, net" in the condensed
statement of income. Such amount was not material for the quarter ended
March 31, 2001.
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. Generally, the Company maintains variable interest rate debt at a
level of 25% to 50% of total borrowings. 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 use of
interest rate swaps. To the extent effective, changes in the fair value of
these instruments are deferred in other comprehensive income and
reclassified to interest expense as the interest expense is accrued on the
underlying debt. As of January 1, 2001 and March 31, 2001, the fair value
of interest rate swaps was not material.
Currently, the Company's principal use of derivative financial instruments
is to manage its exposure to fluctuating natural gas prices through the use
of natural gas swap and option contracts. To the extent that these
instruments are effective in hedging PPG's exposure to price changes,
changes in the hedge contracts' fair values are deferred in other
comprehensive income and reclassified to cost of sales as the natural gas
is purchased. Changes in the time value of option contracts are excluded
from the Company's assessment of hedge effectiveness and reported in
earnings immediately. The amount of ineffectiveness, which is reported in
"Other, net" in the condensed statement of income for the quarter ended
March 31, 2001, was immaterial.
-10-
No derivative instrument initially designated as a hedge instrument was
undesignated or discontinued as a hedging instrument for the quarter ended
March 31, 2001. Derivative instruments designated as hedging instruments
mature within the next twelve months. During the three months ended March
31, 2001, $23 million of accumulated gain on derivatives was reclassified
from accumulated other comprehensive income to earnings and other
comprehensive income decreased by $22 million from current period risk
management activities and the related tax effects of such activities.
9. Commitments and Contingent Liabilities
--------------------------------------
PPG is involved in a number of lawsuits and claims, both actual and
potential, including some that it has asserted against others, in which
substantial monetary damages are sought. These lawsuits and claims 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 thirty 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, 2001, the
Company was one of many defendants in numerous asbestos-related lawsuits
involving approximately 116,000 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. Prior to 2000, PPG
had never been found liable for any such claims, and in numerous cases PPG
had been dismissed on motions prior to trial. In January 2000, in a trial
in a state court in Texas involving six plaintiffs, the jury found PPG not
liable. However, a week later in a separate trial also in a state court in
Texas, another jury found PPG, for the first time, partly responsible 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 for Chapter 11 bankruptcy in the Federal
Bankruptcy Court in Pittsburgh, Pennsylvania. Accordingly, in the first
quarter of 2000, the Company recorded an after-tax charge of $35 million
for the write-off of all of its equity investment in PC. As a consequence
of the bankruptcy filing and the various motions and orders in that
proceeding, the asbestos litigation against PC and PPG has been stayed,
and the filing of additional asbestos suits against them has been
enjoined, until May 21, 2001, and the court has indicated that the stay
will be extended for an additional 90 days after this date. During the
pendency of the stay, interested parties, including PC and PPG, among
others, have been engaged in discussions to determine whether a
settlement of all current and potential asbestos claims can be agreed on
within the context of the PC bankruptcy proceeding. These settlement
discussions involve numerous, complex issues. Accordingly, it is
impossible to predict whether or on what terms a voluntary settlement, if
any, on the part of PPG might be reached.
-11-
Although PPG believes it has adequate insurance for the lawsuits and claims
against PPG described above, certain of PPG's insurers are contesting
coverage with respect to some of these claims. 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. Except with respect to any PPG contribution arising out
of a possible voluntary settlement of asbestos claims as discussed above,
the amount of which cannot be predicted, 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
March 31, 2001 and December 31, 2000, PPG had reserves for environmental
contingencies totaling $83 million and $84 million, respectively. Pre-tax
charges against income for environmental remediation costs totaled $1
million for each of the three months ended March 31, 2001 and 2000 and are
included in "Other, net" in the condensed statement of income. Cash outlays
related to such environmental remediation for the three months ended March
31, 2001 and 2000 aggregated $5 million and $4 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 2000. 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, 2000. 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
-12-
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.
A major customer of one of the Company's Asian coatings joint ventures is
experiencing financial difficulties. Should this customer be unable to pay
the amounts owed to our investee or cease operations, our loss would be
limited to the carrying value of the Company's investment in the joint
venture which was approximately $20 million as of March 31, 2001.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Performance Overview
Sales decreased 2% for the first quarter of 2001 to $2.1 billion compared to
$2.2 billion for the first quarter of 2000. The combination of a 1% sales volume
decline across all of our business segments and a 3% decline from foreign
currency translation primarily in our coatings segment contributed to the sales
decline. These negative factors were partially offset by a 2% increase due to
higher selling prices in our chemicals and glass segments.
The gross profit percentage decreased to 36.9% for the first quarter of 2001
compared to 38.7% for the same quarter of 2000. The decrease in the gross profit
percentage was due to higher energy costs in our glass and chemical segments
that was offset, in part, by higher selling prices within our chemicals segment.
Net income and earnings per share, diluted, for the first quarter of 2001 was
$56 million and $0.33, respectively, compared to $139 million and $0.79,
respectively, for the same quarter in 2000. Net income for the first quarter of
2001 included after-tax charge of $71 million for restructuring and other
related activities and net income for the first quarter of 2000 included an
after-tax charge of $35 million for the write-off of an equity investment.
Excluding these charges, net income and earnings per share, diluted, for the
first quarter of 2001 was $127 million and $0.75, respectively, compared to $174
million and $0.99, respectively, for the same quarter in 2000.
Performance of Business Segments
Coatings sales decreased 6% to $1.11 billion compared to $1.18 billion for the
first quarter of 2000. The combination of a decrease in sales volume of 3%,
primarily in our North American automotive original and industrial coatings
businesses, and a 4% decline from the negative effects of foreign currency
translation contributed to the sales decline. These sales decreases were offset
slightly by a 1% increase in sales from our acquisition of Monarch Paint Co.,
which occurred in February 2000. Operating income was $61 million for the first
quarter of 2001 compared to $167 million for the same quarter of 2000. Operating
income for the first quarter of 2001 included pre-tax restructuring and other
related costs of $83 million, as previously discussed. Excluding these charges,
operating income for the first quarter of 2001 was $144 million. The decrease in
operating income is attributable to lower sales volumes and the effect of
inflation primarily in our automotive original equipment and refinish businesses
offset by improved manufacturing efficiencies in our refinish business.
Glass sales increased 3% to $583 million compared to $565 million for the first
quarter of 2000. Sales increased 3% due to higher selling prices, primarily for
our fiber glass products, and 5% due to increased sales volumes from our
automotive replacement glass business and PPG Auto Glass L.L.C. These increases
were offset partially by decreased sales volumes of 4% within our automotive
original and U.S. fiber glass reinforcement businesses and a 1% decline due to
foreign currency translation. Operating income was $85 million for the first
quarter of 2001 compared to $98 million for the same quarter of 2000. Operating
income for the first quarter of 2001 included pre-tax restructuring and other
related costs of $10 million, as previously discussed. Excluding these charges,
operating income for the first quarter of 2001 was $95 million. The decrease in
operating income is attributable to lower sales volumes
- 14 -
primarily in our automotive original business and the effects of higher natural
gas costs. These negative factors were partially offset by higher selling prices
in our fiber glass reinforcement business.
Chemicals sales of $411 million were comparable to $410 million for the first
quarter of 2000. A sales increase of 5% resulting from higher selling prices
for our chlorine and other chlor-alkali products, was offset by a 4% decline
in sales volume of our chlor-alkali products and a 1% decline from the
negative effects of foreign currency translation. Operating income was $23
million for the first quarter of 2001 compared to $74 million for the same
quarter of 2000. Operating income for the first quarter of 2001 included pre-
tax restructuring and other related costs of $7 million, as previously
discussed. Excluding these charges, operating income for the first quarter of
2001 was $30 million. The decrease in operating income is attributable to
lower sales volumes, higher natural gas costs and decreased manufacturing
efficiencies offset, in part, by higher selling prices.
Other Factors
The Company's pre-tax earnings for the first quarter of 2001 and 2000 included
net periodic pension income of $13 million and $21 million, respectively,
related to its U.S. defined benefit pension plans.
The tax rate on on-going operations for 2001 is 36.0% and reflects an
improvement in the regional mix of non-U.S. taxable earnings and a lower
effective state tax rate when compared with the prior year. Restructuring
charges, which reflected a tax benefit at a rate of 30.0%, raised the overall
effective tax rate for the first quarter of 2001 to 42.1%. The overall effective
tax rate of 42.6% for the first quarter of 2000 reflects a 38.5% tax rate on on-
going operations and the adverse effects of the write-off of an equity
investment, which was not deductible for tax purposes.
Accounting Standards
Effective January 1, 2001, PPG adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." These standards require
the Company to recognize all derivatives as either assets or liabilities at fair
value in its balance sheet. The accounting for changes in the fair value of a
derivative depends on the use of the derivative. To the extent that a derivative
is effective as a hedge of a future exposure to changes in value, the fair value
of the derivative is deferred in other comprehensive income. Any portion
considered to be ineffective is reported in earnings immediately.
Adoption of these new standards on January 1, 2001 resulted in an increase to
current assets and current liabilities of $70 million and $26 million,
respectively, and transition adjustments of $43 million in other comprehensive
income and in net income of less than $1 million.
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 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.
- 15 -
PPG has identified and 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.
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.
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 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 could have a material adverse
effect on the Company's consolidated financial condition, operations or
liquidity.
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
monetary 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. See Note 9, "Commitments and Contingent
Liabilities," to the condensed financial statements in this Form 10-Q for an
expanded description of certain 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. As discussed in Note 9, except with respect to any PPG contribution
arising out of a possible voluntary settlement of asbestos claims, the amount of
which cannot be predicted, 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.
- 16 -
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 March 31, 2001 and
December 31, 2000, PPG had reserves for environmental contingencies totaling $83
million and $84 million, respectively. Pre-tax charges against income for
environmental remediation costs totaled $1 million for each of the three months
ended March 31, 2001 and 2000 and are included in "Other, net" in the condensed
statement of income. Cash outlays related to such environmental remediation for
the three months ended March 31, 2001 and 2000 aggregated $5 million and $4
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 2000. 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, 2000.
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.
- 17 -
A major customer of one of the Company's Asian coatings joint ventures is
experiencing financial difficulties. Should this customer be unable to pay the
amounts owed to our investee or cease operations, our loss would be limited to
the carrying value of the Company's investment in the joint venture which was
approximately $20 million as of March 31, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
With the exception of natural gas swap and option contracts, there were no
material changes in the Company's exposure to market risk from December 31,
2000. See Note 8, "Derivative Financial Instruments," to the condensed financial
statements in the Form 10-Q for an expanded description of these market risks.
- 18 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In the Company's Form 10-K for the year ended December 31, 2000, it was reported
that the Company has been a 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 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 for Chapter 11
bankruptcy in the Federal Bankruptcy Court in Pittsburgh, Pennsylvania.
Accordingly in the first quarter of 2000, the Company recorded an after-tax
charge of $35 million for the write-off of all of its equity investment in PC.
As a consequence of the bankruptcy filing and the various motions and orders
in that proceeding, the asbestos litigation against PC and PPG has been stayed,
and the filing of additional asbestos suits against them has been enjoined,
until May 21, 2001, and the court has indicated that the stay will be extended
for an additional 90 days after this date. During the pendency of the stay,
interested parties, including PC and PPG, among others, have been engaged in
discussions to determine whether a settlement of all current and potential
asbestos claims can be agreed on within the context of the PC bankruptcy
proceeding. These settlement discussions involve numerous, complex issues.
Accordingly, it is impossible to predict whether or on what terms a voluntary
settlement, if any, on the part of PPG might be reached.
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 first quarter of 2001, the
Directors, as a group, were credited with 886 Common Stock Equivalents under
this Plan. The values of the Common Stock Equivalents, when credited, ranged
from $46.18 to $54.70.
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,
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 first quarter of 2001, the Directors, as a group,
- 19 -
received 281 Common Stock Equivalents under this Plan. The value of each Common
Stock Equivalents, when credited, was $54.70.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the Company's Annual Meeting of Shareholders held on April 19, 2001 (the
Annual Meeting), the shareholders voted on the election of four directors to
serve for the terms indicated in the proxy statement relating to the Annual
Meeting.
1. On the matter of the election of four directors to serve for the terms
indicated in the proxy statement relating to the Annual Meeting, the vote
was as follows:
Nominees Votes For Votes Against
-------- --------- -------------
James G. Berges 133,488,645 2,347,183
Erroll B. Davis, Jr. 133,502,830 2,332,998
Allen J. Krowe 133,340,888 2,494,940
Robert Mehrabian 133,455,059 2,380,769
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.
The following proposals were approved by the margins indicated:
2. Adoption of the Executive Officers' Annual Incentive Compensation Plan, the
vote was as follows:
Votes For Votes Against Votes Abstain
--------- ------------- -------------
119,014,844 14,771,597 2,046,387
There were 3,000 broker non-votes with respect to this matter.
3. Adoption of the Executive Officers' Total Shareholder Return Plan, the vote
was as follows:
Votes For Votes Against Votes Abstain
--------- ------------- -------------
124,961,377 8,827,440 2,044,011
There were 3,000 broker non-votes with respect to this matter.
The following proposals were not approved by the margins indicated:
4. Shareholder proposal regarding the declassification of the Company's Board
of Directors, the vote was as follows:
Votes For Votes Against Votes Abstain
--------- ------------- -------------
52,863,641 62,351,553 6,002,286
There were 14,618,348 broker non-votes with respect to this matter.
- 20 -
5. Shareholder proposal regarding the adoption of a workplace code of conduct
based on international labor organization conventions, the vote was as
follows:
Votes For Votes Against Votes Abstain
--------- ------------- -------------
10,534,727 100,035,069 10,650,684
There were 14,615,348 broker non-votes with respect to this matter.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
(1) The Company filed a Form 8-K on February 26, 2001, attaching a
press release. The release recommended that shareholders reject
an offer by TRC Capital Corporation to purchase up to 5,750,000
shares of the Company's common stock at a price of $45.75 per
share.
- 21 -
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: May 3, 2001 By /s/ W. H. Hernandez
---------------------------------
W. H. Hernandez
Senior Vice President, Finance
(Principal Financial and
Accounting Officer and
Duly Authorized Officer)
- 22 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
(12) Computation of Ratio of Earnings to Fixed Charges.