Company Quick10K Filing
Quick10K
PPG Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$118.40 236 $27,950
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-18 Officers, Shareholder Vote, Exhibits
8-K 2019-04-18 Earnings, Exhibits
8-K 2019-03-28 Officers
8-K 2019-01-17 Earnings, Regulation FD, Exhibits
8-K 2019-01-07 Officers
8-K 2018-10-18 Earnings, Exhibits
8-K 2018-10-08 Earnings, Exhibits
8-K 2018-07-19 Officers, Exhibits
8-K 2018-07-19 Earnings, Exhibits
8-K 2018-06-27 Earnings, Amendment, Exhibits
8-K 2018-05-16 Exhibits
8-K 2018-05-10 Amendment, Officers, Other Events, Exhibits
8-K 2018-04-23 Exit Costs
8-K 2018-04-19 Shareholder Vote
8-K 2018-02-28 Regulation FD, Exhibits
8-K 2018-02-27 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-01-18 Earnings, Exhibits
8-K 2018-01-04 Officers
ENBL Enable Midstream Partners 5,800
OMF Onemain Holdings 4,580
VLY Valley National Bancorp 3,450
SOGO Sogou 2,080
GTE Gran Tierra Energy 967
CATC Cambridge Bancorp 338
TNXP Tonix Pharmaceuticals Holding 15
IAIC Information Analysis 0
LOXO Loxo Oncology 0
USVR US VR Global.com 0
PPG 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 ppgq1201910qex101.htm
EX-31.1 ppgq1201910qex311.htm
EX-31.2 ppgq1201910qex312.htm
EX-32.1 ppgq1201910qex321.htm
EX-32.2 ppgq1201910qex322.htm

PPG Industries Earnings 2019-03-31

PPG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ppgq1201910q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ________________________________________
FORM 10-Q
 ––––––––––––––––––––––––––––––––––––––––
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2019
Commission File Number 1-1687
____________________________________________________________ 
PPG INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 
Pennsylvania
 
25-0730780
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One PPG Place, Pittsburgh, Pennsylvania
 
15272
(Address of principal executive offices)
 
(Zip Code)
(412) 434-3131
(Registrant’s telephone number, including area code)
–––––––––––––––––––––––––––––––––––––––––––––––––––––– 
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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý  No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files).   Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated filer
o 
Smaller reporting company
o
 
 
Emerging growth company
o
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 Exchange Act).    Yes  ¨    No  ý
As of March 31, 2019, 236,059,963 shares of the Registrant’s common stock, par value $1.66 2/3 per share, were outstanding.

 


PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX

1


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Income (Unaudited)
($ in millions, except per share amounts)
 
Three Months Ended
March 31
 
2019
 
2018
Net sales

$3,624

 

$3,781

Cost of sales, exclusive of depreciation and amortization
2,073

 
2,181

Selling, general and administrative
889

 
906

Depreciation
86

 
87

Amortization
32

 
36

Research and development, net
105

 
112

Interest expense
31

 
26

Interest income
(6
)
 
(5
)
Release of business restructuring reserves
(3
)
 

Other charges
14

 
41

Other income
(16
)
 
(24
)
Income before income taxes

$419

 

$421

Income tax expense
102

 
87

Income from continuing operations

$317

 

$334

Income from discontinued operations, net of tax

 
6

Net income attributable to controlling and noncontrolling interests

$317

 

$340

Less: Net income attributable to noncontrolling interests
(5
)
 
(6
)
Net income (attributable to PPG)

$312

 

$334

Amounts attributable to PPG:
 
 
 
Income from continuing operations, net of tax

$312

 

$328

Income from discontinued operations, net of tax

 
6

Net income (attributable to PPG)

$312

 

$334

 
 
 
 
Earnings per common share:
 
 
 
Income from continuing operations, net of tax

$1.32

 

$1.32

Income from discontinued operations, net of tax

 
0.02

Net income (attributable to PPG)

$1.32

 

$1.34

Earnings per common share – assuming dilution:
 
 
 
Income from continuing operations, net of tax

$1.31

 

$1.31

Income from discontinued operations, net of tax

 
0.02

Net income (attributable to PPG)

$1.31

 

$1.33

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

2


PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Comprehensive Income (Unaudited)
($ in millions)
 
Three Months Ended
March 31
 
2019
 
2018
Net income attributable to the controlling and noncontrolling interests

$317

 

$340

Other comprehensive (loss) income, net of tax:
 
 
 
Defined benefit pension and other postretirement benefits
(6
)
 
17

Unrealized foreign currency translation adjustments
81

 
146

Derivative financial instruments

 
(2
)
Other comprehensive income, net of tax

$75

 

$161

Total comprehensive income

$392

 

$501

Less: amounts attributable to noncontrolling interests:
 
 
 
Net income
(5
)
 
(6
)
Unrealized foreign currency translation adjustments
1

 
(2
)
Comprehensive income attributable to PPG

$388

 

$493

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

3


PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
($ in millions)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents

$784

 

$902

Short-term investments
55

 
61

Receivables (less allowance for doubtful accounts of $26 and $24)
3,197

 
2,845

Inventories
1,965

 
1,783

Other
408

 
370

Total current assets

$6,409

 

$5,961

Property, plant and equipment (net of accumulated depreciation of $3,897 and $3,828)
2,866

 
2,805

Goodwill
4,103

 
4,070

Identifiable intangible assets, net
2,020

 
1,972

Deferred income taxes
242

 
229

Investments
261

 
251

Operating lease right-of-use assets
726

 

Other assets
744

 
727

Total

$17,371

 

$16,015

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities

$3,684

 

$3,623

Restructuring reserves
83

 
99

Short-term debt and current portion of long-term debt
653

 
651

Current portion of operating lease liabilities
168

 

Total current liabilities

$4,588

 

$4,373

Long-term debt
4,626

 
4,365

Operating lease liabilities
566

 

Accrued pensions
646

 
645

Other postretirement benefits
623

 
629

Deferred income taxes
447

 
429

Other liabilities
865

 
842

Total liabilities

$12,361

 

$11,283

Commitments and contingent liabilities (Note 15)
 
 

Shareholders’ equity:
 
 
 
Common stock
969

 
969

Additional paid-in capital
899

 
788

Retained earnings
18,330

 
18,131

Treasury stock, at cost
(13,070
)
 
(12,958
)
Accumulated other comprehensive loss
(2,224
)
 
(2,300
)
Total PPG shareholders’ equity

$4,904

 

$4,630

Noncontrolling interests
106

 
102

Total shareholders’ equity

$5,010

 

$4,732

Total

$17,371

 

$16,015

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

4


PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
($ in millions)
 
Common Stock
Additional Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive (Loss)/Income
Total PPG
Non-controlling Interests
Total
January 1, 2019

$969


$788


$18,131


($12,958
)

($2,300
)

$4,630


$102


$4,732

Net income attributable to the controlling and noncontrolling interests


312



312

5

317

Other comprehensive income/(loss), net of tax




76

76

(1
)
75

Cash dividends


(113
)


(113
)

(113
)
Purchase of treasury stock



(175
)

(175
)

(175
)
Issuance of treasury stock

121


63


184


184

Stock-based compensation activity

(10
)



(10
)

(10
)
March 31, 2019

$969


$899


$18,330


($13,070
)

($2,224
)

$4,904


$106


$5,010

 
Common Stock
Additional Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive (Loss)/Income
Total PPG
Non-controlling Interests
Total
January 1, 2018

$969


$756


$17,140


($11,251
)

($2,057
)

$5,557


$115


$5,672

Net income attributable to the controlling and noncontrolling interests


334



334

6

340

Other comprehensive income, net of tax




159

159

2

161

Cash dividends


(112
)


(112
)

(112
)
Purchase of treasury stock



(600
)

(600
)

(600
)
Issuance of treasury stock

24


7


31


31

Stock-based compensation activity

(19
)



(19
)

(19
)
Reductions in noncontrolling interests






(2
)
(2
)
Reclassification from other comprehensive income to retained earnings - Adoption of ASU 2018-02


107


(107
)



Adjustment to retained earnings - Adoption of ASU 2016-16


(4
)


(4
)

(4
)
March 31, 2018

$969


$761


$17,465


($11,844
)

($2,005
)

$5,346


$121


$5,467

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

5


PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited)
 
Three Months Ended
March 31
($ in millions)
2019
 
2018
Operating activities:
 
 
 
Net income attributable to controlling and noncontrolling interests

$317

 

$340

Less: Income from discontinued operations

 
(6
)
Income from continuing operations

$317

 

$334

Adjustments to reconcile net income to cash from operations:
 
 
 
Depreciation and amortization
118

 
123

Pension expense
12

 
10

Environmental remediation charges
10

 
34

Release of business restructuring reserves
(3
)
 

Stock-based compensation expense
9

 
9

Equity affiliate earnings, net of dividends
(4
)
 
(4
)
Deferred income tax benefit
(32
)
 
(5
)
Cash contributions to pension plans
(3
)
 
(30
)
Cash used for restructuring actions
(15
)
 
(17
)
Change in certain asset and liability accounts:
 
 
 
Receivables
(299
)
 
(373
)
Inventories
(152
)
 
(202
)
Other current assets
(56
)
 
(46
)
Accounts payable and accrued liabilities
(24
)
 
74

Taxes and interest payable
42

 
(45
)
Noncurrent assets and liabilities, net
(22
)
 
(75
)
Other
36

 
(15
)
Cash used for operating activities

($66
)
 

($228
)
Investing activities:
 
 
 
Capital expenditures
(47
)
 
(75
)
Business acquisitions, net of cash balances acquired
(57
)
 
(96
)
Payments for the settlement of cross currency swap contracts
(6
)
 
(13
)
Proceeds from the settlement of cross currency swap
16

 

Other
8

 
6

Cash used for investing activities

($86
)
 

($178
)
Financing activities:
 
 
 
Net change in borrowing with maturities of three months or less
9

 
7

Proceeds from commercial paper
300

 

Proceeds from the issuance of debt, net of discounts and fees

 
992

Repayment of long-term debt
(1
)
 
(1
)
Purchase of treasury stock
(175
)
 
(600
)
Issuance of treasury stock
7

 
9

Dividends paid
(113
)
 
(112
)
Payments related to tax withholding on stock-based compensation awards
(8
)
 
(13
)
Other
13

 
13

Cash from financing activities

$32

 

$295

Effect of currency exchange rate changes on cash and cash equivalents
2

 
21

Net decrease in cash and cash equivalents

($118
)
 

($90
)
Cash and cash equivalents, beginning of period
902

 
1,436

Cash and cash equivalents, end of period

$784

 

$1,346

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid, net of amount capitalized

$40

 

$24

Taxes paid, net of refunds

$94

 

$118

 
 
 
 
Supplemental disclosure of noncash investing activities:
 
 
 
Reissuance of common stock for business acquisition

$164

 

$—

The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.

6


PPG INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
1.
Basis of Presentation
The condensed consolidated financial statements included herein are unaudited and have been prepared following the requirements of the Securities and Exchange Commission (the "SEC") and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim reporting. Under these rules, certain footnotes and other financial information that are normally required for annual financial statements can be condensed or omitted. These statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the financial position and shareholders' equity of PPG as of March 31, 2019, and the results of its operations and cash flows for the three months ended March 31, 2019 and 2018. 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 2018 Annual Report on Form 10-K (the "2018 Form 10-K").
Net sales, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results of operations for the three months ended March 31, 2019 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.
New Accounting Standards
Accounting Standards Adopted in 2019
Effective January 1, 2019, PPG adopted Accounting Standards Update (“ASU”) No. 2016-02, "Leases." This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU using a retrospective adoption method at January 1, 2019, as outlined in ASU No. 2018-11, "Leases - Targeted Improvements." Under this method of adoption, there is no impact to the comparative condensed consolidated statement of income and condensed consolidated balance sheet. PPG determined that there was no cumulative-effect adjustment to beginning Retained earnings on the condensed consolidated balance sheet. PPG will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in Accounting Standards Codification Topic 840, "Leases". In addition, PPG elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.
Adoption of this standard did not materially impact PPG’s Income before income taxes and had no impact on the condensed consolidated statement of cash flows. See Note 3, “Leases” for further details.
Accounting Standards to be Adopted in Future Years
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software." This ASU requires capitalization of certain implementation costs incurred in a cloud computing arrangement that is a service contract. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 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.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses.” This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and for interim periods therein. Entities may choose to adopt the new ASU as of its fiscal year beginning after December 15, 2018. PPG did not early adopt this standard. PPG does not believe this ASU will have a material impact on its consolidated financial position, results of operations or cash flows.
3.
Leases
PPG leases certain retail paint stores, warehouses, distribution facilities, office space and equipment, including fleet vehicles. PPG determines if a contract is a lease at the inception of the arrangement. PPG reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised. Certain real estate leases contain lease and non-lease components, which are accounted for separately. For certain equipment leases, lease and non-lease components are accounted for as a single lease component.

7


Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
The components of lease expense were as follows:
($ in millions)
Classification in the Condensed Consolidated Statement of Income
Three Months Ended March 31, 2019
Operating lease cost (a)
Cost of sales, exclusive of depreciation and amortization

$9

Operating lease cost (a)
Selling, general and administrative
48

Total operating lease cost
 

$57

Finance lease cost:
 
 
Amortization of right-of-use assets
Depreciation

$1

Interest on lease liabilities
Interest Expense

Total finance lease cost
 

$1

Total lease cost
 

$58

(a)
Includes variable lease costs of $4 million. Short-term lease costs were $1 million during the period.
Variable lease expense is based on contractual arrangements with PPG’s lessors determined based on external indices or other relevant market factors. In addition, PPG’s variable lease expense also includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.
($ in millions)
Classification on the Condensed Consolidated Balance Sheet
March 31, 2019
Assets:
 
 
Operating
Other assets

$726

Finance (a)
Property, plant, and equipment
14

Total leased assets
 

$740

Liabilities:
 
 
Current
 
 
Operating
Current portion of operating lease liabilities

$168

Finance
Short-term debt and current portion of long-term debt
3

Noncurrent
 
 
Operating
Operating lease liabilities
566

Finance
Long-term debt
9

Total lease liabilities
 

$746

(a)
Net of accumulated depreciation of $15 million.
($ in millions)
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases

$52

Operating cash flows from finance leases

$—

Financing cash flows from finance leases

$1

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases

$34

Finance leases

$—


8


 
As of March 31, 2019
Weighted-average remaining lease term (in years)
 
Operating leases
7.4

Finance leases
6.2

Weighted-average discount rate
 
Operating leases
3.2
%
Finance leases
9.5
%
Nearly all of PPG’s lease contracts do not provide a readily determinable implicit rate. For these contracts, PPG’s estimated incremental borrowing rate is based on information available at the inception of the lease.
As of March 31, 2019, maturities of lease liabilities were as follows:
($ in millions)
Operating Leases
 
Finance Leases
Remaining nine months of 2019

$142

 

$3

2020
155

 
3

2021
116

 
3

2022
89

 
2

2023
70

 
2

Thereafter
255

 
4

Total lease payments

$827

 

$17

Less: Interest
93

 
5

Total lease obligations

$734

 

$12

Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a retrospective adoption method at January 1, 2019 as noted in Note 2. "New Accounting Standards." As required, the following disclosure is provided for periods prior to adoption. Minimum lease commitments as of December 31, 2018 that have initial or remaining lease terms in excess of one year are as follows:
($ in millions)
Operating Leases
 
Capital Leases
2019

$207

 

$3

2020
157

 
3

2021
116

 
1

2022
93

 
1

2023
76

 
1

Beyond 2023

$244

 

$3

4.
Acquisitions and Divestitures
Acquisitions
On April 16, 2019, PPG completed the acquisition of Hemmelrath, an automotive coatings manufacturer. Headquartered in Klingenberg, Germany, Hemmelrath is 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, are not anticipated to be significant. The results of this business will be reported within the automotive original equipment manufacturer ("OEM") coatings business within the Industrial Coatings reportable 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 employs more than 700 people and operates 10 manufacturing facilities globally. 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 segment.

9


In January 2018, PPG acquired ProCoatings, a leading architectural paint and coatings wholesaler located in The Netherlands. ProCoatings, established in 2001, distributes a large portfolio of well-known professional paint brands through its network of 23 multi-brand stores. The company employs nearly 100 people. 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 architectural coatings - Europe, Middle East and Africa (EMEA) business within the Performance Coatings reportable segment.
Divestitures
Glass Segment
The Net sales and Income from discontinued operations, net of tax related to the former Glass reportable business segment for the three months ended March 31, 2018 were as follows:
($ in millions)
Three Months Ended March 31, 2018
Income from operations

$8

Income tax expense
2

Income from discontinued operations, net of tax

$6

5.
Inventories
($ in millions)
March 31, 2019
 
December 31, 2018
Finished products

$1,234

 

$1,105

Work in process
211

 
193

Raw materials
486

 
452

Supplies
34

 
33

Total Inventories

$1,965

 

$1,783

Most U.S. inventories are valued using the last-in, first-out method. These inventories represented approximately 34% and 36% of total inventories at March 31, 2019 and December 31, 2018, respectively. If the first-in, first-out method of inventory valuation had been used, inventories would have been $126 million and $113 million higher as of March 31, 2019 and December 31, 2018, respectively.
6.
Goodwill and Other Identifiable Intangible Assets
The change in the carrying amount of goodwill attributable to each reportable segment for the three months ended March 31, 2019 was as follows:
($ in millions)
Performance
Coatings
 
Industrial
Coatings
 
Total
January 1, 2019

$3,266

 

$804

 

$4,070

Acquisitions, including purchase accounting adjustments
2

 
46

 
48

Foreign currency impact
(11
)
 
(4
)
 
(15
)
March 31, 2019

$3,257

 

$846

 

$4,103


10


A summary of the carrying value of the Company's identifiable intangible assets is as follows:
 
March 31, 2019
 
December 31, 2018
($ in millions)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Indefinite-Lived Identifiable Intangible Assets
Trademarks

$1,155

 
N/A

 

$1,155

 

$1,140

 
N/A

 

$1,140

Definite-Lived Identifiable Intangible Assets
Acquired technology

$673

 

($522
)
 

$151

 

$648

 

($515
)
 

$133

Customer-related
1,422

 
(822
)
 
600

 
1,396

 
(798
)
 
598

Trade names
205

 
(98
)
 
107

 
190

 
(96
)
 
94

Other
45

 
(38
)
 
7

 
44

 
(37
)
 
7

Total Definite Lived Intangible Assets

$2,345

 

($1,480
)
 

$865

 

$2,278

 

($1,446
)
 

$832

Total Identifiable Intangible Assets

$3,500

 

($1,480
)
 

$2,020

 

$3,418

 

($1,446
)
 

$1,972

The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives.
As of March 31, 2019, estimated future amortization expense of identifiable intangible assets is as follows:
($ in millions)
Future Amortization Expense
Remaining nine months of 2019

$88

2020
100

2021
95

2022
85

2023
75

2024
65

Thereafter
357

7.
Business 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 asset write-downs.
2018 Restructuring Program
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 current product demand, as well as reductions in various global functional and administrative costs. Substantially all actions from this business restructuring plan are expected to be complete by the end of the first quarter of 2020.
2016 Restructuring Program
In December 2016, PPG’s Board of Directors approved a business restructuring program which includes actions necessary to reduce the Company's global cost structure. The program is focused on certain regions and end-use markets where business conditions are the weakest, as well as reductions in production capacity and various global functional and administrative costs. Substantially all actions from this business restructuring plan are expected to be complete by the end of the third quarter of 2019.

11


The following table summarizes the reserve activity for the three months ended March 31, 2019:
($ in millions)
Total Reserve
December 31, 2018

$110

Cash payments
(15
)
Release of prior reserves 
(3
)
Foreign currency impact
(1
)
March 31, 2019

$91

During the first quarter, adjustments of approximately $3 million were recorded to reduce the remaining restructuring reserves to reflect the current estimate of the costs to complete these actions.
8.
Borrowings
During the first quarter of 2019, PPG issued $300 million of commercial paper. The Company's commercial paper borrowings are supported by the five-year credit agreement (the "Credit Agreement") entered into in 2015. As a result, the commercial paper borrowings as of March 31, 2019 are classified as long-term debt based on PPG's intent and ability to refinance these borrowings on a long-term basis.
In February 2018, PPG completed a public offering of $300 million aggregate principal amount of 3.2% notes due 2023 and $700 million aggregate principal amount of 3.75% notes due 2028. These notes were issued pursuant to PPG’s existing shelf registration statement and pursuant to an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented. 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 $992 million. A portion of the notes were converted from a fixed interest rate to a floating interest rate using interest rate swap contracts. For more information, refer to Note 13, “Financial Instruments, Hedging Activities and Fair Value Measurements.”
9.
Earnings Per Common Share
The effect of dilutive securities on the weighted average common shares outstanding included in the calculation of earnings per diluted common share for the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended
March 31
(number of shares in millions)
2019
 
2018
Weighted average common shares outstanding
236.7

 
249.8

Effect of dilutive securities:
 
 
 
Stock options
0.7

 
0.9

Other stock compensation plans
0.6

 
0.7

Potentially dilutive common shares
1.3

 
1.6

Adjusted weighted average common shares outstanding
238.0

 
251.4

 
 
 
 
Dividends per common share

$0.48

 

$0.45

Excluded from the computation of earnings per diluted share due to their antidilutive effect were 1.6 million and 1.1 million outstanding stock options for the three months ended March 31, 2019 and 2018, respectively.

12


10.
Income Taxes
 
Three Months Ended
March 31
 
2019
 
2018
Effective tax rate on pre-tax income from continuing operations
24.3
%
 
20.7
%
Income tax expense for the three months ended March 31, 2019 reflects $2 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. For the three months ended March 31, 2018, discrete items of $15 million reduced Income tax expense. Income tax expense for the first three months of 2019 is based on an estimated annual effective rate, which requires management to make its best estimate of annual pretax income or loss.
During the year, PPG management regularly updates forecasted annual pretax results for the various countries in which we operate based on changes in factors such as prices, shipments, product mix, and raw material inflation and manufacturing operations. To the extent that actual 2019 pretax results for U.S. and foreign income or loss vary from estimates, the actual Income tax expense recognized in 2019 could be different from the forecasted amount used to estimate the Income tax expense for the three months ended March 31, 2019.
11.
Pensions 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 now recorded in Other charges, except for pension settlement charges, in the accompanying condensed consolidated statements of income.
The net periodic pension and other postretirement benefit costs for the three months ended March 31, 2019 and 2018 were as follows:
 
Pension
 
Other Postretirement Benefits
 
Three Months Ended
March 31
 
Three Months Ended
March 31
($ in millions)
2019
 
2018
 
2019
 
2018
Service cost

$6

 

$8

 

$2

 

$2

Interest cost
26

 
24

 
6

 
6

Expected return on plan assets
(35
)
 
(38
)
 

 

Amortization of actuarial losses
15

 
16

 
2

 
5

Amortization of prior service credit

 

 
(14
)
 
(15
)
Net periodic benefit cost

$12

 

$10

 

($4
)
 

($2
)
PPG expects its 2019 net periodic pension and other postretirement benefit cost to be approximately $30 million, with pension expense representing approximately $45 million and other postretirement benefit cost representing a benefit of approximately $15 million.
Contributions to Defined Benefit Pension Plans
 
Three Months Ended
March 31
($ in millions)
2019
 
2018
U.S. defined benefit pension contributions

$—

 

$25

Non-U.S. defined benefit pension mandatory contributions

$3

 

$5

PPG made a voluntary contribution of $25 million to its U.S. defined benefit pension plans in January 2018. PPG expects to make mandatory contributions to its non-U.S. pension plans in the range of $15 million to $25 million during the remaining nine months of 2019. PPG may make voluntary contributions to its defined benefit pension plans in 2019 and beyond.

13


12.
Accumulated Other Comprehensive Loss
($ in millions)
Unrealized Foreign Currency Translation Adjustments
 
Pension and Other Postretirement Benefit Adjustments, net of tax (c)
 
Unrealized Gain (Loss) on Derivatives, net of tax (d)
 
Accumulated Other Comprehensive Loss
January 1, 2019
 

($1,734
)
 
 

($568
)
 
 

$2

 
 

($2,300
)
Current year deferrals to AOCI (a)
31

 
 

 
 

 
 
31

 
Current year deferrals to AOCI, net of tax (b)
51

 
 
(8
)
 
 

 
 
43

 
Reclassifications from AOCI to net income

 
 
2

 
 

 
 
2

 
Period change
 

$82

 
 

($6
)
 
 

$—

 
 

$76

March 31, 2019
 

($1,652
)
 
 

($574
)
 
 

$2

 
 

($2,224
)
 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2018
 

($1,567
)
 
 

($493
)
 
 

$3

 
 

($2,057
)
Current year deferrals to AOCI
189

 
 

 
 

 
 
189

 
Current year deferrals to AOCI, net of tax (b)
(45
)
 
 
14

 
 
(5
)
 
 
(36
)
 
Reclassifications from AOCI to net income

 
 
3

 
 
3

 
 
6

 
Period change
 

$144

 
 

$17

 
 

($2
)
 
 

$159

Reclassification from AOCI to Retained earnings - Adoption ASU 2018-02
 
(23
)
 
 
(84
)
 
 

 

(107
)
March 31, 2018
 

($1,446
)
 
 

($560
)
 
 

$1

 
 

($2,005
)
(a)
Except for income taxes of $6 million related to foreign currency impacts of certain unasserted earnings, unrealized foreign currency translation adjustments related to translation of foreign denominated balance sheets are not presented net of tax given that no deferred U.S. income taxes have been provided on undistributed earnings of non-U.S. subsidiaries because they are deemed to be reinvested for an indefinite period of time.
(b)
The tax cost related to unrealized foreign currency translation adjustments on tax inter-branch transactions and net investment hedges for the three months ended March 31, 2019 and 2018 was $17 million and $21 million, respectively.
(c)
The tax cost (benefit) related to the adjustment for pension and other postretirement benefits for the three months ended March 31, 2019 and 2018 was $1 million and ($1) million, respectively. Reclassifications from AOCI are included in the computation of net periodic benefit costs (See Note 11, "Pensions and Other Postretirement Benefits").
(d)
The tax cost (benefit) related to the changes in the unrealized gain (loss) on derivatives was insignificant for the three months ended March 31, 2019, and was ($1) million for the three months ended March 31, 2018. Reclassifications from AOCI are included in the gain recognized on cash flow hedges (See Note 13, "Financial Instruments, Hedging Activities and Fair Value Measurements").
13.
Financial Instruments, Hedging Activities and Fair Value Measurements
Financial instruments include cash and cash equivalents, short-term investments, cash held in escrow, marketable equity securities, accounts receivable, company-owned life insurance, accounts payable, short-term and long-term debt instruments, and derivatives. The fair values of these financial instruments approximated their carrying values at March 31, 2019 and December 31, 2018, 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 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 month periods ended March 31, 2019 and 2018.
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.

14


There were no derivative instruments de-designated or discontinued as hedging instruments during the three month periods ended March 31, 2019 and 2018 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 income statement in the three month periods ended March 31, 2019 and 2018 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 it’s 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.
In February of 2018, PPG entered into interest rate swaps which converted $525 million of fixed rate debt to variable rate debt. The 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.
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. Underlying notional amounts related to these foreign currency forward contracts were $69 million at March 31, 2019 and $50 million at December 31, 2018.
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:
In February 2018, PPG entered into U.S. dollar to euro cross currency swap contracts with a total notional amount of $575 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 payments in U.S. dollars and make payments in euros to the counterparties. Also in February 2018, the Company settled outstanding U.S. dollar to euro cross currency swap contracts with a total notional amount of $560 million.
As of March 31, 2019 and December 31, 2018, PPG had designated €2.3 billion of euro-denominated borrowings as hedges of a portion of its net investment in the Company's European operations. The carrying value of these instruments as of March 31, 2019 and December 31, 2018 was $2.6 billion and $2.7 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 $2.5 billion at both March 31, 2019 and December 31, 2018.
Gains/Losses Deferred in Accumulated Other Comprehensive Loss
As of March 31, 2019, the Company had accumulated pre-tax 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 $231 million. As of December 31, 2018, the Company had accumulated pre-tax unrealized translation gains of $161 million.
The following table summarizes the location within the condensed consolidated financial statements and amount of gains (losses) related to derivative financial instruments activity for the three months ended March 31, 2019 and 2018. All dollar amounts are shown on a pre-tax basis.

15


 
March 31, 2019
 
March 31, 2018
 
 
($ in millions)
Gain Deferred in OCI
 
Gain (Loss) Recognized
 
Loss Deferred in OCI
 
Gain (Loss) Recognized
 
Caption In Condensed Consolidated Statement of Income
Economic
 
 
 
 
 
 
 
 
 
   Foreign currency forward contracts 

$—

 

$6

 

$—

 

$4

 
Other charges
Fair Value
 
 
 
 
 
 
 
 
 
   Interest rate swaps 

 

 

 
1

 
Interest expense
Cash Flow
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts(1)

 
(1
)
 
(6
)
 
(3
)
 
Other charges and Cost of sales
Total Cash Flow

$—



$5

 

($6
)
 

$2

 
 
Net Investment
 
 
 
 
 
 
 
 
 
Cross currency swaps

$13

 

$4

 

($26
)
 

$1

 
Interest expense
Foreign denominated debt
57

 

 
(68
)
 

 
 
Total Net Investment

$70

 

$4

 

($94
)
 

$1

 
 
(1)
For the period ended March 31, 2019, the amounts excluded from effectiveness testing recognized in earnings based on an amortized approach was expense of $1 million.
Fair Value Measurements
The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of March 31, 2019 and December 31, 2018, 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 2018 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 consolidated balance sheets as of March 31, 2019 and December 31, 2018 that are classified as Level 3 inputs.

16


Assets and liabilities reported at fair value on a recurring basis:
 
March 31, 2019
 
December 31, 2018
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities

$4

 

$—

 

$—

 

$4

 

$—

 

$—

Foreign currency forward contracts (a)

 
1

 

 

 

 

Foreign currency forward contracts (b)

 
29

 

 

 
45

 

Investments:
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities
78

 

 

 
69

 

 

Other assets:
 
 
 
 
 
 
 
 
 
 
 
Cross currency swaps (c)

 
48

 

 

 
35

 

Interest rate swaps (d)

 
18

 

 

 
8

 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (a)

 
1

 

 

 
1

 

Foreign currency forward contracts (b)

 
15

 

 

 
9

 

(a) Cash flow hedges
(c) Net investment hedges
(b) Derivatives not designated as hedging instruments
(d) Fair value hedges
Long-Term Debt
($ in millions)
March 31, 2019 (a)
 
December 31, 2018 (b)
Long-term debt - carrying value

$5,254

 

$5,000

Long-term debt - fair value

$5,447

 

$5,101

(a) Excluding finance lease obligations of $12 million and short term borrowings of $13 million as of March 31, 2019.
(b) Excluding capital lease obligations of $12 million and short term borrowings of $4 million as of December 31, 2018.
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.
Stock-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 7.4 million as of March 31, 2019.
Stock-based compensation and the income tax benefit recognized during the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended
March 31
($ in millions)
2019
 
2018
Stock-based compensation

$9

 

$9

Income tax benefit recognized

$2

 

$2


17


Grants of stock-based compensation during the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended
March 31
 
2019
 
2018
Grant Details
Shares
 
Fair Value
 
Shares
 
Fair Value
Stock options
588,870

 

$22.50

 
517,433

 

$25.38

Restricted stock units
179,564

 

$103.35

 
168,432

 

$110.28

Contingent shares (a)
51,850

 

$109.74

 
49,278

 

$116.32

(a) The number of contingent shares represents the target value of the award.
Stock options are generally exercisable 36 months after being granted and have a maximum term of 10 years. Compensation expense for stock options is recorded over the vesting period based on the fair value on the date of grant. The fair value of the stock option grants issued during the three months ended March 31, 2019 was calculated with the following weighted average assumptions:
Weighted average exercise price

$109.74

Risk-free interest rate
2.6
%
Expected life of option in years
6.5

Expected dividend yield
1.6
%
Expected volatility
20.0
%
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.
The amount paid upon vesting of performance-based RSUs may range from 0% to 180% of the original grant, based upon the frequency with which the annual earnings per share growth and cash flow return on capital performance targets are met over the three calendar year periods comprising the vesting period.
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. 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.
Commitments 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, antitrust, employment 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 and property damage, 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 if the settlement is not implemented. PPG’s lawsuits

18


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.
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).
Pittsburgh Corning Corporation asbestos bankruptcy
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. At the time of the bankruptcy filing, the Company had been named as one of many defendants in approximately 114,000 open 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: (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 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 will be 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.
In accordance with the PC plan of reorganization, PPG's equity interest in PC was canceled. PPG satisfied its funding obligations to the Trust on June 9, 2016, when it conveyed to the Trust the stock it owned in Pittsburgh Corning Europe and 2,777,778 shares of PPG’s common stock and made a cash payment to the Trust in the amount of $764 million. PPG’s historical insurance carriers participating in the PC plan of reorganization are required to make cash payments to the Trust of approximately $1.7 billion, subject to a right of prepayment at a 5.5% discount rate.
On October 13, 2016, the Bankruptcy Court issued an order entering a final decree and closing the Chapter 11 case. That order provided that the Bankruptcy Court retained jurisdiction to enforce any order issued in the case and any agreements approved by the court, enforce the terms and conditions of the modified third amended Plan, and consider any requests to reopen the case.

19


Non-PC relationship asbestos claims
At the time PC filed for bankruptcy, PPG had been named as one of many defendants in one or more of the categories of asbestos-related claims identified above. Over the course of the 16 years during which the PC bankruptcy proceedings, and corresponding preliminary injunction staying the prosecution of asbestos-related claims against PPG, were pending, certain plaintiffs alleging premises claims filed motions seeking to lift the stay with respect to more than 1,000 individually-identified premises claims. The Bankruptcy Court granted motions to lift the stay in respect to certain of these premises claims and directed PPG to engage in a process to address any additional premises claims that were the subject of pending or anticipated lift-stay motions. As a result of the overall process as directed by the Bankruptcy Court involving more than 1,000 premises claims between 2006 and May 27, 2016, hundreds of these claims were withdrawn or dismissed without payment and approximately 650 premises claims were dismissed upon agreements by PPG and its insurers to resolve such claims in exchange for monetary payments.
With respect to the remaining claims still reportable within the inventory of 114,000 asbestos-related claims 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 asbestos-related claims against it.
Current open and active claims post-Pittsburgh Corning bankruptcy
As of March 31, 2019, the Company was aware of approximately 460 open and active asbestos-related claims pending against the Company and certain of its subsidiaries. These claims consist primarily of non-PC Relationship Claims and claims against a subsidiary of PPG. The Company is defending the remaining open and active claims vigorously.
Since April 1, 2013, a subsidiary of PPG has been implicated in claims alleging death or injury caused by asbestos-containing products manufactured, distributed or sold by a North American architectural coatings business or its predecessors which was acquired by PPG. All such claims have been either served upon or tendered to the seller for defense and indemnity pursuant to obligations undertaken by the seller in connection with the Company’s purchase of the North American architectural coatings business. The seller has accepted the defense of these claims subject to the terms of various agreements between the Company and the seller. The seller’s defense and indemnity obligations in connection with newly filed claims ceased with respect to claims filed after April 1, 2018.
PPG has established reserves totaling approximately $180 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 potential future asbestos liabilities.  These reserves include a $162 million reserve established in 2009 in connection with an amendment to the PC plan of reorganization.  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. PPG does not have sufficient current claim information or settlement history on which to base a better estimate of this liability in light of the fact that the Bankruptcy Court’s injunction staying most asbestos claims against the Company was in effect from April 2000 through May 2016. PPG will monitor the activity associated with its remaining asbestos claims and evaluate, 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

20


resulting from its asbestos-related claims will not have a material adverse effect on PPG’s consolidated financial position, liquidity or results of operations.
Environmental Matters
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 2018 Form 10-K for additional descriptions of the following environmental matters.
As of March 31, 2019 and December 31, 2018, PPG had reserves for environmental contingencies associated with PPG’s former chromium manufacturing plant in Jersey City, N.J. (“New Jersey Chrome”) and for other environmental contingencies, including National Priority List sites and legacy glass and chemical manufacturing sites. These reserves are reported as Accounts payable and accrued liabilities and Other liabilities in the accompanying condensed consolidated balance sheet.
Environmental Reserves
($ in millions)
March 31, 2019
 
December 31, 2018
New Jersey Chrome

$137

 

$151

Glass and chemical
68

 
90

Other
61

 
50

Total

$266

 

$291

Current portion

$109

 

$105

Pre-tax charges against income for environmental remediation costs are included in Other charges in the accompanying condensed consolidated statement of income. The pre-tax charges and cash outlays related to such environmental remediation for the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended
March 31
($ in millions)
2019
 
2018
Environmental remediation pre-tax charges

$16

 

$34

Cash outlays for environmental remediation activities

$16

 

$17

In the first quarter of 2019, a one-time charge was taken to increase an existing legacy reserve classified within "Other" sites above by $10 million. In the first quarter of 2018, charges were taken to increase the existing reserves for the New Jersey Chrome and glass and chemical sites by $26 million and $8 million, respectively.
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 19 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 20 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 19 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. In 2018 and 2016, PPG completed updated 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

21


other associated costs. Based on these assessments, the reserve has been adjusted accordingly as noted in the table above. Principal factors affecting costs included 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 increased 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 after NJDEP's approval of the work plan. 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 2021.
PPG’s financial reserve for remediation of all New Jersey Chrome sites is $137 million at March 31, 2019. 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 19%, 17% and 31% 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. Final 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 be adjusted.
Remediation: Other Sites
Among other sites at which PPG is managing environmental liabilities, remedial actions are occurring at a legacy chemical manufacturing site in Barberton, Ohio, where PPG has completed a Facility Investigation and Corrective Measure Study under USEPA’s Resource Conservation and Recovery Act (“RCRA”) 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 $100 million to $200 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 $143 million and guarantees of $14 million as of March 31, 2019. The Company does not believe any loss related to such guarantees is likely.

22


16.
Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales. For most transactions, control passes in accordance with agreed upon delivery terms. 
The Company delivers products to company-owned stores, home centers and other regional or national consumer retail outlets, paint dealers, concessionaires and independent distributors, company-owned distribution networks, and directly to manufacturing companies and retail customers. Each product delivered to a third party customer is considered to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates. Accounts receivable are recognized when there is an unconditional right to consideration. Payment terms vary from customer to customer, depending on creditworthiness, prior payment history and other considerations.
The Company also provides services by applying coatings to customers' manufactured parts and assembled products and by providing technical support to certain customers. Performance obligations are satisfied over time as critical milestones are met and as services are provided. PPG is entitled to payment as the services are rendered. For the three months ended March 31, 2019 and 2018, service revenue constituted approximately 5% of total revenue.
Net sales by segment and region for the three months ended March 31, 2019 and 2018 were as follows:
($ in millions)
Performance Coatings
 
Industrial Coatings
 
Total Net Sales
 
Three Months Ended
March 31
 
Three Months Ended
March 31
 
Three Months Ended
March 31
 
2019
2018
 
2019
2018
 
2019
2018
United States and Canada

$953


$974

 

$613


$611

 

$1,566


$1,585

EMEA
688

707

 
426

473

 
1,114

1,180

Asia-Pacific
243

242

 
340

388

 
583

630

Latin America
224

237

 
137

149

 
361

386

Total

$2,108


$2,160

 

$1,516


$1,621

 

$3,624


$3,781

17.
Reportable Business Segment Information
PPG is a multinational manufacturer with 9 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 two 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 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 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 segment is comprised of the automotive original equipment manufacturer (“OEM”) coatings, industrial coatings, packaging coatings, and the specialty coatings and materials operating segments. This reportable 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.

23


Reportable segment net sales and segment income for the three months ended March 31, 2019 and 2018 were as follows: 
 
Three Months Ended
March 31
($ in millions)
2019
 
2018
Net sales:
 
 
 
Performance Coatings

$2,108

 

$2,160

Industrial Coatings
1,516

 
1,621

Total

$3,624

 

$3,781

Segment income:
 
 
 
Performance Coatings

$297

 

$280

Industrial Coatings
218

 
239

Total

$515

 

$519

Corporate
(45
)
 
(43
)
Interest expense, net of interest income
(25
)
 
(21
)
Legacy items (a)
(2
)
 
4

Environmental remediation charges
(10
)
 
(34
)
Release of business restructuring reserves
3

 

Accelerated depreciation and other costs from restructuring actions
(6
)
 

Acquisition-related costs (b)
(7
)
 

Costs associated with ongoing accounting investigations
(4
)
 

Costs related to customer assortment change

 
(4
)
Income before income taxes

$419

 

$421

(a)
Legacy items include current costs related to former operations of the Company, including pension and other postretirement benefit costs, certain charges for legal matters and certain recurring environmental remediation costs, and certain other charges which are not associated with PPG's current business portfolio.
(b)
Acquisition-related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred to effect significant acquisitions, as well as similar fees and other costs to effect divestitures not classified as discontinued operations. These costs also include the flow-through cost of sales for the step up to fair value of inventory acquired in acquisitions.

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 2018 Form 10-K.
Executive Overview
Below are our key financial results for the three months ended March 31, 2019:
Net sales were approximately $3.6 billion, down 4.2% compared to the prior year.
Cost of sales, exclusive of depreciation and amortization ("Cost of sales") was $2.1 billion, down 5.0% versus prior year. As a percentage of sales, Cost of sales decreased 0.5%.
Selling, general and administrative ("SG&A") expense was $889 million, down 1.9% year-over-year. As a percentage of sales, SG&A expense increased 0.5%.
Income before income taxes was $419 million.
The reported effective tax rate was 24.3%. The adjusted effective tax rate was 24.4%.
Income from continuing operations, net of tax (attributable to PPG) was $312 million.
Earnings per diluted share from continuing operations was $1.31.

24


For the three months ended March 31, 2019:
Cash flows used by operating activities - continuing operations was $66 million, an increase of $162 million year-over-year.
Capital expenditures, including business acquisitions (net of cash acquired), was $104 million.
The Company paid $113 million in dividends and repurchased $175 million of its outstanding common stock.
Performance in the first quarter of 2019 compared to the first quarter of 2018
Performance Overview
Net Sales by Region
 
Three Months Ended
March 31
 
Percent Change
($ in millions, except percentages)
2019
 
2018
 
2019 vs. 2018
United States and Canada

$1,566

 

$1,585

 
(1.2
)%
Europe, Middle East and Africa (EMEA)
1,114

 
1,180

 
(5.6
)%
Asia-Pacific
583

 
630

 
(7.5
)%
Latin America
361

 
386

 
(6.5
)%
Total

$3,624

 

$3,781

 
(4.2
)%
Net sales decreased $157 million due to the following:
● Unfavorable foreign currency translation (-4%)
● Lower sales volumes (-3%)
Partially offset by:
● Higher selling prices (+3%)
● Slightly higher acquisition-related sales, net of dispositions
Higher selling prices were achieved across all businesses, reflecting the value of our products and services. These increases helped to offset persistent raw material and logistics cost inflation.
U.S and Canada net sales decreased, primarily driven by lower sales volumes.
Europe, Middle East and Africa ("EMEA") net sales decreased, driven by unfavorable foreign currency translation.
Asia Pacific net sales decreased, driven by unfavorable foreign currency translation and lower sales volumes.
Latin America net sales decreased versus the prior year driven by lower sales volumes.
Foreign currency translation decreased net sales approximately $160 million as the U.S. dollar strengthened against several foreign currencies versus the prior year, most notably the euro, Mexican peso and Chinese yuan.
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
March 31
 
Percent Change
($ in millions, except percentages)
2019
 
2018
 
2019 vs. 2018
Cost of sales, exclusive of depreciation and amortization

$2,073

 

$2,181

 
(5.0
)%
Cost of sales as a percentage of net sales
57.2
%
 
57.7
%
 
(0.5
)%
Cost of sales, exclusive of depreciation and amortization, decreased $108 million primarily due to the following:
● Foreign currency translation
● Lower sales volumes
● Restructuring cost savings
Partially offset by:
● Cost of sales attributable to acquired businesses
● Raw materials and other cost inflation

25


Selling, general and administrative expenses    
 
Three Months Ended
March 31
 
Percent Change
($ in millions, except percentages)
2019
 
2018
 
2019 vs. 2018
Selling, general and administrative expenses (SG&A)

$889

 

$906

 
(1.9
)%
Selling, general and administrative expenses as a percentage of net sales
24.5
%
 
24.0
%
 
0.5
 %
SG&A expense decreased $17 million primarily due to the following:
● Foreign currency translation
● Restructuring cost savings
Partially offset by:
● Wage and other cost inflation
● SG&A expenses attributable to acquired businesses
Other costs and income
 
Three Months Ended
March 31
 
Percent Change
($ in millions, except percentages)
2019
 
2018
 
2019 vs. 2018
Interest expense, net of Interest income

$25

 

$21

 
19.0
 %
Other charges

$14

 

$41

 
(65.9
)%
Other income

($16
)
 

($24
)
 
(33.3
)%
Other charges
Other charges were lower in the three months ended March 31, 2019 compared to prior year due to lower environmental remediation charges of $16 million versus $34 million in 2018.
Other income
Other income was lower in the three months ended March 31, 2019 due to slightly lower equity earnings and royalty income compared to prior year.
Effective tax rate and earnings per diluted share
 
Three Months Ended
March 31
 
Percent Change
($ in millions, except percentages)
2019
 
2018
 
2019 vs. 2018
Income tax expense

$102

 

$87

 
17.2
 %
Effective tax rate
24.3
%
 
20.7
%
 
3.6
 %
Adjusted effective tax rate, continuing operations*
24.4
%
 
20.9
%
 
3.5
 %
 
 
 
 
 
 
Earnings per diluted share, continuing operations

$1.31

 

$1.31

 
 %
Adjusted earnings per diluted share*

$1.38

 

$1.42

 
(2.8
)%
*See Regulation G Reconciliation below
The effective tax rate for the three months ending March 31, 2019 reflects the benefit of U.S. tax legislation enacted in December 2017 as well as the impact of certain discrete tax items. The Company expects that its full year 2019 adjusted effective tax rate will be between 23% and 25%.
Earnings per diluted share from continuing operations for the three months ended March 31, 2019 and 2018 remained the same year-over-year due to items described further in the Regulation G reconciliation. The Company benefited from the 10.7 million shares repurchased in the last nine months of 2018 and 1.6 million shares repurchased in the first quarter of 2019.

26


Regulation G Reconciliation - Results from Operations
PPG believes investors’ understanding of the Company’s operating performance is enhanced by the disclosure of net income, earnings per diluted share and the effective tax rate adjusted for certain charges. PPG’s management considers this information useful in providing insight into the Company’s ongoing operating 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, earnings per diluted share 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, earnings per diluted share, the effective tax rate or other financial measures as computed in accordance with U.S. GAAP. In addition, adjusted net income, earnings per diluted share and the 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 March 31, 2019
($ 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
As reported, continuing operations

$419

 

$102

 
24.3
%
 

$312

 

$1.31

Adjusted for:
 
 
 
 
 
 
 
 
 
Acquisition-related costs
7

 
2

 
23.4
%
 
5

 
0.02

Environmental remediation charge
10

 
2

 
24.3
%
 
8

 
0.03

Costs associated with ongoing accounting investigations
4

 
1

 
24.3
%
 
3

 
0.01

Release of business restructuring reserves
(3
)
 
(1
)
 
25.6
%
 
(2
)
 
(0.01
)
Accelerated depreciation and other costs from restructuring actions
6

 
2

 
25.0
%
 
4

 
0.02

Adjusted, continuing operations, excluding certain items

$443

 

$108

 
24.4
%
 

$330

 

$1.38

 
Three Months Ended March 31, 2018
($ 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
As reported, continuing operations

$421

 

$87

 
20.7
%
 

$328

 

$1.31

Adjusted for: