filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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 2022 Form 10-K.
Highlights
Net sales were approximately $4.6 billion for the three months ended September 30, 2023, an increase of 3.9% compared to the prior year, driven by higher selling prices and favorable foreign currency translation, partially offset by lower sales volumes. The increase in Net sales was led by the aerospace coatings, automotive OEM coatings and PPG Comex businesses which were able to realize the benefit of strong demand. Sales volumes were negatively impacted in some businesses by soft global industrial production, including a slower than anticipated recovery in China.
Income before income taxes was $557 million for the three months ended September 30, 2023, an increase of $139 million compared to the prior year. This increase was primarily due to strong selling price realization and moderating raw material costs.
Results of Operations
| Three Months Ended September 30 | Percent Change | Nine Months Ended September 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2023 | 2022 | 2023 vs. 2022 | 2023 | 2022 | 2023 vs. 2022 | |||||||||||||||||||||||||||||
| Net sales | $4,644 | $4,468 | 3.9 | % | $13,896 | $13,467 | 3.2 | % | |||||||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $2,752 | $2,821 | (2.4) | % | $8,214 | $8,473 | (3.1) | % | |||||||||||||||||||||||||||
| Selling, general and administrative | $1,047 | $931 | 12.5 | % | $3,108 | $2,887 | 7.7 | % | |||||||||||||||||||||||||||
| Depreciation | $102 | $95 | 7.4 | % | $287 | $296 | (3.0) | % | |||||||||||||||||||||||||||
| Amortization | $40 | $40 | — | % | $121 | $125 | (3.2) | % | |||||||||||||||||||||||||||
| Research and development, net | $108 | $110 | (1.8) | % | $322 | $340 | (5.3) | % | |||||||||||||||||||||||||||
| Interest expense | $64 | $46 | 39.1 | % | $190 | $114 | 66.7 | % | |||||||||||||||||||||||||||
| Interest income | ($39) | ($14) | 178.6 | % | ($96) | ($34) | 182.4 | % | |||||||||||||||||||||||||||
| Impairment and other related charges, net | $— | $— | — | % | — | $230 | (100.0) | % | |||||||||||||||||||||||||||
| Pension settlement charge | $— | $— | — | % | $190 | $— | 100.0 | % | |||||||||||||||||||||||||||
| Other charges/(income), net | $13 | $21 | (38.1) | % | $4 | ($26) | (115.4) | % |
Net Sales by Region
| Three Months Ended September 30 | Percent Change | Nine Months Ended September 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2023 | 2022 | 2023 vs. 2022 | 2023 | 2022 | 2023 vs. 2022 | |||||||||||||||||||||||||||||
| United States and Canada | $1,941 | $1,954 | (0.7) | % | $5,776 | $5,684 | 1.6 | % | |||||||||||||||||||||||||||
| EMEA | 1,393 | 1,286 | 8.3 | % | 4,341 | 4,236 | 2.5 | % | |||||||||||||||||||||||||||
| Asia Pacific | 733 | 734 | (0.1) | % | 2,116 | 2,120 | (0.2) | % | |||||||||||||||||||||||||||
| Latin America | 577 | 494 | 16.8 | % | 1,663 | 1,427 | 16.5 | % | |||||||||||||||||||||||||||
| Total | $4,644 | $4,468 | 3.9 | % | $13,896 | $13,467 | 3.2 | % |
Three Months Ended September 30, 2023
Net sales increased $176 million due to the following:
● Higher selling prices (+3%)
● Favorable foreign currency translation (+2%)
● Net acquisitions and divestitures (+1%)
Partially offset by:
● Lower sales volumes (-2%)
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, decreased $69 million primarily due to lower sales volumes and moderating raw material costs.
Selling, general and administrative expense increased $116 million primarily due to wage and other cost inflation and higher performance-based incentive compensation expense, partially offset by savings from previously approved restructuring actions.
Interest expense increased $18 million primarily due to the unfavorable impact of higher interest rates on PPG’s variable rate debt obligations. Interest income increased $25 million primarily due to higher interest rates.
Nine Months Ended September 30, 2023
Net sales increased $429 million due to the following:
● Higher selling prices (+5%)
Partially offset by:
● Lower sales volumes (-2%)
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, decreased $259 million primarily due to lower sales volumes and moderating raw material costs.
Selling, general and administrative expense increased $221 million primarily due to wage and other cost inflation and higher performance-based incentive compensation expense, partially offset by savings from previously approved restructuring actions.
Interest expense increased $76 million primarily due to the unfavorable impact of higher interest rates on PPG’s variable rate debt obligations. Interest income increased $62 million primarily due to higher interest rates.
Impairment and other related charges of $230 million were recorded in the nine months ended September 30, 2022 associated with the wind down of the Company's operations in Russia. Refer to Note 7, "Impairment and Other Related Charges, Net" in Part I, Item 1 of this Form 10-Q for additional information. There were no impairment charges recorded during 2023.
A Pension settlement charge of $190 million was recorded in the first quarter 2023 associated with the Company's purchase of group annuity contracts that transferred pension benefit obligations for certain of the Company’s
retirees in the U.S. to third-party insurance companies. Refer to Note 10, "Pensions and Other Postretirement Benefits" in Part I, Item 1 of this Form 10-Q for additional information.
Effective Tax Rate and Earnings Per Diluted Share
| Three Months Ended September 30 | Percent Change | Nine Months Ended September 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages and amounts per share) | 2023 | 2022 | 2023 vs. 2022 | 2023 | 2022 | 2023 vs. 2022 | |||||||||||||||||||||||||||||
| Income tax expense | $121 | $79 | 53.2 | % | $350 | $252 | 38.9 | % | |||||||||||||||||||||||||||
| Effective tax rate | 21.7 | % | 18.9 | % | 2.8 | % | 22.5 | % | 23.7 | % | (1.2) | % | |||||||||||||||||||||||
| Adjusted effective tax rate, continuing operations* | 19.5 | % | 19.9 | % | (0.4) | % | 22.0 | % | 21.7 | % | 0.3 | % | |||||||||||||||||||||||
| Earnings per diluted share, continuing operations | $1.79 | $1.39 | 28.8 | % | $4.97 | $3.33 | 49.2 | % | |||||||||||||||||||||||||||
| Adjusted earnings per diluted share* | $2.07 | $1.66 | 24.7 | % | $6.15 | $4.84 | 27.1 | % | |||||||||||||||||||||||||||
| *See Regulation G Reconciliation below |
The effective tax rate of 23.7% for the nine months ended September 30, 2022 reflected a tax benefit of $27 million on the $230 million net charges associated with PPG's operations in Russia.
Adjusted earnings per diluted share for the three and nine months ended September 30, 2023 increased year-over-year primarily due to increased selling prices and moderating raw material costs, partially offset by wage and other cost inflation and lower sales volumes.
Regulation G Reconciliations - Results from Operations
PPG believes investors’ understanding of the Company’s performance is enhanced by the disclosure of net income from continuing operations, earnings per diluted share from continuing operations, PPG’s effective tax rate and segment income adjusted for certain items. PPG’s management considers this information useful in providing insight into the Company’s ongoing performance because it excludes the impact of items that cannot reasonably be expected to recur on a quarterly basis or that are not attributable to our primary operations. Net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate and segment income adjusted for these items are not recognized financial measures determined in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and should not be considered a substitute for net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate, segment income or other financial measures as computed in accordance with U.S. GAAP. In addition, adjusted net income, adjusted earnings per diluted share 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.
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Income Tax Expense | Effective Tax Rate | Net Income (attributable to PPG) | Earnings Per Diluted Share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $557 | $121 | 21.7 | % | $426 | $1.79 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 40 | 10 | 23.9 | % | 30 | 0.13 | |||||||||||||||||||||||
| Business restructuring-related costs, net (b) | 13 | 3 | 22.9 | % | 10 | 0.04 | |||||||||||||||||||||||
| Transaction-related costs (c) | 15 | (12) | (77.2 | %) | 27 | 0.11 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $625 | $122 | 19.5 | % | $493 | $2.07 |
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Income Tax Expense | Effective Tax Rate | Net Income (attributable to PPG) | Earnings Per Diluted Share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $418 | $79 | 18.9 | % | $329 | $1.39 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 40 | 10 | 24.6 | % | 30 | 0.13 | |||||||||||||||||||||||
| Business restructuring-related costs, net (b) | 45 | 11 | 25.4 | % | 34 | 0.14 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $503 | $100 | 19.9 | % | $393 | $1.66 |
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| ($ 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 | $1,556 | $350 | 22.5 | % | $1,180 | $4.97 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Pension settlement charge (d) | 190 | 46 | 24.2 | % | 144 | 0.61 | |||||||||||||||||||||||
| Acquisition-related amortization expense | 121 | 30 | 24.3 | % | 91 | 0.39 | |||||||||||||||||||||||
| Business restructuring-related costs, net (b) | 27 | 6 | 23.5 | % | 21 | 0.09 | |||||||||||||||||||||||
| Transaction-related costs (c) | 22 | (10) | (45.2) | % | 30 | 0.12 | |||||||||||||||||||||||
| Insurance recovery of expenses incurred due to a natural disaster (e) | (9) | (2) | 24.3 | % | (7) | (0.03) | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $1,907 | $420 | 22.0 | % | $1,459 | $6.15 |
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| ($ 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 | $1,062 | $252 | 23.7 | % | $790 | $3.33 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Impairment and other related (income)/charges, net (f) | 230 | 27 | 11.7 | % | 203 | 0.85 | |||||||||||||||||||||||
| Acquisition-related amortization expense | 125 | 30 | 24.0 | % | 95 | 0.40 | |||||||||||||||||||||||
| Business restructuring-related costs, net (b) | 67 | 17 | 25.4 | % | 50 | 0.21 | |||||||||||||||||||||||
| Transaction-related costs (c) | 10 | (2) | (20.0) | % | 12 | 0.05 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $1,494 | $324 | 21.7 | % | $1,150 | $4.84 |
(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)Transaction-related costs include losses on the sale of certain assets, which are included in Other charges/(income), net in the condensed consolidated statement of income, including the loss recognized in the third quarter 2023 on the sale of the Company’s legacy industrial Russian operations, resulting primarily from the recognition of accumulated foreign currency translation losses upon the divestiture. Transaction-related costs also include advisory, legal, accounting, valuation, other professional or consulting fees, and certain internal costs directly incurred to effect acquisitions, which are included in Selling, general and administrative expense in the condensed consolidated statement of income, and the impact for the step up to fair value of inventory acquired in certain acquisitions, which is included in Cost of sales, exclusive of depreciation and amortization in the condensed consolidated statement of income.
(d)In the first quarter 2023, PPG purchased group annuity contracts that transferred pension benefit obligations for certain of the Company’s retirees in the U.S. to third-party insurance companies, resulting in a non-cash pension settlement charge.
(e)The Company incurred expenses due to damages at a southern U.S. factory resulting from a winter storm in 2020. In the first quarter 2023, the Company received reimbursement under its insurance policies related to the damages incurred at this factory due to this storm.
(f)In 2022, the Company recorded impairment and other related charges due to the wind down of the Company’s operations in Russia.
Performance of Reportable Business Segments
Performance Coatings
| Three Months Ended September 30 | $ Change | % Change | Nine Months Ended September 30 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2023 | 2022 | 2023 vs. 2022 | 2023 vs. 2022 | 2023 | 2022 | 2023 vs. 2022 | 2023 vs. 2022 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $2,880 | $2,705 | $175 | 6.5 | % | $8,549 | $8,204 | $345 | 4.2 | % | |||||||||||||||||||||||||||||||||||||
| Segment income | $452 | $362 | $90 | 24.9 | % | $1,384 | $1,127 | $257 | 22.8 | % | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $28 | $30 | ($2) | (6.7) | % | $87 | $93 | ($6) | (6.5) | % | |||||||||||||||||||||||||||||||||||||
| Segment income, excluding amortization expense | $480 | $392 | $88 | 22.4 | % | $1,471 | $1,220 | $251 | 20.6 | % |
Three Months Ended September 30, 2023
Performance Coatings net sales increased due to the following:
● Higher selling prices (+3%)
● Favorable foreign currency translation (+3%)
Architectural coatings – EMEA net sales, excluding the impact of currency, acquisitions, divestitures and the wind down of Russia operations ("organic sales") increased a low single digit percentage year over year, with higher selling prices partially offset by lower sales volumes. Year-over-year sales volumes are approaching prior year levels as demand for architectural coatings products is stabilizing at lower absolute levels. While aggregate demand remains at lower levels and uneven by country, sales were robust in certain countries during the third quarter.
Architectural coatings - Americas and Asia Pacific organic sales increased by a low single-digit percentage. Solid organic growth at PPG Comex was partially offset by lower demand for do-it-yourself ("DIY") products in the U.S. and Canada. PPG Comex achieved record quarterly sales.
Automotive refinish coatings organic sales were slightly higher year over year. Price gains in all regions and sales volume growth in the EMEA and Asia-Pacific regions were partially offset by lower sales volumes in the U.S., primarily due to shifting order patterns from certain U.S. distribution customers. In the U.S., body shop activity remains solid, with backlogs in the U.S. beginning to normalize closer to historical levels as supply chain conditions improve. In Europe, sales volumes were solidly above third quarter 2022 levels as demand from distributors rebounded. In China, demand for PPG refinish products continues to recover.
Aerospace coatings organic sales were higher by a mid-teen percentage driven by increases in both price and volume. This strong organic sales growth was achieved despite global air travel remaining below pre-pandemic levels. Demand remained strong in all major product categories throughout the quarter.
Protective and marine coatings organic sales increased by a mid-single-digit percentage driven by solid selling price realization and higher sales volumes. The third quarter was the second consecutive quarter with positive year-over-year sales volume growth.
Traffic solutions organic sales decreased by a mid-single-digit percentage compared to the same quarter last year, with sales volume declines in all regions. In the U.S., the Company continues to prioritize higher margin business.
Segment income increased $90 million versus the prior year primarily due to higher selling prices and moderating year over year input costs.
Nine Months Ended September 30, 2023
Performance Coatings net sales increased due to the following:
● Higher selling prices (+6%)
Partially offset by:
● Lower sales volumes (-2%)
Architectural coatings – EMEA organic sales were flat year over year as selling price increases were offset by lower sales volumes. Demand for architectural coatings products in many countries decreased stemming from reduced remodeling activity and lower consumer confidence due to continued geopolitical issues in Europe. However, demand for architectural coatings products is beginning to stabilize at lower absolute levels.
Architectural coatings - Americas and Asia Pacific organic sales increased by a low single-digit percentage. Solid organic growth at PPG Comex was partially offset by lower demand for DIY products in the U.S. and Canada. In Mexico, PPG Comex architectural coatings organic sales increased compared to the prior year driven by selling price increases and continued strong demand in the concessionaire network.
Automotive refinish coatings organic sales increased by a low single-digit percentage year over year as selling price increases in all regions more than offset lower sales volumes.
Aerospace coatings organic sales increased significantly year over year with strength in all regions driven by double-digit increases in both selling price and sales volume.
Protective and marine coatings organic sales increased by a mid-single-digit percentage primarily due to selling price increases in all regions and strong demand in Europe, the U.S. and Latin America.
Traffic solutions organic sales decreased by a mid-single-digit percentage as higher selling prices in all regions were more than offset by lower sales volumes.
Segment income increased $257 million versus the prior year primarily due to higher selling prices and moderating year over year input costs, which more than offset lower sales volumes.
Looking Ahead
In the fourth quarter, demand for aerospace coatings and PPG Comex products is expected to remain robust. Demand conditions in Europe and for architectural DIY globally are anticipated to remain at lower levels. Raw material and transportation availability continue to broadly improve. Aggregate organic sales for the Performance Coatings segment are anticipated to increase by a low single-digit percentage compared to the fourth quarter 2022.
Industrial Coatings
| Three Months Ended September 30 | $ Change | % Change | Nine Months Ended September 30 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2023 | 2022 | 2023 vs. 2022 | 2023 vs. 2022 | 2023 | 2022 | 2023 vs. 2022 | 2023 vs. 2022 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $1,764 | $1,763 | $1 | 0.1 | % | $5,347 | $5,263 | $84 | 1.6 | % | |||||||||||||||||||||||||||||||||||||
| Segment income | $246 | $192 | $54 | 28.1 | % | $736 | $488 | $248 | 50.8 | % | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $12 | $10 | $2 | 20.0 | % | $34 | $32 | $2 | 6.3 | % | |||||||||||||||||||||||||||||||||||||
| Segment income, excluding amortization expense | $258 | $202 | $56 | 27.7 | % | $770 | $520 | $250 | 48.1 | % |
Three Months Ended September 30, 2023
Industrial Coatings segment net sales increased due to the following:
● Higher selling prices (+2%)
● Favorable foreign currency translation (+1%)
● Net acquisitions and divestitures (+1%)
Partially offset by:
● Lower sales volumes (-4%)
Automotive OEM coatings organic sales increased by a low single-digit percentage year over year driven by higher selling prices in all regions and strong sales volume growth in most regions. The United Auto Workers labor actions had a minor impact on the Company's third quarter net sales in the U.S.
In the industrial coatings business, organic sales decreased by a mid-single-digit percentage year over year as higher selling prices partially offset lower sales volumes in Europe and China due to softer general industrial production. Sales volumes were negatively impacted by lower demand in the wood, consumer electronics and general finishes subsegments.
Packaging coatings organic sales decreased by a high-single-digit percentage primarily due to lower demand in all regions driven by lower demand in the metal packaged food and beverage markets.
Specialty coatings and materials organic sales decreased by a mid-single-digit percentage primarily due to lower sales volumes, partially offset by higher selling prices.
Segment income increased $54 million versus the prior year primarily due to higher selling prices and moderating year over year raw material costs, partially offset by lower sales volumes.
Nine Months Ended September 30, 2023
Industrial Coatings segment net sales increased due to the following:
● Higher selling prices (+5%)
● Net acquisitions and divestitures (+1%)
Partially offset by:
● Lower sales volumes (-3%)
● Unfavorable foreign currency translation (-1%)
Automotive OEM coatings organic sales increased by a high single-digit percentage year over year driven by higher selling prices and strong sales volume growth in all regions. Sales volume growth was led by the EMEA and Asia-Pacific regions, where retail sales and industry build rates remain robust compared to a weak prior-year base.
In the industrial coatings business, organic sales decreased by a mid-single-digit percentage year over year as higher selling prices were more than offset by lower sales volumes in all regions due to softening global industrial demand.
Packaging coatings organic sales decreased by a mid-single-digit percentage year over year due to lower sales volume in all regions driven by broad demand weakness. These sales volumes decreases were partially offset by higher selling prices in most regions.
Specialty coatings and materials organic sales decreased by a mid-single-digit percentage primarily due to lower sales volumes, partially offset by higher selling prices.
Segment income increased $248 million versus the prior year primarily due to higher selling prices and moderating year over year raw material costs, which more than offset lower sales volumes.
Looking Ahead
In the fourth quarter, global industrial production is expected to remain at lower levels. Aggregate organic sales are anticipated to decrease by a low single-digit percentage compared to the fourth quarter 2022. Similar to the third quarter, automotive industry build rates and retail activity are expected to continue to be solid while other industrial production end-use markets are expected to be soft, including softness in the industrial coatings, packaging coatings, and the specialty coatings and materials businesses. The duration and scope of the automotive industry labor actions in the fourth quarter could result in incrementally higher impacts to the Company sales and earnings; although, the overall exposure for the Company is a small percentage of total revenue. In the fourth quarter 2023, the pricing gains realized in 2022 will reach their anniversary.
Liquidity and Capital Resources
PPG had cash and short-term investments totaling $1.3 billion and $1.2 billion at September 30, 2023 and December 31, 2022, respectively.
The Company continues to believe that cash on hand and short-term investments, cash from operations and the Company's access to capital markets will be sufficient to fund our operating activities, capital spending, acquisitions, dividend payments, debt service, share repurchases, contributions to pension plans and contractual obligations.
Cash from operating activities
Cash from operating activities for the nine months ended September 30, 2023 and 2022 was $1,513 million and $376 million, respectively. The $1,137 million increase was primarily due to higher net income driven by higher selling prices and moderating raw material costs and favorable changes in working capital compared to the prior year.
Operating Working Capital
Operating working capital is a subset of total working capital and represents (1) trade receivables – net of the allowance for doubtful accounts (2) FIFO inventories and (3) trade liabilities. We believe operating working capital represents the key components of working capital under the operating control of our businesses. A key metric we use to measure our working capital management is operating working capital as a percentage of sales (current quarter sales annualized).
| ($ in millions, except percentages) | September 30, 2023 | December 31, 2022 | September 30, 2022 | ||||||||||||||
| Trade receivables, net | $3,213 | $2,824 | $3,040 | ||||||||||||||
| Inventories, FIFO | 2,479 | 2,544 | 2,671 | ||||||||||||||
| Trade creditors’ liabilities | (2,491) | (2,538) | (2,717) | ||||||||||||||
| Operating working capital | $3,201 | $2,830 | $2,994 | ||||||||||||||
| Operating working capital as a % of sales | 17.2 | % | 16.9 | % | 16.8 | % | |||||||||||
| Days sales outstanding | 57 | 56 | 57 |
Environmental
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Cash outlays for environmental remediation activities | $12 | $18 | $28 | $65 |
| ($ in millions) | Remainder of 2023 | Annually 2024 - 2027 | |||||||||
| Projected future cash outlays for environmental remediation activities | $10 - $20 | $20 - $75 |
Cash used for investing activities
Cash used for investing activities for the nine months ended September 30, 2023 and 2022 was $399 million and $246 million, respectively. The $153 million increase in cash used for investing activities was primarily due to higher spending on business acquisitions and lower proceeds from asset sales.
Total capital spending in 2023 is expected to be approximately $575 million in support of future organic growth opportunities.
Cash used for financing activities
Cash used for financing activities for the nine months ended September 30, 2023 and 2022 was $1,005 million and $56 million, respectively. The $949 million increase was primarily due to repayments of long-term debt and lower proceeds from the issuance of debt, partially offset by the absence of net payments on commercial paper.
Credit Agreements
In April 2023, PPG entered into a €500 million term loan credit agreement (the "Term Loan"). The Term Loan provides the Company with the ability to increase the size of the loan by an amount not to exceed €250 million. The Term Loan contains covenants that are consistent with those in the Credit Agreement discussed below and that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Term Loan terminates and all amounts outstanding are payable in April 2026. In April 2023, PPG borrowed €500 million under the Term Loan.
In February 2021, PPG entered into a $2.0 billion term loan credit agreement (the "Term Loan Credit Agreement") to finance the Company’s acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. The Term Loan Credit Agreement provided the Company with the ability to borrow up to an aggregate principal amount of $2.0 billion on an unsecured basis. In addition to the amounts borrowed to finance the acquisition of Tikkurila, the Term Loan Credit Agreement allowed the Company to make up to eleven additional borrowings prior to December 31, 2021, to be used for working capital and general corporate purposes. The Term Loan Credit Agreement contains covenants that are consistent with those in the Credit Agreement discussed below and that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Term Loan Credit Agreement matures and all outstanding borrowings are due and payable on the third anniversary of the date of the initial borrowing under the Agreement. In March 2023, PPG amended the Term Loan Credit Agreement to replace the LIBOR-based reference interest rate option with a reference interest rate option based upon Term Secured Overnight Financing Rate ("SOFR"). The other terms of the Term Loan Credit Agreement remain unchanged. In June 2021, PPG borrowed $700 million under the Term Loan Credit Agreement to finance the Company’s acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. In December 2021, PPG borrowed an additional $700 million under the Term Loan Credit Agreement. In 2022 and 2023, PPG repaid $300 million and $800 million, respectively, of the Term Loan Credit Agreement using cash on hand. Borrowings of $300 million and $1.1 billion were outstanding under the Term Loan Credit Agreement as of September 30, 2023 and December 31, 2022, respectively.
In March 2023, PPG amended its five-year credit agreement (the “Credit Agreement”) dated as of August 30, 2019. The amendments to the Credit Agreement replace the LIBOR-based reference interest rate option with a reference interest rate option based upon Term SOFR. The other terms of the Credit Agreement remain unchanged. In July 2023, PPG amended and restated the Credit Agreement, extending the term through July 27, 2028. The amended and restated Credit Agreement provides for a $2.3 billion unsecured revolving credit facility. The Company has the ability to increase the size of the Credit Agreement by up to an additional $750 million, subject to the receipt of lender commitments and other conditions precedent. The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement. There were no amounts outstanding under the Credit Agreement as of September 30, 2023 and December 31, 2022.
The Term Loan, Term Loan Credit Agreement and Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan, Term Loan Credit Agreement and Credit Agreement, of 60% or less; provided, that for any fiscal quarter in which the Company has made an acquisition for consideration in excess of $1 billion and for the next five fiscal quarters thereafter, the ratio of Total Indebtedness to Total Capitalization may not exceed 65% at any time. As of September 30, 2023, Total Indebtedness to Total Capitalization as defined under the Term Loan, Term Loan Credit Agreement and Credit Agreement was 43%.
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 no commercial paper borrowings outstanding as of September 30, 2023 and December 31, 2022.
Other Debt Issued and Repaid
In March 2023, PPG's $300 million 3.2% notes matured, and the Company repaid this obligation using cash on hand.
In May 2022, PPG completed a public offering of €300 million 1.875% Notes due 2025 and €700 million 2.750% Notes due 2029. Refer to Note 6, “Borrowings” in Part I, Item 1 of this Form 10-Q for additional information.
In March 2022, PPG privately placed a 15-year €50 million 1.95% fixed interest note. Refer to Note 6, “Borrowings” in Part I, Item 1 of this Form 10-Q for additional information.
Other Liquidity Information
Restructuring
Aggregate restructuring savings, including the impact of acquisition synergies, were approximately $15 million in the third quarter 2023. Total restructuring savings are expected to be at least $60 million in 2023. In addition, the Company continues to review its cost structure to identify additional cost savings opportunities. Refer to Note 5, “Business Restructuring” in Part I, Item 1 of this Form 10-Q for further details on the Company's business restructuring programs. We expect cash outlays related to these actions of $60 million to $70 million in 2023.
Currency
Comparing spot exchange rates at December 31, 2022 and at September 30, 2023, the U.S. dollar weakened against the currencies of many countries within the regions PPG operates, most notably the Mexican peso. As a result, consolidated net assets at September 30, 2023 increased by $200 million compared to December 31, 2022.
Comparing average exchange rates during the first nine months of 2023 to those of the first nine months of 2022, the U.S. dollar weakened against the currencies of certain countries where PPG operates, including the Mexican peso and the euro, partially offset by strengthening against the Chinese yuan. The weakening of the U.S. dollar had a favorable impact on Income before income taxes for the nine months ended September 30, 2023 of $11 million from the translation of these foreign earnings into U.S. dollars.
New Accounting Standards
Refer to Note 2, “New Accounting Standards” in Part I, Item 1 of this Form 10-Q for further details on recently issued accounting guidance.
Commitments and Contingent Liabilities, including Environmental Matters
PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. See Part II, Item 1, “Legal Proceedings” of this Form 10-Q and Note 14, “Commitments and Contingent Liabilities” in Part I, Item 1 of this Form 10-Q for a description of certain of these lawsuits.
As discussed in Part II, Item 1 and Note 14, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims, will not have a material effect on PPG’s consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
As also discussed in Note 14, PPG has significant reserves for environmental contingencies. Refer to the Environmental Matters section of Note 14 for details of these reserves. It is PPG’s policy to accrue expenses for contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are generally not discounted. In management’s opinion, the Company operates in an environmentally sound manner and the outcome of the Company’s environmental contingencies will not have a material effect on PPG’s financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution of the Company’s environmental contingencies will occur over an extended period of time.
Critical Accounting Estimates
Management has evaluated the accounting policies used in the preparation of the financial statements and related notes presented in this Form 10-Q and believes those policies to be reasonable and appropriate. We believe that the most critical accounting estimates made in the preparation of our financial statements are those related to accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and to accounting for pensions, other postretirement benefits, business combinations, goodwill and other identifiable intangible assets with indefinite lives because of the importance of management judgment in making the estimates necessary to apply these policies.
For a comprehensive discussion of the Company’s critical accounting estimates, see Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K. There were no material changes in the Company’s critical accounting estimates from the 2022 Form 10-K.
Forward-Looking Statements
Management’s Discussion and Analysis and other sections of this Quarterly Report contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast,” "looking ahead" and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to 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 COVID-19, global economic conditions, geopolitical issues in Europe, increasing price and product competition by our competitors, fluctuations in cost and availability of raw materials, energy, labor and logistics, the ability to achieve selling price increases, the ability to recover margins, customer inventory levels, PPG inventory levels, our ability to maintain favorable supplier relationships and arrangements, the timing of and the realization of anticipated cost savings from restructuring initiatives, the ability to identify additional cost savings opportunities, the timing and expected benefits of our acquisitions, difficulties in integrating acquired businesses and achieving expected synergies therefrom, the amount of future share repurchases, 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 unpredictability of existing and possible future litigation, including asbestos litigation, and government investigations. However, it is not possible to predict or identify all such factors.
Consequently, while the list of factors presented here and in the 2022 Form 10-K under Item 1A is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements.
Consequences of material differences in the results compared with those anticipated in the forward-looking statements could include, among other things, lower sales or income, business disruption, operational problems, financial loss, legal liability to third parties, other factors set forth in Item 1A of the 2022 Form 10-K and similar risks, any of which could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
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