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14: R2 Condensed Consolidated Statement of Income HTML 133K
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15: R3 Condensed Consolidated Statement of Comprehensive HTML 60K
Income (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 September 30, 2020, i236,204,417
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 September 30, 2020, and the results of its operations and cash flows for the three and nine months ended September 30, 2020 and 2019.
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 2019 Annual Report on Form 10-K (the "2019 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 and nine months ended September 30, 2020 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 2020
Effective January 1, 2020, PPG adopted Accounting Standards Update (“ASU”) No. 2016-13, "Financial Instruments - Credit Losses." This ASU requires an organization to measure all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience,
current conditions, and reasonable and supportable information. Organizations will now use forward-looking information to better estimate their credit losses. PPG adopted this ASU using a modified retrospective approach. Under this method of adoption, PPG determined that there was no cumulative-effect adjustment to beginning Retained earnings on the condensed consolidated balance sheet. Adoption of this standard did not impact PPG’s Income before income taxes and had no impact on the condensed consolidated statement of cash flows. See Note 3, “Allowance for Credit Losses” for further details.
Effective January 1, 2020, PPG adopted ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). PPG adopted this ASU prospectively. Under this method of adoption, PPG determined there was not a material impact to the condensed consolidated balance sheet, Income before income taxes or the condensed consolidated statement of 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.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes." This ASU is intended to simplify various aspects related to accounting for income taxes by eliminating certain exceptions within Accounting Standards Codification Topic 740, "Income Taxes" and clarifies certain aspects of the current accounting guidance. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020 and for interim periods therein with early adoption permitted. PPG does not believe this ASU will have a material impact on its consolidated financial position, results of operations or cash flows.
3.iAllowance
for Credit Losses
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 nine months ended September 30, 2020:
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. During the third quarter of 2020, a customer filed for bankruptcy as a result of the COVID-19 pandemic and the trade receivables associated with that customer were written off against the previously established reserve. As of September 30, 2020, $i25 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.
4.iAcquisitions
On March 2, 2020, PPG completed the acquisition of Alpha Coating Technologies,
LLC, a manufacturer of powder coatings for light industrial applications and heat sensitive substrates. 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 industrial coatings business within the Industrial Coatings reportable business segment.
On January 31, 2020, PPG completed the acquisition of Industria Chimica Reggiana S.p.A ("ICR"), an Italian manufacturer of automotive refinish products. 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 automotive
refinish coatings business within the Performance Coatings reportable business segment.
On August 14, 2019, PPG completed the acquisition of Dexmet Corporation, a specialty materials manufacturer. Headquartered in Wallingford, Connecticut, Dexmet Corporation specializes in customized, highly-engineered, expanded and perforated metal foils and polymers used for structural 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 aerospace coatings business within the Performance Coatings reportable segment.
On April 16, 2019, PPG completed the acquisition of Hemmelrath,
a global manufacturer of coatings for automotive original equipment manufacturers ("OEMs"). 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 automotive OEM coatings business within the Industrial Coatings reportable business segment.
On March 1, 2019, PPG completed the acquisition of Whitford Worldwide Company ("Whitford"), a
global manufacturer that specializes in low-friction and nonstick coatings for industrial applications and consumer products. Whitford operates 10 manufacturing facilities globally. The pro-forma impact on PPG's sales and results of operations, including the proforma 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 industrial coatings business within the Industrial Coatings reportable business segment.
Most
U.S. inventories are valued using the last-in, first-out method. These inventories represented approximately i34% of total inventories at September 30, 2020 and December 31, 2019. If the first-in, first-out method of inventory valuation had been used, inventories would have been $i111
million and $i124 million higher as of September 30, 2020 and December 31, 2019, respectively.
6.iGoodwill
and Other Identifiable Intangible Assets
The Company tests indefinite-lived intangible assets and goodwill for impairment by either performing a qualitative evaluation or a quantitative test at least annually, or more frequently if an indication of impairment arises. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit or asset is less than its carrying amount.
Throughout the year, the Company has evaluated the effects of the COVID-19 pandemic and its negative impact on the global economy on each of the Company’s reporting
units and indefinite-lived intangible assets. Management reviews key assumptions, including revisions of projected future revenues for reporting units and the results of the previous annual impairment testing performed during the fourth quarter of 2019. The Company did not identify an indication of impairment for each of its reporting units and indefinite-lived intangible assets. Although it was determined that a triggering event had not occurred as of September 30, 2020, the Company will continue to monitor the impacts of the COVID-19 pandemic on the Company and significant changes in key assumptions that could result in future period impairment charges.
i
The
change in the carrying amount of goodwill attributable to each reportable segment for the nine months ended September 30, 2020 was as follows:
The
Company’s identifiable intangible assets with definite lives are being amortized over their estimated useful lives.
i
As of September 30, 2020, estimated future amortization expense of identifiable intangible assets is as follows:
($
in millions)
Future Amortization Expense
Remaining three months of 2020
$i35
2021
$i125
2022
$i125
2023
$i110
2024
$i90
2025
$i85
Thereafter
$i296
/
7.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 17 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 includes a voluntary separation
program that was offered in the U.S. and Canada. A pretax restructuring charge of $i176 million was recorded in PPG's second quarter 2020 financial results. This charge represents employee severance and other cash costs. The majority of restructuring actions are expected to be completed by the end of 2020 with the remainder of the actions expected to be completed in 2021.
2019 and 2018 Restructuring Programs
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 now expected to be completed by the end of the first 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 now expected to be completed by the end of the fourth quarter of 2020.
i
The following table summarizes the reserve activity for the nine months ended September 30, 2020 and 2019:
Total
Reserve
($ in millions)
2020
2019
January 1
$i224
$i110
Approved
restructuring actions (a)
i198
i194
Release
of prior reserves and other adjustments
(i26)
(i19)
Cash
payments
(i98)
(i35)
Foreign
currency impact
i10
(i8)
September
30
$i308
$i242
/
(a) In
the first quarter of 2020, additional programs were approved by management and charges of $i22 million were recorded in PPG's financial results.
8.iBorrowings
In August 2020, PPG completed a public offering of $i100 million aggregate principal amount of i3.75% notes due March 2028.
These notes were issued as additional notes pursuant to PPG’s existing shelf registration statement and pursuant to the Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented (the "Indenture"), which is is the same Indenture pursuant to which we previously issued $i700 million
in aggregate principle amount of our i3.75% notes due March 2028 on February 27, 2018. The new notes will be treated as a single series of notes with the existing notes under indenture, have the same CUSIP number as the existing notes, and be fungible with the existing notes for US federal income tax purposes. The Indenture governing these notes
contains covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets. The terms of these notes also require the Company to make an offer to repurchase the notes upon a Change of Control Triggering Event (as defined in the Indenture) at a price equal to 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, including the premium received at issuance, net of fees, was $i119 million.
In June 2020, PPG completed an early redemption of the $i500 million
i3.6% notes due November 2020 using proceeds from the May 2020 public offering and cash on hand. The Company recorded a charge of $i7 million
in the second quarter for the debt redemption which consists of the aggregate make-whole cash premium of $i6 million and a balance of unamortized fees and discounts of $i1 million
related to the debt redeemed.
In May 2020, PPG completed a public offering of $i300 million aggregate principal amount of i2.55%
notes due 2030. These notes were issued pursuant to PPG’s existing shelf registration statement and pursuant to the Indenture. The Indenture governing these notes contains covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets. The terms of these notes also require the Company to make an offer to repurchase 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 $i296 million.
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 described below
and that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. In September 2020, PPG repaid
$i1.0 billion
of the Term Loan using cash on hand. The remaining Term Loan terminates and all amounts outstanding are payable on April 13, 2021.
In 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 September 30, 2020 and December 31, 2019.
The Term Loan and Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan and Credit Agreement, of i60%
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 September 30, 2020, Total Indebtedness to Total Capitalization as defined under the Credit Agreement and Term Loan 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. There were ino
commercial paper borrowings outstanding as of September 30, 2020. Commercial paper borrowings of $i100 million were outstanding as of December 31, 2019.
9.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 and nine months ended September 30, 2020 and 2019 were as follows:
Three
Months Ended September 30
Nine Months Ended September 30
(number of shares in millions)
2020
2019
2020
2019
Weighted average common shares outstanding
i236.8
i237.1
ii236.6/
ii236.9/
Effect
of dilutive securities:
Stock options
i0.5
i0.7
ii0.4/
ii0.6/
Other
stock compensation plans
i0.6
i0.7
ii0.7/
ii0.7/
Potentially
dilutive common shares
i1.1
i1.4
ii1.1/
ii1.3/
Adjusted
weighted average common shares outstanding
i237.9
i238.5
ii237.7/
ii238.2/
Dividends
per common share
$i0.54
$i0.51
$ii1.56/
$ii1.47/
/
Excluded
from the computation of earnings per diluted share due to their antidilutive effect were i1.5 million and ii2.0/ million
outstanding stock options for the three and nine months ended September 30, 2020, respectively, and i1.0 million outstanding stock options for both the three and nine months ended September 30, 2019.
10.iIncome
Taxes
i
Nine Months Ended September 30
2020
2019
Effective
tax rate on pretax income
i22.0
%
i23.5
%
/
The
effective tax rate of i22.0% for the nine months ended September 30, 2020 reflects a benefit of $i38 million of
discrete items associated with PPG's U.S. and foreign jurisdictions. Income tax expense for the first nine months of 2020 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 nine months ended September 30, 2019 reflects $i23 million for discrete items associated with PPG's U.S. and foreign locations and implementation of updated regulations associated with the 2017 Tax Cuts and Jobs Act for Global Intangible Low Taxed
Income.
During the year, PPG management regularly updates forecasted annual pretax results for the various countries in which PPG operates based on changes in factors such as prices, shipments, product mix, raw material inflation and manufacturing operations. To the extent that actual 2020 pretax results for U.S. and foreign income or loss vary from estimates, the actual Income tax expense recognized in 2020 could be different from the forecasted amount used to estimate the Income tax expense for the nine months ended September 30, 2020.
11.iPensions
and Other Postretirement Benefits
Service cost for net periodic pension and other postretirement benefit costs is included in Cost of sales, exclusive of depreciation and amortization, Selling, general and administrative, and Research and development, net in the accompanying condensed consolidated statements of income. All other components of net periodic benefit cost are recorded in Other charges in the accompanying condensed consolidated statements of income.
i
The net periodic pension and other postretirement
benefit costs for the three and nine months ended September 30, 2020 and 2019 were as follows:
Pension
Three
Months Ended September 30
Nine Months Ended September 30
($ in millions)
2020
2019
2020
2019
Service cost
$i6
$i6
$i18
$i17
Interest
cost
i22
i26
i65
i79
Expected
return on plan assets
(i36)
(i35)
(i108)
(i105)
Amortization
of actuarial losses
i17
i16
i53
i47
Curtailments
i—
i—
i1
i—
Net
periodic benefit cost
$i9
$i13
$i29
$i38
/
Other
Postretirement Benefits
Three Months Ended September 30
Nine Months Ended September 30
($ in millions)
2020
2019
2020
2019
Service
cost
$i2
$i3
$i7
$i7
Interest
cost
i5
i6
i15
i19
Amortization
of actuarial losses
i4
i2
i12
i6
Amortization
of prior service credit
(i14)
(i14)
(i44)
(i43)
Net
periodic benefit cost
($i3)
($i3)
($i10)
($i11)
PPG
expects its 2020 net periodic pension and other postretirement benefit cost will be approximately $i25 million, with pension expense representing approximately $i40 million
and other postretirement benefit cost representing a benefit of approximately $i15 million.
Contributions to Defined Benefit Pension Plans
i
Three
Months Ended September 30
Nine Months Ended September 30
($ in millions)
2020
2019
2020
2019
Non-U.S. defined
benefit pension mandatory contributions
$i2
$i2
$i7
$i8
/
PPG
expects to make mandatory contributions to its non-U.S. pension plans in the range of $i5 million to $i10
million during the remaining three months of 2020. PPG may make voluntary contributions to its defined benefit pension plans in 2020 and beyond.
(a)Except
for income taxes of $i7 million and $i6 million
as of September 30, 2020 and 2019, respectively, 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 benefit (cost) related to unrealized foreign currency translation adjustments on tax inter-branch transactions and net investment hedges as of September 30, 2020 and 2019
was $i27 million and $(i39) million,
respectively.
(c)The tax cost related to the adjustment for pension and other postretirement benefits as of September 30, 2020 and 2019 was $i5 million and $i2 million,
respectively. Reclassifications from AOCI are included in the computation of net periodic benefit costs (See Note 11, "Pensions and Other Postretirement Benefits").
//
13.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 September 30, 2020 and December 31, 2019, 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 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 and nine month periods ended
September 30, 2020 and 2019.
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 and nine month periods
ended September 30, 2020 and 2019 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 nine month periods ended September 30, 2020 and 2019 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 $i74 million and $i35 million
at September 30, 2020 and December 31, 2019, 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 September 30, 2020. The underlying notional amounts relating to foreign currency forward contracts were $i43
million at December 31, 2019. As of December 31, 2019, the fair value of all foreign currency forward contracts designated as cash flow hedges was a liability of $i1 million.
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 September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, the fair value of the U.S. dollar to euro cross currency swap contracts was a net asset of $i34 million
and a net asset of $i48 million, respectively.
As of September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019 was $i2.3 billion and $i2.2
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 $i1.1 billion
and $i2.8 billion at September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020 and December 31, 2019 the fair value of these contracts was a net a net liability of $i3 million
and $i6 million, respectively.
Gains/Losses Deferred in Accumulated Other Comprehensive Loss
As of September 30, 2020, the Company had accumulated pretax unrealized translation gains in Accumulated other comprehensive loss on the condensed consolidated balance sheet related
to the euro-denominated borrowings, foreign currency forward contracts and the cross currency swaps of $i120 million. As of December 31, 2019, the Company had accumulated pretax unrealized translation gains of $i235
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 nine months ended September 30, 2020 and 2019. 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 September 30, 2020 and December 31, 2019, 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 13, "Employee Benefit Plans" under Item 8 in the 2019 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 September 30, 2020 and December 31, 2019 that are classified as Level 3 inputs.
(a)
Excluding finance lease obligations of $i9 million and short-term borrowings of $i540 million as of September
30, 2020.
/
(b) Excluding finance lease obligations of $i11 million and short-term borrowings of $i10
million as of December 31, 2019.
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.
14.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 i6.2
million as of September 30, 2020.
i
Stock-based compensation and the income tax benefit recognized during the three and nine months ended September 30, 2020 and 2019 were as follows:
Grants of stock-based compensation during the nine months ended September 30, 2020 and 2019 were as follows:
Nine
Months Ended September 30
2020
2019
Grant Details
Shares
Fair Value
Shares
Fair Value
Stock
options
i663,485
$i21.93
i588,870
$i22.50
Restricted
stock units
i203,574
$i109.99
i233,306
$i104.69
Contingent
shares (a)
i55,319
$i119.52
i51,850
$i109.74
(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 nine months ended September 30, 2020 was calculated with the following weighted average assumptions:
Weighted
average exercise price
$i119.52
Risk free interest rate
i1.6
%
Expected
life of option in years
i6.5
Expected dividend yield
i1.5
%
Expected
volatility
i20.0
%
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 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 and 2018, 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 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 and 2018, 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.
15.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 are expected to be distributed by the claims administrator in late 2020 or early 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 September 30, 2020, the Company was aware of approximately i600
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.
These reserves also include PPG’s best estimate, following an analysis performed in 2019 of its claims history and discussions with consultants and its counsel, of the value of the Company’s potential liability for premises-related non-PC Relationship Claims against it and claims against PPG’s subsidiary acquired on April 1,
2013 that are presently pending, and that are projected to be asserted through December 31, 2028.
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 14, "Commitments and Contingent Liabilities," under Item 8 of the 2019 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 2020 and 2019, 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 September 30, 2020 and December 31, 2019, 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 and nine months ended September 30, 2020 and 2019 were as follows:
Three
Months Ended September 30
Nine Months Ended September 30
($ in millions)
2020
2019
2020
2019
Environmental remediation pretax charges
$i6
$i24
$i21
$i75
Cash
outlays for environmental remediation activities
$i15
$i21
$i52
$i57
/
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 i14
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. 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. The reserve adjustments for the estimated costs to remediate all New Jersey Chrome sites are exclusive of any third party indemnification, as the recovery of any such amounts is uncertain.
Groundwater remediation at the former Garfield Avenue chromium manufacturing site and five adjacent sites is expected to occur over several years. Ongoing groundwater monitoring will be utilized to develop a final groundwater remedial action work plan which is currently expected to be submitted to NJDEP in the
fourth quarter of 2020.
PPG’s financial reserve for remediation of all New Jersey Chrome sites was $i99 million at September 30, 2020. 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 i20%,
i15% and i37% 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.
Other Matters
The Company had outstanding letters of credit and surety bonds of $i137
million and guarantees of $i9 million as of September 30, 2020. The Company does not believe any loss related to such guarantees is likely.
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 and nine months ended September 30, 2020 and 2019, service revenue constituted approximately
i5% of total revenue.
i
Net sales by segment and region for the three and nine months ended September 30, 2020
and 2019 were as follows:
PPG is a multinational manufacturer with i9
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, and protective and marine coatings 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, 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.
i
Reportable business segment net sales and segment income for the three and nine months ended September 30, 2020 and 2019 were as follows:
Three
Months Ended September 30
Nine Months Ended September 30
($ in millions)
2020
2019
2020
2019
Net sales:
Performance
Coatings
$i2,251
$i2,313
$i6,328
$i6,851
Industrial
Coatings
i1,434
i1,513
i3,749
i4,623
Total
$i3,685
$i3,826
$i10,077
$i11,474
Segment
income:
Performance Coatings
$i426
$i380
$i1,060
$i1,102
Industrial
Coatings
i253
i206
i468
i659
Total
$i679
$i586
$i1,528
$i1,761
Corporate
(i55)
(i43)
(i165)
(i134)
Interest
expense, net of interest income
(i30)
(i23)
(i89)
(i76)
Business
restructuring-related costs, net (a)
(i14)
(i18)
(i200)
(i203)
Expenses
incurred due to a natural disaster(b)
(i8)
i—
(i8)
i—
Debt
extinguishment charge
i—
i—
(i7)
i—
Environmental
remediation charges
i—
(i21)
(i12)
(i61)
Increase
in allowance for doubtful accounts related to COVID-19
i—
i—
(i30)
i—
Costs
associated with accounting investigations
i—
i—
i—
(i7)
Acquisition-related
costs (c)
i—
i—
i—
(i17)
Income
before income taxes
$i572
$i481
$i1,017
$i1,263
(a)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.
(b)In the third quarter 2020, Hurricane Laura caused damages to a southern U.S. factory that supports the Company's specialty coatings and materials business.
(c)Acquisition-related costs include advisory, legal, accounting, valuation, and other professional or consulting fees 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.
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 2019 Form 10-K.
Executive Overview
During the quarter, Hurricane Laura caused significant damages to a PPG factory that supports the Company’s specialty coatings and materials business. The net earnings impact of the damage to PPG's assets was $8 million in the third quarter 2020. These costs were reported as a natural-disaster-related charge excluded from adjusted net income in the third quarter. Additionally, the
company estimated lost revenue of $7 million due to the production interruption from late August to late September. Although production resumed at the end of the third quarter, the facility shut down again in early October due to another hurricane at the production site. It is expected that fourth quarter sales could be impacted by a similar amount to that of the third quarter due to issues caused by both weather events.
Below are our key financial results for the three months ended September 30, 2020:
•Net sales were approximately $3.7 billion, down 3.7% compared to the prior year.
•Cost of sales, exclusive of depreciation and amortization ("Cost of sales") was $2.0 billion, down 7.1% versus prior year primarily due to lower sales
volumes as a result of COVID-19 and lower manufacturing costs. As a percentage of sales, Cost of sales decreased 2.0%.
•Selling, general and administrative ("SG&A") expense was $836 million, down 5.7% year-over-year due to cost mitigation initiatives. As a percentage of sales, SG&A expense decreased 0.5%.
•Income before income taxes was $572 million.
•The reported effective tax rate was 21.7%. The adjusted effective tax rate was 21.9%.
•Net income from continuing operations attributable to PPG was $442 million.
•Earnings per diluted share from continuing operations attributable to PPG was $1.86.
As a result of COVID-19 and reduced global economic activity, lower sales volumes resulted in lower net sales in both reportable business segments. Higher selling prices partially offset this downturn.
For specific business results, see the Performance of Reportable Business Segments section within Item 2 of this Form 10-Q.
Cost of Sales, exclusive of depreciation and amortization
Three
Months Ended September 30
Percent Change
($ in millions, except percentages)
2020
2019
2020 vs. 2019
Cost of sales, exclusive of depreciation and amortization
$2,026
$2,181
(7.1)
%
Cost
of sales as a percentage of net sales
55.0
%
57.0
%
(2.0)
%
Cost of sales, exclusive of depreciation and amortization, decreased $155 million primarily due to the following:
● Lower sales volumes
Partially offset by:
● Cost of sales attributable to acquired businesses
Selling, general and administrative expenses
Three
Months Ended September 30
Percent Change
($ in millions, except percentages)
2020
2019
2020 vs. 2019
Selling, general and administrative expenses (SG&A)
$836
$887
(5.7)
%
Selling,
general and administrative expenses as a percentage of net sales
22.7
%
23.2
%
(0.5
%)
SG&A expense decreased $51 million primarily due to the following:
● Cost savings initiatives, including restructuring actions
Other costs and other income
Three
Months Ended September 30
Percent Change
($ in millions, except percentages)
2020
2019
2020 vs. 2019
Interest expense, net of Interest income
$30
$23
30.4
%
Other
charges
$21
$26
(19.2)
%
Other income
($24)
($14)
71.4
%
Interest expense, net of Interest income
Interest expense, net of Interest income was higher in the three months ended September
30, 2020 due to the $1.5 billion 364-day term loan credit agreement entered into in April 2020. As of September 30, 2020, $500 million remains outstanding under this agreement.
Other charges
Other charges were lower in the three months ended September 30, 2020 compared to prior year due to lower environmental remediation charges during the quarter.
The
effective tax rate for the three months ended September 30, 2020 reflects the impact of certain discrete tax items for the quarter. The Company expects that its fourth quarter 2020 effective tax rate will be between 18% and 21%, including potential favorable discrete tax items.
Adjusted earnings per diluted share for the three months ended September 30, 2020 increased year-over-year due to the items described further in the Regulation G reconciliation.
Regulation G Reconciliations - Results from Operations
PPG believes investors' understanding of the Company’s performance
is enhanced by the disclosure of net income from continuing operations, earnings per diluted share from continuing operations and PPG's effective tax rate adjusted for certain items. PPG’s management considers this information useful in providing insight into the Company’s ongoing performance because it excludes the impact of items that cannot reasonably be expected to recur on a quarterly basis or that are not attributable to our primary operations. Net income from continuing operations, earnings per diluted share from continuing operations and the effective tax rate adjusted for these items are not recognized financial measures determined in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and should not be considered a substitute for net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate
or other financial measures as computed in accordance with U.S. GAAP. In addition, adjusted net income, adjusted earnings per diluted share and the adjusted effective tax rate may not be comparable to similarly titled measures as reported by other companies.
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
$481
$109
22.7
%
$366
$1.54
Adjusted for:
Business
restructuring-related costs, net (b)
18
4
23.3
%
14
0.06
Environmental remediation charges, net
21
5
25.2
%
16
0.07
Adjusted,
continuing operations, excluding certain items
$520
$118
22.7
%
$396
$1.67
(a) Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.
(b) Included in business restructuring-related costs, net are business restructuring charges, accelerated depreciation of certain assets and other related
costs, offset by releases related to previously approved programs.
(c) In the third quarter 2020, Hurricane Laura caused damages to a southern U.S. factory that supports the Company's specialty coatings and materials business.
Performance of Reportable Business Segments
Performance Coatings
Three
Months Ended September 30
$ Change
% Change
($ in millions, except per share amounts)
2020
2019
2020 vs. 2019
2020 vs. 2019
Net sales
$2,251
$2,313
($62)
(2.7)
%
Segment
income
$426
$380
$46
12.1
%
Performance Coatings net sales decreased due to the following:
● Lower sales volumes (-5%)
Partially offset by:
● Higher selling prices (2%)
● Acquisition-related sales (1%)
Architectural coatings - Americas and Asia Pacific net sales, excluding
the impact of currency and acquisitions ("organic sales") increased a low-single-digit percentage with differences by channel and region. Sales volumes were mixed by channel during the quarter, including the unfavorable impact of inclement weather in the southern U.S. and lower commercial repaint activity impacting the company-owned stores channel. Despite challenging economic conditions in Mexico, the PPG Comex architectural coatings business organic sales increased by a mid-single-digit percentage compared to the prior year as most concessionaire locations have reopened after mandated shutdowns.
Architectural coatings – EMEA organic sales increased by about 10%, driven in part by strong consumer demand after many countries permitted retail stores to reopen after mandatory closures during the second quarter.
Sales volumes for automotive refinish coatings declined about 10% versus prior year, despite strong sales volumes in China during the quarter. Higher selling prices were more than offset by lower sales volumes in each region reflecting lower collision claims in the U.S. and continued lower traffic density in most of the world.
Aerospace coatings sales volumes decreased about 35% year-over-year due to a sharp decline in commercial OEM and after-market demand due to lower airline activity. Net sales benefited from consistent military demand year-over-year and acquisition-related sales from Texstars and Dexmet.
Sales volumes in the protective and marine coatings business were down a mid-single-digit percentage driven by lower sales volumes in all regions, with the exception of Asia Pacific, driven by continued weak
demand in the oil and gas sector and project delays.
Segment income increased $46 million year-over-year due to the execution of cost-mitigation efforts, higher selling prices, and restructuring initiatives, partially offset by lower sales volumes related to the pandemic.
Looking Ahead
Looking ahead for the Performance Coatings segment, net sales are expected to be lower year-over-year by a mid-single-digit percentage, with continued sharper declines in the commercial aerospace coatings businesses. Overall segment sales are anticipated to be lower sequentially due to normal seasonality. Lastly, acquisitions are forecast to add about $15 million of net sales primarily from Texstars and ICR, and foreign currency translation is expected to have an unfavorable impact on segment sales and earnings of about $10 million to $20 million and $5
million, respectively, based on recent exchange rates.
Industrial Coatings
Three Months Ended September 30
$ Change
%
Change
($ in millions, except per share amounts)
2020
2019
2020 vs. 2019
2020 vs. 2019
Net sales
$1,434
$1,513
($79)
(5.2)
%
Segment
income
$253
$206
$47
22.8
%
Industrial Coatings segment net sales decreased due to the following:
● Lower sales volumes (-5%)
Automotive OEM coatings sales volumes were flat year-over-year driven by strong year-over-year automotive OEM retail sales in China and improving production build rates in the U.S. and Europe. In addition, sales volumes were strongest in China, increasing by a low-teen-percentage compared
to the prior year third quarter.
For the industrial coatings business, net sales decreased by a mid-single-digit percentage year-over-year due to mixed demand by sub-segment. Electronic materials and appliances had strong year-over-year growth, and sales volumes in China were higher than the prior year.
Packaging coatings organic sales decreased by a low-single-digit percentage year-over-year as strong demand in the U.S. and Latin America was offset by softer aggregate demand in Asia and Europe.
Segment income increased $47 million year-over-year due to cost-mitigation actions and restructuring cost savings.
Looking ahead
Looking ahead for the Industrial Coatings segment, on a sequential basis, demand is expected to be modestly better in the fourth
quarter compared to the third quarter, but likely will remain below prior-year levels. Aggregate net sales for the business segment are expected to be lower by a low-single-digit percentage and it is anticipated that selling prices will be flat. Based on current exchange rates, foreign currency translation is not expected to have a significant impact on segment sales or earnings for the third quarter. All businesses are focusing on strong cost management and cost mitigation actions along with cash flow optimization.
Performance
in the first nine months of 2020 compared to the first nine months of 2019
Performance Overview
Net Sales by Region
Nine Months Ended September 30
Percent Change
($ in millions, except percentages)
2020
2019
2020
vs. 2019
United States and Canada
$4,269
$4,964
(14.0)
%
EMEA
3,158
3,496
(9.7)
%
Asia-Pacific
1,697
1,870
(9.3)
%
Latin
America
953
1,144
(16.7)
%
Total
$10,077
$11,474
(12.2)
%
Net sales decreased $1,397 million due to the following:
● Lower sales volumes (-13%)
● Unfavorable foreign
currency translation (-2%)
Partially offset by:
● Higher selling prices (2%)
● Acquisition-related sales (1%)
As a result of COVID-19 and reduced global economic activity, lower sales volumes and unfavorable foreign currency translation reduced net sales in each region and in both reportable business segments. Higher selling prices and acquisition-related sales partially offset this downturn.
Foreign currency translation decreased net sales by approximately $210 million as the U.S. dollar strengthened against several foreign currencies versus the prior year, most notably the Mexican peso.
For specific business results, see the Performance of Reportable Business Segments section within Item 2 of this
Form 10-Q.
Cost of Sales, exclusive of depreciation and amortization
Nine Months Ended September 30
Percent Change
($ in millions, except percentages)
2020
2019
2020
vs. 2019
Cost of sales, exclusive of depreciation and amortization
$5,637
$6,542
(13.8)
%
Cost of sales as a percentage of net sales
55.9
%
57.0
%
(1.1)
%
Cost
of sales, exclusive of depreciation and amortization, decreased $905 million primarily due to the following:
● Lower sales volumes
● Foreign currency translation
Partially offset by:
● Cost of sales attributable to acquired businesses
Selling, general and administrative expenses
Nine
Months Ended September 30
Percent Change
($ in millions, except percentages)
2020
2019
2020 vs. 2019
Selling, general and administrative expenses (SG&A)
$2,507
$2,710
(7.5)
%
Selling,
general and administrative expenses as a percentage of net sales
24.9
%
23.6
%
1.3
%
SG&A expense decreased $203 million primarily due to the following:
● Cost savings initiatives, including restructuring actions
● Foreign currency translation
Partially offset by:
● Charge for potential uncollectible accounts related to COVID-19 incurred in the first quarter of 2020
Interest expense, net of Interest income was higher in the nine months ended September 30, 2020 due to the $1.5 billion 364-day term loan credit agreement entered into in April 2020. As of September 30, 2020, $500 million remains outstanding under this agreement.
Other charges
Other charges were lower in the nine months ended September 30, 2020 compared to prior year due to lower environmental remediation charges, offset by a debt extinguishment charge related to the early retirement of debt in the second quarter 2020.
The
effective tax rate for the nine months ended September 30, 2020 reflects the impact of certain discrete tax items. The Company expects that its full year 2020 effective tax rate will be between 21% and 23%.
Adjusted earnings per diluted share for the nine months ended September 30, 2020 decreased year-over-year due to the items described further in the Regulation G reconciliation.
Regulation G Reconciliation - Results from Operations
PPG believes investors' understanding of the Company’s performance is enhanced by the disclosure of net income from continuing operations, earnings
per diluted share from continuing operations and PPG's effective tax rate adjusted for certain items. PPG’s management considers this information useful in providing insight into the Company’s ongoing performance because it excludes the impact of items that cannot reasonably be expected to recur on a quarterly basis or that are not attributable to our primary operations. Net income from continuing operations, earnings per diluted share from continuing operations and the effective tax rate adjusted for these items are not recognized financial measures determined in accordance with U.S. GAAP and should not be considered a substitute for net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate or other financial measures as computed in accordance with U.S. GAAP. In addition, adjusted net income, adjusted earnings per diluted share
and the adjusted effective tax rate may not be comparable to similarly titled measures as reported by other companies.
Income before income taxes from continuing operations is reconciled to adjusted income before income taxes from continuing operations, the effective tax rate from continuing operations is reconciled to the adjusted effective tax rate from continuing operations and net income from continuing operations (attributable to PPG) and earnings per share – assuming dilution (attributable to PPG) are reconciled to adjusted net income from continuing operations (attributable to PPG) and adjusted earnings per share – assuming dilution below:
($ in millions, except percentages and per share amounts)
Income Before Income Taxes
Tax Expense
Effective Tax Rate
Net income from continuing operations (attributable to PPG)
Earnings per diluted share(a)
As
reported, continuing operations
$1,263
$297
23.5
%
$948
$3.98
Adjusted for:
Business
restructuring-related costs, net (b)
203
49
24.1
%
154
0.65
Environmental remediation charges, net
61
14
23.0
%
47
0.20
Acquisition-related
costs
17
4
23.5
%
13
0.05
Costs associated with accounting investigations
7
2
28.6
%
5
0.02
Adjusted,
continuing operations, excluding certain items
$1,551
$366
23.6
%
$1,167
$4.90
(a) Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.
(b) Included in business restructuring-related costs, net are business restructuring charges, accelerated depreciation of certain assets and other related
costs, offset by releases related to previously approved programs.
(c) In the third quarter 2020, Hurricane Laura caused damages to a southern U.S. factory that supports the Company's specialty coatings and materials business.
Performance of Reportable Business Segments
Performance Coatings
Nine
Months Ended September 30
$ Change
% Change
($ in millions, except per share amounts)
2020
2019
2020 vs. 2019
2020 vs. 2019
Net sales
$6,328
$6,851
($523)
(7.6)
%
Segment
income
$1,060
$1,102
($42)
(3.8)
%
Performance Coatings net sales decreased due to the following:
Architectural coatings - Americas and Asia Pacific net sales decreased a low-single-digit percentage during the first nine months of the year with differences by channel and region. Higher DIY sales volumes were more than offset by the unfavorable impact of retail store shutdowns in the U.S., Canada and Mexico and unfavorable foreign currency translation driven by the Mexican peso.
Architectural coatings – EMEA organic sales increased by a low-single-digit percentage driven by a strong volumes in the third quarter offset by lower demand in Southern Europe earlier in the year when various countries mandated the closure of retail paint stores.
Net sales for automotive refinish coatings were down about 15% versus prior year driven by a sharp decline in global miles driven and traffic density in most of the world.
Aerospace
coatings sales volumes decreased about 20% year-over-year due to a sharp decline in commercial OEM, general aviation and after-market products. Net sales benefited from consistent demand for the company’s military applications and acquisition-related sales from Dexmet and Texstars.
Sales volumes in the protective and marine coatings business were down a mid-single-digit percentage driven by delayed projects as a result of the pandemic and lower demand in the U.S. oil and gas sector.
Segment income decreased $42 million year-over-year, including unfavorable foreign currency translation impacts of approximately $20 million. Segment income was impacted by lower sales volumes related to the pandemic and unfavorable foreign currency translation partially offset by higher selling prices, execution of cost-mitigation
efforts and restructuring initiatives.
Industrial Coatings
Nine Months Ended September 30
$ Change
% Change
($
in millions, except per share amounts)
2020
2019
2020 vs. 2019
2020 vs. 2019
Net sales
$3,749
$4,623
($874)
(18.9)
%
Segment income
$468
$659
($191)
(29.0)
%
Industrial
Coatings segment net sales decreased due to the following:
● Lower sales volumes (-18%)
● Unfavorable foreign currency translation (-2%)
Partially offset by:
● Acquisition-related sales (1%)
Automotive OEM coatings sales volumes decreased by about 25% year-over-year, driven by the significant curtailment in global automotive industry production rates.
For the industrial coatings business, net sales decreased by about 15% compared to prior year. Acquisition-related sales from Whitford were more than offset by lower demand stemming from reduced industrial production in most regions due to customer shutdowns.
Packaging coatings organic sales were
flat year-over-year as modestly higher selling prices were offset by lower sales volumes stemming from pandemic-related customer shutdowns.
Segment income decreased $191 million year-over-year, including unfavorable foreign currency translation impacts of about $10 million. Segment income was impacted by lower sales volumes driven by customer shutdowns related to the pandemic, partially offset by cost-mitigation actions, restructuring cost savings, and modestly higher selling prices.
Cash provided by operating activities from continuing operations for the nine months ended September 30, 2020 and 2019 was $1,163 million and $1,275 million, respectively. Operating cash flow decreased primarily due to lower net income and increased cash payments for restructuring actions partially offset by improvement in working capital in the first nine months of 2020 compared to the prior year.
Other uses of cash during the nine months ended September 30, 2020 included:
•Capital expenditures, excluding acquisitions, of $170 million.
•Business acquisition cash spending of $45 million.
•Cash dividends paid of $368 million.
In August 2020, PPG completed a public offering of $100 million aggregate principal amount of 3.75% notes due March 2028. These notes were issued as additional notes pursuant to PPG’s existing shelf registration statement and pursuant to the Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented (the "Indenture"), which is is the same Indenture
pursuant to which we previously issued $700 million in aggregate principle amount of our 3.75% notes due March 2028 on February 27, 2018. The new notes will be treated as a single series of notes with the existing notes under indenture, have the same CUSIP number as the existing notes, and be fungible with the existing notes for US federal income tax purposes. The Indenture governing these notes contains covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all
the Company’s assets. The terms of these notes also require the Company to make an offer to repurchase the notes upon a Change of Control Triggering Event (as defined in the Indenture) at a price equal to 101% of their principal amount plus accrued and unpaid interest. The Company may issue additional debt from time to time pursuant to the Indenture. The aggregate cash proceeds from the notes, including the premium received at issuance, net of fees, was $119 million.
In June 2020, PPG completed an early redemption
of the $500 million 3.6% notes due November 2020 using proceeds from the May 2020 public offering and cash on hand. The Company recorded a charge of $7 million in the second quarter for the debt redemption which consists of the aggregate make-whole cash premium of $6 million and a balance of unamortized fees and discounts of $1 million related to the debt redeemed.
In May 2020, PPG completed a public offering of $300 million aggregate principal amount of 2.55% notes due 2030. These notes were issued pursuant to PPG’s existing shelf registration statement and pursuant to the Indenture. The Indenture governing these notes contains covenants that limit the
Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets. The terms of these notes also require the Company to make an offer to repurchase notes upon a Change of Control Triggering Event (as defined in the Indenture) at a price equal to 101% of their principal amount plus accrued and unpaid interest. The Company may issue additional debt from time to time pursuant to the Indenture.
The aggregate cash proceeds from the notes, net of discounts and fees, was $296 million.
In April 2020, PPG entered into a $1.5 billion 364-Day Term Loan Credit Agreement (the “Term Loan”).The Term Loan contains covenants that are consistent with those in the Credit Agreement described below and that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. In September 2020, PPG repaid $1.0 billion of the Term Loan using cash on hand. The remaining Term Loan terminates and all amounts outstanding are payable on April
13, 2021.
In March 2020, PPG borrowed $800 million under the Credit Agreement and repaid this amount in full in April 2020. There were no amounts outstanding under the Credit agreement as of September 30, 2020 and December 31, 2019.
In August 2019, PPG completed a public debt offering of $300 million aggregate principal amount of 2.4% notes due 2024 and $300 million aggregate principal amount of 2.8% notes due 2029 and received aggregate net proceeds of $594 million.
The Term Loan and Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan, of 60% or less; provided, that for any
fiscal quarter in which the Company has made an acquisition for consideration in excess of $1 billion and for the next five fiscal quarters thereafter, the ratio of Total Indebtedness to Total Capitalization may not exceed 65% at any time. As of September 30, 2020, Total Indebtedness to Total Capitalization as defined under the Credit Agreement and the Term Loan was 48%.
The Company's commercial paper borrowings are supported by the five-year revolving credit agreement (the "Credit Agreement") entered into in 2019. As a result, commercial paper borrowings are classified as long-term debt based on PPG's intent and ability to refinance these borrowings on a long-term basis. As of September
30, 2020, no commercial paper borrowings were outstanding. As of December 31, 2019, there were $100 million of commercial paper borrowings outstanding.
Total capital spending in 2020 is expected to be $325 million to $350 million, an increase versus the prior Company estimate reflecting the initiation of certain additional projects. The Company continues to defer non-essential capital spending in response to lower industry demand conditions. PPG expects to make mandatory contributions to its non-U.S. pension
plans in the range of $5 million to $10 million during the remaining three months of 2020. PPG may make voluntary contributions to its defined benefit pension plans in 2020 and beyond.
A primary focus for the Company in 2020 will be to maintain appropriate balance sheet flexibility, including cash on hand, due to the uncertain nature and unpredictable timing of the COVID-19 pandemic.
Operating working capital is a subset of total working capital and represents (1) trade receivables – net of the allowance for doubtful accounts (2) FIFO inventories and (3) trade liabilities. We believe operating working capital represents the key components of working capital under the operating control of our businesses. A key metric we use to measure our working capital management is operating working capital as a percentage
of sales (current quarter sales annualized).
The Company continues to believe that cash on hand and short-term investments, cash from operations and the Company's access to capital markets will continue to be sufficient to fund our operating activities, capital spending, acquisitions, dividend payments, debt service, share repurchases, contributions to pension plans and PPG's significant contractual obligations.
Environmental
Three
Months Ended September 30
Nine Months Ended September 30
($ in millions)
2020
2019
2020
2019
Cash outlays for environmental remediation activities
$15
$21
$52
$57
($
in millions)
Remainder of 2020
Annually 2021 - 2024
Projected future cash outlays for environmental remediation activities
$10 - $20
$20 - $50
Restructuring
In June 2020, PPG initiated a $176 million restructuring program. The program addresses weakened global economic conditions stemming from the COVID-19 pandemic and related pace of recovery in a few end-use markets along with further opportunities to optimize supply chain and functional costs. The plan includes a voluntary separation program that was offered in the U.S. and Canada. We
expect to achieve annualized cost savings from the 2020 program of $160 to $170 million by the expected completion date in 2021.
As a result of the COVID-19 pandemic, the Company expects delays in the timing of certain previously recorded restructuring actions. Program completion dates may differ from the originally targeted timeline, as noted below.
In June 2019, PPG initiated a $184 million restructuring program. This program is a result of a comprehensive internal operational assessment to identify further opportunities to improve the profitability of the overall business portfolio. PPG recognized $15 million of savings from this program in 2019. The 2019 program is expected to achieve approximately $125 million of annualized cost savings by the expected completion date in 2022.
In
April 2018, PPG initiated an $83 million global restructuring program. The program is largely centered around the change in customer assortment related to the U.S. architectural coatings DIY business. PPG recognized $55 million of savings from this program in 2019. We expect to achieve annualized cost savings from the 2018 program of $85 million once fully implemented in 2020.
Total restructuring savings are expected to be between $100 million and $110 million in 2020. In addition, the Company continues to review its cost structure to identify additional cost savings
opportunities. See Note 7, “Business Restructuring,” to the accompanying condensed consolidated financial statements for further details on the Company's business restructuring programs.
Currency
Comparing spot exchange rates at December 31, 2019 and at September 30, 2020, the U.S. dollar strengthened against currencies of many countries within the regions PPG operates. As a result, consolidated net assets at September 30, 2020 decreased by $447 million compared to December 31, 2019
primarily driven by the Mexican peso.
Comparing average exchange rates during the first nine months of 2020 to those of the first nine months of 2019, the U.S. dollar strengthened against currencies of most countries within the regions PPG operates. This had an unfavorable impact on Income before income taxes for the nine months ended September 30, 2020 of $30 million from the translation of these foreign earnings into U.S. dollars.
New Accounting Standards
See Note 2, “New Accounting Standards,” to the accompanying condensed consolidated financial
statements for further details on recently issued accounting guidance.
Commitments and Contingent Liabilities, including Environmental Matters
PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. See Part II, Item 1, “Legal Proceedings” of this Form 10-Q and Note 15, “Commitments and Contingent Liabilities” to the accompanying condensed consolidated financial statements for a description of certain of these lawsuits.
As discussed in Part II, Item 1 and Note 15, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes
that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims, will not have a material effect on PPG's consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
As also discussed in Note 15, PPG has significant reserves for environmental contingencies. Please refer to the Environmental Matters section of Note 15 for details of these reserves. A significant portion of our reserves for environmental contingencies relate to ongoing remediation at PPG's former chromium manufacturing plant in Jersey City, N.J. and associated sites ("New Jersey Chrome"). The Company continues to analyze, assess and remediate the environmental issues associated with New Jersey Chrome. Information
will continue to be generated from the ongoing groundwater remedial investigation activities related to New Jersey Chrome and will be incorporated into a final draft remedial action work plan for groundwater expected to be submitted to the New Jersey Department of Environmental Protection in the fourth quarter 2020.
It is possible that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter the Company’s expectations with respect to future charges against income and future cash outlays. Specifically, the level of expected future remediation costs and cash outlays is highly dependent upon activity related to New Jersey Chrome.
Forward-Looking
Statements
Management’s Discussion and Analysis and other sections of this Quarterly Report contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words “aim,”“believe,”“expect,”“anticipate,”“intend,”“estimate,”“project,”“outlook,”“forecast” and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update
any forward looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission ("SEC"). Also, note the following cautionary statements.
Many factors could cause actual results to differ materially from the Company’s forward-looking statements. Such factors include statements related to the expected effects on our business of the COVID-19 pandemic, global economic conditions, increasing price and product competition by foreign and domestic competitors, fluctuations in cost and availability of raw materials, the ability to achieve selling price increases, the ability to recover margins,
customer inventory levels, our ability to maintain favorable supplier relationships and arrangements, the timing of and the realization of anticipated cost savings from restructuring initiatives, the ability to identify additional cost savings opportunities, difficulties in integrating acquired businesses and achieving expected synergies therefrom, economic and political conditions in the markets we serve, the ability to penetrate existing, developing and emerging foreign and domestic markets, foreign exchange rates and fluctuations in such rates, fluctuations in tax rates, the impact of future legislation, the impact of environmental regulations, unexpected business disruptions, the effectiveness of our internal control over financial reporting, the results of governmental investigations, and the unpredictability of existing and possible future litigation. However, it is not possible to predict or identify
all such factors.
Consequently, while the list of factors presented here, in the 2019 Form 10-K under Item 1A and in this Form 10-Q under Item 1A is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements.
Consequences of material differences in the results compared with those anticipated in the forward-looking statements could include, among other things, lower sales or income, business disruption, operational problems, financial loss, legal liability to third parties, other factors set forth in Item 1A of the 2019 Form 10-K and in Item 1A of this Form 10-Q and similar risks, any of which could have a material adverse effect on the
Company’s consolidated financial condition, results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
At September 30, 2020 and December 31, 2019, PPG had non-U.S. dollar denominated borrowings outstanding of $2.3 billion. A weakening of the U.S. dollar by 10% against European currencies and by 20% against Asian and South American currencies would have resulted in unrealized translation losses on these borrowings of $265 million at September
30, 2020 and $255 million at December 31, 2019, respectively.
The fair value of foreign currency forward contracts outstanding at September 30, 2020 and December 31, 2019 was a net liability of $3 million and a net liability of $7 million, respectively. The potential reduction in PPG's Income before income taxes resulting from the impact of adverse changes in exchange rates on the fair value of its outstanding foreign currency hedge contracts of 10% for European and Canadian currencies and 20% for Asian and Latin American currencies for the period ended
September 30, 2020 was $183 million and $357 million for the period ended December 31, 2019.
PPG has U. S. dollar to euro cross currency swap contracts with a total notional amount of $875 million outstanding, resulting in a net asset of $34 million and a net asset of $48 million at September 30, 2020 and December 31, 2019, respectively. A 10% increase in the value of the euro to the U.S. dollar would have had an unfavorable effect on the fair value of these swap contracts by reducing the value of these instruments
by $92 million and $87 million at September 30, 2020 and December 31, 2019, respectively.
Interest Rate Risk
The Company manages its interest rate risk of fixed and variable rates while attempting to minimize its interest costs. PPG has interest rate swaps which converted $525 million of fixed rate debt to variable rate debt. The fair value of these contracts was an asset of $74 million and $35 million at September 30, 2020 and December 31, 2019, respectively. An increase in variable interest rates of 10% would
lower the fair value of these swaps and increase interest expense by $1 million and $7 million for the periods ended September 30, 2020 and December 31, 2019, respectively. A 10% increase in interest rates in the U.S., Canada, Mexico and Europe and a 20% increase in interest rates in Asia and South America would have an insignificant effect on PPG's variable rate debt obligations and interest expense for the periods ended September 30, 2020 and December 31, 2019. Further a 10% reduction in interest rates would have increased the fair value of the Company's fixed rate debt by approximately $51 million and $67 million at September 30, 2020 and
December 31, 2019, respectively; however, such changes would not have had an effect on PPG's income before income taxes or cash flows.
There were no other material changes in the Company’s exposure to market risk from December 31, 2019 to September 30, 2020. See Note 13, “Financial Instruments, Hedging Activities and Fair Value Measurements” for a description of our instruments subject to market risk.
Item 4. Controls and Procedures
a. Evaluation of disclosure
controls and procedures. Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that the
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.
Between January and early April 2020, the Company, as a nominal defendant, and certain of its current or former officers and directors were named as defendants in four shareholder derivative actions. All of the actions were filed in Pittsburgh, three in the U.S. District Court for the Western District of Pennsylvania and one in the Court of Common Pleas for Allegheny
County. The plaintiffs in these actions allege breach of fiduciary duty, unjust enrichment and/or corporate waste arising out of various alleged acts, and alleged failures to act, by the individually named defendants following financial restatements by the Company. One of the federal court actions also alleges breach of fiduciary duty and unjust enrichment claims arising out of certain environmental liabilities the Company incurred, and continues to incur, related to its former Ford City glass plant. The three federal court derivative actions have been consolidated. On May 28, 2020, a Motion to Dismiss all three federal court derivative actions was filed. The court has confirmed that the
Company and the individual defendants need not respond to the lawsuits while the Motion to Dismiss is pending. The state court derivative action has been stayed pending the outcome of the federal court Motion to Dismiss.
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 are expected to be distributed by the claims administrator in late 2020 or early 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 believes that the citizen’s suit is without merit and intends to defend itself 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 15, “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
Except for the effects of COVID-19 as a result of its negative impact to the global economy as described below, there were no material changes in the
Company’s risk factors from the risks disclosed in the 2019 Form 10-K.
The effects of the recent COVID-19 outbreak are negatively impacting, and are expected to continue to adversely impact our financial condition and results of operations.
The effects of the public health crisis caused by the COVID-19 outbreak have interfered with the ability of PPG, our suppliers, customers, and others to conduct business and have negatively affected consumer confidence and the global economy. Public health officials have recommended or mandated certain precautions to mitigate the spread of COVID-19, including prohibitions on congregating in groups, shelter-in-place orders or similar measures. Preventative and protective actions that public health officials, governments or PPG have taken with respect to COVID-19 have and will continue to adversely impact our business, suppliers, distribution
channels, and customers, including business shutdowns or disruptions for an indefinite period of time, reduced operations, reduced ability to supply products, or reduced demand for our products. Our financial condition, liquidity and results of operations have been and will continue to be adversely impacted by these preventative actions and the disruption to our business and that of our suppliers and customers. As we cannot predict the duration or scope of the COVID-19 pandemic, the negative financial impact to our results cannot be reasonably estimated, but could be material.
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 September 30, 2020 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 12,371,858 shares as of September 30, 2020. 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 nine months ended September 30, 2020 and 2019, (ii) the Condensed Consolidated Balance Sheet at September 30, 2020 and December 31, 2019, (iii) the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2020 and 2019, and (iv) Notes to Condensed Consolidated Financial Statements for the
nine months ended September 30, 2020.
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.
