Exhibit 13
Financial and Operating Review
Independent Auditors' Report
To the Board of Directors and Shareholders of PPG Industries, Inc.:
We have audited the accompanying consolidated balance sheet of PPG Industries,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity, comprehensive income
and cash flows for each of the three years in the period ended December 31, 2001
set forth on pages 10 to 13 and pages 23 to 35. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of PPG Industries, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 17, 2002
Management Statement
Responsibility for Preparation of the Financial Statements
The management of PPG Industries, Inc. is responsible for the preparation
of the financial statements included in this Annual Report.
To ensure the reliability of financial data, PPG has established, and
maintains, an internal control system. We believe the internal controls in use
give reasonable assurance that financial reports do not contain any material
misstatement.
We believe that the financial statements and related notes in this report
are accurate in all material respects, and that they were prepared according to
accounting principles generally accepted in the United States of America. The
financial statements include amounts that are based on the best estimates and
judgments of management.
We believe, further, that the other financial information contained in this
Annual Report is consistent with the financial statements.
/s/ RAYMOND W. LEBOEUF
Raymond W. LeBoeuf
Chairman of the Board
and Chief Executive Officer
/s/ WILLIAM H. HERNANDEZ
William H. Hernandez
Senior Vice President, Finance
PPG Industries, Inc. 2001 Annual Report 9
Statement of Income
For the Year
- -------------------------------------------------------------------------------------------------------------
(Millions, except per share amounts) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Net sales $8,169 $8,629 $7,995
- -------------------------------------------------------------------------------------------------------------
Cost of sales 5,137 5,334 4,957
- -------------------------------------------------------------------------------------------------------------
Gross profit 3,032 3,295 3,038
- -------------------------------------------------------------------------------------------------------------
Other expenses (earnings)
Selling, general and administrative 1,395 1,364 1,230
--------------------------------------------------------------------------------------------------------
Depreciation 375 374 366
--------------------------------------------------------------------------------------------------------
Research and development -- net (See Note 18) 266 282 284
--------------------------------------------------------------------------------------------------------
Interest 169 177 133
--------------------------------------------------------------------------------------------------------
Amortization 72 73 49
--------------------------------------------------------------------------------------------------------
Business divestitures and realignments (See Note 2) 103 5 42
--------------------------------------------------------------------------------------------------------
Purchased in-process research and development (See Note 2) -- -- 40
--------------------------------------------------------------------------------------------------------
Other charges 84 141 45
--------------------------------------------------------------------------------------------------------
Other earnings (See Note 15) (98) (138) (124)
- -------------------------------------------------------------------------------------------------------------
Total other expenses -- net 2,366 2,278 2,065
- -------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 666 1,017 973
- -------------------------------------------------------------------------------------------------------------
Income taxes (See Note 9) 247 369 377
- -------------------------------------------------------------------------------------------------------------
Minority interest 32 28 28
- -------------------------------------------------------------------------------------------------------------
Net income $ 387 $ 620 $ 568
=============================================================================================================
Earnings per common share (See Note 8) $ 2.30 $ 3.60 $ 3.27
=============================================================================================================
Earnings per common share -- assuming dilution (See Note 8) $ 2.29 $ 3.57 $ 3.23
=============================================================================================================
The accompanying notes to the financial statements are an integral part of this
consolidated statement.
10 PPG Industries, Inc. 2001 Annual Report
Balance Sheet
December 31
- ----------------------------------------------------------------------------------------------------------
(Millions) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 108 $ 111
----------------------------------------------------------------------------------------------------
Receivables (See Note 3) 1,416 1,563
----------------------------------------------------------------------------------------------------
Inventories (See Note 3) 904 1,121
----------------------------------------------------------------------------------------------------
Deferred income taxes (See Note 9) 155 155
----------------------------------------------------------------------------------------------------
Other 120 143
- ----------------------------------------------------------------------------------------------------------
Total current assets 2,703 3,093
- ----------------------------------------------------------------------------------------------------------
Property (See Note 4) 7,153 7,089
- ----------------------------------------------------------------------------------------------------------
Less accumulated depreciation 4,401 4,148
- ----------------------------------------------------------------------------------------------------------
Property -- net 2,752 2,941
- ----------------------------------------------------------------------------------------------------------
Investments (See Note 10) 305 320
- ----------------------------------------------------------------------------------------------------------
Goodwill 1,129 1,160
- ----------------------------------------------------------------------------------------------------------
Less accumulated amortization 157 128
- ----------------------------------------------------------------------------------------------------------
Goodwill -- net 972 1,032
- ----------------------------------------------------------------------------------------------------------
Identifiable intangible assets 710 718
- ----------------------------------------------------------------------------------------------------------
Less accumulated amortization 140 102
- ----------------------------------------------------------------------------------------------------------
Identifiable intangible assets -- net 570 616
- ----------------------------------------------------------------------------------------------------------
Other assets (See Note 10) 1,150 1,123
- ----------------------------------------------------------------------------------------------------------
Total $ 8,452 $ 9,125
==========================================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Short-term debt and current portion of long-term debt (See Note 5) $ 696 $ 1,161
----------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities (See Note 3) 1,259 1,382
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 1,955 2,543
- ----------------------------------------------------------------------------------------------------------
Long-term debt (See Note 5) 1,699 1,810
- ----------------------------------------------------------------------------------------------------------
Deferred income taxes (See Note 9) 552 543
- ----------------------------------------------------------------------------------------------------------
Accrued pensions (See Note 10) 157 131
- ----------------------------------------------------------------------------------------------------------
Other postretirement benefits (See Note 10) 514 529
- ----------------------------------------------------------------------------------------------------------
Other liabilities (See Note 10) 373 344
- ----------------------------------------------------------------------------------------------------------
Total liabilities 5,250 5,900
- ----------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (See Note 11)
- ----------------------------------------------------------------------------------------------------------
Minority interest 122 128
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity (See Note 12)
Common stock 484 484
----------------------------------------------------------------------------------------------------
Additional paid-in capital 109 102
----------------------------------------------------------------------------------------------------
Retained earnings 6,551 6,444
----------------------------------------------------------------------------------------------------
Treasury stock, at cost (3,496) (3,508)
----------------------------------------------------------------------------------------------------
Unearned compensation (See Note 14) (108) (114)
----------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss (See Note 13) (460) (311)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,080 3,097
- ----------------------------------------------------------------------------------------------------------
Total $ 8,452 $ 9,125
==========================================================================================================
Shares outstanding were 168,488,256 and 168,222,073 at Dec. 31, 2001 and 2000,
respectively.
The accompanying notes to the financial statements are an integral part of this
consolidated statement.
PPG Industries, Inc. 2001 Annual Report 11
Statement of Shareholders' Equity
Accumulated
Other
Additional Unearned Comprehensive
Common Paid-In Retained Treasury Compensation Loss
(Millions) Total Stock Capital Earnings Stock (See Note 14) (See Note 13)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, Jan. 1, 1999 $2,880 $484 $105 $5,791 $(3,198) $(149) $(153)
- ---------------------------------------------------------------------------------------------------------------------------
Net income 568 -- -- 568 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax (25) -- -- -- -- -- (25)
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends (264) -- -- (264) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (82) -- -- -- (82) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of treasury stock 11 -- (1) -- 12 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Loans to ESOP (24) -- -- -- -- (24) --
- ---------------------------------------------------------------------------------------------------------------------------
Repayment of loans by ESOP 39 -- -- -- -- 39 --
- ---------------------------------------------------------------------------------------------------------------------------
Other 3 -- -- 3 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 1999 3,106 484 104 6,098 (3,268) (134) (178)
- ---------------------------------------------------------------------------------------------------------------------------
Net income 620 -- -- 620 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax (133) -- -- -- -- -- (133)
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends (276) -- -- (276) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (247) -- -- -- (247) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of treasury stock 5 -- (2) -- 7 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Loans to ESOP (24) -- -- -- -- (24) --
- ---------------------------------------------------------------------------------------------------------------------------
Repayment of loans by ESOP 44 -- -- -- -- 44
- ---------------------------------------------------------------------------------------------------------------------------
Other 2 -- -- 2 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2000 3,097 484 102 6,444 (3,508) (114) (311)
- ---------------------------------------------------------------------------------------------------------------------------
Net income 387 -- -- 387 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax (149) -- -- -- -- -- (149)
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends (283) -- -- (283) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (5) -- -- -- (5) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of treasury stock 24 -- 7 -- 17 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Loans to ESOP (32) -- -- -- -- (32) --
- ---------------------------------------------------------------------------------------------------------------------------
Repayment of loans by ESOP 38 -- -- -- -- 38 --
- ---------------------------------------------------------------------------------------------------------------------------
Other 3 -- -- 3 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2001 $3,080 $484 $109 $6,551 $(3,496) $(108) $(460)
===========================================================================================================================
Statement of Comprehensive Income
For the Year
- ---------------------------------------------------------------------------------------------------------------------------
(Millions) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 387 $ 620 $568
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, net of tax (See Note 13)
Currency translation adjustment (131) (120) (40)
----------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment (20) (16) 18
----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on marketable equity securities 10 (6) (3)
----------------------------------------------------------------------------------------------------------------------
Transition adjustment on derivatives (See Note 1) 43 -- --
----------------------------------------------------------------------------------------------------------------------
Net change -- derivatives (See Note 7) (51) -- --
----------------------------------------------------------------------------------------------------------------------
Reclassification adjustment -- marketable equity securities -- 9 --
----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax (149) (133) (25)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 238 $ 487 $543
============================================================================================================================
The accompanying notes to the financial statements are an integral part of these
consolidated statements.
12 PPG Industries, Inc. 2001 Annual Report
Statement of Cash Flows
For the Year
- ---------------------------------------------------------------------------------------------------------------------------------
(Millions) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 387 $ 620 $ 568
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile to cash from operations
Depreciation and amortization 447 447 415
----------------------------------------------------------------------------------------------------------------------------
Business divestitures and realignments 103 5 42
----------------------------------------------------------------------------------------------------------------------------
Purchased in-process research and development -- -- 40
----------------------------------------------------------------------------------------------------------------------------
Loss on write-off of equity investment -- 39 --
----------------------------------------------------------------------------------------------------------------------------
Reclassification adjustment -- marketable equity securities -- 9 --
----------------------------------------------------------------------------------------------------------------------------
Increase in pension asset (63) (102) (110)
----------------------------------------------------------------------------------------------------------------------------
Decrease (increase) in receivables 74 (44) (128)
----------------------------------------------------------------------------------------------------------------------------
Decrease (increase) in inventories 187 (92) (7)
----------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in accounts payable and accrued liabilities (126) (11) 77
----------------------------------------------------------------------------------------------------------------------------
Change in other current assets -- net 32 (11) (9)
----------------------------------------------------------------------------------------------------------------------------
Other -- net 19 10 14
- ---------------------------------------------------------------------------------------------------------------------------------
Cash from operating activities 1,060 870 902
- ---------------------------------------------------------------------------------------------------------------------------------
Investing activities
Capital spending
Additions to property and investments (291) (561) (490)
----------------------------------------------------------------------------------------------------------------------------
Business acquisitions, net of cash balances acquired (10) (115) (1,343)
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from the sale of the Company's headquarters complex -- -- 152
- ---------------------------------------------------------------------------------------------------------------------------------
Reductions of other property and investments 56 40 37
- ---------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (245) (636) (1,644)
- ---------------------------------------------------------------------------------------------------------------------------------
Financing activities
Net change in borrowings with maturities of three months or less (511) 220 492
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from other short-term debt 179 268 252
- ---------------------------------------------------------------------------------------------------------------------------------
Repayment of other short-term debt (203) (244) (267)
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from long-term debt 29 32 821
- ---------------------------------------------------------------------------------------------------------------------------------
Repayment of long-term debt (41) (55) (203)
- ---------------------------------------------------------------------------------------------------------------------------------
Loans to employee stock ownership plan (32) (24) (24)
- ---------------------------------------------------------------------------------------------------------------------------------
Repayment of loans by employee stock ownership plan 38 44 39
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (5) (247) (82)
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of treasury stock 13 4 9
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends paid (283) (276) (264)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash (used for) from financing activities (816) (278) 773
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents (2) (3) (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3) (47) 30
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 111 158 128
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 108 $ 111 $ 158
=================================================================================================================================
The accompanying notes to the financial statements are an integral part of this
consolidated statement.
PPG Industries, Inc. 2001 Annual Report 13
Management's Discussion and Analysis
Performance in 2001 Compared with 2000
Overall Performance
Our sales decreased 5% in 2001 to $8.2 billion from $8.6 billion in 2000. The
majority of this sales decrease, 4%, is attributable to decreased volumes across
all of our business segments. Sales for 2001 also declined 2% from foreign
currency translation primarily within our coatings segment due to the
strengthening of the U.S. dollar against other currencies. These sales decreases
were partially offset by a 1% increase in prices within our coatings and glass
segments.
The gross profit percentage decreased to 37.1% in 2001 from 38.2% in 2000.
Increased raw material costs, including natural gas, particularly in our glass
and chemicals segments, along with unfavorable sales mix across our glass and
chemicals segments were offset slightly by the benefits realized from improved
manufacturing efficiencies in our coatings and glass segments.
Net income and earnings per share, diluted, in 2001 were $387 million and
$2.29, respectively, compared to $620 million and $3.57, respectively, in 2000.
Net income in 2001 included an after-tax charge of $71 million for restructuring
and other related activities. Net income in 2000 included after-tax charges of
$35 million for the write-off of a 50% owned equity investment and $3 million of
restructuring and one-time integration costs associated with PPG Auto Glass
L.L.C. (PPG Auto Glass), an automotive replacement glass distribution venture
formed during 2000. Excluding these charges, net income and earnings per share,
diluted, for 2001 were $458 million and $2.71, respectively, and $658 million
and $3.79, respectively, in 2000. The decrease in earnings is largely
attributable to the lower sales volume and gross profit percentage described
above. In addition, selling, general and administrative expenses were up $31
million as the savings from our restructuring actions of about $35 million were
more than offset by the additional overhead costs of businesses acquired during
2000, higher pension and other benefit costs, higher growth related overhead in
our architectural coatings business and the impact of inflation. Additional cost
reductions of $25 million related to our restructuring actions are reflected in
research and development costs and costs of sales.
Results of Business Segments
Coatings sales decreased 5% to $4.4 billion in 2001 from $4.7 billion in 2000.
Sales decreased 4% from decreased volumes primarily in our North American
automotive original equipment, refinish and industrial businesses. Sales also
decreased 2% due to negative effects of foreign currency translation. These
decreases were offset slightly by a 1% increase from higher selling prices
primarily in our refinish business. Operating income decreased to $495 million
in 2001 compared to $685 million in 2000. Operating income in 2001 included
pretax restructuring and other related costs of $83 million. Excluding these
pretax charges, operating income in 2001 was $578 million. The decrease in
operating income is attributable to lower sales volumes and higher
environmental, pension and other benefit costs offset, in part, by improved
manufacturing efficiencies and lower research and development costs.
Glass sales decreased 5% to $2.2 billion in 2001 from $2.4 billion in 2000.
Sales decreased 6% from decreased volumes primarily in our North American
automotive original and fiber glass businesses and 1% due to the negative
effects of foreign currency translation. These declines were offset by a 2%
increase in selling prices, due in part to more profitable product mix, in our
flat glass, automotive replacement glass and fiber glass businesses. Operating
income decreased to $255 million in 2001 compared to $377 million in 2000.
Operating income in 2001 included pretax restructuring and other related costs
of $10 million and operating income in 2000 included pretax charges of $6
million for restructuring and one-time integration costs related to PPG Auto
Glass. Excluding these pretax charges, operating income in 2001 was $265 million
compared to $383 million in 2000. The decrease in operating income is
attributable to lower sales volumes primarily in our North American automotive
original and fiber glass businesses, the effects of higher natural gas costs and
lower equity earnings, partially offset by improved manufacturing efficiencies,
higher selling prices and the inclusion of a full year's results of PPG Auto
Glass.
Chemicals sales decreased 6% to $1.5 billion in 2001 from $1.6 billion in
2000. Sales volumes declined 4% primarily from our chlorine, caustic soda,
chlor-alkali derivative and silica products. Sales also decreased 1% due to
lower selling prices for our chlor-alkali derivative products and 1% due to the
negative effects of foreign currency translation. Operating income decreased to
$91 million in 2001 from $174 million in 2000. Operating income in 2001 included
pretax restructuring and other related costs of $7 million. Excluding these
pretax charges, operating income in 2001 was $98 million. The decrease in
operating income is attributable to lower sales volumes, higher natural gas and
environmental costs and decreased manufacturing efficiencies.
Other Significant Factors
Earnings in 2001 and 2000 included pension income of $53 million and $86
million, respectively. This decline in pension income is due primarily to a
decline in the market value of pension plan assets during 2000. The market value
of our pension plan assets continued to decrease during 2001 due primarily to
the declines in the U.S. equity markets. As a result of this decline, along with
a reduction in the expected return on plan assets and discount rate assumptions,
the Company expects to record pension expense of approximately $50 million in
2002. See Note 10, "Pensions and Other Postretirement Benefits," for information
concerning the pension plan assets and the components of pension income.
Other unallocated corporate expense--net, was $21 million in 2001 as
compared to $54 million in 2000. Included in 2001 is a pretax charge of $1
million for restructuring and other related costs. Included in 2000 are pretax
charges of $39 million representing the write-off of a 50% owned equity
investment in Pittsburgh Corning Corporation, which has filed for reorganization
under the federal bankruptcy code and $14 million representing an other than
temporary decline in the market value of an investment in marketable
14 PPG Industries, Inc. 2001 Annual Report
Management's Discussion and Analysis
equity securities, previously recorded, net of tax, as an unrealized loss in
other comprehensive loss.
The tax rate for ongoing operations was 36% in both 2001 and 2000. However,
the overall effective tax rate in 2001 was 37.07% as the geographic spread of
the restructuring charges taken in the first quarter provided a tax benefit of
only 30%. The effective tax rate for ongoing operations for 2002 is expected to
approximate 36%.
The decrease in short-term and long-term debt during 2001 is due
principally to the repayment of various U.S. and non-U.S. debt obligations.
Outlook
The impact of the recession on our results of operations for 2001 was
significant, as we experienced continued weakness in many of our North American
markets, including automotive original equipment, aerospace and other
transportation products, electronics, construction materials, pulp and paper and
aluminum. During 2001 we also saw demand weaken in the key markets we serve in
Europe, South America and Asia as the impact of the North American recession
broadened.
As we begin 2002, the North American recession and general, global economic
weakness continue. There are mixed economic indicators in the U.S.: recent
reports on consumer confidence, unemployment and industrial orders suggest that
the economy may be strengthening; conversely, the extension of sales incentive
programs by the North American automobile manufacturers and the continued
decline in U.S. industrial production indicates that the economy continues to be
weak. There is also uncertainty related to many aspects of the global economy,
particularly the automotive markets. We know that our inventory levels are lower
than they have been in past downturns and we believe that our customers have
also reduced their inventories. This indicates that industrial production could
respond quickly to a strengthening of demand, whenever it occurs.
Although the timing of the recovery is uncertain, we know from past
experience that we need to continue to increase our productivity, reduce our
cost structure and conserve our capital. We focused on these issues in 2001 and
will continue to do so in 2002. Following the restructuring and workforce
reductions begun last year, we are developing plans to take additional actions
that will result in a restructuring charge against earnings later in the first
quarter of 2002 in the range of $60 million to $90 million before taxes. These
actions will include further workforce reductions and the closing of facilities
or portions of facilities no longer needed as a result of the improvements made
in our productivity and key business processes. We will also continue our
efforts to improve our customers' results through the delivery of cost effective
solutions. These efforts will include developing new products and integrated
product/service offerings.
We also expect continued consolidation of companies within our customer,
supplier and competitor groups in 2002. This will lead to continued downward
pressure on our selling prices and to potentially higher raw material prices. In
particular, there is a risk that further chemical industry consolidation,
combined with a profitability horizon that is shorter than has historically been
acceptable, could make prices or physical availability of certain raw materials
more volatile and could contribute to increases in raw material costs in excess
of inflation. The impacts may be dampened by weaker, recession-driven demand
but, in a period of economic recovery, demand may outpace supply. These same
factors should create favorable market conditions for our chlor-alkali business
in terms of its selling prices and demand.
The operating performance of our glass and chemicals segments during the
last two years has been adversely impacted by the sharp increase in natural gas
prices beginning in the second half of 2000. Each one-dollar change in the price
of natural gas per mmbtu (million British thermal units) could have a direct
impact of approximately $60 million on our annual operating costs. The average
monthly market price for 2001 was $4.38 per mmbtu, up from $3.91 per mmbtu in
2000 to a level which was almost twice the average monthly market price during
the 1995-1999 time period. Prices came down significantly in the second half of
2001 and ended the year at $2.54 per mmbtu. However, natural gas prices are
expected to continue to be substantially more volatile over the next few years,
making it difficult to predict the future cost of natural gas. In order to
reduce the risks associated with volatile prices, we use a number of techniques
including hedging, conserving through improved manufacturing technologies and
switching to alternative fuels.
Another factor that will impact our operating performance in 2002 is
increased employee benefit costs due to rising medical costs and lower returns
on pension assets. Growing increases in medical costs, particularly prescription
drugs, will give rise to higher costs for postretirement medical benefits in
2002. We will also experience a shift from pension income in 2001 to pension
expense in 2002 as a result of a decline in the market value of our pension plan
assets, due primarily to a second straight year of negative investment returns
in the U.S. equity markets, a reduction in our expected rate of return on
pension plan assets and discount rate assumptions for 2002. We expect our
pension and other postretirement benefit costs to increase by about $130 million
in 2002, which will reduce earnings per share by about $0.49 but have only a
minor impact on 2002's cash flow.
Newly Adopted Accounting Standards
Note 1, "Summary of Significant Accounting Policies," effective Jan. 1, 2001,
describes and quantifies the Company's adoption of the provisions of the
Financial Accounting Standards Board's (FASB) standards on accounting for
derivative instruments and hedging activities.
Accounting Standards to be Adopted in Future Years
In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. All of the
Company's acquisitions in recent years were accounted for under the purchase
PPG Industries, Inc. 2001 Annual Report 15
Management's Discussion and Analysis
method. The new standard had no impact on PPG in 2001. SFAS No. 142 changes the
accounting for goodwill and certain other intangible assets from an amortization
method to an impairment only approach. We will adopt the provisions of SFAS No.
142 effective Jan. 1, 2002. This change in accounting will increase our 2002 net
income by approximately $30 million or $0.18 per share because goodwill will no
longer be amortized. The standard also requires a reassessment of the useful
lives of identifiable intangible assets other than goodwill and a test for
impairment of goodwill and intangibles with indefinite lives annually, unless
events and circumstances indicate that the carrying amounts may not be
recoverable. The Company expects to complete its assessment by the end of the
first quarter of 2002.
During 2001 the FASB issued two other accounting standards--"Accounting for
Asset Retirement Obligations" and "Accounting for the Impairment or Disposal of
Long-Lived Assets." See Note 1, "Summary of Significant Accounting Policies" for
an expanded description of these new standards.
Performance in 2000 Compared with 1999
Overall Performance
Our sales increased 8% in 2000 to $8.6 billion from $8.0 billion in 1999. The
majority of this sales increase, 7%, is attributable to several acquisitions
made in 1999 and 2000, primarily within our coatings segment. Other improvements
in volume in our coatings and glass segments totaled 2%. Sales for 2000 also
increased by 2% due to higher selling prices primarily within our chemicals
segment. These sales increases were partially offset by a 3% decline from
foreign currency translation in all of our business segments due to the
strengthening of the U.S. dollar against other currencies, especially the euro
and the British pound sterling.
The gross profit percentage increased slightly to 38.2% in 2000 from 38.0%
in 1999. Improvements in manufacturing efficiencies across all of our business
segments and higher selling prices, primarily in our chemicals segment, were
substantially offset by increases in raw material costs, particularly for
natural gas.
Net income and earnings per share, diluted, in 2000 were $620 million and
$3.57, respectively, compared to $568 million and $3.23, respectively, in 1999.
Net income in 2000 included after-tax charges of $35 million for the write-off
of a 50% owned equity investment and $3 million of restructuring and one-time
integration costs associated with PPG Auto Glass. Net income in 1999 included
after-tax charges of $33 million for purchased in-process research and
development, $31 million related to the integration of packaging coatings
acquisitions and ongoing cost reduction efforts and $15 million for the
fair-market-value adjustment of acquired inventories sold. Excluding these
charges, net income and earnings per share, diluted, for 2000 were $658 million
and $3.79, respectively, and $647 million and $3.68, respectively, in 1999.
Results of Business Segments
Coatings sales increased 9% to $4.7 billion in 2000 from $4.3 billion in 1999.
Sales increased 11% from acquisitions and 2% due to volume improvements
primarily in our European automotive original equipment business and our
European industrial business. Sales declined 3% from the negative effects of
foreign currency translation and 1% from lower selling prices. Operating income
was $685 million in 2000 compared to $545 million in 1999. Operating income in
1999 included pretax charges of $40 million for purchased in-process research
and development; $41 million of restructuring charges related to the integration
of packaging coatings acquisitions and ongoing cost reduction efforts throughout
our coatings businesses and $23 million representing the fair-market-value
adjustment of acquired inventories that had been sold. Excluding these pretax
restructuring charges, operating income in 1999 was $649 million. The increase
in operating income is attributable to acquisitions, increased sales volumes and
manufacturing efficiencies. These factors were partially offset by higher raw
material costs, the effect of inflation and currency.
Glass sales increased 5% to $2.4 billion in 2000 from $2.2 billion in 1999.
Sales increased 3% from increased volumes across all glass businesses, 2% from
acquisitions and 1% from higher selling prices primarily for our fiber glass
products. These increases were partially offset by a 1% decline due to foreign
currency translation. Operating income was $377 million in 2000 compared to $363
million in 1999. Operating income in 2000 also included pretax charges of $6
million for restructuring and one-time integration costs related to PPG Auto
Glass. Excluding these charges, operating income in 2000 was $383 million. The
increase in operating income is attributable to increased selling prices,
increased equity affiliate earnings and manufacturing efficiencies, partially
offset by higher natural gas costs.
Chemicals sales increased 8% to $1.6 billion in 2000 from $1.5 billion in
1999. Sales increased 11% as a result of higher selling prices for our chlorine
and caustic soda products. This increase was offset slightly by a 2% decline in
sales volume of our chlor-alkali derivative, optical and fine chemicals products
and a 1% decline from the negative effect of foreign currency translation.
Operating income decreased to $174 million in 2000 from $177 million in 1999.
The decrease in operating income is attributable to lower sales volumes and
higher natural gas costs. These negative factors were partially offset by higher
selling prices mentioned previously and improved manufacturing efficiencies.
Other Significant Factors
Earnings in 2000 and 1999 included pension income of $86 million and $71
million, respectively, due primarily to returns on U.S. defined benefit pension
plan assets.
Interest expense increased due to the issuance of $800 million aggregate
principal amount of debt securities in August 1999 to finance the 1999
acquisitions.
Other unallocated corporate expense--net, was expense of $54 million in
2000 as compared to income of $12 million in 1999. Included in 2000 are pretax
charges of $39 million representing the write-off of a 50% owned equity
investment in Pittsburgh Corning Corporation, which has filed for reorganization
under the federal bankruptcy code, and $14 million representing an other than
temporary
16 PPG Industries, Inc. 2001 Annual Report
Management's Discussion and Analysis
decline in the market value of an investment in marketable equity securities,
previously recorded, net of tax, as an unrealized loss in other comprehensive
loss.
The effective tax rate for 2000 was 36.25% compared to 38.80% for 1999. The
reduction in the effective tax rate for 2000 was due to an improvement in the
regional mix of non-U.S. taxable earnings and a lower effective state tax rate.
The 1999 rate reflects the impact of the non-deductibility of certain purchased
in-process research and development charges recorded in 1999.
Business Divestitures and 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 substantially all of these amounts will be spent by June
2002. The details of this charge were as follows:
- -------------------------------------------------------------------
(Millions, except Severance and Asset Total Employees
employee amounts) Other Costs Dispositions Charge Covered
- -------------------------------------------------------------------
Coatings $ 60 $ 23 $ 83 1,072
- -------------------------------------------------------------------
Glass 4 6 10 254
- -------------------------------------------------------------------
Chemicals 2 5 7 23
- -------------------------------------------------------------------
Corporate 1 -- 1 18
- -------------------------------------------------------------------
Total $ 67 $ 34 $ 101 1,367
--------------------------------------------------------------
Activity (34) (32) (66) (935)
- -------------------------------------------------------------------
Balance at
Dec. 31, 2001 $ 33 $ 2 $ 35 432
===================================================================
In conjunction with this first quarter charge, an additional $2 million of
restructuring costs were recorded in 2001 as incurred.
During 2001, we paid $17 million related to restructuring reserves accrued
in 2000 and 1999. See Note 2, "Acquisitions, Business Divestitures and
Realignments," for an expanded description of these restructuring actions.
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. See Note 11, "Commitments and Contingent
Liabilities," for an expanded description of certain of these lawsuits. As
discussed in Note 11, 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 or liquidity; however, such outcome may be
material to the results of operations of the period in which the costs, if any,
are recognized.
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 generally not discounted. As of Dec. 31,
2001 and 2000, PPG had reserves for environmental contingencies totaling $94
million and $84 million, respectively. Pretax charges against income for
environmental remediation costs in 2001, 2000 and 1999 totaled $29 million, $18
million and $10 million, respectively, and are included in "Other charges" in
the statement of income. Cash outlays related to such environmental remediation
aggregated $19 million, $16 million and $22 million in 2001, 2000 and 1999,
respectively.
Management anticipates that the resolution of the Company's environmental
contingencies will occur over an extended period of time and could result in
charges against income of up to $50 million in 2002. 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 the prior year
end. 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 in our
chemicals segment. 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
PPG Industries, Inc. 2001 Annual Report 17
Management's Discussion and Analysis
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 value of the Company's investment in the joint venture which was
approximately $20 million at Dec. 31, 2001.
Impact of Inflation
PPG'sfinancial statements are prepared on the historical cost basis, which does
not completely account for the effects of inflation.
In 2001, the increase in production costs due to the negative effects of
inflation was not fully recovered through price increases and manufacturing
efficiencies, which were adversely impacted by lower production volumes. In
2000, the negative effects of inflation, including the impact of higher natural
gas costs, were substantially offset in the aggregate by the impact of higher
selling prices in our glass and chemicals businesses and manufacturing
efficiencies in all of our businesses. In 1999, the decline in selling prices
and negative effects of inflation on our production costs were partially offset
by improved manufacturing efficiencies. While inflationary and market pressures
on costs are expected to be experienced in 2002, we anticipate that ongoing
improvements in manufacturing efficiencies and reductions in overhead will
mitigate the negative effect of inflation and selling prices on 2002 operating
income to a significant extent.
Financial Resources, Capital Spending
During the past three years, we continued to have sufficient financial resources
to meet operating requirements, to fund our capital spending, share repurchase
programs, and to pay increased dividends to shareholders. Cash from operating
activities was $1,060 million in 2001, $870 million in 2000 and $902 million in
1999. Dividends paid to shareholders totaled $283 million in 2001, $276 million
in 2000 and $264 million in 1999.
During 2001, 2000 and 1999, the Company repurchased approximately 0.1
million, 5.8 million and 1.2 million shares of common stock at a cost of $5
million, $234 million and $68 million, respectively, under various share
repurchase programs. The program initiated in November 1998 authorized the
repurchase of 10 million shares of common stock. As of Dec. 31, 2001, 9.1
million shares of common stock had been repurchased under this program at a cost
of $421 million. In October 2000, we authorized a program to repurchase an
additional 10 million shares of common stock. The repurchase of common stock was
financed principally by cash from operations and proceeds from long-term debt.
Additional shares were repurchased from the PPG Employee Savings Plan.
Capital spending in 2001 totaled $301 million, compared with $676 million
in 2000 and $1,833 million in 1999. This spending related to business
acquisitions totaling $10 million, $115 million and $1,343 million, in 2001,
2000 and 1999, respectively, modernization and productivity improvements,
expansion of existing businesses, and environmental control projects. Capital
spending in 2000 also included $83 million for marketable securities relating to
the deferred compensation plan. Capital spending, excluding acquisitions, is
expected to total about $300 million during 2002.
We periodically review our array of businesses in comparison to our overall
strategic and performance objectives. As part of this review, we routinely
acquire or divest of certain businesses. During 2002, we anticipate that any
acquisitions completed will be funded through a combination of cash generated
from operations or from the sale of other businesses and, to a lesser extent,
external funding sources or the issuance of stock.
The ratio of total debt, including capital leases, to total debt and equity
was 44% and 49% at Dec. 31, 2001 and 2000, respectively. Cash from operations
and the Company's debt capacity are expected to continue to be sufficient to
fund capital spending, dividend payments and operating requirements.
See Note 5, "Debt and Bank Credit Agreements and Leases," for details
regarding the use and availability of committed and uncommitted lines of credit.
In addition to the lines of credit, the Company may issue up to $500
million aggregate principal amount of debt securities under a shelf registration
statement filed with the Securities and Exchange Commission (SEC)in July 1999.
Critical Accounting Policies
Management has evaluated the accounting policies used in the preparation of the
accompanying financial statements and related notes and believes those policies
to be reasonable and appropriate. We believe that the most critical accounting
policies applied in the preparation of our financial statements relate to
accounting for contingencies, under which we accrue a loss when it is probable
that a liability has been incurred and the amount can be reasonably estimated,
and to accounting for pensions and other postretirement benefits because of the
importance of management judgment in making the estimates necessary to apply
these policies.
Contingencies, by their nature, relate to uncertainties that require
management to exercise judgment both in assessing the likelihood that a
liability has been incurred as well as in estimating the amount of potential
loss. The most important contingencies impacting our financial statements are
those related to the collectibility of accounts receivable (see Note 3),
environmental remediation and pending litigation against the Company (see Note
11), and the resolution of matters related to open tax years (see Note 9).
Accounting for pensions and other postretirement benefits involves
estimating the cost of benefits to be provided well into the future and
attributing that cost over the time period each employee works. To accomplish
this, extensive use is made of assumptions about inflation, investment returns,
mortality, turnover, medical costs and discount rates (see Note 10).
As part of our ongoing financial reporting process, a collaborative effort
is undertaken involving PPG managers
18 PPG Industries, Inc. 2001 Annual Report
Management's Discussion and Analysis
with functional responsibility for financial reporting, credit, environmental,
legal, tax and benefit matters and outside advisors such as consultants,
engineers, lawyers and actuaries. The results of this effort provide management
with the necessary information on which to base their judgments on these
contingencies and develop the estimates used to prepare the financial
statements.
We believe that the amounts recorded in the accompanying financial
statements related to these contingencies, pensions and postretirement benefits
are based on the best estimates and judgments of the appropriate PPG management,
although actual outcomes could differ from our estimates.
Currency
On Jan. 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. Greece has since joined the original eleven countries and will adopt
the euro in 2002. The legacy currencies will remain legal tender through
February 28, 2002. Issuance of euro-denominated currency began as of Jan. 1,
2002. No later than February 28, 2002, the participating countries will withdraw
all bills and coins so that their legacy currencies will no longer be considered
legal tender.
Conversion to the euro has not had a material impact on PPG's operating
results and financial condition.
At Dec. 31, 2001, PPG had net assets in Argentina of $68 million translated
using an exchange rate of 1.7 Argentine pesos to one U.S. dollar. Any reduction
in the value of these net assets resulting from a further devaluation of the
Argentine peso will result in a direct charge to accumulated other comprehensive
loss component of shareholders' equity.
Research and Development
Innovation and technology have been a hallmark of our Company's success
throughout its history. Research and development costs totaled about 3% of sales
in each of the past three years, representing a level of expenditure that we
expect to continue in 2002. These costs include technology-driven improvements
to our manufacturing processes and customer technical service, as well as the
costs of developing new products. Because of our broad array of products and
customers, we are not materially dependent upon any single technology platform.
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 Annual Report 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 SEC. 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.
Market Risk
PPG is exposed to market risks related to changes in foreign currency exchange
rates, interest rates and natural gas prices 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. A detailed description of these exposures and the Company's risk
management policies are provided in Note 7, "Derivative Financial Instruments,"
to PPG's financial statements.
The fair value of the foreign currency forward and option contracts
outstanding as of Dec. 31, 2001 and 2000, which were used to hedge PPG's
exposure to changes in foreign currency cash flows and translation risk, was not
material. The potential reduction in PPG's earnings resulting from adverse
changes in the exchange rates of its outstanding foreign currency hedge
contracts of 10% for European currencies and 20% for Asian and South American
currencies would have totaled approximately $4 million and $2 million as of Dec.
31, 2001 and 2000, respectively.
PPG had non-U.S. dollar-denominated debt of $409 million and $554 million
as of Dec. 31, 2001 and 2000, respectively. A weakening of the U.S. dollar by
10% to European currencies and by 20% to Asian and South American currencies
would have resulted in unrealized translation losses of approximately $59
million and $76 million as of Dec. 31, 2001 and 2000, respectively.
Interest rate swaps are used to manage a portion of PPG's interest rate
risk and, as of Dec. 31, 2001, the fair
PPG Industries, Inc. 2001 Annual Report 19
Management's Discussion and Analysis
value of the interest rate swaps outstanding was a net $20 million liability.
The fair value of these swaps would have increased by $11 million if variable
interest rates changed unfavorably by 10%. As of Dec. 31, 2000, the fair value
of interest rate swaps was not material. A 10% increase in interest rates in
Canada, Mexico and Europe and a 20% increase in interest rates in Asia and South
America would have affected PPG's variable rate debt obligations by increasing
interest expense by approximately $6 million and $9 million as of Dec. 31, 2001
and 2000, respectively. Further, a 10% reduction in interest rates would have
increased the present value of the Company's fixed rate debt by approximately
$62 million and $84 million as of Dec. 31, 2001 and 2000, respectively. Such
changes would not have had a material effect on PPG's earnings or cash flows.
The fair value of commodity swap and option contracts as of Dec. 31, 2001
and 2000 was a $12 million liability and a $62 million asset, respectively,
which were entered into to reduce PPG's exposure to rising prices in natural
gas. As a result of a 10% reduction in the price of natural gas, the Company
would have experienced a loss in the fair value of the underlying commodity swap
and option contracts outstanding as of Dec. 31, 2001 and 2000 of approximately
$12 million at both dates.
Business Segment Information
Segment Organization and Products
PPG is a multinational manufacturer with three reportable segments: coatings,
glass and chemicals. The Company's segments are organized based on differences
in products. The glass and fiber glass operations have been aggregated into a
single reportable segment. The coatings segment supplies a variety of protective
and decorative coatings and finishes along with adhesives, sealants and metal
pretreatment products for automotive original equipment and aftermarket
refinish, aerospace, industrial, packaging and architectural applications. In
addition to specific products, the coatings segment supplies technical
expertise, engineering and purchasing services to the automotive original,
industrial and aerospace portions of the business. The glass segment supplies
flat glass and continuous-strand fiber glass for residential and commercial
construction, automotive original and replacement markets and industrial
applications. The chemicals segment supplies chlor-alkali and specialty
chemicals products. The primary chlor-alkali products are chlorine, caustic
soda, vinyl chloride monomer, chlorinated solvents and chlorinated benzenes. The
primary specialty chemicals products are Transitions lenses, optical monomers,
silicas and fine chemicals. Production facilities and markets for the coatings
and glass segments are predominantly in North America and Europe, while the
chemicals segment operates primarily in North America. Our businesses are also
pursuing opportunities to develop markets in Asia and South America. Each of the
businesses in which PPG is engaged is highly competitive. However, the
diversification of product lines and worldwide markets served tends to minimize
the impact on total sales and earnings of changes in demand for a particular
product line or in a particular geographic area.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company allocates resources
to segments and evaluates the performance of segments based upon reported
segment income before interest expense--net, income taxes and minority interest.
Substantially all corporate administrative expenses are allocated to the
segments. Net periodic pension income and expense is allocated to the segments;
however, prepaid pension assets for defined benefit plans that cover certain
U.S. employees are not allocated to the segments and are included in corporate
assets. Intersegment sales and transfers are recorded at selling prices that
approximate market prices.
- ------------------------------------------------------------------------------------------------------------------------------------
(Millions) Consolidated
Segments Coatings/(1)/ Glass/(2)/ Chemicals/(3)/ Corporate/(4)/ Totals
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Net sales to external customers $ 4,410 $ 2,236 $ 1,523 $ -- $ 8,169
- ------------------------------------------------------------------------------------------------------------------------------------
Intersegment net sales 2 1 8 (11) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total net sales $ 4,412 $ 2,237 $ 1,531 $ (11) $ 8,169
====================================================================================================================================
Operating income (loss) $ 495 $ 255 $ 91 $ (21) $ 820
- ------------------------------------------------------------------------------------------------------------------------------------
Interest--net (154)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest $ 666
====================================================================================================================================
Depreciation and amortization $ 193 $ 137 $ 97 $ 20 $ 447
- ------------------------------------------------------------------------------------------------------------------------------------
Share of net earnings of equity affiliates $ -- $ 9 $ 1 $ 5 $ 15
- ------------------------------------------------------------------------------------------------------------------------------------
Segment assets/(5)/ $ 4,160 $ 1,596 $ 1,105 $ 1,591 $ 8,452
- ------------------------------------------------------------------------------------------------------------------------------------
Investments in equity affiliates $ 24 $ 94 $ 26 $ 13 $ 157
- ------------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets $ 109 $ 85 $ 58 $ 31 $ 283
====================================================================================================================================
(continued on next page)
20 PPG Industries, Inc. 2001 Annual Report
Business Segment Information
(continued)
- -------------------------------------------------------------------------------------------------------------------------------
(Millions) Consolidated
Segments Coatings/(1)/ Glass/(2)/ Chemicals/(3)/ Corporate/(4)/ Totals
- -------------------------------------------------------------------------------------------------------------------------------
2000
Net sales to external customers $ 4,658 $ 2,350 $ 1,621 $ -- $ 8,629
- -------------------------------------------------------------------------------------------------------------------------------
Intersegment net sales 3 1 11 (15) --
- -------------------------------------------------------------------------------------------------------------------------------
Total net sales $ 4,661 $ 2,351 $ 1,632 $ (15) $ 8,629
===============================================================================================================================
Operating income (loss) $ 685 $ 377 $ 174 $ (54) $ 1,182
- -------------------------------------------------------------------------------------------------------------------------------
Interest--net (165)
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest $ 1,017
===============================================================================================================================
Depreciation and amortization $ 193 $ 140 $ 95 $ 19 $ 447
- -------------------------------------------------------------------------------------------------------------------------------
Share of net earnings of equity affiliates $ 5 $ 25 $ 3 $ 6 $ 39
- -------------------------------------------------------------------------------------------------------------------------------
Segment assets/(5)/ $ 4,592 $ 1,791 $ 1,221 $ 1,521 $ 9,125
- -------------------------------------------------------------------------------------------------------------------------------
Investments in equity affiliates $ 24 $ 106 $ 29 $ 13 $ 172
- -------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets $ 240 $ 140 $ 79 $ 37 $ 496
===============================================================================================================================
1999
Net sales to external customers $ 4,266 $ 2,228 $ 1,501 $ -- $ 7,995
- -------------------------------------------------------------------------------------------------------------------------------
Intersegment net sales 3 1 8 (12) --
- -------------------------------------------------------------------------------------------------------------------------------
Total net sales $ 4,269 $ 2,229 $ 1,509 $ (12) $ 7,995
===============================================================================================================================
Operating income $ 545 $ 363 $ 177 $ 12 $ 1,097
- -------------------------------------------------------------------------------------------------------------------------------
Interest--net (124)
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest $ 973
===============================================================================================================================
Depreciation and amortization $ 153 $ 148 $ 91 $ 23 $ 415
- -------------------------------------------------------------------------------------------------------------------------------
Share of net earnings of equity affiliates $ 3 $ 14 $ 3 $ 8 $ 28
- -------------------------------------------------------------------------------------------------------------------------------
Segment assets/(5)/ $ 4,451 $ 1,728 $ 1,252 $ 1,483 $ 8,914
- -------------------------------------------------------------------------------------------------------------------------------
Investments in equity affiliates $ 21 $ 87 $ 33 $ 54 $ 195
- -------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets $ 1,415 $ 144 $ 125 $ 54 $ 1,738
===============================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------------
(Millions)
Geographic Information 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Net sales/(6)/
United States $ 5,469 $ 5,754 $ 5,358
--------------------------------------------------------------------------------------------------------------------------
Europe 1,507 1,599 1,569
--------------------------------------------------------------------------------------------------------------------------
Canada 545 595 542
--------------------------------------------------------------------------------------------------------------------------
Other 648 681 526
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 8,169 $ 8,629 $ 7,995
===============================================================================================================================
Operating income
United States/(7)/ $ 664 $ 934 $ 888
--------------------------------------------------------------------------------------------------------------------------
Europe/(8)/ 103 185 121
--------------------------------------------------------------------------------------------------------------------------
Canada 38 74 63
--------------------------------------------------------------------------------------------------------------------------
Other 36 43 13
- -------------------------------------------------------------------------------------------------------------------------------
Total/(9)/ $ 841 $ 1,236 $ 1,085
- -------------------------------------------------------------------------------------------------------------------------------
Interest net (154) (165) (124)
- -------------------------------------------------------------------------------------------------------------------------------
Other unallocated corporate (expense) income -- net (21) (54) 12
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest $ 666 $ 1,017 $ 973
===============================================================================================================================
(continued on next page)
PPG Industries, Inc. 2001 Annual Report 21
Business Segment Information
(continued)
- ----------------------------------------------------------------------
(Millions)
Geographic Information 2001 2000 1999
- ----------------------------------------------------------------------
Long-lived assets/(10)/
United States $ 3,764 $ 3,862 $ 3,676
-----------------------------------------------------------------
Europe 964 1,031 1,082
-----------------------------------------------------------------
Canada 191 211 235
-----------------------------------------------------------------
Other 473 553 545
- ----------------------------------------------------------------------
Total $ 5,392 $ 5,657 $ 5,538
======================================================================
Identifiable assets
United States/(11)/ $ 5,606 $ 5,977 $ 5,625
-----------------------------------------------------------------
Europe 1,646 1,752 1,943
-----------------------------------------------------------------
Canada 314 366 390
-----------------------------------------------------------------
Other 886 1,030 956
- ----------------------------------------------------------------------
Total $ 8,452 $ 9,125 $ 8,914
======================================================================
(1) Coatings segment income in 2001 includes a pretax charge of $83 million for
restructuring and other related activities. Coatings segment income in 1999
includes a pretax restructuring charge of $41 million related to the
integration of the packaging coatings acquisition and ongoing cost
reduction efforts throughout our coatings businesses. Also included in 1999
coatings segment income is a $40 million pretax charge for purchased in-
process research and development and a $23 million pretax charge for the
fair-market-value adjustment of acquired inventories that have been sold.
(2) Glass segment income in 2001 includes a pretax charge of $10 million for
restructuring and other related activities. Glass segment income in 2000
includes pretax restructuring and one-time integration costs of $6 million
related to PPG Auto Glass.
(3) Chemicals segment income in 2001 includes a pretax charge of $7 million for
restructuring and other related activities.
(4) Corporate intersegment net sales represent intersegment net sales
eliminations. Corporate income (loss) represents unallocated corporate
income and expenses. The corporate loss in 2001 includes a pretax charge of
$1 million for restructuring and other related activities. The corporate
loss in 2000 includes a pretax charge of $39 million representing the
write-off of a 50% owned equity investment in Pittsburgh Corning
Corporation, which has filed for reorganization under the federal
bankruptcy code. Also included in 2000 is a pretax charge of $14 million
due to an other than temporary decline in the market value of an investment
in marketable equity securities, previously recorded net of tax as an
unrealized loss in other comprehensive loss.
(5) Segment assets are the total assets used in the operation of each segment.
Corporate assets are principally cash and cash equivalents, income tax
assets and prepaid pensions. See Note 10.
(6) Net sales to external customers are attributed to individual countries
based upon the location of the operating unit shipping the product.
(7) Operating income in 2000 includes pretax charges of $39 million, $14
million and $6 million, respectively, related to the write-off of a 50%
owned equity investment in Pittsburgh Corning Corporation which has filed
for reorganization under the federal bankruptcy code, an other than
temporary decline in the market value of an investment in marketable equity
securities, and restructuring and one-time integration costs related to PPG
Auto Glass. Operating income in 1999 includes pretax charges (credit) of
$40 million, $18 million, $6 million and $(5) million, respectively,
related to purchased in-process research and development, cost reduction
initiatives, the fair-market-value adjustment of acquired inventories that
have been sold and the reversal of previously established restructuring
reserves.
(8) Operating income in 1999 includes pretax charges of $29 million and $13
million, respectively, related to cost reduction initiatives and the fair-
market-value adjustment of acquired inventories that have been sold.
(9) Operating income in 2001 includes a pretax charge of $101 million for
restructuring and other related activities, including severance and other
costs of $67 million and asset dispositions of $34 million.
(10) Long-lived assets include property, goodwill and identifiable intangible
assets, net of accumulated depreciation and amortization, and other assets
except for non-current trade and notes receivable.
(11) Includes corporate assets which are principally cash and cash equivalents,
income tax assets and prepaid pensions.
22 PPG Industries, Inc. 2001 Annual Report
Notes
1. Summary of Significant Accounting
Policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of PPG
Industries, Inc. (PPG or the Company), and all significant subsidiaries, both
U.S. and non-U.S., that we control. In substantially all cases, we own more than
50% of the voting stock of the subsidiaries that we control. Investments in
companies of which we own 20% to 50% of the voting stock and have the ability to
exercise significant influence over operating and financial policies of the
investee are accounted for using the equity method of accounting and, as a
result, our share of the earnings or losses of such equity affiliates is
included in the statement of income. Transactions between PPG and its
subsidiaries are eliminated in consolidation.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of income and expenses during the reporting period.
Actual outcomes could differ from those estimates.
Revenue recognition
Revenue from sales is recognized when goods are shipped and title to inventory
passes to the customer.
Foreign currency translation
For all significant non-U.S. operations, the functional currency is the local
currency. Assets and liabilities of those operations are translated into U.S.
dollars using year-end exchange rates; income and expenses are translated using
the average exchange rates for the reporting period. Translation adjustments are
deferred in accumulated other comprehensive income (loss), a separate component
of shareholders' equity.
Inventories
Most U.S. inventories are stated at cost, using the last-in, first-out (LIFO)
method, which does not exceed market. All other inventories are stated at cost,
using the first-in, first-out (FIFO) method, which does not exceed market. We
determine cost using either average or standard factory costs, which approximate
actual costs, excluding certain fixed costs such as depreciation and property
taxes.
Property
Property is recorded at cost. We compute depreciation by the straight-line
method based on the estimated useful lives of depreciable assets. Additional
expense is recorded when facilities or equipment are subject to abnormal
economic conditions or obsolescence. Significant improvements that add to
productive capacity or extend the lives of properties are capitalized. Costs for
repairs and maintenance are charged to expense as incurred. When property is
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any related gains or losses are included in
income. Amortization of the cost of capitalized leased assets is included in
depreciation expense.
Identifiable intangible assets and goodwill
Identifiable intangible assets acquired in business combinations accounted for
by the purchase method are recorded based upon fair market value at the date of
acquisition. Identifiable intangible assets are amortized on a straight-line
basis over their estimated useful lives (3 to 40 years) and primarily consist of
core developed technology, trademarks and tradenames and customer lists.
Goodwill, representing the excess of the cost over the net tangible and
identified intangible assets of acquired businesses, is stated at cost and
amortized on a straight-line basis over the estimated future periods to be
benefited, principally 40 years.
Identified intangible assets and goodwill are reviewed for impairment
whenever events or circumstances indicate that the carrying amounts may not be
recoverable.
Employee Stock Ownership Plan
We account for our employee stock ownership plan (ESOP) in accordance with
Statement of Position (SOP) No. 93-6 for PPG common stock purchased after Dec.
31, 1992 (new ESOP shares). As permitted by SOP No. 93-6, shares purchased prior
to Dec. 31, 1992 (old ESOP shares), continue to be accounted for in accordance
with SOP No. 76-3. ESOP shares are released for future allocation to
participants based on the ratio of debt service paid during the year on loans
used by the ESOP to purchase the shares to the remaining debt service on these
loans. These loans are a combination of borrowings guaranteed by PPG and
borrowings by the ESOP directly from PPG. Borrowings from third parties are
included in debt in our balance sheet (see Note 5). Unearned compensation,
reflected as a reduction of shareholders' equity, principally represents the
unpaid balance of all of the ESOP's loans. Dividends received by the ESOP are
used to pay debt service.
For old ESOP shares, compensation expense is equal to amounts contributed
to the ESOP by the Company less the ESOP interest expense element of such
contributions. Dividends on old ESOP shares are deducted from retained earnings.
Old ESOP shares are considered to be outstanding in computing earnings per
common share. For new ESOP shares, compensation expense is equal to the
Company's matching contribution (see Note 14). Dividends on released new ESOP
shares are deducted from retained earnings, and dividends on unreleased shares
are reported as a reduction of debt or accrued interest. Only new ESOP shares
that have been released are considered outstanding in computing earnings per
common share.
PPG Industries, Inc. 2001 Annual Report 23
Notes
Cash equivalents
Cash equivalents are highly liquid investments (valued at cost, which
approximates fair value) acquired with an original maturity of three months or
less.
Derivative financial instruments
Effective Jan. 1, 2001, the Company 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 derivative instruments as either assets or
liabilities at fair value most of which were previously not recorded on the
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 cash flow hedge of an exposure to future changes in value, the
change in fair value of the derivative is deferred in other comprehensive
income. Any portion considered to be ineffective will be reported in earnings
immediately. To the extent that a derivative is effective as a hedge of an
exposure to future changes in fair value, the change in the derivative's fair
value will be offset in the statement of income by the change in fair value of
the item being hedged.
Adoption of these new accounting standards on Jan. 1, 2001 resulted in an
increase in current assets, current liabilities and other comprehensive income
of $70 million, $26 million and $43 million, respectively, with a cumulative
after-tax increase in net income of less than $1 million. This increase to other
comprehensive income principally represents the deferred gain on outstanding
natural gas option and swap contracts as of Jan. 1, 2001. Since the issuance of
SFAS No. 133 and SFAS No. 138, the Financial Accounting Standards Board (FASB),
through its Derivatives Implementation Group, continues to issue additional
requirements. On an ongoing basis, the Company evaluates the potential impact of
these new requirements on PPG's consolidated results of operations, financial
position and cash flows. None of the changes with effective dates in 2002 are
expected to have a material impact on the Company.
Prior to adoption of the provisions of SFAS No. 133, gains and losses on
derivative financial instruments that were used to hedge foreign currency,
interest rate, and natural gas price changes were not recognized until the
hedged transaction was reflected in the statement of income. Premiums paid on
foreign currency option contracts were amortized over the lives of the
contracts. Unrealized gains and losses from forward currency contracts that
hedged anticipated transactions did not previously qualify for deferral
accounting treatment.
Accounting Standards to be Adopted in Future Years
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. All of the Company's acquisitions in recent years were
accounted for under the purchase method. The new standard had no impact on PPG
in 2001. SFAS No. 142 changes the accounting for goodwill and certain other
intangible assets from an amortization method to an impairment only approach. We
will adopt the provisions of SFAS No. 142 effective Jan. 1, 2002. This change in
accounting will increase our 2002 net income by approximately $30 million or
$0.18 per share because goodwill will no longer be amortized. The standard also
requires a reassessment of the useful lives of identifiable intangible assets
other than goodwill and a test for impairment of goodwill and intangibles with
indefinite lives annually, unless events and circumstances indicate that the
carrying amounts may not be recoverable. The Company expects to complete its
assessment by the end of the first quarter of 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" which is effective Jan. 1, 2003. We are currently in the
process of evaluating the effect the adoption of this standard will have on
PPG's consolidated results of operations, financial position and cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which is effective Jan. 1, 2002.
The adoption of this new standard in 2002 will not have a material effect on
PPG's consolidated results of operations, financial position and cash flows.
Reclassifications
Certain amounts in the 2000 and 1999 financial statements have been reclassified
to be consistent with the 2001 presentation.
2. Acquisitions, Business Divestitures and Realignments
During the past three years, we have acquired a number of businesses, all of
which were recorded using the purchase method of accounting. Accordingly, the
results of operations of the acquired companies have been included in our
consolidated results from their respective acquisition dates.
The cost of the acquisitions was $10 million in 2001, $115 million in 2000
and $1,343 million in 1999 plus the assumption of indebtedness of $1 million in
2000 and $5 million in 1999.
In July 2000, PPG and Apogee Enterprises, Inc. (Apogee) combined their U.S.
automotive replacement glass distribution businesses, creating a new entity, PPG
Auto Glass L.L.C. (PPG Auto Glass). PPG contributed net assets with a basis of
$39 million and has a 66 percent ownership interest in PPG Auto Glass. Apogee
contributed net assets with a fair value of $31 million in exchange for its 34
percent ownership interest. In February 2000, we acquired Monarch Paint Co., an
architectural coatings producer. Additionally, throughout 2001 and 2000, we
acquired several smaller businesses.
24 PPG Industries, Inc. 2001 Annual Report
Notes
In October 1999, we acquired a majority interest in privately held powder
coatings maker Bellaria S.p.A. In July 1999, we acquired the global automotive
refinish, automotive and industrial coatings businesses of Imperial Chemical
Industries PLC (the ICI business), except for the businesses in the Indian
subcontinent, for approximately $677 million, and aerospace coatings and sealant
maker PRC-DeSoto International, Inc. (PRC-DeSoto) from Akzo Nobel N.V. (Akzo)
for approximately $524 million. Although included as part of the original
purchase price, the majority of the ICI business in Asia was not acquired until
the fourth quarter of 1999 and the PRC-DeSoto and ICI businesses in France were
not acquired until November 1999. We also acquired the U.S. architectural
coatings business of Australian based Wattyl, Ltd. and we completed the
acquisition of the German-based specialty coatings business of the ICI business
in July 1999. In February 1999, we acquired the commercial transport refinish
coatings business of Sigma Coatings B.V., a subsidiary of Belgian refiner
PetroFina S.A. Finally, in January 1999, we completed the acquisition of the
remaining portion of the global packaging coatings business formerly owned by
Courtaulds plc from Akzo and the purchase of certain leased assets associated
with our 1998 acquisition of the technical coatings business of Orica Ltd.
In connection with the acquisitions of PRC-DeSoto and the ICI business, a
portion of the purchase price for each acquisition was allocated to purchased
in-process research and development (IPR&D) which totaled $21 million and $19
million, respectively. The amounts attributed to IPR&D were expensed at the
dates of acquisition as the IPR&D projects had not reached technological
feasibility nor had any alternative future use.
The IPR&D projects, which totaled more than 40, primarily related to
developing improved environmentally compliant product offerings, such as high
solids (low solvents) or waterborne products, were valued through the
application of the income approach by independent valuation specialists. The
income approach includes an analysis of the markets, projected net cash flows,
and technical and commercial risks associated with achieving such cash flows.
With respect to the IPR&D projects of PRC-DeSoto and the ICI business, the
estimated cash flows were projected over periods ranging from ten to twenty
years after the date of the acquisitions, and were discounted at rates ranging
from 15% to 30% (the average discount rate utilized was approximately 20%). The
discount rates were selected on a project-by-project basis and were based on the
Company's weighted average cost of capital adjusted for the risks associated
with the estimated growth, profitability, and technical and commercial risks of
the acquired IPR&D projects. The nature of the efforts to develop the acquired
IPR&D into commercially viable products consists principally of planning,
designing and testing activities necessary to determine that the products can
meet market expectations, including functionality, technical and performance
requirements and specifications. The financial assumptions utilized in the
valuation of the IPR&D were consistent with the acquired businesses' historical
results, PPG's specific experience and expectations, and general industry
levels. Anticipated cost savings and other synergies were not included in the
valuation analysis of the IPR&D. The Company expected that the products
incorporating the acquired technology will generally be completed and begin to
generate cash flows over the three to twenty-four month period after the
acquisitions. However, development of these technologies remains a significant
risk due to the remaining effort to achieve technical viability, evolving
customer markets, uncertain standards and performance specifications for new
products, and significant competitive threats from numerous companies.
The valuation of the acquired IPR&D also gave consideration to the stage of
completion of the projects at the time of the acquisition and the degree to
which the projects relied on prior, existing technology. With respect to the
stage of completion, the PRC-DeSoto and the ICI business IPR&D projects were, on
average, approximately 46% and 56% complete, respectively, at the dates of
acquisition. Similarly, the IPR&D projects' degree of leverage from the
applicable developed technologies was approximately 33% for PRC-DeSoto and 36%
for the ICI business.
During 2000 and 2001 work continued on these projects. At Dec. 31, 2001,
half of the acquired projects had achieved technological feasibility and have
been incorporated into products marketed to customers. About 20% of the acquired
projects have been abandoned or reprioritized, none of which are material to the
acquired businesses. Most of the remaining projects are expected to be
incorporated into products marketed to customers.
Pro forma information reflecting the 2001 and 2000 acquisitions is not
presented as the impact would not be material. The following table reflects the
results of our operations on a pro forma basis as if the 1999 acquisitions had
been completed on Jan. 1, 1999. The pro forma results of operations do not
include 1999 after-tax charges of $33 million for IPR&D and $15 million for the
fair-market-value adjustment of acquired inventories sold, both of which are
associated with the 1999 acquisitions of the ICI business and PRC-DeSoto. The
following unaudited pro forma information also excludes the effects of synergies
and cost reduction initiatives directly related to all acquisitions.
- ----------------------------------------------------------
(Millions, except per share amounts) 1999
- ----------------------------------------------------------
Net sales $ 8,416
- ----------------------------------------------------------
Earnings before interest, income
taxes and minority interest $ 1,191
- ----------------------------------------------------------
Net income $ 597
- ----------------------------------------------------------
Earnings per common share $ 3.44
- ----------------------------------------------------------
Earnings per common share--
assuming dilution $ 3.40
- ----------------------------------------------------------
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions been consummated
as of Jan. 1, 1999, nor are they necessarily indicative of future operating
results.
PPG Industries, Inc. 2001 Annual Report 25
Notes
In July 1999, we completed the sale of our Pittsburgh headquarters complex
for $186 million and concurrently entered into a long-term operating lease for
the portion of the complex occupied by the Company. The pretax gain of $7
million on the sale was deferred and will be amortized over the term of the
long-term operating lease.
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 substantially all of these amounts will be spent by June
2002. The details of this charge were as follows:
- -------------------------------------------------------------------
(Millions, except Severance and Asset Total Employees
employee amounts) Other Costs Dispositions Charge Covered
- -------------------------------------------------------------------
Coatings $ 60 $ 23 $ 83 1,072
- -------------------------------------------------------------------
Glass 4 6 10 254
- -------------------------------------------------------------------
Chemicals 2 5 7 23
- -------------------------------------------------------------------
Corporate 1 -- 1 18
- -------------------------------------------------------------------
Total $ 67 $ 34 $ 101 1,367
---------------------------------------------------------------
Activity (34) (32) (66) (935)
---------------------------------------------------------------
Balance at
Dec. 31, 2001 $ 33 $ 2 $ 35 432
===============================================================
In conjunction with this first quarter charge, an additional $2 million of
restructuring costs were recorded in 2001 as incurred.
During 2000, we finalized restructuring plans for certain locations related
to the integration of the ICI business and PRC-DeSoto. These restructuring plans
were originally developed at the acquisition date (principally July 1999). The
plans covered severance benefits for 618 employees, as well as other costs, and
resulted in an increase to goodwill of $24 million and a pretax charge of $1
million in 2000. As of Dec. 31, 2001, $21 million has been paid including $20
million to 618 employees. The remaining reserve of $4 million will cover
remaining lease costs and other exit costs.
During 2000, PPG Auto Glass accrued severance and other restructuring
related costs of $10 million, resulting in an increase to goodwill of $6 million
and a pretax charge of $4 million. In addition, PPG Auto Glass incurred one-time
integration costs of $2 million. The restructuring plans included severance
benefits for 133 employees and other exit costs. As of Dec. 31, 2001, $9 million
of the reserve has been paid. The remaining reserve of $1 million will cover
remaining lease costs.
In the fourth quarter of 2000, we took charges of $3 million related to
work force reductions in our coatings business for 65 people. These actions were
completed in 2001.
During 1999, we approved restructuring plans associated with the
integration of the packaging coatings acquisitions and cost reduction activities
across all of our businesses that resulted in pretax charges of $47 million. The
components of the plans included severance benefits for 519 employees and
estimated losses of $17 million on the disposal of a 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. These actions were completed in 2001. In 1999, we also
reversed $5 million related to changes in estimates of reserves originally
recorded in 1999, 1998 and 1997.
3. Working Capital Detail
- -----------------------------------------------------------------
(Millions) 2001 2000
- -----------------------------------------------------------------
Receivables
Customers $1,339 $ 1,478
- -----------------------------------------------------------------
Other 121 122
- -----------------------------------------------------------------
Allowance for doubtful accounts (44) (37)
- -----------------------------------------------------------------
Total $1,416 $ 1,563
==================================================================
Inventories/(1)/
Finished products and work
in process $ 622 $ 807
-------------------------------------------------------------
Raw materials 166 198
-------------------------------------------------------------
Supplies 116 116
- ------------------------------------------------------------------
Total $ 904 $ 1,121
==================================================================
Accounts payable and
accrued liabilities
-------------------------------------------------------------
Trade creditors $ 610 $ 764
-------------------------------------------------------------
Accrued payroll 208 235
-------------------------------------------------------------
Other postretirement and
pension benefits 79 72
-------------------------------------------------------------
Income taxes 22 12
-------------------------------------------------------------
Other 340 299
- ------------------------------------------------------------------
Total $1,259 $ 1,382
==================================================================
(1) Inventories valued using the LIFO method comprised 63% and 65% of total
gross inventory values at Dec. 31, 2001 and 2000, respectively. If the
first-in, first-out method of inventory valuation had been used,
inventories would have been $180 million and $183 million higher at Dec.
31, 2001 and 2000, respectively. During the year ended Dec. 31, 2001,
certain inventories accounted for on the LIFO method of accounting were
reduced, which resulted in the liquidation of certain quantities carried at
costs prevailing in prior years. The net effect on earnings of these
liquidations was not material.
4. Property
- ---------------------------------------------------------------------
Useful
Lives
(Millions) (years) 2001 2000
- ------------------------------------------------------------------------
Property/(1)/
Land and land improvements 10-30 $ 301 $ 303
-------------------------------------------------------------------
Buildings 20-50 1,099 1,076
-------------------------------------------------------------------
Machinery and equipment 5-25 5,192 5,020
-------------------------------------------------------------------
Other 3-20 384 371
-------------------------------------------------------------------
Construction in progress 177 319
- ------------------------------------------------------------------------
Total $ 7,153 $ 7,089
========================================================================
(1) Interest capitalized in 2001, 2000 and 1999 was $13 million, $16 million
and $11 million, respectively.
26 PPG Industries, Inc. 2001 Annual Report
Notes
5. Debt and Bank Credit Agreements and Leases
- -------------------------------------------------------------------------
(Millions) 2001 2000
- -------------------------------------------------------------------------
6 1/4% non-callable notes, due 2002 $100 $100
- -------------------------------------------------------------------------
6 3/4% non-callable notes, due 2004 299 299
- -------------------------------------------------------------------------
6 7/8% non-callable debentures, due 2005/(1)/ 100 100
- -------------------------------------------------------------------------
6 1/2% notes due 2007/(1)/ 150 150
- -------------------------------------------------------------------------
7.05% notes, due 2009/(1)/ 298 298
- -------------------------------------------------------------------------
6 7/8% notes, due 2012 100 100
- -------------------------------------------------------------------------
7 3/8% notes, due 2016 149 149
- -------------------------------------------------------------------------
6 7/8% notes, due 2017 74 74
- -------------------------------------------------------------------------
7.4% notes, due 2019 199 199
- -------------------------------------------------------------------------
9% non-callable debentures, due 2021 148 148
- -------------------------------------------------------------------------
ESOP notes/(2)/
--------------------------------------------------------------------
Fixed-rate notes,
weighted average 8.5% 36 46
--------------------------------------------------------------------
Variable-rate notes, weighted
average 1.9% at Dec. 31, 2001 60 68
- -------------------------------------------------------------------------
Various other U.S. debt, weighted
average 3.1% at Dec. 31, 2001 55 54
- -------------------------------------------------------------------------
Various other non-U.S. debt, weighted
average 5.7% at Dec. 31, 2001 46 44
- -------------------------------------------------------------------------
Capital lease obligations 9 10
- -------------------------------------------------------------------------
Total 1,823 1,839
- -------------------------------------------------------------------------
Less payments due within one year 124 29
- -------------------------------------------------------------------------
Long-term debt $1,699 $1,810
=========================================================================
(1) In November 2001, PPG entered into several interest rate swaps which had
the effect of converting $400 million of these fixed rate notes to variable
rates, based on three-month London Interbank Offered Rate (LIBOR). The
weighted average effective interest rate for these borrowings, including
the effects of the outstanding swaps was 6.6%.
(2) See Note 14 for discussion of ESOP borrowings. The fixed- and variable-rate
notes mature in 2009 and require annual principal payments from 2002 to
2008.
Aggregate maturities during the next five years are (in millions) $124 in
2002, $33 in 2003, $335 in 2004, $120 in 2005 and $15 in 2006.
During 2001 the Company renegotiated $1.2 billion in credit lines which
support its commercial paper programs in the United States, Europe and Canada.
The new facility is comprised of a $600 million portion having a 5-year term and
a $600 million portion having a 364-day term. The facility fee paid on the
committed amount is 7 1/2 basis points on the 5-year portion and six basis
points on the 364-day portion. There is also a $25 million credit line, relating
to a subsidiary, that will expire in October 2002 and requires payment of annual
fees equal to 10 basis points on the unused portion of the line. At Dec. 31,
2001, we had $2 million outstanding on these credit lines.
Our non-U.S. operations have other uncommitted lines of credit totaling
$282 million of which $74 million was used at Dec. 31, 2001. These uncommitted
lines of credit are subject to cancellation at any time and are not subject to
any commitment fees.
PPG is in compliance with the restrictive covenants under its various
credit agreements, loan agreements and indentures.
The Dec. 31, 2001 and 2000, balances for "Short-term debt and current
portion of long-term debt" include, respectively, $451 million and $947 million
of commercial paper and $121 million and $185 million of short-term notes. Of
the $451 million in commercial paper, $281 million relates to our euro-
denominated commercial paper program. The weighted-average interest rates of
short-term borrowings as of Dec. 31, 2001 and 2000, were 3.7% and 6.4%,
respectively.
Interest payments in 2001, 2000 and 1999 totaled $180 million, $195 million
and $123 million, respectively.
Rental expense for operating leases was $118 million, $120 million and $92
million in 2001, 2000 and 1999, respectively. Minimum lease commitments for
operating leases that have initial or remaining lease terms in excess of one
year at Dec. 31, 2001, are (in millions) $65 in 2002, $49 in 2003, $36 in 2004,
$27 in 2005, $22 in 2006 and $76 thereafter.
Outstanding letters of credit and other guarantees at Dec. 31, 2001 and
2000 totaled $109 million and $108 million, respectively. These letters of
credit and guarantees secure the Company's performance to third parties under
certain self-insurance programs and other commitments made in the ordinary
course of business. The Company does not believe any loss related to these
letters of credit or guarantees is likely.
6. Financial Instruments, Excluding Derivative
Financial Instruments
Included in PPG's financial instrument portfolio are cash and cash equivalents,
marketable equity securities, company-owned life insurance and short- and
long-term debt instruments. The most significant instrument, long-term debt
(excluding capital lease obligations), had carrying and fair values totaling
$1,814 million and $1,827 million, respectively, at Dec. 31, 2001. The
corresponding amounts at Dec. 31, 2000, were $1,829 million and $1,819 million,
respectively. The fair values of the other financial instruments approximated
their carrying values, in the aggregate.
The fair values of the debt instruments were based on discounted cash flows
and interest rates available to the Company for instruments of the same
remaining maturities.
7. 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 speculation in derivative financial
instruments.
PPG enters into derivative financial instruments with high credit quality
counterparties and diversifies its positions among such counterparties in order
to reduce its exposure to
PPG Industries, Inc. 2001 Annual Report 27
Notes
credit losses. The Company has not experienced any credit losses on derivatives
during the three-year period ended Dec. 31, 2001.
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. The expanding use of the euro has reduced our
transaction risk because cash flows between our businesses in the twelve
Euroland countries are now occurring, effectively, in one currency. 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 do not qualify for hedge accounting. Therefore, the
change in the fair value of these instruments is recorded in "Other charges" in
the statement of income in the period of change. Such amount was not material
for the year ended Dec. 31, 2001. The fair value of these contracts was not
material as of Jan. 1, 2001 and Dec. 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 "Other charges"
in the statement of income in the period of change. Such amount was not material
for the year ended Dec. 31, 2001. The fair value of these contracts was not
material as of Jan. 1, 2001 and Dec. 31, 2001.
PPG designates forward currency contracts as hedges against the Company's
exposure to variability in exchange rates on short-term 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 charges" in the statement of income as
foreign exchange gains and losses are recognized on the related intercompany
borrowings. The portion of the change in fair value considered to be ineffective
is recognized in "Other charges" in the statement of income. Such amount was not
material for the year ended Dec. 31, 2001. The fair value of these contracts was
not material as of Jan. 1, 2001 and Dec. 31, 2001.
The Company manages its interest rate risk by balancing its exposure to
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 fixed and variable
interest rate risk by retiring and issuing debt from time to time. PPG also
manages its interest rate risk through the use of interest rate swaps.
Currently, these swaps convert $400 million of fixed rate debt to variable rate
debt and are designated as fair value hedges. As such, the swaps are carried at
fair value. As of Dec. 31, 2001 the fair value of interest rate swaps was a
liability of $20 million, and as of Jan. 1, 2001, the fair value of interest
rate swaps was not material. Changes in the fair value of these swaps and that
of the related debt are recorded in "Interest expense" in the statement of
income.
The Company uses derivative instruments to manage its exposure to
fluctuating natural gas prices through the use of natural gas swap and option
contracts. These instruments mature over the next 24 months, with a significant
portion maturing in the next twelve months. To the extent that these instruments
are effective in hedging PPG's exposure to price changes, changes in the fair
values of the hedge contracts are deferred in other comprehensive income and
reclassified to cost of sales as the natural gas is purchased. As of Jan. 1, and
Dec. 31, 2001, the fair value of these contracts was an asset of $62 million and
a liability of $12 million, respectively. Of the contracts outstanding at Dec.
31, 2001, $11 million are to mature in the next twelve months. 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 charges" in the statement of income
for the year ended Dec. 31, 2001, was not material.
No derivative instrument initially designated as a hedge instrument was
undesignated or discontinued as a hedging instrument during the year ended Dec.
31, 2001. During the year ended Dec. 31, 2001, the net change in other
comprehensive loss related to derivatives totaled $51 million, excluding the
transition adjustment. This was comprised of $7 million of accumulated gain on
derivatives, net of tax, which was reclassified from accumulated other
comprehensive income to earnings, and a decrease in other comprehensive loss of
$44 million, due to changes in the fair value and composition of derivatives
held, net of tax. The fair values of all outstanding derivative instruments were
determined using quoted market prices.
28 PPG Industries, Inc. 2001 Annual Report
Notes
8. Earnings Per Common Share
The earnings per common share calculations for the three years ended Dec. 31,
2001 are as follows:
- -------------------------------------------------------------------
(Millions, except per share amounts) 2001 2000 1999
- -------------------------------------------------------------------
Earnings per common share
- -------------------------------------------------------------------
Net income $ 387 $ 620 $ 568
---------------------------------------------------------------
Weighted average common shares
outstanding 168.3 172.3 173.8
- -------------------------------------------------------------------
Earnings per common share $ 2.30 $ 3.60 $ 3.27
===================================================================
Earnings per common share--
assuming dilution
Net income $ 387 $ 620 $ 568
---------------------------------------------------------------
Weighted average common shares
outstanding 168.3 172.3 173.8
---------------------------------------------------------------
Effect of dilutive securities
Stock options 0.2 0.1 0.5
-------------------------------------------------------------
Other stock compensation plans 0.7 1.2 1.2
---------------------------------------------------------------
Potentially dilutive common shares 0.9 1.3 1.7
---------------------------------------------------------------
Adjusted weighted average
common shares outstanding 169.2 173.6 175.5
- -------------------------------------------------------------------
Earnings per common share--
assuming dilution $ 2.29 $ 3.57 $ 3.23
===================================================================
There were 11.5 million, 12.0 million and 7.4 million stock options excluded
in 2001, 2000 and 1999, respectively, from the computation of diluted earnings
per common share due to their anti-dilutive effect.
9. Income Taxes
The following is a reconciliation of the statutory U.S. corporate federal income
tax rate to our effective income tax rate.
- -------------------------------------------------------------------
(Percent of Pre-Tax Income) 2001 2000 1999
- -------------------------------------------------------------------
U.S. federal income tax rate 35.00% 35.00% 35.00%
- -------------------------------------------------------------------
Changes in rate due to:
State and local taxes-- U.S. 1.07 1.08 1.85
---------------------------------------------------------------
Taxes on non-U.S.
earnings net of related
tax credits 3.94 2.41 3.52
---------------------------------------------------------------
ESOP dividends (1.98) (1.26) (1.24)
---------------------------------------------------------------
Other (0.96) (0.98) (0.33)
- -------------------------------------------------------------------
Effective income tax rate 37.07% 36.25% 38.80%
===================================================================
The following table gives details of income tax expense reported in the
statement of income.
- -------------------------------------------------------------------
(Millions) 2001 2000 1999
- -------------------------------------------------------------------
Current income taxes
U.S. federal $ 149 $ 210 $ 310
---------------------------------------------------------------
Non-U.S. 82 85 87
---------------------------------------------------------------
State and local--U.S. 10 20 28
- -------------------------------------------------------------------
Total current 241 315 425
- -------------------------------------------------------------------
Deferred income taxes
U.S. federal 33 39 (43)
---------------------------------------------------------------
Non-U.S. (29) 23 (2)
---------------------------------------------------------------
State and local--U.S. 2 (8) (3)
- -------------------------------------------------------------------
Total deferred 6 54 (48)
- -------------------------------------------------------------------
Total $ 247 $ 369 $ 377
===================================================================
Net deferred income tax assets and liabilities as of Dec. 31, 2001 and 2000,
are as follows:
- -------------------------------------------------------------------
(Millions) 2001 2000
- -------------------------------------------------------------------
Deferred income tax assets related to
Employee benefits $ 329 $ 321
---------------------------------------------------------------
Environmental 31 28
---------------------------------------------------------------
Operating loss and other carryforwards 75 60
---------------------------------------------------------------
Inventories 36 35
---------------------------------------------------------------
Property 26 23
---------------------------------------------------------------
Restructuring 7 8
---------------------------------------------------------------
Intangibles 6 14
---------------------------------------------------------------
Other 52 47
---------------------------------------------------------------
Valuation allowance (50) (42)
- -------------------------------------------------------------------
Total 512 494
- -------------------------------------------------------------------
Deferred income tax liabilities related to
Property 400 406
---------------------------------------------------------------
Employee benefits 336 315
---------------------------------------------------------------
Intangibles 143 138
---------------------------------------------------------------
Other 37 25
- -------------------------------------------------------------------
Total 916 884
- -------------------------------------------------------------------
Deferred income tax liabilities--
net $ 404 $ 390
===================================================================
The 2001 overall effective tax rate was unfavorably impacted as the
geographic spread of the restructuring charges taken in the first quarter
provided a tax benefit of only 30%.
In 2000, the overall effective tax rate was favorably impacted by an
improvement in the regional mix of non-U.S. taxable earnings and a lower
effective state tax rate. In addition, the rate impact of the write-off of a 50%
owned equity investment, a significant portion of which was not deductible for
tax purposes, was offset by the recognition of a U.S. income tax benefit
associated with the losses of exiting our Asian glass operations. The 1999
effective tax rate was higher due to the non-deductibility of certain purchased
in-process research and development charges recorded in 1999.
PPG Industries, Inc. 2001 Annual Report 29
Notes
At Dec. 31, 2001, subsidiaries of the Company had available net operating
loss (NOL) carryforwards of approximately $254 million for income tax purposes,
of which approximately $190 million has an indefinite expiration. The remaining
$64 million expires between the years 2002 and 2020. A valuation allowance has
been established for carryforwards where the ability to utilize them is not
likely.
Income before income taxes of our non-U.S. operations for 2001, 2000 and 1999
was $140 million, $280 million and $190 million, respectively.
No deferred U.S. income taxes have been provided on certain undistributed
earnings of non-U.S. subsidiaries, which amounted to $715 million at Dec. 31,
2001 and $875 million at Dec. 31, 2000. These earnings are considered to be
reinvested for an indefinite period of time or will be repatriated when it is
tax effective to do so. It is not practicable to determine the deferred tax
liability on these earnings.
The determination of annual income tax expense takes into consideration
amounts which may be needed to cover exposures for open tax years. The Internal
Revenue Service (IRS) has examined our U.S. federal income tax returns through
1993, and we have paid all tax claims. In addition the IRS has examined our U.S.
federal income tax returns for the years 1994 through 1996. The final resolution
of these returns is currently under appeal. The Company does not expect any
material impact on earnings to result from the resolution of matters related to
open tax years, however, actual settlements may differ from amounts accrued.
Income tax payments in 2001, 2000 and 1999 totaled $232 million, $319 million
and $394 million, respectively.
10. Pensions and Other Postretirement Benefits
We have defined benefit pension plans that cover certain employees worldwide.
PPG also sponsors defined benefit plans that provide postretirement medical and
life insurance benefits for certain U.S. and Canadian employees and dependents.
The Company has the right to modify or terminate certain of these defined
benefit plans in the future. In general, U.S. salaried and certain wage
employees hired after Jan. 31, 1993, were not, as of Dec. 31, 2000, entitled to
postretirement medical benefits. At Dec. 31, 2000, the U.S. plans had provisions
that capped the cost of postretirement medical benefits at 2003 levels for
certain current and future retirees covered by bargaining plans and non-
bargaining plans.
Effective August 1, 2001, the Company adopted new medical and prescription
drug programs in the U.S. with cost sharing provisions that generally replaced
the cap of postretirement medical benefits at 2003 levels. These programs
require retiree contributions based on selected coverage levels and provide for
the equal sharing of future cost increases between PPG and retirees. Other plan
modifications were also implemented. Additionally, as of that date, salaried and
certain wage employees hired after Jan. 31, 1993 became entitled to
postretirement medical benefits at retirement, after ten years of service.
The following table sets forth the changes in projected benefit obligations,
plan assets, the funded status and the amounts recognized in our balance sheet
for our defined benefit pension and other postretirement benefit plans.
- -----------------------------------------------------------------------
Other
Postretirement
Pensions Benefits
- -----------------------------------------------------------------------
(Millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------
Projected benefit obligation,
Jan. 1 $2,247 $2,012 $ 601 $ 637
- -----------------------------------------------------------------------
Service cost 48 43 12 5
- -----------------------------------------------------------------------
Interest cost 159 154 48 45
- -----------------------------------------------------------------------
Plan amendments 11 35 26 (2)
- -----------------------------------------------------------------------
Actuarial losses (gains) 103 113 210 (15)
- -----------------------------------------------------------------------
Benefits paid (152) (145) (72) (68)
- -----------------------------------------------------------------------
Businesses acquired 6 50 -- --
- -----------------------------------------------------------------------
Businesses disposed -- (1) -- --
- -----------------------------------------------------------------------
Foreign currency translation
adjustments (16) (19) (2) (1)
- -----------------------------------------------------------------------
Other 8 5 -- --
- -----------------------------------------------------------------------
Projected benefit obligation,
Dec. 31 $2,414 $2,247 $ 823 $ 601
=======================================================================
Fair value of plan assets,
Jan. 1 $2,637 $2,730
- ----------------------------------------------------
Actual return on plan assets (80) (21)
- ----------------------------------------------------
Contributions 15 15
- ----------------------------------------------------
Benefits paid (142) (133)
- ----------------------------------------------------
Businesses acquired 6 66
- ----------------------------------------------------
Plan expenses and other--net 3 --
- ----------------------------------------------------
Foreign currency translation
adjustments (16) (20)
- ----------------------------------------------------
Fair value of plan assets,
Dec. 31 $2,423 $2,637
====================================================
Funded status $ 9 $ 390 $ (823) $ (601)
- -----------------------------------------------------------------------
Accumulated unrecognized:
Actuarial losses 801 355 213 6
--------------------------------------------------------------------
Prior service cost 99 103 24 --
--------------------------------------------------------------------
Transition asset (4) (8) -- --
- -----------------------------------------------------------------------
Minimum pension liability (80) (52) -- --
- -----------------------------------------------------------------------
Net prepaid (accrued) benefit
cost $ 825 $ 788 $ (586) $ (595)
=======================================================================
The accumulated unrecognized actuarial losses for pensions relate primarily
to the actual return on plan assets being less than the expected return on plan
assets. The accumulated unrecognized actuarial losses for other postretirement
benefits in 2001 relate primarily to the use of higher medical healthcare cost
trend rate assumptions in the valuation of the year end 2001 projected benefit
obligation. To the extent that the accumulated unrecognized actuarial losses
exceed 10% of the higher of the fair value of plan assets or the projected
benefit obligation at the beginning of the year, amortization of such excess
over a period of 11 to 13 years will occur and be included in net pension cost.
30 PPG Industries, Inc. 2001 Annual Report
Notes
The following summarizes the amounts recognized in the balance sheet:
- -------------------------------------------------------------------
Other
Postretirement
Pensions Benefits
- -------------------------------------------------------------------
(Millions) 2001 2000 2001 2000
- -------------------------------------------------------------------
Prepaid benefit cost $ 982 $ 919 $ -- $ --
- -------------------------------------------------------------------
Accrued benefit cost (157) (131) (586) (595)
- -------------------------------------------------------------------
Net prepaid (accrued)
benefit cost $ 825 $ 788 $(586) $(595)
===================================================================
The minimum pension liability impacted the following balance sheet captions:
- -------------------------------------------------------------------
(Millions) 2001 2000
- -------------------------------------------------------------------
Other assets $ 5 $ 6
- -------------------------------------------------------------------
Accumulated other comprehensive loss $ 49 $ 29
- -------------------------------------------------------------------
Deferred income taxes $ 26 $ 17
- -------------------------------------------------------------------
Minimum pension liability $ 80 $ 52
===================================================================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with benefit obligations in excess of
plan assets were $266 million, $231 million and $89 million, respectively, at
Dec. 31, 2001, and were $249 million, $218 million and $92 million,
respectively, at Dec. 31, 2000.
The accrued pension benefit cost reflected in the balance sheet includes $7
million and $6 million, at Dec. 31, 2001 and 2000, for defined contribution
plans.
Net periodic benefit (income) cost includes the following:
- --------------------------------------------------------------------------------
Other
Postretirement
Pensions Benefits
- --------------------------------------------------------------------------------
(Millions) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------
Service cost $ 48 $ 43 $ 48 $ 12 $ 5 $ 8
- --------------------------------------------------------------------------------
Interest cost 159 154 140 48 45 45
- --------------------------------------------------------------------------------
Expected return on plan assets (279) (296) (271) -- -- --
- --------------------------------------------------------------------------------
Amortization of transition
assets (5) (5) (5) -- -- --
- --------------------------------------------------------------------------------
Amortization of prior service
cost 17 16 12 3 12 5
- --------------------------------------------------------------------------------
Amortization of actuarial
losses (gains) 7 2 5 1 (2) 5
- --------------------------------------------------------------------------------
Net periodic benefit
(income) cost $ (53) $ (86) $ (71) $ 64 $ 60 $ 63
================================================================================
In determining net periodic benefit (income) cost, unrecognized prior service
costs are amortized over periods ranging from 5 to 14 years.
The following weighted average assumptions were used to determine the benefit
obligations and net periodic benefit (income) cost for our defined benefit
pension and other postretirement benefit plans:
- -------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------
Discount rate/(1)/ 7.0% 7.3% 7.8%
- -------------------------------------------------------------------
Expected return on assets/(2)/ 10.9% 10.9% 10.9%
- -------------------------------------------------------------------
Rate of compensation increase 4.1% 4.1% 4.1%
- -------------------------------------------------------------------
(1) Net periodic benefit (income) cost is determined using the previous year's
discount rate.
(2) Applies only to defined benefit pension plans.
The weighted-average medical healthcare cost trend rate used was 5.3% for
2001 declining ratably to 3.5% in the year 2007. For 2002, the weighted-average
medical healthcare cost trend rate used will be 10.0% declining gradually to
4.0% in the year 2007. If these 2002 trend rates were increased or decreased by
one percentage point per year, such increases or decreases would have the
following effects:
- -------------------------------------------------------------------
One-Percentage Point
(Millions) Increase Decrease
- -------------------------------------------------------------------
Increase (decrease) in the
aggregate of service and interest
cost components $ 6 $ (4)
- -------------------------------------------------------------------
Increase (decrease) in the
benefit obligation $ 58 $ (51)
- -------------------------------------------------------------------
The Company also incurred costs for multi-employer pension plans of $1
million in each of the years 2001, 2000 and 1999. Multi-employer healthcare
costs totaled $1 million in each of the years 2001, 2000 and 1999.
The Company has a deferred compensation plan for certain key managers which
allows them to defer a portion of their annual compensation in a phantom PPG
stock account or other phantom investment accounts. The amount deferred earns a
return based on the investment options selected by the participant. The amount
owed to participants is an unfunded and unsecured general obligation of the
Company. Upon retirement, death, disability or termination of employment, the
compensation deferred and related accumulated earnings are distributed in cash
or in PPG stock, based on the accounts selected by the participant.
Effective Oct. 1, 2000, the plan was amended to provide participants with
expanded investment alternatives and the ability to transfer amounts between the
phantom non-PPG stock investment accounts. Concurrent with the plan amendment
and to mitigate the impact on compensation expense of changes in the market
value of the liability, the Company purchased a portfolio of marketable
securities that mirror the phantom non-PPG stock investment accounts selected by
the participants except the money market accounts. The changes in market value
of these securities are also included in earnings. Trading will occur in this
portfolio to align the securities held with the participant's phantom non-PPG
stock investment accounts except the money market accounts.
PPG Industries, Inc. 2001 Annual Report 31
Notes
The cost of the deferred compensation plan, comprised of dividend equivalents
accrued on the phantom PPG stock account, investment income and, in 2001 and
2000, the change in market value of the liability, was income of $6 million and
$1 million in 2001 and 2000, respectively, and expense of $5 million in 1999.
These amounts are reflected in selling, general and administrative expenses in
the accompanying statement of income. The change in market value of the
investment portfolio in 2001 and 2000 was a loss of $7 million and $5 million,
respectively, and is also reflected in selling, general and administrative
expenses.
The Company's obligations under this plan were $89 million and $94 million at
Dec. 31, 2001 and 2000, respectively, and the investments in marketable
securities, which are included in investments in the accompanying balance sheet,
were $61 million and $79 million at Dec. 31, 2001 and 2000, respectively.
11. 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, some of which are
described below, relate to product liability, contract, patent, environmental,
antitrust and other matters arising out of the conduct of PPG's business. Except
with respect to any PPG contribution arising out of a possible voluntary
settlement of asbestos claims as discussed below, 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 or liquidity; however, such outcome may be
material to the results of operations of the period in which the costs, if any,
are recognized.
The Company has been named in a number of antitrust lawsuits alleging that
PPG acted with competitors to fix prices and allocate markets in the automotive
refinish industry and for certain glass products. The automotive refinish claims
have been consolidated, but the proceedings are still at an early stage. All of
the initial defendents in the glass antitrust cases other than PPG, have
settled. PPG believes it has meritorious defenses to these claims.
The Company has been a defendant since April 1994 in a suit filed by Marvin
Windows and Doors (Marvin) alleging numerous claims, including breach of
warranty. All of the plaintiff's claims, other than breach of warranty, have
been dismissed. However, on Feb. 14, 2002, a federal jury awarded Marvin $136
million on the remaining claim. PPG believes it has meritorious defenses to the
plaintiff's claims and intends to appeal the jury's decision.
For over thirty years, PPG has been a defendant in lawsuits involving claims
alleging personal injury from exposure to asbestos. Aggregate settlements by PPG
to date have been immaterial. At Dec. 31, 2001, PPG was one of many defendants
in numerous asbestos-related lawsuits involving about 116,000 claims. In many of
the cases, the plaintiffs allege that PPG should be liable for injuries
involving asbestos-containing thermal insulation products manufactured and
distributed by Pittsburgh Corning Corporation ("PC"). PPG and Corning
Incorporated are each 50% shareholders in PC. PPG believes that 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
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.
PPG intends to appeal the adverse 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, PPG recorded an after-tax charge of $35 million for the write-off of
all of its investment in PC. As a consequence of the bankruptcy filing and the
various motions and orders in that proceeding, the asbestos litigation against
PPG (and against PC and Corning Incorporated) related to PC products has been
stayed and the filing of additional asbestos suits against them has been
enjoined, until March 1, 2002. 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 current and potential asbestos claims can be
agreed on within the context of the PC bankruptcy proceeding. The court has
extended the stay several times with the parties' consent in order to facilitate
settlement discussions. These settlement discussions involve numerous, complex
issues. Accordingly, it is impossible to predict whether, when, or on what terms
a voluntary settlement, if any, on the part of PPG might be reached.
Although PPG believes it has adequate insurance for the personal injury and
property damage 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.
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 generally not discounted. As of Dec. 31,
2001 and 2000, PPG had reserves for environmental contingencies totaling $94
million and $84 million, respectively. Pretax charges against income for
environmental remediation costs in 2001, 2000 and 1999 totaled $29 million, $18
million and $10 million, respectively, and are included in "Other charges" in
the statement of income. Cash outlays related to such environmental remediation
aggregated $19 million, $16 million and $22 million in 2001, 2000 and 1999,
respectively.
Management anticipates that the resolution of the Company's environmental
contingencies will occur over an extended period of time and could result in
charges against
32 PPG Industries, Inc. 2001 Annual Report
Notes
income of up to $50 million in 2002. 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 the prior year end.
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 in our
chemicals segment. 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.
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 value of the Company's investment in the joint venture which was
approximately $20 million at Dec. 31, 2001.
12. Shareholders' Equity
A class of 10 million shares of preferred stock, without par value, is
authorized but unissued. Common stock has a par value of $1.66 2/3 per share;
600 million shares are authorized and 290,573,068 were issued at Dec. 31, 2001,
2000 and 1999. Shares outstanding at Dec. 31, 2001 and 2000, exclude unreleased
new ESOP shares (see Note 14).
PPG has a Shareholders' Rights Plan, under which each share of the Company's
outstanding common stock has an associated preferred share purchase right. The
rights are exercisable only under certain circumstances and allow holders of
such rights to purchase common stock of PPG or an acquiring company at a
discounted price, which would generally be 50% of the respective stocks' current
fair market value.
Treasury shares held at Dec. 31, 2001 and 2000, were 121,859,854 shares and
122,350,519 shares, respectively. Purchases of treasury stock totaled 109,400,
6,126,000 and 1,452,600 shares in 2001, 2000 and 1999, respectively. Issuances
of treasury stock totaled 600,065, 248,100 and 428,510 shares in 2001, 2000 and
1999, respectively.
Per share cash dividends paid were $1.68 in 2001, $1.60 in 2000 and $1.52 in
1999.
13. Accumulated Other Comprehensive Loss
- --------------------------------------------------------------------------------
Minimum Unrealized Accumulated
Currency Pension (Losses) Gains Accumulated Other
Translation Liability on Marketable Derivative Comprehensive
(Millions) Adjustment Adjustment Securities Loss Loss
- --------------------------------------------------------------------------------
Balance,
Jan. 1, 2000 $(162) $(13) $(3) $-- $(178)
- --------------------------------------------------------------------------------
Net change (120) (16) 3 -- (133)
- --------------------------------------------------------------------------------
Balance,
Dec. 31, 2000 (282) (29) -- -- (311)
- --------------------------------------------------------------------------------
Net change (131) (20) 10 (8) (149)
- --------------------------------------------------------------------------------
Balance,
Dec. 31, 2001 $(413) $(49) $10 $(8) $(460)
================================================================================
Foreign currency translation adjustments exclude income tax expense (benefit)
given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for
an indefinite period of time. The income tax benefit associated with the minimum
pension liability adjustment was $9 million in 2001 and $11 million in 2000.
The 2000 net change in unrealized losses on marketable securities includes
the reclassification to "Other charges" in the statement of income for
unrealized losses of $14 million, $9 million net of tax, due to an other than
temporary decline in the market value of an investment in marketable equity
securities.
14. Employee Stock Ownership Plan
Our employee stock ownership plan (ESOP) covers substantially all U. S.
employees. The Company makes matching contributions to the ESOP based upon
participants' savings, subject to certain limitations, the matching percentage
being based upon our return on average capital for the previous year.
PPG Industries, Inc. 2001 Annual Report 33
Notes
Compensation expense related to the ESOP for 2001, 2000 and 1999 totaled $6
million, $11 million and $18 million, respectively. Interest expense totaled $7
million, $9 million and $9 million for 2001, 2000 and 1999, respectively.
Dividends on PPG shares held by the ESOP, to service ESOP debt, totaled $42
million for 2001 and 2000 and $40 million for 1999. The fair value of unreleased
new ESOP shares was $12 million and $22,000 at Dec. 31, 2001 and 2000,
respectively. The average cost of the unreleased old ESOP shares was $21 per
share. Shares held by the ESOP as of Dec. 31, 2001 and 2000, are as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Old New Old New
Shares Shares Shares Shares
- --------------------------------------------------------------------------------
Allocated shares 9,970,943 3,749,488 9,255,641 3,390,372
- --------------------------------------------------------------------------------
Unreleased shares 3,429,391 224,958 4,144,693 476
- --------------------------------------------------------------------------------
Total 13,400,334 3,974,446 13,400,334 3,390,848
================================================================================
15. Other Earnings
- --------------------------------------------------------------------------------
(Millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Interest income $15 $ 12 $ 8
- --------------------------------------------------------------------------------
Royalty income 26 27 26
- --------------------------------------------------------------------------------
Share of net earnings of equity
affiliates 15 39 28
- --------------------------------------------------------------------------------
Other 42 60 62
- --------------------------------------------------------------------------------
Total $98 $138 $124
================================================================================
PPG's share of undistributed net earnings of equity affiliates was $52
million and $66 million at Dec. 31, 2001 and 2000, respectively. Dividends
received from equity affiliates were $26 million, $20 million and $16 million in
2001, 2000 and 1999, respectively.
16. Stock Option Plans
Under PPG's stock option plan, certain employees of the Company have been
granted options to purchase shares of common stock at prices equal to the fair
market value of the shares on the date the option was granted. Options are
exercisable beginning from six to 12 months after granting and have a maximum
term of 10 years. Shares available for future grants were 3,751,911 and
5,562,305 at Dec. 31, 2001 and 2000, respectively.
On July 1, 1998, the Company granted to substantially all active employees
of the Company and its majority owned subsidiaries the option to purchase 100
shares of common stock at its then fair market value of $70 per share. Options
are exercisable beginning July 1, 2003 and expire on June 30, 2008.
PPG applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based compensation. Accordingly, no compensation cost for PPG's stock
option plan has been recognized in the accompanying financial statements. Had
compensation cost been determined based upon the fair value at the grant date
for awards granted in 2001, 2000 and 1999 consistent with the methodology
prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation," net
income and earnings per common share, assuming dilution, would have been reduced
by $24 million and $0.14 in 2001, $23 million and $0.13 in 2000 and $26 million
and $0.14 in 1999. The weighted average fair value of options granted was $11.93
per share in 2001, $13.08 per share in 2000 and $10.20 per share in 1999. The
fair value of stock options is estimated at the grant date using the Black-
Scholes option pricing model with the following weighted average assumptions.
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Risk-free interest rate 5.2% 6.1% 5.4%
- --------------------------------------------------------------------------------
Expected life of option in years 5.3 5.7 5.2
- --------------------------------------------------------------------------------
Expected dividend yield 2.7% 2.6% 2.6%
- --------------------------------------------------------------------------------
Expected volatility 26.3% 24.5% 22.2%
================================================================================
The following table summarizes stock option activity under all plans for
the three years ended Dec. 31, 2001:
Weighted
Number of average
shares exercise
subject to price
Stock option activity options per share
- --------------------------------------------------------------------------------
Outstanding, Jan. 1, 1999 10,761,030 $59.13
- --------------------------------------------------------------------------------
Granted 3,117,845 57.40
--------------------------------------------------------------------------
Exercised (1,711,732) 51.21
--------------------------------------------------------------------------
Terminated (374,022) 66.58
- --------------------------------------------------------------------------------
Outstanding, Dec. 31, 1999 11,793,121 59.58
- --------------------------------------------------------------------------------
Granted 2,048,445 52.99
--------------------------------------------------------------------------
Exercised (301,432) 43.00
--------------------------------------------------------------------------
Terminated (353,405) 64.30
- --------------------------------------------------------------------------------
Outstanding, Dec. 31, 2000 13,186,729 58.81
- --------------------------------------------------------------------------------
Granted 2,697,920 51.52
--------------------------------------------------------------------------
Exercised (871,389) 45.99
--------------------------------------------------------------------------
Terminated (502,581) 62.66
- --------------------------------------------------------------------------------
Outstanding, Dec. 31, 2001 14,510,679 $58.09
================================================================================
The following table summarizes information about stock options outstanding
and exercisable at Dec. 31, 2001:
- --------------------------------------------------------------------------------
Options outstanding Options exercisable
--------------------------------------------------------------
Weighted Weighted Weighted
Range of average average average
exercise remaining exercise exercise
price Number contractual price Number price
per share of shares life (years) per share of shares per share
- --------------------------------------------------------------------------------
$29.37-$39.75 518,679 2.09 $36.10 518,679 $36.10
- --------------------------------------------------------------------------------
$40.68-$60.00 7,829,444 6.89 $52.80 5,588,728 $53.71
- --------------------------------------------------------------------------------
$60.06-$76.31 6,162,556 4.85 $66.67 3,717,356 $64.48
- --------------------------------------------------------------------------------
14,510,679 9,824,763
========== =========
34 PPG Industries, Inc. 2001 Annual Report
Notes
At Dec. 31, 2000, options were exercisable for 8.8 million shares at a
weighted average exercise price of $56.80 per common share. The corresponding
amounts at Dec. 31, 1999, were 7.0 million and $57.17 per common share,
respectively.
17. Advertising Costs
Advertising costs are expensed as incurred and totaled $62 million, $75 million
and $101 million in 2001, 2000 and 1999, respectively.
18. Research and Development
- --------------------------------------------------------------------------------
(Millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Research and development-- total $283 $301 $301
- --------------------------------------------------------------------------------
Less depreciation 17 19 17
- --------------------------------------------------------------------------------
Research and development-- net $266 $282 $284
================================================================================
19. Quarterly Financial Information
(unaudited)
- --------------------------------------------------------------------------------
Earnings
Per
Earnings Common
Net Gross Net Per Share--
Sales Profit Income Common Assuming
(Millions) (Millions) (Millions) Share Dilution
- --------------------------------------------------------------------------------
2001 quarter ended
- --------------------------------------------------------------------------------
March 31/(1)/ $ 2,099 $ 775 $ 56 $ .33 $ .33
- --------------------------------------------------------------------------------
June 30 2,164 822 155 .92 .92
- --------------------------------------------------------------------------------
September 30 1,999 738 93 .56 .55
- --------------------------------------------------------------------------------
December 31 1,907 697 83 .49 .49
- --------------------------------------------------------------------------------
Total $ 8,169 $ 3,032 $ 387 $ 2.30 $ 2.29
================================================================================
2000 quarter ended
- --------------------------------------------------------------------------------
March 31/(2)/ $ 2,152 $ 833 $ 139 $ .80 $ .79
- --------------------------------------------------------------------------------
June 30 2,275 883 205 1.18 1.17
- --------------------------------------------------------------------------------
September 30/(3)/ 2,144 807 150 .87 .86
- --------------------------------------------------------------------------------
December 31/(4)/ 2,058 772 126 .75 .75
- --------------------------------------------------------------------------------
Total $ 8,629 $ 3,295 $ 620 $ 3.60 $ 3.57
================================================================================
(1) First quarter 2001 earnings were reduced by pretax charges of $101 million
for restructuring and other related activities, including severance and
other costs of $67 million and asset dispositions of $34 million.
(2) First-quarter 2000 earnings were reduced by pretax charges of $39 million
for the write-off of a 50% owned equity investment in Pittsburgh Corning
Corporation which has filed for reorganization under the federal bankruptcy
code.
(3) Third-quarter 2000 earnings were reduced by a pretax charge of $7 million
for restructuring and one-time integration costs related to PPG Auto Glass.
(4) Fourth-quarter 2000 earnings were reduced by a pretax charge of $14 million
due to an other than temporary decline in the market value of an investment
in marketable equity securities, previously recorded net of tax as an
unrealized loss in other comprehensive loss.
20. Business Segment Information
Refer to pages 20 through 22 for information on our business segments for 2001,
2000 and 1999.
Officer Changes
Douglas B. Atkinson was named vice president of investor relations. He had been
director of investor relations. Also, Susan M. Kreh was elected treasurer. She
succeeds Daniel W. Kiener, who left the company. Kreh had been general manager
of PPG's optical monomers and coatings business.
During the year, Garry Goudy was named vice president of automotive
refinish. He had been vice president of automotive replacement glass. Douglas C.
Hepper was named vice president of market initiatives, coatings. He had been
vice president of automotive refinish. Maurice V. Peconi was named vice
president of corporate development. He had been vice president of electronic
commerce. David E. Sharick was named vice president of automotive replacement
glass. He had been vice president of corporate development. Also, Thomas M. Von
Lehman, former vice president of specialty chemicals, left the company.
PPG Industries, Inc. 2001 Annual Report 35
Eleven-Year Digest
2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------
Statement of Income
Net sales 8,169 8,629 7,995 7,751 7,631 7,466 7,311 6,570 5,980 6,042 5,889
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit (%) 37.1 38.2 38.0 39.1 39.1 38.5 38.9 37.5 35.5 35.1 33.9
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 634 989 945 1,267 1,149 1,215 1,248 840 531 538 348
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes 247 369 377 466 435 471 480 325 236 218 147
- -----------------------------------------------------------------------------------------------------------------------------
Income before
accounting changes 387 620 568 801 714 744 768 515 295 319 201
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative effect of
accounting changes/(1)/ -- -- -- -- -- -- -- -- (273) -- 75
- -----------------------------------------------------------------------------------------------------------------------------
Net income 387 620 568 801 714 744 768 515 22 319 276
- -----------------------------------------------------------------------------------------------------------------------------
Return on average
capital (%)/(2)(3)/ 8.4 12.1 12.7 19.6 19.1 20.3 21.6 15.3 2.2/8.9 9.7 8.7/7.0
- -----------------------------------------------------------------------------------------------------------------------------
Return on average
equity (%)/(2)/ 12.6 19.7 19.3 29.4 28.8 29.5 28.8 20.1 .9/10.7 11.8 10.7/8.0
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per common
share before
accounting changes 2.30 3.60 3.27 4.52 3.97 3.96 3.80 2.43 1.39 1.51 .95
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative effect of
accounting changes on
earnings per common
share -- -- -- -- -- -- -- -- (1.29) -- .35
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per
common share 2.30 3.60 3.27 4.52 3.97 3.96 3.80 2.43 .10 1.51 1.30
- -----------------------------------------------------------------------------------------------------------------------------
Average number
of common shares 168.3 172.3 173.8 177.0 179.8 187.8 202.0 211.9 212.6 212.2 212.4
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per common
share--
assuming dilution 2.29 3.57 3.23 4.48 3.94 3.93 3.78 2.42 .10 1.50 1.29
- -----------------------------------------------------------------------------------------------------------------------------
Dividends 283 276 264 252 239 237 239 238 221 200 183
- -----------------------------------------------------------------------------------------------------------------------------
Per share 1.68 1.60 1.52 1.42 1.33 1.26 1.18 1.12 1.04 .94 .86
- -----------------------------------------------------------------------------------------------------------------------------
Balance Sheet
Current assets 2,703 3,093 3,062 2,660 2,584 2,296 2,275 2,168 2,026 1,951 2,173
- -----------------------------------------------------------------------------------------------------------------------------
Current liabilities 1,955 2,543 2,384 1,912 1,662 1,769 1,629 1,425 1,281 1,253 1,341
- -----------------------------------------------------------------------------------------------------------------------------
Working capital 748 550 678 748 922 527 646 743 745 698 832
- -----------------------------------------------------------------------------------------------------------------------------
Property (net) 2,752 2,941 2,933 2,905 2,855 2,913 2,835 2,742 2,787 2,972 3,183
- -----------------------------------------------------------------------------------------------------------------------------
Total assets 8,452 9,125 8,914 7,387 6,868 6,441 6,194 5,894 5,652 5,662 6,056
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,699 1,810 1,836 1,081 1,257 834 736 773 774 905 1,190
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 3,080 3,097 3,106 2,880 2,509 2,483 2,569 2,557 2,473 2,699 2,655
- -----------------------------------------------------------------------------------------------------------------------------
Per share 18.28 18.41 17.86 16.46 14.11 13.57 13.23 12.35 11.57 12.71 12.50
- -----------------------------------------------------------------------------------------------------------------------------
Other Data
Capital spending/(4)/ 301 676 1,833 877 829 489 454 356 293 283 335
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation expense 375 374 366 354 348 340 332 318 331 352 351
- -----------------------------------------------------------------------------------------------------------------------------
Quoted market price
High 59.75 65.06 70.75 76.63 67.50 62.25 47.88 42.13 38.13 34.13 29.63
-----------------------------------------------------------------------------------------------------------------------
Low 38.99 36.00 47.94 49.13 48.63 42.88 34.88 33.75 29.63 25.00 20.75
-----------------------------------------------------------------------------------------------------------------------
Year-end 51.72 46.31 62.56 58.19 57.13 56.13 45.75 37.13 37.88 32.88 25.25
-----------------------------------------------------------------------------------------------------------------------
Price/earnings ratio/(5)/
High 26 18 22 17 17 16 13 17 27 23 31
-----------------------------------------------------------------------------------------------------------------------
Low 17 10 15 11 12 11 9 14 21 17 22
-----------------------------------------------------------------------------------------------------------------------
Average number of
employees 34,900 36,000 33,800 32,500 31,900 31,300 31,200 30,800 31,400 32,300 33,700
- -----------------------------------------------------------------------------------------------------------------------------
All amounts are in millions of dollars except per share data and number of
employees.
Data was adjusted, as appropriate, to reflect the two-for-one stock split
payable on June 10, 1994.
(1) The 1993 changes in methods of accounting relate to the adoption of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions"; SFAS No. 109, "Accounting for Income Taxes," and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The 1991 change in the
method of accounting relates to the cost of rebuilding glass and fiber
glass melting facilities. The effect of all the changes on net income in
the years of change, exclusive of the cumulative effect to Jan. 1 of the
year of change and the pro forma effect on individual prior years' net
income, was not material.
(2) Return on average capital and return on average equity for 1993 and 1991
were calculated and presented inclusive and exclusive of the cumulative
effect of the accounting changes.
(3) Return on average capital is calculated using pre-interest, after-tax
earnings and average debt and equity during the year.
(4) Includes the cost of businesses acquired.
(5) Price/earnings ratios were calculated based on high and low market prices
during the year and the respective year's earnings per common share. The
1993 and 1991 ratios were calculated and presented exclusive of the
cumulative effect of the accounting changes.
36 PPG Industries, Inc. 2001 Annual Report
PPG Shareholder Information
World Headquarters
One PPG Place
Pittsburgh, PA 15272, U.S.A.
Phone (412) 434-3131
Internet: www.ppg.com
Annual Meeting
Thursday, April 18, 2002, 11:00 A.M.
Pittsburgh Marriott Hotel, City Center
112 Washington Place
Pittsburgh, PA 15219
Transfer Agent & Registrar
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
PPG-dedicated phone 1-800-648-8160
Internet inquiries: www.mellon-investor.com
-----------------------
As a convenience to shareholders, account information, address changes, requests
for replacement checks, and Form 1099's can be accessed by way of the Internet.
Log on to Investor ServiceDirect(TM) at www.mellon-investor.com. Shareholders
-----------------------
with specific questions regarding dividend checks, transfer or replacement of
stock certificates or dividend tax information should contact Mellon Investor
Services.
Publications Available to Shareholders
Copies of the following publications will be furnished without charge upon
written request to Corporate Communications, 7W, PPG Industries, One PPG Place,
Pittsburgh, PA 15272.
Form 10-K -- the Company's Annual Report filed with the Securities and Exchange
Commission.
PPG Industries Blueprint -- a booklet summarizing PPG's mission, values,
strategy and goals.
PPG's Global Code of Ethics -- an employee guide to corporate conduct policies,
including those concerning personal conduct, relationships with customers,
suppliers and competitors, protection of corporate assets, responsibilities to
the public, and PPG as a global organization.
PPG's Environment, Health and Safety Policy -- a statement describing the
Company's commitment, worldwide, to manufacturing, selling and distributing
products in a manner that is safe and healthful for its employees, neighbors and
customers, and that protects the environment.
PPG's Environment, Health and Safety Progress Report -- a report of progress
during the year with respect to the Company's environment, health and safety
commitment.
PPG's Responsible Care Commitment -- a brochure outlining the Company's
voluntary activities under the Responsible Care initiative of the Chemical
Manufacturers Association for safe and ethical management of chemicals.
Dividend Information
PPG has paid uninterrupted dividends since 1899. The latest quarterly dividend
of 42 cents per share, voted by the board of directors on Jan. 17, 2002, results
in an annual dividend rate of $1.68 per share.
Stock Exchange Listings
PPG common stock is traded on the New York, Pacific and Philadelphia stock
exchanges (symbol: PPG).
Direct Purchase Plan with Dividend Reinvestment Option
This plan is offered as a service and convenience to shareholders. It allows
purchase of shares of PPG stock directly through the plan, as well as dividend
reinvestment, direct deposit of dividends, and safekeeping of PPG stock
certificates.
For more information, call Mellon Investor Services at 1-800-648-8160.
Investor Relations
General PPG shareholder information may be obtained by calling (412) 434-3312,
or by writing PPG Industries, Investor Relations, One PPG Place, 40E,
Pittsburgh, PA 15272.
Quarterly Stock Market Price
- -------------------------------------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------------------------------------
Quarter Ended High Low Close High Low Close
- -------------------------------------------------------------------------------------------------------------
March 31 $55.50 $43.00 $46.09 $65.06 $44.38 $52.31
- -------------------------------------------------------------------------------------------------------------
June 30 59.75 45.55 52.57 58.13 41.56 44.31
- -------------------------------------------------------------------------------------------------------------
Sept. 30 55.78 38.99 45.75 46.50 36.00 39.69
- -------------------------------------------------------------------------------------------------------------
Dec. 31 55.56 44.15 51.72 47.44 37.19 46.31
- -------------------------------------------------------------------------------------------------------------
The number of holders of record of PPG common stock as of Jan. 31, 2002,
was 29,005, as shown on the records of the Company's transfer agent.
Dividends
- --------------------------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------------------------
Amount Per Amount Per
Month of Payment (Millions) Share (Millions) Share
- --------------------------------------------------------------------------------------------------
March $ 70 $ .42 $ 70 $ .40
- --------------------------------------------------------------------------------------------------
June 71 .42 70 .40
- --------------------------------------------------------------------------------------------------
September 71 .42 69 .40
- --------------------------------------------------------------------------------------------------
December 71 .42 67 .40
- --------------------------------------------------------------------------------------------------
Total $283 $ 1.68 $276 $ 1.60
==================================================================================================
PPG Industries, Inc. 2001 Annual Report 37