SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2002 Commission File Number 1-1687
------------------ ------
PPG INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0730780
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
One PPG Place, Pittsburgh, Pennsylvania 15272
(Address of principal executive offices) (Zip Code)
(412) 434-3131
(Registrant's telephone number, including area code)
As of October 31, 2002, 169,434,782 shares of the Registrant's common stock, par
value $1.66-2/3 per share, were outstanding.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ___
---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ___
---
PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE(S)
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Statement of Income (Loss) .................................. 2
Condensed Balance Sheet ............................................... 3
Condensed Statement of Cash Flows ..................................... 4
Notes to Condensed Financial Statements ............................... 5-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 17-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 23
Item 4. Controls and Procedures ........................................... 23
Part II. Other Information
Item 1. Legal Proceedings ................................................. 24
Item 2. Change in Securities and Use of Proceeds .......................... 24-25
Item 5. Other Information ................................................. 25
Item 6. Exhibits and Reports on Form 8-K .................................. 25-27
Signature ...................................................................... 28
Certifications ................................................................. 29-32
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Income (Loss) (Unaudited)
------------------------------------------------
(Millions, except per share amounts)
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
2002 2001 2002 2001
---------- ---------- ---------- -----------
Net sales ......................................................... $ 2,068 $ 1,999 $ 6,077 $ 6,262
Cost of sales ..................................................... 1,291 1,261 3,805 3,927
---------- ---------- ---------- -----------
Gross profit .................................................. 777 738 2,272 2,335
---------- ---------- ---------- -----------
Other expenses (earnings):
Selling, general and administrative ........................... 352 348 1,053 1,041
Depreciation .................................................. 92 93 275 281
Research and development ...................................... 68 66 202 200
Interest ...................................................... 33 43 99 137
Amortization .................................................. 7 18 24 54
Asbestos settlement (Note 11) ................................. (24) - 748 -
Business realignments (Note 4) ................................ - 2 77 103
Other, net .................................................... 1 15 (20) (9)
---------- ---------- ---------- -----------
Total other expenses - net ................................ 529 585 2,458 1,807
---------- ---------- ---------- -----------
Income (loss) before income taxes, minority interest and
cumulative effect of accounting change ........................ 248 153 (186) 528
Income tax expense (benefit) ...................................... 89 55 (64) 197
Minority interest ................................................. 11 5 32 27
---------- ---------- ---------- -----------
Income (loss) before cumulative effect of accounting change ....... 148 93 (154) 304
Cumulative effect of accounting change, net of tax (Note 2) ....... - - (9) -
---------- ---------- ---------- -----------
Net income (loss) ................................................. $ 148 $ 93 $ (163) $ 304
========== ========== ========== ===========
Earnings (loss) per common share (Note 3):
Income (loss) before cumulative effect of accounting change ... $ 0.87 $ 0.56 $ (0.92) $ 1.81
Cumulative effect of accounting change, net of tax ............ - - (0.05) -
---------- ---------- ---------- -----------
Earnings (loss) per common share .................................. $ 0.87 $ 0.56 $ (0.97) $ 1.81
========== ========== ========== ===========
Earnings (loss) per common share - assuming dilution (Note 3):
Income (loss) before cumulative effect of accounting change ... $ 0.87 $ 0.55 $ (0.91) $ 1.80
Cumulative effect of accounting change, net of tax ............ - - (0.05) -
---------- ---------- ---------- -----------
Earnings (loss) per common share - assuming dilution .............. $ 0.87 $ 0.55 $ (0.96) $ 1.80
========== ========== ========== ===========
Dividends per common share ........................................ $ 0.43 $ 0.42 $ 1.27 $ 1.26
========== ========== ========== ===========
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-2-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Balance Sheet (Unaudited)
-----------------------------------
Sept. 30 Dec. 31
2002 2001
---------- ---------
Assets (Millions)
- ------
Current assets:
Cash and cash equivalents ........................................... $ 163 $ 108
Receivables-net ..................................................... 1,559 1,416
Inventories (Note 5) ................................................ 957 904
Deferred income taxes ............................................... 215 155
Other ............................................................... 156 120
------- -------
Total current assets ............................................ 3,050 2,703
Property (less accumulated depreciation of
$4,626 million and $4,401 million) .................................. 2,606 2,752
Investments .............................................................. 252 305
Goodwill (Notes 2 and 6) ................................................. 1,015 972
Identifiable intangible assets (Notes 2 and 6) ........................... 517 570
Prepaid pension asset .................................................... 970 982
Other assets ............................................................. 172 168
------- -------
Total ........................................................... $ 8,582 $ 8,452
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt and current
portion of long-term debt ....................................... $ 494 $ 696
Asbestos settlement (Note 11) ....................................... 182 -
Accounts payable and accrued liabilities ............................ 1,392 1,259
------- -------
Total current liabilities ....................................... 2,068 1,955
Long-term debt ........................................................... 1,707 1,699
Asbestos settlement (Note 11) ............................................ 566 -
Deferred income taxes .................................................... 346 552
Accumulated provisions ................................................... 467 530
Other postretirement benefits ............................................ 521 514
------- -------
Total liabilities ............................................... 5,675 5,250
------- -------
Commitments and contingent liabilities (Note 11)
Minority interest ........................................................ 134 122
------- -------
Shareholders' equity:
Common stock ........................................................ 484 484
Additional paid-in capital .......................................... 125 109
Retained earnings ................................................... 6,174 6,551
Treasury stock ...................................................... (3,472) (3,496)
Unearned compensation ............................................... (90) (108)
Accumulated other comprehensive loss (Note 8) ....................... (448) (460)
------- -------
Total shareholders' equity ...................................... 2,773 3,080
------- -------
Total ........................................................... $ 8,582 $ 8,452
======= =======
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-3-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Statement of Cash Flows (Unaudited)
---------------------------------------------
Nine Months Ended Sept. 30
--------------------------
2002 2001
------ ------
(Millions)
Cash from operating activities ............................................... $ 592 $ 766
----- -----
Investing activities:
Capital spending
Additions to property and investments ............................... (136) (223)
Business acquisitions, net of cash balances
acquired ........................................................ (12) (8)
Other ................................................................... 40 23
----- -----
Cash used for investing activities .................................. (108) (208)
----- -----
Financing activities:
Net change in borrowings with
maturities of three months or less .................................. (147) (260)
Proceeds from other short-term debt ..................................... 59 142
Repayment of other short-term debt ...................................... (53) (174)
Proceeds from long-term debt ............................................ 1 26
Repayment of long-term debt ............................................. (125) (35)
Loans to employee stock ownership plan .................................. - (32)
Repayment of loans by employee stock
ownership plan ...................................................... 18 29
Issuance of treasury stock, net ......................................... 31 7
Dividends paid .......................................................... (215) (212)
----- -----
Cash used for financing activities .................................. (431) (509)
----- -----
Effect of currency exchange rate changes
on cash and cash equivalents ............................................ 2 (1)
----- -----
Net increase in cash and cash equivalents .................................... 55 48
Cash and cash equivalents, beginning of period ............................... 108 111
----- -----
Cash and cash equivalents, end of period ..................................... $ 163 $ 159
===== =====
The accompanying notes to the condensed financial statements are an integral
part of this statement.
-4-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Financial Statements (Unaudited)
---------------------------------------------------
1. Financial Statements
--------------------
The condensed financial statements included herein are unaudited. In the opinion
of management, these statements include all adjustments, consisting only of
normal, recurring adjustments necessary for a fair presentation of the financial
position of PPG Industries, Inc. and subsidiaries (the Company or PPG) at
September 30, 2002, and the results of their operations for the three and nine
month periods ended September 30, 2002 and 2001 and their cash flows for the
nine month periods then ended. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto incorporated
by reference in PPG's Annual Report on Form 10-K for the year ended December 31,
2001.
The results of operations and cash flows for the nine months ended September 30,
2002 are not necessarily indicative of the results to be expected for the full
year.
2. Changes in Method of Accounting
-------------------------------
Effective January 1, 2002, PPG adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
This standard changes the accounting for goodwill and certain other intangible
assets from an amortization method to an impairment only approach. The standard
also requires a reassessment of the useful lives of identifiable intangible
assets other than goodwill and at least an annual test for impairment of
goodwill and intangibles with indefinite lives. Note 6, "Goodwill and Other
Identifiable Intangible Assets" provides additional information concerning
goodwill and other identifiable intangible assets.
In accordance with the requirements of SFAS No. 142, the Company tested the
goodwill attributable to each of our reporting units for impairment as of
January 1, 2002 and concluded that none of its goodwill was impaired. The
Company's reporting units are the major product lines comprising our reportable
business segments. Fair value was estimated using discounted cash flow
methodologies and market comparable information. The Company will test goodwill
of each of our reporting units for impairment annually in connection with our
strategic planning process. This impairment test will be completed in the fourth
quarter.
In addition, the Company reassessed the useful lives of its identifiable
intangible assets and determined that the lives were appropriate other than for
the Company's trademarks, which were concluded to have indefinite useful lives.
As a result, the Company ceased amortization of the cost of its trademarks as of
January 1, 2002. Also, in accordance with the requirements of SFAS No. 142, the
Company tested each of its trademarks for impairment by comparing the fair value
of each trademark to its carrying value as of January 1, 2002. Fair value was
estimated by using the relief from royalty method (a discounted cash flow
methodology.) Based on these impairment tests, PPG recognized an adjustment of
$14 million ($9 million or $0.05 per share, net of tax) in the first quarter of
2002 to reduce the carrying value of certain trademarks within our coatings
segment to their estimated fair value as the level of future cash flows from
sales of certain brands are expected to be less than originally anticipated.
Under SFAS No. 142, this impairment adjustment has been reported as the
cumulative effect of an accounting change in our first quarter 2002 income
statement. The Company will test the carrying value of trademarks for impairment
at least annually. This impairment test will be completed in the fourth quarter.
-5-
Had the Company been accounting for its goodwill and certain other intangible
assets under SFAS No. 142 for all prior periods presented, the Company's net
income and earnings per common share would have been as follows for the three
and nine months ended September 30, 2001:
Three Months Ended Nine Months Ended
Sept. 30 2001 Sept. 30 2001
------------- -------------
(Millions, except per share amounts)
Net income
Reported net income ................................... $ 93 $ 304
Add back amortization expense, net of tax ............. 8 24
------------- -------------
Adjusted net income ................................... $ 101 $ 328
============= =============
Earnings per common share
Reported earnings ..................................... $ 0.56 $ 1.81
Impact of amortization expense, net of tax ............ 0.05 0.15
------------- -------------
Adjusted earnings per common share .................... $ 0.61 $ 1.96
============= =============
Earnings per common share -
assuming dilution
Reported earnings ..................................... $ 0.55 $ 1.80
Impact of amortization expense, net of tax ............ 0.05 0.15
------------- -------------
Adjusted earnings per common share -
assuming dilution ................................... $ 0.60 $ 1.95
============= =============
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," which requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. All of the
Company's acquisitions have been accounted for using the purchase method. Also,
in accordance with the transition provisions of SFAS No. 141, the carrying
amount of the intangible asset related to the acquired assembled workforce, net
of related tax effects, which totaled $15 million, was reclassified from
identifiable intangible assets to goodwill effective January 1, 2002, as this
intangible asset no longer meets the criteria for recognition apart from
goodwill.
-6-
3. Earnings (Loss) Per Common Share
--------------------------------
The following table presents the earnings (loss) per common share calculations
for the three and nine months ended September 30, 2002 and 2001.
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Millions, except per share amounts)
Earnings (loss) per common share
Income (loss) before cumulative effect of
accounting change ...................................... $ 148 $ 93 $ (154) $ 304
Cumulative effect of accounting change,
net of tax ............................................. - - (9) -
---------- ---------- ---------- ----------
Net income (loss) ........................................ $ 148 $ 93 $ (163) $ 304
---------- ---------- ---------- ----------
Weighted average common shares
outstanding ............................................ 169.3 168.3 168.9 168.3
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
accounting change ...................................... $ 0.87 $ 0.56 $ (0.92) $ 1.81
Cumulative effect of accounting change,
net of tax ............................................. - - (0.05) -
---------- ---------- ---------- ----------
Earnings (loss) per common share ......................... $ 0.87 $ 0.56 $ (0.97) $ 1.81
========== ========== ========== ==========
Earnings (loss) per common share -
assuming dilution
Income (loss) before cumulative effect of
accounting change ...................................... $ 148 $ 93 $ (154) $ 304
Cumulative effect of accounting change,
net of tax ............................................. - - (9) -
---------- ---------- ---------- ----------
Net income (loss) ........................................ $ 148 $ 93 $ (163) $ 304
---------- ---------- ---------- ----------
Weighted average common shares
outstanding ............................................ 169.3 168.3 168.9 168.3
Effect of dilutive securities:
Stock options .......................................... 0.4 0.2 0.3 0.2
Other stock compensation plans ......................... 0.7 0.8 0.7 0.7
---------- ---------- ---------- ----------
Potentially dilutive common shares ....................... 1.1 1.0 1.0 0.9
---------- ---------- ---------- ----------
Adjusted weighted average
common shares outstanding .............................. 170.4 169.3 169.9 169.2
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
accounting change ...................................... $ 0.87 $ 0.55 $ (0.91) $ 1.80
Cumulative effect of accounting change,
net of tax ............................................. - - (0.05) -
---------- ---------- ---------- ----------
Earnings (loss) per common share -
assuming dilution ...................................... $ 0.87 $ 0.55 $ (0.96) $ 1.80
========== ========== ========== ==========
-7-
4. Business Realignments
---------------------
During the first quarter of 2002, the Company finalized plans to reduce costs,
increase efficiencies and accelerate performance improvement and took a charge
of $81 million for restructuring and other related activities, including
severance and other costs of $66 million and asset dispositions of $15 million.
It is expected that these activities will be completed by June 2003.
Severance and Asset Total Employees
Other Costs Dispositions Charge Covered
----------- ------------ ------ -------
(Millions, except employee amounts)
Coatings .................... $ 62 $ 15 $ 77 1,004
Glass ....................... 1 - 1 22
Chemicals ................... 1 - 1 20
Corporate ................... 2 - 2 20
------------- ----------- ----------- -------
Total ................... $ 66 $ 15 $ 81 1,066
Activity ................ (19) (15) (34) (456)
------------- ----------- ----------- -------
Balance, end of period .. $ 47 $ - $ 47 610
============= =========== =========== =======
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.
During the second quarter of 2002, $4 million of the initial $101 million charge
related to the coatings segment was reversed to income.
Severance and Asset Total Employees
Other Costs Dispositions Charge Covered
----------- ------------ ------ -------
(Millions, except employee amounts)
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 ................ (65) (34) (99) (1,338)
----------- ----------- ----------- -------
Balance, end of period .. $ 2 $ - $ 2 29
=========== =========== =========== =======
5. Inventories
-----------
Inventories at September 30, 2002 and December 31, 2001 are detailed below.
Sept. 30 Dec. 31
2002 2001
---- ----
(Millions)
Finished products and work in process .... $ 670 $ 622
Raw materials ............................ 168 166
Supplies ................................. 119 116
-------- --------
Total ................................ $ 957 $ 904
======== ========
-8-
Most domestic and certain foreign inventories are valued using the last-in,
first-out method. If the first-in, first-out method had been used, inventories
would have been $158 million and $180 million higher at September 30, 2002 and
December 31, 2001, respectively.
6. Goodwill and Other Identifiable Intangible Assets
-------------------------------------------------
The change in the carrying amount of goodwill attributable to each business
segment for the nine months ended September 30, 2002 was as follows:
Coatings Glass Chemicals Total
-------- ----- --------- -----
(Millions)
Balance, December 31, 2001 ........................ $ 873 $ 79 $ 20 $ 972
Reclass assembled workforce, net of taxes
(See Note 2) ............................... 15 - - 15
----------- ----------- ------------ -----------
Balance, January 1, 2002 .......................... $ 888 $ 79 $ 20 $ 987
Goodwill acquired ............................. 8 - - 8
Currency translation .......................... 15 3 2 20
----------- ----------- ------------ -----------
Balance, September 30, 2002 ....................... $ 911 $ 82 $ 22 $ 1,015
=========== =========== ============ ===========
The change in the carrying amount of trademarks with indefinite lives for the
nine months ended September 30, 2002 was as follows:
Balance, December 31, 2001 ............................ $ 158
Cumulative effect of accounting change -
impairment adjustment .......................... (14)
--------------
Balance, September 30, 2002 and January 1, 2002 ....... $ 144
==============
The Company's identifiable intangible assets with finite lives are being
amortized over their estimated useful lives and are detailed below.
September 30, 2002 December 31, 2001
------------------ -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
(Millions)
Acquired technology ......... $ 348 $ (77) $ 271 $ 348 $ (60) $ 288
Assembled workforce ......... - - - 29 (10) 19
Other ....................... 161 (59) 102 147 (42) 105
--------- --------- -------- -------- ---------- -------
Balance ................. $ 509 $ (136) $ 373 $ 524 $ (112) $ 412
========= ========= ======== ======== ========== =======
The estimated useful lives of the Company's identifiable intangible assets with
finite lives range from 3 to 25 years.
Aggregate amortization expense for the three and nine months ended September 30,
2002 related to these identifiable intangible assets, was $7 million and $24
million, respectively, and $10 million and $30 million, respectively, for the
three and nine months ended September 30, 2001. At September 30, 2002, estimated
future amortization expense of identifiable intangible assets is as follows: $9
million for the remaining quarter of 2002 and $31 million, $30 million, $29
million, $28 million and $27 million in 2003, 2004, 2005, 2006 and 2007,
respectively.
-9-
7. Business Segment Information
----------------------------
Business segment net sales and operating income (loss) for the three and nine
months ended September 30, 2002 and 2001 were as follows:
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Millions)
Net sales:
Coatings ................................. $ 1,136 $ 1,068 $ 3,376 $ 3,340
Glass .................................... 536 554 1,601 1,745
Chemicals ................................ 398 378 1,128 1,185
Intersegment net sales (a) ............... (2) (1) (28) (8)
---------- ----------- ---------- ------------
Total ................................ $ 2,068 $ 1,999 $ 6,077 $ 6,262
========== =========== ========== ============
Operating income:
Coatings ................................. $ 178 $ 123 $ 460 $ 359
Glass .................................... 45 49 114 233
Chemicals ................................ 41 25 90 74
---------- ----------- ---------- ------------
Total ................................ 264 197 664 666
Interest expense - net ....................... (31) (37) (93) (124)
Asbestos settlement .......................... 24 - (748) -
Other unallocated corporate
expense - net ............................. (9) (7) (9) (14)
---------- ----------- ---------- ------------
Income (loss) before income taxes,
minority interest and cumulative effect
of accounting change (b) ..................
$ 248 $ 153 $ (186) $ 528
========== =========== ========== ============
(a) Includes intersegment net sales of $23 million for the nine months ended
September 30, 2002 related to the glass segment.
(b) Includes for the nine months ended September 30, 2002, a pretax charge of
$81 million for restructuring and other related activities, including
severance and other costs of $66 million and asset dispositions of $15
million. The results for the nine months ended September 30, 2002 also
include a reversal of $4 million of coatings restructuring reserve
originally recorded in 2001. Includes for the nine months ended September
30, 2001, 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. See Note 4, "Business Realignments," for
amounts by business segment.
-10-
8. Comprehensive Income (Loss)
---------------------------
Total comprehensive income (loss) for the three and nine months ended September
30, 2002 and 2001 was as follows:
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Millions)
Net income (loss) ........................................ $ 148 $ 93 $ (163) $ 304
Other comprehensive (loss) income, net of tax:
Currency translation adjustment ........................ (41) 15 6 (86)
Minimum pension liability adjustment ................... - - - (6)
Unrealized (losses) gains on
marketable securities ................................. (2) (1) (7) 7
Net change - derivatives (Note 9) ...................... - (2) 13 (59)
Transition adjustment on derivatives (Note 9) .......... - - - 43
------ ------ ------ -----
(43) 12 12 (101)
------ ------ ------ -----
Total comprehensive income (loss) ..................... $ 105 $ 105 $ (151) $ 203
====== ====== ====== =====
9. Derivative Financial Instruments
--------------------------------
PPG uses derivative instruments to manage its exposure to fluctuating natural
gas prices through the use of natural gas swap and option contracts. PPG also
uses forward currency contracts as hedges against its exposure to variability in
exchange rates on short-term intercompany borrowings denominated in foreign
currencies and interest rate swaps to hedge its exposures to changing interest
rates. The Company recognizes all derivative instruments as either assets or
liabilities at fair value. The unrealized change in the fair value of certain of
these instruments is deferred in accumulated other comprehensive income (loss)
and subsequently recognized, when realized, by reclassification of the gain or
loss into cost of sales, as natural gas is purchased, and into other earnings or
charges, as foreign exchange gains and losses are recognized on the related
intercompany borrowings.
During the first nine months of 2002, the other comprehensive income due to
derivatives was $13 million, net of tax. It was comprised of realized losses of
$6 million that were reclassified into earnings and unrealized gains of $7
million. The realized losses relate to the settlement, during the period, of
natural gas swap and forward currency contracts. The unrealized gains during the
period relate primarily to the changes in fair value of the natural gas
contracts, offset, in part, by unrealized losses for certain interest rate swaps
outstanding as of September 30, 2002.
During the first nine months of 2001, the other comprehensive loss due to
derivatives was $59 million, net of tax. It was comprised of realized gains of
$13 million that were reclassified into earnings and unrealized losses of $46
million. The majority of the realized gains related to the settlement during the
period of natural gas swap and option contracts. The unrealized losses related
primarily to the changes in fair value of the natural gas contracts outstanding
as of September 30, 2001.
The Company's interest rate swaps, which convert $400 million of fixed-rate debt
to variable-rate debt, are designated as fair value hedges. As such, the swaps
and related long-term debt are carried in the balance sheet at fair value. As of
September 30, 2002, the fair value of the interest rate swaps was an asset of
$22 million. As of December 31, 2001, the fair value of interest rate swaps was
a liability of $20 million. These swaps effectively hedge the increase in
long-term debt from December 31, 2001 to September 30, 2002 resulting from the
increase in fair value of such
-11-
debt of $42 million. The changes in the fair value of these swaps and that of
the related debt are recorded in "Interest" in the condensed statement of
income, the net of which is zero.
The transition adjustment on derivatives of $43 million represents the
unrealized gain, net of tax, on the derivatives held at January 1, 2001, the
date of our adoption of SFAS No. 133, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", as amended by SFAS No. 138.
10. Cash Flow Information
---------------------
Cash payments for interest were $111 million and $153 million for the nine
months ended September 30, 2002 and 2001, respectively. Net cash payments for
income taxes for the nine months ended September 30, 2002 and 2001 were $218
million and $134 million, respectively.
The Company surrendered in July 2002 certain company-owned life insurance
policies and received proceeds of $32 million, which are included in "Other" in
the investing activities section in the accompanying condensed statement of cash
flows, resulting from the resolution of all matters related to its federal
income tax returns for the years 1994 to 1998.
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. To the
extent that these lawsuits and claims involve personal injury and property
damage, PPG believes it has adequate insurance; however, certain of PPG's
insurers are contesting coverage with respect to some of these claims, and other
insurers, as they had prior to the asbestos settlement described below, may
contest coverage with respect to some of the asbestos claims if the settlement
is not implemented. 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.
The result of any future litigation of such lawsuits and claims is inherently
unpredictable. However, management believes that, in the aggregate, the outcome
of all lawsuits and claims involving PPG, including asbestos-related claims in
the event the settlement described below does not become effective, 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 any
particular period in which costs, if any, are recognized.
The Company has been named in a number of antitrust lawsuits, including suits
alleging that PPG acted with competitors to fix prices and allocate markets in
the automotive refinish industry and a class action relating to certain glass
products. The automotive refinish claims have been consolidated, but the
proceedings are still at an early stage. All of the initial defendants in the
glass class action antitrust case 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 February 14, 2002, a federal jury awarded Marvin
$136 million on the remaining claim. Subsequently, the court added $20 million
for interest bringing the total judgment to $156 million. PPG filed an appeal on
July 8, 2002. PPG believes it has meritorious defenses to the plaintiff's claims
and has reasonable prospects of prevailing on appeal.
-12-
For over thirty years, PPG has been a defendant in lawsuits involving claims
alleging personal injury from exposure to asbestos. At September 30, 2002, PPG
was one of many defendants in numerous asbestos-related lawsuits involving
approximately 116,000 claims. Most of PPG's potential exposure relates to
allegations by plaintiffs 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 of PC. PPG has denied responsibility for, and has defended, all
claims for any injuries caused by PC products.
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 (as
well as against PC) has been stayed and the filing of additional asbestos suits
against them has been enjoined, until thirty days after the effective date of a
confirmed plan of reorganization for PC substantially in accordance with the
settlement arrangement discussed below. The stay may be terminated if the
Bankruptcy Court determines that such a plan will not be confirmed, or the
settlement arrangement set forth below is not likely to be consummated.
On May 14, 2002, PPG announced that it had agreed with several other parties,
including certain of its insurance carriers, the official committee representing
asbestos claimants in the PC bankruptcy (ACC), and the legal representatives of
future asbestos claimants appointed in the PC bankruptcy, on the terms of a
settlement arrangement relating to asbestos claims against PPG and PC.
The parties to the settlement arrangement intend to have the settlement terms
incorporated into a bankruptcy reorganization plan for PC. The parties to the
settlement expect that PC will file the plan of reorganization, along with a
disclosure statement describing the plan, with the Bankruptcy Court. Other
parties with an interest in the bankruptcy proceeding may file objections to the
plan of reorganization. After considering any objections at a hearing, the
Bankruptcy Court, if it approves the disclosure statement, would permit the plan
of reorganization and a disclosure statement to be sent to PC's creditors for
voting. In order to approve the plan, at least two-thirds in amount and more
than one-half in number of the allowed creditors in a given class must vote in
favor of the plan, and for a plan to contain a channeling injunction for present
and future asbestos claims under ss.524(g) of the Bankruptcy Code, as described
below, seventy-five percent of the asbestos claimants voting must vote in favor
of the plan. Assuming that the plan receives the requisite votes, the judge
would conduct another hearing regarding the fairness of the settlement,
including whether the plan would be fair with respect to present and future
claimants, whether such claimants would be treated in substantially the same
manner, and whether the protection provided to PPG and its participating
insurers would be fair in view of the assets they would convey to the asbestos
settlement trust ("Trust") to be established as part of the settlement
arrangement. At that hearing, other parties in interest could raise objections
to the plan. Following that hearing, the Bankruptcy Court would enter a
confirmation order if all requirements to confirm a plan of reorganization under
the Bankruptcy Code, including the requirements described above, have been
satisfied; this order may be appealed to the District Court. (The District Court
may join the Bankruptcy Court in the confirmation order, in which case an appeal
to the District Court would not be necessary.) Assuming that the District Court
approves the confirmation order, interested parties could appeal the order to
the U.S. Circuit Court and subsequently to the U. S. Supreme Court. The
settlement would not become effective until 30 days after the plan of
reorganization was finally approved by an appropriate court order that was no
longer subject to appeal (the "Effective Date").
-13-
Parties to the settlement are in the process of preparing documents necessary to
implement the settlement, including the bankruptcy reorganization plan for PC
along with the disclosure statement describing the plan. The PC plan of
reorganization and disclosure statement has not yet been filed with the
Bankruptcy Court.
If the PC plan of reorganization incorporating the settlement terms were
approved by the Bankruptcy Court and all legal requirements under the Bankruptcy
Code or otherwise were satisfied, the Court would enter a channeling injunction
under ss. 524(g) of the Bankruptcy Code, prohibiting present and future
claimants from asserting bodily injury claims against PPG or its subsidiaries or
PC relating to the manufacture, distribution or sale of asbestos-containing
products by PC or PPG or its subsidiaries. The injunction would also prohibit
co-defendants in those cases from asserting claims against PPG or its
subsidiaries for contribution, indemnification or other recovery. All such
claims would have to be filed with the Trust and only paid from the assets of
the Trust.
The channeling injunction would not extend to claims against PPG alleging injury
caused by asbestos on premises owned, leased or occupied by PPG (so called
"premises claims"), or claims alleging property damage resulting from asbestos.
Approximately 9,000 of the 116,000 claims pending against PPG and its
subsidiaries are premises claims. Many of PPG's premises claims have been
resolved without payment from PPG. To date, PPG has paid about $7 million to
settle approximately 1,100 premises claims, virtually all of which has been
covered by PPG's insurers. There are no property damage claims pending against
PPG or its subsidiaries. PPG believes that it has adequate insurance for the
asbestos claims not covered by this injunction and that any financial exposure
resulting from such claims will not have a material effect on PPG's consolidated
financial position, liquidity or results of operations.
PPG has no obligation to pay any amounts under the settlement until the
Effective Date. PPG and certain of its insurers (along with PC) would then fund
the Trust, which would provide the sole source of payment for all present and
future asbestos bodily injury claims against PPG, its subsidiaries or PC alleged
to be caused by the manufacture, distribution or sale of asbestos products by
these companies. PPG would convey the following assets to the Trust. First, PPG
would convey the stock it owns in PC and Pittsburgh Corning Europe. Second, PPG
would transfer 1,388,889 shares of PPG's common stock. Third, PPG would make
aggregate cash payments to the Trust of approximately $998 million, payable
according to a fixed payment schedule over 21 years, beginning on June 30, 2003,
or, if later, the Effective Date. PPG would have the right, in its sole
discretion, to prepay these cash payments to the Trust at any time at a discount
rate of 5.5% per annum. In addition to the conveyance of these assets, PPG would
pay, up to a capped amount, any legal fees and expenses incurred by the Trust to
recover proceeds from certain historical insurance assets, including policies
issued by certain insurance carriers that are not participating in the
settlement, the rights to which would be assigned to the Trust.
PPG's participating historical insurance carriers would make cash payments to
the Trust of approximately $1.7 billion between the Effective Date and 2023.
These payments could also be prepaid to the Trust at any time at a discount rate
of 5.5% per annum as of the prepayment date. In addition, PPG would assign to
the Trust its rights, insofar as they relate to the asbestos claims to be
resolved by the Trust, to the proceeds of policies issued by certain insurance
carriers that are not participating in the settlement and from the estates of
insolvent insurers and state insurance guaranty funds.
PPG would grant asbestos releases to all participating insurers, subject to a
coverage-in-place agreement with certain insurers for the continuing coverage of
premises claims (discussed above). PPG would grant certain participating
insurers full policy releases on primary policies
-14-
and full product liability releases on excess coverage policies. PPG would also
grant certain other participating excess insurers credit against their product
liability coverage limits.
In the second quarter of 2002, PPG recorded a pretax charge of $772 million, or
$495 million after-tax, reflecting the estimated cost of this settlement. The
amount includes the net present value, using a discount rate of 5.5%, of the
aggregate cash payments of approximately $998 million which will be made by PPG
to the Trust. This amount also included the carrying value of PPG's stock in PC
and Pittsburgh Corning Europe, the fair value as of June 30, 2002 of 1,388,889
shares of PPG common stock and the estimated legal fees of the Trust to be paid
by PPG, which together with the first payment scheduled to be made to the Trust
on June 30, 2003, have been reflected in the current liability for asbestos
settlement in the accompanying balance sheet. The net present value of the
remaining payments of $566 million has been recorded in the noncurrent liability
for asbestos settlement in the accompanying balance sheet. In the third quarter
of 2002, the current liability for the asbestos settlement was reduced by $24
million with a corresponding credit to income, reflecting the decline in the
fair value from June 30, 2002 to September 30, 2002 of the shares of PPG common
stock which are to be transferred to the asbestos settlement trust.
Because the filing of asbestos claims against the Company has been enjoined
since April 2000, a significant number of additional claims may be filed against
the Company if the Bankruptcy Court stay were to expire. If the settlement is
not implemented, for any reason, and the Bankruptcy Court stay expires, the
Company intends to vigorously defend the pending and any future asbestos claims
against it and its subsidiaries. The Company believes that it is not responsible
for any injuries caused by PC products, which represent the preponderance of the
pending bodily injury claims against it. Prior to 2000, PPG had never been found
liable for any such claims, in numerous cases PPG had been dismissed on motions
prior to trial, and aggregate settlements by PPG to date have been immaterial.
In January 2000, in a trial in a state court in Texas involving six plaintiffs,
the jury found PPG not liable. However, a week later in a separate trial also in
a state court in Texas, another jury found PPG, for the first time, partly
responsible for injuries to five plaintiffs alleged to be caused by PC products.
PPG intends to appeal the adverse verdict in the event the settlement does not
become effective. Although PPG has successfully defended asbestos claims brought
against it in the past, in view of the number of claims, and the questionable
verdicts and awards that other companies have experienced in asbestos
litigation, the result of any future litigation of such claims is inherently
unpredictable.
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 September
30, 2002 and December 31, 2001, PPG had reserves for environmental contingencies
totaling $86 million and $94 million, respectively. Pretax charges against
income for environmental remediation costs for the three and nine months ended
September 30, 2002 totaled $2 million and $10 million, respectively, and $20
million and $27 million, respectively, for the three and nine months ended
September 30, 2001, and are included in "Other, net" in the condensed statement
of income. Cash outlays related to such environmental remediation for the nine
months ended September 30, 2002 and 2001 aggregated $18 million and $13 million,
respectively.
Management anticipates that the resolution of the Company's environmental
contingencies will occur over an extended period of time. Over the past 10 years
the pretax charges against income have ranged between $10 million and $49
million. We anticipate that charges against income in 2002 will be within that
range. It is possible, however, that technological, regulatory and enforcement
developments, the results of environmental studies and other factors could
-15-
alter this expectation. In management's opinion, the Company operates in an
environmentally sound manner and the outcome of the Company's environmental
contingencies will not have a material effect on PPG's financial position or
liquidity.
In addition to the amounts currently reserved, the Company may be subject to
loss contingencies related to environmental matters estimated to be as much as
$200 million to $400 million, which range is unchanged from December 31, 2001.
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 carrying value of the Company's investment in the joint venture which was
approximately $19 million as of September 30, 2002.
-16-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Performance in Third Quarter of 2002 Compared to Third Quarter of 2001
Performance Overview
Sales increased 3% for the third quarter of 2002 to $2.1 billion compared to
$2.0 billion for the third quarter of 2001. The increase in sales was due to a
4% increase in volume primarily in our coatings and chemicals segments and the
positive effects of foreign currency translation offset, in part, by a 1%
decline in selling prices primarily in our glass and chemicals segments.
The gross profit percentage increased to 37.6% for the third quarter of 2002
compared to 36.9% for the third quarter of 2001. The increase in the gross
profit percentage was due to improved manufacturing efficiencies in our glass
and chemicals segments, lower raw material costs in our coatings segment and
lower energy costs offset, in part, by lower selling prices in our glass and
chemicals segments.
Net income and earnings per share - diluted, for the third quarter of 2002 were
$148 million and $0.87, respectively, compared to $93 million and $0.55,
respectively, for the same quarter in 2001. Net income for the third quarter of
2002 included after-tax income of $15 million, or $0.09 a share, to reflect the
decline in fair value from June 30, 2002 to September 30, 2002 of the 1,388,889
shares of PPG stock which are to be transferred to the asbestos settlement trust
as discussed in Note 11, "Commitments and Contingent Liabilities," to the
condensed financial statements. Excluding this income, net income and earnings
per share - diluted, for the third quarter of 2002 were $133 million and $0.78,
respectively. The increase in net income is attributable to higher sales volumes
in our coatings and chemicals segments, improved manufacturing efficiencies in
our glass and chemicals segments, lower environmental remediation expenses
primarily in our chemicals segment, lower overhead costs and the benefit of
goodwill and certain trademarks no longer being amortized. These improvements
were partially offset by lower selling prices primarily in our glass and
chemicals segments and an increase in pension and postretirement medical costs
of approximately $30 million.
Performance of Business Segments
Coatings sales increased 6% to $1.14 billion compared to $1.07 billion for the
third quarter of 2001. The combination of a 5% increase in sales volume, a 1%
increase due to higher selling prices and the positive effects of foreign
currency translation resulted in the sales improvement. Operating income was
$178 million for the third quarter of 2002 compared to $123 million for the same
quarter of 2001. The increase in operating income is attributable to higher
sales volumes and prices, lower raw material costs and the benefit of goodwill
and certain trademarks no longer being amortized. These were offset, in part, by
higher selling costs in our architectural coatings business and higher pension
and postretirement medical costs.
Glass sales decreased 3% to $536 million compared to $554 million for the third
quarter of 2001. The decrease reflects the combination of a 2% decrease from
lower selling prices throughout our glass businesses and a 1% decline from lower
sales volumes. Operating income was $45 million for the third quarter of 2002
compared to $49 million for the same quarter of 2001. The decrease in operating
income is attributable to lower sales volumes and prices, a shift in sales mix
to lower margin products, lower equity earnings and higher pension and
postretirement medical costs offset, in part, by lower overhead costs and
improved manufacturing efficiencies.
Chemicals sales increased 5% to $396 million compared to $377 million for the
third quarter of 2001. Sales increased due to a 10% improvement in sales volume
across all of our businesses
-17-
offset by a 5% decline due to lower selling prices for our chlorine and other
chlor-alkali products. Operating income was $41 million for the third quarter of
2002 compared to $25 million for the same quarter of 2001. The increase in
operating income is attributable to higher sales volumes for our commodity
chemicals and optical businesses, improved manufacturing efficiencies, lower
energy costs and lower environmental remediation expenses offset, in part, by
lower selling prices for our commodity chemicals, higher selling costs from our
optical business and higher pension and postretirement medical costs.
Performance in the First Nine Months of 2002 Compared to the First Nine Months
of 2001
Performance Overview
Sales decreased 3% for the first nine months of 2002 to $6.1 billion compared to
$6.3 billion for the first nine months of 2001. The sales decline is due to
lower selling prices in our glass and chemicals segments. Lower volumes in our
glass segment offset higher volumes in our coatings and chemicals segments.
The gross profit percentage increased slightly to 37.4% for the first nine
months of 2002 compared to 37.3% for the first nine months of 2001. The increase
in the gross profit percentage was due to improved manufacturing efficiencies
across all of our business segments, lower energy costs and lower raw material
costs in our coatings segment offset, in part, by lower selling prices in our
glass and chemicals segments and a shift in sales mix of products sold in our
glass segment to lower margin products.
As a result of a charge for the asbestos settlement discussed in Note 11, PPG
had a net loss of $163 million, or a loss per share - diluted, of $0.96 for the
first nine months of 2002 compared to net income of $304 million, or earnings
per share - diluted, of $1.80 for the first nine months of 2001. The net loss
for the first nine months of 2002 included an after-tax charge of $495 million,
or $2.92 a share, for the asbestos settlement taken in the second quarter,
reduced by $15 million, after-tax, or $0.09 a share, reflecting the decline in
fair value from June 30, 2002 to September 30, 2002 of the shares of PPG common
stock which are to be transferred to the asbestos settlement trust, an after-tax
charge of $52 million, or $0.31 a share, for restructuring and other related
activities and an after-tax charge of $9 million, or $0.05 a share, for the
cumulative effect of an accounting change. Net income for the first nine months
of 2001 included an after-tax charge of $71 million, or $0.42 a share, for
restructuring and other related activities. Excluding these charges, net income
and earnings per share - diluted, for the first nine months of 2002 were $378
million and $2.23, respectively, compared to $375 million and $2.22,
respectively, for the first nine months of 2001. The cumulative effect of an
accounting change of $9 million after-tax reflects the impairment in the
carrying value of certain trademarks within the coatings segment resulting from
the Company's adoption of the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Also, in
accordance with this new standard, the carrying value of goodwill and trademarks
will no longer be amortized and will instead be tested for impairment annually.
Such amortization reduced earnings for the first nine months of 2001 by $24
million after-tax, or $0.15 a share. Aside from the factors described above, the
increase in net income was due to improved manufacturing efficiencies, lower
energy costs, lower overhead costs in our coatings and glass segments, lower
environmental remediation expenses and higher insurance recoveries substantially
offset by lower selling prices in our glass and chemicals segments and an
increase in pension and postretirement medical costs of approximately $90
million.
Performance of Business Segments
Coatings sales increased 1% to $3.38 billion compared to $3.34 billion for the
first nine months of 2001. The sales increase relates primarily to higher sales
volume in our architectural, North American automotive original equipment and
industrial businesses offset, in part, by lower sales
-18-
volumes in our refinish and aerospace businesses. Operating income was $460
million for the first nine months of 2002 compared to $359 million for the first
nine months of 2001. Operating income for the first nine months of 2002 and 2001
included pretax restructuring and other costs of $73 million and $83 million,
respectively. Excluding these charges, operating income for the first nine
months of 2002 and 2001 was $533 million and $442 million, respectively. The
increase in operating income is attributable to higher sales volumes, lower raw
material and overhead costs, improved manufacturing efficiencies and the benefit
of goodwill and certain trademarks no longer being amortized due to the
Company's adoption of SFAS No. 142 offset, in part, by higher pension and
postretirement medical costs.
Glass sales decreased 10% to $1.58 billion compared to $1.75 billion for the
first nine months of 2001. The combination of a decrease in sales volume of 7%,
primarily in our automotive replacement glass, flat glass and fiber glass
businesses and a 3% decline from lower selling prices across all of our glass
businesses resulted in the sales decline. Operating income was $114 million for
the first nine months of 2002 compared to $233 million for the first nine months
of 2001. Operating income for the first nine months of 2002 and 2001 included
pretax restructuring and other costs of $1 million and $10 million,
respectively. Excluding these charges, operating income for the first nine
months of 2002 and 2001 was $115 million and $243 million, respectively. The
decrease in operating income is attributable to lower sales volumes and selling
prices, a shift in sales mix to lower margin products, lower equity earnings and
higher pension and postretirement medical costs offset, in part, by improved
manufacturing efficiencies and lower overhead costs.
Chemicals sales decreased 5% to $1.12 billion compared to $1.18 billion for the
first nine months of 2001. Lower selling prices of 13%, primarily of our
chlor-alkali products, were offset, in part, by an 8% increase in sales volumes,
principally in our optical and fine chemicals businesses. Operating income was
$90 million for the first nine months of 2002 compared to $74 million for the
first nine months of 2001. Operating income for the first nine months of 2002
and 2001 included pretax restructuring and other costs of $1 million and $7
million, respectively. Excluding these charges, operating income for the first
nine months of 2002 and 2001 was $91 million and $81 million, respectively. The
increase in operating income is attributable to lower energy costs, improved
volumes in our optical business, improved manufacturing efficiencies across all
of our chemicals businesses and lower environmental remediation expenses offset,
in part, by lower selling prices for our chlorine and other chlor-alkali
products and higher pension and postretirement medical costs.
Other Factors
The reduction in other unallocated corporate expense - net for the first nine
months of 2002 as compared to the first nine months of 2001 is principally due
to the receipt of increased insurance litigation recoveries in 2002 offset, in
part, by the loss on disposal of a corporate asset.
The Company's pretax loss for the first nine months of 2002 included net
periodic pension expense of $37 million as compared to net periodic pension
income of $43 million for the comparable 2001 period. These amounts are included
in "Cost of sales", "Selling, general and administrative", and "Research and
development" in the accompanying condensed statement of income. This trend will
continue for the remainder of 2002. The increase in pension costs is due
principally to lower pension assets resulting from lower than expected
investment returns in 2001. The low investment returns have continued in 2002
and, as a result, pension costs could rise approximately $120 million in 2003 if
the investment returns do not improve in the last quarter of this year.
-19-
Additionally, if the fair market value of our pension plan assets is less than
the accumulated benefit obligation at December 31, 2002, PPG will be required to
record a minimum pension liability adjustment equal to the pension asset
shortfall plus the amount of the related prepaid pension asset with the offset
recorded, net of tax, as a reduction to shareholders' equity. If that
calculation were required to be made as of September 30, 2002 and assuming an
estimated accumulated benefit obligation (ABO) of $2.3 billion and plan assets
with a fair market value of $1.9 billion at September 30, 2002, the Company
would have reduced its prepaid pension asset to zero, established an intangible
pension asset and an additional pension liability of approximately $100 million
and $400 million, respectively, and reduced its deferred tax liability and
shareholders' equity by approximately $500 million and $800 million,
respectively.
The actual charge, if any, which would be recorded as a reduction to
shareholders' equity at December 31, 2002, would be determined separately for
each plan. The ABO at year-end will be determined based on actuarial assumptions
established for each plan, including the discount rate, which can have a
significant impact on the value of the ABO. The plan assets will be valued at
year-end market values. Due to the significant uncertainties in the market with
respect to interest rates and investment returns, the amounts that may
ultimately be recorded at year-end could be materially different than the
estimates provided above.
As stated before, the Company has no mandatory pension funding requirements
under existing regulations but may choose to make a contribution in the
remainder of 2002. For our two principal U.S. defined benefit pension plans, the
tax deductible contribution limit for 2002 under the Internal Revenue Code is
approximately $160 million.
The tax rate on earnings, excluding charges for restructuring and the asbestos
settlement, was 36% for the first nine months of 2002 and 2001. For the first
nine months of 2002, the tax benefit of the restructuring charges and the
asbestos settlement were 33.0% and 35.8%, respectively, which resulted in an
overall effective tax benefit for the period of 34.4%. The overall effective tax
rate for the first nine months of 2001 was 37.3%, including a 36% rate on
earnings excluding charges for restructuring.
During the third quarter of 2002, the Company resolved all matters related to
its federal income tax returns for the years 1994 to 1998, including matters
that were on appeal related to the 1994 to 1996 tax returns. In connection with
the resolution of these matters, the Company surrendered in July 2002 certain
company-owned life insurance policies and received proceeds of $32 million,
which are included in "Other" in the investing activities section in the
accompanying condensed statement of cash flows. There was no impact on current
year earnings as a result of the resolution of these tax matters.
Capital spending for the nine months ended September 30, 2002 includes the cost
of several small acquisitions by our coatings businesses. The 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 for the coming year. The Company is in compliance with the
covenants under its various credit agreements, loan agreements and indentures.
The Company's revolving credit agreements, under which there are currently no
borrowings, and a portion of PPG's ESOP Notes, include financial ratio
covenants. The most restrictive of these covenants requires that the amount of
long-term senior debt outstanding not exceed 55% of the Company's tangible net
assets. At September 30, 2002, long-term senior debt was 34% of the Company's
tangible net assets. In the event of a breach of this covenant, each holder of
the ESOP notes would have the right to require the Company to redeem the notes.
Additionally, substantially all of our debt agreements contain customary
cross-default provisions. Those provisions state that a default on a debt
service payment of $10 million or
-20-
more for longer than the grace period provided (usually 10 days) under one
agreement may constitute an event of default of other agreements.
None of our debt agreements contain covenants that would be impacted by any
change in our credit rating. However, the majority of the Company's European
debt is raised under the $800 million Euro Commercial Paper Program. Should the
Company's credit rating fall below its current level, access to the European
commercial paper market could be severely impacted; however, the Company could
replace this debt with borrowings in the U.S. commercial paper market or under
our revolving credit agreement.
PPG's net investment in Argentina was $68 million at December 31, 2001. As a
result of the continuing devaluation of the Argentine peso during the first nine
months of 2002, the net investment declined to $27 million at September 30,
2002, resulting in an unrealized currency translation loss of $41 million
reported as a direct charge to the accumulated other comprehensive loss
component of shareholders' equity. The total unrealized currency translation
loss related to Argentina at September 30, 2002 is $71 million and is included
in "Accumulated other comprehensive loss" in the accompanying condensed balance
sheet.
Accounting Standards
Note 2, "Changes in Method of Accounting" describes and quantifies the impact of
the Company's adoption, effective January 1, 2002, of the provisions of the
Financial Accounting Standards Board's (FASB) new standards on the accounting
for goodwill and intangible assets.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which is effective January 1, 2003. We are currently in the process
of finalizing the adoption of this standard but we do not believe that it will
have a material effect on the Company's consolidated results of operations,
financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard requires recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment by management to an exit or disposal plan. This new
standard will be effective for activities initiated after December 31, 2002. The
adoption of this standard will not have a material effect on the Company's
consolidated results of operations, financial position or cash flows.
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 in this Form 10-Q for an expanded
description of certain of these lawsuits, including the proposed settlement of
asbestos claims announced on May 14, 2002. As discussed in Note 11, although the
result of any future litigation of such lawsuits and claims is inherently
unpredictable, management believes that, in the aggregate, the outcome of all
lawsuits and claims involving PPG, including asbestos-related claims in the
event the settlement described in Note 11 does not become effective, 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 any
particular 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 September
30, 2002 and December 31, 2001, PPG had reserves for environmental contingencies
totaling $86 million and $94 million, respectively. Pretax charges against
income for environmental remediation costs for the three and nine months ended
-21-
September 30, 2002 totaled $2 million and $10 million, respectively, and $20
million and $27 million, respectively, for the three and nine months ended
September 30, 2001, and are included in "Other, net" in the condensed statement
of income. Cash outlays related to such environmental remediation for the nine
months ended September 30, 2002 and 2001 aggregated $18 million and $13 million,
respectively.
Management anticipates that the resolution of the Company's environmental
contingencies will occur over an extended period of time. Over the past 10 years
the pretax charges against income have ranged between $10 million and $49
million. We anticipate that charges against income in 2002 will be within that
range. It is possible, however, that technological, regulatory and enforcement
developments, the results of environmental studies and other factors could alter
this expectation. In management's opinion, the Company operates in an
environmentally sound manner and the outcome of the Company's environmental
contingencies will not have a material effect on PPG's financial position or
liquidity.
In addition to the amounts currently reserved, the Company may be subject to
loss contingencies related to environmental matters estimated to be as much as
$200 million to $400 million, which range is unchanged from December 31, 2001.
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 carrying value of the Company's investment in the joint venture which was
approximately $19 million as of September 30, 2002.
-22-
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of the Company. Management's
Discussion and Analysis and other sections of this Form 10-Q contain
forward-looking statements that reflect the Company's current views with respect
to future events and financial performance.
Forward-looking statements are identified by the use of the words "aim,"
"believe," "expect," "anticipate," "intend," "estimate" and other expressions
that indicate future events and trends. Any forward-looking statement speaks
only as of the date on which such statement is made and the Company undertakes
no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise. You are advised, however, to
consult any further disclosures we make on related subjects in our reports to
the Securities and Exchange Commission. Also, note the following cautionary
statements.
Many factors could cause actual results to differ materially from the Company's
forward-looking statements. Among these factors are increasing price and product
competition by foreign and domestic competitors, fluctuations in the cost and
availability of raw materials, the ability to maintain favorable supplier
relationships and arrangements, economic and political conditions in
international markets, the ability to penetrate existing, developing and
emerging foreign and domestic markets, which also depends on economic and
political conditions, foreign exchange rates and fluctuations in those rates,
and the unpredictability of possible future litigation, including litigation
that could result if the asbestos settlement does not become effective. 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 with 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
There were no material changes in the Company's exposure to market risk from
December 31, 2001.
Item 4. Controls and Procedures
- --------------------------------
a. Evaluation of disclosure controls and procedures. Based on their evaluation
-------------------------------------------------
as of a date within 90 days of the filing date of this Form 10-Q, the
Company's principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934
(the "Exchange Act")) are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and
forms.
b. Changes in internal control. There were no significant changes in the
----------------------------
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation described
above. There were no significant deficiencies or material weaknesses, and
therefore there were no corrective actions taken.
-23-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
In the Company's Form 10-K for the year ended December 31, 2001, it was reported
the Company has been a defendant since April 1994 in a suit filed in the Federal
District Court in St. Paul, Minnesota, by Marvin Windows and Doors (Marvin)
alleging numerous claims, including breach of warranty. The district court
dismissed the plaintiff's claims in 1999, but certain of the claims were
reinstated on appeal. The Eighth Circuit U.S. Court of Appeals dismissed 12 of
13 claims, but allowed the plaintiff to proceed to trial on a breach of warranty
claim. On February 14, 2002, the federal jury awarded Marvin $136 million on the
remaining claim. Subsequently, the court added $20 million for interest bringing
the total judgment to $156 million. PPG filed an appeal on July 8, 2002. PPG
believes it has meritorious defenses to the plaintiff's claims and has
reasonable prospects of prevailing on appeal.
In the Company's Form 10-K for the year ended December 31, 2001, it was reported
that the Company has been a defendant in lawsuits involving claims alleging
personal injury from exposure to asbestos. Most of PPG's potential exposure
relates to allegations by plaintiffs that the Company should be liable for
injuries involving asbestos-containing thermal insulation products manufactured
and distributed by Pittsburgh Corning Corporation (PC). The Company and Corning
Incorporated are each 50% shareholders of PC. On April 16, 2000, PC filed for
Chapter 11 Bankruptcy in the Federal Bankruptcy Court in Pittsburgh,
Pennsylvania. As a consequence of the bankruptcy filing and the various motions
and orders in that proceeding, the asbestos litigation against PPG (as well as
against PC) has been stayed and the filing of additional asbestos suits against
them has been enjoined, until thirty days after the effective date of a
confirmed plan of reorganization for PC substantially in accordance with the
settlement arrangement discussed in Note 11, "Commitments and Contingent
Liabilities" to the condensed financial statements in this Form 10-Q. In the
event such a plan is not confirmed, or PPG or the official committee
representing asbestos claimants in the PC bankruptcy (ACC) concludes that the
settlement arrangement set forth in Note 11 is not likely to be consummated,
then either PPG or the ACC may move for an order terminating the stay. The stay
will remain in effect, however, until the Bankruptcy Court resolves the motion
if the motion is opposed by the non-moving party.
On May 14, 2002, PPG announced that it has agreed with several other parties,
including certain of its insurance carriers, the ACC, and the legal
representatives of future asbestos claimants appointed in the PC bankruptcy, on
the terms of a settlement arrangement relating to asbestos claims against PPG
and PC. The proposed terms of the settlement arrangement, and the process and
legal requirements for incorporating the settlement into a plan of
reorganization in PC's bankruptcy, are discussed in more detail under Note 11 to
the condensed financial statements in this Form 10-Q.
Item 2. Change in Securities and Use of Proceeds
- ------------------------------------------------
Directors who are not also Officers of the Company receive Common Stock
Equivalents pursuant to the Deferred Compensation Plan for Directors and the
Directors' Common Stock Plan. Common Stock Equivalents are hypothetical shares
of Common Stock having a value on any given date equal to the value of a share
of Common Stock. Common Stock Equivalents earn dividend equivalents that are
converted into additional Common Stock Equivalents but carry no voting rights or
other rights of a holder of Common Stock. The Common Stock Equivalents credited
to Directors under both plans are exempt from registration under Section 4(2) of
the Securities Act of 1933 as private offerings made only to Directors of the
Company in accordance with the provisions of the plans.
-24-
Under the Company's Deferred Compensation Plan for Directors, each Director must
defer receipt of such compensation as the Board mandates. Currently, the Board
mandates deferral of one-third of each payment of the basic annual retainer of
each Director. Each Director may also elect to defer the receipt of (1) an
additional one-third of each payment of the basic annual retainer, (2) all of
the basic annual retainer, or (3) all compensation. All deferred payments are
held in the form of Common Stock Equivalents. Payments out of the deferred
accounts are made in the form of Common Stock of the Company (and cash as to any
fractional Common Stock Equivalent). In the third quarter of 2002, the
Directors, as a group, were credited with 961 Common Stock Equivalents under
this Plan. The values of the Common Stock Equivalents, when credited, ranged
from $44.70 to $57.40.
Under the Directors' Common Stock Plan, each Director who neither is nor was an
employee of the Company is credited annually with Common Stock Equivalents worth
one-half of the Director's basic annual retainer. Upon termination of service,
the Common Stock Equivalents held in a Director's account are converted to and
paid in Common Stock of the Company (and cash as to any fractional Common Stock
Equivalent). In the third quarter of 2002, the Directors, as a group, received
300 Common Stock Equivalents under this Plan. The value of each Common Stock
Equivalent, when credited, was $51.92.
Item 5. Other Information
- -------------------------
The Company's chief executive officer and chief financial officer have provided
as part of this filing the certification with respect to this Form 10-Q that is
required by Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
a. Exhibits
3 The Restated Articles of Incorporation, as amended, were filed as
Exhibit 3 to the Registrant's Form 10-Q for the quarter ended March
31, 1995, which exhibit is incorporated herein by reference.
3.1 Statement with Respect to Shares, amending the Restated Articles of
Incorporation effective April 21, 1998 was filed as Exhibit 3.1 to
the Registrant's Form 10-K for the year ended December 31, 1998,
which exhibit is incorporated herein by reference.
3.2 The Bylaws, as amended, were filed as Exhibit 3.2 to the
Registrant's Form 10-Q for the quarter ended March 31, 2002, which
exhibit is incorporated herein by reference.
4 The Shareholders' Rights Plan was filed as Exhibit 4 on the
Registrant's Form 8-K, dated February 19, 1998, which exhibit is
incorporated herein by reference.
4.1 Indenture, dated as of August 1, 1982, was filed as Exhibit 4.1 to
PPG's Registration Statement on Form S-3 (No. 333-44397) dated
January 16, 1998 (the "1998 Form S-3"), which exhibit is
incorporated herein by reference.
4.2 First Supplemental Indenture, dated as of April 1, 1986, was filed
as Exhibit 4.2 to the 1998 Form S-3, which exhibit is incorporated
herein by reference.
4.3 Second Supplemental Indenture, dated as of October 1, 1989, was
filed as Exhibit 4.3 to the 1998 Form S-3, which exhibit is
incorporated herein by reference.
-25-
4.4 Third Supplemental Indenture, dated as of November 1, 1995, was
filed as Exhibit 4.4 to the 1998 Form S-3, which exhibit is
incorporated herein by reference.
*10 The Supplemental Executive Retirement Plan II, as amended, and the
Change in Control Employment Agreement were filed as Exhibits 10.2
and 10.5, respectively, to the Registrant's Form 10-Q for the
quarter ended September 30, 1995, which exhibit is incorporated
herein by reference. PPG Industries, Inc. Deferred Compensation Plan
for Directors was filed as Exhibit 10.3 to the Registrant's Form
10-K for the year ended December 31, 1997, which exhibit is
incorporated herein by reference. PPG Industries, Inc. Incentive
Compensation and Deferred Income Plan for Key Employees, as amended,
was filed as Exhibit 10.1 to the Registrant's Form 10-Q for the
quarter ended March 31, 2000, which exhibit is incorporated herein
by reference. PPG Industries, Inc. Directors' Common Stock Plan, as
amended April 19, 2000, was filed as Exhibit 10.1 to the
Registrant's Form 10-K for the year ended December 31, 2000, which
exhibit is incorporated herein by reference. PPG Industries, Inc.
Executive Officers Annual Incentive Compensation Plan, dated as of
April 19, 2001, was filed as Exhibit 10.3 to the Registrant's Form
10-K for the year ended December 31, 2000, which exhibit is
incorporated herein by reference.
*10.1 PPG Industries, Inc. Nonqualified Retirement Plan dated as of
January 1, 1989, as amended February 21, 2002, was filed as Exhibit
10.1 to the Registrant's Form 10-K for the year ended December 31,
2001, which exhibit is incorporated herein by reference.
*10.2 PPG Industries, Inc. Deferred Compensation Plan, as amended
effective February 21, 2002, was filed as Exhibit 10.2 to the
Registrant's Form 10-K for the year ended December 31, 2001, which
exhibit is incorporated herein by reference.
*10.3 PPG Industries, Inc. Stock Plan, dated as of April 17, 1997, as
amended April 18, 2002, was filed as Exhibit 10.3 to the
Registrant's Form 10-K for the year ended December 31, 2001, which
exhibit is incorporated herein by reference.
*10.4 PPG Industries, Inc. Total Shareholder Return Plan for Key
Employees, as amended effective April 18, 2002, was filed as Exhibit
10.4 to the Registrant's Form 10-K for the year ended December 31,
2001, which exhibit is incorporated herein by reference.
*10.5 PPG Industries, Inc. Executive Officers' Total Shareholder Return
Plan, as amended effective April 18, 2002, was filed as Exhibit 10.5
to the Registrant's Form 10-K for the year ended December 31, 2001,
which exhibit is incorporated herein by reference.
12 Computation of Ratio of Earnings to Fixed Charges for the Nine
Months Ended September 30, 2002 and for the Five Years Ended
December 31, 2001.
* Items referred to in Exhibit 10, 10.1, 10.2, 10.3, 10.4 and 10.5 and
incorporated by reference are either management contracts,
compensatory plans or arrangements required to be filed as an
exhibit hereto pursuant to Item 601 of Regulation S-K.
-26-
b. Reports on Form 8-K
1. The Company filed a Form 8-K issuing a press release dated July 18,
2002. The press release announced that Charles E. (Chuck) Bunch,
president and chief operating officer, has been elected a member of
PPG's Board of Directors.
2. On August 6, 2002, the Company filed a Current Report on Form 8-K
announcing that on August 5, 2002, each of the Principal Executive
Officer, Raymond W. LeBoeuf, and Principal Financial Officer,
William H. Hernandez, signed and submitted to the Securities and
Exchange Commission sworn statements pursuant to Securities and
Exchange Commission Order No. 4-460.
-27-
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PPG INDUSTRIES, INC.
---------------------------------
(Registrant)
Date: November 6, 2002 By /s/ W. H. Hernandez
--------------------------------
W. H. Hernandez
Senior Vice President, Finance
(Principal Financial and
Accounting Officer and
Duly Authorized Officer)
-28-
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
-----------------------------------------
I, Raymond W. LeBoeuf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PPG Industries, Inc.
("PPG");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of PPG as of, and for, the periods presented in this quarterly
report;
4. PPG's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for PPG and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to PPG, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of PPG's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. PPG's other certifying officer and I have disclosed, based on our most
recent evaluation, to PPG's auditors and the audit committee of PPG's Board
of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect PPG's ability to record, process,
summarize and report financial data and have identified for PPG's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in PPG's internal controls; and
6. PPG's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002 /s/ Raymond W. LeBoeuf
----------------------
Raymond W. LeBoeuf
Chairman of the Board and
Chief Executive Officer
-29-
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
-----------------------------------------
I, William H. Hernandez, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PPG Industries, Inc.
("PPG");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of PPG as of, and for, the periods presented in this quarterly
report;
4. PPG's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for PPG and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to PPG, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of PPG's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. PPG's other certifying officer and I have disclosed, based on our most
recent evaluation, to PPG's auditors and the audit committee of PPG's Board
of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect PPG's ability to record, process,
summarize and report financial data and have identified for PPG's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in PPG's internal controls; and
6. PPG's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002 /s/ William H. Hernandez
------------------------
William H. Hernandez
Senior Vice President, Finance
-30-
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PPG Industries, Inc. on Form 10-Q for
the period ended September 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Raymond W. LeBoeuf, Chief
Executive Officer of PPG Industries, Inc., certify to the best of my knowledge,
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of PPG
Industries, Inc.
/s/ Raymond W. LeBoeuf
- ----------------------
Raymond W. LeBoeuf
Chief Executive Officer
November 6, 2002
-31-
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PPG Industries, Inc. on Form 10-Q for
the period ended September 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, William H. Hernandez, Chief
Financial Officer of PPG Industries, Inc., certify to the best of my knowledge,
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of PPG
Industries, Inc.
/s/ William H. Hernandez
- ------------------------
William H. Hernandez
Chief Financial Officer
November 6, 2002
-32-
PPG INDUSTRIES, INC. AND SUBSIDIARIES
-------------------------------------
INDEX TO EXHIBITS
Exhibit
Number Description
12 Computation of Ratio of Earnings to Fixed Charges for the Nine
Months Ended September 30, 2002 and for the Five Years Ended
December 31, 2001.