PPG: Quarterly Report

Performance in Second Quarter of 2002 Compared to Second Quarter of 2001 Performance Overview Sales decreased 1% for the second quarter of 2002 to $2.1 billion compared to $2.2 billion for the second quarter of 2001.

The decline in sales price of 3% in our glass and chemicals segments was offset by a 2% increase in volume in our coatings and chemicals business segments.

The gross profit percentage decreased slightly to 37.9% for the second quarter of 2002 compared to 38.0% for the second quarter of 2001. The decrease in the gross profit percentage was due to lower selling prices primarily in our glass and chemicals segments offset, in part, by improved manufacturing efficiencies across all of our business segments, lower energy costs and lower raw material costs in our coatings segment.

As a result of a charge for the asbestos settlement discussed in Note 11, "Commitments and Contingent Liabilities," to the condensed financial statements, PPG had a net loss of $345 million, or a loss per share - diluted, of $2.03 for the second quarter of 2002 compared to net income of $155 million, or earnings per share - diluted, of $0.92 for the same quarter in 2001. The net loss for the second quarter of 2002 included an after-tax charge of $495 million, or $2.92 per share, for the asbestos settlement. Excluding this charge, net income and earnings per share - diluted, for the second quarter of 2002 were $150 million and $0.89, respectively. The reversal in the second quarter of 2002 of a portion of the coatings restructuring reserve recorded in 2001 amounted to $4 million or $0.02 a share. The decrease in net income was due to lower selling prices in our glass and chemicals segments and an increase in pension and postretirement medical benefit costs of approximately $30 million offset, in part, by improved manufacturing efficiencies and lower overhead costs across all of our business segments and the benefit of goodwill and certain trademarks no longer being amortized due to the Company's adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which reduced 2001 second quarter earnings by $8 million after-tax, or $0.05 a share.

Performance of Business Segments

Coatings sales increased 2% to $1.19 billion compared to $1.17 billion for the second quarter of 2001. The combination of an increase in sales volume, primarily in our architectural, industrial and North American automotive original equipment businesses, increases in selling prices and the positive effects of foreign currency translation resulted in the sales improvement. Operating income was $211 million for the second quarter of 2002 compared to $175 million for the same quarter of 2001. The increase in operating income is attributable to higher selling prices and volume, lower raw material and overhead costs, improved manufacturing efficiencies, the benefit of goodwill and certain trademarks no longer being amortized due to the Company's adoption of SFAS No. 142 and the reversal of a previously recorded restructuring reserve.

Glass sales decreased 9% to $554 million compared to $608 million for the second quarter of 2001. The combination of a decrease in sales volume of 6%, 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 contributed to the sales decline. Operating income was $49 million for the second quarter of 2002 compared to $99 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 benefit costs offset, in part, by improved manufacturing efficiencies.

Chemicals sales of $393 million were comparable to $391 million for the second quarter of 2001. Sales increased 16% due to improved sales volume across all of our businesses offset by a 15% decline due to lower selling prices for our chlorine and other chlor-alkali products. Operating income was $22 million for the second quarter of 2002 compared to $26 million for the same quarter of 2001. The decrease in operating income is attributable to lower selling prices for our chlorine and other chlor-alkali products offset, in part, by lower energy costs, improved volume, particularly in our optical business and improved manufacturing efficiencies.

Performance in the First Six Months of 2002 Compared to the First Six Months of

Performance Overview

Sales decreased 6% for the first six months of 2002 to $4.0 billion compared to $4.3 billion for the first six months of 2001. The combination of a decline in sales price of 4% primarily in our glass and chemicals segments, a 1% decrease in volume primarily in our glass segment and a 1% decline due to the negative effects of foreign currency translation contributed to the sales decline.

The gross profit percentage decreased slightly to 37.3% for the first six months of 2002 compared to 37.5% for the first six months of 2001. The decrease in the gross profit percentage was due to lower selling prices offset, in part, by improved manufacturing efficiencies across all of our business segments, lower energy costs and lower raw material costs in our coatings segment.

As a result of a charge for the asbestos settlement discussed in Note 11, PPG had a net loss of $311 million, or a loss per share - diluted, of $1.83 for the first six months of 2002 compared to net income of $211 million, or earnings per share - diluted, of $1.25 for the first six months of 2001. The net loss for the first six months of 2002 included an after-tax charge of $495 million, or $2.92 per share, for the asbestos settlement, an after-tax charge of $55 million, or $0.33 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 six 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 six months of 2002 were $248 million and $1.47, respectively, compared to $282 million and $1.67, respectively, for the first six months of 2001. The reversal in the second quarter of 2002 of a portion of the coatings restructuring reserve recorded in 2001 amounted to $4 million or $0.02 a share. Also, in the first six months of 2002, the Company adopted the provisions of SFAS No. 142, resulting in a cumulative effect of an accounting change of $9 million after-tax to reflect an impairment in the carrying value of certain trademarks within the coatings segment. 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 six months of 2001 by $16 million after-tax, or $0.10 a share. Aside from the factors described above, the decrease in net income was due to lower selling prices in our glass and chemicals segments and an increase in pension and postretirement medical benefit costs of approximately $60 million offset, in part, by improved manufacturing efficiencies and lower overhead costs across all of our business segments.

Performance of Business Segments

Coatings sales decreased 1% to $2.24 billion compared to $2.27 billion for the first six months of 2001. The sales decrease relates primarily to lower sales volume in our aerospace and refinish businesses. Operating income was $282 million for the first six months of 2002 compared to $236 million for the first six months of 2001. Operating income for the first six

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 six months of 2002 and 2001 was $355 million and $319 million, respectively. The increase in operating income is attributable to lower raw material and overhead costs, improved manufacturing efficiencies, the benefit of goodwill and certain trademarks no longer being amortized due to the Company's adoption of SFAS No. 142 and the reversal of a previously recorded restructuring reserve.

Glass sales decreased 12% to $1.04 billion compared to $1.19 billion for the first six months of 2001. The combination of a decrease in sales volume of 9%, primarily in our automotive replacement glass, flat glass and fiber glass businesses and a 3% decline from lower selling prices across all of our businesses contributed to the sales decline. Operating income was $69 million for the first six months of 2002 compared to $184 million for the first six months of 2001. Operating income for the first six 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 six months of 2002 and 2001 was $70 million and $194 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 benefit costs offset, in part, by improved manufacturing efficiencies and lower overhead costs.

Chemicals sales decreased 9% to $728 million compared to $802 million for the first six months of 2001. The combination of lower selling prices of 16%, primarily of our chlorine and other chlor-alkali products and a 1% decline due to the negative effects of foreign currency translation were offset, in part, by the 8% increase in sales volumes in our optical business. Operating income was $49 million for both the first six months of 2002 and 2001. Operating income for the first six 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 six months of 2002 and 2001 was $50 million and $56 million, respectively. The decrease in operating income is attributable to lower selling prices for our chlorine and other chlor-alkali products offset, in part, by lower energy costs, improved volumes in our optical business, improved manufacturing efficiencies and lower overhead costs.

Other Factors

The reduction in other unallocated corporate expense - net for the first six months of 2002 as compared to the first six months of 2001 is principally due to the receipt of increased insurance litigation recoveries in 2002.

The Company's pretax loss for the first six months of 2002 included net periodic pension expense of $16 million as compared to net periodic pension income of $30 million for the comparable 2001 period. This trend will continue for the second half 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 an additional $40 million in 2003 if the investment returns do not improve in the second half of this year. Additionally, if the fair market value of pension plan assets is less than the accumulated benefit obligation at December 31, 2002, PPG would be required to record a minimum pension liability adjustment equal to the pension asset shortfall plus the amount of the related prepaid pension asset. The minimum pension liability adjustment would be determined separately for each pension plan and recorded net of tax by a direct charge to shareholders' equity. The fair market value of plan assets for all of the Company's defined benefit pension plans at June 30, 2002, was approximately $2.2 billion.

The Company has no mandatory pension funding requirements under existing regulations but may choose to make a contribution in the second half 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 six months of 2002 and 2001. For the first six months of 2002, the tax benefit of the restructuring charges and the asbestos settlement were 33.0% and 35.9%, respectively, which resulted in an overall effective tax benefit for the period at a rate of 35.2%. The overall effective tax rate for the first six months of 2001 was 37.9%, reflecting the impact of a lower tax benefit on restructuring charges.

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 six months of 2002, the net investment declined to $26 million at June 30, 2002, resulting in an unrealized currency translation loss of $42 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 June 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 new standards on the accounting for goodwill and intangible assets.

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 June 30, 2002 and December 31, 2001, PPG had reserves for environmental contingencies totaling $91 million and $94 million, respectively. Pretax charges against income for environmental remediation costs for the three and six months ended June 30, 2002 totaled $5 million and $8 million, respectively, and $3 million and $7 million, respectively, for the three and six months ended June 30, 2001, and are included in "Other, net" in the condensed statement of income. Cash outlays related to such environmental remediation for the six months ended June 30, 2002 and 2001 aggregated $11 million and $7 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 June 30, 2002.

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.

600450 PPG: Quarterly Report glassonweb.com

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