Performance in Second Quarter of 2009 Compared to Second Quarter of 2008

Performance Overview

Sales decreased 30% in the second quarter of 2009 to $3,115 million compared to $4,474 million for the second quarter of 2008. Lower volumes in all reportable segments accounted for a decrease of 18%, weaker foreign currency and the absence of sales from the divested automotive glass and services business each accounted for a decrease of 6%.

Cost of sales, exclusive of depreciation and amortization, decreased by $931 million for the second quarter of 2009 to $1,898 million compared to $2,829 million for the second quarter of 2008. Cost of sales as a percentage of sales was 60.9% for the second quarter of 2009 compared to 63.2% for the second quarter of 2008. This decrease was primarily a result of lower raw material costs and improved sales mix.

Selling, general and administrative expenses decreased by $205 million in the second quarter of 2009 compared to the second quarter of 2008 due to lower sales volumes, specific overhead cost reduction actions taken in response to the decline in the global economy and the impact of foreign currency translation.

Depreciation expense declined to $88 million in the second quarter of 2009 as compared to $128 million in the second quarter of 2008 due to the impact of foreign currency translation, our restructuring actions over the past nine months and the divestiture of our automotive glass and services business. Research and development costs declined from $118 million in the second quarter of 2008 to $97 million in the second quarter of 2009 largely due to cost reduction efforts and the impact of foreign currency translation. Interest expense declined from $65 million to $49 million in the second quarter of 2009, reflective of the lower debt balances and interest rates in the second quarter of 2009.

The effective tax rate on pretax earnings was 33% for the second quarter of 2009 compared to 29.5% for the second quarter of 2008. The second quarter 2009 effective tax rate includes a tax benefit of 38.5% on the adjustment to increase the current value of the Company's obligation relating to asbestos claims under the proposed asbestos settlement. The second quarter 2008 effective tax rate included a tax benefit of 36% on the charges for the catch-up of depreciation expense and the impact of benefit changes related to the divestiture of the automotive glass and services business and a tax benefit of 39% on the adjustment to increase the current value of the Company's obligation relating to asbestos claims under the proposed asbestos settlement. The effective tax rate was 33% on the remaining pretax earnings for the second quarter of 2009 compared to 30% for the second quarter of 2008.

Net income (attributable to PPG) and earnings per share - assuming dilution (attributable to PPG) are summarized below:

             Three Months ended June 30, 2009               Net Income
                                                            $      EPS
             Net income (attributable to PPG)             $ 146   $ 0.89
             Net income (attributable to PPG) includes:
             Charge related to asbestos settlement(1)         2     0.02

             Three Months ended June 30, 2008               Net Income
                                                            $      EPS
             Net income (attributable to PPG)             $ 250   $ 1.51
             Net income (attributable to PPG) includes:
             Charge related to asbestos settlement(1)         2     0.01
             Depreciation catch-up charge (2)                11     0.07
             Divestiture related benefit costs(3)            12     0.07

(1) Net increase in the current value of the Company's obligation under the proposed asbestos settlement.

(2) Represents the catch-up of depreciation expense, which was suspended when the automotive glass and services business was classified previously as a discontinued operation.

(3) Represents special termination benefits and a pension curtailment loss relating to the impact of benefit changes, including accelerated vesting, negotiated as part of the sale of the automotive glass and services business.

Performance of Reportable Business Segments

Performance Coatings sales decreased 16% to $1,066 million for the second quarter of 2009 compared to $1,269 million for the second quarter of 2008. Sales declined 12% as a result of lower sales volumes, particularly in the automotive refinish business and architectural coatings - Americas and Asia/Pacific business. The volume decline in automotive refinish was most pronounced in the U.S. and Europe, while the decline in architectural coatings was mainly in the U.S. and Latin America. Weaker foreign currency also reduced sales by 7%. Sales increased 3% due to improved pricing in all businesses. Segment income was $158 million for the second quarter of 2009 compared to $171 million for the second quarter of 2008. The earnings impact of lower volumes was offset by increased selling prices and lower overhead costs. The remaining decline in segment earnings was due to the impact of currency.

Industrial Coatings sales decreased 36% to $741 million for the second quarter of 2009 compared to $1,152 million for the second quarter of 2008. Sales decreased 31% due primarily to lower sales volumes, most notably in the automotive and industrial businesses, reflecting the continued severe decline in global demand. Volume declines in these businesses occurred in all major geographic regions. Sales also declined 8% due to the negative impact of foreign currency translation. Sales increased 2% due to the positive impact of acquisitions and 1% due to increased selling prices. Segment income was $28 million for the second quarter of 2009 compared to segment income of $109 million for the same quarter in 2008 due mostly to significantly lower volumes as well as some negative currency impact. Factors increasing segment income were lower overhead costs, lower production input costs and higher selling prices.

Architectural Coatings - EMEA (Europe, Middle East and Africa) sales decreased 21% to $527 million for the second quarter of 2009 compared to $667 million for the second quarter of 2008. Sales decreased due, in large part, to the negative impact of foreign currency translation. Lower sales volumes were slightly offset by increased selling prices. Segment income was $55 million for the second quarter of 2009 compared to $71 million for the same quarter in 2008. Factors decreasing segment income were lower sales volumes, negative currency impacts and inflation. These factors were partially offset by higher selling prices and lower overhead costs.

Optical and Specialty Materials sales decreased $55 million to $255 million for the second quarter of 2009 compared to $310 million for the second quarter of 2008. Sales volumes decreased 14% in part reflecting the decline from strong second quarter 2008 volumes associated with the launch of Transitions Optical's next generation lens product. Volumes were also lower in the silicas business as a result of the deterioration of the automotive OEM market. Sales declined 5% due to the negative impact of foreign currency translation, which was partially offset by a slight increase in selling prices. Segment income was $61 million for the second quarter of 2009 compared to $76 million for the same quarter in 2008. The decrease in segment income was primarily the result of the lower sales volumes offset somewhat with lower manufacturing costs, higher prices and lower overhead costs.

Commodity Chemicals sales decreased 36% to $319 million for the second quarter of 2009 compared to $495 million for the second quarter of 2008. Sales declined due to a combination of lower sales volumes and selling prices. Segment income was $42 million for the second quarter of 2009 compared to $68 million for the same quarter in 2008. Segment income decreased in large part due to negative impact of lower sales volumes and higher manufacturing costs stemming from the lower production levels. The impact of lower input costs, primarily natural gas, was counteracted by the lower selling prices.

Glass sales decreased 64% to $207 million for the second quarter of 2009 compared to $581 million for the second quarter of 2008. About $253 million of the decline in sales was due to the divestiture of a majority interest in the automotive glass and services business, which was completed in September 2008. Sales also declined by 18% due to lower volumes reflecting reduced construction and general industrial demand and 2% due to weaker foreign currency. Segment loss was $7 million for the second quarter of 2009 compared to segment earnings of $30 million for the same quarter in 2008. The decline in segment earnings was due to the negative impact of lower sales volumes, lower equity earnings and the absence of earnings from the divested automotive glass and services business. Lower overhead and production input costs positively impacted segment income.

Performance in the First Six Months of 2009 Compared to First Six Months of 2008

Performance Overview

Sales decreased 30% for the first six months of 2009 to $5,898 million compared to $8,436 million for the first six months of 2008. Lower volumes in all reportable segments accounted for a decrease of 19%, weaker foreign currency accounted for a decrease of 7% and the absence of sales from the divested automotive glass and services business accounted for a decrease of 6%. These sales decreases were slightly offset by a 2% increase stemming from improved selling prices.

Cost of sales, exclusive of depreciation and amortization, decreased by $1,809 million for the first six months of 2009 to $3,616 million compared to $5,425 million for the first six months of 2008. This decrease corresponds with the decrease in sales. Cost of sales as a percentage of sales was 61.3% for the first six months of 2009 compared to 64.3% for the first six months of 2008. Cost of sales in the first six months of 2008 includes $94 million for the flow through cost of sales of the step up to fair value of acquired inventory. The remaining reduction in cost of sales as a percentage of sales was due to increased selling prices in 2009 and favorable mix.

Selling, general and administrative expenses decreased by $358 million in the first six months of 2009 compared to the first six months of 2008 due to lower sales volumes, specific overhead cost reduction actions taken in response to the decline in the global economy, the impact of foreign currency translation and the absence of the 2008 charge of $19 million for special termination benefits and a pension curtailment loss relating to the sale of the automotive glass and services business.

Depreciation expense declined to $176 million in the first six months of 2009 as compared to $235 million in the first six months of 2008 due to both the impact of foreign currency translation, our restructuring actions and the divestiture of the automotive glass and services business. Research and development costs declined from $230 million in the first six months of 2008 to $191 million in the first six months of 2009 largely due cost reduction efforts and the impact of foreign currency translation. Interest expense declined from $131 million to $97 million in the first six months of 2009, reflective of the lower debt balances and interest rates in the first six months of 2009.

The charge for in-process research and development in the first six months of 2008 of $23 million was related to the 2008 SigmaKalon acquisition.

The business restructuring charge of $186 million in the first six months of 2009 represents costs under a restructuring plan focused on further reducing PPG's global cost structure. The actions included in the restructuring plan are expected to deliver pretax cost savings of approximately $60 million in 2009, growing to an annual run rate of about $140 million in 2010.

Other earnings decreased to $54 million in the first six months of 2009 as compared to $81 million for the first six months of 2008. This decrease was largely due to lower equity earnings, including equity losses from PPG's investment in the former automotive glass and services business and lower equity earnings from our Asian fiber glass joint ventures.

The effective tax rate on pretax earnings was 45% for the first six months of 2009 compared to 30% for the first six months of 2008. The effective tax rate for the first six months of 2009 includes a tax benefit of 24% related to the business restructuring charge and a tax benefit of 38.5% on the adjustment to increase the current value of the Company's obligation relating to asbestos claims under the proposed settlement. The effective tax rate for the first six months of 2008 included a tax benefit of $6 million related to the settlement with the Internal Revenue Service of our U.S. tax returns for the years 2004 and 2005, a tax benefit of 24% on costs related to the acquisition of SigmaKalon, a tax benefit of 36% on the charges for the catch-up of depreciation expense and the impact of benefit changes related to the divestiture of the automotive glass and services business and a tax benefit of 39% on the adjustment to increase the current value of the Company's obligation relating to asbestos claims under the proposed settlement. The effective tax rate was 33% on the remaining pretax earnings for the first six months of 2009 compared to 30% for the first six months of 2008.

Net income (attributable to PPG) and earnings per share - assuming dilution (attributable to PPG) are summarized below:

             Six Months ended June 30, 2009                 Net Income
                                                            $      EPS
             Net income (attributable to PPG)             $  35   $ 0.21
             Net income (attributable to PPG) includes:
             Business restructuring charge                  141     0.86
             Charge related to asbestos settlement(1)         4     0.03

             Six Months ended June 30, 2008                 Net Income
                                                            $      EPS
             Net income (attributable to PPG)             $ 350   $ 2.12
             Net income (attributable to PPG) includes:
             Charge related to asbestos settlement(1)         2     0.01
             Acquisition-related costs(3)                    89     0.54
             Depreciation catch-up charge (4)                11     0.07
             Divestiture related benefit costs(5)            12     0.07

(1) Net increase in the current value of the Company's obligation relating to asbestos claims under the proposed asbestos settlement.

(2) Costs related to SigmaKalon acquisition, including $66 million aftertax for the flow-through cost of sales of the step up to fair value of acquired inventory and $23 million aftertax for the write-off of in-process research and development.

(3) Represents the catch-up of depreciation expense, which was suspended when the automotive glass and services business was classified previously as a discontinued operation.

(4) Represents special termination benefits and a pension curtailment loss relating to the impact of benefit changes, including accelerated vesting, negotiated as part of the sale of the automotive glass and services business.

Performance of Reportable Segments

Performance Coatings sales decreased 16% to $1,994 million for the first six months of 2009 compared to $2,383 million for the first six months of 2008. Sales declined 13% as a result of lower sales volumes, particularly in the automotive refinish business and architectural coatings - Americas and Asia/Pacific business. The volume decline in automotive refinish was most pronounced in the U.S. and Europe, while the decline in architectural coatings was mainly in the U.S. and Latin America. Weaker foreign currency also reduced sales by 7%. Sales increased 4% due to improved pricing in all businesses. Segment income was $247 million for the first six months of 2009 compared to $291 million for the first six months of 2008. The lower volumes and weaker foreign currencies reduced segment income, while increased selling prices and lower overhead costs partially offset these decreases.

Industrial Coatings sales decreased 37% to $1,385 million for the first six months of 2009 compared to $2,210 million for the first six months of 2008. Sales decreased 32% due to lower sales volumes, most notably in the automotive and industrial businesses, reflecting the continued severe decline in global demand. Volume declines in these businesses occurred in all major regions. Sales also declined 8% due to the negative impact of foreign currency translation. Sales increased 2% due to the positive impact of acquisitions and 1% due to increased selling prices. Segment income was $12 million for the first six months of 2009 compared to $204 million for the same period in 2008. The lower sales volumes significantly reduced segment earnings. Factors increasing segment income were lower overhead costs, higher selling prices and deflation.

Architectural Coatings - EMEA sales decreased 22% to $936 million for the first six months of 2009 compared to $1,203 million for the first six months of 2008. Sales decreased 16% due to the negative impact of foreign currency translation and 9% from lower sales volumes. These factors were slightly offset by increased selling prices. Segment income was $58 million for the first six months of 2009 compared to $80 million for the same period in 2008. The lower sales volumes, inflation and weaker foreign currency reduced segment income. This decrease was not fully offset by lower overhead costs and higher selling prices.

Optical and Specialty Materials sales decreased 17% to $500 million for the first six months of 2009 compared to $605 million for the first six months of 2008. Sales volumes decreased 14% in part reflecting strong first half of 2008 volumes associated with the launch of Transitions Optical's next generation lens product in North America. Volumes were also lower in the silicas business as a result of the deterioration of the automotive OEM market. Sales declined 4% due to the negative impact of foreign currency translation, which was partially offset by a slight increase in selling prices. Segment income was $121 million for the first six months of 2009 compared to $150 million for the same period in 2008. The decrease in segment income was primarily the result of lower sales volumes.

Commodity Chemicals sales decreased 26% to $680 million for the first six months of 2009 compared to $918 million for the first six months of 2008. Sales declined largely due to lower sales volumes with smaller contributions from price and currency translation. Segment income was $125 million for the first six months of 2009 compared to $136 million for the same period in 2008. Segment income decreased in large part due to the negative impact of lower sales volumes, higher manufacturing costs stemming from the lower production levels and lower selling prices. Factors increasing segment income were lower energy and raw material costs.

Glass sales decreased 64% to $403 million for the first six months of 2009 compared to $1,117 million for the first six months of 2008. About $495 million of the decline in sales was due to the divestiture of a majority interest in the automotive glass and services business, which was completed in September 2008. Sales also declined by 18% due to lower volumes reflecting reduced construction and general industrial demand and 2% due to weaker foreign currency. Segment loss was $34 million for the first six months of 2009 compared to segment earnings of $60 million for the same period in 2008. The decline in segment earnings was due to the negative impact of lower sales volumes, lower equity earnings, the absence of earnings from the divested automotive glass and services business and higher manufacturing costs stemming from reduced operating rates. Increased selling prices and lower overhead costs positively impacted segment income.

Liquidity and Capital Resources

Cash from operating activities for the six months ended June 30, 2009 was $106 million versus cash from operations of $402 million for the comparable period of 2008. This decline in cash from operating activities in 2009 is primarily due to lower earnings and the negative impact of pension contributions totaling approximately $190 million, including a $160 million voluntary contribution that we made to our U.S. pension plans during the period. Pension contributions in the first six months of 2008 totaled $50 million. Cash from operations and the Company's debt capacity are expected to continue to be sufficient to fund operating activities, capital spending, including acquisitions, dividend payments, debt service, amounts due under the proposed asbestos settlement, share repurchases, and contributions to pension plans.

The ratio of total debt, including capital leases, to total debt and equity was 57% at June 30, 2009 and 53% at December 31, 2008. The increase at June 30, 2009 is primarily due to a reduction of equity driven by the first quarter net loss, dividends and adjustments to accumulated other comprehensive loss for unrealized currency translation adjustment.

We do not have a mandatory contribution to make to our U.S. defined benefit pension plans in 2009; however, due in large part to the negative investment return on pension plan assets in 2008, we made a voluntary contribution in the amount of $160 million to these plans in January 2009, and we will make an additional voluntary contribution to these plans in 2009 in an amount of $55 million, which is expected to be in the form of PPG stock. We expect to make mandatory contributions to our non-U.S. plans in 2009 of approximately $60 million, of which approximately $50 million was made in the first six months of 2009.

In June 2009, PPG entered into a $400 million three year unsecured term loan. The proceeds will be used to repay outstanding debt. During the second quarter $165 million of the proceeds from this term loan were used to retire outstanding amounts under our €650 million revolving credit facility; the remainder of the loan proceeds will be used to retire our 7.05% bonds, which are to mature in August of 2009 and to repay additional amounts under our €650 million revolving credit facility. The principal amount of this loan is due in three years. The interest rate on borrowings under this facility is variable based on a spread over LIBOR.

In December of 2008, the Company entered into an agreement with a counterparty to repurchase 1.5 million shares of the Company's stock. Under the terms of the agreement, the counterparty purchased the shares in the open market in January of 2009 and is now holding the shares until such time as the Company pays the agreed upon price of $39.53 per share and takes possession of these shares. These shares are not considered outstanding for basic and diluted earnings per share calculations and total shareholders' equity at June 30, 2009 has been reduced by approximately $59 million, representing the amount that will be paid by PPG to the counterparty upon settlement.

New Accounting Standards

Note 2, "Newly Adopted Accounting Standards," to the accompanying condensed
consolidated financial statements describes the Company's adoption of SFAS No. 165, "Subsequent Events," SFAS No. 141 (revised 2007), "Business Combinations," SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51," EITF Issue No. 07-1, "Accounting for Collaborative Arrangements," FSP FAS 157-2, "Effective Date of FASB Statement No. 157," SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities," FSP FAS 157-4, "Determining Fair Value When Market Activity Has Decreased," FSP FAS 115-2 and FAS 124-2, "Other-Than-Temporary Impairment," and FSP FAS 107-1/APB 28-1, "Interim Fair Value Disclosures for Financial Instruments."

Note 3, "Other New Accounting Standards," to the accompanying condensed
consolidated financial statements describes the potential impact on PPG of accounting standards that are not yet effective, including SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" and SFAS No. 168, "The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162."

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 Part II, Item 1, "Legal Proceedings" of this Form 10-Q and Note 20, "Commitments and Contingent Liabilities," to the accompanying condensed consolidated financial statements for a description of certain of these lawsuits, including a description of the proposed asbestos settlement. As discussed in Part II, Item 1 and Note 20, 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 20 does not become effective, will not have a material effect on PPG's consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.

It is 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. 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; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution of the Company's environmental contingencies will occur over an extended period of time.

As of June 30, 2009 and December 31, 2008, PPG had reserves for environmental contingencies totaling $292 million and $299 million, respectively, of which $43 million and $44 million, respectively, were classified as current liabilities. . . .