PPG INDUSTRIES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the condensed consolidated financial statements in Part I, Item 1, "Financial Statements," of this report and in conjunction with the 2019 Form 10-K. Executive Overview COVID-19 Our first quarter results reflect a sudden and wide-ranging deterioration in global demand as a result of the COVID-19 pandemic beginning with the impacts of the economic shutdown inChina during February and continuing across the world during the month of March. As the COVID-19 pandemic spread, we remained focused on and prioritized protecting our people, customers and all of our stakeholders. While we cannot determine the precise impact of the COVID-19 outbreak on our first quarter results, we estimate that net sales and earnings per diluted share were unfavorably impacted from the effects of the COVID-19 pandemic by approximately$225 million and$0.35 , respectively. From a financial perspective, our businesses through early March, with the exception of those inChina , were mostly performing at or above the financial targets we had set at the outset of the year, and we were pacing toward low-double-digit percentage EPS growth. We had solid performance in our global architectural and packaging coatings businesses and continued growth in the aerospace coatings business. In the last two weeks of March, however, many of our larger original equipment manufacturer ("OEM") customers were forced to shut down; a number of architectural paint stores in certain countries were mandated to close; and miles driven and flown throughout the world fell sharply as many countries imposed stay-at-home mandates. For our reportable business segments, the impact was more significant in the Industrial Coatings segment as company sales inChina are weighted more to those businesses. In addition, inMarch 2020 , PPG recorded estimated future credit losses for trade receivables of$30 million , or$0.10 per-diluted-share, related to the potential financial impacts of the COVID-19 pandemic. These amounts were 23 -------------------------------------------------------------------------------- Table of Contents estimated based on a regional business perspective including certain forward-looking information and other considerations. As new information becomes available, PPG will monitor the adequacy of this reserve. We have taken immediate and broad steps to adapt to the current business climate, including decisive cost actions and an increased focus on cash generation and liquidity. These include announced salary reductions for senior leaders, shutdowns of some manufacturing and distribution operations, temporary employee furloughs at the most severely demand-impacted businesses, reduced spending across all businesses and functions, and deferred capital expenditures. In addition, we continued to execute our previously announced restructuring programs, achieving about$20 million of savings in the first quarter. We are continuing to assess and manage through the crisis, and will determine if further cost or restructuring actions are warranted. In mid-March, the company borrowed$800 million under its revolving credit facility reflecting an abundance of caution and the anticipated uncertainty in the debt capital markets, including the commercial paper market. Subsequently, in April, the company entered into a$1.5 billion 364-day term loan and utilized a portion of the proceeds to fully repay the revolver borrowing. These strategic actions bolstered the company's liquidity. The company expects that second quarter sales volumes will be down 30% to 35%, presuming that demand begins to improve in June. We anticipate that the automotive OEM, automotive refinish, and aerospace coatings businesses along with certain architectural coatings businesses will be most impacted in the second quarter. Our operations inChina are now fully operational, and regional economic activity is returning toward pre-crisis levels. We expect that for certain other business, including packaging coatings, do-it-yourself ("DIY") architectural coatings, long-cycle protective coatings and military products, that the impact will be less severe and may in some cases drive greater demand for PPG products. Due to the heightened level of uncertainty over global economic demand, the company is withdrawing all of its previously communicated full year sales and earnings guidance. Below are our key financial results for the three months endedMarch 31, 2020 : •Net sales were approximately$3.4 billion , down 6.8% compared to the prior year. •Cost of sales, exclusive of depreciation and amortization ("Cost of sales") was$1.9 billion , down 8.0% versus prior year primarily due to lower sales volumes as a result of COVID-19 and foreign currency translation. As a percentage of sales, Cost of sales decreased 0.7%. •Selling, general and administrative ("SG&A") expense was$905 million , up 1.8% year-over-year due to a$30 million increase in the allowance for uncollectible accounts related to COVID-19 and wage and other cost inflation. As a percentage of sales, SG&A expense increased 2.3%. •Income before income taxes was$319 million . •The reported effective tax rate was 22.3%. The adjusted effective tax rate was 22.4%. •Net income attributable to PPG was$243 million . •Earnings per diluted share attributable to PPG was$1.02 . •Cash flows used for operating activities was$159 million , an increase of$93 million year-over-year. •Capital expenditures, including business acquisitions (net of cash acquired), was$81 million . •The Company paid$120 million in dividends. 24 -------------------------------------------------------------------------------- Table of Contents Performance in the first quarter of 2020 compared to the first quarter of 2019 Performance Overview Net Sales by Region Three Months Ended March 31 Percent Change ($ in millions, except percentages) 2020 2019 2020 vs. 2019 United States and Canada$1,509 $1,566 (3.6) % Europe, Middle East and Africa ("EMEA") 1,061 1,114 (4.8) % Asia Pacific 459 583 (21.3) % Latin America 348 361 (3.6) % Total$3,377 $3,624 (6.8) %
Net sales decreased
? Lower sales volumes (-8%)
? Unfavorable foreign currency translation (-2%)
Partially offset by:
? Acquisition-related sales (2%)
? Higher selling prices (1%)
As a result of COVID-19 and slowing of the global economy, sales volumes and
unfavorable foreign currency translation lowered net sales in each region and in
both reportable business segments. Slightly higher selling prices and
acquisition-related sales partially offset this downturn.
Foreign currency translation decreased net sales approximately $75 million as
the U.S. dollar strengthened against several foreign currencies versus the prior
year, most notably the Mexican peso and euro.
For specific business results see the Performance of Reportable Business
Segments section within Item 2 of this Form 10-Q.
Cost of Sales, exclusive of depreciation and amortization
Three Months Ended
March 31 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Cost of sales, exclusive of depreciation and
amortization $1,908 $2,073 (8.0) %
Cost of sales as a percentage of net sales 56.5 % 57.2 % (0.7) %
Cost of sales, exclusive of depreciation and amortization, decreased
? Lower sales volumes
? Foreign currency translation
Partially offset by:
? Cost of sales attributable to acquired businesses Selling, general and administrative expenses
Three Months Ended
March 31 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Selling, general and administrative expenses (SG&A) $905 $889 1.8 %
Selling, general and administrative expenses as a
percentage of net sales 26.8 % 24.5 % 2.3 %
SG&A expense increased
? Charge for uncollectible accounts related to COVID-19
? Wage and other cost inflation
Partially offset by:
? Restructuring cash savings
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? Foreign currency translation
Other costs and other income
Three Months Ended
March 31 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Interest expense, net of Interest income $23 $25 (8.0) %
Other charges $3 $14 (78.6) %
Other income ($18 ) ($16 ) 12.5 %
Other charges
Other charges were lower in the three months ended March 31, 2020 compared to
prior year due to lower environmental remediation charges during the quarter.
Effective tax rate and earnings per diluted share
Three Months Ended
March 31 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Income tax expense $71 $102 (30.4) %
Effective tax rate 22.3 % 24.3 % (2.0) %
Adjusted effective tax rate* 22.4 % 24.4 % (2.0) %
Earnings per diluted share $1.02 $1.31 (22.1) %
Adjusted earnings per diluted share* $1.19 $1.38 (13.8) %
*See Regulation G Reconciliation below
The effective tax rate for the three months endingMarch 31, 2020 and 2019 reflects the impact of certain discrete tax items for the quarter. The Company expects that its full year 2020 adjusted effective tax rate will be between 22% and 24%. Adjusted earnings per diluted share for the three months endedMarch 31, 2020 decreased year-over-year due to the mix of pretax earnings and items described further in the Regulation G reconciliation. Regulation G Reconciliations - Results from Operations PPG believes investor's understanding of the Company's performance is enhanced by the disclosure of net income, earnings per diluted share and PPG's effective tax rate 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, earnings per diluted share and the effective tax rate 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 and the adjusted effective tax rate may not be comparable to similarly titled measures as reported by other companies. 26 -------------------------------------------------------------------------------- Table of Contents Income before income taxes is reconciled to adjusted income before income taxes, the effective tax rate is reconciled to the adjusted effective tax rate and net income (attributable to PPG) and earnings per share - assuming dilution (attributable to PPG) are reconciled to adjusted net income (attributable to PPG) and adjusted earnings per share - assuming dilution below: Three Months Ended March 31, 2020 Income Before Earnings per ($ in millions, except percentages and per share Income Effective Tax Net income diluted amounts) Taxes Tax Expense Rate (attributable to PPG) share(a) As reported$319 $71 22.3 %$243 $1.02 Adjusted for: Increase in allowance for doubtful accounts related to COVID-19 30 7 23.2 % 23
0.10
Business restructuring-related costs, net (b) 13 3 22.4 % 10
0.04
Environmental remediation charges 8 2 24.3 % 6
0.03
Adjusted, excluding certain items$370 $83 22.4 %$282 $1.19 Three Months Ended March 31, 2019 Income Before Earnings per ($ in millions, except percentages and per share Income Effective Tax Net income diluted amounts) Taxes Tax Expense Rate (attributable to PPG) share(a) As reported$419 $102 24.3 %$312 $1.31 Adjusted for: Acquisition-related costs 7 2 23.4 % 5 0.02 Environmental remediation charge 10 2 24.3 % 8 0.03 Litigation matters 4 1 24.3 % 3 0.01 Business restructuring-related costs, net (b) 3 1 24.4 % 2
0.01
Adjusted, excluding certain items$443 $108 24.4 %$330
(a) Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding. (b) For the three months endedMarch 31, 2020 and 2019, included in business restructuring-related costs, net are business restructuring charges, accelerated depreciation of certain assets and other related costs, offset by releases related to previously approved programs. Performance of Reportable Business Segments Performance Coatings Three Months Ended March 31 $ Change % Change ($ in millions, except per share amounts) 2020 2019 2020 vs. 2019 2020 vs. 2019 Net sales$2,008 $2,108 ($100 ) (4.7) % Segment income$272 $297 ($25 ) (8.4) %
Performance Coatings net sales decreased due to the following:
? Lower sales volumes (-6%)
? Unfavorable foreign currency translation (-2%) Partially offset by:
? Higher selling prices (2%)
? Acquisition-related sales (1%)
Architectural coatings - Americas and Asia Pacific net sales, excluding the
impact of currency and acquisitions ("organic sales") increased a
low-single-digit percentage with differences by channel and region. Higher
selling prices offset lower sales volumes. DIY sales volumes were higher by a
mid-single-digit percentage and Mexican PPG Comex organic sales grew by a
mid-single-digit percentage.
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Architectural coatings - EMEA organic sales decreased by a low-single-digit
percentage as positive organic sales trends in the first two months of the
quarter were more than offset by lower demand in southern Europe where various
countries mandated the closures of retail paint stores in March.
Net sales for automotive refinish coatings were down a low-teen percentage as
higher selling prices and acquisition-related sales were more than offset by
lower sales volumes in each region reflecting a sharp decline in global miles
driven.
Aerospace coatings sales volumes were higher year-over-year through the first
two months of the quarter but fell in March due to customer production shutdowns
and softening commercial after-market demand resulting in sales volumes being
down a low-single-digit percentage for the quarter.
Sales volumes in the protective and marine coatings business were down a
low-single-digit percentage driven by lower sales volumes in China related to
mandated shutdowns.
Segment income decreased $25 million year-over-year, including unfavorable
foreign currency translation impacts of $7 million . Segment income was impacted
by lower sales volumes related to the pandemic and unfavorable foreign currency
translation partially offset by higher selling prices, execution of
cost-mitigation efforts and restructuring initiatives.
Looking Ahead
Looking ahead, industry demand levels in the second quarter are expected to be
significantly lower year-over-year especially in the automotive refinish
coatings, aerospace coatings, and certain architectural coatings regions.
Completed acquisitions are expected to add about $25 million of net sales
primarily from Dexmet, Texstars , and ICR. Net sales for the Performance Coatings
segment are expected to be lower by 25% to 35% compared to the second quarter of
2019. Based on current exchange rates, foreign currency translation is expected
to have an unfavorable impact on segment sales of about $90 million .
Industrial Coatings
Three Months Ended
March 31 $ Change % Change
($ in millions, except per share
amounts) 2020 2019 2020 vs. 2019 2020 vs. 2019
Net sales $1,369 $1,516 ($147 ) (9.7) %
Segment income $181 $218 ($37 ) (17.0) %
Industrial Coatings segment net sales decreased due to the following:
? Lower sales volumes (-11%)
? Unfavorable foreign currency translation (-2%) Partially offset by:
? Acquisition-related sales (3%)
Automotive OEM coatings sales volumes decreased by a high-teen percentage
year-over-year, driven by the significant downturn in global automotive industry
production rates.
For the industrial coatings business, net sales decreased by a mid-single-digit
percentage. Acquisition-related sales were more than offset by lower industrial
production demand in most regions due to customer shutdowns.
Packaging coatings organic sales decreased by a low-single-digit percentage
year-over-year as modestly higher selling prices were offset by lower sales
volumes stemming from pandemic-related China customer shutdowns.
Segment income decreased $37 million year-over-year, including unfavorable
foreign currency translation impacts of about $5 million . Segment income was
impacted by lower sales volumes driven by customer shutdowns related to the
pandemic, partially offset by cost-mitigation actions, restructuring cost
savings, and modestly higher selling prices.
Looking ahead
Looking ahead, industry demand levels are expected to be significantly lower in
the second quarter compared to prior year, especially in the automotive OEM
coatings and the industrial coatings businesses. Net sales for the Industrial
Coatings segment are expected to be lower by about 30% to 35% compared to the
second quarter of 2019. Based on current exchange rates, foreign currency
translation is expected to have an unfavorable impact on
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segment sales of about $50 million . In China , customer demand is expected to
continue to recover and turn positive in the second half of 2020.
Liquidity and Capital Resources
PPG had cash and short-term investments totaling $1.9 billion and $1.3 billion
at March 31, 2020 and December 31, 2019 , respectively.
Cash used for operating activities for the three months ended March 31, 2020 and
2019 was $159 million and $66 million , respectively. Operating cash flow
decreased primarily due to lower net sales partially offset by improvement in
working capital in the first three months of 2020 compared to the prior year.
Other uses of cash during the three months ended March 31, 2020 included:
•Capital expenditures, excluding acquisitions, of $37 million .
•Business acquisition cash spending of $44 million .
•Cash dividends paid of $120 million .
The Company's commercial paper borrowings are supported by the five-year
revolving credit agreement (the "Credit Agreement") entered into in 2019. As a
result, the commercial paper borrowings are classified as long-term debt based
on PPG's intent and ability to refinance these borrowings on a long-term basis.
As of March 31, 2020 and December 31, 2019 , there were $307 million and $100
million of commercial paper borrowings outstanding, respectively.
In March 2020 , PPG borrowed $800 million under the Credit Agreement, which is
classified as short-term based on PPG's intent to repay these borrowings within
one year. There were no amounts outstanding under the Credit agreement as of
December 31, 2019 .
On April 14, 2020 , PPG entered into a $1.5 billion 364-Day Term Loan Credit
Agreement (the "Term Loan"). The Term Loan contains covenants that are
consistent with those in the Credit Agreement and that are usual and customary
restrictive covenants for facilities of its type, which include, with specified
exceptions, limitations on the Company's ability to create liens or other
encumbrances, to enter into sale and leaseback transactions and to enter into
consolidations, mergers or transfers of all or substantially all of its assets.
The Term Loan also requires the Company to maintain a ratio of Total
Indebtedness to Total Capitalization, as defined in the Term Loan, of 60% or
less; provided, that for any fiscal quarter in which the Company has made an
acquisition for consideration in excess of $1 billion and for the next five
fiscal quarters thereafter, the ratio of Total Indebtedness to Total
Capitalization may not exceed 65% at any time. On April 14, 2020 , the Company
borrowed $1.5 billion under the Term Loan and used a portion of the proceeds to
repay in full the Company's $800 million of borrowings under its revolving
Credit Agreement. The Term Loan terminates and all amounts outstanding are
payable on April 13, 2021 .
Total capital spending in 2020 is expected to be in the range of $200 million to
$250 million . The Company has deferred non-essential capital spending in
response to lower industry demand conditions. PPG expects to make mandatory
contributions to its non-U.S. pension plans in the range of $10 million to $15
million during the remaining nine months of 2020. PPG may make voluntary
contributions to its defined benefit pension plans in 2020 and beyond.
A primary focus for the Company in 2020 will be to maintain appropriate balance
sheet flexibility, including cash on hand, due to the uncertain nature and
unpredictable timing of the COVID-19 pandemic.
As of March 31, 2020 , Total Indebtedness to Total Capitalization as defined
under the Credit Agreement and the Term Loan was 53%. The Credit Agreement and
Term Loan require the Company to maintain a ratio of Total Indebtedness to Total
Capitalization of 60% or less.
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Operating working capital is a subset of total working capital and represents
(1) trade receivables - net of the allowance for doubtful accounts (2) FIFO
inventories and (3) trade liabilities. We believe operating working capital
represents the key components of working capital under the operating control of
our businesses. A key metric we use to measure our working capital management is
operating working capital as a percentage of sales (current quarter sales
annualized).
($ in millions, except percentages) March 31, 2020 December 31, 2019 March 31, 2019
Trade receivables, net $2,436 $2,479 $2,832
Inventories, FIFO 1,979 1,834 2,091
Trade creditors' liabilities 2,141 2,098 2,316
Operating working capital $2,274 $2,215 $2,607
Operating working capital as a % of
Sales 16.8 % 15.1 % 18.0 %
Days sales outstanding 60 56 63
Days payable outstanding 95 94 97
Other Liquidity Information
The Company continues to believe that cash on hand and short-term investments,
cash from operations and the Company's access to capital markets will continue
to be sufficient to fund our operating activities, capital spending,
acquisitions, dividend payments, debt service, share repurchases, contributions
to pension plans and PPG's significant contractual obligations.
Environmental
Three Months Ended
March 31
($ in millions) 2020 2019
Cash outlays for environmental remediation activities $25 $16
Remainder of Annually
($ in millions) 2020 2021 - 2024
Projected future cash outlays for environmental
remediation activities $55 - $75 $20 - $50
Restructuring
In April 2018 , PPG initiated an $83 million global restructuring program. The
program is largely centered around the change in customer assortment related to
the U.S. architectural coatings DIY business. PPG recognized $55 million of
savings from this program in 2019. We expect to achieve annualized cost savings
from the 2018 program of $85 million once fully implemented in 2020.
In June 2019 , PPG initiated a $184 million restructuring program. This program
is a result of a comprehensive internal operational assessment to identify
further opportunities to improve the profitability of the overall business
portfolio. PPG recognized $15 million of savings from this program in 2019. The
2019 program is expected to achieve approximately $125 million of annualized
cost savings by the expected completion date in 2022.
Total restructuring savings are expected to be between $80 million and $90
million in 2020. In addition, the Company continues to review its cost structure
to identify additional cost savings opportunities. See Note 7, "Business
Restructuring," to the accompanying condensed consolidated financial statements
for further details on the Company's business restructuring programs.
Currency
Comparing spot exchange rates at December 31, 2019 and at March 31, 2020 , the
U.S. dollar strengthened against currencies of most countries within the regions
PPG operates. As a result, consolidated net assets at March 31, 2020 decreased
by $696 million compared to December 31, 2019 primarily driven by the Mexican
peso.
Comparing average exchange rates during the first three months of 2020 to those
of the first three months of 2019, the U.S. dollar strengthened against
currencies of most countries within the regions PPG operates, including EMEA,
Asia Pacific , and Latin America . This had an unfavorable impact on Income before
income taxes for the three months ended March 31, 2020 of $12 million from the
translation of these foreign earnings into U.S. dollars.
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New Accounting Standards
See Note 2, "New Accounting Standards," to the accompanying condensed
consolidated financial statements for further details on recently issued
accounting guidance.
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 16, "Commitments and Contingent Liabilities" to the
accompanying condensed consolidated financial statements for a description of
certain of these lawsuits.
As discussed in Part II, Item 1 and Note 16, although the result of any future
litigation of such lawsuits and claims is inherently unpredictable, management
believes that, in the aggregate, the outcome of all lawsuits and claims
involving PPG, including asbestos-related claims, 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.
As also discussed in Note 16, PPG has significant reserves for environmental
contingencies. Please refer to the Environmental Matters section of Note 16 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 in Jersey City, N.J. and associated sites ("New
Jersey Chrome"). The Company continues to analyze, assess and remediate the
environmental issues associated with New Jersey Chrome. Information will
continue to be generated from the ongoing groundwater remedial investigation
activities related to New Jersey Chrome and will be incorporated into a final
draft remedial action work plan for groundwater expected to be submitted to the
New Jersey Department of Environmental Protection in 2020.
It is possible that technological, regulatory and enforcement developments, the
results of environmental studies and other factors could alter the Company's
expectations with respect to future charges against income and future cash
outlays. Specifically, the level of expected future remediation costs and cash
outlays is highly dependent upon activity related to New Jersey Chrome.
Forward-Looking Statements
Management's Discussion and Analysis and other sections of this Quarterly 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 statement, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further
disclosures we make on related subjects in our reports to the Securities and
Exchange Commission ("SEC"). 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 statements related to the
expected effects on our business of the COVID-19 pandemic, 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 in the 2019 Form 10-K
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,
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Table of Contents financial loss, legal liability to third parties, other factors set forth in Item 1A of the 2019 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 3. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Risk AtMarch 31, 2020 andDecember 31, 2019 , PPG had non-U.S. dollar denominated borrowings outstanding of$2.4 billion and$2.3 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 on these borrowings of$267 million atMarch 31, 2020 and$255 million atDecember 31, 2019 , respectively. The fair value of foreign currency forward contracts outstanding atMarch 31, 2020 andDecember 31, 2019 was a net liability of$11 million and$7 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 period endedMarch 31, 2020 was$203 million and$357 million for the period endedDecember 31, 2019 . PPG has U. S. dollar to euro cross currency swap contracts with a total notional amount of$875 million outstanding, resulting in an asset of$90 million and a net asset of$48 million atMarch 31, 2020 andDecember 31, 2019 , 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$86 million and$87 million atMarch 31, 2020 andDecember 31, 2019 , respectively. Interest Rate Risk The Company manages its interest rate risk of fixed and variable rates while attempting to minimize its interest costs. PPG has 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$76 million and$35 million atMarch 31, 2020 andDecember 31, 2019 , respectively. An increase in variable interest rates of 10% would lower the fair value of these swaps and increase interest expense by$5 million and$7 million for the periods endedMarch 31, 2020 andDecember 31, 2019 , 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 endedMarch 31, 2020 andDecember 31, 2019 . Further a 10% reduction in interest rates would have increased the fair value of the Company's fixed rate debt by approximately$75 million and$67 million atMarch 31, 2020 andDecember 31, 2019 , respectively; however, such changes would not have had an effect on PPG's income before income taxes or cash flows. There were no other material changes in the Company's exposure to market risk fromDecember 31, 2019 toMarch 31, 2020 . See Note 14, "Financial Instruments, Hedging Activities and Fair Value Measurements" for a description of our instruments subject to market risk. Item 4. Controls and Procedures a. Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. b. Changes in internal control over financial reporting. There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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