UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010 |
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) | |
Registrants telephone number, including area code: | 412-434-3131 |
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock Par Value $1.66 2/3 |
New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities
Act. YES x NO ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
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 checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller reporting company ¨ | |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act). YES ¨ NO x
The aggregate market value of common stock held by non-affiliates as of June 30, 2010, was $9,811 million.
As of January 31, 2011, 160,589,140 shares of the Registrants common stock, with a par value of $1.66 2/3 per share, were outstanding. As of that date, the aggregate market value of common stock held by non-affiliates was $13,508 million.
DOCUMENTS INCORPORATED BY REFERENCE
Document |
Incorporated By | |
Portions of PPG Industries, Inc. Proxy Statement for its 2011 |
III |
2010 PPG ANNUAL REPORT AND FORM 10-K | 3 |
PPG INDUSTRIES, INC.
AND CONSOLIDATED SUBSIDIARIES
As used in this report, the terms PPG, Company, Registrant, we, us and our refer to PPG Industries, Inc., and its subsidiaries, taken as a whole, unless the context indicates otherwise.
Note on Incorporation by Reference
Throughout this report, various information and data are incorporated by reference from the Companys 2010 Annual Report (hereinafter referred to as the Annual Report). Any reference in this report to disclosures in the Annual Report shall constitute incorporation by reference only of that specific information and data into this Form 10-K.
4 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Part I
PPG Industries, Inc., incorporated in Pennsylvania in 1883, is comprised of six reportable business segments: Performance Coatings, Industrial Coatings, Architectural Coatings EMEA (Europe, Middle East and Africa), Optical and Specialty Materials, Commodity Chemicals and Glass. Each of the business segments in which PPG is engaged is highly competitive. The diversification of product lines and worldwide markets served tend to minimize the impact on PPGs total sales and earnings from changes in demand for a particular product line or in a particular geographic area. Refer to Note 25, Reportable Business Segment Information under Item 8 of this Form 10-K for financial information relating to our reportable business segments.
Performance Coatings, Industrial Coatings and Architectural Coatings - EMEA
PPG is a major global supplier of protective and decorative coatings. The Performance Coatings, Industrial Coatings and Architectural Coatings EMEA reportable segments supply protective and decorative finishes for customers in a wide array of end use markets, including industrial equipment, appliances and packaging; factory-finished aluminum extrusions and steel and aluminum coils; marine and aircraft equipment; automotive original equipment; and other industrial and consumer products. In addition to supplying finishes to the automotive original equipment market (OEM), PPG supplies refinishes to the automotive aftermarket. PPG also supplies coatings to painting and maintenance contractors and directly to consumers for decoration and maintenance. The coatings industry is highly competitive and consists of a few large firms with global presence and many smaller firms serving local or regional markets. PPG competes in its primary markets with the worlds largest coatings companies, most of which have global operations, and many smaller regional coatings companies. Product development, innovation, quality and technical and customer service have been stressed by PPG and have been significant factors in developing an important supplier position by PPGs coatings businesses comprising the Performance Coatings, Industrial Coatings and Architectural Coatings EMEA reportable segments.
On January 2, 2008, PPG completed the acquisition of SigmaKalon Group (SigmaKalon), a worldwide coatings producer based in Uithoorn, Netherlands. The results of operations of SigmaKalon are included in PPGs consolidated financial statements from the acquisition date onward. The businesses acquired from SigmaKalon produce architectural, protective and marine and industrial coatings. The protective and marine and industrial coatings businesses of SigmaKalon are managed as part of PPGs previously existing coatings businesses. The SigmaKalon architectural coatings business in Europe, the Middle East and Africa is reported as a separate reportable business segment known as Architectural Coatings EMEA since 2008. This business represented about 70% of SigmaKalons preacquisition sales.
The Performance Coatings reportable segment is comprised of the refinish, aerospace, protective and marine and architectural Americas and Asia Pacific coatings businesses.
The refinish coatings business supplies coatings products for automotive and commercial transport/fleet repair and refurbishing, light industrial coatings for a wide array of markets and specialty coatings for signs. These products are sold primarily through distributors.
The aerospace coatings business supplies sealants, coatings, technical cleaners and transparencies for commercial, military, regional jet and general aviation aircraft and transparent armor for military land vehicles. PPG supplies products to aircraft manufacturers, maintenance and aftermarket customers around the world both on a direct basis and through a company-owned distribution network.
The protective and marine coatings business supplies coatings and finishes for the protection of metals and structures to metal fabricators, heavy duty maintenance contractors and manufacturers of ships, bridges, rail cars and shipping containers. These products are sold through the company-owned architectural coatings stores, independent distributors and directly to customers.
Product performance, technology, quality, distribution and technical and customer service are major competitive factors in these three coatings businesses.
The architectural coatings-Americas and Asia Pacific business primarily produces coatings used by painting and maintenance contractors and by consumers for decoration and maintenance. These coatings are sold under a number of brands. Architectural coatings Americas and Asia Pacific products are sold through a combination of company-owned stores, home centers, paint dealers, independent distributors and directly to customers. Price, product performance, quality, distribution and brand recognition are key competitive factors for the architectural coatings business. The architectural coatings-Americas and Asia Pacific business operates about 400 company-owned stores in North America and about 50 company-owned stores in Australia.
The major global competitors of the Performance Coatings reportable segment are Akzo Nobel NV, BASF Corporation, the DuPont Company, the Sherwin-Williams Company, Valspar Corporation and GKN plc. The average number of persons employed by the Performance Coatings reportable segment during 2010 was about 12,000.
2010 PPG ANNUAL REPORT AND FORM 10-K | 5 |
The Industrial Coatings reportable segment is comprised of the automotive OEM, industrial and packaging coatings businesses. Industrial, automotive OEM and packaging coatings are formulated specifically for the customers needs and application methods.
The industrial and automotive OEM coatings businesses sell directly to a variety of manufacturing companies. PPG also supplies adhesives and sealants for the automotive industry and metal pretreatments and related chemicals for industrial and automotive applications. PPG has established alliances with Kansai Paint, Helios Group and Asian Paints Ltd. to serve certain automotive original equipment manufacturers in various regions of the world. PPG owns a 60% interest in PPG Kansai Finishes to serve Japanese-based automotive OEM customers in North America and Europe. PPG owns a 60% interest in PPG Helios Ltd. to serve Russian-based automotive OEM customers in Russia and the Ukraine. PPG and Asian Paints currently each own a 50% interest in Asian PPG Paints to serve global and domestic-based automotive OEM customers in India. In January of 2011, PPG announced that it plans to expand the Asian PPG Paints joint venture and also create a second 50-50 joint venture with Asian Paints. The expansion of the existing joint venture will expand its scope to serve Indias industrial liquid, marine and consumer packaging coatings markets. The new venture will serve the protective, industrial powder, industrial containers and light industrial coatings markets. These transactions are subject to Indian regulatory approvals and are expected to be completed during 2011. PPG and Asian Paints have agreed that PPG will lead the existing joint venture and Asian Paints will lead the new venture.
The packaging coatings business supplies coatings and inks to the manufacturers of aerosol, food and beverage containers.
Product performance, technology, quality and technical and customer service are major competitive factors in the industrial coatings businesses. The major global competitors of the Industrial Coatings reportable segment are Akzo Nobel NV, BASF Corporation, the DuPont Company, Valspar Corporation and Nippon Paint. The average number of persons employed by the Industrial Coatings reportable segment during 2010 was about 7,900.
The Architectural Coatings EMEA business supplies a variety of coatings under a number of brands and purchased sundries to painting contractors and consumers in Europe, the Middle East and Africa. Architectural Coatings EMEA products are sold through a combination of about 600 company-owned stores, home centers, paint dealers, independent distributors and directly to customers. Price, product performance, quality, distribution and brand recognition are key competitive factors for this business. The major competitors of the Architectural Coatings EMEA reportable segment are Akzo Nobel NV and Materis Paints. The average number of persons employed by the Architectural Coatings EMEA reportable segment during 2010 was about 8,200.
Optical and Specialty Materials
PPGs Optical and Specialty Materials reportable segment is comprised of the optical products and silicas businesses. The primary Optical and Specialty Materials products are Transitions® lenses, optical lens materials and high performance sunlenses; amorphous precipitated silicas for tire, battery separator and other end-use markets; and Teslin® substrate used in such applications as radio frequency identification (RFID) tags and labels, e-passports, drivers licenses and identification cards. Transitions® lenses are processed and distributed by PPGs 51%-owned joint venture with Essilor International. In the Optical and Specialty Materials businesses, product quality and performance, branding, distribution and technical service are the most critical competitive factors. The major global competitors of the Optical and Specialty Materials reportable segment are Vision-Ease Lens, Corning, Inc., Acomon AG, Mitsui Chemicals, Inc., Rhodia, S.A. and Evonik Industries, A.G. The average number of persons employed by the Optical and Specialty Materials reportable business segment during 2010 was about 2,900.
Commodity Chemicals
PPG is a producer and supplier of basic chemicals. The Commodity Chemicals reportable segment produces chlor-alkali and derivative products, including chlorine, caustic soda, vinyl chloride monomer, chlorinated solvents, calcium hypochlorite, ethylene dichloride, hydrochloric acid and phosgene derivatives. Most of these products are sold directly to manufacturing companies in the chemical processing, rubber and plastics, paper, minerals, metals and water treatment industries. PPG competes with six other major producers of chlor-alkali products, including The Dow Chemical Company, Formosa Plastics Corporation, U.S.A., Georgia Gulf Corporation, Olin Corporation, Occidental Chemical Corporation and Shintech, Inc. Price, product availability, product quality and customer service are the key competitive factors. The average number of persons employed by the Commodity Chemicals reportable business segment during 2010 was about 2,000.
Glass
PPG is a producer of flat glass in North America and a global producer of continuous-strand fiber glass. The Glass reportable business segment is comprised of the flat glass (formerly known as performance glazings) and fiber glass businesses. PPGs major markets are commercial and residential construction and the wind energy, energy infrastructure, transportation and electronics industries. Most glass products are sold directly to manufacturing companies. PPG manufactures flat glass by the float process and fiber glass by the continuous-strand process.
The bases for competition in the Glass businesses are price, quality, technology and customer service. The Company competes with four major producers of flat glass including Asahi Glass Company, Cardinal Glass Industries, Guardian Industries and NSG Pilkington, and six major producers of fiber glass throughout the world,
6 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
including Owens Corning-Vetrotex, Jushi Group, Johns Manville Corporation, CPIC Fiberglass, AGY and Taishan Fiberglass. The average number of persons employed by the Glass reportable business segment during 2010 was about 3,100.
Historically, the Glass reportable segment included the automotive glass and services business. In September 2008, PPG completed a transaction by which it divested a majority interest in the automotive glass and services business. The results of this business through September 30, 2008 are reported as part of the Glass reportable segment in the consolidated financial statements under Item 8 of this Form 10-K. See Note 3, Divestiture of Automotive Glass and Services Business under Item 8 for additional information.
Raw Materials and Energy
The effective management of raw materials and energy is important to PPGs continued success. Our primary energy cost is natural gas used in our Commodity Chemicals and Glass businesses. Inclusive of the impact of PPGs natural gas hedging activities, PPGs 2010 natural gas cost decreased 12% in the U.S. compared to 2009.
During 2010, the incremental cost of coatings raw materials due to inflation was approximately $210 million. This compares to a benefit from lower coatings raw material prices of $150 million in 2009 and to raw material inflation of $150 million in 2008. Many of our coatings raw materials are petroleum based and changes in pricing for these raw materials traditionally lag oil price fluctuations by several months. While crude oil prices remained relatively stable through most of the year, the tightness of supply of several key raw materials along with unanticipated, stronger global demand drove market price increases in nearly all major coatings raw material categories. In addition, the adverse effects of a significant number of supplier disruptions, including force majeure declarations by key suppliers across most of our product portfolio, strained our supply chains and encouraged higher prices.
The Companys most significant raw materials are titanium dioxide, solvents and epoxy and other resins in the Coatings businesses; lenses, sand and soda ash in the Optical and Specialty Materials businesses; brine and ethylene in the Commodity Chemicals business; and sand, clay and soda ash in the Glass businesses. Energy is a significant production cost in the Commodity Chemicals and Glass businesses. Most of the raw materials and energy used in production are purchased from outside sources, and the Company has made, and plans to continue to make, supply arrangements to meet the planned operating requirements for the future. Supply of critical raw materials and energy is managed by establishing contracts, multiple sources, and identifying alternative materials or technology whenever possible. The Company is continuing its aggressive sourcing initiatives to support its continuous efforts to find the lowest raw material costs. These initiatives include reformulation of certain of our products using both petroleum-derived and bio-based materials as part of a product renewal strategy. Another initiative is to qualify multiple and local sources of supply, including suppliers from Asia and other lower cost regions of the world.
We are subject to existing and evolving standards relating to the registration of chemicals that impact or could potentially impact the availability and viability of some of the raw materials we use in our production processes. Our ongoing global product stewardship efforts are directed at maintaining our compliance with these standards.
In December 2006, the European Union (EU) member states adopted new comprehensive chemical management legislation known as REACH (Registration, Evaluation, and Authorization of Chemicals). REACH applies to all chemical substances manufactured or imported into the EU in quantities of one metric ton or more annually and will require the registration of approximately 30,000 chemical substances with the European Chemicals Agency. PPG met the requirements for pre-registration of such chemicals that ended on December 1, 2008. Additionally, REACH requires the registration of these substances, entailing the filing of extensive data on their potential risks to human health and the environment. Registration activities are occurring in three phases over an 11-year period, based on tonnage and level of concern. The first registration deadline was December 1, 2010. Subsequent phases end in 2013 and 2018. In the case of chemicals with a high level of concern, the regulation calls for progressive substitution unless no alternative can be found; in these cases, authorization of the chemicals will be required.
PPG has established a dedicated organization to manage REACH implementation. We have continued to review of our product portfolio, worked closely with our suppliers to assure their commitment to register substances in our key raw materials and begun preparation for registration of substances in PPG manufactured or imported raw materials. We will continue to work with our suppliers to understand the future availability and viability of the raw materials we use in our production processes.
Compliance with the REACH legislation will result in increased costs due to registration costs, product testing and reformulation, risk characterization and participation in Substance Information Exchange Forums (SIEFs) required to coordinate registration dossier preparation. PPG identified 10 substances that required registration in 2010 and engaged with other key companies through SIEFs to develop the required registration dossiers. The costs for 2013 and 2018 registrations and potential additional future testing in support of 2010 registrations are currently unclear; however, our current estimate of the total spend during 2011-2018 is in the range of $25 million to $40 million. We anticipate that some current raw materials and products will be subject to the REACH
2010 PPG ANNUAL REPORT AND FORM 10-K | 7 |
authorization process and believe that we will be able to demonstrate adequate risk management for the use and application of the majority of such substances.
Research and Development
Technology innovation has been a hallmark of PPGs success throughout its history. Research and development costs, including depreciation of research facilities, were $408 million, $403 million and $468 million during 2010, 2009 and 2008, respectively. These costs totaled approximately 3% of sales in each year of the period from 2008 to 2010. PPG owns and operates several facilities to conduct research and development relating to new and improved products and processes. Additional process and product research and development work is also undertaken at many of the Companys manufacturing plants. As part of our ongoing efforts to manage our formulations and raw material costs effectively, we operate a global competitive sourcing laboratory in China. We have obtained government funding of a small portion of the Companys research efforts and we will continue to pursue government funding. Because of the Companys broad array of products and customers, PPG is not materially dependent upon any single technology platform.
Patents
PPG considers patent protection to be important. The Companys reportable business segments are not materially dependent upon any single patent or group of related patents. PPG earned $58 million in 2010, $45 million in 2009 and $52 million in 2008 from royalties and the sale of technical know-how.
Backlog
In general, PPG does not manufacture its products against a backlog of orders. Production and inventory levels are geared primarily to projections of future demand and the level of incoming orders.
Non-U.S. Operations
PPG has a significant investment in non-U.S. operations. This broad geographic footprint serves to lessen the significance of economic impacts occurring in any one region. As a result of our expansion outside the U.S., we are subject to certain inherent risks, including economic and political conditions in international markets and fluctuations in foreign currency exchange rates.
Our sales generated by products sold in the developed and emerging regions of the world over the past three years are summarized below:
(millions) |
Sales |
|||||||||||
2010 |
2009 |
2008 |
||||||||||
United States, Canada, Western Europe |
$ | 9,837 | $ | 9,252 | $ | 12,420 | ||||||
Latin America, Eastern Europe, Middle East, Africa, Asia |
3,586 | 2,987 | 3,429 | |||||||||
Total |
$ |
13,423 |
|
$ |
12,239 |
|
$ |
15,849 |
|
Seasonality
PPGs earnings are typically greater in the second and third quarters and cash flow from operations is greatest in the fourth quarter due to end-use market seasonality, primarily in PPGs architectural coatings businesses. Demand for PPGs architectural coatings products is typically strongest in the second and third quarters due to higher home improvement, maintenance and construction activity during the spring and summer months in North America and Europe. This higher activity level results in higher outstanding receivables that are collected in the fourth quarter generating higher fourth quarter cash flow.
Employee Relations
The average number of persons employed worldwide by PPG at December 31, 2010 was 38,300. The Company has numerous collective bargaining agreements throughout the world. While we have experienced occasional work stoppages as a result of the collective bargaining process and may experience some work stoppages in the future, we believe we will be able to negotiate all labor agreements on satisfactory terms. To date, these work stoppages have not had a significant impact on PPGs operating results. Overall, the Company believes it has good relationships with its employees.
Environmental Matters
PPG is subject to existing and evolving standards relating to protection of the environment. Capital expenditures for environmental control projects were $16 million, $27 million and $15 million in 2010, 2009 and 2008, respectively. It is expected that expenditures for such projects in 2011 will be in the range of $15 - $20 million. Although future capital expenditures are difficult to estimate accurately because of constantly changing regulatory standards and policies, it can be anticipated that environmental control standards will become increasingly stringent and the cost of compliance will increase.
PPG completed the conversion of its Lake Charles, La., mercury cell chlor-alkali unit to membrane cell technology in 2007. PPG currently operates one remaining mercury cell production unit located in Natrium, W.Va. This unit constitutes approximately 4% of PPGs total chlor-alkali production capacity.
PPG is negotiating with various government agencies concerning 106 current and former manufacturing sites and offsite waste disposal locations, including 22 sites on the National Priority List. While PPG is not generally a major contributor of wastes to these offsite waste disposal locations, each potentially responsible party may face governmental agency assertions of joint and several liability. Generally, however, a final allocation of costs is made based on relative contributions of wastes to the site. There is a wide range of cost estimates for cleanup of these sites, due largely to uncertainties as to the nature and extent of their condition and the methods that may have to be employed for their remediation. The Company has
8 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
established reserves for onsite and offsite remediation of those sites where it is probable that a liability has been incurred and the amount can be reasonably estimated. As of December 31, 2010 and 2009, PPG had reserves for environmental contingencies totaling $272 million and $287 million, respectively, of which $83 million and $59 million, respectively, were classified as current liabilities. Pretax charges against income for environmental remediation costs in 2010, 2009 and 2008 totaled $21 million, $11 million and $15 million, respectively. Cash outlays related to such environmental remediation aggregated $34 million, $24 million and $24 million in 2010, 2009 and 2008, respectively. The impact of foreign currency translation decreased the liability by $2 million in 2010 and increased the liability by $1 million in 2009. Environmental remediation of a former chromium manufacturing plant site and associated sites in Jersey City, N.J. (which we refer to as New Jersey Chrome), represents the major part of our existing reserves. Included in the amounts mentioned above were $168 million and $188 million in reserves at December 31, 2010 and 2009, respectively, associated with all New Jersey chromium sites.
The Companys experience to date regarding environmental matters leads PPG to believe that it will have continuing expenditures for compliance with provisions regulating the protection of the environment and for present and future remediation efforts at waste and plant sites. Management anticipates that such expenditures will occur over an extended period of time.
Our continuing efforts to analyze and assess the environmental issues associated with a former chromium manufacturing plant site located in Jersey City, N.J., and the Calcasieu River Estuary located near our Lake Charles, La. chlor-alkali plant resulted in a pre-tax charge of $173 million in the third quarter of 2006 for the estimated costs of remediating these sites. These charges for estimated environmental remediation costs in 2006 were significantly higher than PPGs historical range. Excluding 2006, pre-tax charges against income have ranged between $10 million and $35 million per year for the past 15 years. We anticipate that charges against income in 2011 for environmental remediation costs will be within this historical range.
In managements opinion, the Company operates in an environmentally sound manner, is well positioned, relative to environmental matters, within the industries in which it operates and the outcome of these environmental contingencies will not have a material adverse effect on PPGs financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. See Note 16, Commitments and Contingent Liabilities, under Item 8 of this Form 10-K for additional information related to environmental matters.
Public and governmental concerns related to climate change continue to grow, leading to efforts to limit the greenhouse gas (GHG) emissions believed to be responsible. These concerns were reflected in the 2005 framework for GHG reduction under the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC). The Kyoto Protocol was adopted by many countries where PPG operates, including the European Union and Canada, though not by the U.S. The European Union implemented a cap and trade approach with a mandatory emissions trading scheme for GHGs. In December 2007, delegates to the UNFCCC reached agreement on development of a plan for the second phase of Kyoto, which culminated in the Copenhagen Accord in December 2009. The Copenhagen Accord requires Annex I Parties (economically developed countries) to further strengthen the emission reductions initiated by the Kyoto Protocol by submitting economy-wide emission targets for 2020. PPG has operations in many of these countries. However, there are indications that some influential Annex 1 and Non-Annex 1 countries may decide to reduce their emission targets or forego signing the Accord thereby putting the future of the entire Climate Change Convention into question.
A substantial portion of PPGs GHG emissions are generated by locations in the U.S., where considerable legislative and regulatory activity took place during 2009. As a result of a U.S. Supreme Court ruling in April 2007 declaring that GHGs are air pollutants covered by the Clean Air Act, the United States Environmental Protection Agency (USEPA) proposed and later finalized in December 2009 an Endangerment Finding that GHG emissions threaten public health and welfare of current and future generations. Based on the Endangerment Finding, the USEPA proposed then finalized new, tailored thresholds for GHG emissions that define when Clean Air Act New Source Review and title V operating permit programs would be required for new or existing industrial facilities. These rules impose new permit requirements on PPG facilities emitting more than 100,000 tons of GHGs per year as well as on new equipment installations that will emit more than 75,000 tons of GHGs per year. The U.S. federal government has committed to a 17% economy-wide emission reduction target below 2005 levels by 2020. The potential impact on PPG of the implementation of these requirements will not be known until related guidelines are proposed and finalized.
With the enactment of USEPAs own GHG reporting, verification, and permitting regulations, PPG made the decision to withdraw from the U. S. based Climate Registry program. With formal regulations in place, PPG no longer saw sufficient value in continuing to belong and pay dues to the voluntary program. Also in 2010, USEPA announced their decision to disband their own voluntary Climate Leaders program, of which PPG had been a
2010 PPG ANNUAL REPORT AND FORM 10-K | 9 |
member. PPG has, and will continue to, annually report our global GHG emissions to the voluntary Climate Disclosure project, which has ranked PPG as a leader in emissions disclosures and reduction.
Energy prices and supply continue to be a concern for major energy users. Since PPGs GHG emissions arise principally from combustion of fossil fuels, PPG has for some time recognized the desirability of reducing energy consumption and GHG generation. We committed under the Business Roundtables Climate RESOLVE program to reduce our GHG intensity (GHGs produced per million dollars of revenue) by 18% between 2002 and 2012. PPG achieved this target in 2006, six years ahead of schedule. Additionally, in 2007 PPG announced new corporate targets, namely (i) a reduction in energy intensity by 25% from 2006 to 2016 and (ii) a 10% absolute reduction in GHG emissions from 2006 to 2011. PPG has joined the U.S. Department of Energy Save Energy Now LEADER Program reinforcing the companys voluntary efforts to significantly reduce its industrial energy intensity. Recognizing the continuing importance of this matter, PPG has a senior management group with a mandate to guide the Companys progress in this area.
PPGs public disclosure on energy security and climate change can be viewed in our Sustainability Report http://corporateportal.ppg.com/ppg/csr or at the Carbon Disclosure Project www.cdproject.net.
Available Information
The Companys website address is www.ppg.com. The Company posts, and shareholders may access without charge, the Companys recent filings and any amendments thereto of its annual reports on Form 10-K, quarterly reports on Form 10-Q and its proxy statements as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission (SEC). The Company also posts all financial press releases and earnings releases to its website. All other reports filed or furnished to the SEC, including reports on Form 8-K, are available via direct link on PPGs website to the SECs website, www.sec.gov. Reference to the Companys and SECs websites herein does not incorporate by reference any information contained on those websites and such information should not be considered part of this Form 10-K.
As a global manufacturer of coatings, chemicals and glass products, we operate in a business environment that includes risks. These risks are not unlike the risks we have faced in the recent past. Each of the risks described in this section could adversely affect our operating results, financial position and liquidity. While the factors listed here are considered to be the more significant factors, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles which may adversely affect our business.
Increases in prices and declines in the availability of raw materials could negatively impact our financial results.
Our financial results are significantly affected by the cost of raw materials and energy, including natural gas. Changes in natural gas prices have a significant impact on the financial performance of our Commodity Chemicals and Glass businesses. Each one-dollar change in our unit cost of natural gas per million British Thermal Units (mmbtu) has a direct impact of approximately $60 million to $70 million on our annual operating costs. In 2010, our natural gas costs on average decreased almost 12% in the U.S. compared to 2009 levels. Year-over-year coatings raw material costs increased approximately $210 million following a decline of approximately $150 million in 2009. This increase in costs, which was partially linked to increased oil prices later in 2010, was driven by stronger emerging region demand, supply disruptions and lack of increased supplier capacity. Increases occurred in all regions of the world, with the most significant impact in North America and Europe.
We also import raw materials and intermediates, particularly for use at our manufacturing facilities in the emerging regions of the world. In most cases, those imports are priced in the currency of the supplier and, therefore, if that currency strengthens against the currency of our manufacturing facility, our margins are at risk of being lowered.
Additionally, certain raw materials are critical to our production processes. These include titanium dioxide, solvents and epoxy and other resins in the Coatings businesses; lenses, sand and soda ash in the Optical and Specialty Materials businesses; brine and ethylene in the Commodity Chemicals business; and sand, clay and soda ash in the Glass businesses. We have made, and plan to continue to make, supply arrangements to meet the planned operating requirements for the future. However, an inability to obtain these critical raw materials would adversely impact our ability to produce products and an increase in raw material and energy prices would increase our costs.
The lingering effects of the global recession in certain end-use markets could continue to have a negative impact on our results of operations and cash flows.
During the fourth quarter of 2008, the demand for many of our products in Europe, Asia and Latin America declined significantly as the impact of the recession, which had impacted demand throughout 2008 in the U.S. and U.K. economies, spread globally. Many global industrial end-markets remained depressed for most of 2009. The impact of the recession was felt by all of our businesses but most noticeably by those businesses serving the automotive original equipment, construction, residential and general industrial markets. During 2010, the global economy began to mend; however, the pace of recovery was uneven. Emerging economies rapidly returned to prerecession levels
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while volume recovery in developed regions was more gradual. There was also a contrast in the various end-use markets with global industrial end-use markets demonstrating a rapid and consistent recovery while construction markets, particularly commercial and residential, in the developed regions and parts of Eastern Europe remained depressed. The outlook for 2011 reflects expectations for the economic recovery to strengthen and broaden. The growth rate in emerging regions is expected to moderate somewhat but still easily outpace developed regions. It is anticipated that the North American recovery will continue with higher industrial activity and modest improvement in construction markets. The recovery rate in Europe is expected to once again lag that of Asia, Latin America and North America, as export growth moderates and further effects are realized from 2010 austerity measures put in place to ease concerns over European governmental debt loads. Construction markets in Western and Eastern Europe are forecasted to improve only slightly in 2011. It is anticipated that global industrial activity will grow, but at a slower rate than 2010 in many industries. Remaining at the current low activity levels in the commercial and residential construction markets of the developed regions and Eastern Europe would continue to result in low demand for many of our products that serve these markets and keep credit risk exposure elevated from customers most impacted by these industries. The extent of or the sustainability of the recovery in the global economy or which end-use markets and developed regions will rebound in 2011 is not known.
We experience substantial competition from certain low-cost regions.
Our flat glass and fiber glass businesses are subject to competition from companies in certain regions of the world, including Asia, Eastern Europe and Latin America, where labor costs are lower than those in the U.S. This could result in lower selling prices or reduced demand for some of our flat glass and fiber glass products.
We are subject to existing and evolving standards relating to the protection of the environment.
We have accrued $272 million for estimated environmental remediation costs that are probable at December 31, 2010. Our 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, and the potential for technological and regulatory developments. As such, in addition to the amounts currently reserved, we may be subject to loss contingencies related to environmental matters estimated to be as much as $200 million to $400 million which is a change from the previously reported range of $200 million to $300 million. This change in estimate relates principally to the cost of New Jersey Chrome and legacy glass manufacturing site remediation. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence.
We are involved in a number of lawsuits and claims, both actual and potential, in which substantial monetary damages are sought.
The results of any future litigation or settlement of such lawsuits and claims are inherently unpredictable, but such outcomes could be adverse and material in amount.
For over 30 years, we have been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos.
Most of our potential exposure relates to allegations by plaintiffs that PPG should be liable for injuries involving asbestos containing thermal insulation products manufactured by Pittsburgh Corning Corporation (PC). PPG is a 50% shareholder of PC. Although we have entered into a settlement arrangement with several parties concerning these asbestos claims as discussed in Note 16, Commitments and Contingent Liabilities, under Item 8 of this Form 10-K, the arrangement remains subject to court proceedings and, if not approved, the outcome could be material to the results of operations of any particular period.
Our products are subject to existing and evolving regulations.
Regulations concerning the composition and use of chemical products continue to evolve. Developments concerning these regulations could potentially impact (i) the availability or viability of some of the raw materials we use in our product formulations and/or (ii) our ability to supply certain products to some customers or markets. Import/export regulations also continue to evolve and could result in increased costs, slower product movements or additional complexity in our supply chains.
Our international operations expose us to additional risks and uncertainties that could affect our financial results.
PPG has a significant investment in non-U.S. operations. This broad geographic footprint serves to lessen the significance of economic impacts occurring in any one region. As a result of our expansion outside the U.S., we are subject to certain inherent risks, including economic and political conditions in the international markets and fluctuations in foreign currency exchange rates. Our percentage of sales generated in 2010 by products sold in developing regions, including Asia, Eastern Europe, the Middle East, Africa and Latin America was 27%.
As a producer of commodity chemicals, we manufacture and transport certain materials that are inherently hazardous due to their toxic nature.
We have significant experience in handling these materials and take precautions to handle and transport them in a safe manner. However, these materials, if mishandled or released into the environment, could cause substantial property damage or personal injuries resulting in significant legal claims against us. In addition, evolving regulations concerning the security of chemical production facilities and
2010 PPG ANNUAL REPORT AND FORM 10-K | 11 |
the transportation of hazardous chemicals could result in increased future capital or operating costs.
Business disruptions could have a negative impact on our results of operations and financial condition.
Unexpected events, including supply disruptions, temporary plant and/or power outages, natural disasters and severe weather events, fires, war or terrorist activities, could increase the cost of doing business or otherwise harm the operations of PPG, our customers and our suppliers. It is not possible for us to predict the occurrence or consequence of any such events. However, such events could reduce demand for our products or make it difficult or impossible for us to receive raw materials from suppliers or to deliver products to customers.
Item 1B. Unresolved Staff Comments
None.
The Companys corporate headquarters is located in Pittsburgh, Pa. The Companys manufacturing facilities, sales offices, research and development centers and distribution centers are located throughout the world. The Company operates 121 manufacturing facilities in 41 countries. The Companys principal manufacturing and distribution facilities are as follows:
Performance Coatings: |
Clayton, Australia; Delaware, Ohio; Dover, Del.; Huntsville, Ala.; Kunshan, China; Stowmarket, United Kingdom; Sylmar, Calif.; about 400 company-owned stores in the United States and about 50 company-owned stores in Australia | |
Industrial Coatings: |
Cieszyn, Poland; Cleveland, Ohio; Oak Creek, Wis.; Tianjin, China; Quattordio, Italy; San Juan del Rio, Mexico; Sumaré, Brazil and Busan, South Korea | |
Architectural CoatingsEMEA: |
Moreuil, France; Ruitz, France; Budapest, Hungary; Amsterdam, Netherlands; Wroclaw, Poland; Birstall, United Kingdom and about 600 company-owned stores, including 195 stores each in France and the United Kingdom | |
Optical and Specialty Materials: |
Barberton, Ohio; Bangkok, Thailand; Lake Charles, La. and Manila, Philippines | |
Commodity Chemicals: |
Lake Charles, La. and Natrium, W. Va. | |
Glass: |
Carlisle, Pa.; Hoogezand, Netherlands; Shelby, N.C. and Wichita Falls, Texas |
Including the principal manufacturing facilities noted above, the Company has manufacturing facilities in the following geographic areas:
United States: |
34 manufacturing facilities in 20 states. | |
Other Americas: |
9 manufacturing facilities in 5 countries. | |
EMEA: |
51 manufacturing facilities in 25 countries. | |
Asia: |
27 manufacturing facilities in 10 countries. |
The Companys principal research and development centers are located in Allison Park, Pa.; Harmarville, Pa.; and Monroeville, Pa.
The Companys headquarters and company-owned paint stores are located in facilities that are leased while the Companys other facilities are generally owned. Our facilities are considered to be suitable and adequate for the purposes for which they are intended and overall have sufficient capacity to conduct business in the upcoming year.
12 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
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, the most significant of which are described below, relate to contract, patent, environmental, product liability, antitrust and other matters arising out of the conduct of PPGs current and past business activities. To the extent that these lawsuits and claims involve personal injury and property damage, PPG believes it has adequate insurance; however, certain of PPGs 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. PPGs 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 results of any future litigation and the above lawsuits and claims are 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 PPGs 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.
For over 30 years, PPG has been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. For a description of asbestos litigation affecting the Company and the terms and status of the proposed asbestos settlement arrangement, see Note 16, Commitments and Contingent Liabilities under Item 8 of this Form 10-K.
As described in Note 16, the U.S. Department of Commerces Bureau of Industry and Security (BIS) and the U.S. Department of Justice conducted an investigation into violations of U.S. export control laws related to the exportation without the required export license of small quantities (approximately 1,000 gallons) of protective coatings for potential use in Pakistan in 2006. The Company cooperated with the government in this matter. The Company, with the assistance of outside counsel, conducted an investigation into these violations of the U.S. export control laws and responded to administrative and federal grand jury subpoenas. The Company also made disclosures of certain U.S. export control violations to the U.S. Department of Commerce related to this matter.
After reviewing the Companys voluntary self-disclosure, other documents submitted by the Company and the findings of its own investigation, on December 21, 2010 the U.S. Attorneys Office for the District of Columbia and BIS entered into an agreement with the Company and the Companys wholly-owned Chinese subsidiary, PPG Paints Trading (Shanghai) Co., Ltd. (SPT) to resolve this matter. As part of the settlement, the Company entered into a cooperation and non-prosecution agreement (NPA) with the Department of Justice under which the U.S. Attorneys Office for the District of Columbia agreed not to bring charges related to this matter against the Company or its affiliates (except SPT as noted below). The Company is required to meet the conditions of the NPA for two years, including reporting any future violations and maintaining an ethics and export compliance program. The Company also agreed to resolve the BIS investigation through the payment of a $750,000 civil penalty and a commitment to satisfy certain compliance and reporting obligations. In addition, SPT pled guilty in U.S. District Court to four charges under U.S. export control laws, paid fines of $3 million for civil and criminal violations, along with $32,319 in criminal forfeitures, and will serve five years of corporate probation. These costs were accrued in the fourth quarter of 2010 and are reported in Other charges in the consolidated statement of income for 2010.
Over the past several years, the Company and others have been named as defendants in several cases in various jurisdictions claiming damages related to exposure to lead and remediation of lead-based coatings applications. PPG has been dismissed as a defendant from most of these lawsuits and has never been found liable in any of these cases.
On March 16, 2009, PPG received a Notice of Intent (NOI) to file a Citizen Suit under the federal Clean Water Act from the West Virginia Rivers Coalition and Oceana. The NOI alleges that PPG exceeded permitted discharge limits at its Natrium, West Virginia plant. The West Virginia Department of Environmental Protection filed suit in State Court for the permit exceedances covered by the NOI and informed PPG that it intended to seek a civil penalty. Prior to the expiration of the 60-day notice period, a lawsuit was filed in state court by the West Virginia Department of Environmental Protection (WVDEP) for the same alleged violations described in the Citizen Suit NOI, blocking the Citizen Suit for the time being. Following extensive negotiations with WVDEP, PPG signed a Consent Order on June 10, 2010 to resolve the lawsuit initiated by the agency, which was entered by the court on August 18, 2010. The settlement calls for the payment of a cash civil penalty of $1.02 million in four installments and a commitment to spend an additional $350,000 for supplemental environmental projects. PPG will also be required to complete certain facility improvements designed to ensure the facilitys compliance with the mercury limits in its water discharge permit by July 2011, which are designed to achieve compliance with the facilitys water discharge permit. The
2010 PPG ANNUAL REPORT AND FORM 10-K | 13 |
Company has completed a pilot study to evaluate several wastewater treatment technologies for this purpose. Preliminary engineering design is underway for a treatment system which is currently projected to cost between $4 million and $6 million. The Company has accrued a reserve of $4.2 million at December 31, 2010 related to this matter.
PPG received a Consolidated Compliance Order and Notice of Proposed Penalty (CO/NOPP) from the Louisiana Department of Environmental Quality (LDEQ) in February 2006 alleging violation of various requirements of its Lake Charles, La. facilitys air permit based largely upon permit deviations self-reported by PPG. The CO/NOPP did not contain a proposed civil penalty. PPG filed a request for hearing and has engaged LDEQ in settlement discussions. Since 2006, PPG has held discussions with LDEQ to try to resolve the CO/NOPP. In April 2009, PPG offered to settle all of its self-reported air permit deviations through the first half of 2008 for a proposed penalty of $130,000. LDEQ responded to this settlement offer by asking PPG to make another offer that includes all self-reported air permit deviations through the end of 2009. PPG has increased its offer to settle this matter to $171,000.
Executive Officers of the Company
Set forth below is information related to the Companys executive officers as of February 17, 2011.
Name | Age | Title | ||||
Charles E. Bunch (a) |
61 | Chairman of the Board and Chief Executive Officer since July 2005 | ||||
J. Rich Alexander (b) |
55 | Executive Vice President, Performance Coatings since August 2010 | ||||
Pierre-Marie De Leener (c) |
53 | Executive Vice President, Architectural Coatings, Europe, Middle East and Africa since August 2010 and President, PPG Europe since July 2008 | ||||
Glenn E. Bost II (d) |
58 | Senior Vice President and General Counsel since July 2010 | ||||
Robert J. Dellinger (e) |
50 | Senior Vice President, Finance and Chief Financial Officer since October 2009 | ||||
Richard C. Elias (f) |
57 | Senior Vice President, Optical and Specialty Materials since July 2008 | ||||
Michael H. McGarry (g) |
52 | Senior Vice President, Commodity Chemicals since July 2008 | ||||
Cynthia A. Niekamp (h) |
51 | Senior Vice President, Automotive Coatings since August 2010 | ||||
Viktoras R. Sekmakas (i) |
50 | Senior Vice President, Industrial Coatings since August 2010 and President, PPG Asia/Pacific since March 2009 |
(a) | Mr. Bunch held the position of President and Chief Operating Officer from July 2002 until July 2005. |
(b) | Mr. Alexander became responsible for also managing the Glass segment in October 2010. Mr. Alexander held the position of Senior Vice President, Performance Coatings from May 2005 to August 2010 and held the position of Vice President, Industrial Coatings from July 2002 through April 2005. |
(c) | Mr. De Leener was appointed to Senior Vice President, Architectural Coatings, Europe, Middle East and Africa upon PPGs acquisition of SigmaKalon Group on January 2, 2008. He previously served as Chief Executive Officer of SigmaKalon Group from 1999 until January 2008. |
(d) | Mr. Bost held the position of Vice President and Associate General Counsel from July 2006 through June 2010. Previously, Mr. Bost served as Associate General Counsel, Operations from July 2005 through June 2006 and Assistant General Counsel, Operations from September 2000 through June 2005. |
(e) | Mr. Dellinger held the position of Senior Vice President, Finance and Chief Financial Officer Designate from September 2009 through October 2009. Prior to joining PPG, he held the position of Executive Vice President and Chief Financial Officer from October 2005 to September 2008 at Delphi Corporation and Executive Vice President and Chief Financial Officer from June 2002 through September 2005 at Sprint Corporation. |
(f) | Mr. Elias held the position of Vice President, Optical Products from April 2000 until June 2008. |
(g) | Mr. McGarry held the positions of Vice President, Coatings, Europe and Managing Director, PPG Europe from July 2006 through June 2008; and the position of Vice President, Chlor-Alkali and Derivatives from March 2004 through June 2006. |
(h) | Ms. Niekamp was appointed Vice President, Automotive Coatings in January 2009 when she joined PPG from BorgWarner, Inc. She previously served as President of BorgWarners TorqTransfer Systems business from 2004 until 2008. |
(i) | In addition to serving as President, Asia/Pacific, Mr. Sekmakas held the position of Vice President Industrial Coatings from March 2010 through July 2010. He was appointed President, Asia/Pacific in March 2009. Previously, Mr. Sekmakas, served as Vice President, Asia/Pacific from July 2006 through February 2009, Managing Director, Coatings and General Manager Industrial Coatings Asia from March 2005 through June 2006 and General Manager Asia/Pacific Industrial Coatings from April 2001 through February 2005. |
14 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Part II
Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The information required by Item 5 regarding market information, including stock exchange listings and quarterly stock market prices, dividends and holders of common stock is included in Exhibit 13.1 filed with this Form 10-K and is incorporated herein by reference. This information is also included in the PPG Shareholder Information on page 83 of the Annual Report to shareholders.
Directors who are not also officers of the Company receive common stock equivalents pursuant to the PPG Industries, Inc., Deferred Compensation Plan for Directors (PPG Deferred Compensation Plan for Directors). 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 afforded to a holder of common stock. The common stock equivalents credited to directors under this plan 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 plan.
Under the PPG Deferred Compensation Plan for Directors, each director may elect to defer the receipt of all or any portion of the compensation paid to such director for serving as a PPG director. 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). The directors, as a group, were credited with 15,647; 22,103; and 9,751 common stock equivalents in 2010, 2009 and 2008, respectively, under this plan. The values of the common stock equivalents, when credited, ranged from $60.36 to $80.90 in 2010, $34.34 to $58.51 in 2009 and $43.89 to $67.77 in 2008.
Issuer Purchases of Equity Securities
The following table summarizes the Companys stock repurchase activity for the three months ended December 31, 2010:
Month | Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of
Shares as Part of |
Maximum that May |
||||||||||||||
October 2010 | ||||||||||||||||||
Repurchase programs |
360,000 | $ | 76.77 | 360,000 | 12,762,726 | |||||||||||||
Other transactions(2) |
74,944 | 77.32 | ||||||||||||||||
November 2010 | ||||||||||||||||||
Repurchase programs |
1,707,746 | 77.42 | 1,707,746 | 11,054,980 | ||||||||||||||
Other transactions(2) |
9,255 | 77.53 | ||||||||||||||||
December 2010 | ||||||||||||||||||
Repurchase programs |
1,829,592 | 82.52 | 1,829,592 | 9,225,388 | ||||||||||||||
Other transactions(2) |
21,102 | 81.48 | ||||||||||||||||
Total quarter ended December 31, 2010 |
||||||||||||||||||
Repurchase programs |
3,897,338 | $ | 79.75 | 3,897,338 | 9,225,388 | |||||||||||||
Other transactions(2) |
105,301 | 78.17 |
(1) | These shares were repurchased under a 5 million share repurchase program approved by PPGs Board of Directors in December 2009 as well as an additional 10 million share repurchase program approved in October 2010. The December 2009 repurchase program was concluded in December 2010. The October 2010 repurchase program has no expiration date. |
(2) | Includes shares withheld or certified to in satisfaction of the exercise price and/or tax withholding obligation by holders of employee stock options who exercised options granted under the Companys equity compensation plans. |
Item 6. Selected Financial Data
The information required by Item 6 regarding the selected financial data for the five years ended December 31, 2010 is included in Exhibit 13.2 filed with this Form 10-K and is incorporated herein by reference. This information is also reported in the Five-Year Digest on page 82 of the Annual Report to shareholders.
2010 PPG ANNUAL REPORT AND FORM 10-K | 15 |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Performance in 2010 compared with 2009
Performance Overview
Our sales in 2010 totaled $13.4 billion compared to $12.2 billion in 2009. The sales increase totaled 10%. Sales increased 8% due to higher sales volumes in all reportable segments, except Architectural Coatings - EMEA, reflecting the partial recovery from the impact of the global recession on demand, 1% due to higher selling prices and the remainder due to foreign currency and acquisitions.
Cost of sales, exclusive of depreciation and amortization, increased by $675 million in 2010 to $8,214 million compared to $7,539 million in 2009. Cost of sales as a percentage of sales was 61.2% in 2010 compared to 61.6% in 2009. The negative impact of inflation on cost of sales in 2010 was offset by increases in selling prices and lower manufacturing costs. The incremental sales volume in 2010 delivered an above average gross margin. These factors combined to produce the reduction in cost of sales as a percentage of sales.
Selling, general and administrative expenses increased by $43 million in 2010 compared to 2009 due to higher sales volumes, inflation and currency, offset partially by specific overhead cost reduction actions. Selling, general and administrative costs as a percentage of sales were 22.2% in 2010, down from 24.0% in 2009.
During the first quarter of 2009, the Company finalized a restructuring plan that was focused on further reducing PPGs global cost structure. The Company recorded a charge of $186 million for the cost of these restructuring actions.
Other charges increased by $19 million due principally to higher environmental remediation expense compared with the prior year.
Other earnings increased by $36 million in 2010 due primarily to higher equity earnings and royalties, offset partially by the absence of gains on non-operating asset sales that occured in 2009.
The effective tax rate on pretax earnings in 2010 was 32.0% compared to 31.0% in 2009. The 2010 rate includes expense of $85 million resulting from the reduction of our previously provided deferred tax asset related to our liability for retiree medical costs. The deferred tax asset needed to be reduced because the healthcare legislation enacted in March 2010 included a provision that reduces the amount of retiree medical costs that will be deductible after December 31, 2012. The 2010 rate also includes a $5 million benefit as a result of enacted changes in statutory tax rates outside the U.S. and a tax benefit of 38% on the adjustment to increase the current value of the Companys obligation relating to asbestos claims under the proposed settlement, as discussed in Note 16, Commitments and Contingent Liabilities under Item 8 of this Form 10-K. The rate was approximately 26% on the remaining pretax earnings in 2010.
The 2009 rate includes a tax benefit of $2 million related to audit settlements and a tax benefit of 24.5% related to the business restructuring charge. The rate for 2009 also includes a tax benefit of 38% on the adjustment to increase the current value of the Companys obligation relating to asbestos claims. The rate was approximately 30% on the remaining pretax earnings in 2009.
The decrease in the tax rate on the remaining pretax earnings in 2010 is mainly the result of shifts in the geographic mix of pretax earnings to lower taxed regions of the world.
Net income (attributable to PPG) and earnings per share assuming dilution (attributable to PPG) for 2010 and 2009 are summarized below:
(Millions, except per share amounts) | ||||||||
Year ended December 31, 2010 | Net Income | |||||||
$ | EPS | |||||||
Net income (attributable to PPG) |
$ | 769 | $ | 4.63 | ||||
Net income (attributable to PPG) includes: | ||||||||
Charges related to: |
||||||||
Change in U. S. Tax Law (U. S. Patient Protection and Affordable Care Act) |
85 | 0.51 | ||||||
Asbestos settlement net(1) |
8 | 0.04 |
(Millions, except per share amounts) | ||||||||
Year ended December 31, 2009 | Net Income | |||||||
$ | EPS | |||||||
Net income (attributable to PPG) |
$ | 336 | $ | 2.03 | ||||
Net income (attributable to PPG) includes: | ||||||||
Charges related to: |
||||||||
Business restructuring |
141 | 0.86 | ||||||
Asbestos settlement net(1) |
8 | 0.05 |
(1) | Net increase in the current value of the Companys obligation relating to asbestos claims under the proposed asbestos settlement. |
Results of Reportable Business Segments
Net sales | Segment income (loss) | |||||||||||||||
(Millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Performance Coatings |
$ | 4,281 | $ | 4,095 | $ | 661 | $ | 551 | ||||||||
Industrial Coatings |
3,708 | 3,068 | 378 | 159 | ||||||||||||
Architectural Coatings EMEA |
1,874 | 1,952 | 113 | 128 | ||||||||||||
Optical and Specialty Materials |
1,141 | 1,002 | 307 | 235 | ||||||||||||
Commodity Chemicals |
1,434 | 1,273 | 189 | 152 | ||||||||||||
Glass |
985 | 849 | 74 | (39 | ) |
Performance Coatings sales increased $186 million or 5% in 2010. Sales improved 3% due to improved pricing and 2% due to the effects of currency, along with slight volume increases. Volume increases in the refinish, aerospace and protective and marine coatings businesses were offset by a mid-single digit percentage volume decline in the architectural-Americas and Asia Pacific coatings business. Segment income in 2010 increased $110 million lead by the automotive refinish, protective
16 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
and marine coatings and aerospace businesses. The negative earnings impact of inflation was offset by favorable pricing and lower manufacturing costs. Lower overhead costs and the improved margin mix from volume growth in the refinish, aerospace and protective and marine coatings businesses drove the increased segment earnings.
Industrial Coatings sales increased $640 million or 21% in 2010. Sales increased 19% due to higher sales volumes, most notably in the automotive OEM business and the industrial businesss emerging regions, reflecting the gradual recovery from the global recession. Sales also increased due to favorable pricing and the impact of foreign currency translation. Segment income improved $219 million in 2010, including about $260 million due to increased volumes, partially offset by the negative impact of inflation net of increases in selling prices and lower manufacturing and overhead costs.
Architectural Coatings - EMEA sales decreased $78 million or 4% in 2010. Sales decreased 4% due to the negative impact of foreign currency translation. A mid-single digit percentage decline in sales volume was offset by increases in selling prices and the impact of acquisitions. Segment income decreased $15 million in 2010. The earnings impact of lower sales volumes and mix combined with inflation were not fully offset by lower overhead costs and higher selling prices.
Optical and Specialty Materials sales increased $139 million or 14% in 2010 due primarily to increased volumes in both the optical and silicas businesses. Segment income increased $72 million in 2010. The increase in segment income was primarily the result of higher sales volumes, which was partially offset by higher selling and advertising costs to support the increased optical volumes.
Commodity Chemicals sales increased $161 million or 13% in 2010. Sales improved 15% due to higher volumes, partially offset by a 3% decline in pricing for the year. The impact of foreign currency translation was slightly positive. Segment income increased $37 million in 2010 due to higher volumes as well as favorable manufacturing and overhead costs. Factors that contributed to offsetting some of the earnings improvement were lower pricing and cost inflation.
Glass sales increased $136 million or 16% in 2010. The increase in sales was due to higher sales volumes in the fiber glass business partially offset by lower flat glass pricing. Segment income increased $113 million in 2010 due to the higher fiber glass sales volumes, lower manufacturing costs and higher equity earnings, partially offset by lower flat glass pricing.
Outlook
In 2010, the global economy continued to mend from the severe recession that began during 2008 and continued through most of 2009. The pace of recovery was uneven, with emerging economies rapidly returning to prior activity levels, while volume recovery in many developed economies has been gradual and has not yet returned to 2008 levels. There was also a contrast in the pace of recovery by end-market. Global industrial end-markets, which were some of the most significantly impacted end-markets during the recession, demonstrated a more rapid and consistent recovery throughout the year in nearly all regions. Activity levels in construction markets in the developed regions remained challenging, but rose in many emerging regions. Despite the recovery, activity levels in most developed regions still remain well below pre-recession levels, while emerging regions are at or above pre-recession levels. After falling in 2009 due to the recession, global prices of energy and many related commodities rose in 2010 in recognition of the stronger demand from the gradual economic recovery while supplies of many materials were tight.
The North American economy generally followed the global trends with improving industrial activity, including nearly 40 percent growth in automotive OEM production, versus a recession-impacted 2009. Automotive production and sales levels were very consistent throughout the year. Construction markets in North America showed initial signs of a potential recovery early in the year, but demand faded, and annual activity levels were negative once again in both the residential and commercial construction segments. Recovery was evident in other end-markets, such as aerospace, transportation and consumer products. Despite the improved economic pace, several factors limited further recovery, including the U.S. unemployment rate, which remained at a high historical level, and a focus on limiting governmental spending and debt loads, including the removal of economic stimulus actions instituted during the recession.
The rate of recovery in the European economy in 2010 underperformed in comparison with most other major economies, led by recurring concerns over governmental spending and the ability to sustain or refinance government debt loads. Several major European countries initiated significant austerity measures to reign in spending and maintain access to the debt markets. Eastern European activity levels were mixed, with several countries returning to a growth bias, while others remained mired in the recession. Unemployment levels in most countries in the region remained high, and the effects of the austerity measures were not fully reflected given that most of them were only beginning to be implemented in the latter stages of 2010. One area where improvement was realized was in higher industrial exports from the region.
Many of the major emerging economies in which we participate, such as Asia and Latin America, maintained late 2009 economic momentum and grew throughout 2010, in many cases surpassing pre-recession economic activity levels. Industrial growth rates remained high, including mid-teen percentage growth in China, as
2010 PPG ANNUAL REPORT AND FORM 10-K | 17 |
exports were coupled with higher local consumption. Other regions, such as Latin America and India, also delivered rapid growth throughout the year. These strong growth rates have resulted in some governmental actions to remove previous economic stimulus programs or to dampen the rate of rapid growth. Some initiatives were also a reflection of concerns over inflation driven by the rapid growth.
Entering 2011, the expectation is for economic recovery to strengthen and broaden in most end-markets and most regions. The growth rate in emerging regions is expected to moderate somewhat, but still easily outpace the developed regions. It is anticipated that the North American recovery will continue with higher industrial activity and construction markets no longer acting as a headwind. The recovery rate in Europe in 2011 is expected to once again lag that of Asia, Latin America and North America, as export growth moderates and further impacts are realized from the 2010 austerity measures.
In the middle of 2010, commodity and oil prices began to inflate, and it is anticipated that these prices will remain at elevated levels during 2011. PPG typically experiences fluctuating prices for energy and raw materials used in many of our businesses. Factors which impact our input prices are supply/demand imbalances, global industrial activity levels and changes in supplier feedstock costs. Lower activity levels in 2009 resulted in a decline of $150 million in our coatings raw material costs, and the economic recovery in 2010 resulted in an approximate $210 million increase in these costs, primarily in the second half of the year. We also had inflation in 2008 and 2007 of $150 million and $40 million, respectively. Our current forecast for the early portion of 2011 is for persistent raw material inflation to continue. Given the volatile supply/demand, energy cost and currency environment, it is not feasible to project full year raw material pricing.
Changes in natural gas pricing have a significant impact on the financial performance of our Commodity Chemicals and Glass businesses. Each one dollar change in our unit price of natural gas per million British thermal units (mmbtu) has a direct impact of $60 million to $70 million on our annual operating costs. Our 2010 natural gas costs averaged nearly $5.50 per mmbtu for the year, while our 2009 costs averaged about $6.15 per unit. We currently estimate our cost for natural gas in the first quarter of 2011 will be between $5.00 and $5.25 per mmbtu. We currently have about 12% of full year 2011 U.S. natural gas needs hedged at a price of about $7.50 per unit from hedges placed prior to 2010, including about 18% of our first quarter needs at a price of about $8.00 per unit. We have additional hedges for the first quarter, equating to an additional 10 percent of needs and additional hedges for the hurricane months of August through October representing roughly 12% of our needs, which were contracted more recently at closer to current spot pricing, which is about $4.50 per unit. While it remains difficult to predict future natural gas prices, in order to reduce the risks associated with volatile prices, we will continue to use a variety of techniques, which include reducing consumption through improved manufacturing processes, switching to alternative fuels and hedging.
In an effort to offset the impacts of energy and raw materials cost inflation on earnings, during 2010, PPG initiated higher selling prices in all operating segments. The Company has historically raised selling prices to counteract the negative earnings impact from this inflation. The higher pricing did not fully counter inflation in our coatings segments in the second half of 2010, which resulted in margin compression in these segments. However, reflecting strong demand, Commodity Chemicals pricing improved throughout the year and served as an offset to the higher overall inflation for PPG late in the year. Additional pricing efforts are underway for 2011 in all of our reporting segments to address the inflation we experienced in the second half of 2010. We intend to supplement these sales gains with continued cost actions as necessary to fully offset the earnings impact of raw material cost inflation.
Our pension and postretirement benefit costs were $258 million in 2010, a decrease of about $69 million from 2009. These costs are expected to decline in 2011 by about $20 million to $30 million, including the benefit of our January 2011 plan design change. During 2010 and 2009, PPGs contributions to our pension plans totaled about $340 million and $450 million, respectively, and we anticipate 2011 contributions will be in the range of $100 million to $125 million.
The Company announced significant restructuring actions in both the third quarter of 2008 and the first quarter of 2009, in recognition of recession-driven lower demand levels, that focused on reducing our cost structure, including actions associated with achieving the synergies from the integration of the acquired SigmaKalon business. The total annual savings from these fully completed actions is about $250 million, including incremental realized savings in 2010 of about $100 million. These actions are complete, and all of the savings were realized by the end of 2010.
We expect our ongoing tax rate in 2011 to be in the range of 26% to 27%, consistent with the 2010 rate. The reduction we have achieved in 2010 in our ongoing tax rate reflects our sales and earnings growth outside the U.S. where corporate income tax rates are lower, particularly in Asia/Pacific and Europe.
The current global economic outlook for 2011 reflects a broadening of the current recovery. As such, PPG expects to see higher demand in 2011 compared with 2010 but intends to remain focused on continued cost management. The Company also entered 2011 with about $2 billion in cash and short-term investments, which is a historically high level
18 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
for the Company and includes proceeds from a $1 billion debt offering in November of 2010. Despite the recession, the Companys cash generation has been consistent and at or near record levels the past three years. A stronger operating focus has resulted in lower operating working capital over that same time period. The strengthening economic recovery, our broad geographic footprint, the reductions we have made in our cost structure and our substantial financial flexibility give us optimism regarding the Companys prospects for 2011.
Accounting Standards Adopted in 2010
Note 1, Summary of Significant Accounting Policies, under Item 8 describes the Companys recently adopted accounting pronouncements.
Accounting Standards to be Adopted in Future Years
There are no new accounting standards that have been promulgated prior to December 31, 2010 but not effective until a future date.
Performance in 2009 compared with 2008
Performance Overview
Our sales in 2009 totaled $12.2 billion compared to $15.8 billion in 2008. The sales decrease totaled 23%. Sales decreased 13% due to lower sales volumes in all reportable segments reflecting the adverse impact of the global recession on demand, 4% due to weaker foreign currency, 5% due to the absence of sales from the divested automotive glass and services business and 1% due to lower selling prices.
Cost of sales, exclusive of depreciation and amortization, decreased by $2,616 million in 2009 to $7,539 million compared to $10,155 million in 2008. Cost of sales as a percentage of sales was 61.6% in 2009 compared to 64.1% in 2008. Cost of sales in 2008 includes $94 million for the flow through cost of sales of the step up to fair value of acquired inventory. The reduction in cost of sales as a percentage of sales was due to our higher margin coatings businesses being a larger portion of our total 2009 results, favorable manufacturing cost efficiency and favorable price net of inflation.
Selling, general and administrative expenses decreased by $496 million in 2009 compared to 2008 due to lower sales volumes, specific overhead cost reduction actions taken in response to the decline in the global economy, the impact of foreign currency translation and the absence of the 2008 charge of $19 million for special termination benefits and a pension curtailment loss relating to the sale of the automotive glass and services business.
Depreciation expense decreased by $74 million in 2009 due to the impact of foreign currency translation, our restructuring actions and the divestiture of the automotive glass and services business. Research and development costs decreased by $63 million in 2009 largely due to cost reduction efforts and the impact of foreign currency translation. Interest expense decreased by $61 million in 2009, reflective of the lower debt balances and lower interest rates in 2009.
During the first quarter of 2009, the Company finalized a restructuring plan that is focused on further reducing PPGs global cost structure. The Company recorded a charge of $186 million for the cost of this restructuring. During the third quarter of 2008, the Company finalized a restructuring plan that is part of implementing PPGs global transformation strategy and the integration of its acquisition of SigmaKalon. The Company recorded a charge of $163 million for the cost of this restructuring.
Other earnings increased by $13 million in 2009 due primarily to the impact of gains on non-operating asset sales.
The effective tax rate on pretax earnings in 2009 was 31.0% compared to 31.3% in 2008. The 2009 rate includes a tax benefit of $2 million related to audit settlements. The 2009 rate also includes a tax benefit of 24.5% related to the business restructuring charge and a tax benefit of 38% related to the adjustment to increase the current value of the Companys obligation relating to asbestos claims under the proposed asbestos settlement, as discussed in Note 16, Commitments and Contingent Liabilities under Item 8 of this Form 10-K. The tax rate was approximately 30% on the remaining pretax earnings in 2009.
The 2008 rate includes a tax benefit of $14 million related to the settlement with the Internal Revenue Service of our U.S. tax returns for tax years 2004, 2005 and 2006. The 2008 rate also includes a total net tax benefit of 26.5% on costs related to the acquisition of SigmaKalon, the charges for the catch-up of depreciation expense and the impact of benefit changes related to the divestiture of the automotive glass and services business, the business restructuring charge, the adjustment to increase the current value of the Companys obligation under the proposed asbestos settlement and the gain on divestiture of the automotive glass and services business. The tax rate was approximately 31% on the remaining pretax earnings in 2008.
2010 PPG ANNUAL REPORT AND FORM 10-K | 19 |
Net income (attributable to PPG) and earnings per share assuming dilution (attributable to PPG) for 2009 and 2008 are summarized below:
(Millions, except per share amounts) | ||||||||
Year ended December 31, 2009 | Net Income | |||||||
$ | EPS | |||||||
Net income (attributable to PPG) |
$ | 336 | $ | 2.03 | ||||
Net income (attributable to PPG) includes: | ||||||||
Charges related to: | ||||||||
Business restructuring |
141 | 0.86 | ||||||
Asbestos settlement net(1) |
8 | 0.05 |
(Millions, except per share amounts) | ||||||||
Year ended December 31, 2008 | Net Income | |||||||
$ | EPS | |||||||
Net income (attributable to PPG) |
$ | 538 | $ | 3.25 | ||||
Net income (attributable to PPG) includes: | ||||||||
Charges related to: | ||||||||
Business restructuring |
110 | 0.67 | ||||||
Asbestos settlement net(1) |
2 | 0.01 | ||||||
Acquisition-related costs(2) |
89 | 0.54 | ||||||
Depreciation catch-up(3) |
11 | 0.07 | ||||||
Divestiture related benefit costs(4) |
12 | 0.07 | ||||||
Gain on divestiture of automotive glass and services business |
(3 | ) | (0.02 | ) |
(1) | Net increase in the current value of the Companys obligation relating to asbestos claims under the proposed asbestos settlement. |
(2) | Costs related to SigmaKalon acquisition, including $66 million aftertax for the flow-through cost of sales of the step up to fair value of acquired inventory and $23 million aftertax for the write-off of in-process research and development. |
(3) | Represents the catch-up of depreciation expense, which was suspended when the automotive glass and services business was classified previously as a discontinued operation. |
(4) | Represents special termination benefits and a pension curtailment loss relating to the impact of benefit changes, including accelerated vesting, negotiated as part of the sale of the automotive glass and services business. |
Results of Reportable Business Segments
Net sales | Segment income (loss) | |||||||||||||||
(Millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Performance Coatings |
$ | 4,095 | $ | 4,716 | $ | 551 | $ | 582 | ||||||||
Industrial Coatings |
3,068 | 3,999 | 159 | 212 | ||||||||||||
Architectural Coatings EMEA |
1,952 | 2,249 | 128 | 141 | ||||||||||||
Optical and Specialty Materials |
1,002 | 1,134 | 235 | 244 | ||||||||||||
Commodity Chemicals |
1,273 | 1,837 | 152 | 340 | ||||||||||||
Glass |
849 | 1,914 | (39 | ) | 70 |
Performance Coatings sales decreased $621 million or 13% in 2009. Sales declined 13% as a result of lower sales volumes, particularly in the automotive refinish business and architectural coatings Americas and Asia/Pacific businesses. The volume decline in automotive refinish was most pronounced in the U.S. and Europe, while the decline in architectural coatings was mainly in the U.S. and Latin America. Weaker foreign currency also reduced sales by 3%. Sales increased 3% due to improved pricing. Segment income in 2009 decreased $31 million, including a decline of $24 million due to currency. The earnings impact of lower sales volume was largely offset by favorable pricing and lower overhead, manufacturing and input costs.
Industrial Coatings sales decreased $931 million or 23% in 2009. Sales decreased 21% due to lower sales volumes, most notably in the automotive OEM and industrial businesses, reflecting the severe decline in demand resulting from the global recession. Volume declines in the segment occurred in all major regions. Sales also declined 3% due to the negative impact of foreign currency translation. Sales increased 1% due to increased selling prices. Segment income declined $53 million in 2009. The decline in earnings due to lower volumes was about $320 million. Factors increasing segment income were lower overhead, manufacturing and input costs and improved selling prices.
Architectural Coatings EMEA sales decreased $297 million or 13% in 2009. Sales decreased 9% due to the negative impact of foreign currency translation and 7% from lower sales volumes. Sales increased 3% due to increased selling prices. Segment income decreased $13 million in 2009, including $19 million due to currency. The earnings impact of lower sales volumes and inflation were more than offset by lower overhead costs and higher selling prices and other income.
Optical and Specialty Materials sales decreased $132 million or 12% in 2009. Sales decreased 10% due to volume, in part reflecting strong 2008 volumes associated with the launch of Transitions Opticals next generation lens product in North America. Volumes were also lower in the silicas business as a result of the slowdown in the automotive OEM market. Sales declined 2% due to the negative impact of foreign currency translation. Segment income decreased $9 million in 2009. The decrease in segment income was primarily the result of lower sales volumes, which was partially offset by lower manufacturing and overhead costs.
Commodity Chemicals sales decreased $564 million or 31% in 2009. Sales declined 21% due to lower selling prices, 9% due to lower sales volumes and 1% due to currency. Segment income decreased $188 million in 2009 due to the negative impact of lower selling prices and volumes. Factors that contributed to offsetting some of the earnings decline were lower input costs, particularly energy, lower overhead costs and higher other income.
Glass sales decreased $1,065 million or 56% in 2009. About $725 million of the sales decrease was due to the divestiture of a majority interest in the automotive glass and services business, which was completed in September 2008. The remaining decrease in sales was due mainly to lower sales volumes in the flat glass and fiber glass businesses, reflecting reduced construction and general industrial demand and, to a lesser extent, weaker foreign currency and lower selling prices. Segment income decreased $109 million
20 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
in 2009, with $16 million due to the absence of earnings from the divested automotive glass and services business. The remaining decline in segment earnings was due to the negative impact of lower sales volumes and lower selling prices. Lower overhead, manufacturing and input costs positively impacted segment income.
See Note 25, Reportable Business Segment Information, under Item 8 of this Form 10-K for further information related to the Companys operating segments and reportable business segments.
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 Item 3, Legal Proceedings and Note 16, Commitments and Contingent Liabilities, under Item 8 of this Form 10-K for a description of certain of these lawsuits, including a description of the proposed asbestos settlement and a description of the antitrust suits against PPG related to the flat glass industry.
As discussed in Item 3 and Note 16, 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 proposed asbestos settlement described in Note 16 does not become effective, will not have a material effect on PPGs consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
It is PPGs 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. In managements opinion, the Company operates in an environmentally sound manner and the outcome of the Companys environmental contingencies will not have a material effect on PPGs financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution of the Companys environmental contingencies will occur over an extended period of time.
As of December 31, 2010 and 2009, PPG had reserves for environmental contingencies totaling $272 million and $287 million, respectively, of which $83 million and $59 million, respectively, were classified as current liabilities. Pretax charges against income for environmental remediation costs in 2010, 2009 and 2008 totaled $21 million, $11 million and $15 million, respectively, and are included in Other charges in the accompanying consolidated statement of income. Cash outlays related to such environmental remediation aggregated $34 million, $24 million and $24 million in 2010, 2009 and 2008, respectively. The impact of foreign currency decreased the liability by $2 million in 2010 and increased the liability by $1 million in 2009.
In addition to the amounts currently reserved for environmental remediation, the Company may be subject to loss contingencies related to environmental matters estimated to be as much as $200 million to $400 million, which is a change from the previously reported range of $200 million to $300 million. This change in estimate relates principally to the cost of New Jersey Chrome and legacy glass manufacturing site remediation. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence.
Our continuing efforts to analyze and assess the environmental issues associated with a former chromium manufacturing plant site located in Jersey City, N.J., and at the Calcasieu River Estuary located near our Lake Charles, La., chlor-alkali plant resulted in a pre-tax charge of $173 million in the third quarter of 2006 for the estimated costs of remediating these sites. These charges for estimated environmental remediation costs in 2006 were significantly higher than PPGs historical range. Excluding 2006, pretax charges against income have ranged between $10 million and $35 million per year for the past 15 years. We anticipate that charges against income in 2011 for environmental remediation costs will be within this historical range.
Management expects cash outlays for environmental remediation costs to be approximately $80 million in 2011 and to range from $50 million to $70 million annually through 2014. It is possible that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter our expectations with respect to charges against income and future cash outlays. Specifically, the level of expected cash outlays and charges for environmental remediation costs are highly dependent upon activity related to the former chromium manufacturing plant site in New Jersey, as PPG awaits approval of work plans that have been submitted to the applicable regulatory agencies.
Impact of Inflation
In 2010, PPG experienced a reduction in its primary energy costs but a steady increase in its coatings raw material costs, most notably in the second half of the year. This was driven by higher global demand as a result of the gradual recovery in the global economy and tightness of supply as suppliers have not increased their capacities. This impact was offset by higher selling prices in our Performance Coatings and Architectural Coatings - EMEA reportable segments and partially offset in our Industrial Coatings reportable segment. Industrial Coatings partially addressed the remaining impact of raw material inflation
2010 PPG ANNUAL REPORT AND FORM 10-K | 21 |
with further cost reductions in 2010. The impact of inflation net of price was positive in the Optical and Specialty Materials reportable segment and negative in the Commodity Chemicals and Glass reportable segments.
In 2009, PPG experienced a reduction in our energy and raw material costs, following the significant increases in these costs experienced in 2008 and 2007, which was driven by lower global demand as a result of the recession and the delayed impact of lower oil prices. This impact was largely offset by reductions in our selling prices. The impact of inflation net of price was negative in our Commodity Chemicals and Glass reportable segments and was positive in our three Coatings and the Optical and Specialty Materials reportable segments.
In 2008, through increased selling prices, PPG was able to more than offset the increase in our costs due to the negative effects of inflation, including the impact of higher raw materials and energy costs. In our Commodity Chemicals reportable segment, the increase in our costs due to inflation was more than offset by higher selling prices. In our Performance Coatings and Optical and Specialty Materials reportable segments, the increase in our costs due to the negative effects of inflation was offset by higher selling prices. However, in our Industrial Coatings and Glass reportable segments, the increase in our costs due to the negative effects of inflation was not offset by higher selling prices.
In 2011, we expect the costs in all our reportable segments to increase due to the negative effects of inflation, most notably the cost of certain raw materials in our coatings segments as a result of increases in global demand for these materials without an associated increase in supply. We will continue our efforts to manage our energy costs. We will also continue our efforts to manage our material costs through product reformulation and qualification of additional suppliers, particularly those from lower cost regions of the world. We expect those efforts, combined with increases in our selling prices, will offset the negative impact of inflation in 2011.
Liquidity and Capital Resources
During the past three years, we had sufficient financial resources to meet our operating requirements, to fund our capital spending, share repurchases and pension plans and to pay increasing dividends to our shareholders.
Cash from operating activities was $1,310 million, $1,345 million and $1,437 million in 2010, 2009 and 2008, respectively. Higher earnings increased cash from operations in 2010 compared to 2009. Cash provided by working capital was greater in 2009 than 2010 and that decline more than offset the cash from higher 2010 earnings.
Operating Working Capital is a subset of total working capital and represents (1) trade receivables -net of the allowance for doubtful accounts plus (2) inventories on a first-in, first-out (FIFO) basis less (3) trade creditors liability. See Note 4, Working Capital Detail under Item 8 of this Form 10-K for further information related to the components of the Companys Operating Working Capital. We believe Operating Working Capital represents the key components of working capital under the operating control of our businesses. Operating Working Capital at December 31, 2010 and 2009 was $2.6 billion and $2.7 billion, respectively. A key metric we are using to measure improvement in our working capital management is Operating Working Capital as a percentage of sales (fourth quarter sales annualized).
(Millions) | 2010 | 2009 | ||||||
Operating Working Capital |
$ | 2,595 | $ | 2,671 | ||||
Operating Working Capital as % of Sales |
19.2 | % | 21.4 | % |
The change in operating working capital elements, excluding the impact of currency, was a reduction of $55 million during the year ended December 31, 2010. This reduction was the net result of an increase in receivables from customers associated with the 2010 increase in sales being more than offset by a larger increase in the trade creditors liability. Receivables, from customers, net, as a percentage of fourth quarter sales, annualized, for 2010 was 18.1%, down slightly from 18.3% for 2009. Days sales outstanding decreased to 66 days in 2010 from 67 days in 2009. Inventories on a FIFO basis as a percentage of fourth quarter sales, annualized, for 2010 was 13.1% down from 14.2% for 2009. Inventory turnover was 5 times in 2010 and 4 times in 2009.
Total capital spending was $341 million, $265 million and $2,056 million in 2010, 2009 and 2008, respectively. Spending related to modernization and productivity improvements, expansion of existing businesses and environmental control projects was $307 million, $239 million and $383 million in 2010, 2009 and 2008, respectively, and is expected to be in the range of $375-$425 million during 2011. Capital spending related to business acquisitions amounted to $34 million, $26 million and $1,673 million in 2010, 2009 and 2008, respectively. We continue to evaluate acquisition opportunities and expect to use cash in 2011 to fund bolt-on acquisitions, as part of a balanced deployment of our cash to support growth in earnings.
Dividends paid to shareholders totaled $360 million, $353 million and $343 million in 2010, 2009 and 2008, respectively. PPG has paid uninterrupted dividends since 1899, and 2010 marked the 39th consecutive year of increased annual dividend payments to shareholders.
We did not have a mandatory contribution to our U.S. defined benefit pension plans in 2010; however, due in large part to the negative investment return on pension plan assets in 2009, we made voluntary contributions to
22 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
these plans in 2010 totaling $250 million. In 2009 and 2008, we made voluntary contributions to our U.S. defined benefit pension plans of $360 million (of which $100 million was made in PPG stock) and $50 million, respectively. Contributions were made to our non-U.S. defined benefit pension plans of $87 million, $90 million (of which approximately $20 million was made in PPG stock) and $69 million for 2010, 2009 and 2008, respectively, some of which were required by local funding requirements. In January of 2011, we made an additional voluntary contribution to our U.S. plans of $50 million, and we expect to make mandatory contributions to our non-U.S. plans in 2011 of approximately $75 million.
The Companys share repurchase activity in 2010, 2009 and 2008 totaled 8.1 million shares at a cost of $586 million, 1.5 million shares at a cost of $59 million and 0.1 million shares at a cost of $7 million, respectively.
In October of 2009, the Company entered into an agreement with a counterparty to repurchase up to 1.2 million shares of the Companys stock of which 1.1 million shares were purchased in the open market. The counterparty held the shares until September of 2010 when the Company paid $65 million and took possession of these shares.
In December of 2008, the Company entered into an agreement with a counterparty to repurchase 1.5 million shares of the Companys stock. Under the terms of the agreement, the counterparty purchased the shares in the open market in January of 2009 and held the shares until December of 2009 when the Company paid the agreed upon price of $39.53 per share and took possession of these shares. The total cost of this share repurchase was approximately $59 million.
On January 2, 2008, PPG completed the acquisition of SigmaKalon, a worldwide coatings producer based in Uithoorn, Netherlands, from global private investment firm Bain Capital (the seller). The acquired business produces architectural, protective and marine and industrial coatings and is a leading coatings supplier in Europe and other key markets across the globe, with an increasing presence in Africa and Asia. The total transaction value was approximately $3.2 billion, consisting of cash paid to the seller of $1,673 million and debt assumed of $1,517 million.
On March 18, 2008, PPG completed a public offering of $600 million in aggregate principal amount of its 5.75% Notes due 2013 (the 2013 Notes), $700 million in aggregate principal amount of its 6.65% Notes due 2018 (the 2018 Notes) and $250 million in aggregate principal amount of its 7.70% Notes due 2038 (the 2038 Notes and, together with the 2013 Notes and the 2018 Notes, the Notes). The Notes were offered by the Company pursuant to its existing shelf registration statement. The proceeds of this offering of $1,538 million (net of discount and issuance costs) and additional borrowings of $195 million under a 650 million revolving credit facility were used to repay existing debt incurred in connection with the acquisition of SigmaKalon. The discount and issuance costs related to the Notes, which totaled $12 million, will be amortized to interest expense over the respective lives of the Notes.
In July 2008, the Company entered into an agreement to divest its automotive OEM glass and automotive replacement glass and services businesses (automotive glass and services business). Under the agreement, PPG received a noncontrolling ownership interest in the new company formed by the buyer. The transaction was completed on September 30, 2008. The Company received cash proceeds of $225 million at closing and two six-year notes totaling $90 million from this transaction.
In the fourth quarter 2008, the Company monetized certain cross currency foreign exchange swap contracts, which had been designated as hedges of our Euro denominated net investment in SigmaKalon, and replaced them with new swap contracts. As a result of these swap monetizations, the Company received $208 million in cash proceeds. See Item 7A of this Form 10-K for further information regarding these instruments.
In June 2009, PPG entered into a $400 million three year unsecured term loan. We used $116 million of the proceeds from this term loan to retire our 7.05% Notes due 2009; the remainder of the loan proceeds of approximately $284 million were used to retire outstanding amounts under our former 650 million revolving credit facility. The principal amount of this term loan is due in three years, and the interest rate is variable based on a spread over LIBOR.
In August 2010, PPG entered into a three-year credit agreement with several banks and financial institutions (the Credit Agreement). The Credit Agreement provides for a $1.2 billion unsecured revolving credit facility. In connection with entering into this Credit Agreement, the Company terminated its 650 million and its $1 billion revolving credit facilities that were each set to expire in 2011. There were no outstanding amounts due under either revolving facility at the time of their termination. The Company has the ability to increase the size of the Credit Agreement by up to an additional $300 million, subject to the receipt of lender commitments and other conditions. The Credit Agreement will terminate and all amounts outstanding will be due and payable on August 5, 2013.
On November 12, 2010, PPG completed a public offering of $250 million in aggregate principal amount of its 1.900% Notes due 2016 (the 2016 Notes), $500 million in aggregate principal amount of its 3.600% Notes due 2020 (the 2020 Notes) and $250 million in aggregate principal amount of its 5.500% Notes due 2040 (the 2040 Notes). These notes were offered by the Company pursuant to its existing shelf registration statement. The proceeds of this
2010 PPG ANNUAL REPORT AND FORM 10-K | 23 |
offering were $983 million (net of discount and issuance costs). We intend to use the proceeds to repay our $400 million three-year unsecured term loan due in 2012, contribute to employee pension plans, fund certain asbestos claims and for other general corporate purposes of the Company.
The ratio of total debt, including capital leases, to total debt and equity was 53% at December 31, 2010 and 47% at December 31, 2009. The increase at year end 2010 is primarily due to the issuance of additional debt during 2010.
We continue to believe that our cash on hand, cash from operations and the Companys available debt capacity will continue to be sufficient to fund our operating activities, capital spending, including acquisitions, dividend payments, debt service, amounts due under the proposed asbestos settlement, share repurchases, contributions to pension plans, and PPGs significant contractual obligations. These significant contractual obligations, along with amounts due under the proposed asbestos settlement are presented in the following table.
Obligations Due In: |
||||||||||||||||||||||
(Millions) |
Total | 2011 | 2012- 2013 |
2014- 2015 |
Thereafter | |||||||||||||||||
Contractual Obligations | ||||||||||||||||||||||
Long-term debt |
$ | 4,013 | $ | 2 | $ | 1,088 | $ | 402 | $ | 2,521 | ||||||||||||
Short-term debt |
24 | 24 | | | | |||||||||||||||||
Capital lease obligations |
34 | 2 | 4 | 4 | 24 | |||||||||||||||||
Operating leases |
665 | 160 | 225 | 135 | 145 | |||||||||||||||||
Interest payments(1) | 2,007 | 206 | 369 | 322 | 1,110 | |||||||||||||||||
Pension contributions(2) | 125 | 125 | | | | |||||||||||||||||
Unconditional purchase commitments |
812 | 242 | 238 | 91 | 241 | |||||||||||||||||
Total |
$ | 7,680 | $ | 761 | $ | 1,924 | $ | 954 | $ | 4,041 | ||||||||||||
Asbestos Settlement(3) | ||||||||||||||||||||||
Aggregate cash payments | $ | 825 | $ | 446 | $ | 33 | $ | 5 | $ | 341 | ||||||||||||
PPG stock and other | 132 | 132 | | | | |||||||||||||||||
Total |
$ | 957 | $ | 578 | $ | 33 | $ | 5 | $ | 341 | ||||||||||||
(1) | Includes interest on all outstanding debt. Interest for variable-rate debt instruments is based on effective rates at December 31, 2010. Interest for fixed-rate debt instruments have been adjusted for the impact of interest rate swaps using the effective rate at December 31, 2010. |
(2) | Includes the estimated pension contribution for 2011 only, as PPG is unable to estimate the pension contributions beyond 2011. |
(3) | We have recorded an obligation equal to the net present value of the aggregate cash payments, along with the PPG stock and other assets to be contributed to a trust under the proposed asbestos settlement. However, PPG has no obligation to pay any amounts under this settlement until the Funding Effective Date, as more fully discussed in Note 16, Commitments and Contingent Liabilities, under Item 8 of this Form 10-K. |
The unconditional purchase commitments are principally take-or-pay obligations related to the purchase of certain materials, including industrial gases, natural gas, coal and electricity, consistent with customary industry practice. These amounts also include PPGs commitment to purchase electricity and steam from the RS Cogen joint venture discussed in Note 6, Investments, under Item 8 of this Form 10-K.
See Note 9, Debt and Bank Credit Agreements and Leases, under Item 8 of this Form 10-K for details regarding the use and availability of committed and uncommitted lines of credit, letters of credit, guarantees and debt covenants.
In addition to the amounts available under the lines of credit, the Company has an automatic shelf registration statement on file with the SEC pursuant to which it may issue, offer and sell from time to time on a continuous or delayed basis any combination of securities in one or more offerings.
Off-Balance Sheet Arrangements
The Companys off-balance sheet arrangements include the operating leases and unconditional purchase commitments disclosed in the Liquidity and Capital Resources section in the contractual obligations table as well as letters of credit and guarantees as discussed in Note 9, Debt and Bank Credit Agreements and Leases, under Item 8 of this Form 10-K.
Critical Accounting Estimates
Management has evaluated the accounting policies used in the preparation of the financial statements and related notes presented under Item 8 of this Form 10-K and believes those policies to be reasonable and appropriate. We believe that the most critical accounting estimates made in the preparation of our financial statements are those related to accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and to accounting for pensions, other postretirement benefits, goodwill and other identifiable intangible assets with indefinite lives because of the importance of management judgment in making the estimates necessary to apply these policies.
Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial statements are those related to the collectibility of accounts receivable, to environmental remediation, to pending, impending or overtly threatened litigation against the Company and to the resolution of matters related to open tax years. For more information on these matters, see Note 4, Working Capital Detail, Note 14, Income Taxes and Note 16, Commitments and Contingent Liabilities under Item 8 of this Form 10-K.
Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. These assumptions are reviewed annually. See Note 15, Pensions and Other Postretirement
24 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Benefits, under Item 8 for information on these plans and the assumptions used.
The discount rate used in accounting for pensions and other postretirement benefits is determined by reference to a current yield curve and by considering the timing and amount of projected future benefit payments. The discount rate assumption at December 31, 2010 and for 2011 is 5.35% for our U.S. defined benefit pension and other postretirement benefit plans. A change in the discount rate of 75 basis points, with all other assumptions held constant, would impact 2011 net periodic benefit expense for our defined benefit pension and other postretirement benefit plans by approximately $12 million and $6 million, respectively.
The expected return on plan assets assumption used in accounting for our pension plans is determined by evaluating the mix of investments that comprise plan assets and external forecasts of future long-term investment returns. For 2010, the return on plan assets assumption for our U.S. defined benefit pension plans was 8.5%. This assumption will be lowered to 8.0% for 2011. A change in the rate of return of 75 basis points, with other assumptions held constant, would impact 2011 net periodic pension expense by approximately $21 million.
As discussed in Note 1, Summary of Significant Accounting Policies, under Item 8 of this Form 10-K, the Company tests goodwill and identifiable intangible assets with indefinite lives for impairment at least annually by comparing the fair value of the reporting units to their carrying values. Fair values are estimated using discounted cash flow methodologies that are based on projections of the amounts and timing of future revenues and cash flows. Based on this testing, none of our goodwill or identifiable intangible assets with indefinite lives was impaired as of December 31, 2010.
As part of our ongoing financial reporting process, a collaborative effort is undertaken involving PPG managers with functional responsibility for financial, credit, environmental, legal, tax and benefit matters. The results of this effort provide management with the necessary information on which to base their judgments on these contingencies and to develop the estimates and assumptions used to prepare the financial statements.
We believe that the amounts recorded in the financial statements under Item 8 of this Form 10-K related to these contingencies, pensions, other postretirement benefits, goodwill and other identifiable intangible assets with indefinite lives are based on the best estimates and judgments of the appropriate PPG management, although actual outcomes could differ from our estimates.
Currency
From December 31, 2009 to December 31, 2010, the U.S. dollar strengthened against the euro, the Polish zloty, and the British pound sterling while at the same time it weakened against the Canadian and Australian dollar, the Chinese yuan, the South Korean won, and the Brazilian real, which had a nearly offsetting effect on the translation of the net assets of PPGs operations denominated in non-U.S. currencies to the U.S. dollar. A $13 million decrease resulted from translating PPGs foreign denominated net assets at December 31, 2010, compared to December 31, 2009. The impact of translating foreign pretax earnings into U.S. dollars was insignificant.
From December 31, 2008 to December 31, 2009, the U.S. dollar weakened against the currencies of most of the countries in which PPG operates, most notably against the euro, the Canadian dollar, the British pound sterling, the Polish zloty, the Brazilian real, the South Korean won and the Australian dollar. As a result, the effects of translating the net assets of PPGs operations denominated in non-U.S. currencies to the U.S. dollar increased consolidated net assets at December 31, 2009 by $173 million compared to December 31, 2008. During much of the year, the U.S. dollar was stronger against the currencies of many countries in which PPG operates than it was in 2008, which had an unfavorable impact on 2009 pretax earnings of $29 million from the translation of these foreign earnings into U.S. dollars.
From December 31, 2007 to December 31, 2008, the U.S. dollar strengthened against the currencies of most of the countries in which PPG operates, most notably against the euro, the British pound sterling, the Polish zloty, the Brazilian real, the South Korean won and the Australian dollar. As a result, the effects of translating the net assets of PPGs operations denominated in non-U.S. currencies to the U.S. dollar decreased consolidated net assets at December 31, 2008 by $499 million compared to December 31, 2007. During much of the year, the U.S. dollar was weaker against the currencies of many countries in which PPG operates than it was in 2007, which had a favorable impact on 2008 pretax earnings of $45 million from the translation of these foreign earnings into U.S. dollars.
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. Managements Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that reflect the Companys current views with respect to future events and financial performance.
You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words aim, believe, expect, anticipate, intend, estimate, project, outlook, forecast 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
2010 PPG ANNUAL REPORT AND FORM 10-K | 25 |
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 Companys forward-looking statements. Such factors include global economic conditions, increasing price and product competition by foreign and domestic competitors, fluctuations in cost and availability of raw materials, the ability to maintain favorable supplier relationships and arrangements, the realization of anticipated cost savings from restructuring initiatives, difficulties in integrating acquired businesses and achieving expected synergies therefrom, economic and political conditions in international markets, the ability to penetrate existing, developing and emerging foreign and domestic markets, foreign exchange rates and fluctuations in such rates, fluctuations in tax rates, the impact of future legislation, the impact of environmental regulations, unexpected business disruptions and the unpredictability of existing and possible future litigation, including litigation that could result if the proposed asbestos settlement does not become effective. However, it is not possible to predict or identify all such factors. Consequently, while the list of factors presented here and under Item 1A 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.
Consequences of material differences in the results 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, other factors set forth in Item 1A of this Form 10-K and similar risks, any of which could have a material adverse effect on the Companys consolidated financial condition, results of operations or liquidity.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
PPG is exposed to market risks related to changes in foreign currency exchange rates, interest rates, and natural gas prices and to changes in PPGs stock price. The Company may enter into derivative financial instrument transactions in order to manage or reduce these market risks. A detailed description of these exposures and the Companys risk management policies are provided in Note 12, Derivative Financial Instruments and Hedge Activities, under Item 8 of this Form 10-K.
The following disclosures summarize PPGs exposure to market risks and information regarding the use of and fair value of derivatives employed to manage its exposure to such risks. Quantitative sensitivity analyses have been provided to reflect how reasonably possible, unfavorable changes in market rates can impact PPGs consolidated results of operations, cash flows and financial position.
Foreign currency forward and option contracts outstanding during 2010 and 2009 were used to hedge PPGs exposure to foreign currency transaction risk. The fair value of these contracts as of December 31, 2010 and 2009 were assets of $2 million and liabilities of $3 million, respectively. The potential reduction in PPGs earnings resulting from the impact of adverse changes in exchange rates on the fair value of its outstanding foreign currency hedge contracts of 10% for European currencies and 20% for Asian and South American currencies for the years ended December 31, 2010 and 2009 would have been $22 million and $17 million, respectively.
Concurrent with the March 18, 2008 completion of the $1.55 billion public debt offering, PPG entered into ten U.S. dollar to euro cross currency swap contracts with a total notional amount of $1.3 billion, of which $600 million were to settle on March 15, 2013 and $700 million were to settle on March 15, 2018. On March 18, 2008, PPG paid the counterparties to the contracts a total of $1.3 billion and received euros, which were used to repay most of a 1 billion bridge loan, which the Company employed to finance the acquisition of SigmaKalon. During the fourth quarter of 2008, PPG converted $1.16 billion of these contracts to $208 million of cash and replaced them with new cross currency swap contracts. One contract, with a notional amount of $140 million and a settlement date of March 15, 2018 was converted to cash during the first quarter of 2010. Accordingly, on settlement of the contracts, PPG will receive $1.2 billion and pay euros to the counterparties to the contracts. The Company has designated these swaps as hedges of its net investment in the acquired SigmaKalon businesses and, as a result, mark to fair value adjustments of the swaps have been and will be recorded as a component of other comprehensive income. As of December 31, 2010 and 2009, the aggregate fair value of these swaps was a liability of $163 million and $308 million, respectively. A 10% increase in the value of the euro to the U.S. dollar would have had an unfavorable effect on the fair value of these swap contracts and increased the liability by $158 million and $182 million at December 31, 2010 and 2009, respectively.
PPG had non-U.S. dollar denominated debt outstanding of $447 million as of December 31, 2010 and $723 million as of December 31, 2009. A weakening of the U.S. dollar by 10% against European currencies and by 20% against Asian and South American currencies would have resulted in unrealized translation losses of approximately $52 million and $81 million as of December 31, 2010 and 2009, respectively.
Interest rate swaps are used to manage a portion of PPGs interest rate risk. The fair value of the interest rate swaps was an asset of $20 million and $10 million as of
26 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
December 31, 2010 and 2009, respectively. The fair value of these swaps would have changed unfavorably by $1 million and $3 million as of December 31, 2010 and 2009, respectively, if variable interest rates increased by 10%. A 10% increase in interest rates in the U.S., Canada, Mexico and Europe and a 20% increase in interest rates in Asia and South America would have affected PPGs variable rate debt obligations by increasing interest expense approximately $1 million as of December 31, 2010 and December 31, 2009, respectively. Further, a 10% reduction in interest rates would have increased the present value of the Companys fixed rate debt by approximately $115 million and $91 million as of December 31, 2010 and 2009, respectively; however, such changes would not have had an effect on PPGs annual earnings or cash flows.
The Company entered into forward starting swaps in the third quarter of 2009 to effectively lock-in a fixed interest rate based on the 10-year swap rate, to which will be added a corporate spread, related to future debt refinancings. The notional amount of these swaps totaled $250 million. In the second quarter of 2010, the Company entered into additional forward starting swaps arrangements with a notional amount of $150 million. As of December 31, 2010, the fair value of these swaps was a liability of $21 million. As of December 31, 2009, the fair value of these swaps was an asset of $3 million. A 10% decline in interest rates would unfavorably affect the fair value of these swaps by $14 million and $10 million as of December 31, 2010 and 2009, respectively.
The fair value of natural gas swap contracts in place as of December 31, 2010 and 2009 was a liability of $31 million and $50 million, respectively. These contracts were entered into to reduce PPGs exposure to higher prices of natural gas. A 10% reduction in the price of natural gas would have had an unfavorable effect on the fair value of these contracts and increased the liability by $5 million and $14 million at December 31, 2010 and 2009, respectively.
An equity forward arrangement was entered into to hedge the Companys exposure to changes in fair value of its future obligation to contribute PPG stock into an asbestos settlement trust (see Note 12 Derivative Financial Instruments and Hedge Activities and Note 16, Commitments and Contingent Liabilities, under Item 8 of this Form 10-K). The fair value of this instrument as of December 31, 2010 and 2009 was an asset of $55 million and $18 million, respectively. A 10% decrease in PPGs stock price would have had an unfavorable effect on the fair value of this instrument of $12 million and $8 million at December 31, 2010 and 2009, respectively.
2010 PPG ANNUAL REPORT AND FORM 10-K | 27 |
Item 8. Financial Statements and Supplementary Data
Internal Controls Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of PPG Industries, Inc.
We have audited the internal control over financial reporting of PPG Industries, Inc. and subsidiaries (the Company) as of December 31, 2010, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2010 of the Company and our report dated February 17, 2011 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
February 17, 2011
28 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Responsibility for Preparation of the Financial Statements and Establishing and Maintaining Adequate Internal Control Over Financial Reporting
We are responsible for the preparation of the financial statements included in this Annual Report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management.
We are also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. All internal control systems, no matter how well designed, have inherent limitations. Therefore, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. In addition, because of changing conditions, there is risk in projecting any evaluation of internal controls to future periods.
We conducted an evaluation of the effectiveness of the Companys internal control over financial reporting as of December 31, 2010. In making this evaluation, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Our evaluation included reviewing the documentation of our controls, evaluating the design effectiveness of our controls and testing their operating effectiveness. Based on this evaluation we believe that, as of December 31, 2010, the Companys internal controls over financial reporting were effective.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued their report, included on page 28 of this Form 10-K, regarding the Companys internal control over financial reporting.
/s/ Charles E. Bunch Charles E. Bunch Chairman of the Board and Chief Executive Officer February 17, 2011 |
/s/ Robert J. Dellinger Robert J. Dellinger Senior Vice President, Finance and Chief Financial Officer February 17, 2011 |
Consolidated Financial Statements Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of PPG Industries, Inc.
We have audited the accompanying consolidated balance sheets of PPG Industries, Inc. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and the financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PPG Industries, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on January 1, 2009 the Company adopted the provisions of accounting guidance on consolidations, and applied the new guidance to all periods presented in the accompanying consolidated financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2011 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
February 17, 2011
2010 PPG ANNUAL REPORT AND FORM 10-K | 29 |
Consolidated Statement of Income
For the Year | ||||||||||||
(Millions, except per share amounts) | 2010 | 2009 | 2008 | |||||||||
Net sales |
$ | 13,423 | $ | 12,239 | $ | 15,849 | ||||||
Cost of sales, exclusive of depreciation and amortization (See Note 2) |
8,214 | 7,539 | 10,155 | |||||||||
Selling, general and administrative (See Note 3) |
2,979 | 2,936 | 3,432 | |||||||||
Depreciation (See Note 3) |
346 | 354 | 428 | |||||||||
Amortization (See Note 7) |
124 | 126 | 135 | |||||||||
Research and development net (See Note 23) |
394 | 388 | 451 | |||||||||
Interest |
189 | 193 | 254 | |||||||||
Asbestos settlement net (See Notes 12 and 16) |
12 | 13 | 4 | |||||||||
In-process research and development (See Note 2) |
| | 23 | |||||||||
Business restructuring (See Note 8) |
| 186 | 163 | |||||||||
Other charges (See Note 16) |
84 | 65 | 61 | |||||||||
Other earnings (See Note 20) |
(214 | ) | (178 | ) | (165 | ) | ||||||
Income before income taxes |
1,295 | 617 | 908 | |||||||||
Income tax expense (See Note 14) |
415 | 191 | 284 | |||||||||
Net income attributable to the controlling and noncontrolling interests (See Note 1) |
880 | 426 | 624 | |||||||||
Less: net income attributable to noncontrolling interests (See Note 1) |
111 | 90 | 86 | |||||||||
Net income (attributable to PPG) |
$ | 769 | $ | 336 | $ | 538 | ||||||
Earnings per common share (See Note 13) |
||||||||||||
Net income (attributable to PPG) |
$ | 4.67 | $ | 2.04 | $ | 3.27 | ||||||
Earnings per common share assuming dilution (See Note 13) |
||||||||||||
Net Income (attributable to PPG) |
$ | 4.63 | $ | 2.03 | $ | 3.25 | ||||||
The accompanying notes to the consolidated financial statements are an integral part of this consolidated statement.
30 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
December 31 | ||||||||||
(Millions) | 2010 | 2009 | ||||||||
Assets |
||||||||||
Current assets |
||||||||||
Cash and cash equivalents |
$ | 1,341 | $ | 1,057 | ||||||
Short-term investments (See Note 10) |
637 | 7 | ||||||||
Receivables (See Note 4) |
2,778 | 2,628 | ||||||||
Inventories (See Note 4) |
1,573 | 1,548 | ||||||||
Deferred income taxes (See Note 14) |
451 | 485 | ||||||||
Other |
278 | 256 | ||||||||
Total current assets |
7,058 | 5,981 | ||||||||
Property (See Note 5) |
8,415 | 8,313 | ||||||||
Less accumulated depreciation |
5,729 | 5,559 | ||||||||
Property net |
2,686 | 2,754 | ||||||||
Investments (See Note 6) |
550 | 499 | ||||||||
Goodwill (See Note 7) |
2,719 | 2,784 | ||||||||
Identifiable intangible assets net (See Note 7) |
1,268 | 1,416 | ||||||||
Other assets (See Note 14) |
694 | 806 | ||||||||
Total |
$ | 14,975 | $ | 14,240 | ||||||
Liabilities and Shareholders Equity |
||||||||||
Current liabilities |
||||||||||
Short-term debt and current portion of long-term debt (See Note 9) |
$ | 28 | $ | 272 | ||||||
Asbestos settlement (See Note 16) |
578 | 534 | ||||||||
Accounts payable and accrued liabilities (See Note 4) |
3,002 | 2,648 | ||||||||
Business restructuring (See Note 8) |
17 | 123 | ||||||||
Total current liabilities |
3,625 | 3,577 | ||||||||
Long-term debt (See Note 9) |
4,043 | 3,074 | ||||||||
Asbestos settlement (See Note 16) |
243 | 238 | ||||||||
Deferred income taxes (See Note 14) |
293 | 328 | ||||||||
Accrued pensions (See Note 15) |
819 | 944 | ||||||||
Other postretirement benefits (See Note 15) |
1,151 | 1,010 | ||||||||
Other liabilities (See Note 15) |
968 | 1,147 | ||||||||
Total liabilities |
11,142 | 10,318 | ||||||||
Commitments and contingent liabilities (See Note 16) |
||||||||||
Shareholders equity (See Note 17) |
||||||||||
Common stock |
484 | 484 | ||||||||
Additional paid-in capital |
725 | 609 | ||||||||
Retained earnings |
8,548 | 8,139 | ||||||||
Treasury stock, at cost |
(4,708 | ) | (4,218 | ) | ||||||
Accumulated other comprehensive loss (See Note 18) |
(1,411 | ) | (1,261 | ) | ||||||
Total PPG shareholders equity |
3,638 | 3,753 | ||||||||
Noncontrolling interests (Note 1) |
195 | 169 | ||||||||
Total shareholders equity |
3,833 | 3,922 | ||||||||
Total |
$ | 14,975 | $ | 14,240 | ||||||
Shares outstanding were 160,381,815 and 165,667,659 as of December 31, 2010 and 2009, respectively.
The accompanying notes to the consolidated financial statements are an integral part of this consolidated statement.
2010 PPG ANNUAL REPORT AND FORM 10-K | 31 |
Consolidated Statement of Shareholders Equity
(Millions) | |
Common Stock |
|
|
Additional Paid-In Capital |
|
|
Retained Earnings |
|
|
Treasury Stock |
|
|
Accumulated Other Comprehensive (Loss) Income (See Note 18) |
|
|
Total PPG |
|
|
Non- controlling |
|
Total | ||||||||||
Balance, January 1, 2008 |
$ | 484 | $ | 553 | $ | 7,963 | $ | (4,267 | ) | $ | (582 | ) | $ | 4,151 | $ | 161 | $ | 4,312 | ||||||||||||||
Net income attributable to the controlling and noncontrolling interests |
| | 538 | | | 538 | 86 | 624 | ||||||||||||||||||||||||
Other comprehensive (loss), net of tax |
| | | | (1,046 | ) | (1,046 | ) | (7 | ) | (1,053 | ) | ||||||||||||||||||||
Cash dividends |
| | (343 | ) | | | (343 | ) | | (343 | ) | |||||||||||||||||||||
Purchase of treasury stock |
| | | (7 | ) | | (7 | ) | | (7 | ) | |||||||||||||||||||||
Issuance of treasury stock |
| 18 | | 15 | | 33 | | 33 | ||||||||||||||||||||||||
Stock option activity |
| 9 | | | | 9 | | 9 | ||||||||||||||||||||||||
Transition adjustment from adopting new accounting guidance (See Note 1) |
| | (2 | ) | | | (2 | ) | | (2 | ) | |||||||||||||||||||||
Increase through acquisition |
| | | | | | 23 | 23 | ||||||||||||||||||||||||
Decrease through divestiture |
| | | | | | (27 | ) | (27 | ) | ||||||||||||||||||||||
Dividends paid on subsidiary common stock to noncontrolling interests |
| | | | | | (79 | ) | (79 | ) | ||||||||||||||||||||||
Other |
| | | | | | (1 | ) | (1 | ) | ||||||||||||||||||||||
Balance, December 31, 2008 |
$ | 484 | $ | 580 | $ | 8,156 | $ | (4,259 | ) | $ | (1,628 | ) | $ | 3,333 | $ | 156 | $ | 3,489 | ||||||||||||||
Net income attributable to the controlling and noncontrolling interests |
| | 336 | | | 336 | 90 | 426 | ||||||||||||||||||||||||
Other comprehensive income, net of tax |
| | | | 367 | 367 | | 367 | ||||||||||||||||||||||||
Cash dividends |
| | (353 | ) | | | (353 | ) | | (353 | ) | |||||||||||||||||||||
Purchase of treasury stock |
| | | (59 | ) | | (59 | ) | | (59 | ) | |||||||||||||||||||||
Issuance of treasury stock |
| 50 | | 100 | | 150 | | 150 | ||||||||||||||||||||||||
Stock option activity |
| 6 | | | | 6 | | 6 | ||||||||||||||||||||||||
Equity forward arrangement |
| (27 | ) | | | | (27 | ) | | (27 | ) | |||||||||||||||||||||
Dividends paid on subsidiary common stock to noncontrolling interests |
| | | | | | (77 | ) | (77 | ) | ||||||||||||||||||||||
Balance, December 31, 2009 |
$ | 484 | $ | 609 | $ | 8,139 | $ | (4,218 | ) | $ | (1,261 | ) | $ | 3,753 | $ | 169 | $ | 3,922 | ||||||||||||||
Net income attributable to the controlling and noncontrolling interests |
| | 769 | | | 769 | 111 | 880 | ||||||||||||||||||||||||
Other comprehensive (loss) income, net of tax |
| | | | (150 | ) | (150 | ) | 2 | (148 | ) | |||||||||||||||||||||
Cash dividends |
| | (360 | ) | | | (360 | ) | | (360 | ) | |||||||||||||||||||||
Purchase of treasury stock |
| | | (521 | ) | | (521 | ) | | (521 | ) | |||||||||||||||||||||
Issuance of treasury stock |
| 77 | | 96 | | 173 | | 173 | ||||||||||||||||||||||||
Stock option activity |
| 12 | | | | 12 | | 12 | ||||||||||||||||||||||||
Equity forward arrangement |
| 27 | | (65 | ) | | (38 | ) | | (38 | ) | |||||||||||||||||||||
Dividends paid on subsidiary common stock to noncontrolling interests |
| | | | | | (87 | ) | (87 | ) | ||||||||||||||||||||||
Balance, December 31, 2010 |
$ | 484 | $ | 725 | $ | 8,548 | $ | (4,708 | ) | $ | (1,411 | ) | $ | 3,638 | $ | 195 | $ | 3,833 | ||||||||||||||
Consolidated Statement of Comprehensive Income (Loss)
For the Year | ||||||||||||||
(Millions) | 2010 | 2009 | 2008 | |||||||||||
Net income attributable to the controlling and noncontrolling interests |
$ | 880 | $ | 426 | $ | 624 | ||||||||
Other comprehensive (loss) income, net of tax (See Note 18) |
||||||||||||||
Unrealized currency translation adjustment |
(11 | ) | 173 | (506 | ) | |||||||||
Defined benefit pension and other postretirement benefit adjustments (See Note 15) |
(136 | ) | 169 | (494 | ) | |||||||||
Unrealized gains (losses) on marketable equity securities |
1 | | (4 | ) | ||||||||||
Net change derivatives (See Note 12) |
(2 | ) | 25 | (49 | ) | |||||||||
Other comprehensive (loss) income, net of tax |
(148 | ) | 367 | (1,053 | ) | |||||||||
Total comprehensive income (loss) |
$ | 732 | $ | 793 | $ | (429 | ) | |||||||
Less: amounts attributable to noncontrolling interests: |
||||||||||||||
Net income |
(111 | ) | (90 | ) | (86 | ) | ||||||||
Unrealized currency translation adjustment |
(2 | ) | | 7 | ||||||||||
Comprehensive income (loss) attributable to PPG |
$ | 619 | $ | 703 | $ | (508 | ) | |||||||
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
32 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Consolidated Statement of Cash Flows
For the Year | ||||||||||||||
(Millions) | 2010 | 2009 | 2008 | |||||||||||
Operating activities |
||||||||||||||
Net income attributable to the controlling and noncontrolling interests |
$ | 880 | $ | 426 | $ | 624 | ||||||||
Adjustments to reconcile to cash from operations |
||||||||||||||
Depreciation and amortization |
470 | 480 | 563 | |||||||||||
Asbestos settlement, net of tax |
7 | 8 | 2 | |||||||||||
Business restructuring |
| 186 | 163 | |||||||||||
Write-off of in-process research and development |
| | 23 | |||||||||||
Restructuring cash spending |
(103 | ) | (142 | ) | (27 | ) | ||||||||
Change in U.S. tax law (U.S. Patient Protection and Affordable Care Act) |
85 | | | |||||||||||
Equity affiliate (earnings) loss net of dividends |
(39 | ) | 17 | 15 | ||||||||||
(Decrease) increase in net accrued pension benefit costs |
(202 | ) | (22 | ) | 78 | |||||||||
(Increase)/decrease in receivables |
(178 | ) | 294 | 48 | ||||||||||
(Increase)/decrease in inventories |
(34 | ) | 232 | 79 | ||||||||||
Decrease (increase) in other current assets |
39 | 62 | (123 | ) | ||||||||||
Increase/(decrease) in accounts payable and accrued liabilities |
333 | (152 | ) | 15 | ||||||||||
Decrease in noncurrent assets |
103 | 12 | 21 | |||||||||||
Decrease in noncurrent liabilities |
(1 | ) | (61 | ) | (132 | ) | ||||||||
Other |
(50 | ) | 5 | 88 | ||||||||||
Cash from operating activities |
1,310 | 1,345 | 1,437 | |||||||||||
Investing activities |
||||||||||||||
Capital spending |
||||||||||||||
Additions to property and investments |
(307 | ) | (239 | ) | (383 | ) | ||||||||
Business acquisitions, net of cash balances acquired (See Note 2) |
(34 | ) | (26 | ) | (1,673 | ) | ||||||||
Deposits held in escrow (See Note 2) |
(7 | ) | | (37 | ) | |||||||||
Release of deposits held in escrow (See Note 2) |
1 | 22 | 1,740 | |||||||||||
Purchase of short term investments |
(624 | ) | | | ||||||||||
Proceeds from sale of automotive glass and services business (See Note 3) |
| | 225 | |||||||||||
Proceeds from termination of currency swap contracts (See Note 12) |
5 | | 208 | |||||||||||
Reductions of other property and investments |
26 | 43 | 45 | |||||||||||
Payments on cross currency swap contract (See Note 12) |
(9 | ) | (3 | ) | | |||||||||
Cash (used for)/from investing activities |
(949 | ) | (203 | ) | 125 | |||||||||
Financing activities |
||||||||||||||
Debt: |
||||||||||||||
Borrowings to refinance acquired SigmaKalon debt (See Note 9) |
| | 1,143 | |||||||||||
Repayment of acquired SigmaKalon debt (See Note 9) |
| | (1,259 | ) | ||||||||||
Proceeds from issuance of notes (net of discount and issuance costs) (See Note 9) |
983 | | 1,538 | |||||||||||
Repayment of bridge loan (See Note 9) |
| | (1,557 | ) | ||||||||||
Net change in borrowings with maturities of three months or less |
(23 | ) | (431 | ) | (392 | ) | ||||||||
Proceeds from term loan (See Note 9) |
| 400 | | |||||||||||
Proceeds from other short-term debt |
8 | 1 | 329 | |||||||||||
Repayment of other short-term debt |
(225 | ) | (517 | ) | (442 | ) | ||||||||
Repayment of 7.05% Notes due 2009 (See Note 9) |
| (116 | ) | | ||||||||||
Proceeds from other long-term debt |
7 | 29 | | |||||||||||
Repayment of other long-term debt |
(14 | ) | (12 | ) | (41 | ) | ||||||||
Net change in cash related to debt transactions |
736 | (646 | ) | (681 | ) | |||||||||
Other financing activities: |
||||||||||||||
Proceeds from termination of interest rate swaps |
| | 40 | |||||||||||
Purchase of treasury stock |
(586 | ) | (59 | ) | (7 | ) | ||||||||
Issuance of treasury stock |
146 | 12 | 13 | |||||||||||
Dividends paid on subsidiary common stock to noncontrolling interests (See Note 1) |
(87 | ) | (77 | ) | (79 | ) | ||||||||
Dividends paid |
(360 | ) | (353 | ) | (343 | ) | ||||||||
Other |
47 | | | |||||||||||
Cash used for financing activities |
(104 | ) | (1,123 | ) | (1,057 | ) | ||||||||
Effect of currency exchange rate changes on cash and cash equivalents |
27 | 17 | (10 | ) | ||||||||||
Net increase in cash and cash equivalents |
284 | 36 | 495 | |||||||||||
Cash and cash equivalents, beginning of year |
1,057 | 1,021 | 526 | |||||||||||
Cash and cash equivalents, end of year |
$ | 1,341 | $ | 1,057 | $ | 1,021 | ||||||||
The accompanying notes to the consolidated financial statements are an integral part of this consolidated statement.
2010 PPG ANNUAL REPORT AND FORM 10-K | 33 |
Notes to the Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of PPG Industries, Inc. (PPG or the Company) and all subsidiaries, both U.S. and non-U.S., that it controls. PPG owns more than 50% of the voting stock of the subsidiaries that it controls. Investments in companies in which PPG owns 20% to 50% of the voting stock and has the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting. As a result, PPGs share of the earnings or losses of such equity affiliates is included in the accompanying consolidated statement of income and PPGs share of these companies shareholders equity is included in investments in the accompanying consolidated balance sheet. Transactions between PPG and its subsidiaries are eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual outcomes could differ from those estimates.
Revenue Recognition
Revenue from sales is recognized by all operating segments when goods are shipped and title to inventory and risk of loss passes to the customer or when services have been rendered.
Shipping and Handling Costs
Amounts billed to customers for shipping and handling are reported in Net sales in the accompanying consolidated statement of income. Shipping and handling costs incurred by the Company for the delivery of goods to customers are included in Cost of sales, exclusive of depreciation and amortization in the accompanying consolidated statement of income.
Selling, General and Administrative Costs
Amounts presented as Selling, general and administrative in the accompanying consolidated statement of income are comprised of selling, customer service, distribution and advertising costs, as well as the costs of providing corporate-wide functional support in such areas as finance, law, human resources and planning. Distribution costs pertain to the movement and storage of finished goods inventory at company-owned and leased warehouses, terminals and other distribution facilities. Certain of these costs may be included in cost of sales by other companies, resulting in a lack of comparability with other companies.
Legal Costs
Legal costs are expensed as incurred.
Foreign Currency Translation
For all significant non-U.S. operations, their functional currency is their local currency. Assets and liabilities of those operations are translated into U.S. dollars using year-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Unrealized currency translation adjustments are deferred in accumulated other comprehensive (loss) income, a separate component of shareholders equity.
Cash Equivalents
Cash equivalents are highly liquid investments (valued at cost, which approximates fair value) acquired with an original maturity of three months or less.
Short-term Investments
Short-term investments are highly liquid, high credit quality investments (valued at cost plus accrued interest) that have stated maturities of greater than three months to one year. The purchases and sales of these investments are classified as investing activities in the consolidated statement of cash flows.
Inventories
Most U.S. inventories are stated at cost, using the last-in, first-out (LIFO) method of accounting, which does not exceed market. All other inventories are stated at cost, using the first-in, first-out (FIFO) method of accounting, which does not exceed market. PPG determines cost using either average or standard factory costs, which approximate actual costs, excluding certain fixed costs such as depreciation and property taxes.
Marketable Equity Securities
The Companys investment in marketable equity securities is recorded at fair market value and reported in Other current assets and Investments in the accompanying consolidated balance sheet with changes in fair market value recorded in income for those securities designated as trading securities and in other comprehensive (loss) income, net of tax, for those designated as available for sale securities.
Property
Property is recorded at cost. PPG computes depreciation by the straight-line method based on the estimated useful lives of depreciable assets. Additional expense is recorded when facilities or equipment are subject to abnormal economic conditions or obsolescence. Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for
34 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Notes to the Consolidated Financial Statements
repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the original cost and related accumulated depreciation balance are removed from the accounts and any related gain or loss is included in income. Amortization of the cost of capitalized leased assets is included in depreciation expense. Property and other long-lived assets are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable.
Goodwill and Identifiable Intangible Assets
Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets less liabilities assumed from acquired businesses. Identifiable intangible assets acquired in business combinations are recorded based upon their fair value at the date of acquisition.
The Company tests goodwill of each reporting unit for impairment at least annually in connection with PPGs strategic planning process in the third quarter. The goodwill impairment test is performed by comparing the fair value of the associated reporting unit to its carrying value. The Companys reporting units are its operating segments. (See Note 25, Reportable Business Segment Information for further information concerning the Companys operating segments.) Fair value is estimated using discounted cash flow methodologies.
The Company has determined that certain acquired trademarks have indefinite useful lives. The Company tests the carrying value of these trademarks for impairment at least annually in the third quarter by comparing the fair value of each trademark to its carrying value. Fair value is estimated by using the relief from royalty method (a discounted cash flow methodology).
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives (2 to 25 years) and are reviewed for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts to reduce receivables to their estimated net realizable value when it is probable that a loss will be incurred. Those estimates are based on historical collection experience, current economic and market conditions, a review of the aging of accounts receivable and the assessments of current creditworthiness of customers.
Product Warranties
The Company accrues for product warranties at the time the associated products are sold based on historical claims experience. As of December 31, 2010 and 2009, the reserve for product warranties was $7 million and $8 million, respectively. Pretax charges against income for product warranties in 2010, 2009 and 2008 totaled $7 million, $6 million and $7 million, respectively. Cash outlays related to product warranties were $7 million annually in 2010, 2009 and 2008. In addition, $1 million of warranty obligations were assumed as part of the Companys 2008 business acquisitions.
Asset Retirement Obligations
An asset retirement obligation represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development or normal operation of that long-lived asset. PPG recognizes asset retirement obligations in the period in which they are incurred, if a reasonable estimate of fair value can be made. The asset retirement obligation is subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life. PPGs asset retirement obligations are primarily associated with closure of certain assets used in the chemicals manufacturing process.
The accrued asset retirement obligation was $13 million as of December 31, 2010 and 2009.
PPGs only conditional asset retirement obligation relates to the possible future abatement of asbestos contained in certain PPG production facilities. The asbestos in PPGs production facilities arises from the application of normal and customary building practices in the past when the facilities were constructed. This asbestos is encapsulated in place and, as a result, there is no current legal requirement to abate it. Inasmuch as there is no requirement to abate, the Company does not have any current plans or an intention to abate and therefore the timing, method and cost of future abatement, if any, are not known. The Company has not recorded an asset retirement obligation associated with asbestos abatement, given the uncertainty concerning the timing of future abatement, if any.
Accounting Standards Adopted Prior to 2010
Due to accounting guidance issued in 2007, an employer is required to recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement if the employer has agreed to maintain a life insurance policy during the employees retirement or provide the employee with a death benefit based on the substantive arrangement with the employee. An employer must also recognize and measure an asset in a collateral assignment split-dollar life insurance arrangement based on the nature and substance of the arrangement. This guidance was effective as of
2010 PPG ANNUAL REPORT AND FORM 10-K | 35 |
Notes to the Consolidated Financial Statements
January 1, 2008. PPG has collateral assignment split- dollar life insurance arrangements within the scope of this accounting guidance.
As a result of the adoption of this guidance, the Company recognized a liability of $2 million in 2008, representing the present value of the future premium payments to be made under the existing policies. In accordance with the transition provisions, this amount was recorded as a direct decrease to retained earnings. No adjustment to the recorded asset value was required.
On January 1, 2008, PPG adopted accounting guidance related to fair value measurements for financial assets and liabilities. The guidance defines fair value, establishes a framework for measuring fair value under U.S. Generally Accepted Accounting Principles (GAAP), and expands disclosures about fair value measurements. Refer to Note 10, Fair Value Measurement for additional information regarding our fair value measurements. Adoption of the guidance applicable to financial assets and liabilities did not have a significant effect on PPGs consolidated results of operations or financial position.
In June 2009, the Financial Accounting Standards Board (FASB) issued new accounting guidance entitled, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (ASC), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. This new guidance was implemented at September 30, 2009 when it became effective. The adoption of this guidance has changed how we reference various elements of GAAP when preparing our financial statement disclosures, but did not have an impact on PPGs consolidated financial position, results of operations or cash flows.
In May 2009, the FASB issued new accounting guidance on subsequent events. The objective of this guidance is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This new accounting guidance was adopted as of June 30, 2009, when it became effective. Adopting this new guidance did not have a material impact on the accompanying consolidated financial statements.
In April 2009, the FASB issued new accounting guidance concerning fair value measurement and related disclosures when the volume of market activity has significantly decreased. The impact of adopting this new guidance as of June 30, 2009, when it became effective, did not have a material effect on PPGs consolidated results of operations or financial position.
In December 2008, the FASB issued new accounting guidance related to pension and other postretirement benefits, which provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. This new accounting guidance is effective for annual periods ending after December 15, 2009. The impact of adoption of this guidance has changed PPGs disclosures about plan assets, but did not have an impact on its financial position, results of operations or cash flows.
In December 2007, the FASB issued new accounting guidance on business combinations. The new guidance retains the underlying concepts of previously issued accounting guidance in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting (formerly known as the purchase method of accounting), but this new guidance changes the method of applying the acquisition method in a number of significant aspects. Under the new guidance, acquisition costs are generally to be expensed as incurred; noncontrolling interests are valued at fair value at the acquisition date; in-process research and development is recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination are generally expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. These changes are effective on a prospective basis for all business combinations for which the acquisition date is on or after January 1, 2009, with an exception related to the accounting for valuation allowances on deferred taxes and acquired tax contingencies related to acquisitions completed before that date. This new guidance amends the accounting guidance for income taxes to require adjustments, made after the effective date of this statement, to valuation allowances for acquired deferred tax assets and uncertain income tax positions to be recognized as income tax expense. The adoption of this new guidance as of January 1, 2009 did not have a material impact on the accompanying consolidated financial statements.
In December 2007, the FASB issued new accounting guidance on consolidations. This new guidance was effective for PPG as of January 1, 2009, and requires the presentation of a noncontrolling interest (formerly known as minority interest) as equity in the consolidated balance sheet and separate from the parents equity. The new guidance also requires that the amount of net income attributable to the noncontrolling interest be included in consolidated net income on the face of the income statement and that any dividends paid to noncontrolling interests be reported as a financing activity in the statement of cash flows. This new guidance requires
36 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Notes to the Consolidated Financial Statements
changes in the parents ownership interest in consolidated subsidiaries to be accounted for as equity transactions. This new guidance also includes expanded disclosure requirements regarding the interests of the parent and related noncontrolling interests. Beginning January 1, 2009, PPG applied the new guidance to its accounting for noncontrolling interests and its financial statement disclosures. The provisions of the new guidance have been applied to all periods presented in the accompanying consolidated financial statements.
In November 2007, the Emerging Issues Task Force (EITF) issued new accounting guidance that defined collaborative arrangements and established reporting and disclosure requirements for such arrangements. This new guidance was effective for PPG as of January 1, 2009, and its adoption did not have an effect on PPGs consolidated results of operations or financial position.
On January 1, 2009, PPG adopted new accounting guidance on fair value measurements for nonfinancial assets and liabilities disclosed on a nonrecurring basis. The Company has applied the provisions of this new guidance to its financial statement disclosures beginning in the first quarter of 2009. Adoption of the new guidance did not have an effect on PPGs consolidated results of operations or financial position. Refer to Note 10, Fair Value Measurement for additional information regarding our fair value measurements.
In March 2008, the FASB issued new accounting guidance on derivatives and hedging, which changes the disclosure requirements for derivative instruments and hedging activities. This new guidance requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. PPG has applied the provisions of this new guidance to its financial statement disclosures beginning in the first quarter of 2009.
Accounting Standards Adopted in 2010
In June 2009, the FASB issued revisions to the accounting guidance on consolidation of variable interest entities. On January 1, 2010, PPG adopted the provisions of the new guidance, which did not have an impact on its consolidated results of operations, cash flows or financial position. Refer to Note 6, Investments for information related to PPGs sole variable interest entity, RS Cogen, L.L.C.
In July 2010, the FASB issued new accounting guidance on finance receivables and allowance for credit loss, including disclosure requirements. In the fourth quarter of 2010, PPG adopted the provisions of the new guidance, which did not have an impact on its consolidated results of operations, cash flows or financial position. PPG has applied the provisions of this new guidance to its financial statement disclosures beginning in the fourth quarter of 2010.
2. Acquisitions
The Company spent $34 million on acquisitions (net of cash acquired of $6 million) in 2010, including purchase price adjustments related to acquisitions that were completed prior to December 31, 2009.
The Company spent $26 million on acquisitions (net of cash acquired of $1 million) in 2009, including purchase price adjustments related to acquisitions that were completed prior to December 31, 2008.
The Company spent $1,673 million on acquisitions (net of cash acquired of $136 million) in 2008, including purchase price adjustments related to 2007 acquisitions. Most of this spending was related to the January 2, 2008 acquisition of SigmaKalon, a worldwide coatings producer based in Uithoorn, Netherlands, from global private investment firm Bain Capital (the seller). The acquired business produces architectural, protective and marine and industrial coatings and is a leading coatings supplier in Europe and other key markets across the globe, with an increasing presence in Africa and Asia. The results of these businesses have been included in PPGs consolidated results of operations from January 2, 2008 onward. The 2008 sales of the acquired SigmaKalon businesses were $3.2 billion.
The total transaction value was approximately $3.2 billion, consisting of cash paid to the seller of $1,673 million and debt assumed of $1,517 million. The cash paid to the seller consisted of 717 million ($1,056 million) and $617 million. In 2007, PPG issued $617 million of commercial paper and borrowed $1,056 million (717 million) under a 1 billion bridge loan agreement established in December 2007 in anticipation of completing the SigmaKalon acquisition. The proceeds from these borrowings were deposited into escrow in December 2007. Upon closing of the transaction on January 2, 2008, these amounts were released from escrow and paid to the seller.
2010 PPG ANNUAL REPORT AND FORM 10-K | 37 |
Notes to the Consolidated Financial Statements
The following table summarizes the final purchase price allocation for the SigmaKalon acquisition.
(Millions) | ||||
Current assets (including cash of $136) |
$ | 1,415 | ||
Property, plant, and equipment |
635 | |||
Customer-related intangibles |
685 | |||
Trade names |
277 | |||
Acquired technology |
122 | |||
Goodwill (non-deductible) |
1,353 | |||
Other |
172 | |||
Total assets |
4,659 | |||
Short-term debt |
(1,507 | ) | ||
Current liabilities |
(798 | ) | ||
Long-term debt |
(10 | ) | ||
Deferred taxes |
(389 | ) | ||
Other long-term liabilities |
(305 | ) | ||
Net assets |
1,650 | |||
In-process research and development |
23 | |||
Total purchase price |
$ | 1,673 | ||
Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The identifiable intangible assets acquired in the SigmaKalon transaction will be amortized over an estimated weighted-average amortization period of 11 years. Customer-related intangibles will be amortized over an estimated weighted-average amortization period of 12 years, acquired technology will be amortized over an estimated weighted-average amortization period of seven years and trade names will be amortized over an estimated weighted-average amortization period of 15 years. Estimated future amortization expense related to these identifiable intangible assets is approximately $75 million annually in 2011 and 2012 and approximately $70 million annually in 2013-2015.
Goodwill related to the SigmaKalon acquisition has been recorded by PPGs reportable segments as follows: $1,045 million by Architectural Coatings EMEA, $112 million by Performance Coatings (protective and marine operating segment) and $196 million by Industrial Coatings (industrial operating segment).
The step up to fair value of acquired inventory as part of the purchase price allocation totaled $94 million. This amount was included in cost of sales, exclusive of depreciation and amortization, in the accompanying consolidated statement of income for the year ended December 31, 2008 as the related inventory was sold to customers in the first quarter of 2008. The amount allocated to in-process research and development was charged to expense in the first quarter of 2008.
During 2008, the Company made several other acquisitions in the coatings businesses. The following table summarizes the estimated fair value of assets acquired and liabilities assumed as a result of these acquisitions and reflected in the purchase price allocations and adjustments recorded as of December 31, 2008. There were no significant adjustments to these amounts subsequent to December 31, 2008.
(Millions) | ||||
Current assets |
$ | 38 | ||
Property, plant, and equipment |
6 | |||
Goodwill |
21 | |||
Other current assets |
38 | |||
Other non-current assets |
34 | |||
Total assets |
137 | |||
Long-term liabilities |
(1 | ) | ||
Net assets |
$ | 136 | ||
3. Divestiture of Automotive Glass and Services Business
During the third quarter of 2007, the Company entered into an agreement to sell its automotive glass and services business to Platinum Equity (Platinum) for approximately $500 million. Accordingly, the assets and liabilities of this business were classified as held for sale and the results of operations and cash flows of this business were classified as discontinued operations in the third quarter of 2007. In the fourth quarter of 2007, PPG was notified that affiliates of Platinum had filed suit in the Supreme Court of the State of New York, County of New York, alleging that Platinum was not obligated to consummate the agreement. Platinum also terminated the agreement. PPG has sued Platinum and certain of its affiliates for damages, including the $25 million breakup fee stipulated by the terms of the agreement, based on various alleged actions of the Platinum parties. While the transaction with Platinum was terminated, PPG management remained committed to a sale of the automotive glass and services business and continued to classify its assets and liabilities as held for sale and to report its results of operations and cash flows as discontinued operations through the first quarter of 2008.
In July 2008, PPG entered into an agreement with affiliates of Kohlberg & Company, LLC, under which PPG would divest the automotive glass and services business to a new company formed by affiliates of Kohlberg. Under the agreement, PPG would receive a non-controlling interest in the new company. As a result, the accounting requirements for classifying the business as assets held for sale and reporting its results of operations and cash flows as discontinued operations had no longer been met.
In the second quarter of 2008, the automotive glass and services business was reclassified to continuing operations and, as a result, PPG recorded a one-time, non-cash charge of $17 million ($11 million aftertax) to reflect a catch-up of depreciation expense, which was
38 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Notes to the Consolidated Financial Statements
suspended during the period the business was classified as a discontinued operation. Additionally, in the second quarter of 2008, PPG recorded a charge of $19 million ($12 million aftertax) for special termination benefits and a pension curtailment loss relating to the impact of benefit changes, including accelerated vesting, negotiated as part of the sale. This charge is included in Selling, general and administrative expenses in the accompanying consolidated statement of income for the year ended December 31, 2008.
The transaction with affiliates of Kohlberg was completed on September 30, 2008, with PPG receiving total proceeds of $315 million, including $225 million in cash and two 6-year notes totaling $90 million ($60 million at 8.5% interest and $30 million at 10% interest). Both notes, which may be prepaid at any time without penalty, are senior to the equity of the new company. In addition, PPG received a noncontrolling interest of approximately 40 percent in the new company, Pittsburgh Glass Works LLC. This transaction resulted in a third quarter 2008 gain of $15 million pretax, net of transaction costs, and is included in Other income in the accompanying consolidated statement of income for the year ended December 31, 2008. The aftertax gain on the transaction was $3 million, reflective of tax expense of $12 million. Tax expense on the gain includes the tax cost of repatriating certain transaction proceeds from Canada to the U.S. and the impact of certain permanent book/tax differences which resulted in a larger taxable gain. PPG accounts for its interest in Pittsburgh Glass Works LLC under the equity method of accounting from October 1, 2008 onward.
The automotive glass and services business had net sales of $724 million and earnings of $16 million during the nine months ended September 30, 2008 and its results are part of the Glass reportable segment for that period.
PPG has retained certain liabilities for pension and post-employment benefits earned for service up to the date of sale, totaling approximately $956 million and $850 million at December 31, 2010 and 2009, respectively, for employees who were active as of the divestiture date and for individuals who were retirees of the business as of the divestiture date. PPG recognized expense of approximately $30 million and $40 million related to these obligations in 2010 and 2009, respectively.
Pittsburgh Glass Works LLC ceased production at its Oshawa, Canada plant in 2009 and closed its Hawkesbury, Canada plant in 2010. Under Canadian pension regulations, these plant closures will result in partial wind-ups of the pension plans for former employees at these plants, the liability for which was retained by PPG. Each of these partial windups will result in settlement charges against PPG earnings and require cash contributions to the plans in amounts that will be determined following the required review of the partial wind-ups by the Canadian pension authorities. The amount of each pretax charge and the cash contribution is currently estimated to be in the range of $20-$30 million and $10-$15 million, respectively. The proposed effective dates of the partial windups related to the Oshawa and Hawkesbury plant closures are February 27, 2009 and August 31, 2010, respectively. The cash contributions must be made by the end of the five year period following the proposed effective dates of the partial windups. The settlement charges will be recorded following the approval of the partial windups by the Canadian pension authorities and when the related cash contributions are completed.
4. Working Capital Detail
(Millions) | 2010 | 2009 | ||||||||
Receivables | ||||||||||
Trade - net(1) |
$ | 2,447 | $ | 2,283 | ||||||
Equity affiliates |
24 | 28 | ||||||||
Other - net |
307 | 317 | ||||||||
Total |
$ | 2,778 | $ | 2,628 | ||||||
Inventories(2) | ||||||||||
Finished products |
$ | 912 | $ | 918 | ||||||
Work in process |
136 | 125 | ||||||||
Raw materials |
411 | 390 | ||||||||
Supplies |
114 | 115 | ||||||||
Total |
1,573 | 1,548 | ||||||||
Accounts payable and accrued liabilities | ||||||||||
Trade creditors |
$ | 1,626 | $ | 1,384 | ||||||
Accrued payroll |
405 | 355 | ||||||||
Customer rebates |
218 | 207 | ||||||||
Other postretirement and pension benefits |
109 | 103 | ||||||||
Income taxes |
56 | 33 | ||||||||
Other |
588 | 566 | ||||||||
Total |
$ | 3,002 | $ | 2,648 | ||||||
(1) | Allowance for Doubtful Accounts equaled $91 million and $122 million as of December 31, 2010 and 2009, respectively. |
(2) | Inventories valued using the LIFO method of inventory valuation comprised 33% and 35% of total gross inventory values as of December 31, 2010 and 2009, respectively. If the FIFO method of inventory valuation had been used, inventories would have been $201 million and $224 million higher as of December 31, 2010 and 2009, respectively. During the year ended December 31, 2010 and 2009, certain inventories accounted for on the LIFO method of accounting were reduced, which resulted in the liquidation of certain quantities carried at costs prevailing in prior years. The effect on earnings was expense of $0.3 million and income of $12 million for the years ended December 31, 2010 and 2009, respectively. |
5. Property
(Millions) |
Useful (years) |
2010 | 2009 | |||||||||||
Land and land improvements |
5-30 | $ | 477 | $ | 478 | |||||||||
Buildings |
20-40 | 1,467 | 1,476 | |||||||||||
Machinery and equipment |
5-25 | 5,587 | 5,507 | |||||||||||
Other |
3-20 | 652 | 689 | |||||||||||
Construction in progress |
232 | 163 | ||||||||||||
Total(1) |
$ | 8,415 | $ | 8,313 | ||||||||||
(1) | Interest capitalized in 2010, 2009 and 2008 was $7 million, $9 million and $8 million, respectively. |
2010 PPG ANNUAL REPORT AND FORM 10-K | 39 |
Notes to the Consolidated Financial Statements
6. Investments
(Millions) | 2010 | 2009 | ||||||||
Investments in and advances to equity affiliates |
$ | 416 | $ | 365 | ||||||
Marketable equity securities |
||||||||||
Trading (See Note 15) |
59 | 56 | ||||||||
Available for sale |
6 | 5 | ||||||||
Other |
69 | 73 | ||||||||
Total |
$ | 550 | $ | 499 | ||||||
The Companys investments in and advances to equity affiliates include its approximately 40 percent interest in Pittsburgh Glass Works LLC, which had a carrying value, including $90 million in notes receivable, of $197 million at December 31, 2010 (see Note 3, Divestiture of Automotive Glass and Services Business). The Companys investments in and advances to equity affiliates also include 50 percent ownership interests in a number of joint ventures that manufacture and sell coatings, glass and chemicals products, the most significant of which produce fiber glass products and are located in Asia.
In addition, PPG has a 50 percent ownership interest in RS Cogen, L.L.C., which toll produces electricity and steam primarily for PPG and its joint venture partner. The joint venture was formed with a wholly-owned subsidiary of Entergy Corporation in 2000 for the construction and operation of a $300 million process steam, natural gas-fired cogeneration facility in Lake Charles, La., the majority of which was financed by a syndicate of banks. PPGs future commitment to purchase electricity and steam from the joint venture approximates $23 million per year subject to contractually defined inflation adjustments for the next 12 years. The purchases for the years ended December 31, 2010, 2009 and 2008 were $23 million, $23 million and $24 million, respectively.
RS Cogen is a variable interest entity under U.S. accounting guidance. The joint ventures critical operations are overseen by a management committee, which has equal representation by PPG and Entergy. With the power to direct the activities of RS Cogen equally shared between RS Cogens two owners, PPG does not consider itself to be the joint ventures primary beneficiary. Accordingly, PPG accounts for its investment in RS Cogen as an equity method investment.
The following table summarizes the Companys maximum exposure to loss associated with RS Cogen as of December 31, 2010:
(Millions) | ||||
Investment in and advances to RS Cogen |
$ | 8 | ||
Take-or-pay obligation under power tolling arrangement |
281 | |||
Maximum exposure to loss |
$ | 289 | ||
Summarized financial information of PPGs equity affiliates on a 100 percent basis, in the aggregate, is as follows:
(Millions) | 2010 | 2009 | ||||||||||
Working capital |
$ | 130 | $ | 243 | ||||||||
Property, net |
927 | 957 | ||||||||||
Short-term debt |
(137 | ) | (165 | ) | ||||||||
Long-term debt |
(423 | ) | (502 | ) | ||||||||
Other, net |
184 | 187 | ||||||||||
Net assets |
$ | 681 | $ | 720 | ||||||||
(Millions) | 2010 | 2009 | 2008 | |||||||||
Revenues |
$ | 1,519 | $ | 1,320 | $ | 885 | ||||||
Net earnings (loss) |
$ | 103 | $ | (4 | ) | $ | 14 | |||||
PPGs share of undistributed net earnings of equity affiliates was $94 million and $44 million as of December 31, 2010 and 2009, respectively. Dividends received from equity affiliates were $6 million, $11 million and $18 million in 2010, 2009 and 2008, respectively.
As of December 31, 2010 and 2009, there were unrealized pretax gains of $1 million and unrealized pretax losses of $1 million, respectively, recorded in Accumulated other comprehensive loss in the accompanying consolidated balance sheet related to marketable equity securities available for sale. During 2010, PPG sold certain of these investments resulting in recognition of pretax gains of $2 million and proceeds of $3 million. During 2009, PPG sold certain of these investments resulting in recognition of pretax gains of $0.1 million and proceeds of $0.1 million. During 2008, PPG sold certain of these investments resulting in recognition of a pretax gain of $0.1 million and proceeds of $1 million.
7. Goodwill and Other Identifiable Intangible Assets
The change in the carrying amount of goodwill attributable to each reportable business segment for the years ended December 31, 2010 and 2009 was as follows:
(Millions) | Performance Coatings |
Industrial Coatings |
Architectural EMEA |
Optical and Specialty Materials |
Glass | Commodity Chemicals |
Total | |||||||||||||||||||||
Balance, Jan. 1, 2009 |
$ | 1,078 | $ | 482 | $ | 976 | $ | 50 | $ | 55 | $ | | $ | 2,641 | ||||||||||||||
Goodwill from acquisitions |
| 9 | 5 | | | 3 | 17 | |||||||||||||||||||||
Currency translation |
65 | 18 | 40 | 1 | 2 | | 126 | |||||||||||||||||||||
Balance, Dec. 31, 2009 |
$ | 1,143 | $ | 509 | $ | 1,021 | $ | 51 | $ | 57 | $ | 3 | $ | 2,784 | ||||||||||||||
Goodwill from acquisitions |
| 7 | 8 | | | 3 | 18 | |||||||||||||||||||||
Currency translation |
8 | (21 | ) | (63 | ) | (2 | ) | (5 | ) | | (83 | ) | ||||||||||||||||
Balance, Dec. 31, 2010 |
$ | 1,151 | $ | 495 | $ | 966 | $ | 49 | $ | 52 | $ | 6 | $ | 2,719 | ||||||||||||||
40 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Notes to the Consolidated Financial Statements
The carrying amount of acquired trademarks with indefinite lives as of December 31, 2010 and 2009 totaled $323 million and $334 million, respectively.
The Companys identifiable intangible assets with finite lives are being amortized over their estimated useful lives and are detailed below.
Dec. 31, 2010 | Dec. 31, 2009 | |||||||||||||||||||||||
(Millions) | Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | ||||||||||||||||||
Acquired technology |
$ | 515 | $ | (273 | ) | $ | 242 | $ | 519 | $ | (234 | ) | $ | 285 | ||||||||||
Customer-related intangibles |
974 | (355 | ) | 619 | 990 | (286 | ) | 704 | ||||||||||||||||
Tradenames |
120 | (44 | ) | 76 | 122 | (35 | ) | 87 | ||||||||||||||||
Other |
31 | (23 | ) | 8 | 28 | (22 | ) | 6 | ||||||||||||||||
Balance |
$ | 1,640 | $ | (695 | ) | $ | 945 | $ | 1,659 | $ | (577 | ) | $ | 1,082 | ||||||||||
Aggregate amortization expense was $124 million, $126 million and $135 million in 2010, 2009 and 2008, respectively. The estimated future amortization expense of identifiable intangible assets is approximately $130 million during 2011 and 2012, and approximately $115-$120 million during 2013, 2014 and 2015.
8. Business Restructuring
In March of 2009, the Company finalized a restructuring plan focused on further reducing its global cost structure, driven by global economic conditions, low end-market demand and acceleration of cost-savings from the integration of the 2008 acquisition of SigmaKalon. As part of the restructuring, PPG closed the paint manufacturing portion of its facility in Saultain, France at the end of 2009, as well as several smaller production, laboratory, warehouse and distribution facilities across PPGs businesses and regions, and has reduced staffing across the company globally.
As a result of this restructuring plan, in March of 2009 the Company recorded a charge of $186 million for business restructuring, including severance and other costs of $154 million and asset write-offs of $32 million.
The Company also incurred approximately $11 million of additional costs directly associated with the restructuring actions for demolition, dismantling, relocation and training, of which $9 million was charged to expense as incurred in 2009 and $2 million in the first quarter of 2010.
In the fourth quarter of 2009, adjustments of approximately $10 million were recorded to reduce the remaining restructuring reserves established in 2008 and 2009 to reflect the current estimate of the costs to complete these actions. Also in the fourth quarter of 2009, some additional restructuring actions were approved and charges of approximately $10 million were recorded.
In the fourth quarter of 2010, adjustments of approximately $8 million were recorded to reduce the remaining restructuring reserves established in 2008 and 2009 to reflect the current estimate of the costs to complete these actions. Also in the fourth quarter of 2010, some additional restructuring actions were approved and charges of approximately $8 million were recorded.
At December 31, 2010, all restructuring actions have been finalized. The remaining reserve for the 2008 and 2009 restructuring plans of $23 million relates to severance payments to be made to certain former employees, $6 million of which will be paid after December 31, 2011.
The following table summarizes the activity through December 31, 2010 related to the 2009 restructuring actions:
(Millions, except no. of employees) |
Severance and Other Costs |
Asset Write-offs |
Total Reserve |
Employees Impacted |
||||||||||||
Performance Coatings |
$ | 35 | $ | 4 | $ | 39 | 764 | |||||||||
Industrial Coatings |
75 | 16 | 91 | 935 | ||||||||||||
Architectural Coatings - EMEA |
17 | | 17 | 130 | ||||||||||||
Optical & Specialty Materials |
3 | 9 | 12 | 219 | ||||||||||||
Commodity Chemicals |
6 | | 6 | 42 | ||||||||||||
Glass |
11 | 2 | 13 | 247 | ||||||||||||
Corporate |
7 | 1 | 8 | 91 | ||||||||||||
Total |
$ | 154 | $ | 32 | $ | 186 | 2,428 | |||||||||
2009 activity |
(77 | ) | (32 | ) | (109 | ) | (1,902 | ) | ||||||||
Currency impact |
11 | | 11 | | ||||||||||||
Balance as of December 31, 2009 |
$ |
88 |
|
$ |
|
|
$ |
88 |
|
|
526 |
| ||||
2010 activity |
(67 | ) | | (67 | ) | (526 | ) | |||||||||
Currency impact |
(4 | ) | | (4 | ) | | ||||||||||
Balance as of December 31, 2010 |
$ |
17 |
|
$ |
|
|
$ |
17 |
|
|
|
| ||||
During the third quarter of 2008, the Company finalized a restructuring plan as part of implementing PPGs global transformation strategy and the integration of its 2008 acquisition of SigmaKalon. As part of the restructuring, PPG closed its coatings manufacturing facilities in Clarkson, Ont., Canada, and Geldermalsen, the Netherlands. Other staffing reductions in PPGs coatings businesses in North America and Europe occurred in 2009. PPG also closed its Owen Sound, Ont., Canada, glass manufacturing facility, and idled one float glass production line at its Mt. Zion, Ill., facility in the fourth quarter of 2008. Other actions included writing off idle production assets in PPGs fiber glass and chemicals businesses.
In the third quarter of 2008, the Company recorded a charge of $163 million for business restructuring, including severance and other costs of $73 million, pension curtailments of $21 million and asset write-offs of $69 million. Severance and other restructuring costs related to the SigmaKalon acquisition totaling $33 million
2010 PPG ANNUAL REPORT AND FORM 10-K | 41 |
Notes to the Consolidated Financial Statements
have been recorded as part of the purchase price allocation, effectively increasing goodwill. The restructuring reserve recorded in 2008 totaled $196 million.
The Company also incurred approximately $6 million of additional costs directly associated with the restructuring actions for demolition, dismantling, relocation and training, of which $5 million was charged to expense as incurred in 2009 and $1 million in the first quarter of 2010.
The following table summarizes the activity through December 31, 2010 related to the 2008 restructuring actions:
(Millions, except no. of employees) |
Severance and Other Costs |
Pension Curtailment Losses |
Asset Write- offs |
Total Reserve |
Employees Impacted |
|||||||||||||||
Performance Coatings |
$ | 30 | $ | | $ | 15 | $ | 45 | 270 | |||||||||||
Industrial Coatings |
45 | 9 | 10 | 64 | 577 | |||||||||||||||
Architectural Coatings - EMEA |
19 | | | 19 | 215 | |||||||||||||||
Commodity Chemicals |
| | 13 | 13 | 10 | |||||||||||||||
Glass |
12 | 12 | 31 | 55 | 285 | |||||||||||||||
Total |
$ | 106 | $ | 21 | $ | 69 | $ | 196 | 1,357 | |||||||||||
2008 activity |
(12 | ) | (21 | ) | (69 | ) | (102 | ) | (249 | ) | ||||||||||
Currency impact |
(6 | ) | | | (6 | ) | | |||||||||||||
Balance as of December 31, 2008 |
$ |
88 |
|
$ |
|
|
$ |
|
|
$ |
88 |
|
|
1,108 |
| |||||
2009 activity |
(56 | ) | | | (56 | ) | (951 | ) | ||||||||||||
Currency impact |
2 | | | 2 | | |||||||||||||||
Balance as of December 31, 2009 |
$ |
34 |
|
$ |
|
|
$ |
|
|
$ |
34 |
|
|
157 |
| |||||
2010 activity |
(26 | ) | | | (26 | ) | (157 | ) | ||||||||||||
Currency impact |
(2 | ) | | | (2 | ) | | |||||||||||||
Balance as of December 31, 2010 |
$ |
6 |
|
$ |
|
|
$ |
|
|
$ |
6 |
|
|
|
| |||||
9. Debt and Bank Credit Agreements and Leases
(Millions) | 2010 | 2009 | ||||||||
6 7/8% notes, due 2012(1) |
$ | 71 | $ | 71 | ||||||
5.75% notes, due 2013(1) |
600 | 600 | ||||||||
3 7/8% notes, due 2015 (300) |
401 | 432 | ||||||||
1.9 % notes, due 2016(2) |
248 | | ||||||||
7 3/8% notes, due 2016 |
146 | 146 | ||||||||
6 7/8% notes, due 2017 |
74 | 74 | ||||||||
6.65% notes, due 2018 |
700 | 700 | ||||||||
7.4% notes, due 2019 |
198 | 198 | ||||||||
3.6% notes, due 2020(2) |
494 | | ||||||||
9% non-callable debentures, due 2021 |
149 | 149 | ||||||||
7.70% notes, due 2038 |
249 | 249 | ||||||||
5.5% notes, due 2040(2) |
248 | | ||||||||
Unsecured term loan, due 2012 |
400 | 400 | ||||||||
Impact of derivatives on debt(1) |
24 | 16 | ||||||||
Various other non-U.S. debt, weighted average 3.4% as of December 31, 2010 and 7.0% as of December 31, 2009 | 11 | 11 | ||||||||
Capital lease obligations |
34 | 32 | ||||||||
Total |
4,047 | 3,078 | ||||||||
Less payments due within one year |
4 | 4 | ||||||||
Long-term debt |
$ | 4,043 | $ | 3,074 | ||||||
(1) | PPG entered into several interest rate swaps which have the effect of converting $450 million as of December 31, 2010 and 2009, respectively, of these fixed rate notes to variable rates, based on the three-month London Interbank Offered Rate (LIBOR). The fair values of these interest rate swaps are based on Level 2 inputs as described in Note 10. The weighted average effective interest rate for these borrowings, including the effects of the outstanding swaps was 4.3% and 5.1% for the years ended December 31, 2010 and 2009, respectively. Refer to Notes 1 and 12 for additional information. |
(2) | The 2016 Notes, 2020 Notes and 2040 Notes were issued at a discount. The effective interest rates of the notes are 2.2%, 3.8%, and 5.5% respectively, at December 31`, 2010. |
Aggregate maturities of long-term debt during the next five years are (in millions) $4 in 2011, $477 in 2012, $615 in 2013, $2 in 2014, and $404 in 2015.
On March 18, 2008, PPG completed a public offering of $600 million in aggregate principal amount of its 5.75% Notes due 2013 (the 2013 Notes), $700 million in aggregate principal amount of its 6.65% Notes due 2018 (the 2018 Notes) and $250 million in aggregate principal amount of its 7.70% Notes due 2038 (the 2038 Notes and, together with the 2013 Notes and the 2018 Notes, the Notes). The Notes were offered by the Company pursuant to its existing shelf registration statement. The proceeds of this offering of $1,538 million (net of discount and issuance costs) and additional borrowings of $195 million under a 650 million revolving credit facility were used to repay existing debt, including debt incurred in connection with financing the SigmaKalon acquisition. The discount and issuance costs related to the Notes, which totaled $12 million, will be amortized to interest expense over the respective lives of the Notes.
In June 2009, PPG entered into a $400 million three year unsecured term loan. We used $116 million of the proceeds from this term loan to retire our 7.05% Notes due 2009; the remainder of the loan proceeds of approximately $284 million were used to retire outstanding amounts under a 650 million revolving credit facility. The principal amount of this term loan is due in three years and the interest rate is variable based on a spread over LIBOR.
In August 2010, PPG entered into a three-year credit agreement with several banks and financial institutions (the Credit Agreement). The Credit Agreement provides for a $1.2 billion unsecured revolving credit facility. In connection with entering into this Credit Agreement, the Company terminated its 650 million and its $1 billion revolving credit facilities that were each set to expire in 2011. There were no outstanding amounts due under either revolving facility at the time of their termination. The Company has the ability to increase the size of the Credit Agreement by up to an additional $300 million, subject to the receipt of lender commitments and other conditions. The Credit Agreement will terminate and all amounts outstanding will be due and payable on August 5, 2013.
42 | 2010 PPG ANNUAL REPORT AND FORM 10-K |
Notes to the Consolidated Financial Statements
The Credit Agreement provides that loans will bear interest at rates based, at the Companys option, on one of two specified base rates plus a margin based on certain formulas defined in the Credit Agreement. Additionally, the Credit Agreement contains a commitment fee on the amount of unused commitment under the Credit Agreement ranging from 0.125% to 0.625% per annum. The applicable interest rate and the commitment fee will vary depending on the ratings established by Standard & Poors Financial Services LLC and Moodys Investor Service Inc. for the Companys non-credit enhanced, long-term, senior, unsecured debt.
The Credit Agreement contains usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Companys ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Credit Agreement also requires the Company to maintain a ratio of total indebtedness to total capitalization, as defined in the Credit Agreement, of sixty percent or less.
The Credit Agreement contains customary events of default that would permit the lenders to accelerate the repayment of any loans, including the failure to make timely payments when due under the Credit Agreement or other material indebtedness, the failure to satisfy covenants contained in the Credit Agreement, a change in control of the Company and specified events of bankruptcy and insolvency. There were no amounts outstanding under the Credit Agreement at December 31, 2010.
On November 12, 2010, PPG completed a public offering of $250 million in aggregate principal amount of its 1.900% Notes due 2016 (the 2016 Notes), $500 million in aggregate principal amount of its 3.600% Notes due 2020 (the 2020 Notes) and $250 million in aggregate principal amount of its 5.500% Notes due 2040 (the 2040 Notes). These notes were issued pursuant to an indenture dated as of March 18, 2008 (the Original Indenture) between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee), as supplemented by a first supplemental indenture dated as of March 18, 2008 between the Company and the Trustee (the First Supplemental Indenture) and a second supplemental indenture dated as of November 12, 2010 between the Company and the Trustee (the Second Supplemental Indenture and, together with the Original Indenture and the First Supplemental Indenture, the Indenture). The Company may issue additional debt from time to time pursuant to the Original Indenture. The Indenture governing these notes contains covenants that limit the Companys ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Companys assets. The terms of these notes also require the Company to make an offer to repurchase Notes upon a Change of Control Triggering Event (as defined in the Second Supplemental Indenture) at a price equal to 101% of their principal amount plus accrued and unpaid interest.
Cash proceeds from this notes offering was $983 million (net of discount and issuance costs). The discount and issuance costs related to these notes, which totaled $17 million, will be amortized to interest expense over the respective terms of the notes.
PPGs non-U.S. operations have uncommitted lines of credit totaling $791 million of which $31 million was used as of December 31, 2010. These uncommitted lines of credit are subject to cancellation at any time and are generally not subject to any commitment fees.
Short-term debt outstanding as of December 31, 2010 and 2009, was as follows:
(Millions) | 2010 | 2009 | ||||||
650 million revolving credit facility, 0.8% as of Dec. 31, 2009 |
$ | | $ | 110 | ||||
Other, weighted average 3.39% as of Dec. 31, 2010 and 2.2% as of December 31, 2009 |
24 | 158 | ||||||
Total |
$ | 24 | $ | 268 | ||||
PPG is in compliance with the restrictive covenants under its various credit agreements, loan agreements and indentures. The Companys revolving credit agreements include a financial ratio covenant. The covenant requires that the amount of total indebtedness not exceed 60% of the Companys total capitalization excluding the portion of accumulated other comprehensive income (loss) related to pensions and other postretirement benefit adjustments. As of December 31, 2010, total indebtedness was 45% of the Companys total capitalization excluding the portion of accumulated other comprehensive income (loss) related to pensions and other postretirement benefit adjustments. Additionally, substantially all of the Companys debt agreements contain customary cross-default provisions. Those provisions generally provide that a default on a debt service payment of $10 million or more for longer than the grace period provided (usually 10 days) under one agreement may result in an event of default under other agreements. None of the Companys primary debt obligations are secured or guaranteed by the Companys affiliates.
Interest payments in 2010, 2009 and 2008 totaled $189 million, $201 million and $228 million, respectively.
2010 PPG ANNUAL REPORT AND FORM 10-K | 43 |
Notes to the Consolidated Financial Statements
In December 2008, the Company entered into an agreement with a counterparty to repurchase 1.5 million shares of the Companys stock. Under the terms of the agreement, the counterparty purchased the shares in the open market in January of 2009 and held the shares until December of 2009 when the Company paid the agreed upon price of $39.53 per share and took possession of these shares. The total cost of this share repurchase was approximately $59 million.
In October of 2009, the Company entered into an agreement with a counterparty to repurchase up to 1.2 million shares of the Companys stock of which 1.1 million shares were purchased in the open market (465,006 of these shares were purchased as of December 31, 2009 at a weighted average price of $56.66 per share). The counterparty held the shares until September of 2010 when the Company paid $65 million and took possession of these shares.
Rental expense for operating leases was $233 million, $241 million and $267 million in 2010, 2008 and 2009, respectively. The primary leased assets include paint stores, transportation equipment, warehouses and other distribution facilities, and office space, including the Companys corporate headquarters located in Pittsburgh, Pa. Minimum lease commitments for operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2010, are (in millions) $160 in 2011, $127 in 2012, $98 in 2013, $76 in 2014, $59 in 2015 and $145 thereafter.
The Company had outstanding letters of credit and surety bonds of $167 million as of December 31, 2010. The letters of credit secure the Companys performance to third parties under certain self-insurance programs and other commitments made in the ordinary course of business. As of December 31, 2010 and 2009, guarantees outstanding were $86 million and $80 million, respectively. The guarantees relate primarily to debt of certain entities in which PPG has an ownership interest and selected customers of certain of the Companys businesses. A portion of such debt is secured by the assets of the related entities. The carrying values of these guarantees were $10 million and $7 million as of December 31, 2010 and 2009, respectively, and the fair values were $14 million and $15 million, as of December 31, 2010 and 2009, respectively. The fair value of each guarantee was estimated by comparing the net present value of two hypothetical cash flow streams, one based on PPGs incremental borrowing rate and the other based on the borrowers incremental borrowing rate, as of the effective date of the guarantee. Both streams were discounted at a risk free rate of return. The Company does not believe any loss related to these letters of credit, surety bonds or guarantees is likely.
10. Fair Value Measurement
The accounting guidance on fair value measurements establishes a hierarchy with three levels of inputs used to determine fair value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities, are considered to be the most reliable evidence of fair value, and should be used whenever available. Level 2 inputs are observable prices that are not quoted on active exchanges. Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities.
Assets and liabilities reported at fair value on a recurring basis:
December 31, 2010 |
||||||||||||||||||
(Millions) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Short-term investments: |
||||||||||||||||||
Commercial paper and restricted cash |
$ | | $ | 632 | $ | | $ | 632 | ||||||||||
Marketable equity securities |
5 | | | 5 |