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 2023 Form 10-K.
Highlights
Net sales were approximately $4.6 billion for the three months ended September 30, 2024, a decrease of 1.5% compared to the prior year, primarily due to the unfavorable impact of foreign currency translation and the divestitures of the non-North American portion of the traffic solutions business.
Income before income taxes was $611 million for the three months ended September 30, 2024, an increase of $54 million compared to the prior year. This increase was primarily due to improved manufacturing productivity, certain reductions in overhead, and lower depreciation, amortization and net interest costs, partially offset by wage and benefits inflation.
Results of Operations
| Three Months Ended September 30 | Percent Change | Nine Months Ended September 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||
| Net sales | $4,575 | $4,644 | (1.5) | % | $13,680 | $13,896 | (1.6) | % | |||||||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $2,663 | $2,752 | (3.2) | % | $7,842 | $8,214 | (4.5) | % | |||||||||||||||||||||||||||
| Selling, general and administrative | $1,062 | $1,047 | 1.4 | % | $3,203 | $3,108 | 3.1 | % | |||||||||||||||||||||||||||
| Depreciation | $97 | $102 | (4.9) | % | $298 | $287 | 3.8 | % | |||||||||||||||||||||||||||
| Amortization | $32 | $40 | (20.0) | % | $106 | $121 | (12.4) | % | |||||||||||||||||||||||||||
| Research and development, net | $105 | $108 | (2.8) | % | $325 | $322 | 0.9 | % | |||||||||||||||||||||||||||
| Interest expense | $67 | $64 | 4.7 | % | $184 | $190 | (3.2) | % | |||||||||||||||||||||||||||
| Interest income | ($48) | ($39) | 23.1 | % | ($135) | ($96) | 40.6 | % | |||||||||||||||||||||||||||
| Pension settlement charge | $— | $— | — | % | $— | $190 | (100.0) | % | |||||||||||||||||||||||||||
| Other (income)/charges, net | ($14) | $13 | (207.7) | % | $15 | $4 | 275.0 | % | |||||||||||||||||||||||||||
Net Sales by Region
| Three Months Ended September 30 | Percent Change | Nine Months Ended September 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||
| United States and Canada | $1,929 | $1,941 | (0.6) | % | $5,710 | $5,776 | (1.1) | % | |||||||||||||||||||||||||||
| EMEA | 1,366 | 1,393 | (1.9) | % | 4,179 | 4,341 | (3.7) | % | |||||||||||||||||||||||||||
| Asia Pacific | 751 | 733 | 2.5 | % | 2,141 | 2,116 | 1.2 | % | |||||||||||||||||||||||||||
| Latin America | 529 | 577 | (8.3) | % | 1,650 | 1,663 | (0.8) | % | |||||||||||||||||||||||||||
| Total | $4,575 | $4,644 | (1.5) | % | $13,680 | $13,896 | (1.6) | % |
Three Months Ended September 30, 2024
Net sales decreased $69 million due to the following:
● Unfavorable foreign currency translation and divestiture-related sales (-1%)
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 $89 million primarily due to improved manufacturing productivity.
Selling, general and administrative expense increased $15 million primarily due to wage and benefits inflation partially offset by certain overhead reductions.
Interest expense increased $3 million primarily due to higher interest rates. Interest income increased $9 million primarily due to higher interest rates.
Other (income)/charges, net increased by $27 million of income primarily due to the absence of a loss on the third quarter 2023 sale of the Company's legacy Russian industrial operations and an increase in realized foreign currency gains.
Nine Months Ended September 30, 2024
Net sales decreased $216 million due to the following:
● Lower sales volumes (-1%)
● Unfavorable foreign currency translation and divestiture-related sales (-1%)
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 $372 million primarily due to moderating raw material costs during the first six months of 2024 and lower sales volumes.
Selling, general and administrative expense increased $95 million primarily due to wage and benefits inflation and growth-related investments.
Depreciation expense increased $11 million primarily due to higher capital expenditures in recent periods.
Interest expense decreased $6 million primarily due to lower debt balances. Interest income increased $39 million primarily due to higher interest rates and higher intra-quarter cash and cash equivalents balances during the period.
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.
Other (income)/charges, net increased by $11 million of charges primarily due to a non-cash loss on the second quarter 2024 sale of the Argentina portion of the traffic solutions business and the absence of a first quarter 2023 insurance recovery related to hurricane damage at a southern U.S. factory, partially offset by the absence of a loss on the third quarter 2023 sale of the Company's legacy Russian industrial operations and an increase in realized foreign currency gains.
Effective Tax Rate and Earnings Per Diluted Share
| Three Months Ended September 30 | Percent Change | Nine Months Ended September 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages and amounts per share) | 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||
| Income tax expense | $137 | $121 | 13.2 | % | $422 | $350 | 20.6 | % | |||||||||||||||||||||||||||
| Effective tax rate | 22.4 | % | 21.7 | % | 0.7 | % | 22.9 | % | 22.5 | % | 0.4 | % | |||||||||||||||||||||||
| Adjusted effective tax rate, continuing operations* | 22.5 | % | 19.5 | % | 3.0 | % | 23.2 | % | 22.0 | % | 1.2 | % | |||||||||||||||||||||||
| Earnings per diluted share, continuing operations | $2.00 | $1.79 | 11.7 | % | $5.93 | $4.97 | 19.3 | % | |||||||||||||||||||||||||||
| Adjusted earnings per diluted share* | $2.13 | $2.07 | 2.9 | % | $6.49 | $6.15 | 5.5 | % | |||||||||||||||||||||||||||
| *See Regulation G Reconciliation below |
Adjusted earnings per diluted share for the three months ended September 30, 2024 increased year-over-year primarily due to improved manufacturing productivity and certain reductions in overhead, partially offset by wage and benefits inflation.
Adjusted earnings per diluted share for the nine months ended September 30, 2024 increased year-over-year primarily due to moderating raw material costs during the first six months of 2024, partially offset by wage and benefits inflation.
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, 2024 | |||||||||||||||||||||||||||||
| ($ 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 | $611 | $137 | 22.4 | % | $468 | $2.00 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 32 | 8 | 24.4 | % | 24 | 0.10 | |||||||||||||||||||||||
| Portfolio optimization(b) | 10 | 2 | 24.3 | % | 8 | 0.03 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $653 | $147 | 22.5 | % | $500 | $2.13 |
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| ($ 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 | |||||||||||||||||||||||
| Portfolio optimization(b) | 15 | (12) | (77.2) | % | 27 | 0.11 | |||||||||||||||||||||||
| Business restructuring-related costs, net(c) | 13 | 3 | 22.9 | % | 10 | 0.04 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $625 | $122 | 19.5 | % | $493 | $2.07 |
| Nine Months Ended September 30, 2024 | |||||||||||||||||||||||||||||
| ($ 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 | $1,842 | $422 | 22.9 | % | $1,396 | $5.93 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 106 | 26 | 24.5 | % | 80 | 0.33 | |||||||||||||||||||||||
| Portfolio optimization(b) | 42 | 12 | 28.6 | % | 30 | 0.13 | |||||||||||||||||||||||
| Business restructuring-related costs, net(c) | 15 | 5 | 32.5 | % | 10 | 0.04 | |||||||||||||||||||||||
| Legacy environmental remediation charges(d) | 20 | 5 | 24.3 | % | 15 | 0.06 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $2,025 | $470 | 23.2 | % | $1,531 | $6.49 |
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| ($ 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 (e) | 190 | 46 | 24.2 | % | 144 | 0.61 | |||||||||||||||||||||||
| Acquisition-related amortization expense | 121 | 30 | 24.3 | % | 91 | 0.39 | |||||||||||||||||||||||
| Business restructuring-related costs, net (c) | 27 | 6 | 23.5 | % | 21 | 0.09 | |||||||||||||||||||||||
| Portfolio optimization(b) | 22 | (10) | (45.2) | % | 30 | 0.12 | |||||||||||||||||||||||
| Insurance recovery of expenses incurred due to a natural disaster (f) | (9) | (2) | 24.3 | % | (7) | (0.03) | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $1,907 | $420 | 22.0 | % | $1,459 | $6.15 |
(a)Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.
(b)Portfolio optimization includes losses on the sale of non-core assets, including the loss recognized in the second quarter 2024 on the sale of the Company's traffic solutions business in Argentina and the loss recognized in the third quarter 2023 on the sale of the Company's legacy industrial Russian operations, which are included in Other (income)/charges, net in the condensed consolidated statement of income. Portfolio optimization also includes advisory, legal, accounting, valuation, other professional or consulting fees and certain internal costs directly incurred to effect acquisitions, as well as similar fees and other costs to effect divestitures and other portfolio optimization exit actions. These costs are included in Selling, general and administrative expense on the condensed consolidated statement of income. In 2023, net loss of $2 million was attributable to noncontrolling interests.
(c)Business restructuring-related costs, net include business restructuring charges, offset by releases related to previously approved programs, which are included in Other (income)/charges, net on the condensed consolidated statement of income, accelerated depreciation of certain assets, which is included in Depreciation on the condensed consolidated statement of income, and other restructuring-related costs, which are included in Cost of sales, exclusive of depreciation and amortization and Selling, general and administrative on the condensed consolidated statement of income.
(d)Legacy environmental remediation charges represent environmental remediation costs at certain non-operating PPG manufacturing sites. These charges are included in Other (income)/charges, net in the condensed consolidated statement of income.
(e)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.
(f)In the first quarter 2023, the Company received reimbursement under its insurance policies for damages incurred at a southern U.S. factory from a winter storm in 2020.
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) | 2024 | 2023 | 2024 vs. 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $2,921 | $2,880 | $41 | 1.4 | % | $8,583 | $8,549 | $34 | 0.4 | % | |||||||||||||||||||||||||||||||||||||
| Segment income | $513 | $452 | $61 | 13.5 | % | $1,485 | $1,384 | $101 | 7.3 | % | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $22 | $28 | ($6) | (21.4) | % | $74 | $87 | ($13) | (14.9) | % | |||||||||||||||||||||||||||||||||||||
| Segment income, excluding amortization expense | $535 | $480 | $55 | 11.5 | % | $1,559 | $1,471 | $88 | 6.0 | % |
Three Months Ended September 30, 2024
Performance Coatings net sales increased due to the following:
● Higher sales volumes (+2%)
● Higher selling prices (+1%)
Offset by:
● Unfavorable foreign currency translation (-1%)
● Divestiture-related sales (-1%)
Architectural coatings - Americas and Asia Pacific net sales, excluding the impact of currency, acquisitions and divestitures ("organic sales") increased a low single-digit percentage compared to the prior-year third quarter driven by increased sales volumes in the U.S. and Canada coupled with higher prices. In the U.S. and Canada, growth initiatives through our partnership with The Home Depot® drove higher professional contractor sales volumes. In Mexico, the business benefited from our strong concessionaire network.
Architectural coatings – EMEA organic sales were flat year over year, as higher prices were offset by lower sales volumes. Consumer confidence remained weak during the quarter, and regional demand was uneven by country. Sales volumes were strong in central and eastern Europe offset by lower sales volumes in western Europe.
Automotive refinish coatings organic sales increased by a mid-single-digit percentage versus the prior year. In the U.S., sales volumes were higher compared to prior-year results even with lower industry-wide insurance claims. In Europe, organic sales increased year over year driven by price, and demand improved slightly in Latin America. In China, demand for refinish products is recovering and is expected to improve in the coming quarters.
Aerospace coatings organic sales increased by a double-digit percentage compared to the third quarter 2023, led by higher selling prices and sales volume. Demand remained strong as customer order backlogs are at similar levels to the prior quarter. Global air travel has improved year over year but remains about 3% below pre-pandemic levels for both domestic and international flights. The company remains focused on debottlenecking and expanding manufacturing capabilities to drive volume and earnings growth.
Protective and marine coatings organic sales increased by a low single-digit percentage compared to the prior-year third quarter driven by higher sales volumes in Europe and the Asia Pacific region partially offset by lower sales volumes in the United States. The third quarter was the sixth consecutive quarter with positive year-over-year sales volume growth. In Europe and the Asia Pacific region, increased sales volumes were driven by share gains in marine maintenance and repair, reflecting demand for PPG's sustainably advantaged products.
Traffic solutions organic sales increased by a low single-digit percentage compared with the prior-year third quarter primarily due to increased sales volumes offset by lower prices. Seasonally, second and third quarter sales in the traffic solutions business are typically more than twice the sales in the first and fourth quarter due to the difficulty of applying traffic markings in colder temperatures.
Segment income was $513 million, an increase of 13% versus the prior year, primarily due to higher sales volumes and selling prices, partially offset by wage inflation.
Nine Months Ended September 30, 2024
Performance Coatings net sales were flat due to the following:
● Higher selling prices (+1%)
Partially offset by:
● Lower sales volumes and divestiture-related sales (-1%)
Architectural coatings - Americas and Asia Pacific organic sales were flat year-over-year with slightly higher selling prices offset by slightly lower sales volumes.
Architectural coatings – EMEA organic sales decreased by a low single-digit percentage year over year driven by lower sales volumes. Regional demand was uneven by country, with strong sales volumes in central and eastern Europe offset by lower sales volumes in western Europe.
Automotive refinish coatings organic sales were flat year over year as selling price increases offset lower sales volumes.
Aerospace coatings sales volumes increased by a high single-digit percentage as demand was strong in all regions. Sales also increased due to the benefit of higher selling prices.
Protective and marine coatings organic sales increased by a low single-digit percentage primarily due to strong demand in Europe and the Asia Pacific region.
Traffic solutions organic sales were flat as higher sales volumes in the U.S. were offset by lower selling prices.
Segment income increased $101 million year over year primarily due to higher selling prices, lower manufacturing costs and moderating raw material costs during the first six months of 2024, which more than offset wage and benefits inflation and higher growth-related spending.
Looking Ahead
In the fourth quarter, we expect demand to continue to be strong in aerospace coatings and expect growth in automotive refinish coatings above industry rates. We expect that consumer demand will remain tepid in Europe. Our architectural coatings - Americas and Asia Pacific business is anticipated to benefit from growth initiatives with The Home Depot® and from our strong concessionaire network.
Industrial Coatings
| Three Months Ended September 30 | $ Change | % Change | Nine Months Ended September 30 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2024 | 2023 | 2024 vs. 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $1,654 | $1,764 | ($110) | (6.2) | % | $5,097 | $5,347 | ($250) | (4.7) | % | |||||||||||||||||||||||||||||||||||||
| Segment income | $199 | $246 | ($47) | (19.1) | % | $707 | $736 | ($29) | (3.9) | % | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $10 | $12 | ($2) | (16.7) | % | $30 | $34 | ($4) | (11.8) | % | |||||||||||||||||||||||||||||||||||||
| Segment income, excluding amortization expense | $209 | $258 | ($49) | (19.0) | % | $737 | $770 | ($33) | (4.3) | % |
Three Months Ended September 30, 2024
Industrial Coatings segment net sales decreased due to the following:
● Lower selling prices (-3%)
● Lower sales volumes (-3%)
Automotive OEM coatings organic sales decreased by a double-digit percentage compared to the third quarter 2023 driven by lower sales volumes and lower indexed-based selling prices for certain customer contracts. Overall global demand weakened in the third quarter. Sales volume declines in the U.S. and Europe were partially offset by sales volume increases in Latin America. In Western Europe and the U.S., automotive industry build rates were significantly lower than the third quarter 2023 with reduced demand and extended OEM downtime.
In the industrial coatings business, organic sales decreased by a mid-single-digit percentage compared to the prior year due to lower sales volumes and lower indexed-based prices. Overall, global industrial production remained
sluggish, especially in Europe and the U.S. Sales volume declines in those regions more than offset strong growth in the Asia Pacific and Latin America regions.
Packaging coatings organic sales increased by a low single-digit percentage compared to the prior year with higher sales volumes partially offset by lower, index-driven prices. Global beverage demand remains strong, and PPG is well positioned to support the growth.
Specialty coatings and materials organic sales increased by a low single-digit percentage due to higher sales volumes partially offset by lower selling prices.
Segment income decreased $47 million year over year primarily due to lower index-based pricing, lower sales volumes and wage and benefits inflation, partially offset by lower overhead costs.
Nine Months Ended September 30, 2024
Industrial Coatings segment net sales decreased due to the following:
● Lower selling price (-3%)
● Lower sales volumes (-1%)
● Unfavorable foreign currency translation (-1%)
Automotive OEM coatings organic sales decreased by a high single-digit percentage year over year driven by lower sales volumes and lower index-based selling prices for certain customer contracts. Sales volume increases in the Asia Pacific and Latin America regions were more than offset by declines in Europe and the U.S.
In the industrial coatings business, organic sales decreased by a mid-single-digit percentage year over year driven by lower sales volumes and indexed-based prices. Softening global industrial demand resulted in lower sales volumes in all regions except Asia Pacific where sales volumes increased by a mid single-digit percentage.
Packaging coatings organic sales increased by a low single-digit percentage year over year as higher sales volumes were partially offset by lower selling prices in all regions.
Specialty coatings and materials organic sales increased by a mid-single-digit percentage primarily due to higher sales volumes, partially offset by the absence of European energy-related surcharge pricing in the prior year period.
Segment income decreased $29 million year over year primarily due to index-based selling price declines, partially offset by moderating raw material costs during the first six months of 2024.
Looking Ahead
In the fourth quarter, we expect both automotive production build rates and global industrial production to remain at low levels, especially in the U.S. and Europe. For the packaging coatings business, we expect continued strong growth in the Asia Pacific region.
Liquidity and Capital Resources
PPG had cash and short-term investments totaling $1.3 billion and $1.6 billion at September 30, 2024 and December 31, 2023, 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, 2024 and 2023 was $1,074 million and $1,513 million, respectively. The $439 million decrease in cash from operating activities was primarily due to unfavorable changes in working capital compared to the prior year.
Operating Working Capital
Operating working capital is a subset of total working capital and represents (1) trade receivables – net of the allowance for doubtful accounts (2) FIFO inventories and (3) trade liabilities. We believe operating working capital represents the key components of working capital under the operating control of our businesses. A key metric we use to measure our working capital management is operating working capital as a percentage of sales (current quarter sales annualized).
| ($ in millions, except percentages) | September 30, 2024 | December 31, 2023 | September 30, 2023 | ||||||||||||||
| Trade receivables, net | $3,223 | $2,881 | $3,213 | ||||||||||||||
| Inventories, FIFO | 2,498 | 2,376 | 2,479 | ||||||||||||||
| Trade creditors’ liabilities | 2,536 | 2,612 | 2,491 | ||||||||||||||
| Operating working capital | $3,185 | $2,645 | $3,201 | ||||||||||||||
| Operating working capital as a % of sales | 17.4 | % | 15.2 | % | 17.2 | % | |||||||||||
| Days sales outstanding | 59 | 55 | 57 |
Environmental
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Cash outlays for environmental remediation activities | $6 | $12 | $19 | $28 |
| ($ in millions) | Remainder of 2024 | Annually 2025 - 2028 | |||||||||
| Projected future cash outlays for environmental remediation activities | $10 - $30 | $20 - $75 |
Cash used for investing activities
Cash used for investing activities for the nine months ended September 30, 2024 and 2023 was $511 million and $399 million, respectively. The $112 million increase in cash used for investing activities was primarily due to higher capital expenditures compared to the prior year.
Total capital spending is expected to be approximately $650 million to $700 million in 2024 in support of future organic growth opportunities.
Cash used for financing activities
Cash used for financing activities for the nine months ended September 30, 2024 and 2023 was $617 million and $1,005 million, respectively. The $388 million decrease in cash used for financing activities was primarily due to higher net debt proceeds, partially offset by higher share repurchases compared to the prior year.
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 December 2023, PPG obtained lender commitments sufficient to increase the size of the Term Loan by €250 million. In January 2024, PPG borrowed the additional €250 million.
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 above 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 was scheduled to mature and all outstanding borrowings were to be due and payable on the third anniversary of the date of the initial borrowing under the Agreement. In June 2021, PPG borrowed $700 million under 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 $1.1 billion, respectively, of the Term Loan Credit Agreement using cash on hand. The Term Loan Credit Agreement was fully repaid as of December 31, 2023.
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 remained 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 $408 million commercial paper borrowings outstanding as of September 30, 2024 and no commercial paper borrowings outstanding as of December 31, 2023.
The Term Loan and the Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan and the 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, 2024, Total Indebtedness to Total Capitalization as defined under the Credit Agreement was 44%.
Other Debt Issued and Repaid
In August 2024, PPG's $300 million 2.4% notes matured, and the Company repaid this obligation using cash on hand.
In March 2023, PPG's $300 million 3.2% notes matured, and the Company repaid this obligation using cash on hand.
Other Liquidity Information
Restructuring
Aggregate restructuring savings were approximately $10 million in the third quarter 2024. Total restructuring savings are expected to be at least $35 million in 2024. In addition, the Company continues to review its cost structure to identify additional cost savings opportunities. Refer to Note 6, “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 in the range of $50 million to $60 million in 2024.
Global Silicas Business - Strategic Review
During the first quarter 2024, PPG announced that it would review strategic alternatives for its global silicas products business. During the third quarter 2024, PPG signed an agreement to sell its global silicas products business to QEMETICA S.A., a Warsaw, Poland-based, privately-held manufacturer of soda ash, silicates and other specialty chemicals for approximately $310 million in pre-tax proceeds. Refer to Note 3, "Divestitures" in Part I, Item 1 of this Form 10-Q for further detail related to this transaction.
United States and Canada Architectural Coatings Business - Strategic Review
During the first quarter 2024, PPG announced that it would review strategic alternatives for its architectural coatings U.S. and Canada business. On October 17, 2024, PPG announced that it had entered into a definitive agreement to sell 100% of its architectural coatings business in the U.S. and Canada at a transaction value of approximately $550 million to American Industrial Partners (AIP), an industrials investor. Refer to Note 18, "Subsequent Events" in Part I, Item 1 of this Form 10-Q for further detail related to this transaction.
Currency
Comparing spot exchange rates at September 30, 2024 and at December 31, 2023, the U.S. dollar strengthened 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, 2024 decreased by $558 million compared to December 31, 2023.
Comparing average exchange rates during the first nine months of 2024 to those of the first nine months of 2023, the U.S. dollar was relatively flat compared to the currencies of most countries where PPG operates. Changes in foreign exchange rates had an unfavorable impact on Income before income taxes for the nine months ended September 30, 2024 of $1 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 2023 Form 10-K. There were no material changes in the Company’s critical accounting estimates from the 2023 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 global economic conditions, geopolitical issues in Europe, effects on our business of COVID-19, 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 cost reduction program, including the timing and amounts of the expected future restructuring charges, accelerated depreciation, and cash costs and the timing and realization of anticipated cost savings from restructuring actions, 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 2023 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 2023 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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