The following discussion includes a comparison of our results of operations and liquidity and capital resources for the years endedDecember 31, 2019 and 2018. A discussion of changes in our results of operations for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 has been omitted from this Form 10-K, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2018 Form 10-K, filed with theSecurities and Exchange Commission onFebruary 21, 2019 . Performance OverviewNet Sales by Region % Change
($ in millions, except percentages) 2019 2018 2019 vs. 2018
$6,475 $6,485 (0.2)% Europe, Middle East and Africa (EMEA) 4,549 4,678 (2.8)% Asia Pacific 2,542 2,618 (2.9)% Latin America 1,580 1,593 (0.8)% Total$15,146 $15,374 (1.5)% Net sales decreased$228 million due to the following: ? Lower sales volumes (-3%) ? Unfavorable foreign currency translation (-2%) Partially offset by: ? Higher selling prices (+2%) ? Acquisition-related sales (+2%) We achieved higher selling prices across nearly all businesses, reflecting the value of our products and services. These increases helped to offset general cost inflation, including employee wages and benefits.U.S. andCanada net sales were relatively flat compared to the prior year. Higher selling prices and net sales from acquired businesses were almost entirely offset by lower sales volumes. The unfavorable impact from customer assortment changes in theU.S. architectural DIY channel negatively impacted sales volumes.Europe ,Middle East andAfrica (EMEA) net sales decreased nearly 3% versus the prior year, driven by unfavorable foreign currency translation and lower sales volumes, partially offset by higher selling prices in all businesses and net sales from acquired businesses.Asia Pacific net sales decreased nearly 3% versus the prior year, driven by unfavorable foreign currency translation and lower sales volumes, partially offset by net sales from acquired businesses and higher selling prices.Latin America net sales decreased slightly versus the prior year, driven by lower sales volumes and unfavorable foreign currency translation, partially offset by higher selling prices. For specific business results see the Segment Results section within Item 7 of this Form 10-K. Cost of sales, exclusive of depreciation and amortization % Change ($ in millions, except percentages) 2019 2018 2019 vs. 2018 Cost of sales, exclusive of depreciation and amortization$8,653 $9,001
(3.9)%
Cost of sales as a % of net sales 57.1 % 58.5
% (1.4)%
Cost of sales, exclusive of depreciation and amortization, decreased$348 million due to the following: ? Lower sales volumes ? Foreign currency translation ? Restructuring cost savings Partially offset by: ? Cost of sales attributable to acquired businesses ? General cost inflation 20 2019 PPG ANNUAL REPORT AND 10-K --------------------------------------------------------------------------------
Selling, general and administrative expenses
% Change ($ in millions, except percentages) 2019 2018 2019 vs. 2018 Selling, general and administrative expenses$3,604 $3,573
0.9%
Selling, general and administrative expenses as a % of net sales
23.8 % 23.2
% 0.6%
Selling, general and administrative expenses increased$31 million primarily due to: ? Wage and other cost inflation ? Selling, general and administrative expenses from acquired businesses Partially offset by: ? Foreign currency translation ? Cost management including restructuring cost savings Other charges and other income % Change ($ in millions, except percentages) 2019 2018 2019 vs. 2018 Interest expense, net of Interest income$100 $95 5.3% Business restructuring, net$176 $66 166.7% Other charges$98 $122 (19.7)% Other income ($89 ) ($114 ) (21.9)% Interest expense, net of Interest income Interest expense, net of Interest income increased$5 million in 2019 versus 2018 primarily due to higher levels of debt in the current year. Business restructuring, net Pretax restructuring charges of$194 million were recorded in 2019, offset by certain changes in estimates to complete previously recorded programs of$18 million . A pretax restructuring charge of$83 million was recorded in the second quarter of 2018, offset by certain changes in estimates to complete previously recorded programs of$17 million . Refer to Note 8, "Business Restructuring" in Item 8 of this Form 10-K for additional information. Other charges Other charges consist primarily of environmental remediation charges. These charges were principally for environmental remediation at a former chromium manufacturing plant and associated sites inNew Jersey . Refer to Note 14, "Commitments and Contingent Liabilities" in Item 8 of this Form 10-K for additional information. Other income Other income was lower in 2019 than prior year primarily due to a gain in 2018 on the sale of land near a facility of the Company's former commodity chemicals business. Effective tax rate and earnings per diluted share, continuing operations % Change ($ in millions, except percentages) 2019 2018 2019 vs. 2018 Income tax expense$392 $353 11.0% Effective tax rate 23.6 % 20.9
% 2.7% Adjusted effective tax rate, continuing operations* 23.7 % 22.1 % 1.6%
Earnings per diluted share, continuing operations
(3.3)%
Adjusted earnings per diluted share, continuing operations*$6.22 $5.92
5.1%
*See the Regulation G reconciliations - results of operations
The effective tax rate for the year-endedDecember 31, 2019 was 23.6%, an increase of 2.7% from the prior year. In 2018, the tax rate benefited from certain favorable adjustments, including finalization of the provisional toll charge recorded in 2017 for unremitted foreign earnings under theU.S. Tax Cuts and Jobs Act. 2019 PPG ANNUAL REPORT AND FORM 10-K 21
-------------------------------------------------------------------------------- As reported, earnings per diluted share from continuing operations for the year endedDecember 31, 2019 decreased year-over-year. Refer to the Regulation G Reconciliations - Results from Operations for additional information. The Company's earnings per diluted share and adjusted earnings per diluted share benefited from the 2.7 million and 15.9 million shares of stock repurchased in 2019 and 2018, respectively, in conjunction with the Company's cash deployment objectives. Regulation G Reconciliations - Results from Operations PPG believes investor's understanding of the Company's performance is enhanced by the disclosure of net income from continuing operations, earnings per diluted share from continuing operations and PPG's effective tax rate from continuing operations adjusted for certain items. PPG's management considers this information useful in providing insight into the Company's ongoing performance because it excludes the impact of items that cannot reasonably be expected to recur on a quarterly basis or that are not attributable to our primary operations. Net income from continuing operations, earnings per diluted share from continuing operations and the effective tax rate from continuing operations adjusted for these items are not recognized financial measures determined in accordance withU.S. generally accepted accounting principles ("U.S. GAAP") and should not be considered a substitute for net income, earnings per diluted share, the effective tax rate or other financial measures as computed in accordance withU.S. GAAP. In addition, adjusted net income, adjusted earnings per diluted share from continuing operations and the adjusted effective tax rate from continuing operations may not be comparable to similarly titled measures as reported by other companies. Income before income taxes from continuing operations is reconciled to adjusted income before income taxes from continuing operations, the effective tax rate from continuing operations is reconciled to the adjusted effective tax rate from continuing operations and net income from continuing operations (attributable to PPG) and earnings per share - assuming dilution (attributable to PPG) are reconciled to adjusted net income from continuing operations (attributable to PPG) and adjusted earnings per share - assuming dilution below: Net income from Income continuing Earnings Before operations per ($ in millions, except percentages Income Effective (attributable to diluted and per share amounts) Taxes Tax Expense Tax Rate PPG) share(2) Year-endedDecember 31, 2019 As reported, continuing operations$1,661 $392 23.6 %$1,243 $5.22
Includes:
Net charges related to business restructuring-related costs(1) 222 54 24.4 % 168 0.71 Net charges related to environmental remediation 61 14 23.0 % 47 0.20 Charges related to acquisition-related costs(3) 17 4 23.5 % 13 0.05 Net charges related to litigation matters 12 3 24.1 % 9 0.04 Adjusted, continuing operations, excluding certain items$1,973 $467 23.7 %$1,480 $6.22 Net income from Income continuing Earnings Before operations per ($ in millions, except percentages Income Effective (attributable to diluted and per share amounts) Taxes Tax Expense Tax Rate PPG) share(2) Year-endedDecember 31, 2018 As reported, continuing operations$1,693 $353 20.9 %$1,323 $5.40
Includes:
Net tax benefit related toU.S. Tax Cuts and Jobs Act - 13 N/A (13 ) (0.05 ) Charges related to customer assortment changes 18 4 24.3 % 14 0.05 Charges related to environmental remediation and other costs 77 19 24.3 % 58 0.24 Net charges related to business restructuring-related costs(1) 75 22 29.3 % 53 0.21 Charges related to litigation matters 24 5 24.3 % 19 0.08 Charges related to acquisition-related costs(3) 6 2 25.5 % 4 0.02 Charge related to brand rationalization 6 2 26.8 % 4 0.02 Gain from the sale of a non-operating asset (26 ) (6 ) 24.3 % (20 ) (0.08 ) Charge related to impairment of a non-manufacturing asset 9 2 24.3 % 7 0.03 Adjusted, continuing operations, excluding certain items$1,882 $416 22.1 %$1,449 $5.92
(1) Included in net charges related to business restructuring-related costs,
are business restructuring charges, accelerated depreciation of certain
assets and other related costs, offset by releases related to previously
approved programs. (2) Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.
(3) Acquisition-related costs include advisory, legal, accounting, valuation,
and other professional or consulting fees incurred to effect acquisitions.
These costs are included in Selling, general and administrative expense in
the consolidated statement of income. Acquisition-related costs also
include the impact for the step up to fair value of inventory acquired in
certain acquisitions which are included in Cost of sales, exclusive of
depreciation and amortization in the consolidated statement of income.
22 2019 PPG ANNUAL REPORT AND 10-K -------------------------------------------------------------------------------- Performance of Reportable Business Segments Performance Coatings $ Change %
Change
($ in millions, except percentages) 2019 2018 2019 vs. 2018 2019 vs. 2018 Net sales$9,034 $9,087 ($53 ) (0.6)% Segment income$1,409 $1,300 $109 8.4% Performance Coatings net sales decreased slightly due to the following: ? Unfavorable foreign currency translation (-3%) ? Lower sales volumes (-1%) Partially offset by: ? Higher selling prices (+2%) ? Acquisition-related sales (+1%) For the full year 2019, PPG achieved higher selling prices across all businesses, reflecting the value of our products and services, offset by unfavorable foreign currency translation in all businesses. Architectural coatings -Americas andAsia Pacific net sales decreased by a mid-single-digit percentage versus the prior year. The unfavorable impact from customer assortment changes in theU.S. architectural DIY channel negatively impacted sales volumes. TheU.S. andCanada company-owned stores network net sales decreased slightly compared to the prior year. The PPG-Comex architectural coatings businesses had slightly higher net sales, excluding the impact of foreign currency translation and acquisitions (organic sales), and continued to benefit from the opening of a net of approximately 160 new concessionaire locations. Net sales inAsia Pacific were negatively impacted by unfavorable foreign currency translation. Architectural coatings - EMEA net sales decreased by a mid-single-digit percentage due to unfavorable foreign currency translation; however, organic sales increased by a low-single-digit percentage year-over-year driven by higher selling prices. Despite volume growth in certain key countries, sales volumes were lower year-over-year. Automotive refinish coatings net sales were relatively flat versus the prior year including the increase in net sales from the SEM acquisition. Sales volumes were impacted by softerU.S. industry demand evidenced by lower collision claims during the year. Organic sales increased in all other major geographic regions as customers continued to adopt PPG's industry-leading technologies. Aerospace coatings net sales increased by over 10% versus the prior year, driven by higher sales volumes. This increase was supported by market outperformance in all major platforms stemming from technology-advantaged products and robust industry demand. Protective and marine coatings increased net sales by a mid-single-digit percentage versus the prior year, driven by strong sales volumes inChina andEurope and price gains in each region. Net sales in theU.S. were negatively impacted by reduced activity in the oil and gas sector. Segment income increased$109 million year-over-year due to higher selling prices and the continued benefits from the Company's ongoing restructuring programs. These benefits were partially offset by the earnings impact of lower sales volumes, which were mostly attributable to the previously announced customer assortment changes, and other cost inflation. Additionally, unfavorable foreign currency translation decreased segment income by approximately$25 million , primarily related to the weakening of key currencies, including the Mexican peso and euro. Looking Ahead Looking ahead, industry demand levels in the first quarter of 2020 are expected to be similar to those experienced in the fourth quarter of 2019. Acquisitions are forecasted to add about$25 million of net sales primarily from Dexmet,Texstars , and ICR. In addition, net sales will be impacted due to lower production rates by an aerospace customer. Based on current exchange rates, foreign currency translation is not expected to have a material impact on segment sales or earnings. 2019 PPG ANNUAL REPORT AND FORM 10-K 23 --------------------------------------------------------------------------------
Industrial Coatings
$ Change %
Change
($ in millions, except percentages) 2019 2018 2019 vs. 2018 2019 vs. 2018 Net sales$6,112 $6,287 ($175 ) (2.8)% Segment income$862 $818 $44 5.4% Industrial Coatings segment net sales decreased due to the following: ? Lower sales volumes (-6%) ? Unfavorable foreign currency translation (-3%) Partially offset by: ? Acquisition-related sales (+4%) ? Higher selling prices (+2%) For the full year 2019, PPG achieved higher selling prices in all major regions for nearly all businesses, reflecting the value of our products and services, offset by unfavorable foreign currency translation in all businesses. In the automotive OEM coatings business, net sales decreased by a mid-single-digit percentage driven by lower sales volumes versus the prior year, consistent with the overall global industry automotive build rate. Partially offsetting the lower sales volumes were acquisition-related sales from the Hemmelrath acquisition and higher selling prices in all major regions. Industrial coatings net sales increased slightly versus the prior year, despite lower sales volumes due to weakening global manufacturing demand for certain end-use products. Lower sales volumes were more than offset by acquisition-related sales from the Whitford acquisition. Packaging coatings net sales decreased by a mid-single-digit percentage due to lower sales volumes versus the prior year. Year-over-year volumes were impacted by lower demand in packaged foods. However, sales volumes increased inLatin America due to customer conversions in the region during the year. Specialty coatings and materials net sales were lower by a low-single-digit percentage versus the prior year, despite sales volume growth in theU.S. and EMEA. Segment income increased$44 million year-over-year. Segment income benefited from improving selling prices, continued benefits from the Company's ongoing restructuring programs and acquisition-related income, which were partially offset by the earnings impact of lower sales volumes and other cost inflation. Unfavorable foreign currency translation decreased segment income by approximately$20 million , primarily related to the Chinese yuan, Mexican peso and the euro. Looking ahead Looking ahead, global industrial demand trends are expected to remain subdued through the first quarter of 2020, with inconsistencies by region. Significant public health issues could have an unfavorable impact in certain industries and regions. The company will continue to prioritize operating margin recovery, focusing on executing its cost savings program and implementing contingency actions where necessary. Acquisition-related sales are forecast to add about$60 million stemming from Whitford and Hemmelrath. Based on current exchange rates, foreign currency translation is not expected to have a material impact on segment sales or earnings. Review and Outlook During 2019, economic conditions were generally positive in all of our major geographic regions despite soft global manufacturing activity that weakened during the year and remained mixed by end-uses. PPG's net sales excluding foreign currency translation impact grew approximately 1% versus the prior year. Acquisition-related sales from acquisitions completed in 2018 and 2019 contributed 2% to net sales growth year-over-year, net of dispositions. Foreign currency translation was unfavorable throughout the year and impacted net sales by about 3%. Raw material costs moderated during the year, but remain elevated after a multi-year inflationary period. Some other key costs continued to increase in 2019 such as employee wage and benefit costs.U.S. andCanada During 2019, the pace of economic growth moderated in theU.S. andCanada versus the prior year, led by weakerU.S. GDP growth. Automotive OEM industry builds were relatively flat compared to 2018. Demand in the residential and commercial construction markets was modestly higher in 2019 compared to 2018. New home starts advanced approximately 2% in 2019 versus approximately 4% in 2018. Residential remodeling was down 2% in 2019 versus 2018, while commercial construction was down approximately 4% compared to flat in 2018. Market demand for architectural paint continued to shift more to professional trade painters as continued lowerU.S. unemployment resulted in consumers choosing professional painters 24 2019 PPG ANNUAL REPORT AND 10-K -------------------------------------------------------------------------------- rather than completing projects themselves; although, demand inU.S. do-it-yourself (DIY) paint stores was stable after several years of weaker trends. PPG's architectural coatings sales volumes in theU.S. andCanada was impacted by DIY customer assortment changes that reduced net sales by more than$100 million . The aerospace coatings business had above-market sales volume growth of nearly a double-digit percentage year-over-year. The automotive refinish coatings business was impacted by lower collision rates, changes to inventory management by our customers and a continuing trend of a higher number of automobiles in accidents being scrapped rather than being repaired and repainted offsetting modest growth in miles driven. PPG's packaging coatings business was impacted by lower packaged food demand which offset growth in the packaged beverage segment. PPG's automotive OEM coatings business performance was slightly below industry demand levels due to customer mix. Higher selling prices and acquisition-related sales nearly offset lower sales volumes in the automotive OEM coatings business. For the industrial coatings business, acquisition-related sales and higher selling prices were partially offset by lower sales volumes. TheU.S. andCanada remained PPG's largest region, representing approximately 43% of 2019 net sales.Europe ,Middle East andAfrica European economic activity was weak in 2019. Industrial production and manufacturing rates in the region were lower than 2018 and worsened as the year progressed. The region was impacted by continuing uncertainty over theUnited Kingdom's exit from theEuropean Union and overall contracting demand in most of the end-use markets that PPG supplies. Regional demand continued to be mixed by country and end-uses. Demand for PPG's products was impacted by a decline in automotive industry builds and soft manufacturing activity in most of the general industrial coatings sub-segments. PPG's architectural coatings - EMEA business organic sales were higher by a low-single-digit percentage as higher selling prices offset lower sales volumes. EMEA represented approximately 30% of PPG's 2019 net sales, similar to prior year levels. Regional coatings volumes remain approximately 20% below 2008 pre-recession levels. Net sales, excluding the impact of foreign translation, increased in 2019 compared to 2018 as higher selling prices and acquisition-related sales more than offset lower sales volumes. The euro and British pound both depreciated against theU.S. dollar during 2019.Asia Pacific andLatin America The emerging regions ofAsia Pacific andLatin America represented 27% of PPG's 2019 net sales in aggregate, similar to the prior year.Asia Pacific remained the largest emerging region, with net sales of approximately$2.5 billion , led byChina , which remained PPG's second largest country by revenue. The Performance Coatings segment grew sales volumes inAsia Pacific , led by strong sales volume growth in the protective and marine coatings and aerospace coatings businesses. Sales volumes in the Industrial Coatings segment were lower by a high-single-digit percentage year-over-year, mostly due to a decline in the automotive OEM coatings business, particularly inChina andIndia where new automobile sales were lower, and a decline in the industrial coatings business driven by weakening global manufacturing demand. Overall, demand inLatin America declined year-over-year driven by lower automotive industry builds and overall softer economic conditions in most countries, including a weak trading environment inMexico . InMexico , the PPG-Comex business added a net of approximately 160 new concessionaire locations. The overall region's performance was supported by strong growth in the packaging coatings business. Weaker sales volumes were offset by higher selling prices. Foreign currency translation was volatile and finished 2% unfavorable compared to 2018, principally driven by weaker currencies, including the Mexican peso and Brazilian real. Outlook Looking ahead to 2020, we expect modest global market growth that will likely be uneven by region and end-use. We expect most regional growth rates to be similar to 2019, with the softest conditions expected in the EMEA region. We anticipate PPG'sU.S. andCanada regional growth will be led by aerospace coatings, albeit at lower levels than 2019 due to expected production curtailments at one customer, especially in the first half of the year. Automotive OEM builds are expected to be relatively flat compared to 2019. We expect modestly positive growth in housing and commercial construction. We expect similar industry demand trends in 2020 inEurope as those experienced in 2019 with continuing improvement in profitability due to margin improvement. Regional growth is expected to remain mixed by sub-region and country. Favorable end-use trends are expected to continue in aerospace coatings, with the potential for heightened volatility in automotive OEM builds due to new regional emission standards. Industrial coatings demand is expected to remain soft as industry growth rates are anticipated to be flat to modestly lower. Demand is expected to contract but be mixed by country in the architectural coatings business. We continue to monitor the economic environment in theU.K. , as its exit from theEuropean Union progresses and impacts consumer sentiment and coatings demand. 2019 PPG ANNUAL REPORT AND FORM 10-K 25 -------------------------------------------------------------------------------- InAsia Pacific , we expect improved industrial production growth inChina ,Southeast Asia andIndia as the year progresses. InChina , we foresee continued above global average growth with heightened risk as the Chinese economy continues to shift and rely more on domestic consumption. The sharp decline in automotive OEM activity realized in the past 18 months is expected to moderate and improve as 2020 progresses, with year-over-year demand patterns expected to become more favorable in the second half of 2020. The recovery in marine coatings new-build demand is expected to remain subdued. InLatin America , we anticipate slightly better economic conditions inMexico , most ofCentral America andSouth America compared to 2019. Significant other factors InJune 2019 , PPG initiated a$184 million global restructuring program. The program is the result of a comprehensive internal operational assessment to identify further opportunities to improve profitability of the overall business portfolio. PPG recognized approximately$15 million of savings from this program in 2019. The majority of restructuring actions are expected to be completed by the end of the fourth quarter 2020 with the remainder of the actions expected to be completed in 2022. We made significant progress on the global restructuring programs that were announced inDecember 2016 andMay 2018 . The Company achieved approximately$70 million of savings in 2019 relating to these programs. These restructuring actions are expected to be completed by the end of the second quarter of 2020. Aggregate restructuring savings related to the 2019, 2018 and 2016 programs was approximately$85 million in 2019. We will continue to aggressively manage the Company's cost structure to ensure alignment with the overall demand environment and will make adjustments as required to remain cost competitive in the marketplace. Aggregate restructuring savings are expected to be at least$75 million in 2020. Raw materials are a significant input cost to the process of manufacturing coatings. PPG experiences fluctuating energy and raw material costs driven by various factors, including changes in supplier feedstock costs and inventories, global industry activity levels, foreign currency exchange rates, and global supply and demand factors. In aggregate, average raw material costs were modestly lower in 2019 versus 2018 due to variety of reasons, including softer industry demand and lower crude oil prices. PPG currently expects overall raw material prices to be impacted by weak industrial supply and demand conditions in 2020. Cost inflation is expected in several other areas including wage, benefit, and logistics costs in 2020. In 2019, we achieved broad selling price improvement, reflecting the Company's efforts to offset inflationary pressures. Further benefits from selling price actions are necessary in 2020 to recover operating margins, reflecting the value of our products. The Company will carefully monitor all costs during 2020 and assess the need for additional selling price increases. In 2019, we experienced unfavorable foreign currency translation throughout the year. Based onmid-January 2020 exchange rates, the Company does not expect year-over-year foreign currency translation to significantly impact 2020 net sales or income before income taxes. The foreign currency environment continues to be volatile, and the impact on 2020 net sales and income before income taxes could differ from this expectation. The Company generally purchases raw materials, incurs manufacturing costs and sells finished goods in the same currency, so we typically incur only modest foreign currency transaction related impacts. We are monitoring the potential impact of the recent outbreak of the coronavirus inChina , which could negatively impact our global business and results of operations in 2020. The 2020 effective tax rate from continuing operations is expected to be in the range of 22% to 24%. This range represents the Company's best estimate, including recent updates to the 2017 theU.S. Tax Cuts and Jobs Act. Over the past five years, the Company used over$4.5 billion of cash to repurchase approximately 45 million shares of PPG stock, including$325 million in 2019. The Company ended the year with approximately$1.5 billion remaining under its current share repurchase authorization. During 2019, the Company deployed nearly$700 million for acquisitions, including the purchase of a remaining minority interest, and approximately$470 million for dividends. PPG increased its per-share dividend inSeptember 2019 , marking the 48th annual per share dividend increase and the 120th consecutive year of annual dividend payments. PPG ended 2019 with approximately$1.3 billion in cash and short-term investments. The Company expects continued strong cash generation in 2020. Accounting Standards Adopted in 2019 Note 1, "Summary of Significant Accounting Policies" under Item 8 of this Form 10-K describes the Company's recently adopted accounting pronouncements. 26 2019 PPG ANNUAL REPORT AND 10-K -------------------------------------------------------------------------------- Accounting Standards to be Adopted in Future Years Note 1, "Summary of Significant Accounting Policies" under Item 8 of this Form 10-K describes accounting pronouncements that have been promulgated prior toDecember 31, 2019 but are not effective until a future date. Commitments and Contingent Liabilities, including Environmental Matters PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. See Item 3. "Legal Proceedings" and Note 14, "Commitments and Contingent Liabilities" under Item 8 of this Form 10-K for a description of certain of these lawsuits. As discussed in Item 3 and Note 14, 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, 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 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 also discussed in Note 14, PPG has significant reserves for environmental contingencies. Please refer to the Environmental Matters section of Note 14 for details of these reserves. A significant portion of our reserves for environmental contingencies relate to ongoing remediation at PPG's former chromium manufacturing plant inJersey City, N.J. and associated sites ("New Jersey Chrome"). There are multiple, future events yet to occur, including further remedy selection and design, remedy implementation and execution and applicable governmental agency or community organization approvals. Considerable uncertainty exists regarding the timing of these future events for the New Jersey Chrome sites. Further resolution of these events is expected to occur over the next several years. As these events occur and to the extent that the cost estimates of the environmental remediation remedies change, the existing reserve for this environmental remediation matter will continue to be adjusted. Liquidity and Capital Resources During the past two years, PPG had sufficient financial resources to meet its operating requirements, to fund our capital spending, including acquisitions, share repurchases and pension plans and to pay increasing dividends to shareholders. Cash and cash equivalents and short-term investments ($ in millions) 2019 2018 Cash and cash equivalents$1,216 $902 Short-term investments 57 61 Total$1,273 $963
Cash from operating activities - continuing operations ($ in millions, except percentages)
% Change 2019 2018 2019 vs. 2018
Cash from operating activities
2019 vs. 2018 The$597 million increase in Cash from operating activities - continuing operations was primarily due to favorable changes in working capital, excluding the impact of business acquisitions, and lower cash contributions to its defined benefit pension plans year-over-year. Operating working capital Operating working capital is a subset of total working capital and represents (1) receivables from customers, net of allowance for doubtful accounts, (2) inventories, and (3) trade liabilities. See Note 4, "Working Capital Detail" under Item 8 of this Form 10-K for further information related to the components of the Company's operating working capital. We believe operating working capital represents the key components of working capital under the operating control of our businesses. 2019 PPG ANNUAL REPORT AND FORM 10-K 27
--------------------------------------------------------------------------------
A key metric we use to measure our working capital management is operating working capital as a percentage of sales (fourth quarter sales annualized). ($ in millions, except percentages)
2019 2018 Trade receivables, net$2,479 $2,505 Inventories, FIFO 1,834 1,896 Trade creditors' liabilities 2,098
2,177
Operating working capital$2,215
Operating working capital as a % of fourth quarter sales, annualized
15.1 %
15.3 %
Trade receivables, net as a % of fourth quarter sales, annualized
16.9 % 17.2 % Days sales outstanding 56
56
Inventories, FIFO as a % of fourth quarter sales, annualized 12.5 %
13.0 % Inventory turnover 4.6 4.8 Environmental expenditures ($ in millions) 2019 2018
Cash outlays related to environmental remediation activities
We expect cash outlays for environmental remediation activities in 2020 to be between$80 million and$100 million . Defined benefit pension plan contributions ($ in millions) 2019 2018
Contributions to PPG's non-U.S. defined benefit pension plans in 2019 were required by local funding requirements. PPG expects to make mandatory contributions to its non-U.S. defined benefit pension plans in the range of$15 million to$20 million in 2020. PPG may make voluntary contributions to its defined benefit pension plans in 2020 and beyond. Cash used for investing activities ($ in millions, except percentages) % Change 2019 2018 2019 vs. 2018
Cash used for investing activities (
2019 vs. 2018 The$245 million increase in cash used for investing activities - continuing operations, was primarily due to higher spending on business acquisitions. Capital expenditures, including business acquisitions ($ in millions, except percentages) % Change 2019 2018 2019 vs. 2018 Capital expenditures (1)$413 $411 0.5%
Business acquisitions, net of cash balances acquired
70.1%
Total capital expenditures, including acquisitions
33.8%
Capital expenditures, excluding acquisitions, as a % of sales
2.7 % 2.7
% -%
(1) Includes modernization and productivity improvements, expansion of existing businesses and environmental control projects. Capital expenditures related to modernization and productivity improvements, expansion of existing businesses and environmental control projects is expected to be in the range of 2.5% to 3.0% of sales during 2020. A primary focus for the Company in 2020 will continue to be cash deployment focused on shareholder value creation, with a preference for business acquisitions. 28 2019 PPG ANNUAL REPORT AND 10-K --------------------------------------------------------------------------------
Cash used for financing activities
% Change
($ in millions, except percentages) 2019 2018 2019 vs. 2018
Cash used for financing activities (
2019 vs. 2018 The$447 million decrease in cash used for financing activities - continuing operations, was primarily due to lower net purchases of treasury stock year-over-year, partially offset by the repayment of long term debt. Share repurchase activity ($ in millions, except number of shares) 2019 2018 Number of shares repurchased (millions) 2.7 15.9 Cost of shares repurchased$325 $1,721 The Company has approximately$1.5 billion remaining under the current authorization from the Board of Directors, which was approved inDecember 2017 . The current authorized repurchase program has no expiration date. Dividends paid to shareholders ($ in millions) 2019 2018
Dividends paid to shareholders
PPG has paid uninterrupted annual dividends since 1899, and 2019 marked the 48th consecutive year of increased annual per-share dividend payments to shareholders. The Company raised its per-share quarterly dividend by 6% to$0.51 per share paid inSeptember 2019 . Debt issued and repaid
Debt Issued (net of discount and issuance
costs) Year $ in millions$300 million 2.4% Note due 2024 and$300 million 2.8% Notes due 2029 2019
$300 million 3.2% Note due 2023 and$700 million 3.75% Notes due 2028 2018
Debt Repaid Year $ in millions 0.00% Note (€300) 2019$334 2.3% Notes 2019$300 The ratio of total debt, including finance leases (previously referred to as capital leases), to total debt and equity was 49% atDecember 31, 2019 , down from 52% in 2018. Credit agreements and lines of credit InAugust 2019 , PPG amended and restated the Credit Agreement with several banks and financial institutions as further discussed in Note 9, "Borrowings and Lines of Credit" under Item 8 of this Form 10-K. The Credit Agreement amends and restates the Company's existing five year credit agreement dated as ofDecember 18, 2015 . The Credit Agreement provides for a$2.2 billion unsecured revolving credit facility. The Credit Agreement will terminate onAugust 30, 2024 . During the years endedDecember 31, 2019 and 2018, there were no borrowings outstanding under the existing or the prior credit agreement. The Credit Agreement also supports the Company's commercial paper borrowings. As ofDecember 31, 2019 , there were$100 million of commercial paper borrowings outstanding. There were no commercial paper borrowings outstanding as ofDecember 31, 2018 under the prior credit agreement. In addition to the amounts available under lines of credit, the Company maintains access to the capital markets and may issue debt or equity securities from time to time, which may provide an additional source of liquidity. See Note 9, "Borrowings and Lines of Credit" under Item 8 of this Form 10-K for information regarding notes entered into and repaid as well as details regarding the use and availability of committed and uncommitted lines of credit, letters of credit, guarantees and debt covenants. 2019 PPG ANNUAL REPORT AND FORM 10-K 29 -------------------------------------------------------------------------------- Contractual obligations We continue to believe that our cash on hand and short term investments, cash from operations and the Company's access to capital markets will continue to be sufficient to fund our operating activities, capital spending, acquisitions, dividend payments, debt service, share repurchases, contributions to pension plans, and PPG's significant contractual obligations. These significant contractual obligations are presented in the following table. Obligations Due In: ($ in millions) Total 2020 2021-2022 2023-2024 Thereafter Contractual Obligations Long-term debt$4,931 $500 $832 $596 $3,003 Short-term debt 10 10 - - - Commercial paper 100 - - 100 - Finance lease obligations 11 3 3 2 3 Interest payments(1) 1,184 137 215 183 649 Operating leases(2) 889 191 268 164 266 Pension contributions(3) 20 20 - - - Unconditional purchase commitments(4) 213 86 77 32 18 Other commitments 74 6 13 13 42 Total$7,432 $953 $1,408 $1,090 $3,981
(1) Interest on all outstanding debt, including finance lease obligations.
(2) Includes interest payments.
(3) Includes the high end of the range of the expected non-US mandatory pension
contributions for 2020 only, as PPG is unable to estimate the pension
contributions beyond 2020.
(4) The unconditional purchase commitments are principally take-or-pay
obligations related to the purchase of certain materials, including industrial gases and electricity, consistent with customary industry practice. Other liquidity matters AtDecember 31, 2019 , the total amount of unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was$177 million . The timing of payments will depend on the progress of examinations with tax authorities. PPG does not expect a significant tax payment related to these obligations within the next year. The Company is unable to make a reasonably reliable estimate as to when any significant cash settlements with taxing authorities may occur. Off-Balance Sheet Arrangements The Company's off-balance sheet arrangements include unconditional purchase commitments disclosed in the "Liquidity and Capital Resources" section in the contractual obligations table as well as letters of credit and guarantees as discussed in Note 9, "Borrowings and Lines of Credit" under Item 8 of this Form 10-K. Critical Accounting Estimates Management has evaluated the accounting policies used in the preparation of the financial statements and related notes presented under Item 8 of this Form 10-K and believes those policies to be reasonable and appropriate. We believe that the most critical accounting estimates made in the preparation of our financial statements are those related to accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and to accounting for pensions, other postretirement benefits, business combinations, goodwill and other identifiable intangible assets with indefinite lives because of the importance of management judgment in making the estimates necessary to apply these policies. Contingencies Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial statements are those related to environmental remediation, to pending, impending or overtly threatened litigation against the Company and to the resolution of matters related to open tax years. For more information on these matters, see Note 14, "Commitments and Contingent Liabilities" and Note 12, "Income Taxes" under Item 8 of this Form 10-K. 30 2019 PPG ANNUAL REPORT AND 10-K -------------------------------------------------------------------------------- Defined Benefit Pension and Other Postretirement Benefit Plans Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, we make extensive use of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. The Company has established a process by which management reviews and selects these assumptions annually. See Note 13, "Employee Benefit Plans" under Item 8 of this Form 10-K for information on these plans and the assumptions used. Business Combinations In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed will be recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities including: third-party appraisals for the estimated value and lives of identifiable intangible assets and property, plant and equipment; third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations; and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities. The business and technical judgment of management was used in determining which intangible assets have indefinite lives and in determining the useful lives of finite-lived intangible assets in accordance with the accounting guidance for goodwill and other intangible assets.Goodwill and Intangible Assets The Company tests indefinite-lived intangible assets and goodwill for impairment by either performing a qualitative evaluation or a quantitative test at least annually, or more frequently if an indication of impairment arises. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit or asset is less than its carrying amount. In the quantitative test, fair values are estimated using a discounted cash flow model. Key assumptions and estimates used in the discounted cash flow model include discount rates, tax rates, future revenues, operating cash flows and capital expenditures. For more information on these matters, see Note 1, "Summary of Significant Accounting Policies" under Item 8 of this Form 10-K. We believe that the amounts recorded in the financial statements under Item 8 of this Form 10-K related to these contingencies, pensions, other postretirement benefits, business combinations, goodwill and other identifiable intangible assets with indefinite lives are based on the best estimates and judgments of the appropriate PPG management, although actual outcomes could differ from our estimates. Currency Comparing spot exchange rates atDecember 31, 2018 and atDecember 31, 2019 , theU.S. dollar weakened against certain currencies in the countries where PPG operates, most notably the British pound, Canadian dollar, and the Mexican peso. As a result, consolidated net assets atDecember 31, 2019 increased by$106 million fromDecember 31, 2018 . Comparing spot exchange rates atDecember 31, 2017 and atDecember 31, 2018 , theU.S. dollar strengthened against certain other major currencies associated with countries in which PPG operates, most notably the Australian dollar, British pound, Chinese yuan, euro and South Korean won. As a result, consolidated net assets atDecember 31, 2018 decreased by approximately$167 million fromDecember 31, 2017 . Comparing average exchange rates during 2019 to those of 2018, theU.S. dollar strengthened against currencies of the countries within the regions PPG operates, including EMEA,Asia Pacific , andLatin America . This had an unfavorable impact of approximately$50 million on full year 2019 income before income taxes from the translation of this foreign income intoU.S. dollars. Comparing average exchange rates during 2018 to those of 2017, in the countries in which PPG operates, there was a favorable impact of$21 million on full year 2018 income before income taxes from the translation of this foreign income intoU.S. dollars. Forward-Looking Statements Management's Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance. You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words "aim," "believe," "expect," "anticipate," "intend," "estimate," "project," "outlook," "forecast" and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward looking 2019 PPG ANNUAL REPORT AND FORM 10-K 31
-------------------------------------------------------------------------------- statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to theSecurities and Exchange Commission . Also, note the following cautionary statements. Many factors could cause actual results to differ materially from the Company's forward-looking statements. Such factors include global economic conditions, increasing price and product competition by foreign and domestic competitors, fluctuations in cost and availability of raw materials, the ability to achieve selling price increases, the ability to recover margins, customer inventory levels, our ability to maintain favorable supplier relationships and arrangements, the timing of and the realization of anticipated cost savings from restructuring initiatives, the ability to identify additional cost savings opportunities, difficulties in integrating acquired businesses and achieving expected synergies therefrom, economic and political conditions in the markets we serve, the ability to penetrate existing, developing and emerging foreign and domestic markets, foreign exchange rates and fluctuations in such rates, fluctuations in tax rates, the impact of future legislation, the impact of environmental regulations, unexpected business disruptions, the effectiveness of our internal control over financial reporting, the results of governmental investigations and the unpredictability of existing and possible future litigation. However, it is not possible to predict or identify all such factors. Consequently, while the list of factors presented here and under Item 1A is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in the results compared with those anticipated in the forward-looking statements could include, among other things, lower sales or income, business disruption, operational problems, financial loss, legal liability to third parties, other factors set forth in Item 1A of this Form 10-K and similar risks, any of which could have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. Item 7A. Quantitative and Qualitative Disclosures About Market Risk PPG is exposed to market risks related to changes in foreign currency exchange rates, interest rates, and was exposed to changes in PPG's stock price. The Company may enter into derivative financial instrument transactions in order to manage or reduce these market risks. A detailed description of these exposures and the Company's risk management policies are provided in Note 10, "Financial Instruments, Hedging Activities and Fair Value Measurements" under Item 8 of this Form 10-K. The following disclosures summarize PPG's exposure to market risks and information regarding the use of and fair value of derivatives employed to manage its exposure to such risks. Quantitative sensitivity analyses have been provided to reflect how reasonably possible, unfavorable changes in market rates can impact PPG's consolidated results of operations, cash flows and financial position. Foreign Currency Risk We conduct operations in many countries around the world. Our results of operations are subject to both currency transaction and currency translation risk. Certain foreign currency forward contracts outstanding during 2019 and 2018 were designated as a hedge of PPG's exposure to foreign currency transaction risk. As ofDecember 31, 2019 and 2018, the fair value of these contracts was a net liability of$7 million and a net asset of$36 million , respectively. The potential reduction in PPG's Income before income taxes resulting from the impact of adverse changes in exchange rates on the fair value of its outstanding foreign currency hedge contracts of 10% for European and Canadian currencies and 20% for Asian and Latin American currencies for the years endedDecember 31, 2019 and 2018 would have been$357 million and$291 million , respectively. InAugust 2019 andFebruary 2018 , PPG entered intoU.S. dollar to euro cross currency swap contracts for$300 million and$575 million , respectively; with a combined notional amount of$875 million outstanding, resulting in a net asset with a fair value of$48 million and$35 million as ofDecember 31, 2019 and 2018, respectively. A 10% increase in the value of the euro to theU.S. dollar would have had an unfavorable effect on the fair value of these swap contracts by reducing the value of these instruments by$87 million and$57 million atDecember 31, 2019 and 2018, respectively. As ofDecember 31, 2019 and 2018, PPG had non-U.S. dollar denominated debt outstanding of$2.3 billion and$2.6 billion , respectively. A weakening of theU.S. dollar by 10% against European currencies and by 20% against Asian and South American currencies would have resulted in unrealized translation losses of$255 million and$299 million as ofDecember 31, 2019 and 2018, respectively. Interest Rate Risk The Company manages its interest rate risk of fixed and variable rates while attempting to minimize its interest costs. In the first quarter of 2018, PPG entered into interest rate swaps which converted$525 million of fixed rate debt to variable rate debt. The fair value of these contracts was an asset of$35 million and$8 million as ofDecember 31, 2019 and 2018, respectively. An increase in variable interest rates of 10% would lower the fair value of these swaps and increase interest 32 2019 PPG ANNUAL REPORT AND 10-K -------------------------------------------------------------------------------- expense by$7 million and$10 million for the periods endedDecember 31, 2019 and 2018, respectively. A 10% increase in interest rates in theU.S. ,Canada ,Mexico andEurope and a 20% increase in interest rates inAsia andSouth America would have an insignificant effect on PPG's variable rate debt obligations and interest expense for the periods endedDecember 31, 2019 and 2018, respectively. Further, a 10% reduction in interest rates would have increased the fair value of the Company's fixed rate debt by approximately$67 million and$84 million as ofDecember 31, 2019 and 2018, respectively; however, such changes would not have had an effect on PPG's annual Income before income taxes or cash flows. 2019 PPG ANNUAL REPORT AND FORM 10-K 33 --------------------------------------------------------------------------------
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