PPG Quarterly Report

The increase in sales was due to a 4% increase in volume across all of our business segments, a 4% increase due to the positive effects of foreign currency translation, primarily from our European operations, and a 2% increase in selling prices in our chemicals segment.

The gross profit percentage decreased to 35.2% for the first quarter of 2003, compared to 36.6% for the first quarter of 2002. The decrease in gross profit percentage was due to higher energy costs in our glass and chemicals segments and higher pension and postretirement medical costs across all of our business segments offset, in part, by higher selling prices in our chemicals segment.

Net income and earnings per share—assuming dilution, for the first quarter of 2003 were $78 million and $0.46, respectively, compared to $34 million and $0.20, respectively, for the same quarter in 2002. Net income for the first quarter of 2003 included after tax charges of $6 million, or 3 cents a share, for the cumulative effect of an accounting change and $3 million, or 2 cents a share, to reflect the net change in the current value of the Company’s obligation under the asbestos settlement agreement, as discussed in Note 13, “Commitments and Contingent Liabilities,” to the accompanying condensed financial statements. Net income for the first quarter of 2002 included after tax charges of $55 million, or $0.33 a share, for restructuring and other related activities, as discussed in Note 5, “Business Restructuring,” to the accompanying condensed financial statements, and $9 million, or $0.05 a share, for the cumulative effect of an accounting change.

In the first quarter of 2003, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” resulting in the cumulative effect of an accounting change of $6 million after tax. This standard requires the Company to recognize asset retirement obligations in the period in which they are incurred, if a reasonable estimate of fair value can be made. In the first quarter of 2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” resulting in a cumulative effect of an accounting change of $9 million after tax to reflect an impairment in the carrying value of certain trademarks within the coatings segment.

The increase in net income in 2003 is attributable to higher selling prices in our chemicals segment, improved volumes in our coatings and chemicals segments, the benefit of no restructuring costs in 2003 and the favorable effects of foreign currency translation. These increases were partially offset by higher energy costs in our glass and chemical segments, inflationary cost increases and an increase in pension and postretirement medical costs across all of our business segments.

Performance of Business Segments

Coatings sales increased 7% to $1.13 billion compared to $1.05 billion for the first quarter of 2002. The sales increase resulted from the combination of a 5% increase due to the positive effects of foreign currency translation, principally from our European operations, and a 2% increase from improved volumes in our architectural, aerospace, automotive original equipment and industrial businesses. Volume growth from our North American and Asian operations was partially offset by volume declines from our European operations. Operating income was $139


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million for the first quarter of 2003 compared to $71 million for the same quarter in 2002. The increase in operating income is attributable primarily to lower restructuring costs of $77 million, higher sales volumes described above, increased manufacturing efficiencies and the favorable effects of foreign currency translation. These were partly offset by inflationary costs increases and higher pension and postretirement medical costs.

Glass sales increased 6% to $516 million compared to $488 million for the first quarter of 2002. The increase reflects the combination of a 4% increase in sales volumes, principally from our automotive original equipment business, and a 2% increase due to the positive effects of foreign currency translation from our European fiber glass business. Operating income was $6 million for the first quarter of 2003 compared to $20 million for the same quarter in 2002. The decrease in operating income is attributable to higher energy costs and higher pension and postretirement medical costs. These were offset, in part, by higher sales volumes, lower overhead and restructuring costs, improved manufacturing efficiencies and the favorable effects of foreign currency translation.

Chemicals sales increased 29% to $433 million compared to $336 million for the first quarter of 2002. The increase reflects a 16% increase in selling prices for our commodity products, a 10% improvement in sales volumes for optical, commodity, silica and fine chemical products and a 3% increase due to the positive effects of foreign currency translation. Operating income was $46 million for the first quarter of 2003 compared to $27 million for the same quarter in 2002. The increase in operating income is attributable to higher selling prices and sales volumes described above. Operating income also increased due to lower restructuring costs and the favorable effects of foreign currency translation. These improvements were offset, in part, by higher energy costs, higher pension and postretirement medical costs, inflationary cost increases, additional selling and advertising costs in our optical business and lower equity earnings.

Other Factors

The Company’s pretax earnings for the first three months of 2003 included net periodic pension expense of $43 million compared to $11 million for the same quarter in 2002. These amounts are included in “Cost of sales,” “Selling, general and administrative” and “Research and development” in the accompanying condensed statement of income. This trend will continue for the remainder of 2003. The increase in pension costs is due primarily to a decrease in the market value of pension plan assets through the end of 2002, a reduction in the expected return on plan assets assumption for 2003 and the amortization of accumulated actuarial losses. In addition, the cost of other postretirement benefits during the first quarter of 2003 is $5 million higher compared to similar amounts for the first quarter of 2002 due to higher medical costs.

The tax rate on earnings, excluding charges for restructuring taken in the first quarter of 2002, was 36% for the first quarter of 2003 and 2002. However, restructuring charges reflected a lower tax benefit, which raised the overall effective rate to 39.3% for the first quarter of 2002.

Amounts presented as “Selling, general and administrative” in the accompanying condensed statement of income are comprised of selling, customer service, distribution and advertising costs, as well as the costs of providing corporate-wide functional support in such areas as finance, law, human resources, and planning. Distribution costs pertain to the movement and storage of finished goods inventory at company-owned and leased warehouses, terminals and other distribution facilities. Certain of these costs may be included in cost of sales by other companies, resulting in a lack of comparability between our gross profit and that of other companies.

New Accounting Standards

Note 2, “Newly Adopted Accounting Standards,” to the accompanying condensed financial statements describes and quantifies the impact of the Company’s adoption of the provisions of the Financial Accounting Standards Board’s (FASB) new standards on the accounting for asset retirement obligations, effective January 1, 2003, and the accounting for goodwill and other intangible assets, effective January 1, 2002. See Note 3, “Other New Accounting Standards,” to the accompanying condensed financial statements for a description of the FASB’s Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and Interpretation No. 46, “Consolidation of Variable Interest Entities.”

Commitments and Contingent Liabilities, including Environmental Matters

PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. See Note 13, “Commitments and Contingent Liabilities,” to the accompanying condensed financial statements for an expanded description of certain of these lawsuits, including the proposed PPG Settlement Arrangement for asbestos claims announced on May 14, 2002. As discussed in Note 13, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims in the event the PPG Settlement Arrangement described in Note 13 does not become effective, will not have a material effect on PPG’s consolidated financial position or liquidity; however, such outcome may be material to the results of operations of any particular period in which the costs, if any, are recognized.

It is PPG’s policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are generally not discounted. As of March 31, 2003 and December 31, 2002, PPG had reserves for environmental contingencies totaling $86 million and $87 million, respectively. Pretax charges against income for environmental remediation costs totaled $2 million and $3 million for the three months ended March 31, 2003 and 2002, respectively, and are included in “Other—net” in the accompanying condensed statement of income. Cash outlays related to such environmental remediation aggregated $3 million and $5 million for the three months ended March 31, 2003 and 2002, respectively.

Management anticipates that the resolution of the Company’s environmental contingencies will occur over an extended period of time. Over the past 10 years the pretax charges against income have ranged between $10 million and $49 million per year. We anticipate that charges against income in 2003 will be within that range. It is possible, however, that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter this expectation. In management’s opinion, the Company operates in an environmentally sound manner and the outcome of the Company’s environmental contingencies will not have a material effect on PPG’s financial position or liquidity.

In addition to the amounts currently reserved, the Company may be subject to loss contingencies related to environmental matters estimated to be as much as $200 million to $400 million, which range is unchanged from the prior year end. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. The Company’s environmental contingencies are expected to be resolved over an extended period of time.

Although the unreserved exposure to future loss relates to all sites, a significant portion of such exposure involves three operating plant sites in our chemicals segment. Initial remedial actions