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MarketScreener Homepage  >  Equities  >  Nyse  >  PPG Industries, Inc.    PPG

PPG INDUSTRIES, INC.

(PPG)
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PPG INDUSTRIES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/20/2020 | 12:22pm EST
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 ended September 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 ended September 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.
•In September 2020, PPG repaid $1.0 billion of the $1.5 billion 364-Day Term
Loan Credit Agreement due in April 2021 using cash on hand.
Performance in the third quarter of 2020 compared to the third quarter of 2019
Performance Overview
Net Sales by Region
                                                               Three Months Ended
                                                                  September 30                                           Percent Change
($ 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 $141 million due to the following:

? 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 $155 million primarily due to the following:

  ? 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 $51 million primarily due to the following:

? 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 ended September 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 ended September 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 with U.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 with U.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.
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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

$1.86

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

$1.54

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 southern
U.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 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. Sales
volumes were mixed by channel during the quarter, including the unfavorable
impact of inclement weather in the southern U.S. and lower commercial repaint
activity impacting the company-owned stores channel. Despite challenging
economic conditions in Mexico, 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.
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Sales volumes for automotive refinish coatings declined about 10% versus prior
year, despite strong sales volumes in China during the quarter. Higher selling
prices were more than offset by lower sales volumes in each region reflecting
lower collision claims in the U.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 from Texstars 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 of Asia 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 from
Texstars 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 in China and improving production
build rates in the U.S. and Europe. In addition, sales volumes were strongest in
China, 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 in
China were higher than the prior year.
Packaging coatings organic sales decreased by a low-single-digit percentage
year-over-year as strong demand in the U.S. and Latin America was offset by
softer aggregate demand in Asia and Europe.
Segment income increased $47 million year-over-year due to cost-mitigation
actions and restructuring cost savings.
Looking ahead
Looking ahead for the Industrial Coatings segment, on a sequential basis, demand
is expected to be modestly better in the fourth quarter compared to the third
quarter, but likely will remain below prior-year levels. Aggregate net sales for
the business segment are expected to be lower by a low-single-digit percentage
and it is anticipated that selling prices will be flat. Based on current
exchange rates, foreign currency translation is not expected to have a
significant impact on segment sales or earnings for the third quarter. All
businesses are focusing on strong cost management and cost mitigation actions
along with cash flow optimization.
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Performance in the first nine months of 2020 compared to the first nine months
of 2019
Performance Overview
Net Sales by Region
                                                               Nine Months Ended
                                                                  September 30                                           Percent Change
($ 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 $1,397 million due to the following:

  ? 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 the U.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 $905 million primarily due to the following:

? 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 $203 million primarily due to the following:

  ? 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 ended September 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 ended September 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 with 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 with U.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.
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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

$3.30

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

$3.98

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 southern
U.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
at September 30, 2020 and December 31, 2019, respectively.
Cash provided by operating activities from continuing operations for the nine
months ended September 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 ended September 30, 2020 included:
•Capital expenditures, excluding acquisitions, of $170 million.
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•Business acquisition cash spending of $45 million.
•Cash dividends paid of $368 million.
In August 2020, PPG completed a public offering of $100 million aggregate
principal amount of 3.75% notes due March 2028. These notes were issued as
additional notes pursuant to PPG's existing shelf registration statement and
pursuant to the Indenture between the Company and The 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 due March 2028 on February 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.
In June 2020, PPG completed an early redemption of the $500 million 3.6% notes
due November 2020 using proceeds from the May 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.
In May 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.
In April 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. In September 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 on April 13, 2021.
In March 2020, PPG borrowed $800 million under the Credit Agreement and repaid
this amount in full in April 2020. There were no amounts outstanding under the
Credit agreement as of September 30, 2020 and December 31, 2019.
In August 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 of September 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
of September 30, 2020, no commercial paper borrowings were outstanding. As of
December 31, 2019, there were $100 million of commercial paper borrowings
outstanding.
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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
In June 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 the U.S. and Canada.
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.
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.
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.
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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 at December 31, 2019 and at September 30, 2020,
the U.S. dollar strengthened against currencies of many countries within the
regions PPG operates. As a result, consolidated net assets at September 30, 2020
decreased by $447 million compared to December 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, the U.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 ended
September 30, 2020 of $30 million from the translation of these foreign earnings
into U.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 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 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 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,
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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
At September 30, 2020 and December 31, 2019, PPG had non-U.S. dollar denominated
borrowings outstanding of $2.3 billion. A weakening of the U.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 at September 30, 2020 and $255 million at December
31, 2019, respectively.
The fair value of foreign currency forward contracts outstanding at September
30, 2020 and December 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 ended September 30, 2020 was $183 million and $357
million for the period ended December 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 at September 30, 2020 and December 31, 2019,
respectively. A 10% increase in the value of the euro to the U.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 at
September 30, 2020 and December 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 at September 30,
2020 and December 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 ended September 30, 2020 and
December 31, 2019, respectively. A 10% increase in interest rates in the U.S.,
Canada, Mexico and Europe and a 20% increase in interest rates in Asia and South
America would have an insignificant effect on PPG's variable rate debt
obligations and interest expense for the periods ended September 30, 2020 and
December 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 at September 30, 2020 and December 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
from December 31, 2019 to September 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
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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 in Securities 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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