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2: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
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13: R2 Condensed Consolidated Statement of Income HTML 89K
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14: R3 Condensed Consolidated Statement of Comprehensive HTML 59K
Income/(Loss) (Unaudited)
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(State or Other Jurisdiction of Incorporation or Organization)
iOne PPG Place, iPittsburgh, iPennsylvania
(Address of Principal Executive Offices)
i15272
(Zip Code)
(i412) i434-3131
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name
of each exchange on which registered
iCommon Stock, par value $1.66 2/3
iPPG
iNew
York Stock Exchange
i0.875% Notes due 2022
iPPG 22
iNew
York Stock Exchange
i0.875% Notes due 2025
iPPG 25
iNew
York Stock Exchange
i1.400% Notes due 2027
iPPG 27
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑No☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑No☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
☑
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yesi☐No☑
As of March 31, 2021, i237,091,179
shares of the Registrant’s common stock, par value $1.66 2/3 per share, were outstanding.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.iBasis
of Presentation
The condensed consolidated financial statements included herein are unaudited and have been prepared following the requirements of the Securities and Exchange Commission (the "SEC") and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim reporting. Under these rules, certain footnotes and other financial information that are normally required for annual financial statements can be condensed or omitted. These statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the financial position and shareholders' equity of PPG as of March 31, 2021 and the results of its operations and cash flows for the three months ended March 31, 2021 and 2020.
All intercompany balances and transactions have been eliminated. Material subsequent events are evaluated through the report issuance date and disclosed where applicable. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in PPG's 2020 Annual Report on Form 10-K (the "2020 Form 10-K").
Net sales, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results of operations for the three months ended March 31, 2021 and the trends in these unaudited condensed consolidated financial statements may not necessarily be indicative of the results to be expected for the full year.
2.iNew
Accounting Standards
i
Accounting Standards Adopted in 2021
Effective January 1, 2021, PPG adopted Accounting Standards Update ("ASU") No. 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes." This ASU is intended to simplify various aspects of accounting for income taxes by eliminating certain exceptions within Accounting Standards Codification Topic 740, "Income Taxes" and to clarify certain aspects
of the current accounting guidance. Adoption of this standard did not materially impact PPG's consolidated financial position, results of operations or cash flows.
Accounting Standards to be Adopted in Future Years
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40).” This ASU simplifies the accounting for convertible debt instruments by removing certain accounting separation models as well as the accounting for debt instruments with embedded conversion features that are not required to be accounted for as derivative instruments. The ASU also updates and improves the consistency of earnings per
share calculations for convertible instruments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. PPG is currently assessing the potential impacts this ASU may have on its consolidated financial position, results of operations and cash flows.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform." This ASU provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or
another reference rate expected to be discontinued. The amendments in this ASU are effective through December 31, 2022. PPG is currently assessing the potential impacts this ASU may have on its consolidated financial position, results of operations and cash flows.
3.iAcquisitions and Divestitures
Acquisitions
On December 18, 2020, PPG announced that it entered into a definitive agreement to acquire Tikkurila in an all-cash transaction. On February 4, 2021, PPG and Tikkurila entered into an amendment to the previously announced definitive combination agreement. Tikkurila is a leading Nordic producer and distributor of decorative paint and coatings. Under the terms of the amended agreement, PPG has commenced a tender offer to acquire all of the issued and outstanding stock of Tikkurila. As of March 31, 2021, PPG owned 9.32% of the outstanding shares of Tikkurila. The transaction is expected to close in the second quarter, subject to customary closing conditions.
On February 22, 2021, PPG completed the acquisition of VersaFlex, a manufacturer specializing in polyurea, epoxy and polyurethane coatings for water and waste water infrastructure, flooring, transportation infrastructure, and industrial applications. The pro-forma impact on PPG's sales and results of operations, including the pro-forma effect of events that are directly attributable to the acquisition, was not significant. The results of this business since the date of acquisition have been reported within the protective and marine coatings business within the Performance Coatings reportable business segment.
On January 11, 2021, PPG announced that it had reached a definitive agreement to acquire Wörwag, a global manufacturer of coatings for industrial and automotive
applications. The company specializes in developing sustainable liquid, powder and film coatings. The transaction is expected to close in the second quarter of 2021, subject to customary closing conditions.
Divestitures
In December 2020, PPG committed to a plan to sell certain entities in smaller, non-strategic countries. The planned sale is expected to occur in 2021. The assets and liabilities of these entities are reported as held for sale in Other current assets and Accounts payable and accrued liabilities, respectively, on the accompanying consolidated balance sheet as of March 31, 2021 and December 31, 2020. The results of these entities are reported within the Performance Coatings reportable business
segment.
i
The major classes of assets and liabilities of these entities included in the PPG consolidated balance sheet are as as follows:
Most
U.S. inventories are valued using the last-in, first-out method. These inventories represented approximately i31% and i33% of total inventories at March 31, 2021 and December
31, 2020, respectively. If the first-in, first-out method of inventory valuation had been used, inventories would have been $i113 million and $i110 million higher as of March
31, 2021 and December 31, 2020, respectively.
5.iGoodwill and Other Identifiable Intangible Assets
The Company tests indefinite-lived intangible assets and goodwill
for impairment by either performing a qualitative evaluation or a quantitative test at least annually, or more frequently if an indication of impairment arises. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit or asset is less than its carrying amount.
Although it was determined that a triggering event had not occurred as of March 31, 2021, the Company will continue to monitor the impacts of the COVID-19 pandemic on the Company and significant changes in key assumptions that could result in future period impairment charges. The Company did
not identify an indication of impairment for each of its reporting units and indefinite-lived intangible assets as of March 31, 2021.
The
Company’s identifiable intangible assets with definite lives are being amortized over their estimated useful lives.
i
As of March 31, 2021, estimated future amortization expense of identifiable intangible assets is as follows:
($
in millions)
Future Amortization Expense
Remaining nine months of 2021
$i140
2022
$i175
2023
$i165
2024
$i150
2025
$i140
2026
$i135
Thereafter
$i317
/
6.iBusiness Restructuring
The Company records restructuring liabilities that represent charges incurred in connection with consolidations of certain operations, including operations from acquisitions, as well as headcount reduction programs. These charges consist primarily of severance costs and certain other cash costs. As a result of these programs, the
Company will also incur incremental non-cash accelerated depreciation expense for certain assets due to their reduced expected asset life. These charges are not allocated to the Company’s reportable business segments. Refer to Note 16 Reportable Business Segment Information for additional information.
2020 Restructuring Program
In June 2020, the Company approved a business restructuring plan which included actions to reduce its global cost structure. 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 included a voluntary separation
program that was offered in the U.S. and Canada. The majority of these restructuring actions are expected to be completed by the end of 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, the Company approved a business restructuring plan which included actions to reduce its global cost structure. The program is the result of a comprehensive internal operational assessment to identify further opportunities to improve the profitability of the overall business portfolio. This program includes further manufacturing optimization; targeted pruning of low-profit business in certain regions; exiting certain smaller product lines that are not meeting profitability objectives; reorganization of certain business unit cost structures based on the current economic climate; and certain redundancy actions related to recent acquisitions. The majority of restructuring actions are expected to be completed by the end of the second quarter 2021 with the remainder of the actions expected to be completed in 2022.
In April 2018, the
Company approved a business restructuring plan which included actions to reduce its global cost structure. The program was in response to the impacts of customer assortment changes in our U.S. architectural coatings business during the first quarter 2018 and sustained, elevated raw material inflation. The program aims to further right-size employee headcount and production capacity in certain businesses based on product demand, as well as reductions in various global functional and administrative costs. The majority of restructuring actions are expected to be completed by the end of the second quarter of 2021.
i
The
following table summarizes the reserve activity for the three months ended March 31, 2021 and 2020:
Total Reserve
($ in millions)
2021
2020
January 1
$i293
$i224
Approved
restructuring actions
i—
i22
Release
of prior reserves and other adjustments
i—
(i15)
Cash
payments
(ii26/)
(i18)
Foreign
currency impact
(i11)
(i3)
March
31
$i256
$i210
/
7.iBorrowings
In March 2021, PPG completed a public offering of $i700 million aggregate principal amount of i1.200% notes due 2026. These
notes were issued 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"). 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 i101% 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 $i692 million.
In February 2021, PPG entered into a $i2.0 billion
Term Loan Credit Agreement (the "Term Loan Credit Agreement"). The Term Loan Credit Agreement provides the Company with the ability to borrow up to an aggregate principal amount of $i2.0 billion on an unsecured basis. The Company may borrow term loans under the Term Loan Credit Agreement to finance cash consideration for the
Company’s pending acquisition of up to all of the equity interests of Tikkurila, and to pay fees, costs and expenses related thereto. Following the Closing Date and from time to time prior to December 31, 2021, the Company may make up to eleven additional borrowings of term loans under the Term Loan Credit Agreement, which may be used for working capital and general corporate purposes. The Term Loan Credit Agreement contains covenants that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially
all of its assets. The Term Loan Credit Agreement matures and all outstanding borrowings are due and payable on the third anniversary of the date of the initial borrowing under the Agreement. There were no amounts outstanding under the Term Loan Credit Agreement as of March 31, 2021.
In April 2020, PPG entered into a $i1.5 billion i364-Day
Term Loan Credit Agreement (the “Term Loan”). The Term Loan contains covenants that are consistent with those in the Credit Agreement discussed 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 2020, PPG repaid $i1.1 billion of the Term Loan using cash on hand. In the first quarter 2021, PPG repaid the remaining $i400 million
of the Term Loan using cash on hand.
In August 2019, PPG amended and restated its five-year credit agreement (the “Credit Agreement”) with several banks and financial institutions. The Credit Agreement provides for a $i2.2 billion unsecured revolving credit facility. The Company has the ability to increase the size of the Credit Agreement by up to an additional $i750 million,
subject to the receipt of lender commitments and other conditions precedent. The Credit Agreement will terminate on August 30, 2024. The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement. In March 2020, PPG borrowed $i800 million
under the Credit Agreement and repaid that amount in full in April 2020. There were no amounts outstanding under the credit agreement as of March 31, 2021 and December 31, 2020.
The Term Loan Credit Agreement and Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan Credit Agreement and Credit Agreement, of 60% or less; provided, that for any fiscal quarter in which the Company has made an acquisition for consideration in excess of $i1 billion
and for the next five fiscal quarters thereafter, the ratio of Total Indebtedness to Total Capitalization may not exceed i65% at any time. As of March 31, 2021, Total Indebtedness to Total Capitalization as defined under the Credit Agreement and Term Loan Credit Agreement was i48%.
The
Credit Agreement also supports the Company’s commercial paper borrowings which are classified as long-term based on PPG’s intent and ability to refinance these borrowings on a long-term basis. Commercial paper borrowings of $i550 million and $i250 million
were outstanding as of March 31, 2021 and December 31, 2020, respectively.
8.iEarnings Per Common Share
i
The
effect of dilutive securities on the weighted average common shares outstanding included in the calculation of earnings per diluted common share for the three months ended March 31, 2021 and 2020 were as follows:
Three Months Ended March 31
(number of
shares in millions)
2021
2020
Weighted average common shares outstanding
i237.4
i236.5
Effect
of dilutive securities:
Stock options
i0.9
i0.5
Other
stock compensation plans
i0.7
i0.7
Potentially
dilutive common shares
i1.6
i1.2
Adjusted
weighted average common shares outstanding
i239.0
i237.7
Dividends
per common share
$i0.54
$i0.51
/
Excluded
from the computation of earnings per diluted share due to their antidilutive effect were izero and i1.5
million outstanding stock options for the three months ended March 31, 2021 and 2020, respectively.
9.iIncome Taxes
i
Three
Months Ended March 31
2021
2020
Effective tax rate on pretax income
i22.8
%
i22.3
%
/
The
effective tax rate of i22.8% for the three months ended March 31, 2021 reflects a benefit of $i5
million of discrete items associated with PPG's U.S. and foreign jurisdictions. Income tax expense for the first three months of 2021 is based on an estimated annual effective rate, which requires management to make its best estimate of annual pretax income or loss. Income tax expense for the three months ended March 31, 2020 reflects $i11 million of discrete items associated with PPG's U.S. and foreign locations and implementation of updated regulations associated with the 2017 Tax Cuts and Jobs
Act for Global Intangible Low Taxed Income.
During the year, PPG management regularly updates forecasted annual pretax results for the various countries in which PPG operates based on changes in factors such as prices, shipments, product mix, raw material inflation and manufacturing operations. To the extent that actual 2021 pretax results for U.S. and foreign income or loss vary from estimates, the actual Income tax expense recognized in 2021 could be different from the forecasted amount used to estimate the Income tax expense for the three months ended
March 31, 2021.
10.iPensions and Other Postretirement Benefits
Service cost for net periodic pension and other postretirement benefit costs is included in Cost of sales, exclusive of depreciation and amortization, Selling,
general and administrative, and Research and development, net in the accompanying condensed consolidated statements of income. All other components of net periodic benefit cost are recorded in Other charges in the accompanying condensed consolidated statements of income.
i
The net periodic pension and other postretirement benefit costs for the three months ended March 31, 2021 and 2020 were as follows:
Pension
Other
Postretirement Benefits
Three Months Ended March 31
Three Months Ended March 31
($ in millions)
2021
2020
2021
2020
Service cost
$i3
$i6
$i3
$i2
Interest
cost
i16
i22
i3
i5
Expected
return on plan assets
(i38)
(i36)
—
—
Amortization
of actuarial losses
i10
i18
i6
i4
Amortization
of prior service credit
—
—
(i14)
(i15)
Net
periodic benefit cost
($i9)
$i10
($i2)
($i4)
/
PPG
expects 2021 net periodic pension and other postretirement benefit cost to be income of approximately $i45 million, with pension and other postretirement benefits representing income of approximately $i40 million
and $i5 million, respectively. In 2020, PPG's U.S. and Canadian defined benefit plans were frozen for all participants. As of January 1, 2021, these plans are mostly inactive and as such, the accumulated net actuarial losses amortization period is now the average remaining life expectancy of the plan participants. This change in amortization period reduces future pension expense for PPG.
Contributions to Defined Benefit Pension Plans
i
Three
Months Ended March 31
($ in millions)
2021
2020
Non-U.S. defined benefit pension mandatory contributions
$i1
$i2
/
PPG
expects to make contributions to its defined benefit pension plans in the range of $i10 million to $i15
million during the remaining nine months of 2021. PPG may make voluntary contributions to its defined benefit pension plans in 2021 and beyond.
(a)Except
for income taxes, which were less than $i1 million as of March 31, 2021 and $i7 million
as of March 31, 2020, related to foreign currency impacts of certain unasserted earnings, unrealized foreign currency translation adjustments related to translation of foreign denominated balance sheets are not presented net of tax given that no deferred U.S. income taxes have been provided on undistributed earnings of non-U.S. subsidiaries because they are deemed to be reinvested for an indefinite period of time.
(b)The tax cost related to unrealized foreign currency translation adjustments on tax inter-branch transactions and net investment hedges as of March 31, 2021 and 2020 was $i30 million
and $i19 million, respectively.
(c)The tax cost related to the adjustment for pension and other postretirement benefits as of March 31, 2021 and 2020 was $i1
million and $i2 million, respectively. Reclassifications from AOCI are included in the computation of net periodic benefit costs (See Note 10, "Pensions and Other Postretirement Benefits").
/
12.iFinancial
Instruments, Hedging Activities and Fair Value Measurements
Financial instruments include cash and cash equivalents, short-term investments, cash held in escrow, marketable equity securities, accounts receivable, company-owned life insurance, accounts payable, short-term and long-term debt instruments, and derivatives. The fair values of these financial instruments approximated their carrying values at March 31, 2021 and December 31, 2020, in the aggregate, except for long-term debt instruments.
Hedging Activities
The Company has exposure to market risk from changes in foreign currency exchange rates and interest rates. As a result,
financial instruments, including derivatives, have been used to hedge a portion of these underlying economic exposures. Certain of these instruments may qualify as fair value, cash flow, and net investment hedges upon meeting the requisite criteria, including effectiveness of offsetting hedged or underlying exposures. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in Income before income taxes in the period incurred.
PPG’s policies do not permit speculative use of derivative financial instruments. PPG enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company did not realize a credit loss on derivatives during the three month periods ended March
31, 2021 and 2020.
All of PPG's outstanding derivative instruments are subject to accelerated settlement in the event of PPG’s failure to meet its debt or payment obligations under the terms of the instruments’ contractual provisions. In addition, if the Company would be acquired and its payment obligations under its derivative instruments’ contractual arrangements are not assumed by the acquirer, or if PPG would enter into bankruptcy, receivership or reorganization proceedings, its outstanding derivative instruments would also be subject to accelerated settlement.
There were no derivative instruments de-designated or discontinued as hedging instruments during the three month periods ended March 31,
2021 and 2020 and there were no gains or losses deferred in Accumulated other comprehensive loss on the condensed consolidated balance sheet that were reclassified to Income before income
taxes in the condensed consolidated statement of income in the three month periods ended March 31, 2021 and 2020 related to hedges of anticipated transactions that were no longer expected to occur.
Fair
Value Hedges
The Company uses interest rate swaps from time to time to manage its exposure to changing interest rates. When outstanding, the interest rate swaps are typically designated as fair value hedges of certain outstanding debt obligations of the Company and are recorded at fair value.
PPG has interest rate swaps which converted $i525 million
of fixed rate debt to variable rate debt. These swaps are designated as fair value hedges and are carried at fair value. Changes in the fair value of these swaps and changes in the fair value of the related debt are recorded in interest expense in the accompanying condensed consolidated statement of income. The fair value of these interest rate swaps was $i44 million and $i67 million
at March 31, 2021 and December 31, 2020, respectively.
Cash Flow Hedges
PPG designates certain foreign currency forward contracts as cash flow hedges of the Company’s exposure to variability in exchange rates on third party transactions denominated in foreign currencies. There were no outstanding cash flow hedges at March 31, 2021 and December 31, 2020.
Net Investment Hedges
PPG uses cross currency swaps
and foreign currency euro-denominated debt to hedge a significant portion of its net investment in its European operations, as follows:
As of March 31, 2021 and December 31, 2020, PPG had U.S. dollar to euro cross currency swap contracts with a total notional amount of $ii875/ million
and designated these contracts as hedges of the Company's net investment in its European operations. During the term of these contracts, PPG will receive payment in U.S. dollars and make payments in euros to the counterparties. As of March 31, 2021 and December 31, 2020, the fair value of the U.S. dollar to euro cross currency swap contracts was a net asset of $i19 million
and a net liability of $i8 million, respectively.
As of March 31, 2021 and December 31, 2020, PPG had designated €i2.0
billion of euro-denominated borrowings as hedges of a portion of its net investment in the Company's European operations. The carrying value of these instruments as of March 31, 2021 and December 31, 2020 was $i2.3 billion and $i2.4
billion, respectively.
Other Financial Instruments
PPG uses foreign currency forward contracts to manage net transaction exposures that do not qualify for hedge accounting; therefore, the change in the fair value of these instruments is recorded in Other charges in the condensed consolidated statement of income in the period of change. Underlying notional amounts related to these foreign currency forward contracts were $i1.7 billion
and $i1.4 billion at March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, the fair value of these contracts was a net asset and a net liability of $i9 million
and $i2 million, respectively.
Gains/Losses Deferred in Accumulated Other Comprehensive Loss
As of March 31, 2021, the Company had accumulated pretax unrealized translation gains in Accumulated other comprehensive loss on the condensed consolidated balance sheet related to
euro-denominated borrowings, and cross currency swaps of$i103 million. As of December 31, 2020, the Company had accumulated pretax unrealized translation losses of $i22
million.
iThe following table summarizes the location within the condensed consolidated financial statements and amount of gains/(losses) related to derivative and debt financial instruments for the three months ended March 31, 2021 and 2020. All dollar amounts are shown on a pretax basis.
The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of March 31, 2021 and December 31, 2020, the assets and liabilities measured at fair value on a recurring basis were cash equivalents, equity securities and derivatives. In addition, the Company measures its pension plan assets at fair value (see Note 14, "Employee Benefit Plans" under Item 8 in the 2020 Form 10-K for further details). The Company's financial assets and liabilities are measured using inputs from the following three levels:
Level
1 inputs are quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level 1 inputs are considered to be the most reliable evidence of fair value as they are based on unadjusted quoted market prices from various financial information service providers and securities exchanges.
Level 2 inputs are directly or indirectly observable prices that are not quoted on active exchanges, which include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of the
derivative instruments reflect the instruments' contractual terms, including the period to maturity, and uses observable market-based inputs, including forward curves.
Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities. The Company does not have any recurring financial assets or liabilities that are recorded in its condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 that are classified as Level 3 inputs.
(a)
Excluding finance lease obligations of$i11 million and short-term borrowings of $i5 million as of March
31, 2021.
/
(b) Excluding finance lease obligations of $i12 million and short-term borrowings of $i403
million as of December 31, 2020.
The fair values of the debt instruments were based on discounted cash flows and interest rates then currently available to the Company for instruments of the same remaining maturities and were measured using level 2 inputs.
13.iStock-Based
Compensation
The Company’s stock-based compensation includes stock options, restricted stock units (“RSUs”) and grants of contingent shares that are earned based on achieving targeted levels of total shareholder return. All current grants of stock options, RSUs and contingent shares are made under the PPG Industries, Inc. Amended and Restated Omnibus Incentive Plan (“PPG Amended Omnibus Plan”), which was amended and restated effective April 21, 2016. Shares available for future grants under the PPG Amended Omnibus Plan were i6.5
million as of March 31, 2021.
i
Stock-based compensation and the income tax benefit recognized during the three months ended March 31, 2021 and 2020 were as follows:
Grants of stock-based compensation during the three months ended March 31, 2021 and 2020 were as follows:
Three
Months Ended March 31
2021
2020
Grant Details
Shares
Fair Value
Shares
Fair Value
Stock options
i527,464
$i29.27
i659,835
$i21.93
Restricted
stock units
i162,601
$i129.64
i182,276
$i112.99
Contingent
shares (a)
i55,540
$i136.60
i54,648
$i119.52
(a)
The number of contingent shares represents the target value of the award.
/
Stock options are generally exercisable i36 months after being granted and have a maximum term of i10
years. Compensation expense for stock options is recorded over the vesting period based on the fair value on the date of grant. iThe fair value of the stock option grants issued during the three months ended March 31, 2021 was calculated with the following weighted average assumptions:
Weighted
average exercise price
$i136.60
Risk free interest rate
i1.0
%
Expected
life of option in years
i6.5
Expected dividend yield
i1.6
%
Expected
volatility
i25.3
%
The risk-free interest rate is determined by using the U.S. Treasury yield curve at the date of the grant and using a maturity equal to the expected life of the option. The expected life of options is calculated using the average of the vesting term and the
maximum term, as prescribed by accounting guidance on the use of the simplified method for determining the expected term of an employee share option. The expected dividend yield and volatility are based on historical stock prices and dividend amounts over past time periods equal in length to the expected life of the options.
Time-based RSUs generally vest over the three-year period following the date of grant, unless forfeited, and will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the vesting period. Performance-based RSUs vest based on achieving specific annual performance targets for earnings per share growth and cash flow return on capital over the three calendar year-end periods following the date of grant. Unless forfeited, the performance-based RSUs will be paid out in the form
of stock, cash or a combination of both at the Company’s discretion at the end of the three-year performance period if PPG meets the performance targets.
For awards granted in 2021 and 2020, the amount paid upon vesting of performance-based RSUs may range from 0% to 200% of the original grant, based upon the level of earnings per share growth achieved and frequency with which the annual cash flow return on capital performance target is met over the three calendar year periods comprising the vesting period. For awards granted in 2019, the amount paid upon vesting of performance-based RSUs may range from 0% to 180% of the original grant.
Contingent share grants (referred to as “TSR awards”) are made annually and are paid out at the end of each three-year period following the date of grant based
on PPG's performance. Performance is measured by determining the percentile rank of the total shareholder return of PPG common stock in relation to the total shareholder return of the S&P 500 as it existed at the beginning of the three-year performance period excluding any companies that have been removed from the index because they ceased to be publicly traded during the performance period. For awards granted in 2021 and 2020, the payment of awards following the three-year award period will be based on performance achieved in accordance with the scale set forth in the plan agreement and may range from 0% to 200% of the initial grant. For awards granted in 2019, the amount paid following the three-year award period may range from 0% to 220% of the initial grant. Any payments made at the end of the award period may be in the form of stock, cash or a combination of both at the Company's
discretion. The TSR awards qualify as liability awards, and compensation expense is recognized over the three-year award period based on the fair value of the awards (giving consideration to the Company’s percentile rank of total shareholder return) remeasured in each reporting period until settlement of the awards.
14.iCommitments
and Contingent Liabilities
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. These lawsuits and claims may relate to contract, patent, environmental, product liability, asbestos exposure, antitrust, employment, securities and other
matters arising out of the conduct
of PPG’s current and past business activities. To the extent that these lawsuits and claims involve personal injury, property damage, and certain other claims, PPG believes it has adequate insurance; however, certain of PPG’s insurers are contesting coverage with respect to some of these claims, and other insurers, as they had prior to the asbestos settlement described below, may contest coverage with respect to some of the asbestos claims. PPG’s lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental, asbestos and other matters.
The results of any current or future litigation and claims are inherently unpredictable. However, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG will not have a material effect on PPG’s consolidated financial position or liquidity; however, such
outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
Shareholder Class Action
On May 20, 2018, a putative securities class action lawsuit was filed in the U.S. District Court for the Central District of California against the Company and three of its current and former officers. On September 21, 2018, an Amended Class Action Complaint was filed in the lawsuit. The Amended Complaint, captioned Trevor Mild v. PPG Industries, Inc., Michael H. McGarry, Vincent J. Morales, and Mark C. Kelly, asserted securities fraud claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 on behalf of a putative class of persons who purchased or otherwise acquired stock of the Company between January 19, 2017 and May 10, 2018. The allegations related to, among other things, allegedly false and misleading statements and/or failures to disclose information about the Company’s business, operations and prospects. The parties reached a settlement in principal on May 1, 2019. On June 2, 2019, the plaintiff filed with the Court a Petition for Preliminary Approval of the proposed settlement, including the proposed settlement amount of $i25
million. On November 22, 2019, the Court entered final judgment approving the settlement. PPG’s insurance carriers fully funded the settlement escrow account and the court-approved settlement payments to class members were fully distributed by the claims administrator as of March 31, 2021.
Asbestos Matters
Prior to 2000, the Company had been named as a defendant in numerous claims alleging bodily injury from (i) exposure to asbestos-containing products allegedly manufactured, sold or distributed by the Company,
its subsidiaries, or for which they are otherwise alleged to be liable; (ii) exposure to asbestos allegedly present at a facility owned or leased by the Company; or (iii) exposure to asbestos-containing products of Pittsburgh Corning Corporation (“PC”) for which the Company was alleged to be liable under a variety of legal theories (the Company and Corning Incorporated were each 50% shareholders in PC prior to April 27, 2016).
In 2000, PC filed
for Chapter 11 in the U.S. Bankruptcy Court for the Western District of Pennsylvania in an effort to permanently and comprehensively resolve all of its pending and future asbestos-related liability claims. The Bankruptcy Court subsequently entered a series of orders preliminarily enjoining the prosecution of asbestos litigation against PPG until after the effective date of a confirmed PC plan of reorganization. During the pendency of this preliminary injunction staying asbestos litigation against PPG, PPG and certain of its historical liability insurers negotiated a settlement with representatives of present and future asbestos claimants. That settlement was incorporated into a PC plan of reorganization that was confirmed by the Bankruptcy Court on May
24, 2013 and ultimately became effective on April 27, 2016. With the effectiveness of the plan, the preliminary injunction staying the prosecution of asbestos litigation against PPG expired by its own terms on May 27, 2016. In accordance with the settlement, the Bankruptcy Court issued a permanent channeling injunction under Section 524(g) of the Bankruptcy Code that prohibits present and future claimants from asserting claims against PPG that arise, in whole or in part, out of exposure to asbestos or asbestos-containing products manufactured, sold and/or distributed by PC or asbestos on or emanating from any PC premises. The channeling injunction, by its terms, also prohibits codefendants in cases that are subject to the channeling injunction from asserting claims against PPG for contribution, indemnification or other recovery. The channeling injunction also precludes
the prosecution of claims against PPG arising from alleged exposure to asbestos or asbestos-containing products to the extent that a claimant is alleging or seeking to impose liability, directly or indirectly, for the conduct of, claims against, or demands on PC by reason of PPG’s prior: (i) ownership of a financial interest in PC; (ii) involvement in the management of PC, or service as an officer, director or employee of PC or a related party; (iii) provision of insurance to PC or a related party; or (iv) involvement in a financial transaction affecting the financial condition of PC or a related party. The foregoing PC related claims are referred to as “PC Relationship Claims.”
The Bankruptcy Court's channeling injunction channels the Company’s liability for PC Relationship Claims to a trust funded in part by PPG and its participating
insurers for the benefit of current and future PC asbestos claimants (the
“Trust”). The Trust is the sole recourse for holders of PC Relationship Claims. PPG and its affiliates have no further liability or responsibility for, and are permanently protected from, pending and future PC Relationship Claims. The channeling injunction does not extend to present and future claims against PPG that arise out of alleged exposure to asbestos or asbestos-containing products historically manufactured, sold and/or distributed by PPG or its subsidiaries
or for which they are alleged to be liable that are not PC Relationship Claims, and does not extend to claims against PPG alleging personal injury allegedly caused by asbestos on premises presently or formerly owned, leased or occupied by PPG. These claims are referred to as "non-PC Relationship Claims".
Non-PC relationship claims
With respect to the asbestos-related claims pending against the Company at the time PC filed for bankruptcy, the Company considers such claims to fall within one or more of the following categories: (1) claims that have been closed or dismissed as a result of processes undertaken during the bankruptcy; (2) claims that may have been previously
filed on the dockets of state and federal courts in various jurisdictions, but are inactive as to the Company; and (3) claims that are subject, in whole or in part, to the channeling injunction and thus will be resolved, in whole or in part, in accordance with the Trust procedures established under the PC bankruptcy reorganization plan. As a result of the foregoing, the Company does not consider these three categories of claims to be open or active litigation against it, although the Company cannot now determine whether, or the extent to which, any of these claims may in the future be reinstituted, reinstated, or revived such that they may become open and active non-PC Relationship Claims against it.
Current
open and active claims post-Pittsburgh Corning bankruptcy
As of March 31, 2021, the Company was aware of approximately i1,190 open and active asbestos-related claims pending against the Company and certain of its subsidiaries.
These claims consist of non-PC Relationship Claims against PPG and claims against a PPG subsidiary the Company acquired on April 1, 2013. The Company is defending these open and active claims vigorously.
PPG has established reserves totaling approximately $i190 million for asbestos-related claims that would not be channeled to the Trust which, based on
presently available information, we believe will be sufficient to encompass all of PPG’s current and estimable potential future asbestos liabilities. These reserves, which are included within Other liabilities on the accompanying condensed consolidated balance sheets, represent PPG’s best estimate of its liability for these claims.
These reserves include a $i162 million reserve established in 2009 in connection with an amendment to the PC plan of reorganization for non-PC Relationship
Claims other than claims arising from premises-related exposures. PPG does not have sufficient current claim information or settlement history on which to base a better estimate of this liability in light of the fact that the Bankruptcy Court’s injunction staying most asbestos claims against the Company was in effect from April 2000 through May 2016.
PPG monitors the activity associated with its asbestos claims and evaluates, on a periodic basis, its estimated liability for such claims, its insurance assets then available, and all underlying assumptions to determine whether any adjustment to the reserves for these claims is required.
The amount reserved for asbestos-related claims by its nature is subject to many uncertainties that may change over time, including (i) the ultimate number of claims
filed; (ii) the amounts required to resolve both currently known and future unknown claims; (iii) the amount of insurance, if any, available to cover such claims; (iv) the unpredictable aspects of the litigation process, including a changing trial docket and the jurisdictions in which trials are scheduled; (v) the outcome of any trials, including potential judgments or jury verdicts; (vi) the lack of specific information in many cases concerning exposure for which PPG is allegedly responsible, and the claimants’ alleged diseases resulting from such exposure; and (vii) potential changes in applicable federal and/or state tort liability law. All of these factors may have a material effect upon future asbestos-related liability estimates. As a potential offset to any future asbestos financial exposure, under the PC plan of reorganization PPG retained, for its own account, the right to
pursue insurance coverage from certain of its historical insurers that did not participate in the PC plan of reorganization. While the ultimate outcome of PPG’s asbestos litigation cannot be predicted with certainty, PPG believes that any financial exposure resulting from its asbestos-related claims will not have a material adverse effect on PPG’s consolidated financial position, liquidity or results of operations.
It is PPG’s policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are generally not discounted. In management’s opinion, the Company operates in an environmentally sound manner and the outcome of the Company’s environmental contingencies will not have a material effect on PPG’s financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution
of the Company’s environmental contingencies will occur over an extended period of time. See Note 15, "Commitments and Contingent Liabilities," under Item 8 of the 2020 Form 10-K for additional descriptions of the following environmental matters.
As remediation at certain legacy environmental sites progresses, PPG continues to refine its assumptions underlying the estimates of the expected future costs of its remediation programs. PPG’s ongoing evaluation may result in additional charges against income to increase the reserves for these sites. Remediation activities at our legacy sites are not related to the ongoing operations of PPG. In 2021 and 2020, certain charges have been recorded based on updated estimates to increase existing reserves for these sites. Certain other charges related
to environmental remediation actions are also expensed as incurred.
As of March 31, 2021 and December 31, 2020, PPG had reserves for environmental contingencies associated with PPG’s former chromium manufacturing plant in Jersey City, New Jersey (“New Jersey Chrome”), glass and chemical manufacturing sites, and for other environmental contingencies, including current manufacturing locations and National Priority List sites. These reserves are reported as Accounts payable and accrued liabilities and Other liabilities in the accompanying condensed consolidated balance sheet.
Pretax
charges against income for environmental remediation costs are included in Other charges in the accompanying condensed consolidated statement of income. The pretax charges and cash outlays related to such environmental remediation for the three months ended March 31, 2021 and 2020 were as follows:
Three Months Ended March 31
($
in millions)
2021
2020
Environmental remediation pretax charges
$i19
$i11
Cash
outlays for environmental remediation activities
$i9
$i25
/
In
Q1 2021, PPG recognized a $i16 million pretax charge to increase the existing reserve for New Jersey Chrome based on updated estimates of the underlying factors as described below largely related to groundwater remediation.
Remediation: New Jersey Chrome
In June 2009, PPG entered into a settlement agreement with the New Jersey Department of Environmental Protection (“NJDEP”) and Jersey City, New Jersey (which had asserted claims against PPG for lost tax revenue) which
was in the form of a Judicial Consent Order (the "JCO"). Under the JCO, PPG accepted sole responsibility for the remediation activities at its former chromium manufacturing location in Jersey City and i19 additional sites. The principal contaminant of concern is hexavalent chromium. The JCO also provided for the appointment of a court-approved Site Administrator who is responsible for establishing a master schedule for the remediation of the i20
PPG sites which existed at that time. One site was subsequently removed from the JCO process during 2014 and will be remediated separately at a future date. A total of 6 soil sites and 12 groundwater sites remain subject to the JCO process.
The most significant assumptions underlying the estimate of remediation costs for all New Jersey Chrome sites are those related to the extent and concentration of chromium impacts in the soil, as these determine the quantity of soil that must be treated in place, the quantity that will have to be excavated and transported for offsite disposal, and the
nature of disposal required. Remediation of chromium contaminated soils at the location of the former manufacturing site has been completed pursuant to approved remedial action work plans. Remediation of chromium contaminated soils at certain other smaller sites is ongoing and is expected to continue until 2022. PPG regularly evaluates the assessments of costs incurred to date versus current progress and the potential cost impacts of the most recent information, including the extent of impacted soils, percentage of hazardous versus non-hazardous soils, daily soil excavation rates, and engineering, administrative and other associated costs. Based on these assessments, the reserve is adjusted accordingly. Principal factors affecting costs include refinements in the estimate of the mix of hazardous to non-hazardous soils to be excavated, an overall increase in soil volumes to be excavated, enhanced water
management requirements, decreased daily soil excavation rates due to site conditions, initial estimates for remedial actions related to groundwater, and oversight and management costs.
Groundwater remediation at the former Garfield Avenue chromium manufacturing site and five adjacent sites is expected to occur over several years. A groundwater remedial action work plan was submitted to NJDEP in the first quarter of 2021.
PPG’s financial reserve for remediation of all New Jersey Chrome sites was $i114
million at March 31, 2021. The major cost components of this liability continue to be related to excavation, transportation and disposal of impacted soil, as well as construction services. These components each account for approximately i18%, i15%
and i30% of the accrued amount, respectively.
There are multiple, future events yet to occur, including further remedy selection and design, remedy implementation and execution and applicable governmental agency or community organization approvals. Considerable uncertainty exists regarding the timing of these future events for the New Jersey Chrome sites. Further resolution of these events is expected to occur over the next several years. As these events occur and to the extent that the cost estimates of the environmental remediation remedies change, the
existing reserve for this environmental remediation matter will continue to be adjusted.
Remediation: Glass, Chemicals and Other Sites
Among other sites at which PPG is managing environmental liabilities, remedial actions are occurring at a chemical manufacturing site in Barberton, Ohio, where PPG has completed a Facility Investigation and Corrective Measure Study under the United States Environmental Protection Agency's Resource Conservation and Recovery Act Corrective Action Program. PPG has also been addressing the impacts from a legacy plate glass manufacturing site in Kokomo, Indiana under the Voluntary Remediation Program of the Indiana Department of Environmental Management and a site associated with a legacy plate glass manufacturing site near Ford City, Pennsylvania under the Pennsylvania Land Recycling Program under the oversight of the Pennsylvania Department of Environmental
Protection. PPG is currently performing additional investigation and remedial activities at these locations.
With respect to certain other waste sites, the financial condition of other potentially responsible parties also contributes to the uncertainty of estimating PPG’s final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agency assertions of joint and several liability, in general, final allocations of costs are made based on the relative contributions of wastes to such sites. PPG is generally not a major contributor to such sites.
Remediation: Reasonably Possible Matters
In addition to the amounts currently reserved for environmental remediation, the Company may be subject to loss
contingencies related to environmental matters estimated to be as much as $i100 million to $i200
million. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. These reasonably possible unreserved losses relate to environmental matters at a number of sites, none of which are individually significant. The loss contingencies related to these sites include significant unresolved issues such as the nature and extent of contamination at these sites and the methods that may have to be employed to remediate them.
The impact of evolving programs, such as natural resource damage claims, industrial site re-use initiatives and domestic and international remediation programs, also adds to the present uncertainties with regard to the ultimate resolution of this unreserved exposure to future loss. The Company’s assessment of the potential impact of these environmental contingencies is subject to
considerable uncertainty due to the complex, ongoing and evolving process of investigation and remediation, if necessary, of such environmental contingencies, and the potential for technological and regulatory developments.
The Company had outstanding letters of credit and surety bonds of $i132
million and guarantees of $i9 million as of March 31, 2021. The Company does not believe any loss related to such guarantees is likely.
15.iRevenue
Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales. For most transactions, control passes in accordance with agreed upon delivery terms.
The Company delivers products to company-owned stores, home centers and other regional or national consumer retail outlets, paint
dealers, concessionaires and independent distributors, company-owned distribution networks, and directly to manufacturing companies and retail customers. Each product delivered to a third party customer is considered to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates. Accounts receivable are recognized when there is an unconditional right to consideration. Payment terms vary from customer to customer, depending on creditworthiness, prior payment history and other considerations.
The Company also provides services by applying coatings
to customers' manufactured parts and assembled products and by providing technical support to certain customers. Performance obligations are satisfied over time as critical milestones are met and as services are provided. PPG is entitled to payment as the services are rendered. For the three months ended March 31, 2021 and 2020, service revenue constituted approximately i5% of total revenue.
i
Net
sales by segment and region for the three months ended March 31, 2021 and 2020 were as follows:
All trade receivables are reported on the condensed consolidated balance sheet at the outstanding principal amount adjusted for any allowance for credit losses and any charge offs. PPG provides an allowance for credit losses to reduce trade receivables to their estimated net realizable value equal to the amount that is expected to be collected. This allowance is estimated based on historical collection experience, current regional economic and market conditions, the aging of accounts receivable, assessments of current creditworthiness of customers, and forward-looking information. The use of forward-looking information is based on certain macroeconomic and microeconomic indicators including, but not limited to, regional business environment risk, political risk, and commercial and financing risks.
PPG
reviews its reserves for credit losses on a quarterly basis to ensure its reserves for credit losses reflect regional risk trends as well as current and future global operating conditions.
i
The following table summarizes the activity for the allowance for credit losses for the three months ended March 31, 2021 and 2020:
Trade
Receivables Allowance for Credit Losses
($ in millions)
2021
2020
January 1
$i44
$i22
Current-period
provision for credit losses
i—
i33
Trade
receivables written off as uncollectible, net of recoveries
(i3)
(i4)
Foreign
currency impact
i—
(i1)
March
31
$i41
$i50
/
In
March 2020, PPG recorded estimated future credit losses for trade receivables of $i30 million related to the potential financial impacts of the COVID-19 pandemic. These amounts were estimated based on regional business information, including certain forward-looking information and other considerations. As of March 31, 2021, $i21 million
remains in the reserve for future COVID-19-related matters. PPG will continue to monitor the adequacy of this reserve as new information becomes available.
16.iReportable Business Segment Information
PPG is a multinational manufacturer with i10
operating segments (which the Company refers to as “strategic business units”) that are organized based on the Company’s major products lines. The Company’s reportable business segments include the following itwo segments: Performance Coatings and Industrial Coatings. The operating segments have been aggregated
based on economic similarities, the nature of their products, production processes, end-use markets and methods of distribution.
The Performance Coatings reportable business segment is comprised of the automotive refinish coatings, aerospace coatings, architectural coatings – Americas and Asia Pacific, architectural coatings – EMEA, protective and marine coatings and traffic solutions operating segments. This reportable business segment primarily supplies a variety of protective and decorative coatings, sealants and finishes along with paint strippers, stains and related chemicals, pavement marking products as well as transparencies and transparent armor.
The Industrial Coatings reportable business segment is comprised of the automotive OEM coatings, industrial coatings, packaging coatings, and the specialty coatings and materials operating segments. This reportable business segment
primarily supplies a variety of protective and decorative coatings and finishes along with adhesives, sealants, metal pretreatment products, optical monomers and coatings, precipitated silicas and other specialty materials.
Reportable
business segment net sales and segment income for the three months ended March 31, 2021 and 2020 were as follows:
Three Months Ended March 31
($ in millions)
2021
2020
Net
sales:
Performance Coatings
$i2,319
$i2,008
Industrial
Coatings
i1,562
i1,369
Total
$i3,881
$i3,377
Segment
income:
Performance Coatings
$i386
$i272
Industrial
Coatings
i245
i181
Total
$i631
$i453
Corporate
(i52)
(i60)
Interest
expense, net of interest income
(i24)
(i23)
Acquisition-related
costs (a)
(i24)
i—
Environmental
remediation charges
(i16)
(i8)
Expenses
incurred due to natural disasters(b)
(i12)
i—
Business
restructuring-related costs, net (c)
(i4)
(i13)
Increase
in allowance for doubtful accounts related to COVID-19
i—
(i30)
Income
before income taxes
$i499
$i319
(a)Acquisition-related
costs include advisory, legal, accounting, valuation, other professional or consulting fees, and certain internal costs directly incurred to effect acquisitions. These costs are included in Selling, general and administrative expense in the condensed consolidated statement of income. Acquisition-related costs also include the impact for the step up to fair value of inventory acquired in certain acquisitions which are included in Cost of Sales, exclusive of depreciation and amortization in the condensed consolidated statement of income.
/
(b)In the second half of 2020, Hurricanes Laura and Delta damaged a southern U.S. factory supporting the Company's
specialty coatings and materials business. In the first quarter of 2021, a winter storm further damaged that factory as well as other Company factories in the southern U.S. Incremental expenses incurred in the first quarter of 2021 due to these storms included costs related to maintenance and repairs of damaged property, freight and utility premiums and other incremental expenses directly related to the impacted areas. These incremental expenses largely related to the Company's specialty coatings and materials business.
(c)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.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 2020 Form 10-K.
Executive Overview
Below are our key financial results for the three months ended March 31, 2021:
•Net sales were approximately $3.9 billion, up 14.9% compared to the prior
year.
•Cost of sales, exclusive of depreciation and amortization ("Cost of sales") was $2.2 billion, up 17.0% versus prior year primarily due to higher sales volumes. As a percentage of sales, Cost of sales increased 1.0%.
•Selling, general and administrative ("SG&A") expense was $891 million, down 1.5% year-over-year primarily due to cost mitigation initiatives. As a percentage of sales, SG&A expense decreased 3.8%.
•Income before income taxes was $499 million.
•The reported effective tax rate was 22.8%. The adjusted effective tax rate was 23.1%.
Other charges for the three months ended March 31, 2021 includes a decline in fair value of certain marketable equity securities.
Other income
Other income was lower in the three months ended March 31, 2021 compared to prior year primarily due to slightly lower equity earnings compared to prior year.
The effective tax rate for the three months ended March 31, 2021 and 2020 reflects the impact of certain discrete tax items for the quarter. The Company expects that its second quarter 2021 effective tax rate will be between 23% and 24%, including potential favorable discrete tax items.
Adjusted earnings per diluted share for the three months ended March 31, 2021 increased year-over-year primarily due to higher sales volumes.
Regulation G Reconciliations - Results from Operations
PPG believes investors' understanding of the Company’s performance is enhanced by the disclosure of net income from continuing operations, earnings per diluted share from continuing operations, PPG's effective tax rate and segment income adjusted for certain items. PPG’s management considers this information useful in providing insight into the Company’s ongoing performance because it excludes the impact of items that cannot reasonably
be expected to recur on a quarterly basis or that are not attributable to our primary operations. Net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate and segment income adjusted for these items are not recognized financial measures determined in accordance 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, segment income or other financial measures as computed in accordance with U.S. GAAP. In addition, adjusted net income, adjusted earnings per diluted share, the adjusted effective tax rate and segment income may not be comparable to similarly titled measures as reported by other companies.
Income before income taxes from continuing operations is reconciled to adjusted income before income taxes from continuing operations, the effective tax rate from continuing operations is reconciled to the adjusted effective tax rate 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:
($ in millions, except percentages and per share amounts)
Income Before Income Taxes
Tax Expense
Effective Tax Rate
Net income (attributable to PPG)
Earnings per diluted share(a)
As reported, continuing operations
$319
$71
22.3
%
$243
$1.02
Adjusted
for:
Acquisition-related amortization expense
36
8
22.3
%
28
0.12
Increase in allowance
for doubtful accounts related to COVID-19
30
7
23.2
%
23
0.10
Business restructuring-related costs, net (c)
13
3
22.4
%
10
0.04
Environmental
remediation charges, net
8
2
24.3
%
6
0.03
Adjusted,
continuing operations, excluding certain items
$406
$91
22.4
%
$310
$1.31
(a) Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.
(b) In the second half of 2020, Hurricanes Laura and Delta damaged a southern U.S. factory supporting the
Company's specialty coatings and materials business. In the first quarter of 2021, a winter storm further damaged that factory as well as other Company factories in the southern U.S. Incremental expenses incurred in the first quarter of 2021 due to these storms included costs related to maintenance and repairs of damaged property, freight and utility premiums and other incremental expenses directly related to the impacted areas. These incremental expenses largely related to the Company's specialty coatings and materials business.
(c) Included in business restructuring-related costs, net are business restructuring charges, accelerated depreciation of certain assets and other related costs, offset by releases related to previously approved programs.
Performance
of Reportable Business Segments
Performance Coatings
Three Months Ended March 31
$ Change
% Change
($ in millions,
except per share amounts)
2021
2020
2021 vs. 2020
2021 vs. 2020
Net sales
$2,319
$2,008
$311
15.5
%
Segment income
$386
$272
$114
41.9
%
Amortization
expense
$29
$26
$3
11.5
%
Segment income, excluding amortization expense
$415
$298
$117
39.3
%
Performance
Coatings net sales increased due to the following:
Architectural coatings - Americas and Asia Pacific net sales, excluding the impact of currency and acquisitions ("organic
sales") increased by a high-single-digit percentage with differences by channel and region. Sales volume growth was strong in all regions. In Mexico, PPG Comex architectural coatings business organic sales increased by a high-single-digit percentage compared to the prior year as the concessionaire network sell-out of PPG products continued to be strong throughout the quarter.
Architectural coatings – EMEA organic sales increased by about 20%, driven by strong sales volume growth year-over-year in most countries. This performance was led by strong consumer demand for residential repaint and do-it-yourself ("DIY") products after many countries imposed additional, or stricter, stay-at-home mandates.
Sales volumes for automotive refinish coatings increased by a high-teen percentage compared to prior year, driven by continued demand improvement in the Asia Pacific region and
some customer restocking in the U.S. region. In Europe, congestion and miles driven in major cities remained at lower levels. In the U.S., body shop activity modestly improved during the first quarter.
Aerospace coatings sales volumes decreased nearly 30% year-over-year, slightly better than year-over-year levels experienced in the fourth quarter, as sharp declines continued in commercial OEM and after-market demand due to lower airline activity. Net sales benefited from consistent military demand year-over-year.
Sales volumes in the protective and marine coatings business were higher by a low-single-digit percentage driven by strong demand in the Asia Pacific region.
The first quarter was the first full quarter for the traffic solutions business after the closing of the Ennis-Flint acquisition in December 2020.
Segment
income increased $114 million year-over-year due to higher selling prices, the earnings impact of higher sales volumes, the execution of cost-mitigation actions and restructuring savings, partially offset by raw material cost inflation.
Looking Ahead
Looking ahead for the Performance Coatings segment, raw material cost inflation is expected to be higher in the second quarter compared to the first quarter. Further selling price increases have been secured or are in progress during the quarter. Second quarter year-over-year sales growth will be aided by easier sales comparisons in most businesses due to the pandemic’s impact on demand last year. Supply disruptions have caused some challenges with certain raw material availability, which we expect will have a modest impact on sales activity during the quarter, particularly impacting the architectural coatings businesses. Finally, foreign
currency translation is expected to have a favorable impact on segment sales and earnings of about $100 million and approximately $15 million, respectively, based on recent exchange rates.
Industrial Coatings
Three Months Ended March 31
$ Change
%
Change
($ in millions, except per share amounts)
2021
2020
2021 vs. 2020
2021 vs. 2020
Net sales
$1,562
$1,369
$193
14.1
%
Segment
income
$245
$181
$64
35.4
%
Amortization expense
$10
$10
$—
—
%
Segment
income, excluding amortization expense
$255
$191
$64
33.5
%
Industrial Coatings segment net sales increased due to the following:
● Higher sales volumes (10%)
● Favorable foreign currency translation (3%)
● Higher selling prices (1%)
Automotive OEM coatings sales volumes increased by a low-teen percentage year-over-year,
driven by strong year-over-year retail sales in China. In the U.S., automotive retail dealer inventories decreased to historically low levels as consumer demand remained robust while production levels were constrained due to a shortage of computer chips.
For the industrial coatings business, sales volumes increased by a low-teen percentage year-over-year as global industrial production continued to improve compared to the start of the pandemic. Electronic materials, heavy duty equipment and cookware had strong year-over-year growth.
Packaging
coatings organic sales increased by a low-teen percentage year-over-year due to sales volume growth in the Asia-Pacific region, Europe, and Latin America, with strong growth across the beverage and canned food segments.
Segment income increased $64 million year-over-year due to the earnings impact of higher sales volumes, the execution of cost-mitigation actions and restructuring savings, and higher selling prices, partially offset by raw material cost inflation.
Looking ahead
Looking ahead for the Industrial Coatings segment, sales volumes are expected to be significantly higher than the prior-year second quarter, due to considerably lower global industrial activity during the second quarter of 2020 stemming from the pandemic. The Company has been actively
working with customers to secure selling price increases in all businesses. Due to the rapid increase in raw material costs, the second quarter will likely have an unfavorable net impact from higher raw material and logistics costs offsetting selling price increases. Finally, foreign currency translation is expected to have a favorable impact on segment sales and earnings of about $30 million and $5 million, respectively, based on recent exchange rates.
Cash used for operating activities
from continuing operations for the three months ended March 31, 2021 and 2020 was $23 million and $159 million, respectively. Operating cash flow increased primarily due to higher net income, partially offset by unfavorable changes in working capital in the first quarter 2021 compared to the prior year.
Other uses of cash during the three months ended March 31, 2021 included:
•Capital expenditures, excluding acquisitions, of $80 million.
•Business acquisition cash spending (net of cash acquired) of $356 million.
•Cash dividends paid of $128 million.
In
March 2021, PPG completed a public offering of $700 million aggregate principal amount of 1.200% notes due 2026. These notes were issued 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"). 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, net of discounts and fees, was $692 million.
In
February 2021, PPG entered into a $2.0 billion Term Loan Credit Agreement (the "Term Loan Credit Agreement"). The Term Loan Credit Agreement provides the Company with the ability to borrow up to an aggregate principal amount of $2.0 billion on an unsecured basis. The Company may borrow term loans under the Term Loan Credit Agreement to finance cash consideration for the Company’s pending acquisition of up to all of the equity interests of Tikkurila, and to pay fees, costs and expenses related thereto. Following the Closing Date and from time to time prior to December 31, 2021, the Company
may make up to eleven additional borrowings of term loans under the Term Loan Credit Agreement, which may be used for working capital and general corporate purposes. The Term Loan Credit Agreement contains covenants that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Term Loan Credit Agreement matures and all outstanding borrowings are due and payable on the third anniversary of the date of the initial borrowing under the Agreement. There were no amounts outstanding under the Term Loan Credit Agreement as of March 31, 2021.
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 discussed 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 2020, PPG repaid $1.1 billion
of the Term Loan using cash on hand. In the first quarter 2021, PPG repaid the remaining $400 million of the Term Loan using cash on hand.
In August 2019, PPG amended and restated its five-year credit agreement (the “Credit Agreement”) with several banks and financial institutions. The Credit Agreement provides for a $2.2 billion unsecured revolving credit facility. The Company has the ability to increase the size of the Credit Agreement by up to an additional $750 million, subject to the receipt of lender commitments and other conditions precedent. The Credit Agreement will terminate on August 30, 2024. The Company has the right, subject to
certain conditions set forth in the Credit Agreement, to designate certain subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement. In March 2020, PPG borrowed $800 million under the Credit Agreement and repaid that amount in full in April 2020. There were no amounts outstanding under the credit agreement as of March 31, 2021 and December 31, 2020.
The
Term Loan Credit Agreement and Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan Credit Agreement and Credit Agreement, of 60% or less; provided, that for any fiscal quarter in which the Company has made an acquisition for consideration in excess of $1 billion and for the next five fiscal quarters thereafter, the ratio of Total Indebtedness to Total Capitalization may not exceed 65% at any time. As of March 31, 2021, Total Indebtedness to Total Capitalization as defined under the Credit Agreement and Term Loan Credit Agreement was 48%.
The Credit Agreement also supports the
Company’s commercial paper borrowings which are classified as long-term based on PPG’s intent and ability to refinance these borrowings on a long-term basis. Commercial paper borrowings of $550 million and $250 million were outstanding as of March 31, 2021 and December 31, 2020, respectively.
Total capital spending in 2021 is expected to be approximately $450 million, reflecting a return to pre-pandemic levels of spending in support of future organic growth opportunities. PPG expects to make mandatory contributions to its non-U.S. pension plans in the range of $10 million to $15 million during the remaining nine months of 2021. PPG may make voluntary contributions to its defined benefit pension plans in 2021 and beyond.
A primary focus for the
Company in 2021 will continue to be cash deployment focused on shareholder value creation, with a preference for business acquisitions. The near-term cash deployment priority will be to complete the announced acquisitions using a combination of cash on hand and external financing.
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).
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.
Cash
outlays for environmental remediation activities
$9
$25
($ in millions)
Remainder of 2021
Annually 2022 - 2025
Projected future cash
outlays for environmental remediation activities
$70 - $90
$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. PPG recognized $45 million of savings from this program in 2020. 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 $60 million of savings from this program in 2020. 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 $10 million of savings from this program in 2020. We expect to achieve annualized cost savings from the 2018 program of $85 million once fully implemented in 2021.
Aggregate restructuring savings related to the 2020, 2019 and 2018 programs was approximately $35 million in the first quarter of 2021. Total restructuring savings are expected to be at least $120 million in 2021. In addition, the Company continues to review its cost structure to identify additional cost savings opportunities. See Note 6, “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, 2020 and at March 31, 2021, the U.S. dollar strengthened against currencies of many countries within the regions PPG operates. As a result, consolidated net assets at March 31, 2021 decreased by $126 million compared to December 31, 2020 primarily driven by the Euro and the Mexican peso.
Comparing average exchange rates during the first three months of 2021 to those of the first three months of 2020, the U.S. dollar weakened against currencies of most countries within the EMEA and Asia Pacific regions PPG operates. This had a favorable impact on Income before income taxes for the three months ended March
31, 2021 of $13 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 14, “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 14, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims, will not have a material effect on PPG's consolidated financial
position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
As also discussed in Note 14, PPG has significant reserves for environmental contingencies. Please refer to the Environmental Matters section of Note 14 for details of these reserves. A significant portion of our reserves for environmental contingencies relate to ongoing remediation at PPG's former chromium manufacturing plant in Jersey City, N.J. and associated sites ("New Jersey Chrome"). There are multiple, future events yet to occur, including further remedy selection and design, remedy implementation and execution and applicable governmental agency or community organization approvals. Considerable uncertainty exists regarding the timing of these future events for the New Jersey Chrome sites.
Further resolution of these events is expected to occur over the next several years. As these events occur and to the extent that the cost estimates of the environmental remediation remedies change, the existing reserve for this environmental remediation matter will continue to be adjusted.
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 and the pace of recovery from the pandemic, global economic conditions, increasing price and product competition by foreign and domestic competitors, fluctuations in cost and availability of raw materials, the ability to achieve selling price increases, the ability to recover margins, customer inventory levels, our ability to maintain
favorable supplier relationships and arrangements, the timing of and the realization of anticipated cost savings from restructuring initiatives, the ability to identify additional cost savings opportunities, the timing and expected benefits of our acquisitions, difficulties in integrating acquired businesses and achieving expected synergies therefrom, economic and political conditions in the markets we serve, the ability to penetrate existing, developing and emerging foreign and domestic markets, foreign exchange rates and fluctuations in such rates, fluctuations in tax rates, the impact of future legislation, the impact of environmental regulations, unexpected business disruptions, the effectiveness of our internal control over financial reporting, the results of governmental investigations, and the 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 2020 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 2020 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 March 31, 2021 and December 31, 2020, PPG had non-U.S. dollar denominated borrowings outstanding of $2.4 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 March 31, 2021 and $273 million at December
31, 2020, respectively.
The fair values of foreign currency forward contracts outstanding at March 31, 2021 and December 31, 2020 were net assets of $9 million and $2 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 three months ended March 31, 2021 was $277 million and $226 million for the year ended December 31, 2020.
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 $19 million and a net liability of $8 million at March 31, 2021 and December 31, 2020, 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 $91 million and $95 million at March 31, 2021 and December 31, 2020, 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 values of these contracts
were assets of $44 million and $67 million as of March 31, 2021 and December 31, 2020, respectively. An increase in variable interest rates of 10% would lower the fair values of these swaps and increase interest expense by $1 million for both periods ended March 31, 2021 and December 31, 2020. 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 had an insignificant effect on PPG's variable rate debt obligations and interest expense for the periods ended March 31, 2021 and December 31, 2020. Further a 10% reduction in interest rates would have increased the fair value of the
Company's fixed rate debt by approximately $60 million and $48 million at March 31, 2021 and December 31, 2020, 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, 2020 to March 31, 2021. See Note 12, “Financial Instruments, Hedging Activities and Fair Value Measurements” for a description of our instruments subject to market risk.
Item 4.
Controls and Procedures
a. Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
PPG ("the Company") 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. These lawsuits and claims
may relate to contract, patent, environmental, product liability, asbestos exposure, antitrust, employment, securities and other matters arising out of the conduct of PPG’s current and past business activities. To the extent these lawsuits and claims involve personal injury, property damage and certain other claims, PPG believes it has adequate insurance; however, certain of PPG’s insurers are contesting coverage with respect to some of these claims, and other insurers may contest coverage. PPG’s lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental, asbestos and other matters.
As previously disclosed, the SEC is conducting a non-public investigation of accounting matters described in the Explanatory Note and in Note 2, “Restatement
of Previously Reported Consolidated Annual Financial Statements" under Item 8 of the Company’s 2017 Form 10-K/A. On September 26, 2019, PPG announced a final settlement
with the SEC as to the Company. Without admitting or denying the findings in the SEC’s administrative cease-and-desist order, the
Company consented to the entry of the order, which imposed no financial penalty. The Company continues to cooperate fully with the SEC’s ongoing investigation relating to these accounting matters. The Company is also cooperating fully with an investigation into the same accounting matters commenced by the U.S. Attorney’s Office for the Western District of Pennsylvania (“USAO”). As previously disclosed, the USAO has informed PPG that it will not pursue any action as to the Company.
On May 20, 2018, a putative securities class action lawsuit was filed in the U.S. District Court for the Central District of California against
the Company and three of its current and former officers. On September 21, 2018, an Amended Class Action Complaint was filed in the lawsuit. The Amended Complaint, captioned Trevor Mild v. PPG Industries, Inc., Michael H. McGarry, Vincent J. Morales, and Mark C. Kelly, asserted securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of persons who purchased or otherwise acquired stock of the Company between January 19, 2017 and May 10, 2018. The allegations related to, among other things, allegedly false and
misleading statements and/or failures to disclose information about the Company’s business, operations and prospects. The parties reached a settlement in principal on May 1, 2019. On June 2, 2019, the plaintiff filed with the court a Petition for Preliminary Approval of the proposed settlement, including the proposed settlement amount of $25 million. On November 22, 2019, the court entered final judgment approving the settlement. PPG’s insurance carriers fully funded the settlement escrow account and the court-approved settlement payments to class members were fully distributed by the claims administrator as of March 31, 2021.
From the late 1880’s
until the early 1970’s, PPG owned property located in Cadogan and North Buffalo Townships, Pennsylvania which was used for the disposal of solid waste from PPG’s former glass manufacturing facility in Ford City, Pennsylvania. In October 2018, the Pennsylvania Department of Environmental Protection (the “DEP”) approved PPG’s cleanup plan for the Cadogan Property. In April 2019, PPG and the DEP entered into a consent order and agreement (“CO&A”) which incorporated PPG’s approved cleanup plan and a draft final permit for the collection and discharge of seeps emanating from the former disposal area. The CO&A includes a civil penalty of $1.2 million for alleged past unauthorized discharges. PPG’s former disposal area is also the subject of a citizens’ suit filed by the Sierra Club and PennEnvironment seeking remedial measures beyond the measures specified in PPG’s approved cleanup plan, a civil penalty in addition to the penalty included in the CO&A
and plaintiffs’ attorneys fees. PPG and the plaintiffs settled plaintiffs’ claims for injunctive relief and PPG agreed to enhancements to the DEP approved cleanup plan and a $250,000 donation to a Pennsylvania nonprofit organization. This settlement has been memorialized by an amendment to the CO&A which was appended to a Consent Agreement between PPG and the plaintiffs which has been entered by the federal Court. The remaining claims in the case for attorneys’ fees and a civil penalty are not affected by this settlement. PPG believes that the remaining claims are without merit and intends to defend itself against these claims vigorously.
For many years, PPG has been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. For a description of asbestos litigation affecting the Company, see Note 14, “Commitments
and Contingent Liabilities” to the accompanying condensed consolidated financial statements under Part I, Item 1 of this Form 10-Q.
In the past, the Company and others have been named as defendants in several cases in various jurisdictions claiming damages related to exposure to lead and remediation of lead-based coatings applications. PPG has been dismissed as a defendant from most of these lawsuits and has never been found liable in any of these cases. After having not been named in a new lead-related lawsuit for 15 years, PPG was named as a defendant in two Pennsylvania state court lawsuits filed by Montgomery County and Lehigh County in the respective counties on October 4, 2018 and October 12, 2018. Both suits seek declaratory relief arising
out of alleged public nuisances in the counties associated with the presence of lead paint on various buildings constructed prior to 1980. The Company believes these actions are without merit and intends to defend itself vigorously.
Item 1A. Risk Factors
There were no material changes in the Company’s risk factors from the risks disclosed in the 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer
Purchases of Equity Securities
No shares were repurchased in the three months ended March 31, 2021 under the current $2.5 billion share repurchase program approved in December 2017. The maximum number of shares that may yet be purchased under this program is 10,051,620 shares as of March 31, 2021. This repurchase program has no expiration date.
*The instance document does not appear in the Interactive Data File because its XBRL (Extensible Business Reporting Language) tags are embedded within the Inline XBRL document.
**Attached as Exhibit 101 to this report are the following documents formatted in Inline XBRL: (i) the Condensed Consolidated Statement of Income for the three months ended March
31, 2021 and 2020, (ii) the Condensed Consolidated Balance Sheet at March 31, 2021 and December 31, 2020, (iii) the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2021 and 2020, and (iv) Notes to Condensed Consolidated Financial Statements for the three months ended March 31, 2021.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
