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 2021 Form 10-K.
Highlights
Net sales were approximately$4.5 billion for the three months endedSeptember 30, 2022 , an increase of 2.2% compared to the prior year, driven by higher selling prices resulting from continued selling price initiatives. The Company increased net sales despite softer demand conditions inEurope due to geopolitical issues, resumption of COVID-19 restrictions inChina and unfavorable foreign currency translation impacts due to the strong appreciation of theU.S. dollar versus many foreign currencies. Income before income taxes was$418 million for the three months endedSeptember 30, 2022 , a decrease of$23 million compared to the prior year. This decrease was primarily due to raw material and other cost inflation, lower sales volumes and unfavorable foreign currency translation impact, partially offset by increased selling prices. Results of Operations Three Months Ended Nine Months Ended September 30 Percent Change September 30 Percent Change ($ in millions, except percentages) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 Net sales$4,468 $4,372 2.2 %$13,467 $12,612 6.8 % Cost of sales, exclusive of depreciation and amortization 2,821 2,733 3.2 % 8,473 7,594 11.6 % Selling, general and administrative 931 950 (2.0) % 2,887 2,796 3.3 % Depreciation 95 100 (5.0) % 296 286 3.5 % Amortization 40 46 (13.0) % 125 126 (0.8) % Research and development, net 110 114 (3.5) % 340 323 5.3 % Interest expense 46 30 53.3 % 114 91 25.3 % Interest income (14) (7) 100.0 % (34) (19) 78.9 % Impairment and other related charges, net - 21 (100.0) % 230 21 995.2 % Business restructuring, net 36 - 100.0 % 36 (21) (271.4) % Other income, net (15) (56) (73.2) % (62) (118) (47.5) % 25
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Table of ContentsNet Sales by Region Three Months Ended Nine Months Ended September 30 Percent Change September 30 Percent Change ($ in millions, except percentages) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 United States and Canada$1,954 $1,756 11.3 %$5,684 $5,088 11.7 %Europe ,Middle East and Africa ("EMEA") 1,286 1,418 (9.3) % 4,236 4,126 2.7 % Asia Pacific 734 758 (3.2) % 2,120 2,170 (2.3) % Latin America 494 440 12.3 % 1,427 1,228 16.2 % Total$4,468 $4,372 2.2 %$13,467 $12,612 6.8 %
Three Months Ended
Net sales increased
? Higher selling prices (+12%)
Partially offset by:
? Unfavorable foreign currency translation (-6%) ? Lower sales volumes (-3%) ? Divestiture-related sales and wind down ofRussia operations (-1%)
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, increased$88 million primarily due to raw material and energy cost inflation, partially offset by lower sales volumes and favorable foreign currency translation impacts. Selling, general and administrative expense decreased$19 million primarily due to favorable currency translation impacts and savings from previously approved restructuring actions, partially offset by wage and other cost inflation.
Interest expense increased
Impairment and other related charges decreased
Other income, net was lower in the three months endedSeptember 30, 2022 compared to 2021 primarily due to a$34 million gain on the sale of a production facility in connection with the Company's manufacturing footprint consolidation plans and associated restructuring programs in the third quarter 2021.
Nine Months Ended
Net sales increased
? Higher selling prices (+11%) ? Acquisition-related sales (+3%)
Partially offset by:
? Unfavorable foreign currency translation (-4%) ? Lower sales volumes (-3%)
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, increased
Selling, general and administrative expense increased
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Interest expense increased $23 million primarily due to the unfavorable impact
of higher interest rates on PPG's variable rate debt obligations. Interest
income increased $15 million primarily due to higher interest rates.
Impairment and other related charges of $290 million were recorded in the first
quarter 2022 associated with the wind down of the Company's operations in
Russia . In the second quarter 2022, the Company released a portion of the
previously established reserves due to the collection of certain trade
receivables and recorded recoveries due to the realization of certain previously
written-down inventories, resulting in recognition of income of $60 million . The
Company continues to consider actions to exit Russia , including a possible sale
of its Russian business or controlled withdrawal from the Russia market. Refer
to Note 8, "Impairment and Other Related Charges, Net" in Part I, Item 1 of this
Form 10-Q for additional information. In the third quarter 2021, the Company
recorded an impairment charge for the write-down of certain assets related to
the planned sale of certain entities in smaller, non-strategic countries.
Other income, net was lower in the nine months ended September 30, 2022 compared
to 2021 primarily due to a $34 million gain on the sale of a production facility
in connection with the Company's manufacturing footprint consolidation plans and
associated restructuring programs in the third quarter 2021 and favorable legal
settlements in the second quarter 2021.
Effective Tax Rate and Earnings Per Diluted Share
Three Months Ended Nine Months Ended
September 30 Percent Change September 30 Percent Change
($ in millions, except
percentages and amounts
per share) 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
Income tax expense $79 $96 (17.7) % $252 $370 (31.9) %
Effective tax rate 18.9 % 21.8 % (2.9) % 23.7 % 24.1 % (0.4) %
Adjusted effective tax
rate, continuing
operations* 19.9 % 22.1 % (2.2) % 21.7 % 22.8 % (1.1) %
Earnings per diluted
share, continuing
operations $1.39 $1.43 (2.8) % $3.33 $4.81 (30.8) %
Adjusted earnings per
diluted share* $1.66 $1.69 (1.8) % $4.84 $5.51 (12.2) %
*See Regulation G Reconciliation below
The effective tax rate for the three months ended
Adjusted earnings per diluted share for the three months endedSeptember 30, 2022 decreased year-over-year primarily due to raw material and other cost inflation, lower sales volumes and the impact of unfavorable foreign currency translation, partially offset by increased selling prices. Adjusted earnings per diluted share for the nine months endedSeptember 30, 2022 decreased year-over-year primarily due to raw material cost inflation, lower sales volumes stemming from raw material availability issues and semiconductor chip shortages, softer demand conditions inEurope and the impact of unfavorable foreign currency translation, partially offset by higher selling prices.
Regulation G Reconciliations - Results from Operations
PPG believes investors' understanding of the Company's performance is enhanced by the disclosure of net income from continuing operations, earnings per diluted share from continuing operations, PPG's effective tax rate and segment income 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, the effective tax rate and segment income 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 from continuing operations, earnings per diluted share from continuing operations, the effective tax rate, segment income 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. 27 -------------------------------------------------------------------------------- Table of Contents 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. Three Months Ended September 30, 2022 ($ in millions, except percentages and per Income Before Effective Tax Net Income Earnings Per share amounts) Income Taxes Income Tax Expense Rate (attributable to PPG) Diluted Share(a) As reported, continuing operations$418 $79 18.9 %$329
Adjusted for: Business restructuring-related costs, net (b) 45 11 25.4 % 34
0.14
Acquisition-related amortization expense 40 10 24.6 % 30
0.13
Adjusted, continuing operations, excluding certain items$503 $100 19.9 %$393 $1.66 Three Months Ended September 30, 2021 ($ in millions, except percentages and per Income Before Effective Tax Net Income Earnings Per share amounts) Income Taxes Income Tax Expense Rate (attributable to PPG) Diluted Share(a) As reported, continuing operations$441 $96 21.8 %$344
Adjusted for: Acquisition-related amortization expense 46 11 24.6 % 35 0.15 Transaction-related costs(c) 43 10 24.9 % 33 0.14 Impairment and other related charges, net (d) 21 6 29.2 % 12
0.05
Business restructuring-related costs, net (b) (25) (7) 29.9 % (18)
(0.08)
Adjusted, continuing operations, excluding certain items$526 $116 22.1 %$406 $1.69 Nine Months Ended September 30, 2022 Net Income from Continuing Operations ($ in millions, except percentages and per Income Before Effective Tax (attributable to Earnings per share amounts) Income Taxes Tax Expense Rate PPG) Diluted Share(a) As reported, continuing operations$1,062 $252 23.7 %$790
Adjusted for: Impairment and other related charges, net (d) 230 27 11.7 % 203
0.85
Acquisition-related amortization expense 125 30 24.0 % 95
0.40
Business restructuring-related costs, net (b) 67 17 25.4 % 50
0.21
Transaction-related costs (c) 10 (2) (20.0) % 12
0.05
Adjusted, continuing operations, excluding certain items$1,494 $324 21.7 %$1,150 $4.84 28
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Nine Months Ended September 30, 2021
Net Income from
Continuing
Operations
($ in millions, except percentages and per Income Before Effective Tax (attributable to Earnings per
share amounts) Income Taxes Tax Expense Rate PPG) Diluted Share(a)
As reported, continuing operations $1,533 $370 24.1 % $1,153 Adjusted for: Acquisition-related amortization expense 126 31 24.6 % 95
0.40
Transaction-related costs(c) 81 16 19.8 % 65
0.27
Net tax charge related toUK statutory rate change - (22) N/A 22
0.09
Environmental remediation charges 26 7 24.3 % 19
0.08
Expenses incurred due to natural disasters (e) 17 4 24.3 % 13
0.06
Impairment and other related charges, net (d) 21 6 29.2 % 12
0.05
Decrease in allowance for doubtful accounts related to COVID-19 (14) (3) 24.7 % (11)
(0.05)
Income from legal settlements (22) (5) 24.3 % (17)
(0.07)
Business restructuring-related costs, net (b) (40) (10) 25.0 % (30)
(0.13)
Adjusted, continuing operations, excluding certain items$1,728 $394 22.8 %$1,321 $5.51
(a)Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.
(b)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 and a$34 million gain on the sale of certain assets in the third quarter 2021 in connection with the Company's manufacturing footprint consolidation plans and associated restructuring programs. This gain is included in Other income, net in the condensed consolidated statement of income. (c)Transaction-related costs include advisory, legal, accounting, valuation, other professional or consulting fees, and certain internal costs directly incurred to effect acquisitions, as well as similar fees and other costs to effect disposals not classified as discontinued operations. These costs are included in Selling, general and administrative expense in the condensed consolidated statement of income. Transaction-related costs also include losses on the sale of certain assets, which are included in Other income, net in the condensed consolidated statement of income, and 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 condensed consolidated statement of income. (d)In the first quarter 2022, the Company recorded impairment and other related charges due to the wind down of the company's operations inRussia . In the second quarter 2022, the Company released a portion of the previously established reserves for Receivables and Inventories due to the collection of certain trade receivables and the realization of certain inventories. An impairment charge was recorded in the third quarter 2021 related to the previously planned sale of certain smaller entities in non-strategic regions. Net loss of$12 million is attributable to PPG and net loss of$3 million is attributable to noncontrolling interests. (e)In early 2021, a winter storm damaged a southernU.S. factory supporting the Company's specialty coatings and materials business as well as other Company factories in the southernU.S. Incremental expenses incurred due to this storm included costs related to maintenance and repairs of damaged property, freight and utility premiums and other incremental expenses directly related to the impacted areas.
Performance of Reportable Business Segments
Performance Coatings
Three Months Ended Nine Months Ended
September 30 $ Change % Change September 30 $ Change % Change
($ in millions, except 2022 vs.
percentages) 2022 2021 2022 vs. 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 2021
Net sales $2,705 $2,758 ($53 ) (1.9) % $8,204 $7,826 $378 4.8 %
Segment income $362 $408 ($46 ) (11.3) % $1,127 $1,248 ($121 ) (9.7) %
Amortization expense $30 $33 ($3 ) (9.1) % $93 $92 $1 1.1 %
Segment income, excluding
amortization expense $392 $441 ($49 ) (11.1) % $1,220 $1,340 ($120 ) (9.0) %
Three Months Ended
Performance Coatings net sales decreased due to the following:
? Unfavorable foreign currency translation (-6%)
? Lower sales volumes (-6%)
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? Divestiture-related sales and wind down of Russia operations (-1%)
Partially offset by:
? Higher selling prices (+11%)
Architectural coatings - EMEA net sales, excluding the impact of currency, acquisitions, divestitures and the wind down ofRussia operations ("organic sales") were flat year-over-year as selling price increases were offset by lower sales volumes due to the continuing decrease in do-it-yourself ("DIY") paint demand in many countries primarily due to lower consumer confidence and demand weakness stemming from the war inUkraine . Architectural coatings -Americas andAsia Pacific organic sales increased by a mid-single-digit percentage. Sales in theU.S. andCanada were unfavorably impacted by lower DIY demand. InMexico , PPG Comex architectural coatings organic sales increased compared to the prior year as concessionaire network demand continued to be strong throughout the quarter and further selling price increases were implemented. Automotive refinish coatings organic sales increased by a mid-single-percentage, reflecting higher prices in all regions and improved body shop activity in theU.S. stemming from the continuing return to office work and increased collision claims. Sales volumes were negatively impacted by COVID-19 restrictions inChina and certain supply chain disruptions in the U.S. Aerospace coatings sales volumes increased by more than 10% compared to the prior year, as commercial aftermarket and military demand remained strong, but overall demand remained below pre-pandemic levels. Sales also increased due to the benefit of higher selling prices.
Protective and marine coatings organic sales were higher by a low-single-digit
percentage primarily due to selling price increases. Sales volumes were
adversely impacted by continued COVID-19 restrictions in
Traffic solutions organic sales increased by a low-teen-percentage year-over-year due to the benefit of higher selling prices.
Segment income decreased$46 million year-over-year primarily due to higher raw material and logistics cost inflation, lower sales volumes, the impact of unfavorable foreign currency translation and increased manufacturing costs, partially offset by higher selling prices and savings from previously approved restructuring actions.
Nine Months Ended
Performance Coatings net sales increased due to the following:
? Higher selling prices (+10%) ? Acquisition-related sales (+3%)
Partially offset by:
? Unfavorable foreign currency translation (-4%) ? Lower sales volumes (-4%)
Architectural coatings - EMEA organic sales decreased by a low-single-digit
percentage year-over-year as selling price increases did not fully offset lower
sales volumes. The first nine months of 2022 were negatively impacted by
geopolitical uncertainty in
Architectural coatings -Americas andAsia Pacific organic sales increased by a mid-single-digit percentage primarily due to selling price increases. Sales in theU.S. andCanada were unfavorably impacted by lower DIY demand and raw material and transportation availability challenges, which improved at the end of the second quarter and broadly throughout the third quarter. InMexico , PPG Comex architectural coatings organic sales increased compared to the prior year as concessionaire network demand continued to be strong throughout the first nine months of 2022 and further selling price increases were implemented. Automotive refinish coatings organic sales increased by a high-single-digit percentage due to selling price increases in all regions and strong growth in theU.S. stemming from higher miles driven, increased collision claims and more people returning to office work versus 2021. Aerospace coatings sales volumes increased by a low-teen-percentage compared to the prior year but still remain below pre-pandemic levels. During the first nine months of 2022, demand remained strong for commercial aftermarket and military applications. Sales also grew due to higher selling prices. Protective and marine coatings organic sales were higher by a mid-single-digit percentage primarily due to selling price increases in all regions. While there was modest sales volume improvement in the first quarter 2022 due to 30 -------------------------------------------------------------------------------- Table of Contents improving demand in the oil and gas industry, sales volumes in the second and third quarter 2022 were adversely impacted by COVID-19 restrictions inChina .
Traffic solutions organic sales increased by a mid-teen-percentage
year-over-year due to higher selling prices and increased sales volumes in the
Segment income decreased$121 million year-over-year primarily due to raw material and logistics cost inflation, lower sales volumes and the impact of unfavorable foreign currency translation, partially offset by higher selling prices, acquisition-related earnings and savings from previously approved restructuring actions.
Looking Ahead
In the fourth quarter, demand conditions inEurope and architectural DIY globally are expected to be softer. Raw material and transportation availability continue to broadly improve; however, the supply of certain key inputs remains tight, which will continue to constrain select sales activity, most notably in automotive refinish and aerospace coatings. Selling prices are expected to be higher by about 18% on a two-year stacked basis. Aggregate sales volumes are anticipated to be down a mid-single-digit percentage compared to the fourth quarter 2021 driven by the unfavorable impacts inEurope andChina . The impact of divestiture-related sales and sales related to the Russian business, which the Company is in the process of winding down, are anticipated to reduce sales by about$50 million . In addition to executing against various existing cost-savings initiatives, cost-mitigation actions have been implemented inEurope and other contingency actions have been developed in case there is a broader economic downturn. Industrial Coatings Three Months Ended Nine Months Ended September 30 $ Change % Change September 30 $ Change % Change ($ in millions, except percentages) 2022 2021 2022 vs. 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 2022 vs. 2021 Net sales$1,763 $1,614 $149 9.2 %$5,263 $4,786 $477 10.0 % Segment income$192 $140 $52 37.1 %$488 $575 ($87 ) (15.1) % Amortization expense$10 $13 ($3 ) (23.1) %$32 $34 ($2 ) (5.9) % Segment income, excluding amortization expense$202 $153 $49 32.0 %$520 $609 ($89 ) (14.6) %
Three Months Ended
Industrial Coatings segment net sales increased due to the following:
? Higher selling prices (+14%) ? Higher sales volumes (+2%)
Partially offset by:
? Unfavorable foreign currency translation (-6%) ? Divestiture-related sales and wind down ofRussia operations (-1%) Automotive OEM coatings organic sales increased by more than 20% year-over-year led by higher selling prices and higher sales volumes in all regions. Sales volumes were negatively impacted by semiconductor chip shortages that continued into the third quarter, but the impact was less severe as compared to the prior year. In the industrial coatings business, organic sales increased by a high-single-digit percentage year-over-year as strong selling price increases were partially offset by lower sales volumes inEurope andChina . Sales volume growth continued to be solid in theU.S. andLatin America , particularly in the general finishes and heavy-duty equipment sub-segments. Packaging coatings organic sales increased by about 10% year-over-year primarily due to selling price increases in all regions. Sales volumes were strong in theU.S. , led by the canned beverage sub-segment and the global personal care sub-segment. Sales volumes were adversely impacted by geopolitical uncertainty inEurope and continued COVID-19 restrictions inChina . Segment income increased$52 million year-over-year due to higher selling prices and higher sales volumes, partially offset by manufacturing cost increases, raw material and logistics cost inflation and the impact of unfavorable foreign currency translation. 31 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2022
Industrial Coatings segment net sales increased due to the following:
? Higher selling prices (+13%) ? Acquisition-related sales (+3%)
Partially offset by:
? Unfavorable foreign currency translation (-4%) ? Lower sales volumes (-2%) Automotive OEM coatings organic sales increased by more than 10% year-over-year led by higher selling prices in all regions and higher sales volumes in theU.S. andLatin America . Sales volumes were adversely impacted by the shortage of semiconductor chips, which continued in the first nine months of 2022 but at a lower severity as compared the prior year. Sales volumes were also impacted by lower automotive industry production due to geopolitical uncertainty inEurope and COVID-19 restrictions inChina . Organic sales in the industrial coatings business increased by a high-single-digit percentage year-over-year as strong selling price increases in all regions and solid volume growth in theU.S. andLatin America were partially offset by reduced sales volumes reflecting lower economic activity inChina andEurope .
Packaging coatings organic sales increased by more than 10% year-over-year
primarily due to selling price increases in all regions. Sales volumes were
strong in the
Segment income decreased$87 million year-over-year due to raw material cost inflation and lower sales volumes, partially offset by higher selling prices and savings from previously approved restructuring actions.
Looking Ahead
In the fourth quarter, global industrial production is expected to slow in the fourth quarter, partially due to higher energy prices inEurope and softer economic activity inChina . Selling prices are expected to be higher by more than 20% on a two-year stacked basis. Aggregate sales volumes are anticipated to be down a mid-single-digit percentage compared to the fourth quarter 2021. A year-over-year sales volume increase is expected in the automotive OEM coatings business, but more than offset by lower industrial, packaging, and specialty coatings sales volumes. Year-over-year segment margins are expected to continue to improve on a sequential quarterly basis in the fourth quarter 2022. The impact of divestiture-related sales and sales related to the Russian business, which the Company is in the process of winding down, are anticipated to reduce sales by about$25 million for the fourth quarter. In addition to executing against various existing cost-savings initiatives, cost-mitigation actions have been implemented inEurope and other contingency actions have been developed in case there is a broader economic downturn.
Liquidity and Capital Resources
PPG had cash and short-term investments totaling
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 be sufficient to fund our operating activities, capital spending, acquisitions, dividend payments, debt service, share repurchases, contributions to pension plans and PPG's contractual obligations.
Cash from operating activities
Cash from operating activities for the nine months endedSeptember 30, 2022 and 2021 was$376 million and$1,106 million , respectively. The$730 million decrease was primarily due to a larger increase in working capital in the first nine months of 2022 compared to the prior year, which reflects the impact of higher raw material costs on inventories and higher selling prices on trade receivables. 32 -------------------------------------------------------------------------------- Table of ContentsOperating Working Capital Operating working capital is a subset of total working capital and represents (1) trade receivables - net of the allowance for doubtful accounts (2) FIFO inventories and (3) trade liabilities. We believe operating working capital represents the key components of working capital under the operating control of our businesses. A key metric we use to measure our working capital management is operating working capital as a percentage of sales (current quarter sales annualized). ($ in millions, except percentages) September 30, 2022 December 31, 2021 September 30, 2021 Trade receivables, net$3,040 $2,687 $2,995 Inventories, FIFO 2,671 2,345 2,402 Trade creditors' liabilities 2,717 2,734 2,726 Operating working capital$2,994 $2,298 $2,671 Operating working capital as a % of Sales 16.8 % 13.7 % 15.3 % Days sales outstanding 57 53 57 Environmental Three Months Ended Nine Months Ended September 30 September 30 ($ in millions) 2022 2021 2022 2021 Cash outlays for environmental remediation activities$18 $17 $65 $34 Remainder of Annually ($ in millions) 2022 2023 - 2026
Projected future cash outlays for environmental remediation activities
$10 -$20 $20 -$75
Cash used for investing activities
Cash used for investing activities for the nine months endedSeptember 30, 2022 and 2021 was$246 million and$2,276 million , respectively. The$2,030 million decrease in cash used for investing activities was primarily due to lower spending on business acquisitions and an increase in proceeds from asset sales, partially offset by higher capital expenditures. Total capital spending is expected to be in the range of$450 million to$500 million in 2022 in support of future organic growth opportunities and reflecting lower capital spending in the past two years due to COVID-19 constraints.
Cash (used for)/from financing activities
Cash used for financing activities for the nine months endedSeptember 30, 2022 was$56 million and cash from financing for the nine months endedSeptember 30, 2021 months ended was$606 million . The$662 million decrease was primarily due to the proceeds from the issuance of long-term debt in 2021 to finance the Company's acquisition of Tikkurila and higher purchases of treasury stock in 2022. Debt Issued and Repaid InMay 2022 , PPG completed a public offering of €300 million 1.875% Notes due 2025 and €700 million 2.750% Notes due 2029. Refer to Note 6, "Borrowings" in Part I, Item 1 of this Form 10-Q for additional information.
In
Credit Agreements
InFebruary 2021 , PPG entered into a$2.0 billion Term Loan Credit Agreement (the "Term Loan Credit Agreement") to finance the Company's acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. The Term Loan Credit Agreement provided the Company with the ability to borrow up to an aggregate principal amount of$2.0 billion on an unsecured basis. In addition to the amounts borrowed to finance the acquisition of Tikkurila, the Term Loan Credit Agreement allowed the Company to make up to eleven additional borrowings prior toDecember 31, 2021 , to be used for working capital and general corporate purposes. The Term Loan Credit Agreement contains covenants 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 33 -------------------------------------------------------------------------------- Table of Contents leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Term Loan Credit Agreement matures and all outstanding borrowings are due and payable on the third anniversary of the date of the initial borrowing under the Agreement. InJune 2021 , PPG borrowed$700 million under the Term Loan Credit Agreement to finance the Company's acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. InDecember 2021 , PPG borrowed an additional$700 million under the Term Loan Credit Agreement. In the third quarter 2022, PPG repaid$100 million of the Term Loan Credit Agreement using cash on hand. Borrowings of$1.3 billion and$1.4 billion were outstanding under the Term Loan Credit Agreement as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. InAugust 2019 , PPG amended and restated its five-year credit agreement (the "Credit Agreement") with several banks and financial institutions. The Credit Agreement provides for a$2.2 billion unsecured revolving credit facility. The Company has the ability to increase the size of the Credit Agreement by up to an additional$750 million , subject to the receipt of lender commitments and other conditions precedent. The Credit Agreement will terminate onAugust 30, 2024 . The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement. There were no amounts outstanding under the credit agreement as ofSeptember 30, 2022 andDecember 31, 2021 . The Term Loan Credit Agreement and Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan Credit Agreement and Credit Agreement, 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. As ofSeptember 30, 2022 , Total Indebtedness to Total Capitalization as defined under the Credit Agreement and Term Loan Credit Agreement was 50%. The Credit Agreement also supports the Company's commercial paper borrowings which are classified as long-term based on PPG's intent and ability to refinance these borrowings on a long-term basis. Commercial paper borrowings of zero and$440 million were outstanding as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. Other Liquidity Information Restructuring In the third quarter 2022, the Company approved a business restructuring plan which included actions to reduce its global cost structure in response to current economic conditions, including softening demand inEurope and lower than expected demand recovery inChina . We expect to achieve annualized cost savings from these program of about$70 million once fully implemented. Aggregate restructuring savings, including the impact of acquisition synergies, were approximately$15 million in the third quarter of 2022. Total restructuring savings are expected to be at least$60 million in 2022. Refer to Note 5, "Business Restructuring" in Part I, Item 1 of this Form 10-Q for further details on the Company's business restructuring programs. We expect cash outlays related to these actions of approximately$115 million in 2022.
Currency
Comparing spot exchange rates atDecember 31, 2021 and atSeptember 30, 2022 , theU.S. dollar strengthened against the currencies of many countries within the regions PPG operates, most notably the euro, the British pound and the Chinese yuan. As a result, consolidated net assets atSeptember 30, 2022 decreased by$527 million compared toDecember 31, 2021 . Comparing average exchange rates during the first nine months of 2022 to those of the first nine months of 2021, theU.S. dollar strengthened against the currencies of many countries where PPG operates, including most of the countries in the EMEA region. This had an unfavorable impact on Income before income taxes for the nine months endedSeptember 30, 2022 of$71 million from the translation of these foreign earnings intoU.S. dollars.
New Accounting Standards
Refer to Note 2, "New Accounting Standards" in Part I, Item 1 of this Form 10-Q for further details on recently issued accounting guidance.
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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 15, "Commitments and Contingent Liabilities" in Part I, Item 1 of this Form 10-Q for a description of certain of these lawsuits. As discussed in Part II, Item 1 and Note 15, 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 15, PPG has significant reserves for environmental contingencies. Refer to the Environmental Matters section of Note 15 for details of these reserves. 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.
Critical Accounting Estimates
Management has evaluated the accounting policies used in the preparation of the financial statements and related notes presented in this Form 10-Q 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. For a comprehensive discussion of the Company's critical accounting estimates, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Form 10-K. There were no material changes in the Company's critical accounting estimates from the 2021 Form 10-K.
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," "looking ahead" 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 theSecurities 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 COVID-19, global economic conditions, geopolitical uncertainty inEurope , increasing price and product competition by our competitors, fluctuations in cost and availability of raw materials, energy, labor and logistics, the ability to achieve selling price increases, the ability to recover margins, customer inventory and production 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, the timing and expected benefits of our acquisitions, 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 35
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Table of Contents 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 2021 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, financial loss, legal liability to third parties, other factors set forth in Item 1A of the 2021 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.
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