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 During the quarter, Hurricane Laura caused significant damages to a PPG factory that supports the Company's specialty coatings and materials business. The net earnings impact of the damage to PPG's assets was$8 million in the third quarter 2020. These costs were reported as a natural-disaster-related charge excluded from adjusted net income in the third quarter. Additionally, the company estimated lost revenue of$7 million due to the production interruption from late August to late September. Although production resumed at the end of the third quarter, the facility shut down again in early October due to another hurricane at the production site. It is expected that fourth quarter sales could be impacted by a similar amount to that of the third quarter due to issues caused by both weather events. Below are our key financial results for the three months endedSeptember 30, 2020 : •Net sales were approximately$3.7 billion , down 3.7% compared to the prior year. •Cost of sales, exclusive of depreciation and amortization ("Cost of sales") was$2.0 billion , down 7.1% versus prior year primarily due to lower sales volumes as a result of COVID-19 and lower manufacturing costs. As a percentage of sales, Cost of sales decreased 2.0%. •Selling, general and administrative ("SG&A") expense was$836 million , down 5.7% year-over-year due to cost mitigation initiatives. As a percentage of sales, SG&A expense decreased 0.5%. •Income before income taxes was$572 million . •The reported effective tax rate was 21.7%. The adjusted effective tax rate was 21.9%. •Net income from continuing operations attributable to PPG was$442 million . •Earnings per diluted share from continuing operations attributable to PPG was$1.86 . For the nine months endedSeptember 30, 2020 : •Cash flows provided by operating activities from continuing operations was$1,163 million , a decrease of$112 million year-over-year. •Capital expenditures, including business acquisitions (net of cash acquired), was$215 million . •The Company paid$368 million in dividends. •InSeptember 2020 , PPG repaid$1.0 billion of the$1.5 billion 364-Day Term Loan Credit Agreement due inApril 2021 using cash on hand. Performance in the third quarter of 2020 compared to the third quarter of 2019 Performance OverviewNet Sales by Region Three Months Ended September 30 Percent Change ($ in millions, except percentages) 2020 2019 2020 vs. 2019 United States and Canada$1,484 $1,665 (10.9) % Europe, Middle East and Africa ("EMEA") 1,171 1,127 3.9 % Asia Pacific 672 644 4.3 % Latin America 358 390 (8.2) % Total$3,685 $3,826 (3.7) %
Net sales decreased
? Lower sales volumes (-5%)
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Partially offset by:
? Higher selling prices (1%)
As a result of COVID-19 and reduced global economic activity, lower sales
volumes resulted in lower net sales in both reportable business segments. Higher
selling prices partially offset this downturn.
For specific business results, see the Performance of Reportable Business
Segments section within Item 2 of this Form 10-Q.
Cost of Sales, exclusive of depreciation and amortization
Three Months Ended
September 30 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Cost of sales, exclusive of depreciation and
amortization $2,026 $2,181 (7.1) %
Cost of sales as a percentage of net sales 55.0 % 57.0 % (2.0) %
Cost of sales, exclusive of depreciation and amortization, decreased
? Lower sales volumes Partially offset by:
? Cost of sales attributable to acquired businesses Selling, general and administrative expenses
Three Months Ended
September 30 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Selling, general and administrative expenses
(SG&A) $836 $887 (5.7) %
Selling, general and administrative expenses as a
percentage of net sales 22.7 % 23.2 % (0.5 %)
SG&A expense decreased
? Cost savings initiatives, including restructuring actions Other costs and other income
Three Months Ended
September 30 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Interest expense, net of Interest income $30 $23 30.4 %
Other charges $21 $26 (19.2) %
Other income ($24 ) ($14 ) 71.4 %
Interest expense, net of Interest income
Interest expense, net of Interest income was higher in the three months ended
September 30, 2020 due to the $1.5 billion 364-day term loan credit agreement
entered into in April 2020 . As of September 30, 2020 , $500 million remains
outstanding under this agreement.
Other charges
Other charges were lower in the three months ended September 30, 2020 compared
to prior year due to lower environmental remediation charges during the quarter.
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Effective tax rate and earnings per diluted share
Three Months Ended
September 30 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Income tax expense $124 $109 13.8 %
Effective tax rate 21.7 % 22.7 % (1.0) %
Adjusted effective tax rate, continuing
operations* 21.9 % 22.7 % (0.8) %
Earnings per diluted share, continuing operations $1.86 $1.54 20.8 %
Adjusted earnings per diluted share* $1.93 $1.67 15.6 %
*See Regulation G Reconciliation below
The effective tax rate for the three months endedSeptember 30, 2020 reflects the impact of certain discrete tax items for the quarter. The Company expects that its fourth quarter 2020 effective tax rate will be between 18% and 21%, including potential favorable discrete tax items. Adjusted earnings per diluted share for the three months endedSeptember 30, 2020 increased year-over-year due to the items described further in the Regulation G reconciliation. 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 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 from continuing operations, earnings per diluted share from continuing operations 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 from continuing operations, earnings per diluted share from continuing operations, 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. 28 -------------------------------------------------------------------------------- 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 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 September 30, 2020 ($ in millions, except percentages and per Income Before Effective Tax Net income Earnings per share amounts) Income Taxes Tax Expense Rate (attributable to PPG) diluted share(a) As reported, continuing operations$572 $124 21.7 %$442
Adjusted for: Business restructuring-related costs, net (b) 14 4 26.2 % 10
0.04
Expenses incurred due to a natural disaster(c) 8 2 24.3 % 6
0.03
Adjusted, continuing operations, excluding certain items$594 $130 21.9 %$458 $1.93 Three Months Ended September 30, 2019 ($ in millions, except percentages and per Income Before Effective Tax Net income Earnings per share amounts) Income Taxes Tax Expense Rate (attributable to PPG) diluted share(a) As reported, continuing operations$481 $109 22.7 %$366
Adjusted for: Business restructuring-related costs, net (b) 18 4 23.3 % 14
0.06
Environmental remediation charges, net 21 5 25.2 % 16
0.07
Adjusted, continuing operations, excluding certain items$520 $118 22.7 %$396 $1.67 (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. (c) In the third quarter 2020, Hurricane Laura caused damages to a southernU.S. factory that supports the Company's specialty coatings and materials business. Performance of Reportable Business Segments Performance Coatings Three Months Ended September 30 $ Change % Change ($ in millions, except per share amounts) 2020 2019 2020 vs. 2019 2020 vs. 2019 Net sales$2,251 $2,313 ($62 ) (2.7) % Segment income$426 $380 $46 12.1 %
Performance Coatings net sales decreased due to the following:
? Lower sales volumes (-5%) Partially offset by:
? Higher selling prices (2%)
? Acquisition-related sales (1%) Architectural coatings -Americas andAsia Pacific net sales, excluding the impact of currency and acquisitions ("organic sales") increased a low-single-digit percentage with differences by channel and region. Sales volumes were mixed by channel during the quarter, including the unfavorable impact of inclement weather in the southernU.S. and lower commercial repaint activity impacting the company-owned stores channel. Despite challenging economic conditions inMexico , the PPG Comex architectural coatings business organic sales increased by a mid-single-digit percentage compared to the prior year as most concessionaire locations have reopened after mandated shutdowns. Architectural coatings - EMEA organic sales increased by about 10%, driven in part by strong consumer demand after many countries permitted retail stores to reopen after mandatory closures during the second quarter. 29 -------------------------------------------------------------------------------- Table of Contents Sales volumes for automotive refinish coatings declined about 10% versus prior year, despite strong sales volumes inChina during the quarter. Higher selling prices were more than offset by lower sales volumes in each region reflecting lower collision claims in theU.S. and continued lower traffic density in most of the world. Aerospace coatings sales volumes decreased about 35% year-over-year due to a sharp decline in commercial OEM and after-market demand due to lower airline activity. Net sales benefited from consistent military demand year-over-year and acquisition-related sales fromTexstars and Dexmet. Sales volumes in the protective and marine coatings business were down a mid-single-digit percentage driven by lower sales volumes in all regions, with the exception ofAsia Pacific , driven by continued weak demand in the oil and gas sector and project delays. Segment income increased$46 million year-over-year due to the execution of cost-mitigation efforts, higher selling prices, and restructuring initiatives, partially offset by lower sales volumes related to the pandemic. Looking Ahead Looking ahead for the Performance Coatings segment, net sales are expected to be lower year-over-year by a mid-single-digit percentage, with continued sharper declines in the commercial aerospace coatings businesses. Overall segment sales are anticipated to be lower sequentially due to normal seasonality. Lastly, acquisitions are forecast to add about$15 million of net sales primarily fromTexstars and ICR, and foreign currency translation is expected to have an unfavorable impact on segment sales and earnings of about$10 million to$20 million and$5 million , respectively, based on recent exchange rates. Industrial Coatings Three Months Ended September 30 $ Change % Change ($ in millions, except per share amounts) 2020 2019 2020 vs. 2019 2020 vs. 2019 Net sales$1,434 $1,513 ($79 ) (5.2) % Segment income$253 $206 $47 22.8 %
Industrial Coatings segment net sales decreased due to the following:
? Lower sales volumes (-5%) Automotive OEM coatings sales volumes were flat year-over-year driven by strong year-over-year automotive OEM retail sales inChina and improving production build rates in theU.S. andEurope . In addition, sales volumes were strongest inChina , increasing by a low-teen-percentage compared to the prior year third quarter. For the industrial coatings business, net sales decreased by a mid-single-digit percentage year-over-year due to mixed demand by sub-segment. Electronic materials and appliances had strong year-over-year growth, and sales volumes inChina were higher than the prior year. Packaging coatings organic sales decreased by a low-single-digit percentage year-over-year as strong demand in theU.S. andLatin America was offset by softer aggregate demand inAsia andEurope . Segment income increased$47 million year-over-year due to cost-mitigation actions and restructuring cost savings. Looking ahead Looking ahead for the Industrial Coatings segment, on a sequential basis, demand is expected to be modestly better in the fourth quarter compared to the third quarter, but likely will remain below prior-year levels. Aggregate net sales for the business segment are expected to be lower by a low-single-digit percentage and it is anticipated that selling prices will be flat. Based on current exchange rates, foreign currency translation is not expected to have a significant impact on segment sales or earnings for the third quarter. All businesses are focusing on strong cost management and cost mitigation actions along with cash flow optimization. 30 -------------------------------------------------------------------------------- Table of Contents Performance in the first nine months of 2020 compared to the first nine months of 2019 Performance Overview Net Sales by Region Nine Months Ended September 30 Percent Change ($ in millions, except percentages) 2020 2019 2020 vs. 2019 United States and Canada$4,269 $4,964 (14.0) % EMEA 3,158 3,496 (9.7) % Asia-Pacific 1,697 1,870 (9.3) % Latin America 953 1,144 (16.7) % Total$10,077 $11,474 (12.2) %
Net sales decreased
? Lower sales volumes (-13%) ? Unfavorable foreign currency translation (-2%) Partially offset by: ? Higher selling prices (2%) ? Acquisition-related sales (1%) As a result of COVID-19 and reduced global economic activity, lower sales volumes and unfavorable foreign currency translation reduced net sales in each region and in both reportable business segments. Higher selling prices and acquisition-related sales partially offset this downturn. Foreign currency translation decreased net sales by approximately$210 million as theU.S. dollar strengthened against several foreign currencies versus the prior year, most notably the Mexican peso. For specific business results, see the Performance of Reportable Business Segments section within Item 2 of this Form 10-Q. Cost of Sales, exclusive of depreciation and amortization Nine Months
Ended
September 30 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Cost of sales, exclusive of depreciation and
amortization $5,637 $6,542 (13.8) %
Cost of sales as a percentage of net sales 55.9 % 57.0 % (1.1) %
Cost of sales, exclusive of depreciation and amortization, decreased
? Lower sales volumes
? Foreign currency translation Partially offset by:
? Cost of sales attributable to acquired businesses Selling, general and administrative expenses
Nine Months Ended
September 30 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Selling, general and administrative expenses
(SG&A) $2,507 $2,710 (7.5) %
Selling, general and administrative expenses as a
percentage of net sales 24.9 % 23.6 % 1.3 %
SG&A expense decreased
? Cost savings initiatives, including restructuring actions
? Foreign currency translation
Partially offset by:
? Charge for potential uncollectible accounts related to COVID-19 incurred in
the first quarter of 2020
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Other costs and income
Nine Months Ended
September 30 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Interest expense, net of Interest income $89 $76 17.1 %
Other charges $45 $69 (34.8) %
Other income ($53 ) ($61 ) (13.1) %
Interest expense, net of Interest income
Interest expense, net of Interest income was higher in the nine months ended
September 30, 2020 due to the $1.5 billion 364-day term loan credit agreement
entered into in April 2020 . As of September 30, 2020 , $500 million remains
outstanding under this agreement.
Other charges
Other charges were lower in the nine months ended September 30, 2020 compared to
prior year due to lower environmental remediation charges, offset by a debt
extinguishment charge related to the early retirement of debt in the second
quarter 2020.
Effective tax rate and earnings per diluted share
Nine Months Ended
September 30 Percent Change
($ in millions, except percentages) 2020 2019 2020 vs. 2019
Income tax expense $224 $297 (24.6) %
Effective tax rate 22.0 % 23.5 % (1.5) %
Adjusted effective tax rate, continuing
operations* 22.8 % 23.6 % (0.8) %
Earnings per diluted share, continuing operations $3.30 $3.98 (17.1) %
Adjusted earnings per diluted share* $4.11 $4.90 (16.1) %
*See Regulation G Reconciliation below
The effective tax rate for the nine months endedSeptember 30, 2020 reflects the impact of certain discrete tax items. The Company expects that its full year 2020 effective tax rate will be between 21% and 23%. Adjusted earnings per diluted share for the nine months endedSeptember 30, 2020 decreased year-over-year due to the items described further in the Regulation G reconciliation. Regulation G Reconciliation - 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 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 from continuing operations, earnings per diluted share from continuing operations and the effective tax rate adjusted for these items are not recognized financial measures determined in accordance withU.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 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. 32 -------------------------------------------------------------------------------- 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: Nine Months Ended September 30, 2020 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$1,017 $224 22.0 %$784
Adjusted for: Business restructuring-related costs, net (b) 200 52 26.0 % 148
0.62
Increase in allowance for doubtful accounts related to COVID-19 30 7 23.2 % 23
0.10
Environmental remediation charges 12 3 24.3 % 9
0.04
Expenses incurred due to a natural disaster(c) 8 2 24.3 % 6
0.03
Debt extinguishment charge 7 2 24.3 % 5
0.02
Adjusted, continuing operations, excluding certain items$1,274 $290 22.8 %$975 $4.11 Nine Months Ended September 30, 2019 Net income from continuing operations ($ 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$1,263 $297 23.5 %$948
Adjusted for:
Business restructuring-related costs, net (b) 203 49 24.1 % 154
0.65
Environmental remediation charges, net 61 14 23.0 % 47
0.20
Acquisition-related costs 17 4 23.5 % 13
0.05
Costs associated with accounting investigations 7 2 28.6 % 5
0.02
Adjusted, continuing operations, excluding certain items$1,551 $366 23.6 %$1,167 $4.90 (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. (c) In the third quarter 2020, Hurricane Laura caused damages to a southernU.S. factory that supports the Company's specialty coatings and materials business. Performance of Reportable Business Segments Performance Coatings Nine Months Ended September 30 $ Change % Change ($ in millions, except per share amounts) 2020 2019 2020 vs. 2019 2020 vs. 2019 Net sales$6,328 $6,851 ($523 ) (7.6) % Segment income$1,060 $1,102 ($42 ) (3.8) %
Performance Coatings net sales decreased due to the following:
? Lower sales volumes (-9%)
? Unfavorable foreign currency translation (-2%) Partially offset by:
? Higher selling prices (2%)
? Acquisition-related sales (1%)
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Architectural coatings - Americas and Asia Pacific net sales decreased a
low-single-digit percentage during the first nine months of the year with
differences by channel and region. Higher DIY sales volumes were more than
offset by the unfavorable impact of retail store shutdowns in the U.S. , Canada
and Mexico and unfavorable foreign currency translation driven by the Mexican
peso.
Architectural coatings - EMEA organic sales increased by a low-single-digit
percentage driven by a strong volumes in the third quarter offset by lower
demand in Southern Europe earlier in the year when various countries mandated
the closure of retail paint stores.
Net sales for automotive refinish coatings were down about 15% versus prior year
driven by a sharp decline in global miles driven and traffic density in most of
the world.
Aerospace coatings sales volumes decreased about 20% year-over-year due to a
sharp decline in commercial OEM, general aviation and after-market products. Net
sales benefited from consistent demand for the company's military applications
and acquisition-related sales from Dexmet and Texstars .
Sales volumes in the protective and marine coatings business were down a
mid-single-digit percentage driven by delayed projects as a result of the
pandemic and lower demand in the U.S. oil and gas sector.
Segment income decreased $42 million year-over-year, including unfavorable
foreign currency translation impacts of approximately $20 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.
Industrial Coatings
Nine Months Ended
September 30 $ Change % Change
($ in millions, except per share
amounts) 2020 2019 2020 vs. 2019 2020 vs. 2019
Net sales $3,749 $4,623 ($874 ) (18.9) %
Segment income $468 $659 ($191 ) (29.0) %
Industrial Coatings segment net sales decreased due to the following:
? Lower sales volumes (-18%)
? Unfavorable foreign currency translation (-2%) Partially offset by:
? Acquisition-related sales (1%) Automotive OEM coatings sales volumes decreased by about 25% year-over-year, driven by the significant curtailment in global automotive industry production rates. For the industrial coatings business, net sales decreased by about 15% compared to prior year. Acquisition-related sales from Whitford were more than offset by lower demand stemming from reduced industrial production in most regions due to customer shutdowns. Packaging coatings organic sales were flat year-over-year as modestly higher selling prices were offset by lower sales volumes stemming from pandemic-related customer shutdowns. Segment income decreased$191 million year-over-year, including unfavorable foreign currency translation impacts of about$10 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. Liquidity and Capital Resources PPG had cash and short-term investments totaling$2.1 billion and$1.3 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively. Cash provided by operating activities from continuing operations for the nine months endedSeptember 30, 2020 and 2019 was$1,163 million and$1,275 million , respectively. Operating cash flow decreased primarily due to lower net income and increased cash payments for restructuring actions partially offset by improvement in working capital in the first nine months of 2020 compared to the prior year. Other uses of cash during the nine months endedSeptember 30, 2020 included: •Capital expenditures, excluding acquisitions, of$170 million . 34 -------------------------------------------------------------------------------- Table of Contents •Business acquisition cash spending of$45 million . •Cash dividends paid of$368 million . InAugust 2020 , PPG completed a public offering of$100 million aggregate principal amount of 3.75% notes dueMarch 2028 . These notes were issued as additional notes pursuant to PPG's existing shelf registration statement and pursuant to the Indenture between the Company andThe Bank of New York Mellon Trust Company, N.A. , as trustee, as supplemented (the "Indenture"), which is is the same Indenture pursuant to which we previously issued$700 million in aggregate principle amount of our 3.75% notes dueMarch 2028 onFebruary 27, 2018 . The new notes will be treated as a single series of notes with the existing notes under indenture, have the same CUSIP number as the existing notes, and be fungible with the existing notes for US federal income tax purposes. The Indenture governing these notes contains covenants that limit the Company's ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company's assets. The terms of these notes also require the Company to make an offer to repurchase the notes upon a Change of Control Triggering Event (as defined in the Indenture) at a price equal to 101% of their principal amount plus accrued and unpaid interest. The Company may issue additional debt from time to time pursuant to the Indenture. The aggregate cash proceeds from the notes, including the premium received at issuance, net of fees, was$119 million . InJune 2020 , PPG completed an early redemption of the$500 million 3.6% notes dueNovember 2020 using proceeds from theMay 2020 public offering and cash on hand. The Company recorded a charge of$7 million in the second quarter for the debt redemption which consists of the aggregate make-whole cash premium of$6 million and a balance of unamortized fees and discounts of$1 million related to the debt redeemed. InMay 2020 , PPG completed a public offering of$300 million aggregate principal amount of 2.55% notes due 2030. These notes were issued pursuant to PPG's existing shelf registration statement and pursuant to the Indenture. The Indenture governing these notes contains covenants that limit the Company's ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company's assets. The terms of these notes also require the Company to make an offer to repurchase notes upon a Change of Control Triggering Event (as defined in the Indenture) at a price equal to 101% of their principal amount plus accrued and unpaid interest. The Company may issue additional debt from time to time pursuant to the Indenture. The aggregate cash proceeds from the notes, net of discounts and fees, was$296 million . InApril 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 described below 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. InSeptember 2020 , PPG repaid$1.0 billion of the Term Loan using cash on hand. The remaining Term Loan terminates and all amounts outstanding are payable onApril 13, 2021 . InMarch 2020 , PPG borrowed$800 million under the Credit Agreement and repaid this amount in full inApril 2020 . There were no amounts outstanding under the Credit agreement as ofSeptember 30, 2020 andDecember 31, 2019 . InAugust 2019 , PPG completed a public debt offering of$300 million aggregate principal amount of 2.4% notes due 2024 and$300 million aggregate principal amount of 2.8% notes due 2029 and received aggregate net proceeds of$594 million . The Term Loan and Credit Agreement require 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. As ofSeptember 30, 2020 , Total Indebtedness to Total Capitalization as defined under the Credit Agreement and the Term Loan was 48%. 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, 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 ofSeptember 30, 2020 , no commercial paper borrowings were outstanding. As ofDecember 31, 2019 , there were$100 million of commercial paper borrowings outstanding. 35 -------------------------------------------------------------------------------- Table of Contents Total capital spending in 2020 is expected to be$325 million to$350 million , an increase versus the prior Company estimate reflecting the initiation of certain additional projects. The Company continues to defer 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$5 million to$10 million during the remaining three months of 2020. PPG may make voluntary contributions to its defined benefit pension plans in 2020 and beyond. A primary focus for the Company in 2020 will be to maintain appropriate balance sheet flexibility, including cash on hand, due to the uncertain nature and unpredictable timing of the COVID-19 pandemic. Operating working capital is a subset of total working capital and represents (1) trade receivables - net of the allowance for doubtful accounts (2) FIFO inventories and (3) trade liabilities. We believe operating working capital represents the key components of working capital under the operating control of our businesses. A key metric we use to measure our working capital management is operating working capital as a percentage of sales (current quarter sales annualized). ($ in millions, except percentages) September 30, 2020 December 31, 2019 September 30, 2019 Trade receivables, net$2,495 $2,479 $2,737 Inventories, FIFO 1,784 1,834 1,987 Trade creditors' liabilities 2,055 2,098 2,190 Operating working capital$2,224 $2,215 $2,534 Operating working capital as a % of Sales 15.1 % 15.1 % 16.6 % Days sales outstanding 56 56 59 Days payable outstanding 97 94 95 Other Liquidity Information The Company continues to believe that cash on hand and short-term investments, cash from operations and the Company's access to capital markets will continue to be sufficient to fund our operating activities, capital spending, acquisitions, dividend payments, debt service, share repurchases, contributions to pension plans and PPG's significant contractual obligations. Environmental Three Months Ended Nine Months Ended September 30 September 30 ($ in millions) 2020 2019 2020 2019 Cash outlays for environmental remediation activities$15 $21 $52 $57 Remainder of Annually ($ in millions) 2020 2021 - 2024 Projected future cash outlays for environmental remediation activities$10 -$20 $20 -$50 Restructuring InJune 2020 , PPG initiated a$176 million restructuring program. The program addresses weakened global economic conditions stemming from the COVID-19 pandemic and related pace of recovery in a few end-use markets along with further opportunities to optimize supply chain and functional costs. The plan includes a voluntary separation program that was offered in theU.S. andCanada . We expect to achieve annualized cost savings from the 2020 program of$160 to$170 million by the expected completion date in 2021. As a result of the COVID-19 pandemic, the Company expects delays in the timing of certain previously recorded restructuring actions. Program completion dates may differ from the originally targeted timeline, as noted below. InJune 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. InApril 2018 , PPG initiated an$83 million global restructuring program. The program is largely centered around the change in customer assortment related to theU.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. 36 -------------------------------------------------------------------------------- Table of Contents Total restructuring savings are expected to be between$100 million and$110 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 atDecember 31, 2019 and atSeptember 30, 2020 , theU.S. dollar strengthened against currencies of many countries within the regions PPG operates. As a result, consolidated net assets atSeptember 30, 2020 decreased by$447 million compared toDecember 31, 2019 primarily driven by the Mexican peso. Comparing average exchange rates during the first nine months of 2020 to those of the first nine months of 2019, theU.S. dollar strengthened against currencies of most countries within the regions PPG operates. This had an unfavorable impact on Income before income taxes for the nine months endedSeptember 30, 2020 of$30 million from the translation of these foreign earnings intoU.S. dollars. 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 15, "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 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. Please refer to the Environmental Matters section of Note 15 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"). 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 theNew Jersey Department of Environmental Protection in the fourth quarter 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 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 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, 37 -------------------------------------------------------------------------------- Table of Contents 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, in the 2019 Form 10-K under Item 1A and in this Form 10-Q 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 2019 Form 10-K and in Item 1A of this Form 10-Q 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 AtSeptember 30, 2020 andDecember 31, 2019 , PPG had non-U.S. dollar denominated borrowings outstanding of$2.3 billion . 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$265 million atSeptember 30, 2020 and$255 million atDecember 31, 2019 , respectively. The fair value of foreign currency forward contracts outstanding atSeptember 30, 2020 andDecember 31, 2019 was a net liability of$3 million and a net liability of$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 endedSeptember 30, 2020 was$183 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 a net asset of$34 million and a net asset of$48 million atSeptember 30, 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$92 million and$87 million atSeptember 30, 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$74 million and$35 million atSeptember 30, 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$1 million and$7 million for the periods endedSeptember 30, 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 endedSeptember 30, 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$51 million and$67 million atSeptember 30, 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 toSeptember 30, 2020 . See Note 13, "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 38
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Table of Contents 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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