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, 1998 Commission File Number 1-1687
----------------------- ------------
PPG INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0730780
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
One PPG Place, Pittsburgh, Pennsylvania 15272
(Address of principal executive offices) (Zip Code)
(412) 434-3131
(Registrant's telephone number, including area code)
As of June 30, 1998, 176,990,956 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:
Condensed Statement of Income......................................... 2
Condensed Balance Sheet............................................... 3
Condensed Statement of Cash Flows..................................... 4
Notes to Condensed Financial Statements............................... 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 15
Part II. Other Information
Item 2. Change in Securities and Use of Proceeds....................... 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signature.................................................................. 17
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Income (Unaudited)
-----------------------------------------
(Millions, except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
----------------------------- -----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- --------------
Net sales........................................... $2,004 $1,944 $3,917 $3,721
Cost of sales....................................... 1,186 1,146 2,331 2,233
------ ------ ------ ------
Gross profit...................................... 818 798 1,586 1,488
------ ------ ------ ------
Other expenses (earnings):
Selling, general and administrative............... 293 275 556 522
Depreciation...................................... 89 88 178 173
Research and development.......................... 67 61 134 119
Interest.......................................... 28 26 58 51
Business divestitures and
realignments (Note 3)............................ 15 - 15 -
Other charges..................................... 16 12 34 32
Other earnings.................................... (26) (26) (53) (50)
------ ------ ------ ------
Total other expenses - net...................... 482 436 922 847
------ ------ ------ ------
Income before income taxes and minority
interest.......................................... 336 362 664 641
Income taxes........................................ 130 138 256 244
Minority interest................................... 7 6 17 13
------ ------ ------ ------
Net income.......................................... $ 199 $ 218 $ 391 $ 384
====== ====== ====== ======
Earnings per share (Note 2)......................... $ 1.13 $ 1.21 $ 2.21 $ 2.12
====== ====== ====== ======
Earnings per share - assuming dilution
(Note 2).......................................... $ 1.11 $ 1.20 $ 2.18 $ 2.10
====== ====== ====== ======
Dividends per share................................. $ 0.36 $ 0.33 $ 0.70 $ 0.66
====== ====== ====== ======
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)
-----------------------------------
June 30 Dec. 31
1998 1997
------------------ ------------------
Assets (Millions)
- ------
Current assets:
Cash and cash equivalents...................................... $ 151 $ 129
Receivables-net................................................ 1,509 1,353
Inventories (Note 4)........................................... 902 863
Other.......................................................... 249 239
-------- --------
Total current assets....................................... 2,811 2,584
Property (less accumulated depreciation of
$4,013 million and $3,903 million)............................. 2,889 2,855
Investments....................................................... 245 219
Other assets...................................................... 1,279 1,210
-------- --------
Total...................................................... $ 7,224 $ 6,868
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Short-term borrowings and current
portion of long-term debt.................................. $ 512 $ 444
Accounts payable and accrued liabilities....................... 1,245 1,210
Income taxes................................................... 35 8
-------- --------
Total current liabilities.................................. 1,792 1,662
Long-term debt.................................................... 1,223 1,257
Deferred income taxes............................................. 445 406
Accumulated provisions............................................ 438 421
Other postretirement benefits..................................... 537 531
-------- --------
Total liabilities.......................................... 4,435 4,277
-------- --------
Commitments and contingent liabilities (Note 8)..................
Minority interest................................................. 86 82
-------- --------
Shareholders' equity:
Common stock................................................... 484 484
Additional paid-in capital..................................... 108 99
Retained earnings.............................................. 5,508 5,239
Treasury stock................................................. (3,057) (2,990)
Unearned compensation.......................................... (169) (162)
Accumulated other comprehensive loss (Note 5).................. (171) (161)
-------- --------
Total shareholders' equity................................. 2,703 2,509
-------- --------
Total...................................................... $ 7,224 $ 6,868
======== ========
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)
---------------------------------------------
Six Months Ended June 30
------------------------------------
1998 1997
------------------ ----------------
(Millions)
Cash from operating activities.................................... $ 462 $ 438
------ ------
Investing activities:
Capital spending............................................... (285) (198)
Reduction of investments....................................... 3 22
Other.......................................................... 7 4
------ ------
Cash used for investing activities......................... (275) (172)
------ ------
Financing activities:
Net change in borrowings with
maturities of three months or less......................... 75 (70)
Proceeds from other short-term debt............................ 62 55
Repayment of other short-term debt............................. (64) (50)
Proceeds from long-term debt................................... 4 204
Repayment of long-term debt.................................... (43) (39)
Loans to employee stock ownership plan......................... (26) (26)
Repayment of loans by employee stock
ownership plan............................................. 20 19
Purchase of treasury stock, net................................ (67) (202)
Dividends paid................................................. (124) (119)
------ ------
Cash used for financing activities......................... (163) (228)
------ ------
Effect of currency exchange rate changes
on cash and cash equivalents................................... (2) (3)
------ ------
Net increase in cash and cash equivalents......................... 22 35
Cash and cash equivalents, beginning of period.................... 129 70
------ ------
Cash and cash equivalents, end of period.......................... $ 151 $ 105
====== ======
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 June 30, 1998, and the results of their operations and
their cash flows for the three- and six-month periods ended June 30, 1998
and 1997. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto incorporated by
reference in PPG's Annual Report on Form 10-K for the year ended December
31, 1997.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
2. Earnings Per Share
------------------
The following table reflects the earnings per share calculations for the
three and six months ended June 30, 1998 and 1997.
Three Months Six Months
Ended June 30 Ended June 30
-------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
(Millions, except per share amounts)
Earnings per common share
Net income.......................................... $ 199 $ 218 $ 391 $ 384
------ ------ ------ ------
Weighted average common shares
outstanding........................................ 177.0 180.1 177.3 181.1
------ ------ ------ ------
Earnings per common share........................... $ 1.13 $ 1.21 $ 2.21 $ 2.12
====== ====== ====== ======
Earnings per common share -
assuming dilution
Net income.......................................... $ 199 $ 218 $ 391 $ 384
------ ------ ------ ------
Weighted average common shares
outstanding........................................ 177.0 180.1 177.3 181.1
Effect of dilutive securities:
Stock options...................................... 1.2 0.9 0.9 0.9
Other stock compensation plans..................... 1.0 1.0 1.0 1.0
------ ------ ------ ------
Potentially dilutive common shares.................. 2.2 1.9 1.9 1.9
------ ------ ------ ------
Adjusted common shares
outstanding........................................ 179.2 182.0 179.2 183.0
------ ------ ------ ------
Earnings per common share -
assuming dilution.................................. $ 1.11 $ 1.20 $ 2.18 $ 2.10
====== ====== ====== ======
-5-
3. Business Acquisitions and Divestitures
--------------------------------------
In January 1998, the Company completed the purchase of the automotive
coatings business of Helios-Lacke Bollig & Kemper GmbH & Co. KG of Cologne,
Germany, and the purchase of certain assets of an automotive glass plant in
Evart, Michigan, from Chrysler Corporation. The Company has completed
final purchase price allocations as of June 30, 1998 and the operating
activity associated with these acquisitions has been included in the
Company's operations from the acquisition dates.
PPG's European flat and automotive glass businesses have not performed at
levels that meet the Company's strategic and performance objectives and, as
a result, the Company has actively engaged in discussions to sell these
businesses. An agreement with Glaverbel S.A., of Brussels, Belgium, was
reached to sell the businesses in the third quarter of 1998 which will
result in a gain to the Company. The annual sales generated by these
businesses total approximately $450 million.
Based on the current status of the Company's discussions to dispose of its
equity interests in two Asian float glass plants, the Company performed a
reassessment of the loss expected to be realized on the disposition of
these equity interests. This reassessment resulted in the recognition of
an additional $15 million pre-tax charge during the three months ended June
30, 1998.
4. Inventories
-----------
Inventories at June 30, 1998 and December 31, 1997 are detailed below.
June 30 Dec. 31
1998 1997
-------------- --------------
(Millions)
Finished products and work in process........................... $ 622 $ 608
Raw materials................................................... 166 141
Supplies........................................................ 114 114
----- -----
Total........................................................... $ 902 $ 863
===== =====
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 $186 million and $191 million higher at June 30, 1998 and
December 31, 1997, respectively.
-6-
5. Comprehensive Income
--------------------
Total comprehensive income for the three and six months ended June 30,
1998 and 1997 was as follows:
Three Months Six Months
Ended June 30 Ended June 30
----------------------------- --------------------------
1998 1997 1998 1997
------------- -------------- ------------ ------------
(Millions)
Net income......................................... $ 199 $ 218 $ 391 $ 384
Other comprehensive income:
Unrealized currency translation
adjustment...................................... 1 (21) (10) (79)
Minimum pension liability
adjustment...................................... - (2) - (2)
----- ----- ----- -----
1 (23) (10) (81)
----- ----- ----- -----
Total comprehensive income....................... $ 200 $ 195 $ 381 $ 303
===== ===== ===== =====
As of June 30, 1998 and December 31, 1997, accumulated other comprehensive
loss, as reflected on the condensed balance sheet, was comprised of the
following:
June 30 Dec. 31
1998 1997
------------ ------------
(Millions)
Minimum pension liability adjustment.......................................... $ (25) $ (25)
Currency translation adjustment............................................... (146) (136)
------ ------
Accumulated other comprehensive loss........................................ $ (171) $ (161)
====== ======
6. Cash Flow Information
---------------------
Cash payments for interest were $62 million and $51 million for the six
months ended June 30, 1998 and 1997, respectively. Net cash payments for
income taxes for the six months ended June 30, 1998 and 1997 were $193
million and $203 million, respectively.
-7-
7. Business Segment Information
----------------------------
Three Months Six Months
Ended June 30 Ended June 30
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(Millions)
Net sales:
Coatings................................... $ 900 $ 809 $1,721 $1,522
Glass...................................... 706 707 1,393 1,366
Chemicals.................................. 398 428 803 833
------ ------ ------ ------
Total................................... $2,004 $1,944 $3,917 $3,721
====== ====== ====== ======
Operating income:
Coatings................................... $ 161 $ 171 $ 291 $ 295
Glass...................................... 121 116 230 205
Chemicals.................................. 97 102 208 191
------ ------ ------ ------
Total................................... 379 389 729 691
Interest expense - net....................... (25) (24) (52) (47)
Other unallocated corporate
expense - net (a).......................... (18) (3) (13) (3)
------ ------ ------ ------
Income before income taxes and
minority interest.......................... $ 336 $ 362 $ 664 $ 641
======= ====== ====== ======
(a) Includes in each 1998 period a pre-tax charge of $15 million related
to the divestiture of equity interests in two Asian float glass plants.
8. Commitments and Contingent Liabilities
--------------------------------------
PPG is involved in a number of lawsuits and claims, both actual and
potential, including some which it has asserted against others, in which
substantial money damages are sought. These lawsuits and claims relate to
product liability, contract, patent, antitrust, environmental and other
matters arising out of the conduct of PPG's business. PPG's lawsuits and
claims against others include claims against insurers and other third
parties with respect to actual and contingent losses related to
environmental matters. Management believes that the outcome of all lawsuits
and claims involving PPG, in the aggregate, will not have a material effect
on PPG's consolidated financial position, results of operations, or
liquidity.
It is PPG's policy to accrue expenses for environmental contingencies when
it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. Reserves for environmental contingencies are
exclusive of claims against third parties and are not discounted. As of
June 30, 1998 and December 31, 1997, PPG had reserves for environmental
contingencies totaling $95 million and $100 million, respectively. Pre-tax
charges against income for environmental remediation costs for the six
months ended June 30, 1998 and 1997 were $4 million and $10 million,
-8-
respectively. Cash outlays related to such charges for the six months
ended June 30, 1998 and 1997 aggregated $9 million and $16 million,
respectively.
Management anticipates that the resolution of the Company's environmental
contingencies, which will occur over an extended period of time, will not
result in future annual charges against income that are significantly
greater than those recorded in recent years. It is possible, however, that
technological, regulatory and enforcement developments, the results of
environmental studies and other factors could alter this expectation. In
management's opinion, the Company operates in an environmentally sound
manner and the outcome of the Company's environmental contingencies will
not have a material effect on PPG's financial position or liquidity.
In addition to the amounts currently reserved, the Company may be subject
to loss contingencies related to environmental matters estimated to be as
much as $200 million to $400 million, which range is unchanged from
December 31, 1997. Such unreserved losses are reasonably possible but are
not currently considered to be probable of occurrence. Although insurers
and other third parties may cover a portion of these costs, to the extent
they are incurred, any potential recovery is not included in this
unreserved exposure to future loss. The Company's environmental
contingencies are expected to be resolved over an extended period of time.
Although the unreserved exposure to future loss relates to all sites, a
significant portion of such exposure involves three operating plant sites
and one closed plant site. Initial remedial actions are occurring at these
sites. Studies to determine the nature of the contamination are reaching
completion and the need for additional remedial actions, if any, is
presently being evaluated. The loss contingencies related to the remaining
portion of such unreserved exposure include significant unresolved issues
such as the nature and extent of contamination, if any, at sites and the
methods that may have to be employed should remediation be required.
With respect to certain waste sites, the financial condition of any other
potentially responsible parties also contributes to the uncertainty of
estimating PPG's final costs. Although contributors of waste to sites
involving other potentially responsible parties may face governmental
agency assertions of joint and several liability, in general, final
allocations of costs are made based on the relative contributions of wastes
to such sites. PPG is generally not a major contributor to such sites.
The impact of evolving programs, such as natural resource damage claims,
industrial site reuse initiatives and state voluntary remediation programs,
also adds to the present uncertainties with regard to the ultimate
resolution of this unreserved exposure to future loss. The Company's
assessment of the potential impact of 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.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Performance in the Second Quarter of 1998 Compared to the Second Quarter of 1997
Performance Overview
Sales increased 3% during the second quarter of 1998 to $2.00 billion compared
to $1.94 billion in the second quarter of 1997. On an overall basis, the
increased sales levels resulted from a 7% improvement in volumes, including
sales related to several acquisitions made in late 1997 and early 1998,
principally in our coatings segment. These improvements were partially offset
by a 2% decline from foreign currency translation due to the strong U.S. dollar
and a 2% decline due to the absence of sales from our surfactants business which
was divested late in 1997.
The gross profit percentage declined slightly to 40.8% in the second quarter of
1998 compared to 41.0% in the same quarter of 1997. The combination of an
unfavorable sales mix change in our coatings segment and slightly lower sales
prices in our chemicals segment more than offset the manufacturing efficiencies
realized within our coatings and glass segments.
Net income and earnings per share for the second quarter of 1998 were $199
million and $1.13, respectively, compared to net income and earnings per share
of $218 million and $1.21, respectively, for the second quarter of 1997. Net
income in the second quarter of 1998 was affected by the same factors which
contributed to the decline in the gross profit percentage. In addition, net
income was adversely affected by an additional $15 million provision for the
estimated loss on disposition of equity interests in two Asian float glass
plants and higher selling, general and administrative expenses due principally
to growth initiatives in the coatings segment, the negative effects of
inflation, and the effect of the General Motors strike.
Performance of Business Segments
Coatings sales increased 11% to $900 million in the second quarter of 1998
compared to $809 million in the same quarter of 1997. A 13% sales volume
increase, a significant portion of which related to recent acquisitions, was
partially offset by a 2% decline from foreign currency translation. In addition
to the effects of recent acquisitions, the increase in sales is attributable to
volume gains for worldwide industrial coatings products and North American
architectural coatings products. The unfavorable effects of the General Motors
strike partially offset these improvements. Operating income decreased to $161
million from $171 million when comparing the second quarter of 1998 and 1997.
The decrease in operating income was attributable to higher selling, general and
administrative expenses associated with growth initiatives, the negative effects
of inflation, increased legal costs, and the impact of the General Motors
strike. These unfavorable factors were partially offset by improved
manufacturing efficiencies, increased sales volumes as previously discussed, and
earnings generated by recent acquisitions.
Glass sales decreased slightly to $706 million in the second quarter of 1998
compared with $707 million in the same quarter of 1997. The effects of a 1%
sales volume increase, including sales associated with an acquisition, was
offset by a 1% decline due to foreign currency translation. Volume reductions
for worldwide fiber glass products and North American automotive original glass
products, principally due to the General Motors strike, were offset by volume
increases in other North American glass product lines, sales increases
associated with a recent acquisition, and worldwide sales price improvements for
fiber glass products. Operating income increased to $121 million in the second
quarter of 1998 compared to $116 million in the corresponding 1997 quarter. The
increase in operating income was due to the
-10-
benefits of manufacturing efficiencies at our North American glass operations, a
slight reduction in overhead costs, and earnings related to a recent
acquisition. A reduction in worldwide sales volume for our fiber glass products
only partially offset these positive factors.
Chemicals sales decreased 7% to $398 million in the second quarter of 1997
compared to $428 million in the same quarter of the prior fiscal year. A 4%
sales volume increase, including the effects of a recent acquisition, was more
than offset by a 7% reduction associated with the divestiture of the surfactants
business in late 1997, a 3% reduction related to lower sales prices, and a 1%
decline from foreign currency translation. The effects of sales volume
increases, principally related to our optical products business which includes
Transitions/R/ optical lenses, were partially offset by lower volumes for chlor-
alkali and derivative products. The reduction in sales prices related
principally to chlorine products. Operating income decreased in the current
quarter to $97 million compared to $102 million in the comparable quarter of the
prior year as a result of lower selling prices as previously discussed and the
absence of earnings related to the divested surfactants business. These
negative factors were offset in part by increased volumes in our specialty
chemicals business for Transitions/R/ optical lenses and lower raw materials
costs within our chlor-alkali and derivatives business.
Performance in the First Six Months of 1998 Compared to the First Six Months of
1997
Performance Overview
Sales increased 5% for the first six months of 1998 to $3.92 billion compared to
$3.72 billion for the first six months of 1997. The increase in sales in the
current six-month period results from an overall 10% improvement in volumes,
including sales related to several acquisitions made in late 1997 and early
1998, primarily in our coatings segment. These improvements were partially
offset by the effects of a 2% decline from foreign currency translation due to
the strong U.S. dollar, a 2% decline due to the absence of sales from our
surfactants business which was divested late in 1997, and a 1% decline due to
price.
The gross profit percentage improved slightly to 40.5% in the 1998 six-month
period compared to 40.0% in the same prior-year period. The benefits realized
from favorable sales mix changes in all of our segments, improved manufacturing
efficiencies within our glass and coatings segments, and lower raw materials
costs in our chemicals segment were largely offset by the negative effects of
lower sales prices in our glass and chemicals segments, and the negative effects
of inflation in our glass and coatings segments.
Net income and earnings per share for the current six-month period were $391
million and $2.21, respectively, compared to net income and earnings per share
of $384 million and $2.12, respectively, for the same period of the prior fiscal
year. The increase in the current period's net income is attributable to the
same factors that contributed to the increased sales levels and the gross profit
percentage increase described above, offset in part by an additional $15 million
provision for the estimated loss on the disposition of equity interests in two
Asian float glass plants, higher selling, general and administrative expenses
associated with growth initiatives, higher legal expenses in our coatings
segment, and the effects of the General Motors strike.
-11-
Performance of Business Segments
Coatings sales increased 13% to $1.72 billion in the current six-month period
from $1.52 billion in the comparable six-month period of 1997. The effects of a
16% sales volume increase, including sales from recent acquisitions, was
partially offset by a 3% decline from foreign currency translation. Sales
generated from several acquisitions in late 1997 and early 1998 contributed
substantially to the segment's sales growth in the current six-month period.
Sales also increased due to the impact of volume gains for all product lines,
particularly in our worldwide industrial and North American architectural
coatings businesses. The unfavorable effects of the General Motors strike and
slightly lower pricing for our automotive coatings products in North America and
Europe partially offset these improvements. Operating income decreased to $291
million for the six months ended June 30, 1998 compared to $295 million in the
prior-year's six-month period. The reduction in operating income was principally
due to higher selling, general and administrative expenses associated with
growth initiatives in all product lines, increased legal expenses, the impact of
the General Motors strike, and the negative effects of inflation. These
reductions were partially offset by the previously discussed volume
improvements, overall manufacturing efficiencies, and the favorable effect of
earnings contributions from recent acquisitions.
Glass sales increased 2% to $1.39 billion in the six-month period ended June 30,
1998 from $1.37 billion in the same period of 1997. The effects of a 5% sales
volume increase, including a recent acquisition, was partially offset by a 2%
decline from foreign currency translation and a 1% decline due to slightly lower
sales prices. Volume increases were experienced in our North American automotive
replacement glass and aircraft products businesses, and were partially offset by
the General Motors strike. Additionally, worldwide sales price improvements for
fiber glass products were more than offset by lower sales prices for North
American glass products. Operating income increased to $230 million in the
current six-month period compared to $205 million in last year's six-month
period due to the same factors that contributed to the higher sales levels,
improved manufacturing efficiencies at both glass and fiber glass operations,
and a slight improvement in selling, general and administrative costs. These
favorable factors were partially offset by the negative effects of inflation and
the General Motors strike.
Chemicals sales decreased 4% to $803 million in the six months ended June 30,
1998 from $833 million in the same period of 1997. The decrease in chemical
sales in the current six-month period is attributable to a 7% sales reduction
associated with the divestiture of the surfactants business in late 1997, a 2%
decline from foreign currency translation, and a 1% decline associated with
lower selling prices. These unfavorable factors were partially offset by a 6%
sales volume increase. The increase in sales volume was principally associated
with our specialty chemicals business, specifically Transitions/R/ optical
lenses. The lower sales prices experienced in the current year's six-month
period related to chlor-alkali and derivative products. Operating income
increased in the current year's six-month period to $208 million from $191
million in the same period last year. The improvement in operating income
related to the previously discussed volume increases and lower raw material
costs within our chlor-alkali and derivatives business, offset in part by the
decline in sales prices for chlorine products and the negative effect on
earnings of PPG's late 1997 surfactants business divestment.
Other Factors
The increase in accounts receivable principally results from acquisitions and
higher sales volume in the second quarter of 1998 compared with the fourth
quarter of 1997.
-12-
The increase in short-term borrowings principally results from the issuance of
commercial paper in the second quarter of 1998.
The increase in income tax expense in the current quarter and six-month period
is the result of an increase in the effective tax rate to 38.5% from 38.0% in
the prior-year periods. The increased rate is due to higher anticipated taxes
on foreign earnings. The increase in income taxes payable was principally the
result of the timing of estimated tax payments.
Other assets increased principally from goodwill and intangible assets resulting
from 1998 acquisition activities. Also contributing to the overall increase was
the higher prepaid pension balance which was due to the recognition of net
periodic pension income.
The increase in capital spending for the six-month period was primarily the
result of business acquisitions during the first quarter of 1998.
Acquisitions and Divestitures
In January 1998, the Company completed the purchase of the automotive coatings
business of Helios-Lacke Bollig & Kemper GmbH & Co. KG of Cologne, Germany, and
the purchase of certain assets of an automotive glass plant in Evart, Michigan,
from Chrysler Corporation. The Company completed final purchase price
allocations as of June 30, 1998 and the operating activity associated with these
acquisitions has been included in the Company's operations from the acquisition
dates.
PPG's European flat and automotive glass businesses have not performed at levels
that meet the Company's strategic and performance objectives and, as a result,
the Company has actively engaged in discussions to sell these businesses. An
agreement with Glaverbel S.A., of Brussels, Belgium, was reached to sell the
businesses in the third quarter of 1998 which will result in a gain to the
Company. The annual sales generated by these businesses total approximately
$450 million.
Based on the current status of the Company's discussions to dispose of its
equity interests in two Asian float glass plants, the Company performed a
reassessment of the loss expected to be realized on the disposition of these
equity interests. This reassessment resulted in the recognition of an
additional $15 million pre-tax charge during the three months ended June 30,
1998.
Accounting Standards
On March 4, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. The Company is currently in the process of
evaluating the prospective impact of these standards on its financial position
and results of operations.
-13-
Commitments and Contingent Liabilities, including Environmental Matters
PPG is involved in a number of lawsuits and claims, both actual and potential,
including some which it has asserted against others, in which substantial money
damages are sought. These lawsuits and claims relate to product liability,
contract, patent, antitrust, environmental and other matters arising out of the
conduct of PPG's business. PPG's lawsuits and claims against others include
claims against insurers and other third parties with respect to actual and
contingent losses related to environmental matters. Management believes that the
outcome of all lawsuits and claims involving PPG, in the aggregate, will not
have a material effect on PPG's consolidated financial position, results of
operations or liquidity.
It is PPG's policy to accrue expenses for environmental contingencies when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Reserves for environmental contingencies are exclusive of
claims against third parties and are not discounted. As of June 30, 1998 and
December 31, 1997, PPG had reserves for environmental contingencies totaling $95
million and $100 million, respectively. Pre-tax charges against income for
environmental remediation costs for the six months ended June 30, 1998 and 1997
were $4 million and $10 million, respectively. Cash outlays related to such
charges for the six months ended June 30, 1998 and 1997 aggregated $9 million
and $16 million, respectively.
Management anticipates that the resolution of the Company's environmental
contingencies, which will occur over an extended period of time, will not result
in future annual charges against income that are significantly greater than
those recorded in recent years. It is possible, however, that technological,
regulatory and enforcement developments, the results of environmental studies
and other factors could alter this expectation. In management's opinion, the
Company operates in an environmentally sound manner and the outcome of the
Company's environmental contingencies will not have a material effect on PPG's
financial position or liquidity.
In addition to the amounts currently reserved, the Company may be subject to
loss contingencies related to environmental matters estimated to be as much as
$200 million to $400 million, which range is unchanged from December 31, 1997.
Such unreserved losses are reasonably possible but are not currently considered
to be probable of occurrence. Although insurers and other third parties may
cover a portion of these costs, to the extent they are incurred, any potential
recovery is not included in this unreserved exposure to future loss. The
Company's environmental contingencies are expected to be resolved over an
extended period of time.
Although the unreserved exposure to future loss relates to all sites, a
significant portion of such exposure involves three operating plant sites and
one closed plant site. Initial remedial actions are occurring at these sites.
Studies to determine the nature of the contamination are reaching completion and
the need for additional remedial actions, if any, is presently being evaluated.
The loss contingencies related to the remaining portion of such unreserved
exposure include significant unresolved issues such as the nature and extent of
contamination, if any, at sites and the methods that may have to be employed
should remediation be required.
-14-
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 environmental contingencies is subject to considerable uncertainty due
to the complex, ongoing and evolving process of investigation and remediation,
if necessary, of such environmental contingencies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There were no material changes in the Company's exposure to market risk from
December 31, 1997.
-15-
PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
- -------------------------------------------------
Directors who are not also Officers of the Company receive Common Stock
Equivalents pursuant to 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 which are
converted into additional Common Stock Equivalents but carry no voting rights or
other rights of a holder of Common Stock. The Common Stock Equivalents credited
to Directors under both plans are exempt from registration under Section 4(2) of
the 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 (i) an
additional one-third of each payment of the basic annual retainer, (ii) all of
the basic annual retainer, or (iii) all compensation. All deferred payments are
held in the form of Common Stock Equivalents. Payments out of the deferred
accounts are made in the form of Common Stock of the Company (and cash as to any
fractional Common Stock Equivalent). In the second quarter of 1998, the
Directors, as a group, were credited with 1,349 Common Stock Equivalents under
this Plan. The values of the Common Stock Equivalents, when credited, ranged
from $69.562 to $72.875.
Under the Directors' Common Stock Plan, each Director who neither is nor was an
employee of the Company is credited annually with Common Stock Equivalents worth
one-half of the Director's basic annual retainer. No more than 10 years of
credits may be made for the account of any director. Upon termination of
service, the Common Stock Equivalents held in a Director's account are converted
to and paid in Common Stock of the Company (and cash as to any fractional Common
Stock Equivalent). In the second quarter of 1998, the Directors, as a group,
received 1,903 Common Stock Equivalents under this Plan. The value of each
Common Stock Equivalent, when credited, ranged from $69.825 to $70.937.
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
(1) The Company filed a Form 8-K on May 13, 1998, dated May 6, 1998,
which included a press release announcing that Glaverbel S.A., of
Brussels, Belgium, confirmed its intention to purchase the
Company's European flat and automotive glass businesses.
-16-
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 4, 1998 By /s/ W. H. Hernandez
-----------------------------------------
W. H. Hernandez
Senior Vice President, Finance
(Principal Financial and
Accounting Officer and
Duly Authorized Officer)
-17-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
INDEX TO EXHIBITS
Exhibit
No. Description
- ---------- ------------
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule