Edgar Filing: PPG INDUSTRIES INC

PPG 9.30.2013 10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________

FORM 10-Q

––––––––––––––––––––––––––––––––––––––––

QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 30, 2013

Commission File Number 1-1687

____________________________________________________________

PPG INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––



Pennsylvania		25-0730780
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One PPG Place, Pittsburgh, Pennsylvania		15272
(Address of principal executive offices)		(Zip Code)

(412) 434-3131

(Registrant’s telephone number, including area code)

––––––––––––––––––––––––––––––––––––––––––––––––––––––

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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

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	ý	Accelerated filer	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of September 30, 2013, 142,022,634 shares of the Registrant’s common stock, par value $1.66-2/3 per share, were outstanding.

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PPG INDUSTRIES, INC. AND SUBSIDIARIES

INDEX



		PAGE(S)
Part I. Financial Information
Item 1.	Financial Statements (Unaudited):
Condensed Consolidated Statement of Income		2
Condensed Consolidated Statement of Comprehensive Income		3
Condensed Consolidated Balance Sheet		4
Condensed Consolidated Statement of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46
Part II. Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	48
Signature		49

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PPG INDUSTRIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Income (Unaudited)

(Millions, except per share amounts)



	Three Months Ended September 30						Nine Months Ended September 30
	2013			2012			2013			2012
Net sales	$	3,980		$	3,408		$	11,406		$	10,269
Cost of sales, exclusive of depreciation and amortization	2,238			1,983			6,528			5,995
Selling, general and administrative	964			779			2,742			2,394
Depreciation	91			78			262			233
Amortization (Note 7)	28			27			88			82
Research and development	123			112			362			335
Interest expense	48			54			148			155
Interest income	(11		)	(10		)	(30		)	(29		)
Restructuring provision (Note 8)	98			—			98			208
Asbestos settlement – net (Note 19)	3			3			9			9
Other charges (Note 19)	120			20			168			206
Other income	(31		)	(40		)	(85		)	(100		)
Income before income taxes	309			402			1,116			781
Income tax expense (Note 12)	60			92			242			159
Income from continuing operations	249			310			874			622
Income from discontinued operations, net of income taxes (Note 5)	6			54			2,197			189
Net income attributable to the controlling and noncontrolling interests	255			364			3,071			811
Less: Net income attributable to noncontrolling interests	(29		)	(25		)	(94		)	(97		)
Net income (attributable to PPG)	$	226		$	339		$	2,977		$	714

Amounts attributable to PPG:
Income from continuing operations, net of tax	$	220		$	288		$	780		$	535
Income from discontinued operations, net of tax (Note 5)	6			51			2,197			179
Net income (attributable to PPG)	$	226		$	339		$	2,977		$	714

Earnings per common share (Note 11):
Income from continuing operations, net of tax	$	1.54		$	1.88		$	5.40		$	3.49
Income from discontinued operations, net of tax	0.04			0.33			15.21			1.17
Net income (attributable to PPG)	$	1.58		$	2.21		$	20.61		$	4.66
Earnings per common share – assuming dilution (Note 11):
Income from continuing operations, net of tax	$	1.52		$	1.86		$	5.34		$	3.46
Income from discontinued operations, net of tax	0.04			0.32			15.05			1.15
Net income (attributable to PPG)	$	1.56		$	2.18		$	20.39		$	4.61

Dividends per common share	$	0.61		$	0.59		$	1.81		$	1.75

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

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PPG INDUSTRIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Comprehensive Income (Unaudited)

(Millions)



	Three Months Ended September 30						Nine Months Ended September 30
	2013			2012			2013			2012
Net income attributable to the controlling and noncontrolling interests	$	255		$	364		$	3,071		$	811
Other comprehensive (loss) income, net of tax (Note 15):
Pension and other postretirement benefits	—			13			198			71
Foreign currency translation	172			85			(18		)	38
Marketable equity securities	(1		)	—			—			—
Derivative financial instruments	2			(4		)	9			(10		)
Other comprehensive income, net of tax	$	173		$	94		$	189		$	99
Total comprehensive income	428			458			3,260			910
Less: amounts attributable to noncontrolling interests:
Net income	(29		)	(25		)	(94		)	(97		)
Foreign currency translation	(3		)	(5		)	8			(3		)
Comprehensive income attributable to PPG	$	396		$	428		$	3,174		$	810

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

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PPG INDUSTRIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheet (Unaudited)

(Millions)



	September 30, 2013			December 31, 2012
Assets
Current assets:
Cash and cash equivalents	$	1,562		$	1,306
Short-term investments	687			1,087
Receivables (less allowance for doubtful accounts of $86 and $77)	3,122			2,813
Inventories (Note 6)	1,878			1,687
Deferred income taxes	424			430
Other	447			392
Total current assets	8,120			7,715
Property, plant and equipment (net of accumulated depreciation - $4,762 and $6,142)	2,687			2,888
Goodwill (Note 7)	3,023			2,761
Identifiable intangible assets - net (Note 7)	1,371			1,085
Deferred income taxes	629			669
Investments	404			422
Other assets	404			338
Total	$	16,638		$	15,878
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	3,503		$	3,061
Asbestos settlement (Note 19)	732			683
Restructuring reserves (Note 8)	100			75
Short-term debt and current portion of long-term debt (Note 9)	27			642
Total current liabilities	4,362			4,461
Long-term debt (Note 9)	3,368			3,368
Pensions (Note 13)	909			1,057
Other postretirement benefits (Note 13)	1,120			1,287
Asbestos settlement (Note 19)	242			237
Deferred income taxes	216			231
Other liabilities	940			915
Total liabilities	11,157			11,556
Commitments and contingent liabilities (Note 19)
Shareholders’ equity (Note 14):
Common stock	484			484
Additional paid-in capital	936			870
Retained earnings	12,589			9,871
Treasury stock, at cost	(7,329		)	(5,496		)
Accumulated other comprehensive loss	(1,469		)	(1,666		)
Total PPG shareholders’ equity	5,211			4,063
Noncontrolling interests	270			259
Total shareholders’ equity	5,481			4,322
Total	$	16,638		$	15,878

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

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PPG INDUSTRIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Cash Flows (Unaudited)



(Millions)	Nine Months Ended September 30
	2013			2012
Operating activities:
Net income attributable to controlling and noncontrolling interests	$	3,071		$	811
Less: Income from discontinued operations, net of income taxes (Note 5)	(2,197		)	(189		)
Income from continuing operations	874			622
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization	350			315
Pension expense (Note 13)	72			110
Canadian pension settlement charge (Note 13)	18			—
Restructuring provision (Note 8)	98			208
Environmental remediation charges (Note 19)	101			159
Stock-based compensation expense	59			53
Deferred income taxes	(63		)	(127		)
Equity affiliate losses (earnings), net of dividends	9			(8		)
Asbestos settlement, net of tax	6			6
Pension cash contributions	(47		)	(58		)
Restructuring cash spending (Note 8)	(56		)	(63		)
Other	71			(84		)
Change in certain asset and liability accounts:
Receivables	(302		)	(225		)
Inventories	(12		)	(83		)
Other current assets	(25		)	(3		)
Accounts payable and accrued liabilities	166			49
Noncurrent assets	(31		)	(9		)
Noncurrent liabilities	(69		)	(36		)
Income taxes payable and interest payable	59			40
Cash from operating activities - Continuing Operations	1,278			866
Cash from operating activities - Discontinued Operations	4			173
Cash from operating activities	1,282			1,039
Investing activities:
Additions to property, plant and equipment, and long-term investments	(259		)	(193		)
Proceeds from sale of assets	—			29
Business acquisitions, net of cash balances acquired (Note 4)	(978		)	(53		)
Proceeds from separation and merger of commodity chemicals business, net (Note 5)	940			—
Purchase of short-term investments	(1,063		)	(730		)
Proceeds from maturity of short-term investments	1,532			120
Payments on cross currency swap contracts	(5		)	(23		)
Other	2			6
Cash from (used for) investing activities - Continuing Operations	169			(844		)
Cash used for investing activities - Discontinued Operations	(1		)	(32		)
Cash from (used for) investing activities	168			(876		)
Financing activities:
Net payments on short-term debt	(13		)	(8		)
Proceeds from debt issuance (Note 9)	1			397
Payment of debt (Note 9)	(607		)	(202		)
Settlement of forward starting swaps	—			(121		)
Proceeds from termination of swaps	—			29
Issuance of treasury stock (Note 14)	59			110
Purchase of treasury stock (Note 14)	(320		)	(92		)
Dividends paid (Note 14)	(259		)	(267		)
Dividends paid on subsidiary common stock to noncontrolling interests (Note 14)	(58		)	(61		)
Other	10			(13		)
Cash used for financing activities - Continuing Operations	(1,187		)	(228		)
Cash used for financing activities - Discontinued Operations	—			(13		)
Cash used for financing activities	(1,187		)	(241		)
Effect of currency exchange rate changes on cash and cash equivalents	(7		)	13
Net increase/(decrease) in cash and cash equivalents	256			(65		)
Cash and cash equivalents, beginning of period	1,306			1,457
Cash and cash equivalents, end of period	$	1,562		$	1,392

Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized	$	166		$	178
Taxes paid, net of refunds	$	231		$	367

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

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PPG INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


1.	Basis of Presentation

The condensed consolidated financial statements included herein are unaudited. In the opinion of management, these statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the financial position of PPG Industries, Inc. and its subsidiaries (the “Company” or “PPG”) as of September 30, 2013, and the results of their operations for the three and nine months ended September 30, 2013 and 2012 and their cash flows for the nine months then ended. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in PPG’s Annual Report on Form 10-K for the year ended December 31, 2012.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results of operations for the nine months ended September 30, 2013 and the trends in these unaudited condensed consolidated financial statements may not necessarily be indicative of the results to be expected for the full year.

Certain reclassifications of prior years’ data have been made to conform to the current year presentation.

On January 28, 2013, PPG completed the separation of its commodity chemicals business and the merger of the subsidiary holding the PPG commodity chemicals business with a subsidiary of the Georgia Gulf Corporation ("Georgia Gulf"). The combined company formed by uniting Georgia Gulf with PPG's former commodity chemicals business is named Axiall Corporation ("Axiall"). PPG holds no ownership interest in Axiall. The Company concluded that the accounting requirements for reporting the results of operations and cash flows of its former commodity chemicals business as discontinued operations were met when its separation and merger was completed. The accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2012, the condensed consolidated statement of cash flows for the nine months ended September 30, 2012, and the amounts in these notes to the condensed consolidated financial statements related to 2012 have been adjusted to reflect the presentation of the results of operations and cash flows of the former commodity chemicals business as discontinued operations. Refer to Note 5 for additional information relating to this transaction.


2.	New Accounting Standards

On February 5, 2013, the Financial Accounting Standards Board (the "FASB") issued an amendment to the disclosure requirements for reporting reclassifications out of accumulated other comprehensive income ("AOCI"). The new requirements were effective for the first interim or annual period beginning after December 15, 2012. The amendment requires companies to present information about reclassification adjustments from accumulated other comprehensive income to the income statement, including the income statement line items affected by the reclassification. The information must be presented in the financial statements in a single note or on the face of the financial statements. The new accounting guidance also requires the disclosure to be cross referenced to other financial statement disclosures for reclassification items that are not reclassified directly to net income in their entirety in the same reporting period. PPG adopted the new requirements in the first quarter of 2013; however, the adoption of this guidance did not have an effect on its consolidated financial position, results of operations or cash flows (see Note 15, "Accumulated Other Comprehensive Income").

On July 18, 2013, the FASB issued an Accounting Standard Update ("ASU") that changes how certain unrecognized tax benefits are to be presented on the consolidated balance sheet. This ASU clarifies current guidance to require that an unrecognized tax benefit or a portion thereof be presented in the consolidated balance sheet as a reduction to a deferred tax asset for a net operating loss ("NOL") carryforward, similar tax loss, or a tax credit carryforward except when an NOL carryforward, similar tax loss, or tax credit carryforward is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. In such a case, the unrecognized tax benefit would be presented in the consolidated balance sheet as a liability. This new standard is effective for the first interim or annual period beginning after December 15, 2013. This standard is to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Early adoption and retrospective application are permitted. PPG is currently evaluating the new requirements; however, it does not expect that the adoption of this guidance will have a material effect on its consolidated financial position, results of operations or cash flows.

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3.	Fair Value Measurement

The accounting guidance on fair value measurement establishes a hierarchy with three levels of inputs used to determine fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities, 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 used for measuring the fair value of assets or liabilities.

Assets and liabilities reported at fair value on a recurring basis:

(Millions)



	Level 1		Level 2		Level 3		Total
At September 30, 2013
Short-term investments:
Commercial paper and certificates of deposit	$	—	$	201	$	—	$	201
Other current assets:
Marketable equity securities	5		—		—		5
Foreign currency contracts^(a)	—		15		—		15
Equity forward arrangement^(a)	—		176		—		176
Other assets:
Foreign currency contracts^(a)	—		1		—		1
Investments:
Marketable equity securities	67		—		—		67
Accounts payable and accrued liabilities:
Foreign currency contracts^(a)	—		5		—		5
Other liabilities:
Cross currency swaps^(a)	—		107		—		107

At December 31, 2012
Short-term investments:
Commercial paper and certificates of deposit	$	—	$	455	$	—	$	455
Other current assets:
Marketable equity securities	5		—		—		5
Foreign currency contracts^(a)	—		3		—		3
Equity forward arrangement^(a)	—		130		—		130
Investments:
Marketable equity securities	60		—		—		60
Accounts payable and accrued liabilities:
Foreign currency contracts^(a)	—		1		—		1
Other liabilities:
Cross currency swaps^(a)	—		95		—		95

(a) This balance is designated as a hedging instrument under U.S. generally accepted accounting principles.

Assets and liabilities reported at fair value on a nonrecurring basis:

As a result of the 2013 restructuring plan, as discussed in Note 8, “Business Restructuring”, long-lived assets with a carrying amount of $3 million were written-down to fair value resulting in a charge of $3 million which was included in the business restructuring expense reported in the nine months ended September 30, 2013. These long-lived assets were valued using Level 3 inputs.

As a result of the 2012 restructuring plan, as discussed in Note 8, “Business Restructuring”, long-lived assets with a carrying amount of $10 million were written-down to fair value of $7 million, resulting in a charge of $3 million, which was included in the business restructuring expense reported in the nine months ended September 30, 2012. These long-lived assets were valued using Level 3 inputs.

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4.	Acquisitions and Divestitures

During the nine month period ended September 30, 2013, the Company completed the acquisition of two coatings businesses. The Company spent $978 million on these acquisitions, net of cash acquired and including purchase price adjustments related to acquisitions that were completed prior to December 31, 2012.

On April 1, 2013, PPG finalized the acquisition of the North American architectural coatings business of Akzo Nobel N.V., Amsterdam, the Netherlands ("Legacy Akzo") for $957 million, net of cash acquired of $14 million, and including a preliminary working capital adjustment. The purchase price is subject to customary post closing adjustments. The acquisition further extends PPG’s architectural coatings business in the United States, Canada and the Caribbean. With this acquisition, PPG has expanded its reach in all three major North American architectural coatings distribution channels, including home centers, independent paint dealers and company-owned paint stores. Since April 1, 2013, the results of this acquired business have been included in the results of the architectural coatings - Americas and Asia Pacific operating segment, within the Performance Coatings reportable segment. Net sales reported by PPG from the date of acquisition from this acquired business were approximately $400 million and $875 million for the three and nine month periods ended September 30, 2013, respectively. Earnings from this acquisition have been in the mid single digit percentage return on sales since the acquisition date.

PPG is in the process of completing valuations of assets acquired and liabilities assumed. As such, the allocation of the purchase price is subject to change. The following table summarizes the estimated fair value of assets acquired and liabilities assumed as reflected in the preliminary purchase price allocation for the Legacy Akzo acquisition.



	(Millions)
Current assets	$	558
Property, plant, and equipment	183
Trademarks with indefinite lives	174
Identifiable intangible assets with finite lives	196
Goodwill	262
Other non-current assets	28
Total assets	$	1,401
Current liabilities	(332		)
Accrued pensions	(29		)
Other post-retirement benefits	(40		)
Other long-term liabilities	(43		)
Total liabilities	$	(444	)
Total purchase price, net of cash acquired	$	957

The following information reflects the net sales of PPG for the nine months ended September 30, 2013 and the three and nine months ended September 30, 2012 on a pro forma basis as if the acquisition of Legacy Akzo had been completed on January 1, 2012.



Condensed Consolidated Pro Forma information (unaudited)
	Three months ended	Nine months ended	Nine months ended
Millions	September 30, 2012	September 30, 2012	September 30, 2013

Net sales	$3,802	$11,493	$11,778

The pro forma impact on PPG's results of operations, including the pro forma effect of events that are directly attributable to the acquisition, was not significant. While calculating this impact, no cost savings or operating synergies that may result from the acquisition were included.

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In May 2013, the Company completed the acquisition of certain assets of Deft Incorporated, a privately-owned specialty coatings company based in Irvine, Calif. The acquisition enhances the coatings capabilities of PPG’s aerospace business. Deft products include structural primers and military topcoats for the North American aviation industry. In addition, Deft produces some architectural and general industrial coatings.

During the nine months ended September 30, 2012, the Company closed three acquisitions related to its coatings businesses. The total cost of these acquisitions was $207 million, including debt assumed of $122 million. These acquisitions also provide for contingent payments and escrowed holdbacks. Substantially all of the acquisition activity relates to the two acquisitions described below, as the third acquisition was not significant.

In January 2012, PPG completed the purchase of European coatings company Dyrup A/S (“Dyrup”), based in Copenhagen, Denmark, from its owner, Monberg & Thorsen A/S, a public holding company, for $44 million, of which $26 million is currently being held in escrow. As part of the transaction, PPG assumed debt of $120 million and acquired cash of $6 million. Dyrup, a producer of architectural coatings and woodcare products, operates six manufacturing facilities throughout Europe, and its products are sold primarily in Denmark, France, Germany, Portugal, Poland, and Spain through professional and do-it-yourself channels.

Also in January 2012, PPG completed the purchase of the coatings businesses of Colpisa Colombiana de Pinturas and its affiliate, Colpisa Equador (“Colpisa”), for $38 million, of which $2 million continues to be held in an escrow account as of September 30, 2013 until certain conditions are met, as defined in the purchase agreement. Colpisa manufactures and distributes coatings for automotive OEM, automotive refinish and industrial coatings customers in Colombia and Ecuador.

The purchase price allocations related to the acquisitions made in 2012 resulted in an excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, which was recorded as an addition to "Goodwill".

The following table summarizes the fair value of assets acquired and liabilities assumed as reflected in the final purchase price allocations for the Dyrup and Colpisa acquisitions.



	(Millions)
Cash	$	6
Current assets	131
Property, plant, and equipment	79
Goodwill	24
Identifiable intangible assets	26
Other non-current assets	19
Total assets	$	285
Short-term debt	(110		)
Current liabilities	(64		)
Long-term debt	(10		)
Other long-term liabilities	(19		)
Total liabilities	$	(203	)
Total purchase price including cash in escrow and contingent payments	$	82

In July 2013, PPG reached an agreement to divest its 51 percent interest in Transitions Optical to Essilor International, which currently holds a 49 percent interest in the venture. Transitions Optical is a global supplier of photochromic lenses and a consolidated subsidiary of PPG. The transaction reflects an enterprise value of approximately $3.4 billion, with PPG receiving cash at closing of $1.73 billion pretax or approximately $1.5 billion after-tax, subject to certain post-closing working capital and net debt adjustments. In 2012, Transitions Optical had net sales of approximately $800 million. Essilor will also enter into multi-year agreements with PPG for continuing supply of optical dyes and research and development services and will acquire PPG's optical sunlens business. The transaction is expected to close in the first half of 2014, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals.

Currently, all Transitions Optical sales are consolidated in PPG's financial statements. Essilor's minority share of the joint venture's net earnings is reflected as a reduction to PPG's net income and presented in the financial statements

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as “Net income attributable to non-controlling interests”. Upon receipt of regulatory approvals, PPG expects to account for Transitions Optical as discontinued operations.


5.	Separation and Merger Transaction

On January 28, 2013, the Company completed the previously announced separation of its commodity chemicals business and merger of its wholly-owned subsidiary, Eagle Spinco Inc., with a subsidiary of Georgia Gulf Corporation in a tax efficient Reverse Morris Trust transaction (the “Transaction”). Pursuant to the merger, Eagle Spinco, the entity holding PPG's former commodity chemicals business, became a wholly-owned subsidiary of Georgia Gulf. The closing of the merger followed the expiration of the related exchange offer and the satisfaction of certain other conditions. The combined company formed by uniting Georgia Gulf with PPG's former commodity chemicals business is named Axiall Corporation (“Axiall”). PPG holds no ownership interest in Axiall. PPG received the necessary ruling from the Internal Revenue Service and as a result this Transaction was generally tax free to PPG and its shareholders.

Under the terms of the exchange offer, 35,249,104 shares of Eagle Spinco common stock were available for distribution in exchange for shares of PPG common stock accepted in the offer. Following the merger, each share of Eagle Spinco common stock automatically converted into the right to receive one share of Axiall Corporation common stock. Accordingly, PPG shareholders who tendered their shares of PPG common stock as part of this offer received 3.2562 shares of Axiall common stock for each share of PPG common stock accepted for exchange. PPG was able to accept the maximum of 10,825,227 shares of PPG common stock for exchange in the offer, and thereby, reduced its outstanding shares by approximately 7 percent. The completion of this exchange offer was a non-cash financing transaction, which resulted in an increase in "Treasury stock" at a cost of $1.562 billion based on the PPG closing stock price on January 25, 2013.

Under the terms of the Transaction, PPG received $900 million of cash and 35.2 million shares of Axiall common stock (market value of $1.8 billion on January 25, 2013) which was distributed to PPG shareholders by the exchange offer as described above. In addition, PPG received $67 million in cash for a preliminary post-closing working capital adjustment under the terms of the Transaction agreements. The net assets transferred to Axiall included $27 million of cash on the books of the business transferred. The cash consideration is subject to post-closing adjustments, including a final working capital adjustment, under the terms of the Transaction agreements. In the Transaction, PPG transferred environmental remediation liabilities, defined benefit pension plan assets and liabilities and other post-employment benefit liabilities related to the commodity chemicals business to Axiall.

During the first quarter of 2013, PPG recorded a gain on the Transaction reflecting the excess of the sum of the cash proceeds received and the cost (closing stock price on January 25, 2013) of the PPG shares tendered and accepted in the exchange for the 35.2 million shares of Axiall common stock over the net book value of the net assets of PPG's former commodity chemicals business. The Transaction resulted in a net partial settlement loss of $33 million associated with the spin out and termination of defined benefit pension liabilities and the transfer of other post-retirement benefit liabilities under the terms of the Transaction. The Company also incurred $14 million of pretax expense, primarily for professional services related to the Transaction during the first nine months of 2013 as well as approximately $2 million of net expense related to certain retained obligations and post closing adjustments under the terms of the Transaction agreements. The net gain on the Transaction of $2.2 billion includes these related losses and expenses.

The results of operations and cash flows of PPG's former commodity chemicals business for January 2013 and the net gain on the Transaction are reported as results from discontinued operations for the three and nine months ending September 30, 2013. In prior periods presented, the results of operations and cash flows of PPG's former commodity chemicals business have been reclassified from continuing operations and presented as results from discontinued operations.

PPG will provide Axiall with certain transition services for up to 24 months following the closing date of the Transaction. These services include logistics, purchasing, finance, information technology, human resources, tax and payroll processing.

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Net sales and earnings from discontinued operations are presented in the table below for the three and nine months ended September 30, 2013 and 2012:



	Three Months Ended September 30					Nine Months Ended September 30
Millions	2013		2012			2013		2012
Net sales	$	—	$	437		$	108	$	1,283
Income from operations	$	—	$	84		$	—	$	283
Net gain from separation and merger of commodity chemicals business	—		—			2,192		—
Income tax expense	6		(30		)	5		(94		)
Income from discontinued operations, net of tax	6		54			2,197		189
Less: Net income attributable to non-controlling interests, discontinued operations	—		3			—		10
Net income from discontinued operations (attributable to PPG)	$	6	$	51		$	2,197	$	179

Income from discontinued operations before income taxes for the three and nine months ended September 30, 2012 is $10 million and $17 million lower, respectively than segment earnings for the PPG Commodity Chemicals segment previously reported for these periods. These differences are due to the inclusion of certain gains, losses and expenses associated with the chlor-alkali and derivatives business that was separated but were not part of the PPG Commodity Chemicals segment earnings in accordance with the accounting guidance on segment reporting.

The major classes of assets and liabilities of the commodity chemicals business included in the PPG balance sheet at December 31, 2012 were as follows:



	December 31,
Millions	2012
Cash	$	29
Receivables	245
Inventory	76
Other current assets	23
Property, plant, and equipment	380
Goodwill	6
Other non-current assets	29
Total assets of the commodity chemicals business	$	788
Accounts payable	(100		)
Other current liabilities	(91		)
Accrued pensions and other post-retirement benefits	(233		)
Environmental contingencies	(31		)
Other long-term liabilities	(59		)
Noncontrolling interests	$	(18	)
Net assets of the commodity chemicals business	$	256

The total assets of the commodity chemicals business presented above are $50 million higher than the assets of the PPG Commodity Chemicals segment reported at December 31, 2012 principally due to the inclusion of cash and deferred tax assets which were included in corporate assets for PPG segment reporting.

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6.	Inventories

Inventories as of September 30, 2013 and December 31, 2012 are detailed below:



	September 30, 2013		December 31, 2012
	(Millions)
Finished products	$	1,169	$	980
Work in process	160		144
Raw materials	479		443
Supplies	70		120
Total	$	1,878	$	1,687

Most U.S. inventories are valued using the last-in, first-out method. These inventories represented approximately 36% of total inventories at September 30, 2013 and December 31, 2012, respectively. If the first-in, first-out method of inventory valuation had been used, inventories would have been $196 million and $243 million higher as of September 30, 2013 and December 31, 2012, respectively.


7.	Goodwill and Other Identifiable Intangible Assets

The change in the carrying amount of goodwill attributable to each reportable segment for the nine months ended September 30, 2013 was as follows:



	Performance Coatings			Industrial Coatings		Architectural Coatings – EMEA		Optical and Specialty Materials		Commodity Chemicals			Glass		Total
	(Millions)
Balance, Dec. 31, 2012	$	1,173		$	512	$	970	$	48	$	6		$	52	$	2,761
Acquisitions	262			3		—		—		—			—		265
Separation of commodity chemicals (Note 5)	—			—		—		—		(6		)	—		(6		)
Foreign currency	(19		)	3		17		2		—			—		3
Balance, Sept. 30, 2013	$	1,416		$	518	$	987	$	50	$	—		$	52	$	3,023

The carrying amount of acquired trademarks with indefinite lives as of September 30, 2013 and December 31, 2012 totaled $498 million and $324 million, respectively.

The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and are detailed below:



	September 30, 2013							December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
	(Millions)
Customer-related intangibles	$	1,173	$	(532	)	$	641	$	1,010	$	(491	)	$	519
Acquired technology	523		(362		)	161		516		(342		)	174
Tradenames	126		(59		)	67		120		(57		)	63
Other	30		(26		)	4		34		(29		)	5
Balance	$	1,852	$	(979	)	$	873	$	1,680	$	(919	)	$	761

Aggregate amortization expense related to these identifiable intangible assets for the three and nine months ended September 30, 2013 was $28 million and $88 million, respectively, and for the three and nine months ended September 30, 2012 was $27 million and $82 million, respectively. As of September 30, 2013, estimated future amortization expense of identifiable intangible assets is as follows: approximately $30 million for the remaining three months of 2013 and approximately $120 million, $120 million, $101 million, $93 million and $91 million in 2014, 2015, 2016, 2017 and 2018, respectively.

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8.	Business Restructuring

In July 2013, the Company approved a business restructuring plan that resulted in a pre-tax charge of $98 million. The approved actions are focused on achieving cost synergies related to the recent AkzoNobel North American architectural coatings acquisition, including actions in the acquired business, as well as, in PPG's legacy architectural business. Additionally, smaller targeted actions were approved for businesses where market conditions remain very challenging, most notably protective and marine coatings and certain European businesses such as architectural coatings and fiber glass. The restructuring actions will impact about 1,400 employees.

The charge of $98 million is comprised of employee severance and other costs of approximately $93 million and asset write-offs of approximately $5 million. Cash payouts for certain liabilities will take place over the next few years with about 40 percent and 50 percent of the cash payments expected to occur in 2013 and 2014, respectively, and the remainder in 2015. All actions in the restructuring plan are expected to be completed by the end of 2014.

The following table summarizes the 2013 restructuring charge and the activity during the three months ended September 30, 2013:



(Millions, except no. of employees)	Severance and Other Costs			Asset Write-offs			Total Reserve			Employees Impacted
Performance Coatings	$	51		$	4		$	55		1,016
Industrial Coatings	14			—			14			165
Architectural Coatings - EMEA	23			1			24			237
Glass	4			—			4			14
Corporate	1			—			1			4
Total	$	93		$	5		$	98		1,436
Activity to date	(10		)	(5		)	(15		)	(350	)
Foreign currency impact	4						4			—
Balance as of September 30, 2013	$	87		$	—		$	87		1,086

In March 2012, the Company approved a business restructuring plan that resulted in a charge of $208 million. The approved actions were taken to reduce the Company's cost structure, primarily due to continuing weak economic conditions in Europe and in the commercial and residential construction markets in the U.S. and Europe. As part of this restructuring plan, PPG closed several laboratory, warehouse and distribution facilities and small production units and reduced staffing. The restructuring impacted a number of businesses globally, primarily the global architectural businesses and general and administrative functions in Europe.

The charge of $208 million is comprised of employee severance and other cash costs of $160 million, asset write-offs of $53 million, and a net pension curtailment gain of $5 million. The Company also recognized additional costs directly associated with the restructuring actions for demolition, dismantling, relocation and training that were charged to expense as incurred, totaling $5 million, most of which was incurred by December 31, 2012.

In the fourth quarter of 2012, adjustments of approximately $12 million were recorded to reduce the restructuring reserve established in the first quarter of 2012 to reflect changes in the estimated cost to complete these actions. Also in the fourth quarter of 2012, some additional restructuring actions were approved and charges of approximately $12 million for the estimated cost of these actions were recorded. The additional actions increased the number of employees impacted by 273. All actions in the restructuring plan are expected to be completed by the end of 2013.

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The following table summarizes the 2012 restructuring charge and the activity in the restructuring reserve during the nine months ended September 30, 2013:



(Millions, except no. of employees)	Severance and Other Costs			Pension Curtailment (Gains)/Losses			Asset Write-offs			Total Reserve			Employees Impacted
Performance Coatings	$	55		$	1		$	12		$	68		867
Industrial Coatings	38			(1		)	8			45			394
Architectural Coatings - EMEA	61			(5		)	3			59			881
Optical & Specialty Materials	2			—			30			32			50
Glass	3			—			—			3			36
Corporate	1			—			—			1			4
Total	$	160		$	(5	)	$	53		$	208		2,232
2012 activity	(83		)	5			(53		)	(131		)	(1,631	)
Foreign currency Impact	(2		)	—			—			(2		)	—
Balance as of December 31, 2012	$	75		$	—		$	—		$	75		601
2013 activity to date	(44		)	—			—			(44		)	(582	)
Foreign currency impact	(3		)	—			—			(3		)	—
Balance as of September 30, 2013	$	28		$	—		$	—		$	28		19


9.	Debt

In March 2013, the Company repaid the $600 million of 5.75% notes due March 15, 2013. During the nine months ended September 30, 2012, the Company assumed $120 million of debt in the Dyrup acquisition; prepaid $119 million of that debt, and repaid $71 million of 6 7/8% notes upon their maturity.

On July 31, 2012, PPG completed a public offering of $400 million in aggregate principal amount of its 2.70% Notes due 2022. The 2022 Notes were offered by the Company pursuant to its existing shelf registration statement. The proceeds of this offering of $397 million, net of discount and issuance costs, were used to repay a portion of the $600 million of 5.75% notes due March 2013. The discount and issuance costs related to the 2022 Notes, which totaled $3 million, are being amortized to interest expense over the life of the 2022 Notes. Concurrently with the issuance of the 2022 Notes, PPG settled forward starting swaps with a payment of $121 million on July 30, 2012. This loss is being amortized to interest expense over the term of the notes, resulting in an effective interest rate of 5.8%. (Refer to Note 15, "Derivative Financial Instruments and Hedge Activities" for additional information).


10.	Investments

Until January 28, 2013, PPG held a 50 percent ownership interest in RS Cogen, L.L.C., which produced electricity and steam primarily for PPG's former Lake Charles, La. commodity chemicals facility and its joint venture partner under take-or-pay contracts with terms that extended to 2022. PPG’s purchases of electricity and steam from the joint venture for the years ended December 31, 2012, 2011 and 2010 were $25 million, $23 million and $23 million, respectively. During the first quarter 2013, PPG's ownership interest in RS Cogen, L.L.C. and its future purchase obligations under the take-or-pay commitments were transferred with the assets of the commodity chemicals business in the Transaction (see Note 5).

In July 2012, PPG and Asian Paints Ltd., expanded their coatings operations in India through the creation of a new joint venture and the expansion of the operations of an existing joint venture. PPG gained effective management control of the existing joint venture, with Asian Paints obtaining effective management control of the newly formed joint venture. The accounting for the changes to the existing joint venture resulted in recording assets at their fair values, including goodwill of $22 million and identifiable intangible assets of $12 million. Also, as PPG now consolidates the existing joint venture that is under its control, an amount was recorded for the non-controlling interest owned by Asian Paints of $48 million.

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11.	Earnings Per Common Share

The following table presents the earnings per common share calculations for the three and nine months ended September 30, 2013 and 2012.



	Three Months Ended September 30				Nine Months Ended September 30
(Millions, except per share amounts)	2013		2012		2013		2012
Earnings per common share (attributable to PPG)
Income from continuing operations, net of tax	$	220	$	288	$	780	$	535
Income from discontinued operations, net of tax	6		51		2,197		179
Net income (attributable to PPG)	$	226	$	339	$	2,977	$	714
Weighted average common shares outstanding	143.2		153.7		144.4		153.2
Earnings per common share (attributable to PPG):
Income from continuing operations, net of tax	$	1.54	$	1.88	$	5.40	$	3.49
Income from discontinued operations, net of tax	0.04		0.33		15.21		1.17
Net income (attributable to PPG)	$	1.58	$	2.21	$	20.61	$	4.66
Earnings per common share - assuming dilution (attributable to PPG)
Income from continuing operations, net of tax	$	220	$	288	$	780	$	535
Income from discontinued operations, net of tax	6		51		2,197		179
Net income (attributable to PPG)	$	226	$	339	$	2,977	$	714
Weighted average common shares outstanding	143.2		153.7		144.4		153.2
Effect of dilutive securities:
Stock options	0.9		0.9		0.8		0.8
Other stock compensation plans	0.8		0.9		0.8		0.8
Potentially dilutive common shares	1.7		1.8		1.6		1.6
Adjusted weighted average common shares outstanding	144.9		155.5		146.0		154.8
Earnings per common share - assuming dilution (attributable to PPG):
Income from continuing operations, net of tax	$	1.52	$	1.86	$	5.34	$	3.46
Income from discontinued operations, net of tax	0.04		0.32		15.05		1.15
Net income (attributable to PPG)	$	1.56	$	2.18	$	20.39	$	4.61

There were no antidilutive outstanding stock options for the three and nine month periods ended September 30, 2013 and 2012.

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12. Income Taxes

The effective tax rate on pretax income from continuing operations was approximately 22 percent and 20 percent for the first nine months of 2013 and 2012, respectively. The effective tax rate on pretax income from continuing operations for the nine months ended September 30, 2013 includes tax benefits of $37 million or 37.4 percent on environmental remediation; $25 million or 25.2 percent for business restructuring charges, $5 million or 26.7 percent on the settlement loss related to certain legacy pension plans and $11 million or 30.6 percent on certain acquisition-related costs. The tax rate for the first nine months of 2013 also includes an after-tax benefit of $10 million for the retroactive impact of U.S. tax law changes that were enacted in early 2013 and that were not included in previously reported 2012 earnings. The effective tax rate on the remaining pre-tax earnings from continuing operations was approximately 24 percent resulting in tax expense for the period of $330 million.

The effective tax rate on pretax earnings from continuing operations for the nine months ended September 30, 2012 included tax benefits of $60 million or 37.7 percent for estimated environmental remediation costs primarily at sites in New Jersey, $45 million or 21.4 percent for business restructuring charges and $2 million or 28.6 percent for acquisition-related expenses stemming from the acquisitions of Dyrup in Europe and Colpisa in Latin America. The effective tax rate on the remaining pre-tax earnings from continuing operations was approximately 23 percent resulting in tax expense of $266 million.

The effective tax rate on pretax income from discontinued operations for the nine months ended September 30, 2013 was approximately 0.3 percent. The effective tax rate for the nine months ended September 30, 2013 includes tax benefits of $7 million or 26 percent related to PPG costs associated with the Transaction. The separation and merger of PPG's commodity chemicals business with a subsidiary of Georgia Gulf (See Note 5) was generally tax free to PPG. The deductibility for U.S. federal tax purposes of the costs associated with the Transaction is limited. However, PPG now estimates that approximately 70 percent of the associated costs incurred to effect the transaction will be tax deductible. The 70 percent is an increase from PPG's previous estimate of 20 percent and is based on procedures completed and actions taken in the three months ended September 30, 2013, and benefit from this increased deductibility is recorded within "Income from discontinued operations, net of tax". The effective tax rate on pretax income from discontinued operations for the nine months ended September 30, 2012 was approximately 32 percent.

The Company files federal, state and local income tax returns in numerous domestic and foreign jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is no longer subject to examinations by tax authorities in any major tax jurisdiction for years before 2003. Additionally, the Internal Revenue Service (“IRS”) has completed its examination of the Company’s U.S. federal income tax returns filed for years through 2010. The IRS is currently conducting its examination of the Company's U.S. federal income tax return for 2011, which is expected to be completed during 2014.


13.	Pensions and Other Postretirement Benefits

Net periodic benefit cost is included in "Cost of sales, exclusive of depreciation and amortization", "Selling, general and administrative" and "Research and development" in the accompanying condensed consolidated statement of income. The net periodic benefit costs for the three and nine months ended September 30, 2013 and 2012 were as follows:



	Pensions
	Three Months Ended September 30						Nine Months Ended September 30
	2013			2012			2013			2012
	(Millions)
Service cost	$	16		$	14		$	45		$	42
Interest cost	56			56			162			168
Expected return on plan assets	(72		)	(66		)	(211		)	(200		)
Amortization of actuarial losses	16			34			76			100
Settlement losses	—			—			18			—
Net periodic pension cost	$	16		$	38		$	90		$	110

PPG does not have a mandatory contribution to make to its U.S. defined benefit pension plans in 2013 and does not plan to make a voluntary contribution in 2013. PPG expects to make mandatory contributions to its non-U.S. plans in 2013 of approximately $77 million, of which $47 million was made as of September 30, 2013.

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The net periodic other postretirement benefit costs for the three and nine months ended September 30, 2013 and 2012 were as follows:



	Other Postretirement Benefits
	Three Months Ended September 30						Nine Months Ended September 30
	2013			2012			2013			2012
	(Millions)
Service cost	$	5		$	5		$	15		$	14
Interest cost	12			12			37			38
Amortization of prior service credit	(2		)	(3		)	(7		)	(8		)
Amortization of actuarial losses	7			7			21			23
Net periodic other postretirement benefit cost	$	22		$	21		$	66		$	67

Separation and Merger

On January 28, 2013, PPG completed the separation of its commodity chemicals business and the merger of the subsidiary holding the PPG commodity chemicals business with a subsidiary of Georgia Gulf (see Note 5). PPG transferred the defined benefit pension plan and other postretirement benefit liabilities for the affected employees in the U.S., Canada, and Taiwan resulting in a net partial settlement loss of $33 million that was recorded in the first quarter of 2013 in "Income from discontinued operations". This Transaction lowered the projected benefit obligation of PPG's defined benefit pension plans by approximately $550 million and the accumulated benefit obligation of the other postretirement benefit plans by approximately $165 million. PPG also transferred to Georgia Gulf related pension assets of approximately $480 million. The pension asset transfer will be adjusted when the amount required to be transferred under ERISA is finalized. Pension and other postretirement benefit expense of $2 million and $20 million is recorded in "Income from discontinued operations" for the nine-month periods ended September 30, 2013 and 2012, respectively. These amounts have been excluded from the tables presented above.

Plan Reorganization

As a part of recently completed separation activities related to the separation and merger transaction of the former commodity chemicals business, the Company reorganized two of its U.S. defined benefit pension plans representing 92% of the total U.S. projected benefit obligation as of January 28, 2013, the date of the separation of the former commodity chemicals business and remeasurement of these pension plans, into multiple plans. The decision to reorganize these plans was finalized in August 2013. As a result of this reorganization, certain of these newly formed plans have no active participants and as such the amortization periods of the unrecognized net actuarial losses of these plans were changed to the average remaining life expectancy of the plan participants from the average remaining service period of plan participants in accordance with the accounting guidance for retirement benefits. This change reduced the Company's 2013 annual pension expense by approximately $18 million,of which, a pro-rata portion of $13 million was recorded in the three month period ended September 30, 2013. Of this amount, approximately $9 million related to the first half of 2013.

Legacy Canadian settlement charges

As part of a restructuring plan announced by PPG in September 2008, PPG closed its glass manufacturing facility in Owen Sound, Ont., Canada. Under Canadian pension regulations, this plant closure resulted in a full windup of the pension plan for the former hourly employees of this plant. The settlement charge is recorded following the approval of the windup by the Canadian pension authorities and when all of the related cash contributions are completed. Cash contributions are made to plans based on estimated cash requirements and must be completed by the end of the five year period from the effective date of the windup. The full windup of the Owen Sound plan was previously approved by the Canadian pension authorities and the Company made the final contributions to this plan in the first quarter of 2013. As a result, the Company recorded a settlement charge in the amount of $16 million related to the net unrecognized actuarial losses associated with the pension plan. There will be additional windup charges of $15-$20 million related to this plant closure as well as another Canadian location closed by PPG in 2009, which are expected to be incurred in 2015 and 2016. The expected cash contributions related to these windups total $5-$10 million from 2013 to 2016.

PPG has also retained certain liabilities for pension and postretirement benefits earned for service up to the 2008 date of sale of its former automotive glass and service business for both active and retired employees as of the divestiture date. In 2009, the acquirer ceased production at the Oshawa, Ont., Canada plant and closed its Hawkesbury, Canada

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plant in 2010. Under Canadian pension regulations, these plant closures resulted in five partial windups of defined benefit pension plans covering former employees of these plants in Canada. One of the partial windups was previously approved by the Canadian pension authorities and final cash contributions were made by PPG in the first quarter of 2013. As such, the Company recorded a settlement charge in the amount of $2 million related to the net unrecognized actuarial losses associated with this plan. The proposed effective dates of the remaining partial windups are in 2009 and 2010. Cash contributions are currently being made to the plans based on estimated cash requirements and must be completed 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. The remaining partial windups will result in additional settlement charges against PPG earnings, which are expected to be incurred in 2014-2015, of approximately $40-$50 million and require cash contributions to the plans totaling approximately $5-$10 million.


14.	Shareholders’ Equity

The following tables present the change in total shareholders’ equity for the nine months ended September 30, 2013 and 2012, respectively:



(Millions)	Total PPG Shareholders’ Equity			Non- controlling Interests			Total
Balance, January 1, 2013	$	4,063		$	259		$	4,322
Net income	2,977			94			3,071
Other comprehensive income, net of tax	197			(8		)	189
Cash dividends	(259		)	—			(259		)
Issuance of treasury stock	74			—			74
Purchase of treasury stock	(320		)	—			(320		)
Stock-based compensation activity	40			—			40
Increase in treasury stock (Note 5)	(1,561		)	—			(1,561		)
Reduction in non-controlling interests (Note 5)	—			(17		)	(17		)
Dividends paid on subsidiary common stock to noncontrolling interests	—			(58		)	(58		)
Balance, September 30, 2013	$	5,211		$	270		$	5,481



(Millions)	Total PPG Shareholders’ Equity			Non- controlling Interests			Total
Balance, January 1, 2012	$	3,249		$	197		$	3,446
Net income	714			97			811
Other comprehensive income, net of tax	96			3			99
Cash dividends	(267		)	—			(267		)
Issuance of treasury stock	121			—			121
Purchase of treasury stock	(92		)	—			(92		)
Stock-based compensation activity	40			—			40
Dividends paid on subsidiary common stock to noncontrolling interests (a)	—			(74		)	(74		)
Joint venture formation and consolidation	—			48			48
Balance, September 30, 2012	$	3,861		$	271		$	4,132

(a) - $13 million of this amount relates to noncontrolling interests of the commodity chemicals business separated in January 2013 (see Note 5). As such, this amount is presented in the condensed consolidated statement of cash flows within "Cash used for financing activities - Discontinued Operations".

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15.	Accumulated Other Comprehensive Income



(Millions)	Foreign Currency Translation					Pension and Other Postretirement Benefits					Gain (Loss) on Derivative Financial Instruments						Accumulated Other Comprehensive (Loss) Income
Balance, December 31, 2012			$	6				$	(1,597	)				$	(75	)		$	(1,666	)
Current year deferrals to AOCI	(10	)				107					18						115
Separation and Merger Transaction	—					33	(c)				4		(c)				37
Reclassifications from AOCI to Net income	—					58	(a)				(13	)	(b)				45
Net Change			(10		)			198						9				197
Balance, September 30, 2013			$	(4	)			$	(1,399	)				$	(66	)		$	(1,469	)

(a) - Reclassifications from AOCI are included in the computation of net periodic benefit costs (See Note 13, "Pension and Other Postretirement Benefits").

(b) - Reclassifications from AOCI are included in the gain or loss recognized on cash flow hedges (See Note 17, "Derivative Financial Instruments and Hedge Activities").

(c) Amounts in AOCI related to the commodity chemicals business were removed from the balance sheet in connection with recording the gain on the separation and merger of this business (See Note 5, "Separation and Merger Transaction").

With the exception of foreign currency translation adjustments, all other components of accumulated other comprehensive loss are reported net of tax. Foreign currency translation adjustments related to translation of foreign denominated balance sheets are not presented net of tax given that no deferred U.S. income taxes have been provided on undistributed earnings of non-U.S. subsidiaries. The tax benefit related to foreign currency translation adjustments other than translation of foreign denominated balance sheets for the period ended September 30, 2013 was $8 million.

The tax cost related to the adjustment for pension and other postretirement benefits for the period ended September 30, 2013 was approximately $80 million. The cumulative tax benefit related to the adjustment for pension and other postretirement benefits at September 30, 2013 and December 31, 2012 was approximately $880 million and $960 million, respectively. The tax cost related to the change in the unrealized gain on derivatives for the period ended September 30, 2013 was $6 million.


16.	Financial Instruments, Excluding Derivative Financial Instruments

Included in PPG’s financial instrument portfolio are cash and cash equivalents, short-term investments, cash held in escrow, marketable equity securities, company-owned life insurance and short and long-term debt instruments. The fair values of these financial instruments approximated their carrying values at September 30, 2013 and December 31, 2012, in the aggregate, except for long-term debt.

Long-term debt (excluding capital lease obligations) had carrying and fair values totaling $3,341 million and $3,694 million, respectively, as of September 30, 2013. Long-term debt (excluding capital lease obligations) had carrying and fair values totaling $3,939 million and $4,484 million, respectively, as of December 31, 2012. The fair values of the debt instruments were based on discounted cash flows and interest rates then currently available to the Company for instruments of the same remaining maturities. The fair value of debt is measured using level 2 inputs.

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17.	Derivative Financial Instruments and Hedge Activities

The Company recognizes all derivative financial instruments as either assets or liabilities at fair value on the balance sheet. The accounting for changes in the fair value of a derivative depends on the use of the instrument. To the extent that a derivative is effective as a hedge of an exposure to future changes in cash flows, the change in fair value of the instrument is deferred in AOCI. Any portion considered to be ineffective is reported in earnings immediately, including changes in value related to credit risk. To the extent that a derivative is effective as a hedge of an exposure to future changes in fair value, the change in the derivative’s fair value is offset in the condensed consolidated statement of income by the change in fair value of the item being hedged. To the extent that a derivative or a financial instrument is effective as a hedge of a net investment in a foreign operation, the change in the derivative’s fair value or the financial instrument's carrying value is deferred as an unrealized currency translation adjustment in AOCI.

PPG’s policies do not permit speculative use of derivative financial instruments. PPG uses forward currency and option contracts as hedges against its exposure to variability in exchange rates on short-term intercompany transactions, unrecognized firm sales commitments and cash flows denominated in foreign currencies. PPG uses foreign denominated debt and cross currency swap contracts to hedge net investments in foreign operations. PPG also uses an equity forward arrangement to hedge the Company’s exposure to changes in the fair value of PPG stock that is to be contributed to the asbestos settlement trust as discussed in Note 19, “Commitments and Contingent Liabilities.”

Interest rate swaps are used from time to time to manage the Company's exposure to changing interest rates as such rate changes affected the fair value of fixed rate borrowings. No interest rate swaps were outstanding in the three and nine-month periods ended September 30, 2013 and 2012. Forward starting swaps were used in the first seven months of 2012 to lock-in a fixed interest rate, to which was added a corporate spread, related to future long-term debt refinancings. PPG also used derivative instruments to manage its exposure to fluctuating natural gas prices through the use of natural gas swap contracts in the three and nine-month periods ended September 30, 2012.

PPG enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company did not realize a credit loss on derivatives during the three or nine-month periods ended September 30, 2013 or 2012.

PPG centrally manages certain of its foreign currency transaction risks to minimize the volatility in cash flows caused by currency fluctuations. Decisions on whether to use derivative financial instruments to hedge the net transaction exposures related to all regions of the world are made based on the amount of those exposures by currency and, in certain situations, an assessment of the near-term outlook for certain currencies. This net hedging strategy does not qualify for hedge accounting; therefore, the change in the fair value of these instruments is recorded in "Other charges" in the accompanying condensed consolidated statement of income in the period of change. As of September 30, 2013 and December 31, 2012, the fair value of these contracts was a liability of $0.1 million and an asset of less than $0.1 million, respectively.

PPG designates forward currency contracts as hedges against the Company’s exposure to variability in exchange rates on short-term intercompany borrowings and transactions denominated in foreign currencies. To the extent effective, changes in the fair value of these instruments are deferred in AOCI and subsequently reclassified to "Other charges" in the accompanying condensed consolidated statement of income as foreign exchange gains and losses are recognized on the related intercompany transactions. The portion of the change in fair value considered to be ineffective is recognized immediately in "Other charges" in the accompanying condensed consolidated statement of income. Amounts related to these instruments deferred in AOCI as of September 30, 2013 of $10 million will be reclassified to earnings within the next twelve months. As of September 30, 2013 and December 31, 2012, the fair value of these instruments was a net asset of $10 million and a net liability of $1 million, respectively.

PPG designates forward currency contracts as hedges against the Company’s exposure to future changes in fair value related to certain firm sales commitments denominated in foreign currencies. These contracts are designated as fair value hedges. As such, they are reported at fair value in the Company’s condensed consolidated balance sheet, with changes in the fair value of these contracts and that of the related firm sales commitments reported in net sales. As of September 30, 2013, these contracts converted $33.5 million to the South Korean won over the 21 month period ending June 30, 2015. As of December 31, 2012, these contracts converted $56 million to the South Korean won over the 21 month period ending September 30, 2014. As of September 30, 2013 and December 31, 2012, the fair value of the contracts was a net asset of $1 million and $3 million, respectively.

As of January 1, 2012, PPG had nine U.S. dollar to euro cross currency swap contracts with a total notional amount of $1.16 billion, of which $600 million were to settle on March 15, 2013 and $560 million were to settle on March 15,

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2018. In June 2012, $600 million of swaps, with a settlement date of March 15, 2013, were settled with PPG receiving $1 million in cash. On settlement of the remaining outstanding contracts, PPG will receive $560 million U.S. dollars and pay euros to the counterparties to the contracts. During the term of these contracts, PPG will receive semiannual payments in March and September of each year based on U.S. dollar, long-term fixed interest rates, and PPG will make annual payments in March of each year to the counterparties based on euro, long-term fixed interest rates. The Company designated all of the cross currency swaps as hedges of its net investment in certain European businesses and, as a result, the mark to fair value adjustments of the swaps outstanding have been and will be recorded as a component of AOCI, and the cash flow impact of these swaps has been and will be classified as investing activities in the condensed consolidated statement of cash flows. As of September 30, 2013 and December 31, 2012, the fair value of these contracts was a net liability of $107 million and $95 million, respectively.

As of September 30, 2013 and December 31, 2012, PPG designated €300 million euro-denominated borrowings as a hedge of a portion of PPG’s net investment in the Company’s European operations. As a result, the change in book value from adjusting these foreign denominated borrowings to current spot rates was deferred in AOCI.

As of September 30, 2013, the Company had accumulated pretax unrealized translation losses in AOCI of $16 million, and as of December 31, 2012 the Company had accumulated pretax transaction gains of $9 million in AOCI, which related to both the euro-denominated borrowings and the cross currency swaps that have been designated as hedges of net investments.

Deferrals in AOCI related to hedges of the Company’s net investments in European operations would be reclassified and recognized in earnings upon a substantial liquidation, sale or partial sale of such investments or upon impairment of all or a portion of such investments.

The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to minimize its interest costs. Generally, the Company maintains variable interest rate debt at a level of approximately 25 percent to 50 percent of total borrowings. PPG principally manages its fixed and variable interest rate risk by retiring and issuing debt from time to time and through the use of interest rate swaps. During the year ended December 31, 2012, PPG settled all outstanding interest rate swaps, which had converted $445 million of fixed rate debt to variable rate debt, and received $29 million from such settlements. When outstanding, the swaps were designated as fair value hedges. As such, they were carried at fair value. Changes in the fair value of these swaps and that of the related debt were recorded in "Interest expense" in the accompanying condensed consolidated statement of income.

The Company entered into forward starting swaps in 2009 and in the second quarter of 2010 to effectively lock-in a fixed interest rate for future debt refinancings with an anticipated term of 10 years based on the ten year swap rate, to which was added a corporate spread. The notional amount of the swaps outstanding totaled $400 million, which were settled on July 30, 2012, resulting in a cash payment of $121 million. To the extent that the swaps were effective, changes in the fair values of the swap contracts were deferred in AOCI. The portion of the change in fair value considered to be ineffective was recognized immediately in Other charges in the accompanying condensed consolidated statement of income. As of September 30, 2013, the amount deferred in AOCI was $107 million. This balance will be amortized to interest expense over the remaining term of the ten-year debt that was issued on July 31, 2012.

Derivative instruments have been used to manage the Company's exposure to fluctuating natural gas prices through the use of natural gas swap contracts. There were no natural gas swap contracts outstanding as of September 30, 2013, as the separation and merger of the former commodity chemicals business (see Note 5) reduced PPG's annual natural gas usage by approximately 70 percent. To the extent that these instruments were effective in hedging PPG’s exposure to price changes, changes in the fair values of the hedge contracts were deferred in AOCI and reclassified to "Cost of sales, exclusive of depreciation and amortization" as the natural gas was purchased. The amount of ineffectiveness was reported in "Other charges" in the accompanying condensed consolidated statement of income immediately. There was no balance in AOCI as of September 30, 2013 or December 31, 2012 related to the contracts.

PPG entered into a one-year renewable equity forward arrangement with a bank in 2003 in order to mitigate the impact on PPG earnings of changes in the fair value of 1,388,889 shares of PPG stock that are to be contributed to the asbestos settlement trust as discussed in Note 19, “Commitments and Contingent Liabilities.” This instrument, which has been renewed, is recorded at fair value as an asset or liability and changes in the fair value of this instrument are reflected in the "Asbestos settlement – net" caption of the accompanying condensed consolidated statement of income. The total principal amount payable for these shares is $62 million. PPG will pay to the bank interest based on the principal amount and the bank will pay to PPG an amount equal to the dividends paid on these shares during the period this instrument is outstanding. The difference between the principal amount and any amounts related to unpaid interest or dividends and the current market price for these shares, adjusted for credit risk, represents the fair value

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of the instrument as well as the amount that PPG would pay or receive if the bank chose to net settle the instrument. Alternatively, the bank may, at its option, require PPG to purchase the shares covered by the arrangement at the principal amount adjusted for unpaid interest and dividends as of the date of settlement. As of September 30, 2013 and December 31, 2012, the fair value of this contract was an asset of $176 million and $130 million, respectively.

No derivative instrument initially designated as a hedge instrument was undesignated or discontinued as a hedging instrument during the three and nine-month periods ended September 30, 2013 or 2012. Nor were any amounts deferred in AOCI reclassified to earnings during these periods related to hedges of anticipated transactions that were no longer expected to occur.

All of the outstanding derivative instruments are subject to accelerated settlement in the event of PPG’s failure to meet its debt obligations or payment obligations under the terms of the instruments’ contractual provisions. In addition, should the Company be acquired and its payment obligations under the derivative instruments’ contractual arrangements not be assumed by the acquirer, or should PPG enter into bankruptcy, receivership or reorganization proceedings, the instruments would also be subject to accelerated settlement.

Refer to Note 3, “Fair Value Measurement,” for additional disclosures related to the Company’s derivative instruments outstanding as of September 30, 2013 and December 31, 2012.

The following table provides details for the nine month period ended September 30, 2013 related to fair value, cash flow and net investment hedges by type of derivative and financial instrument. All amounts are pretax:



(Millions) Hedge Type	Gain (Loss) Deferred in OCI			Gain (Loss) Recognized
(Millions) Hedge Type	Gain (Loss) Deferred in OCI			Amount			Caption
Fair Value
Interest rate swaps	Not applicable			$	7		Interest expense
Foreign currency contracts	Not applicable			1			Net sales
Equity forward arrangements	Not applicable			46			Asbestos - net
Total Fair Value				$	54
Cash Flow
Forward starting swaps	$	—		$	(9	)	Interest expense
Foreign currency contracts (a)	29			30			Other charges
Total Cash Flow	$	29		$	21
Net Investment
Cross currency swaps (b)	$	(15	)	$	—
Foreign denominated debt	(10		)	Not applicable
Total Net Investment	$	(25	)


(a)	The ineffective portion related to this item was $6 million of expense.


(b)	The ineffective portion related to this item was $2 million of expense.

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The following tables provide details for the nine month period ended September 30, 2012 related to fair value, cash flow and net investment hedges by type of financial instrument. All amounts are pretax:



(Millions) Hedge Type	Gain (Loss) Deferred in OCI			Gain (Loss) Recognized
(Millions) Hedge Type	Gain (Loss) Deferred in OCI			Amount			Caption
Fair Value
Interest rate swaps	Not applicable			$	6		Interest expense
Foreign currency contracts	Not applicable			—			Net sales
Equity forward arrangements	Not applicable			45			Asbestos - net
Total Fair Value				$	51
Cash Flow
Natural gas swaps	$	(2	)	$	(11	)	Cost of sales and Income from Discontinued operations, net of tax
Interest rate swaps of an equity method investee	(1		)	(1		)	Income from Discontinued operations, net of tax
Forward starting swaps (a)	(26		)	(2		)	Interest Expense
Foreign currency contracts (b)	(17		)	(16		)	Other charges
Total Cash Flow	$	(46	)	$	(30	)
Net Investment
Cross currency swaps	$	32		$	—
Foreign denominated debt	3			Not applicable
Total Net Investment	$	35


(a)	The ineffective portion related to this item was $4 million of expense.


(b)	The ineffective portion related to this item was $6 million of expense.


18.	Stock-Based Compensation

The Company’s stock-based compensation includes stock options, restricted stock units (“RSUs”) and grants of contingent shares that are earned based on achieving targeted levels of total shareholder return. All current grants of stock options, RSUs and contingent shares are made under the PPG Industries, Inc. Amended and Restated Omnibus Incentive Plan (the “PPG Amended Omnibus Plan”), which was amended and restated effective April 21, 2011. Shares available for future grants under the PPG Amended Omnibus Plan were 7.2 million as of September 30, 2013.

Total stock-based compensation expense was $27 million and $59 million for the three and nine months ended September 30, 2013, respectively, and $21 million and $53 million for the three and nine months ended September 30, 2012, respectively. The total income tax benefit recognized in the accompanying condensed consolidated statement of income related to the stock-based compensation was $9 million and $20 million for the three and nine months ended September 30, 2013, respectively, and $7 million and $18 million for the three and nine months ended September 30, 2012, respectively.

Stock Options

PPG has outstanding stock option awards that have been granted under two stock option plans: the PPG Industries, Inc. Stock Plan (“PPG Stock Plan”) and the PPG Amended Omnibus Plan. Under the PPG Amended Omnibus Plan and the PPG Stock Plan, certain employees of the Company have been granted options to purchase shares of common stock at prices equal to the fair market value of the shares on the date the options were granted. The options are generally exercisable beginning from six to 48 months after being granted and have a maximum term of 10 years. Upon exercise of a stock option, shares of Company stock are issued from treasury stock. The PPG Stock Plan includes a restored option provision for options originally granted prior to January 1, 2003 that allows an optionee to exercise options and satisfy the option price by certifying ownership of mature shares of PPG common stock with a market value equal to the option cost.

During the nine months ended September 30, 2013, PPG granted 519,299 stock options under the PPG Amended Omnibus Plan at a weighted average exercise price of $131.55 per share. The weighted average fair value of options granted was $27.36 per share. During the nine months ended September 30, 2012, PPG granted 792,957 stock options

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under the PPG Omnibus Plan at a weighted average exercise price of $90.19 per share. The weighted average fair value of options granted was $17.97 per share.

The fair value of stock options issued to employees is measured on the date of grant and is recognized as expense over the requisite service period. PPG estimates the fair value of stock options using the Black-Scholes option pricing model. The risk-free interest rate is determined by using the U.S. Treasury yield curve at the date of the grant and using a maturity equal to the expected life of the option. The expected life of options is calculated using the average of the vesting term and the maximum term, as prescribed by accounting guidance on the use of the simplified method for determining the expected term of an employee share option. This method is used as the vesting term of stock options was changed to three years in 2004 and, as a result, the historical exercise data does not provide a reasonable basis upon which to estimate the expected life of options. The expected dividend yield and volatility are based on historical stock prices and dividend amounts over past time periods equal in length to the expected life of the options.

The fair value of the grants issued in the nine months ended September 30, 2013 was calculated with the following weighted average assumptions:



Risk free interest rate	1.3	%
Expected life of option in years	6.5
Expected dividend yield	3.2	%
Expected volatility	29.9	%

Restricted Stock Units

Long-term incentive value is delivered to selected key management employees by granting RSUs, which have either time or performance-based vesting features. The fair value of an RSU is equal to the market value of a share of PPG stock on the date of grant. Time-based RSUs vest over the three-year period following the date of grant, unless forfeited, and will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the three year vesting period. Performance-based RSUs vest based on achieving specific annual performance targets for earnings per share growth and cash flow return on capital over the three calendar year-end periods following the date of grant. Unless forfeited, the performance-based RSUs will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the three-year performance period if PPG meets the performance targets. The amount paid for performance-based awards may range from 0 percent to 180 percent of the original grant, based upon the frequency with which the annual earnings per share growth and cash flow return on capital performance targets are met over the three calendar year periods. For the purposes of expense recognition, PPG has assumed that performance-based RSUs granted in 2011 will vest at the 180 percent level, those granted in 2012 will vest at 150 percent level, and those granted in 2013 will vest at the 100 percent level. As of December 31, 2012, four of the four possible performance targets had been met for the 2011 grant and two of the two possible performance targets had been met for the 2012 grant.

During the nine months ended September 30, 2013, PPG granted 189,554 RSUs at a weighted average fair value of $126.35 per share. During the nine months ended September 30, 2012, PPG granted 248,732 RSUs at a weighted average fair value of $83.27 per share.

Contingent Share Grants

The Company also provides grants of contingent shares to selected key executives that may be earned based on PPG total shareholder return over the three-year period following the date of grant. Contingent share grants (referred to as “TSR awards”) are made annually and are paid out at the end of each three-year period based on the Company’s performance. Performance is measured by determining the percentile rank of the total shareholder return of PPG common stock in relation to the total shareholder return of the S&P 500 for the three-year period following the date of grant. This comparison group represents the entire S&P 500 Index as it existed at the beginning of the performance period. The payment of awards following the three-year award period will be based on performance achieved in accordance with the scale set forth in the plan agreement and may range from 0 percent to 220 percent of the initial grant. A payout of 100 percent is earned if the target performance is achieved. Contingent share awards granted in 2011, 2012 and 2013 earn dividend equivalents for the award period, which will be paid to participants with the award payout at the end of the period based on the actual number of contingent shares that are earned. Any payments made at the end of the award period may be in the form of stock, cash or a combination of both. The TSR awards qualify as liability awards, and compensation expense is recognized over the three-year award period based on the fair value of

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the awards (giving consideration to the Company’s percentile rank of total shareholder return) remeasured in each reporting period until settlement of the awards.


19.	Commitments and Contingent Liabilities

PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. These lawsuits and claims, 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 PPG’s 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 PPG’s insurers are contesting coverage with respect to some of these claims, and other insurers, as they had prior to the asbestos settlement described below, may contest coverage with respect to some of the asbestos claims if the settlement is not implemented. PPG’s lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental, asbestos and other matters.

The 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 PPG’s consolidated financial position or liquidity; however, such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.

Antitrust Matters

As previously disclosed, in 2010 PPG reached agreements to resolve flat glass antitrust matters in which PPG was a defendant, for approximately $6 million. The court approved the settlements and distribution of the funds occurred in the first six months of 2012.

In 2010, Transitions Optical, Inc. (“TOI”), a consolidated subsidiary of the Company, entered into a settlement agreement, without admitting liability, with the Federal Trade Commission, which had alleged that TOI violated Section 5 of the Federal Trade Commission Act. Following the announcement of the settlement with the Federal Trade Commission, 30 private putative class cases were filed against TOI, alleging that it has monopolized and/or conspired to monopolize the market for photochromic lenses. All of the federal actions have been transferred and centralized in the Middle District of Florida (the “MDL Action”). Amended complaints in the MDL Action were filed in November and December 2010. In late 2011, the court ruled on TOI's motion to dismiss and allowed the plaintiffs to file new or further amended complaints. Plaintiffs in the MDL Action include Insight Equity A.P. X, LP, d/b/a Vision-Ease Lens Worldwide, Inc., which has sued on its own behalf, and putative classes of “direct purchasers,” including laboratories and retailers (the “Lab/Retailer Plaintiffs”), and “indirect purchasers,” consisting of end-user consumers. Plaintiffs in the MDL Action generally allege that TOI's exclusive dealing arrangements resulted in higher prices and seek lost profits and damages determined by the price premium attributable to wrongful exclusive deals. The damages sought are subject to trebling. The Lab/Retailer Plaintiffs also allege that TOI and certain affiliates of Essilor International SA conspired with respect to the wrongful exclusive dealing arrangements. In March 2013, the magistrate judge issued her report and recommendation to deny the class certification motion of the Lab/Retailer Plaintiffs. In May 2013, the magistrate judge issued her report and recommendation to deny the class certification of the end-use consumer plaintiffs. The reports and recommendations on class certification of the magistrate judge will be referred to the district court judge for a final ruling, which is expected to occur in 2013. TOI believes it has meritorious defenses and continues to defend all of the above-described actions vigorously.

Asbestos Matters

For over 30 years, PPG has been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. Most of PPG’s potential exposure relates to allegations by plaintiffs that PPG should be liable for injuries involving asbestos-containing thermal insulation products, known as Unibestos, manufactured and distributed by Pittsburgh Corning Corporation (“PC”). PPG and Corning Incorporated are each 50 percent shareholders of PC. PPG has denied responsibility for, and has defended, all claims for any injuries caused by PC products. As of the April 16, 2000 order which stayed and enjoined asbestos claims against PPG (as discussed below), PPG was one of many defendants in numerous asbestos-related lawsuits involving approximately 114,000 claims served on PPG. During the period of the stay, PPG generally has not been aware of the dispositions, if any, of these asbestos claims.

Background of PC Bankruptcy Plan of Reorganization

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On April 16, 2000, PC filed for Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the Western District of Pennsylvania located in Pittsburgh, Pa. Accordingly, in the first quarter of 2000, PPG recorded an after-tax charge of $35 million for the write-off of all of its investment in PC. As a consequence of the bankruptcy filing and various motions and orders in that proceeding, the asbestos litigation against PPG (as well as against PC) has been stayed and the filing of additional asbestos suits against them has been enjoined, until 30 days after the effective date of a confirmed plan of reorganization for PC substantially in accordance with the settlement arrangement among PPG and several other parties discussed below. By its terms, the stay may be terminated if the settlement arrangement set forth below is not likely to be consummated.

On May 14, 2002, PPG announced that it had agreed with several other parties, including certain of its insurance carriers, the official committee representing asbestos claimants in the PC bankruptcy, and the legal representatives of future asbestos claimants appointed in the PC bankruptcy, on the terms of a settlement arrangement relating to certain asbestos claims against PPG and PC (the “2002 PPG Settlement Arrangement”).

On March 28, 2003, Corning Incorporated announced that it had separately reached its own arrangement with the representatives of asbestos claimants for the settlement of certain asbestos claims against Corning Incorporated and PC (the “2003 Corning Settlement Arrangement”).

The terms of the 2002 PPG Settlement Arrangement and the 2003 Corning Settlement Arrangement were incorporated into a bankruptcy reorganization plan for PC along with a disclosure statement describing the plan, which PC filed with the Bankruptcy Court on April 30, 2003. Amendments to the plan and disclosure statement were subsequently filed. On November 26, 2003, after considering objections to the second amended disclosure statement and plan of reorganization, the Bankruptcy Court entered an order approving such disclosure statement and directing that it be sent to creditors, including asbestos claimants, for voting. In March 2004, the second amended PC plan of reorganization (the “second amended PC plan of reorganization”) received the required votes to approve the plan with a channeling injunction for present and future asbestos claimants under §524(g) of the Bankruptcy Code. After voting results for the second amended PC plan of reorganization were received, the Bankruptcy Court judge conducted a hearing regarding the fairness of the settlement, including whether the plan would be fair with respect to present and future claimants, whether such claimants would be treated in substantially the same manner, and whether the protection provided to PPG and its participating insurers would be fair in view of the assets they would convey to the asbestos settlement trust (the “Trust”) to be established as part of the second amended PC plan of reorganization. At that hearing, creditors and other parties in interest raised objections to the second amended PC plan of reorganization. Following that hearing, the Bankruptcy Court scheduled oral arguments for the contested items.

The Bankruptcy Court heard oral arguments on the contested items on November 17-18, 2004. At the conclusion of the hearing, the Bankruptcy Court agreed to consider certain post-hearing written submissions. In a further development, on February 2, 2005, the Bankruptcy Court established a briefing schedule to address whether certain aspects of a decision of the U.S. Third Circuit Court of Appeals in an unrelated case had any applicability to the second amended PC plan of reorganization. Oral arguments on these matters were subsequently held in March 2005. During an omnibus hearing on February 28, 2006, the Bankruptcy Court judge stated that she was prepared to rule on the PC plan of reorganization in the near future, provided certain amendments were made to the plan. Those amendments were filed, as directed, on March 17, 2006. After further conferences and supplemental briefings, in December 2006, the court denied confirmation of the second amended PC plan of reorganization, on the basis that the plan was too broad in the treatment of allegedly independent asbestos claims not associated with PC.

Terms of 2002 PPG Settlement Arrangement

PPG had no obligation to pay any amounts under the 2002 PPG Settlement Arrangement until 30 days after the second amended PC plan of reorganization was finally approved by an appropriate court order that was no longer subject to appellate review (the “Effective Date”). If the second amended PC plan of reorganization had been approved as proposed, PPG and certain of its insurers (along with PC) would have made payments on the Effective Date to the Trust, which would have provided the sole source of payment for all present and future asbestos bodily injury claims against PPG, its subsidiaries or PC alleged to be caused by the manufacture, distribution or sale of asbestos products by these companies. PPG would have conveyed the following assets to the Trust: (i) the stock it owns in PC and Pittsburgh Corning Europe, (ii) 1,388,889 shares of PPG’s common stock and (iii) aggregate cash payments to the Trust of approximately $998 million, payable according to a fixed payment schedule over 21 years, beginning on June 30, 2003, or, if later, the Effective Date. PPG would have had the right, in its sole discretion, to prepay these cash payments to the Trust at any time at a discount rate of 5.5 percent per annum as of the prepayment date. In addition to the conveyance of these assets, PPG would have paid $30 million in legal fees and expenses on behalf of the Trust

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to recover proceeds from certain historical insurance assets, including policies issued by certain insurance carriers that were not participating in the settlement, the rights to which would have been assigned to the Trust by PPG.

Under the proposed 2002 PPG Settlement Arrangement, PPG’s participating historical insurance carriers would have made cash payments to the Trust of approximately $1.7 billion between the Effective Date and 2023. These payments could also have been prepaid to the Trust at any time at a discount rate of 5.5 percent per annum as of the prepayment date. In addition, as referenced above, PPG would have assigned to the Trust its rights, insofar as they related to the asbestos claims to have been resolved by the Trust, to the proceeds of policies issued by certain insurance carriers that were not participating in the 2002 PPG Settlement Arrangement and from the estates of insolvent insurers and state insurance guaranty funds.

Under the proposed 2002 PPG Settlement Arrangement, PPG would have granted asbestos releases to all participating insurers, subject to a coverage-in-place agreement with certain insurers for the continuing coverage of premises claims (discussed below). PPG would have granted certain participating insurers full policy releases on primary policies and full product liability releases on excess coverage policies. PPG would have also granted certain other participating excess insurers credit against their product liability coverage limits.

If the second amended PC plan of reorganization incorporating the terms of the 2002 PPG Settlement Arrangement and the 2003 Corning Settlement Arrangement had been approved by the Bankruptcy Court, the Court would have entered a channeling injunction under §524(g) and other provisions of the Bankruptcy Code, prohibiting present and future claimants from asserting bodily injury claims after the Effective Date against PPG or its subsidiaries or PC relating to the manufacture, distribution or sale of asbestos-containing products by PC or PPG or its subsidiaries. The injunction would have also prohibited codefendants in those cases from asserting claims against PPG for contribution, indemnification or other recovery. All such claims would have been filed with the Trust and only paid from the assets of the Trust.

Modified Third Amended PC Plan of Reorganization

To address the issues raised by the Bankruptcy Court in its December 2006 ruling, the interested parties engaged in extensive negotiations regarding the terms of a third amended PC plan of reorganization, including modifications to the 2002 PPG Settlement Arrangement. A modified third amended PC plan of reorganization (the “third amended PC plan of reorganization”), including a modified PPG settlement arrangement (the “2009 PPG Settlement Arrangement”), was filed with the Bankruptcy Court on January 29, 2009. The parties also filed a disclosure statement describing the third amended PC plan of reorganization with the court. The third amended PC plan of reorganization also includes a modified settlement arrangement of Corning Incorporated.

Several creditors and other interested parties filed objections to the disclosure statement. Those objections were overruled by the Bankruptcy Court by order dated July 6, 2009 approving the disclosure statement. The third amended PC plan of reorganization and disclosure statement were then sent to creditors, including asbestos claimants, for voting. The report of the voting agent, filed on February 18, 2010, revealed that all voting classes, including asbestos claimants, voted overwhelmingly in favor of the third amended PC plan of reorganization, which included the 2009 PPG Settlement Arrangement. In light of the favorable vote on the third amended PC plan of reorganization, the Bankruptcy Court conducted a hearing regarding the fairness of the proposed plan, including whether (i) the plan would be fair with respect to present and future claimants, (ii) such claimants would be treated in substantially the same manner, and (iii) the protection provided to PPG and its participating insurers would be fair in view of the assets they would convey to the Trust to be established as part of the third amended PC plan of reorganization. The hearing was held in June of 2010. The remaining objecting parties (a number of objections were resolved through plan amendments and stipulations filed before the hearing) appeared at the hearing and presented their cases. At the conclusion of the hearing, the Bankruptcy Court established a briefing schedule for its consideration of confirmation of the plan and the objections to confirmation. That briefing was completed and final oral arguments held in October 2010. On June 16, 2011 the Bankruptcy Court issued a decision denying confirmation of the third amended PC plan of reorganization.