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, 1995 Commission File Number 1-1687 PPG INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 25-0730780 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One PPG Place, Pittsburgh, Pennsylvania 15272 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (412) 434-3131 As of November 3, 1995, 196,044,279 shares of the Registrant's common stock, par value $1.66-2/3 per share, were outstanding. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No
PPG INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES ============================= Index Part I. Financial Information Page(s) Item 1. Financial Statements: Condensed Statement of Income.................................... 2 Condensed Balance Sheet.......................................... 3 Condensed Statement of Cash Flows................................ 4 Notes to Condensed Financial Statements.......................... 5 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 8 - 12 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K.......................... 13 Signature............................................................ 14 - 1 -
Part I. FINANCIAL INFORMATION Item 1. Financial Statements PPG INDUSTRIES, INC. AND SUBSIDIARIES <TABLE> Condensed Statement of Income (Unaudited) (Millions, except per share amounts) <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 1995 1994 1995 1994 <S> <C> <C> <C> <C> Net sales........................ $1,724.1 $1,575.3 $5,335.3 $4,671.5 Cost of sales.................... 1,029.4 962.1 3,166.8 2,861.8 Gross profit................... 694.7 613.2 2,168.5 1,809.7 Other expenses: Selling, general and administrative............... 246.8 225.7 736.5 665.2 Depreciation................... 83.2 78.6 246.1 236.1 Research and development....... 59.8 55.7 176.0 159.1 Interest....................... 21.2 21.8 62.4 66.0 Business divestiture (Note 3).. -- -- -- 85.0 Other charges.................. 31.9 29.1 102.0 72.7 Total other expenses........... 442.9 410.9 1,323.0 1,284.1 Other earnings................... 28.3 34.4 150.4 81.9 Income before income taxes and minority interest.......... 280.1 236.7 995.9 607.5 Income taxes..................... 106.4 86.2 378.4 230.9 Minority interest................ 3.3 5.0 11.1 13.0 Net income....................... $ 170.4 $ 145.5 $ 606.4 $ 363.6 Earnings per share............... $ 0.85 $ 0.68 $ 2.97 $ 1.71 Dividends per share.............. $ 0.30 $ 0.28 $ 0.88 $ 0.83 Average shares outstanding....... 200.9 212.5 204.0 212.7 </TABLE> The accompanying notes to the condensed financial statements are an integral part of this statement. - 2 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES <TABLE> Condensed Balance Sheet (Unaudited) <CAPTION> Sept. 30 Dec. 31 1995 1994 (Millions) <S> <C> <C> Assets Current assets: Cash and cash equivalents................... $ 118.3 $ 62.1 Receivables-net............................. 1,319.8 1,228.9 Inventories (Note 2)........................ 759.9 686.4 Other....................................... 176.6 190.8 Total current assets...................... 2,374.6 2,168.2 Property (less accumulated depreciation of $3,629.0 million and $3,420.4 million)...... 2,763.6 2,742.3 Investments................................... 201.6 277.4 Other assets.................................. 848.6 706.0 Total..................................... $6,188.4 $5,893.9 Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings and current portion of long-term debt................. $ 444.6 $ 370.7 Accounts payable and accrued liabilities.... 1,096.3 1,034.4 Income taxes................................ 39.4 19.4 Total current liabilities................. 1,580.3 1,424.5 Long-term debt (Note 7)....................... 744.5 773.4 Deferred income taxes......................... 335.0 302.7 Accumulated provisions........................ 299.1 260.5 Other postretirement benefits................. 516.3 505.5 Minority interest............................. 72.2 70.3 Total liabilities......................... 3,547.4 3,336.9 Shareholders' equity: Common stock (Note 8)....................... 484.3 484.3 Additional paid-in capital.................. 72.4 67.5 Retained earnings........................... 4,145.9 3,717.1 Treasury stock.............................. (1,874.8) (1,488.6) Unearned compensation....................... (187.9) (183.0) Minimum pension liability adjustment........ (3.0) (1.7) Currency translation adjustment............. 4.1 (38.6) Total shareholders' equity................ 2,641.0 2,557.0 Total..................................... $6,188.4 $5,893.9 </TABLE> The accompanying notes to the condensed financial statements are an integral part of this statement. - 3 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES <TABLE> Condensed Statement of Cash Flows (Unaudited) <CAPTION> Nine Months Ended Sept. 30 1995 1994 (Millions) <S> <C> <C> Cash from operating activities............... $ 731.6 $ 503.0 Investing activities: Capital spending.......................... (284.2) (224.0) Reduction of investments.................. 129.1 28.5 Other..................................... 22.8 54.8 Cash used for investing activities... (132.3) (140.7) Financing activities: Net change in borrowings with maturities of three months or less...... (30.6) (74.4) Proceeds from other short-term debt....... 38.6 31.0 Repayment of other short-term debt........ (55.8) (23.9) Proceeds from long-term debt.............. 118.3 10.3 Repayment of long-term debt............... (40.3) (28.7) Loans to employee stock ownership plan.... (25.0) (11.0) Repayment of loans by employee stock ownership plan.......................... 20.1 14.8 Purchase of treasury stock, net........... (388.3) (53.0) Dividends paid............................ (180.1) (176.4) Cash used for financing activities... (543.1) (311.3) Effect of currency exchange rate changes on cash and cash equivalents............... -- 2.8 Net increase in cash and cash equivalents........................... 56.2 53.8 Cash and cash equivalents, beginning of period........................ 62.1 111.9 Cash and cash equivalents, end of period.............................. $ 118.3 $ 165.7 </TABLE> 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 consolidated subsidiaries (the Company or PPG) at September 30, 1995, and the results of their operations for the three- and nine-month periods ended September 30, 1995 and 1994 and their cash flows for the nine-month periods ended September 30, 1995 and 1994. 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, 1994. The results of operations for the nine months ended September 30, 1995 are not necessarily indicative of the results to be expected for the full year. 2. Inventories Inventories at September 30, 1995, and December 31, 1994, are detailed below. <TABLE> <CAPTION> Sept. 30 Dec. 31 1995 1994 (Millions) <S> <C> <C> Finished products and work in process............ $507.8 $462.7 Raw materials.................................... 138.9 111.9 Supplies......................................... 113.2 111.8 Total.......................................... $759.9 $686.4 </TABLE> 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 $211.3 million and $199.2 million higher at September 30, 1995 and December 31, 1994, respectively. 3. Business Divestiture PPG's operating results reflect the impact of the Company's programs to divest businesses and activities not meeting strategic or performance objectives. The 1994 charge pertains to the divestiture of the Biomedical Systems Division. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for further details regarding this charge. - 5 -
4. Cash Flow Information Cash payments for interest for the nine months ended September 30, 1995 and 1994 were $61.0 million and $63.7 million, respectively. Cash payments for income taxes for the nine months ended September 30, 1995 and 1994 were $279.4 million and $217.4 million, respectively. 5. Business Segment Information <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 1995 1994 1995 1994 (Millions) <S> <C> <C> <C> <C> Net Sales: Coatings and Resins.. $ 669 $ 640 $2,110 $1,956 Glass................ 655 594 2,014 1,779 Chemicals............ 400 342 1,211 937 Total.............. $1,724 $1,576 $5,335 $4,672 Operating Income (Loss): Coatings and Resins.. $ 91 $ 109 $ 363 $ 376 Glass................ 114 74 404 243 Chemicals............ 90 68 286 139 Other (1)............ -- -- -- (85) Total operating income............ 295 251 1,053 673 Interest expense - net.... (18) (19) (54) (59) Other unallocated corporate income (expense) - net........ 3 5 (3) (6) Income before income taxes and minority interest................. $ 280 $ 237 $ 996 $ 608 </TABLE> (1) Loss in 1994 represents the charge to divest the Biomedical Systems Division (see Note 3). 6. Environmental Matters Management of the Company anticipates that the resolution of the environmental contingencies discussed below, which will occur over an extended period of time, will not result in future annual charges to income that are significantly greater than those recorded in recent years. It is possible, however, that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter this expectation. In management's opinion, the - 6 -
Company operates in an environmentally sound manner and the outcome of these environmental matters will not have a material effect on PPG's financial position or liquidity. To date, compliance with federal, state and local requirements has not had a material impact on PPG's financial position, results of operations or liquidity. It is PPG's policy to accrue expenses for environmental contingencies when it is probable that a liability exists and the amount of loss can be reasonably estimated. As of September 30, 1995 and December 31, 1994, PPG had environmental reserves totaling $97 million and $90 million, respectively. Charges against income for environmental remediation costs for the nine-month periods ended September 30, 1995 and 1994 were $35 million and $25 million, respectively. In addition to the amounts accrued, the Company may be subject to contingencies related to environmental matters estimated at the high end to be as much as $200 million to $400 million. Such aggregate losses are reasonably possible but not currently considered to be probable of occurrence. The Company's current environmental contingencies are expected to be resolved over a period of 20 years or more. These loss contingencies include significant unresolved issues such as the nature and extent of contamination, if any, at sites and the methods that may have to be employed should remediation be required. Although insurance may cover a portion of these costs, to the extent they are incurred, any potential recovery is not included in this unrecorded exposure to future loss. With respect to certain waste sites, the financial condition of any other potentially responsible parties also contributes to the uncertainty of estimating PPG's final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agency assertions of joint and several liability, in general, final allocations of costs are made based on the relative contributions of wastes to such sites. PPG is generally not a major contributor to such sites. Although the unrecorded exposure to future loss relates to all sites, a significant portion of such unrecorded exposure involves three operating plant sites and one closed plant site. Two of the sites are in the early stages of study, while the remaining two are further into the study phase. All four sites require additional study to assess the magnitude of contamination, if any, and the remediation alternatives. 7. Long-term Debt On August 3, 1995, the Company issued $100 million of non-callable 6 7/8% notes which are due August 1, 2005. 8. Common Stock On April 20, 1995, the Company's Restated Articles of Incorporation were amended to increase the number of authorized shares of common stock from 300 million to 600 million. - 7 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Performance in the Third Quarter of 1995 Compared with the Third Quarter of 1994 Performance Overview Sales for the third quarter of 1995 and 1994 were $1.72 billion and $1.58 billion, respectively. The sales increase was primarily attributable to higher prices in virtually all product lines, particularly for our chlor- alkali and derivative, fiber glass, and flat glass products. Also contributing to the sales increase were higher volumes, particularly in our European operations, and the favorable effects of foreign currency translation. The gross profit percentage increased to 40.3% from 38.9% in the prior year's quarter primarily due to higher sales prices in all business segments. The negative effects of inflation partially offset these gains. Net income and earnings per share for the 1995 quarter were $170.4 million and $0.85, respectively. In the third quarter of 1994, net income and earnings per share were $145.5 million and $0.68, respectively. Current period net income was favorably impacted by the factors that contributed to the gross profit percentage improvement and higher sales volumes. Partially offsetting these gains were increased overhead costs, higher income tax expense, and lower other earnings. Performance of Business Segments Coatings and resins sales increased to $669 million from $640 million in the third quarter of 1994. Operating income for the corresponding periods were $91 million and $109 million, respectively. The increase in sales was primarily attributable to stronger pricing in all product lines, higher volumes for our European automotive original products, and the favorable effects of translating European currencies. The effects of lower volumes for most of our North American product lines partially offset these improvements. Despite higher sales, operating income declined as the favorable effects of price improvements were more than offset by the negative impact of inflation, particularly on raw material costs. Glass sales increased to $655 million in the third quarter of 1995 from $594 million in the prior year's quarter. Operating income increased to $114 million from $74 million in the corresponding 1994 period. Contributing to the sales increase were higher sales prices, principally for worldwide fiber glass and flat glass products and North American automotive replacement glass, higher volumes, particularly for our North American automotive original glass products, and the favorable effects of translating European currencies. The effect of lower North American automotive replacement glass volume partially offset these improvements. Increased operating income was primarily the result of the factors that contributed to the sales increase, partially offset by the negative effects of inflation and higher overhead costs. - 8 -
Chemicals sales increased to $400 million from $342 million in the third quarter of 1994. Operating income for the corresponding periods was $90 million and $68 million, respectively. The increase in sales was primarily attributable to substantial price increases for chlor-alkali and derivative products and higher volumes for Transitions (registered trademark) optical lenses. These improvements were partially offset by the effect of lower volumes for our chlor-alkali and derivative products. The increase in operating income was attributable to the factors that contributed to the sales increase, partially offset by increases in other charges, net of other earnings, and overhead costs. The increase in other charges, net of other earnings, was the result of a non-recurring freight charge, the absence of the 1994 third quarter gain from the disposition of the segment's polymer additives business, and higher environmental expense. The "other" segment's 1994 operating loss represents the charge to divest the Biomedical Systems Division. Performance in the First Nine Months of 1995 Compared with the First Nine Months of 1994 Performance Overview Sales for the first nine months of 1995 and 1994 were $5.34 billion and $4.67 billion, respectively. The sales increase was attributable to higher prices in most product lines, particularly for our chlor-alkali and derivative, fiber glass, and flat glass products, higher volumes in each of the business segments, and the favorable effects of foreign currency translation. The gross profit percentage increased to 40.6% from 38.7% in the prior year period primarily due to higher sales prices in all business segments. The negative effects of inflation partially offset these gains. Net income and earnings per share for the current year period were $606.4 million and $2.97, respectively, which included a $24.2 million after-tax gain ($0.12 per share) from a legal settlement of a glass technology dispute with Pilkington plc of England. In the prior year period, net income and earnings per share were $363.6 million and $1.71, respectively, including a $51.9 million ($0.24 per share) second quarter after-tax charge to divest the Biomedical Systems Division. Current period earnings were favorably impacted by the factors that contributed to the gross profit percentage improvement, the absence of the business divestiture charge, higher sales volumes, and increased other earnings which were attributable to several gains from legal settlements and higher earnings from our equity affiliates. Partially offsetting these items were higher income tax expense and increased other charges. The majority of the increase in other charges was the result of a charge for a legal dispute and higher environmental expense. Performance of Business Segments Coatings and resins sales increased to $2.11 billion in the first nine months of 1995 from $1.96 billion in the prior year period. Operating income for the corresponding periods was $363 million and $376 million, respectively. - 9 -
Contributing to the sales increase were higher volumes in most European product lines, particularly automotive original products, the favorable effects of translating European currencies, and stronger prices, primarily in our automotive refinish products. The effect of lower North American automotive refinish volume partially offset these improvements. Operating income declined as the negative effects of inflation, particularly on raw material costs, were only partially offset by increased volumes, higher prices, and gains from legal settlements. Glass sales increased to $2.01 billion in the nine-month period ended September 30, 1995, from $1.78 billion in the prior year period. Operating income increased to $404 million from $243 million in the corresponding 1994 period. Contributing to the sales increase were higher sales prices, principally for worldwide fiber glass and flat glass products and North American automotive replacement glass, higher volumes in most of the segment's major businesses, principally worldwide fiber glass and automotive original glass products, and the favorable effects of translating European currencies. The effect of lower volume in North American automotive replacement glass partially offset these improvements. Increased operating income was primarily the result of the factors that contributed to the sales increase and the gain from the first quarter legal settlement with Pilkington. The negative effects of inflation and higher overhead costs partially offset these improvements. Chemicals sales increased to $1.21 billion for the nine-month period ended September 30, 1995 from $937 million in the corresponding prior period. Operating income increased to $286 million from $139 million for the first nine months of 1994. The increase in sales was primarily attributable to substantial price gains for chlor-alkali and derivative products and volume improvements for specialty products, particularly Transitions (registered trademark) optical lenses. The increase in operating income was attributable to the factors that contributed to the sales increase. Partially offsetting these improvements were the negative effects of inflation, particularly on ethylene costs, increased other charges, the majority of which related to a charge for a legal dispute, increased environmental expenses, and a non- recurring freight charge, as well as higher overhead costs. The "other" segment's 1994 operating loss represents the charge to divest the Biomedical Systems Division. Other Factors Higher inventories were mainly due to a build-up in our coatings and resins segment, primarily in Europe, to support stronger sales volumes. Also contributing to the increase was the strengthening of certain European currencies against the U.S. dollar. The decline in investments was principally due to a loan taken against the cash surrender value of an investment in company-owned life insurance. Pension plan contributions were the main factors contributing to the increase in other assets. - 10 -
The increase in short-term debt and current portion of long-term debt was due to a reclassification of the portion of long-term notes maturing in the first nine months of 1996 to current liabilities, partially offset by the repayment of certain short-term borrowings with cash generated from operations. The corresponding decline in long-term debt was partially offset by the issuance of $100 million of non-callable 6 7/8% notes in August 1995. The ten million share repurchase program approved by PPG's Board of Directors in April 1995 has been completed. PPG's Board of Directors approved an additional repurchase of ten million shares of PPG common stock in October 1995. The shares may be repurchased in open market or private transactions and a timetable for this additional repurchase program has not been established. On November 8, 1995 the Company intends to file a Registration Statement on Form S-3 to cover offerings in the future of up to $500 million aggregate principal amount of debt securities. Such debt securities would be offered on terms to be determined at the time of the offering. The proceeds from the sale of such debt securities would be added to the Company's general funds and be used for general corporate purposes or for such purposes as may be disclosed at the time any debt is issued. Environmental Matters Management of the Company anticipates that the resolution of the environmental contingencies discussed below, which will occur over an extended period of time, will not result in future annual charges to income that are significantly greater than those recorded in recent years. It is possible, however, that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter this expectation. In management's opinion, the Company operates in an environmentally sound manner and the outcome of these environmental matters will not have a material effect on PPG's financial position or liquidity. To date, compliance with federal, state and local requirements has not had a material impact on PPG's financial position, results of operations or liquidity. It is PPG's policy to accrue expenses for environmental contingencies when it is probable that a liability exists and the amount of loss can be reasonably estimated. As of September 30, 1995 and December 31, 1994, PPG had environmental reserves totaling $97 million and $90 million, respectively. Charges against income for environmental remediation costs for the nine-month periods ended September 30, 1995 and 1994 were $35 million and $25 million, respectively. In addition to the amounts accrued, the Company may be subject to contingencies related to environmental matters estimated at the high end to be as much as $200 million to $400 million. Such aggregate losses are reasonably possible but not currently considered to be probable of occurrence. The Company's current environmental contingencies are expected to be resolved over a period of 20 years or more. These loss contingencies include significant unresolved issues such as the nature and extent of contamination, if any, at sites and the methods that may have to be employed should remediation be required. Although insurance may cover a portion of these costs, to the - 11 -
extent they are incurred, any potential recovery is not included in this unrecorded exposure to future loss. With respect to certain waste sites, the financial condition of any other potentially responsible parties also contributes to the uncertainty of estimating PPG's final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agency assertions of joint and several liability, in general, final allocations of costs are made based on the relative contributions of wastes to such sites. PPG is generally not a major contributor to such sites. Although the unrecorded exposure to future loss relates to all sites, a significant portion of such unrecorded exposure involves three operating plant sites and one closed plant site. Two of the sites are in the early stages of study, while the remaining two are further into the study phase. All four sites require additional study to assess the magnitude of contamination, if any, and the remediation alternatives. Business Divestiture PPG's operating results reflect the impact of the Company's programs to divest businesses and activities not meeting strategic or performance objectives. The 1994 charge pertains to the divestiture of the Biomedicals System Division. The majority of the charge was comprised of the reversal of a $60 million gain originally anticipated from divestiture of the division's sensors business at the time the decision was made to dispose of the division and reflects the general decline in health-care and related markets. Also, a $13 million charge was taken for additional operating losses anticipated because of extension of the expected disposal date as well as actual operating losses exceeding those originally estimated. With the sale of the sensors business in January 1995, the divestiture of the Biomedical Systems Division is complete. Foreign Currency and Interest Rate Risk As a multinational company, PPG manages its transaction exposure to foreign currency risk to minimize the volatility of cash flows caused by currency fluctuations. The Company manages its foreign currency transaction exposures principally through the purchase of forward and option contracts. It does not manage its exposure to translation gains and losses; however, by borrowing in local currencies it reduces such exposure. The market value of the forward and option contracts purchased and outstanding as of September 30, 1995, was not material. The Company manages its interest rate risk in order to balance its exposure between fixed and variable rates while attempting to minimize its interest costs. PPG principally manages its interest rate risk by retiring and issuing debt from time to time. To a limited extent, PPG manages its interest rate risk through the purchase of interest rate swaps. As of September 30, 1995 and December 31, 1994, the notional principal amounts and fair values of interest rate swaps held were not material. PPG's policies do not permit active trading of currency or interest rate derivatives. - 12 -
Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10.1) Nonqualified Retirement Plan as amended through September 20, 1995 (10.2) Supplemental Executive Retirement Plan II as amended through September 20, 1995 (10.3) Directors' Retirement Plan as amended through September 20, 1995 (10.4) Deferred Compensation Plan for Directors as amended through September 20, 1995 (10.5) Change in Control Employment Agreement (11) Computation of Earnings Per Share (27) Financial Data Schedule (b) Reports on Form 8-K The Company filed a Form 8-K on August 11, 1995, dated July 31, 1995, filing exhibits to become, by way of incorporation by reference, exhibits to Registration Statement No. 33-04983 on Form S-3. No financial statements were filed. The Company filed a Form 8-K on October 20, 1995, dated October 19, 1995. The report indicated that on October 19, 1995 the Board of Directors approved the repurchase of ten million shares of the Company's outstanding common stock, par value $1.66 2/3 per share. The shares may be repurchased in open market or private transactions and a timetable was not established for the repurchase. - 13 -
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PPG INDUSTRIES, INC. (Registrant) Date: November 8, 1995 /s/ W. H. Hernandez W. H. Hernandez Senior Vice President, Finance (Principal Financial and Accounting Officer and Duly Authorized Officer) - 14 -
PPG INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS Exhibit No. Description 10.1 Nonqualified Retirement Plan as amended through September 20, 1995 10.2 Supplemental Executive Retirement Plan II as amended through September 20, 1995 10.3 Directors' Retirement Plan as amended through September 20, 1995 10.4 Deferred Compensation Plan for Directors as amended through September 20, 1995 10.5 Change in Control Employment Agreement 11 Computation of Earnings Per Share 27 Financial Data Schedule