10-K 1 ppg-20151231x10k.htm 10-K 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________________

FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
 
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
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
 
 
One PPG Place, Pittsburgh, Pennsylvania
  
15272
(Address of principal executive offices)
  
(Zip code)
 
 
Registrant’s telephone number, including area code:
  
412-434-3131
 Securities Registered Pursuant to Section 12(b) of the Act:
 
 
Name of each exchange on
Title of each class
  
which registered
Common Stock – Par Value $1.66 2/3
  
New York Stock Exchange
0.875% Notes due 2022
 
New York Stock Exchange
1.400% Notes due 2027
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  YES  x    NO  ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES  ¨    NO  x
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  x    NO  ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date 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  x    NO  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
 
Accelerated filer                   ¨
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
(Do not check if a smaller
reporting company)
 
 
 Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act).  YES  o    NO  x
 The aggregate market value of common stock held by non-affiliates as of June 30, 2015, was $30,935 million.
As of January 31, 2015, 266,765,632 shares of the Registrant’s common stock, with a par value of $1.66 2/3 per share, were outstanding. As of that date, the aggregate market value of common stock held by non-affiliates was $25,278 million.
 DOCUMENTS INCORPORATED BY REFERENCE
 
 
Incorporated By
Document
  
Reference In Part No.
Portions of PPG Industries, Inc. Proxy Statement for its 2016 Annual Meeting of Shareholders
  
III

2015 PPG ANNUAL REPORT AND FORM 10-K 7


PPG INDUSTRIES, INC.
AND CONSOLIDATED SUBSIDIARIES
 __________________________________________________________
 
As used in this report, the terms “PPG,” “Company,” “Registrant,” “we,” “us” and “our” refer to PPG Industries, Inc., and its subsidiaries, taken as a whole, unless the context indicates otherwise.
__________________________________________________________

TABLE OF CONTENTS
 
 
 
Page
Part I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Part III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV
 
 
Item 15.
 
 
 
Note on Incorporation by Reference
Throughout this report, various information and data are incorporated by reference from the Company’s 2015 Annual Report (hereinafter referred to as “the Annual Report”). Any reference in this report to disclosures in the Annual Report shall constitute incorporation by reference only of that specific information and data into this Form 10-K.
 

8 2015 PPG ANNUAL REPORT AND FORM 10-K


Part I
 
Item 1. Business
 PPG Industries, Inc., manufactures and distributes a broad range of coatings, specialty materials and glass products. PPG was incorporated in Pennsylvania in 1883.
PPG’s vision is to be the world’s leading coatings company by consistently delivering high-quality, innovative and sustainable solutions that customers trust to protect and beautify their products and surroundings. 
PPG’s business is comprised of three reportable business segments: Performance Coatings, Industrial Coatings and Glass.
Performance Coatings and Industrial Coatings
 PPG is a major global supplier of coatings. The Performance Coatings and Industrial Coatings reportable segments supply coatings and specialty materials for customers in a wide array of end-use markets, including industrial equipment, appliances and packaging; factory-finished aluminum extrusions and steel and aluminum coils; marine and aircraft equipment; automotive original equipment (“automotive OEM”); and other industrial and consumer products. In addition to supplying coatings to the automotive OEM market, PPG supplies refinishes to the automotive aftermarket. PPG also serves commercial and residential new build and maintenance markets by supplying coatings to painting and maintenance contractors and directly to consumers for decoration and maintenance. The coatings industry is highly competitive and consists of several large firms with global presence and many smaller firms serving local or regional markets. PPG competes in its primary markets with the world’s largest coatings companies, most of which have global operations, and many smaller regional coatings companies.
Performance Coatings
The Performance Coatings reportable segment is comprised of the refinish, aerospace, protective and marine, architectural – Americas and Asia Pacific and architectural – EMEA coatings businesses.
The refinish coatings business supplies coatings products for automotive and commercial transport/fleet repair and refurbishing, light industrial coatings and specialty coatings for signs. These products are sold primarily through independent distributors.
The aerospace coatings business supplies coatings, sealants and transparencies for commercial, military, regional jet and general aviation aircraft, and transparent armor for specialty applications and provides chemical management services for the aerospace industry. PPG supplies products to aircraft manufacturers and maintenance and aftermarket customers around the world both on a direct basis and through a company-owned distribution network.
The protective and marine coatings business supplies coatings and finishes for the protection of metals and structures to metal fabricators, heavy duty maintenance contractors and manufacturers of ships, bridges and rail cars. These products are sold through company-owned architectural coatings stores, independent distributors and directly to customers.
 
The architectural coatings-Americas and Asia Pacific business primarily produces coatings used by painting and maintenance contractors and by consumers for decoration and maintenance of residential and commercial building structures. These coatings are sold under a number of brands, including PPG®, GLIDDEN®, COMEX®, OLYMPIC®, DULUX® (in Canada), SIKKENS®, PPG PITTSBURGH PAINTS®, MULCO®, FLOOD®, LIQUID NAILS®, SICO®, CIL®, RENNER®, TAUBMANS®, WHITE KNIGHT®, BRISTOL®, , and HOMAX®. Architectural coatings – Americas and Asia Pacific products are also sold through a combination of company-owned stores, home centers and other regional or national consumer retail outlets, paint dealers, concessionaires and independent distributors and directly to customers. At the end of 2015, the architectural coatings-Americas and Asia Pacific business operated about 920 company-owned stores in North America, about 40 company-owned stores in Australia and about 100 company-owned stores in Central America. In 2015, PPG acquired approximately 60 company-owned stores throughout Central America with its acquisition of Consorcio Latinoamericano. In addition, PPG sells coatings and related products through more than 4,000 stores that are independently owned and operated by more than 700 concessionaires, primarily in Mexico.
The architectural coatings – EMEA business supplies a variety of coatings and purchased sundries to painting contractors and consumers in Europe, the Middle East and Africa. The coatings are sold under a number of brands, including SIGMA®, HISTOR®, SEIGNEURIE®, GUITTET®, PEINTURES GAUTHIER®, RIPOLIN®, JOHNSTONE’S®, LEYLAND®, PRIMALEX®, DEKORAL®, TRILAK®, PROMINENT PAINTS®, GORI®, and BONDEX®. Architectural coatings – EMEA products are sold through a combination of about 685 company-owned stores, regional home centers, paint dealers, and independent distributors and directly to customers.
Price, product performance, technology, quality, distribution, brand recognition and technical and customer service are major competitive factors in the performance coatings businesses.
The major global competitors of the Performance Coatings reportable segment are Akzo Nobel N.V., Axalta Coating Systems Ltd., BASF Corporation, Hempel A/S, the Jotun Group, Masco Corporation, the Sherwin-Williams Company, Valspar Corporation, Benjamin Moore, Materis Paints and RPM International Inc. The average number of persons employed by the Performance Coatings reportable segment during 2015 was about 28,600.
Industrial Coatings
The Industrial Coatings reportable segment is comprised of the automotive OEM, industrial coatings, packaging coatings, and specialty coatings and materials businesses. Industrial, automotive OEM, packaging coatings, and specialty coatings and materials products are formulated specifically for the customers’ needs and application methods.
The industrial and automotive OEM coatings businesses sell directly to a variety of manufacturing companies. PPG also supplies adhesives and sealants for the automotive industry and metal pretreatments and related chemicals for industrial and


2015 PPG ANNUAL REPORT AND FORM 10-K 9


automotive applications. PPG has established alliances with Kansai Paints to serve certain automotive OEMs and Asian Paints Ltd. to serve certain aftermarket customers and automotive OEMs. PPG owns a 60% interest in PPG Kansai Automotive Finishes to serve Japanese-based automotive OEM customers in North America and Europe. The packaging coatings business supplies coatings to the manufacturers of aerosol, food, and metal beverage containers.
The primary specialty coatings and materials products are amorphous precipitated silicas for tire, battery separator and other end-use markets; TESLIN® substrate used in such applications as radio frequency identification (RFID) tags and labels, e-passports, drivers’ licenses and identification cards; Organic Light Emitting Diode (OLED) materials for use in displays and lighting; optical lens materials and photochromic dyes for optical lenses and color-change products. Product quality and performance, distribution and technical service are the most critical competitive factors to the specialty coatings and materials business.
Price, product performance, technology, cost effectiveness, quality and technical and customer service are major competitive factors in the industrial, automotive OEM and packaging coatings businesses.
The major global competitors of the Industrial Coatings reportable segment are Akzo Nobel N.V., Axalta Coating Systems Ltd., BASF Corporation, Valspar Corporation, and Nippon Paint. The average number of persons employed by the Industrial Coatings reportable segment during 2015 was about 11,900.
Glass
The Glass reportable segment is comprised of the flat glass and fiber glass businesses. PPG is a producer of flat glass in North America and a producer of fiber glass in North America and Europe, as well as Asia through our partnership with Nan Ya Plastics Corp primarily to serve the electronics industry. PPG’s major markets are commercial and residential construction and the wind energy, energy infrastructure, transportation and electronics industries. Most glass products are sold directly to manufacturing companies. PPG manufactures flat glass by the float process and fiber glass by the continuous-strand process.
Price, quality, technology and customer service are the key competitive factors in the glass businesses. The Company competes with several major producers of flat glass, including Asahi Glass Company, Cardinal Glass Industries, Guardian Industries and NSG Pilkington, and many major producers of fiber glass throughout the world, including Owens Corning, Jushi Group, Johns Manville Corporation, CPIC Fiberglass and Taishan Fiberglass. The average number of persons employed by the Glass reportable segment during 2015 was about 2,900.
 
Strategic Acquisitions
During 2015, the Performance Coatings and Industrial Coatings segments made several strategic acquisitions, as follows:
Performance Coatings
On October 1, 2015, PPG acquired a majority interest in the automotive and aerospace sealants and adhesives business of Le Joint Français SNC (“LJF”), a France-based specialty sealants and adhesives manufacturer serving the aerospace, automotive and insulating glass industries. The new joint venture between PPG and LJF is Sealants Europe SAS. This acquisition brings new approvals and technology variants to PPG that will support geographic expansion and aid growth in existing PPG markets. LJF has been a long-time licensee of PPG Aerospace sealant technology. PPG reports the sales and income from operations for LJF as part of the aerospace coatings business.
On July 1, 2015, PPG acquired Cuming Microwave Corporation based in Avon, Massachusetts, and its wholly-owned subsidiary Cuming-Lehman Chambers, Inc., based in Chambersburg, Pennsylvania. The acquisition enhances PPG’s portfolio of aerospace coatings with specialty coatings and materials that absorb microwaves and radio waves such as radar. The products are used for military aircraft and also have applications in electronics, telecommunications, medical and automotive end-uses. PPG reports the sales and income from operations for Cuming Microwave Corporation as part of the aerospace coatings business.
On June 2, 2015, PPG acquired Consorcio Latinoamericano, which operates a network of 57 paint stores in Central America. With this acquisition, PPG now operates 101 company-owned stores across Belize, El Salvador, Guatemala, Honduras, Costa Rica, Nicaragua and Panama. PPG has branded stores in Panama with the Glidden brand, which is well recognized in the region, and plans to offer products from its protective and marine coatings business in stores throughout Central America. Consorcio Latinoamericano operated as a concessionaire network for PPG-Comex, the Company’s architectural paint and coatings business in Mexico and Central America. PPG reports the sales and income from operations for Consorcio Latinoamericano as part of the architectural coatings - Americas and Asia Pacific business.
Industrial Coatings
On September 30, 2015, PPG completed the acquisition of the remaining interest in Chemfil Canada Limited, a joint venture of PPG and Madinal Enterprises. The acquisition enhances PPG’s pretreatment presence and capabilities in Canada. Chemfil Canada produces pretreatment produces and general industrial chemicals for automotive OEMs and industrial customers in Canada. PPG reports the sales and income from operations for Chemfil Canada as part of the automotive OEM business.
On September 1, 2015, PPG completed the acquisition of I.V.C. Industrial Coatings, Inc. (“IVC”), a U.S.-based specialty powder and liquid coatings company. IVC’s industry-leading coatings are used on a wide variety of products such as metal


10 2015 PPG ANNUAL REPORT AND FORM 10-K


office furniture, material handling and storage products, automotive parts, motorcycles, industrial containers, small appliances and electronics such as printers, servers and audio-visual equipment. The addition of IVC’s high-quality products and industry expertise will further enhance PPG’s ability to deliver a robust portfolio of industry-leading industrial coatings solutions. PPG reports the sales and income from operations for IVC as part of the industrial coatings business.
On April 1, 2015, PPG completed the acquisition of Revocoat S.A.S from the Axson Group. Revocoat, headquartered in France, is a world leader in automotive adhesives and sealants and offers a range of automotive assembly products such as complementary epoxy-based products, polyurethanes and water-based emulsions. Revocoat employs more than 500 people and operates eight manufacturing facilities and one research and development center. PPG reports the sales and income from operations for Revocoat as part of the automotive OEM business.
Raw Materials and Energy
The effective management of raw materials and energy is important to PPG’s continued success. The Company’s most significant raw materials are epoxy and other resins, titanium dioxide and other pigments, and solvents in the coatings segments; sand and soda ash for the specialty coatings and materials business; and sand, clay and soda ash in the Glass segment. Coatings raw materials, which include both organic, primarily petroleum based, materials and inorganic materials, including titanium dioxide, comprise between 70% and 80% of cost of goods sold, excluding depreciation and amortization, in most coatings formulations and represent PPG’s single largest production cost component.
Energy is a significant production cost in the Glass segment, and our primary energy source is natural gas. Natural gas is expected to remain a competitive fuel source when compared to alternatives, especially on a global basis. We will continue to use competitive sourcing and consumption reduction initiatives to manage natural gas costs.
Most of the raw materials and energy used in production are purchased from outside sources, and the Company has made, and plans to continue to make, supply arrangements to meet the planned operating requirements for the future. Supply of critical raw materials and energy is managed by establishing contracts, multiple sources, and identifying alternative materials or technology whenever possible. Our products use both petroleum-derived and bio-based materials as part of a product renewal strategy. While prices for these raw materials typically fluctuate with energy prices, such fluctuations are impacted by the fact that the manufacture of our raw materials is several steps downstream from crude oil and natural gas.
The Company is continuing its aggressive sourcing initiatives to broaden our supply of high quality raw materials. These initiatives include qualifying multiple and local sources of supply, including suppliers from Asia and other lower cost regions of the world and a reduction in the amount of titanium dioxide used in our product formulations.
Our global efforts to reduce titanium dioxide consumption have been successful to date and are expected to continue.
 
Titanium dioxide is a raw material widely used in the paint and coatings industry as a pigment to provide hiding, durability and whiteness characteristics. PPG purchases both sulfate-grade and chloride-grade titanium dioxide from suppliers for use in coatings formulations. The Company has undertaken a strategic initiative to secure and enhance PPG’s supply of titanium dioxide, as well as to minimize PPG’s use of this raw material. PPG possesses intellectual property and expertise in the production and finishing of titanium dioxide pigment. PPG intends to continue to leverage this technology and intends to develop innovative supply solutions through technical collaborations, joint ventures and licensing arrangements with other interested parties.
PPG signed a license agreement with Henan Billions Chemicals Co., Ltd. (“Billions”), under which PPG has licensed certain chloride-based titanium dioxide technologies for use at Billions’ titanium dioxide refinement facilities in China. In addition, PPG has signed a long-term purchase agreement for titanium dioxide with Billions. In the fourth quarter of 2015, PPG began using chloride-grade titanium dioxide produced in commercial quantities by Billions using PPG’s licensed chloride-based technology. PPG is using the chloride-grade titanium dioxide to produce standard grades of coatings products. Billions may also elect to sell its chloride-based titanium dioxide to third parties.
We are subject to existing and evolving standards relating to the registration of chemicals which could potentially impact the availability and viability of some of the raw materials we use in our production processes. Our ongoing global product stewardship efforts are directed at maintaining our compliance with these standards.
Changes to chemical registration regulations have been proposed or implemented in the EU and many other countries, including China, Canada, the United States, and Korea. Because implementation of many of these programs has not been finalized, the financial impact cannot be estimated at this time. We anticipate that the number of chemical registration regulations will continue to increase globally, and we have implemented programs to track and comply with these regulations.
Given the recent volatility in certain energy-based input costs and foreign currencies, the Company is not able to predict with certainty the 2016 full year impact of related changes in raw material pricing. Also, given the distribution nature of many of our businesses, logistics and distribution costs are sizable, as are wages and benefits to a lesser degree. In aggregate, raw material feedstock prices in 2015 were lower, including oil-related products. Since oil is traded in U.S. dollars globally, the strengthening of the dollar against a wide variety of foreign currencies muted some of the oil-related benefits in certain regions, and in certain cases resulted in inflationary raw material prices.


2015 PPG ANNUAL REPORT AND FORM 10-K 11


Research and Development
Technology innovation has been a hallmark of PPG’s success throughout its history. Research and development costs, including depreciation of research facilities, were $505 million, $509 million and $479 million during 2015, 2014 and 2013, respectively. These costs totaled approximately 3% of annual sales in 2015, 2014 and 2013, respectively. We have obtained government funding for a small portion of the Company’s research efforts, and we will continue to pursue government funding where appropriate.
PPG owns and operates several facilities to conduct research and development relating to new and improved products and processes. In addition to the Company’s centralized principal research and development centers (See Item 2 of this Form 10-K), operating segments manage their development through centers of excellence. As part of our ongoing efforts to manage our formulations and raw material costs effectively, we operate a global competitive sourcing laboratory in China. Because of the Company’s broad array of products and customers, PPG is not materially dependent upon any single technology platform.
The Company seeks to optimize its investment in research and development to create new products to drive profitable growth. We align our product development with the macro trends in the end-use markets we serve and leverage core technology platforms to develop products for unmet market needs. Our history of successful technology introductions is based on a commitment to an efficient and effective innovation process and disciplined portfolio management.
 Patents
PPG considers patent protection to be important; however, the Company’s reportable business segments are not materially dependent upon any single patent or group of related patents. PPG earned $39 million in 2015, $50 million in 2014 and $48 million in 2013 from royalties and the sale of technical know-how.
Backlog
In general, PPG does not manufacture its products against a backlog of orders. Production and inventory levels are geared primarily to projections of future demand and the level of incoming orders.
Global Operations
PPG has a significant investment in non-U.S. operations. This broad geographic footprint serves to lessen the significance of economic impacts occurring in any one region on PPG’s total net sales and income from continuing operations. As a result of our expansion outside the U.S., we are subject to certain inherent risks, including economic and political conditions in international markets and fluctuations in foreign currency exchange rates.
 
Our net sales in the developed and emerging regions of the world for the years ended December 31st are summarized below:
($ in millions)
 
Net Sales
 
 
2015
 
2014
 
2013
United States, Canada, Western Europe
 
$
10,708

 
$
11,139

 
$
10,311

Latin America, Central and Eastern Europe, Middle East, Africa, Asia Pacific
 
4,622

 
4,221

 
3,954

Total
 
$
15,330

 
$
15,360

 
$
14,265

Refer to Note 19, “Reportable Business Segment Information” under Item 8 of this Form 10-K for geographic information related to PPG’s property, plant and equipment, and for additional geographic information pertaining to sales.
Seasonality
PPG’s income from continuing operations has typically been greater in the second and third quarters and cash flow from operations has been greatest in the fourth quarter due to end-use market seasonality, primarily in PPG’s architectural coatings businesses. Demand for PPG’s architectural coatings products is typically strongest in the second and third quarters due to higher home improvement, maintenance and construction activity during the spring and summer months in the U.S., Canada and Europe. The Latin America paint season is strongest in the fourth quarter. These higher activity levels result in higher outstanding receivables that are collected in the fourth quarter generating higher fourth quarter cash flow.
Employee Relations
The average number of persons employed worldwide by PPG during 2015 was about 46,600. The Company has numerous collective bargaining agreements throughout the world. We observe local customs, legislation and practice in labor relations when negotiating collective bargaining agreements. There were no significant work stoppages in 2015. While we have experienced occasional work stoppages as a result of the collective bargaining process and may experience some work stoppages in the future, we believe that we will be able to negotiate all labor agreements on satisfactory terms. To date, these work stoppages have not had a significant impact on PPG’s operating results. Overall, the Company believes it has good relationships with its employees.
Environmental Matters
PPG is subject to existing and evolving standards relating to protection of the environment. PPG is negotiating with various government agencies concerning 126 current and former manufacturing sites and offsite waste disposal locations, including 24 sites on the National Priority List. While PPG is not generally a major contributor of wastes to these offsite waste disposal locations, each potentially responsible party may face governmental agency assertions of joint and several liability. Generally, however, a final allocation of costs is made based on relative contributions of wastes to the site. There is a wide range of cost estimates for cleanup of these sites, due largely to uncertainties as to the nature and extent of their condition and the methods that may have to be employed for their remediation. The Company has established reserves for onsite and offsite remediation of those sites where it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.


12 2015 PPG ANNUAL REPORT AND FORM 10-K


The Company’s experience to date regarding environmental matters leads it to believe that it will have continuing expenditures for compliance with provisions regulating the protection of the environment and for present and future remediation efforts at waste and plant sites. Management anticipates that such expenditures will occur over an extended period of time.
In addition to the $233 million currently reserved for environmental remediation efforts, we may be subject to loss contingencies related to environmental matters estimated to be approximately $75 million to $200 million. These reasonably possible unreserved losses relate to environmental matters at a number of sites. 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.
Capital expenditures for environmental control projects were $15 million, $14 million and $22 million in 2015, 2014, and 2013, respectively. It is expected that expenditures for such projects in 2016 will be in the range of $25 million to $35 million. Although future capital expenditures are difficult to estimate accurately because of constantly changing regulatory standards and policies, it can be anticipated that environmental control standards will become increasingly stringent and the cost of compliance will increase.
In management’s opinion, the Company operates in an environmentally sound manner, is well positioned, relative to environmental matters, within the industries in which it operates and the outcome of these environmental contingencies will not have a material adverse 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. See Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K for additional information related to environmental matters and our accrued liability for estimated environmental remediation costs.
Public and governmental concerns related to climate change continue to grow, leading to efforts to limit the greenhouse gas (“GHG”) emissions believed to be responsible. While PPG has operations in many countries, a substantial portion of PPG’s GHG emissions are generated by locations in the U.S., where considerable legislative and regulatory activity has been taking place. PPG has, and will continue to, annually report our global GHG emissions to the voluntary Carbon Disclosure project.
Since PPG’s GHG emissions arise principally from combustion of fossil fuels, PPG has for some time recognized the desirability of reducing energy consumption and GHG generation. For the three year period ended December 31, 2015, energy consumption was reduced by 23% and GHG emission generation was reduced by 18%.
PPG participates in both the U.S. Department of Energy, BETTER BUILDINGS®, BETTER PLANTS® program, formerly the SAVE ENERGY NOW® Leadership program, and the Environmental Protection Agency ENERGY STAR® Industrial Partnership program, both reinforcing the company’s voluntary efforts to significantly reduce its industrial energy intensity. These programs include developing and implementing energy management processes and setting energy savings targets while providing a suite of educational, training, and technical
 
resources to help meet those targets. Recognizing the continuing importance of this matter, PPG has a senior management group with a mandate to guide the Company’s progress in this area.
PPG’s public disclosure on energy security and climate change can be viewed in our Sustainability Report at sustainability.ppg.com or at the Carbon Disclosure Project www.cdproject.net.
Available Information
The Company’s website address is www.ppg.com. The Company posts, and shareholders may access without charge, the Company’s recent filings and any amendments thereto of its annual reports on Form 10-K, quarterly reports on Form 10-Q and its proxy statements as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission (“SEC”). The Company also posts all financial press releases, including earnings releases, to its website. All other reports filed or furnished to the SEC, including reports on Form 8-K, are available via direct link on PPG’s website to the SEC’s website, www.sec.gov. Reference to the Company’s and the SEC’s websites herein does not incorporate by reference any information contained on those websites and such information should not be considered part of this Form 10-K.
Item 1A. Risk Factors
As a global manufacturer of coatings, specialty materials and glass products, we operate in a business environment that includes risks. These risks are not unlike the risks we have faced in the recent past nor are they unlike risks faced by our competitors. Each of the risks described in this section could adversely affect our operating results, financial position and liquidity. While the factors listed here are considered to be the more significant factors, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles which may adversely affect our businesses and our results of operations.
Increases in prices and declines in the availability of raw materials could negatively impact our financial results.
Our financial results are significantly affected by the cost of raw materials. Coatings raw materials, which include both organic, primarily petroleum based, materials and inorganic materials, including titanium dioxide, comprise between 70% and 80% of cost of goods, exclusive of depreciation and amortization, sold in most coatings formulations and represent PPG’s single largest production cost component.
While not our customary practice, we also import raw materials and intermediates, particularly for use at our manufacturing facilities in the emerging regions of the world. In most cases, those imports are priced in the currency of the supplier and, therefore, if that currency strengthens against the currency of our manufacturing facility, our margins may be lower.
Most of our raw materials are purchased from outside sources, and the Company has made, and plans to continue to make, supply arrangements to meet the planned operating requirements for the future. Adequate supply of critical raw materials is managed by establishing contracts, procuring from multiple sources, and identifying alternative materials or technology whenever possible. The Company is continuing its


2015 PPG ANNUAL REPORT AND FORM 10-K 13


aggressive sourcing initiatives to effectively broaden our supply of high quality raw materials. These initiatives include qualifying multiple and local sources of supply, including suppliers from Asia and other lower cost regions of the world and a reduction in the amount of titanium dioxide and other raw materials used in our product formulations. Our products use both petroleum-derived and bio-based materials as part of a product renewal strategy.
An inability to obtain critical raw materials would adversely impact our ability to produce products. Increases in the cost of raw materials may have an adverse effect on our income from continuing operations or cash flow in the event we are unable to offset these higher costs in a timely manner.
The pace of economic growth and level of uncertainty could have a negative impact on our results of operations and cash flows.
During 2015, overall economic conditions remained mixed among the major global economies. PPG provides products and services to a variety of end-use markets in many geographies. This broad end-use market exposure and expanded geographic presence lessens the significance of any individual decrease in activity levels; nonetheless, lower demand levels may result in lower sales, which would result in reduced income from continuing operations and cash flows.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K for discussion of the economic conditions in 2015 and our outlook on certain economic conditions in 2016.
We are subject to existing and evolving standards relating to the protection of the environment.
Environmental laws and regulations control, among other things, the discharge of pollutants into the air and water, the handling, use, treatment, storage and clean-up of hazardous and non-hazardous waste, the investigation and remediation of soil and groundwater affected by hazardous substances, and regulate various health and safety matters. The environmental laws and regulations we are subject to impose liability for the costs of, and damages resulting from, cleaning up current sites, past spills, disposals and other releases of hazardous substances. Violations of these laws and regulations can also result in fines and penalties. Future environmental laws and regulations may require substantial capital expenditures or may require or cause us to modify or curtail our operations, which may have a material adverse impact on our business, financial condition and results of operations.
As described in Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K, we are currently undertaking environmental remediation activities at a number of our current and former facilities and properties, the cost of which is substantial. In addition to the amounts currently reserved, we may be subject to loss contingencies related to environmental matters estimated to be as much as $75 million to $200 million. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence.
 
We are involved in a number of lawsuits and claims, and we may be involved in future lawsuits and claims, in which substantial monetary damages are sought.
PPG is involved in a number of lawsuits and claims, both actual and potential, in which substantial monetary damages are sought. Those lawsuits and claims 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. Any such claims, whether with or without merit, could be time consuming, expensive to defend and could divert management’s attention and resources. We maintain insurance against some, but not all, of these potential claims, and the levels of insurance we do maintain may not be adequate to fully cover any and all losses. We believe that, in the aggregate, the outcome of all current lawsuits and claims involving PPG, including asbestos-related claims in the event the settlement described in Note 13, “Commitments and Contingent Liabilities” under Item 8 of this Form 10-K does not become effective, 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. Nonetheless, the results of any future litigation or claims are inherently unpredictable, but such outcomes could have a material adverse effect on our results of operations, cash flow or financial condition.
Fluctuations in foreign currency exchange rates could affect our financial results.
We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues and expenses into U.S. dollars at the average exchange rate during each reporting period, as well as assets and liabilities into U.S. dollars at exchange rates in effect at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other currencies will affect our net revenues, operating income and the value of balance sheet items denominated in foreign currencies. We use derivative financial instruments to reduce our net exposure to currency exchange rate fluctuations related to foreign currency transactions. However, fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, could materially affect our financial results expressed in U.S. dollars. In 2015, this strengthening had an unfavorable impact on full year net sales and income before income taxes from the translation of these foreign earnings into U.S. dollars of approximately $1.1 billion and $120 million, respectively.
For many years, we have been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos.
Most of our potential exposure relates to allegations by plaintiffs that PPG should be liable for injuries involving asbestos containing thermal insulation products manufactured by Pittsburgh Corning Corporation (“PC”). PPG is a 50% shareholder of PC. We have entered into a settlement arrangement with several parties concerning these asbestos claims as discussed in Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K. The arrangement remains subject to court proceedings and the satisfaction of


14 2015 PPG ANNUAL REPORT AND FORM 10-K


certain closing conditions. We are working with the court and the parties to finalize the arrangement in the first half of the 2016. If the arrangement is not finalized, the outcome could be material to the results of operations of any particular period.
We are subject to a variety of complex U.S. and non-U.S. laws and regulations which could increase our compliance costs.
We are subject to a wide variety of complex U.S. and non-U.S. laws and regulations, and legal compliance risks, including securities laws, tax laws, environmental laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, and laws governing improper business practices, including bribery. We are affected by new laws and regulations and changes to existing laws and regulations, including interpretations by courts and regulators. These laws and regulations effectively expand our compliance obligations and potential enforcement actions by governmental authorities or litigation related to them.
New laws and regulations or changes in existing laws or regulations or their interpretation could increase our compliance costs. For example, regulations concerning the composition, use and transport of chemical products continue to evolve. Developments concerning these regulations could potentially impact the availability or viability of some of the raw materials we use in our product formulations and/or our ability to supply certain products to some customers or markets. Import/export regulations also continue to evolve and could result in increased compliance costs, slower product movements or additional complexity in our supply chains.
Our international operations expose us to additional risks and uncertainties that could affect our financial results.
PPG has a significant investment in global operations. This broad geographic footprint serves to lessen the significance of economic impacts occurring in any one region. Notwithstanding the benefits of geographic diversification, our ability to achieve and maintain profitable growth in international markets is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many countries. As a result of our operations outside the U.S., we are subject to certain inherent risks, including political and economic uncertainty, inflation rates, exchange rates, trade protection measures, local labor conditions and laws, restrictions on foreign investments and repatriation of earnings, and weak intellectual property protection. Our percentage of sales generated in 2015 by products sold outside the U.S. was approximately 58%.
Changes in the tax regimes and related government policies and regulations in the countries in which we operate could adversely affect our results and our effective tax rate.
As a multinational corporation, we are subject to various taxes in both the U.S. and non-U.S. jurisdictions.  Due to economic and political conditions, tax rates in these various jurisdictions may be subject to significant change.  Our future effective income tax rate could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets or changes in tax laws or their interpretation.  Recent developments, including the European Commission’s investigations on illegal state aid as well as the Organisation for Economic Co-operation and Development project on Base Erosion and Profit Shifting may
 
result in changes to long-standing tax principles, which could adversely affect our effective tax rate or result in higher cash tax liabilities. If our effective income tax rate was to increase, our cash flows, financial condition and results of operations would be adversely affected.
Although we believe that our tax filing positions are appropriate, the final determination of tax audits or tax disputes may be different from what is reflected in our historical income tax provisions and accruals. If future audits find that additional taxes are due, we may be subject to incremental tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our cash flows, financial condition and results of operations.
Business disruptions could have a negative impact on our results of operations and financial condition.
Unexpected events, including supply disruptions, temporary plant and/or power outages, work stoppages, natural disasters and severe weather events, computer system disruptions, fires, war or terrorist activities, could increase the cost of doing business or otherwise harm the operations of PPG, our customers and our suppliers. It is not possible for us to predict the occurrence or consequence of any such events. However, such events could reduce our ability to supply products, reduce demand for our products or make it difficult or impossible for us to receive raw materials from suppliers or to deliver products to customers.
Failure to successfully integrate acquired businesses into our existing operations could adversely affect our financial results.
Part of the Company’s strategy is growth through acquisitions, and we will likely acquire additional businesses and enter into additional joint ventures in the future. Growth through acquisitions and the formation of joint ventures involve risks, including:
difficulties in assimilating acquired companies and products into our existing business;
delays in realizing the benefits from the acquired companies or products;
diversion of our management’s time and attention from other business concerns;
difficulties due to lack of or limited prior experience in any new markets we may enter;
unforeseen claims and liabilities, including unexpected environmental exposures or product liability;
unexpected losses of customers or suppliers of the acquired or existing business;
difficulty in conforming the acquired business’ standards, processes, procedures and controls to those of our operations; and
difficulties in retaining key employees of the acquired businesses.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and joint ventures could cause us to fail to realize the anticipated benefits of such acquisitions or joint ventures and could adversely affect our results of operations, cash flow or financial condition.


2015 PPG ANNUAL REPORT AND FORM 10-K 15


Our ability to understand our customers’ specific preferences and requirements, and to innovate, develop, produce and market products that meet customer demand is critical to our business results.
Our business relies on continued global demand for our brands and products. To achieve business goals, we must develop and sell products that appeal to customers.  This is dependent on a number of factors, including our ability to produce products that meet the quality, performance and price expectations of our customers and our ability to develop effective sales, advertising and marketing programs.  Future growth will depend on our ability to continue to innovate our existing products and to develop and introduce new products. If we fail to keep pace with product innovation on a competitive basis or to predict market demands for our products, our business, financial condition and results of operations could be adversely affected.
The industries in which we operate are highly competitive.
With each of our businesses, an increase in competition may cause us to lose market share, lose a large regional or global customer, or compel us to reduce prices to remain competitive, which could result in reduced margins for our products. Competitive pressures may not only reduce our margins but may also impact our revenues and our growth which could adversely affect our results of operations.
The security of our information technology systems could be compromised, which could adversely affect our ability to operate. 
Increased global information technology security requirements, threats and sophisticated and targeted computer crime pose a risk to the security of our systems, networks and the confidentiality, availability and integrity of our data. Despite our efforts to protect sensitive information and confidential and personal data, our facilities and systems may be vulnerable to security breaches. This could lead to negative publicity, theft, modification or destruction of proprietary information or key information, manufacture of defective products, production downtimes and operational disruptions, which could adversely affect our reputation, competitiveness and results of operations.
Item 1B. Unresolved Staff Comments
None.
 
Item 2. Properties
The Company’s corporate headquarters is located in Pittsburgh, Pa. The Company’s manufacturing facilities, sales offices, research and development centers and distribution centers are located throughout the world. As of February 18, 2016, the Company operated 156 manufacturing facilities in 42 countries, and the principal manufacturing and distribution facilities were as follows:
Performance Coatings:
 
Amsterdam, Netherlands; Birstall, United Kingdom; Budapest, Hungary; Clayton, Australia; Delaware, Ohio; Dover, Del.; Gonfreville, France; Huntsville, Ala.; Huron, Ohio; Kunshan, China; Little Rock, Ark.; Milan, Italy; Mojave, Calif.; Moreuil, France; Shildon, United Kingdom; Sylmar, Calif.; Soborg, Denmark; Stowmarket, United Kingdom; Wroclaw, Poland; about 920 company-owned stores in North America; about 685 company-owned stores in the EMEA region, including 212 stores in France and 192 stores in the United Kingdom; about 100 company-owned stores in Latin America and about 40 company-owned stores in Australia. 
Industrial Coatings:
 
Barberton, Ohio; Busan, South Korea; Cieszyn, Poland; Cleveland, Ohio; Lake Charles, La.; Oak Creek, Wis.; Quattordio, Italy; San Juan del Rio, Mexico; Sumaré, Brazil; Tianjin, China, and Zhangjiagang, China
Glass:
 
Carlisle, Pa.; Hoogezand, Netherlands; Wigan, United Kingdom; Shelby, N.C. and Wichita Falls, Texas
Including the principal manufacturing facilities noted above, the Company has manufacturing facilities in the following geographic areas: 
United States:
 
42 manufacturing facilities in 19 states.
Other Americas:
 
23 manufacturing facilities in 5 countries.
EMEA:
 
64 manufacturing facilities in 27 countries.
Asia:
 
27 manufacturing facilities in 9 countries.
The Company’s principal research and development centers are located in Allison Park, Pa.; Cheswick, Pa.; Monroeville, Pa.; Shelby, N.C.; Burbank, Calif. and Tepexpan, Mexico.
The Company’s headquarters, certain distribution centers and substantially all company-owned paint stores are located in facilities that are leased while the Company’s other facilities are generally owned. Our facilities are considered to be suitable and adequate for the purposes for which they are intended and overall have sufficient capacity to conduct business in the upcoming year.
Item 3. Legal Proceedings
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 and claims against others include claims against insurers and other third parties with respect to actual and


16 2015 PPG ANNUAL REPORT AND FORM 10-K


contingent losses related to environmental, asbestos and other matters.
The results of any future litigation and claims are inherently unpredictable. However, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims in the event the settlement does not become effective, 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.
For many years, PPG has been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. For a description of asbestos litigation affecting the Company and the terms and status of the proposed asbestos settlement arrangement, see Note 13, “Commitments and Contingent Liabilities” under Item 8 of this Form 10-K.
In the past, the Company and others have been named as defendants in several cases in various jurisdictions claiming damages related to exposure to lead and remediation of lead-based coatings applications. PPG has been dismissed as a defendant from most of these lawsuits and has never been found liable in any of these cases.
In December 2011, the United States Environmental Protection Agency (“EPA”) issued a Finding of Violation alleging that PPG’s Delaware, Ohio facility violated certain leak detection and repair requirements of the federal Clean Air Act. PPG and the EPA are engaged in discussions in an effort to try to resolve this matter with a negotiated consent decree.  As part of these settlement discussions, the EPA is currently seeking a civil penalty from PPG of approximately $397,000. Final resolution of these matters is subject to further negotiation between PPG and the EPA.  However, it is likely that the final penalty will exceed $100,000.
In July 2013, the EPA issued to PPG a Notice of Violation (“NOV”) alleging that the Company’s Barberton, Ohio facility violated certain air emission regulatory requirements of the federal Clean Air Act.  In February 2015, the EPA issued a second NOV to the Company alleging that the Company’s Barberton facility had failed to submit certain information requested by the EPA and that the facility exceeded certain air emission limits contained in the facility’s air emission permit.  PPG and the EPA are engaged in discussions in an effort to try to resolve this matter with a negotiated consent decree.  As part of these settlement discussions, the EPA is currently seeking a civil penalty from PPG of approximately $137,500. Final resolution of these matters is subject to further negotiation between PPG and the EPA.  However, it is likely that the final penalty will exceed $100,000.
 
Executive Officers of the Company
Set forth below is information related to the Company’s executive officers as of February 18, 2016
Name
Age
Title
Charles E. Bunch(a)
66

Executive Chairman since September 2015
Michael H. McGarry (b)
57

President and Chief Executive Officer since September 2015
Viktoras R. Sekmakas (c)
55

Executive Vice President since September 2012
Frank S. Sklarsky (d)
59

Executive Vice President and Chief Financial Officer since August 2013
Glenn E. Bost II (e)
64

Senior Vice President and General Counsel since July 2010
Cynthia A. Niekamp (f)
56

Senior Vice President, Automotive Coatings since August 2010
(a)
Mr. Bunch served as Chairman and Chief Executive Officer from July 2005 until September 2015.
(b)
Mr. McGarry served as President and Chief Operating Officer from March 2015 until September 2015; Chief Operating Officer from August 2014 until March 2015; Executive Vice President from September 2012 through July 2014; and Senior Vice President, Commodity Chemicals from July 2008 until August 2012.
(c)
Mr. Sekmakas served as Senior Vice President, Industrial Coatings and President, Europe from September 2011 until August 2012; Senior Vice President, Industrial Coatings and President, Asia Pacific Coatings from August 2010 until September 2011; Vice President Industrial Coatings and President, Asia Pacific Coatings from March 2010 until August 2010; and President PPG Asia Pacific from July 2008 until March 2010.
(d)
Mr. Sklarsky was appointed Executive Vice President, Finance, in April 2013 when he joined PPG. Prior to joining PPG, Mr. Sklarsky was Executive Vice President and Chief Financial Officer of Tyco International, Ltd. from December 2010 until September 2012 and was Executive Vice President and Chief Financial Officer of Eastman Kodak Company from November 2006 until December 2010.
(e)
Mr. Bost served as Vice President and Associate General Counsel from July 2006 through June 2010. 
(f)
Ms. Niekamp was appointed Vice President, Automotive Coatings in January 2009 when she joined PPG from BorgWarner, Inc. Ms. Niekamp will retire from PPG on April 1, 2016.

Item 4. Mine Safety Disclosures
Not Applicable.


2015 PPG ANNUAL REPORT AND FORM 10-K 17


Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The information required by Item 5 regarding market information, including stock exchange listings and quarterly stock market prices, dividends and holders of common stock is included in Exhibit 13.1 filed with this Form 10-K and is incorporated herein by reference. This information is also included in the PPG Shareholder Information on page 5 of the Annual Report to shareholders.
Directors who are not also officers of the Company receive common stock equivalents pursuant to the PPG Industries, Inc., Deferred Compensation Plan for Directors (“PPG Deferred Compensation Plan for Directors”). Common stock equivalents are hypothetical shares of common stock having a value on any given date equal to the value of a share of common stock. Common stock equivalents earn dividend equivalents that are converted into additional common stock equivalents but carry no voting rights or other rights afforded to a holder of common stock. The common stock equivalents credited to directors under this plan are exempt from registration under Section 4(a)(2) of the Securities Act of 1933 as private offerings made only to directors of the Company in accordance with the provisions of the plan.
Under the PPG Deferred Compensation Plan for Directors, each director may elect to defer the receipt of all or any portion of the compensation paid to such director for serving as a PPG director. All deferred payments are held in the form of common stock equivalents. Payments out of the deferred accounts are made in the form of common stock of the Company (and cash as to any fractional common stock equivalent). The directors, as a group, were credited with 15,445; 25,724; and 33,540 common stock equivalents in 2015, 2014 and 2013, respectively, under this plan. The values of the common stock equivalents, when credited, ranged from $90.13 to $98.73 in 2015, $95.59 to $109.91 in 2014, and $69.28 to $91.96 in 2013.
Issuer Purchases of Equity Securities
Month
Total Number of Shares Purchased
Avg. Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs (1)
Max. Number of Shares That May Yet Be Purchased Under the Programs
October 2015
 
 
 
 
    Repurchase program
467,076

$
102.94

467,076

10,759,915

November 2015


 
 
 
    Repurchase program
930,165

$
103.36

930,165

9,700,096

December 2015


 
 
 
    Repurchase program
1,048,194

$
100.90

1,048,194

9,309,064

Total quarter ended December 31, 2015


 
 
 
    Repurchase program
2,445,435

$
102.23

2,445,435

9,309,064

(1)In April 2014, PPG’s board of directors authorized a $2 billion repurchase program. The remaining shares that may yet to be purchased under the $2 billion repurchase program have been calculated based upon PPG’s closing stock price on the last business day of the respective month. These repurchase programs have no expiration date.
 
No shares were withheld in satisfaction of the exercise price and/or tax withholding obligation by holders of employee stock options who exercised options granted under the Company’s equity compensation plans in the fourth quarter of 2015.
Item 6. Selected Financial Data
The information required by Item 6 regarding the selected financial data for the five years ended December 31, 2015 is included in Exhibit 13.2 filed with this Form 10-K and is incorporated herein by reference. This information is also reported in the Five-Year Digest on page 84 of the Annual Report to shareholders.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Below are our key financial results for the fiscal year ended December 31, 2015:
Net sales were $15.3 billion, consistent with the prior year, primarily due to unfavorable foreign currency translation (7%) offset by sales from acquired businesses (6%) and higher volumes (1%).
Cost of sales, exclusive of depreciation and amortization decreased 2% to $8.6 billion.
Selling, general and administrative expenses decreased 2% to $3.7 billion.
In April 2015, PPG approved a business restructuring program and recorded a $140 million charge. Partial year savings in 2015 totaled approximately $20 million.
Income before income taxes was $1.9 billion.
The effective tax rate for 2015 was 24.2%.
Net income from continuing operations was $1.4 billion and earnings per diluted share was $5.14.
Operating cash flow was $1.8 billion.
Capital expenditures, including acquisitions (net of cash acquired), was $796 million.
In April 2015, the Company raised the per-share dividend by 7%. In 2015, the Company paid $383 million in dividends and also repurchased approximately $750 million of its outstanding common stock.


18 2015 PPG ANNUAL REPORT AND FORM 10-K


Performance Overview
Net Sales
 
December 31,
Percent Change
($ in millions, except percentages)
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
The Americas
 
 
 
 
 
United States
$
6,389

$
6,323

$
5,712

1.0
 %
10.7
%
Other Americas
2,237

1,718

1,445

30.2
 %
18.9
%
Europe, Middle East and Africa (EMEA)
4,270

4,802

4,650

(11.1
)%
3.3
%
Asia Pacific
2,434

2,517

2,458

(3.3
)%
2.4
%
Total
$
15,330

$
15,360

$
14,265

(0.2
)%
7.7
%
2015 vs. 2014
Net sales decreased $30 million due to the following:
● Unfavorable foreign currency translation (7%)
Partially offset by:
● Net sales from acquired businesses (6%)
● Higher sales volumes (1%)
Foreign currency translation unfavorably impacted net sales by $1.1 billion as the U.S. dollar strengthened against most foreign currencies versus the prior year.
Acquired businesses added $941 million of sales in 2015, primarily Consorcio Comex S.A. de C.V. (“Comex”), supplemented by several other smaller acquisitions made in 2014 and 2015. In November 2015, Comex reached its one year anniversary and its net sales and income are reported as organic growth subsequent to its anniversary date.
Sales volume growth occurred primarily in the emerging regions and EMEA, while North America sales volumes declined less than 1%.
2014 vs. 2013
Net Sales increased $1.1 billion (8%) due to the following:
● Sales from acquired businesses (4%)
● Higher sales volumes (3%)
● Higher selling prices (1%)
Sales volume growth was fairly consistent across all regions, advancing 3.5% overall.
The sales volume growth was led by a 4.3% improvement in the U.S. and Canada. Asia-Pacific sales volumes also grew 3.9% and Latin America sales volumes grew 3.5% year-over-year. Sales for EMEA grew 2.4%, with growth primarily occurring in the first half of the year.
Acquired businesses added about $600 million of sales in 2014, primarily due to the first quarter 2014 sales of the North American architectural coatings business acquired in April 2013, as well as two months of Comex sales.

 
Cost of Sales, exclusive of depreciation and amortization
 
December 31,
Percent Change
($ in millions, except percentages)
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
Cost of sales, exclusive of depreciation and amortization
$
8,591

$
8,791

$
8,314

(2.3
)%
5.7
 %
Cost of sales as a percentage of net sales
56.0
%
57.2
%
58.3
%
(1.2
)%
(1.1
)%
2015 vs. 2014
Cost of sales, exclusive of depreciation and amortization, decreased $200 million (2%) due to the following:
● Foreign currency translation
● Lower manufacturing costs
Partially offset by:
● Cost of sales from acquired businesses
● Higher sales volumes
2014 vs. 2013
Cost of sales, exclusive of depreciation and amortization, increased $477 million (6%) due to the following:
● Higher sales volumes
● Cost of sales from acquired businesses
Partially offset by:
● Lower manufacturing costs
● Foreign currency translation

Selling, general and administrative expenses    
 
December 31,
Percent Change
($ in millions, except percentages)
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
Selling, general and administrative expenses
$
3,679

$
3,758

$
3,486

(2.1
)%
7.8
%
Selling, general and administrative expenses as a percentage of net sales
24.0
%
24.5
%
24.4
%
(0.5
)%
0.1
%
2015 vs. 2014
Selling, general and administrative expenses decreased $79 million (2%) primarily due to:
● Foreign currency translation
Partially offset by:
● Selling, general and administrative expenses from acquired businesses
● Overhead cost inflation
2014 vs. 2013
Selling, general and administrative expenses increased $272 million (8%) due to the following:
● Selling, general and administrative expenses from acquired businesses
● Overhead cost inflation



2015 PPG ANNUAL REPORT AND FORM 10-K 19


Other costs and income
 
December 31,
Percent Change
($ in millions, except percentages)
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
Interest expense, net of Interest income
$
86

$
137

$
153

(37.2
)%
(10.5
)%
Business restructuring
$
140

$

$
98

NA

(100.0
)%
Debt refinancing charge
$

$
317

$

(100.0
)%
NA

Other charges
$
104

$
221

$
189

(52.9
)%
16.9
 %
Other income
$
(145
)
$
(260
)
$
(127
)
(44.2
)%
104.7
 %
Interest expense, net of Interest income
Interest expense, net of Interest income decreased $51 million in 2015 versus the prior year largely as a result of a debt refinancing undertaken in the fourth quarter of 2014.
Business restructuring
In 2015, PPG approved a business restructuring program which includes actions necessary to achieve cost synergies related to recent acquisitions. In addition, the program aims to further align employee levels and production capacity in certain businesses and regions based on current product demand, as well as reductions in various global administrative functions. A pre-tax restructuring charge of $140 million was recorded, of which about 85% represents employee severance and other cash charges. PPG expects these restructuring actions will result in full year, pre-tax savings of approximately $105 million by year 2017, including 2015 partial year savings of approximately $20 million. Refer to Note 7, "Business Restructuring" in Item 8 of this Form 10-K for additional information.
In 2013, the Company recorded a pre-tax restructuring charge of $98 million related to a restructuring plan focused on achieving cost synergies through improved productivity and efficiencies. All actions associated with the 2013 restructuring program are completed.
Debt refinancing
In 2014, the Company recorded a pre-tax charge of $317 million representing costs related to a debt refinancing undertaken to lower the Company's future interest costs. The charge consists of an aggregate make-whole cash premium of $179 million for the redemption of public notes, an aggregate cash premium of $43 million for debt redeemed through a tender offer, a realization of net unamortized losses of $89 million on interest rate swaps and forward starting swaps, and a balance of unamortized fees and discounts of $6 million related to the debt redeemed. Refer to Note 8, "Borrowings and Lines of Credit" in Item 8 of this Form 10-K for additional information.
Other charges
The Company recorded pre-tax environmental charges for the environmental remediation at a former chromium manufacturing plant and associated sites in New Jersey of $136 million and $89 million in 2014 and 2013, respectively.
Other Charges in 2015 and 2013 were lower than 2014 due to the timing and amount of these pre-tax environmental charges.
Other income
In 2014, PPG recorded a $22 million pre-tax gain on the divestiture of a flat glass production facility and a $94 million pre-tax gain on PPG's share of the gain recognized from the sale of an equity affiliate's business.
 
Other Income in 2015 and 2013 was lower than 2014 due to the absence of these benefits. Further, in 2015 Other Income was reduced by an equity affiliate debt refinancing transaction charge of $11 million.
Effective tax rate and earnings per share
 
December 31,
Percent Change
($ in millions, except percentages)
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
Income tax expense
$
456

$
259

$
253

76.1
%
2.4
 %
Effective tax rate
24.2
%
18.3
%
20.6
%
5.9
%
(2.3
)%
Adjusted effective tax rate, ongoing operations*
24.5
%
23.9
%
23.1
%
0.6
%
0.8
 %
 
 
 
 
 
 
Earnings per diluted share, continuing operations
$
5.14

$
4.05

$
3.27

26.9
%
23.9
 %
Adjusted earnings per diluted share*
$
5.69

$
4.88

$
3.83

16.6
%
27.4
 %
*See the Regulation G Reconciliation.
The effective tax rate for the year-ended December 31, 2015 was affected by a shift in PPG's global mix of earnings toward jurisdictions with higher statutory tax rates, due in part to recent acquisitions, including Comex.
Earnings per diluted share for the year ended December 31, 2015 grew consecutively from 2014 and 2013. The Company benefited from the 11.5 million shares of stock repurchased in 2013, the 7.6 million shares of stock repurchased during 2014 and the 7.0 million shares repurchased in 2015.
In addition, about 21.6 million shares were added to treasury stock as a result of the January 2013 exchange transaction that was part of the separation of PPG’s former commodity chemicals business.
On April 16, 2015, the PPG Board of Directors approved a 2-for-1 split of the Company’s common stock for all shareholders. The record date for the split was the close of business on May 11, 2015, and the additional shares were distributed on June 12, 2015. Each shareholder as of the date of record received one additional share of common stock for each share held. Historical per share and share data (except for shares on the balance sheet) in this Form 10-K give retroactive effect to the stock split. These reclassifications had no impact on our previously reported net income, total assets, cash flows or shareholders’ equity.



20 2015 PPG ANNUAL REPORT AND FORM 10-K


Regulation G Reconciliation - Results from Operations
PPG Industries 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 nonrecurring 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. Net income and earnings per diluted share adjusted for these items are not recognized financial measures determined in accordance with U.S. generally accepted accounting principles (GAAP) and should not be considered a substitute for net income or earnings per diluted share 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 is reconciled to adjusted income before income taxes, the effective tax rate from continuing operations is reconciled to the adjusted effective tax rate from continuing operations and net income (attributable to PPG) and earnings per share – assuming dilution (attributable to PPG) are reconciled to adjusted net income (attributable to PPG) and adjusted earnings per share – assuming dilution below:
Year-ended December 31, 2015
 
 
 
 
 
($ 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
$
1,882

 
$
456

 
24.2
%
 
$
1,405

 
$
5.14

Includes:
 
 
 
 
 
 
 
 
 
Charge related to business restructuring
140

 
34

 
24.3
%
 
106

 
0.39

Charges related to transaction-related costs(1)
48

 
16

 
33.3
%
 
32

 
0.11

Legacy pension settlement loss
7

 
2

 
28.6
%
 
5

 
0.02

Charge related to equity affiliate debt refinancing
11

 
4

 
36.4
%
 
7

 
0.03

Adjusted, continuing operations, excluding certain charges
$
2,088

 
$
512

 
24.5
%
 
$
1,555

 
$
5.69

Year-ended December 31, 2014
 
 
 
 
 
($ 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
$
1,416

 
$
259

 
18.3
%
 
$
1,133

 
$
4.05

Includes:
 
 
 
 
 
 
 
 
 
Charge related to debt refinancing
317

 
117

 
36.9
%
 
200

 
0.72

Charges related to environmental remediation
138

 
52

 
37.7
%
 
86

 
0.30

Charges related to transaction-related costs(1)
62

 
20

 
32.3
%
 
42

 
0.16

Gain on asset dispositions
(116
)
 
(43
)
 
37.1
%
 
(73
)
 
(0.26
)
Pension settlement loss
7

 
2

 
28.6
%
 
5

 
0.02

Benefit from favorable foreign tax ruling

 
29

 
 
 
(29
)
 
(0.11
)
Adjusted, continuing operations, excluding certain charges
$
1,824

 
$
436

 
23.9
%
 
$
1,364

 
$
4.88

Year-ended December 31, 2013
 
 
 
 
 
($ 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
$
1,226

 
$
253

 
20.6
%
 
$
950

 
$
3.27

Includes:
 
 
 
 
 
 
 
 
 
Charges related to business restructuring
98

 
25

 
25.5
%
 
73

 
0.25

Charges related to environmental remediation
101

 
37

 
36.6
%
 
64

 
0.22

Charges related to transaction-related costs(1)
36

 
12

 
33.3
%
 
24

 
0.08

Legacy pension settlement loss
18

 
5

 
27.8
%
 
13

 
0.04

U.S. tax law change enacted in 2013

 
10

 
 
 
(10
)
 
(0.03
)
As reported, continuing operations, excluding certain charges
$
1,479

 
$
342

 
23.1
%
 
$
1,114

 
$
3.83

(1) Transaction-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 disposals not classified as discontinued operations. These costs also include the flow-through cost of sales of the step up to fair value of inventory acquired in acquisitions. These costs also include certain nonrecurring severance costs and charges associated with the Company’s business portfolio transformation.


2015 PPG ANNUAL REPORT AND FORM 10-K 21


Performance of Reportable Business Segments
 


Performance Coatings
 
December 31,
 
$ Change
 
Percent Change
($ in millions, except per share amounts)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
 
2015 vs. 2014
 
2014 vs. 2013
Net sales
$
8,765

 
$
8,698

 
$
7,934

 
$
67

 
$
764

 
0.8
%
 
9.6
%
Segment income
$
1,302

 
$
1,205

 
$
1,043

 
$
97

 
$
162

 
8.0
%
 
15.5
%

2015 vs. 2014
Performance Coatings net sales increased (1%) due to the following:
● Net sales from acquisitions (9%), largely Comex
● Selling prices were modestly higher
Partially offset by:
● Unfavorable foreign currency translation of approximately $700 million (8%)
● Lower sales volumes (1%)
Architectural coatings - EMEA sales volumes declined 1%. Demand was inconsistent throughout the region with modest growth continuing in certain countries, including the U.K., while several other countries experienced lower demand, including France.
Protective and marine coatings net sales volumes were slightly higher year-over-year. Sales for the business increased due to acquisition-related sales synergies from the Comex acquisition offset by unfavorable foreign currency translation.
Organic sales growth continued in aerospace coatings, aided by increased end-use market demand, but moderated versus the prior period reflecting the strong growth the business has delivered the past several years. Automotive refinish coatings sales volume growth was higher, with solid growth trends in the U.S. and Canada.
Excluding the impacts of acquisitions and currency, architectural coatings - Americas and Asia Pacific net sales were lower versus 2014. The year-over-year sales comparison was negatively impacted in the U.S. and Canada by several new PPG product pipeline fills at major customers in the previous year, as well as customer inventory management by most U.S. and Canadian retail customers and independent dealers at the end of a modest paint season. Organic sales growth in the recently acquired Comex architectural coatings business was a high-single-digit percentage, but was partially mitigated by unfavorable foreign currency translation caused by the impact of a weaker Mexican peso versus the U.S. dollar.
Segment income increased $97 million (8%) primarily due to acquisitions, lower manufacturing costs and modestly higher selling prices, partially offset by unfavorable foreign currency translation and lower sales volumes.
 
2014 vs. 2013
Performance Coatings net sales increased (10%) due to the following:
● Net sales from acquisitions (8%), which included the 2013 acquisition of a North American architectural coatings business and Comex
● Selling prices increased modestly
● Sales volumes, excluding acquisitions, advanced nearly 2% across all major regions
Partially offset by:
● Unfavorable currency translation of $60 million
Architectural coatings-EMEA sales volumes improved by low-single digit percentages year-over-year aided by partial demand recovery in some regions and in comparison to strengthening prior year levels. Sales volume improvement occurred early in the year, aided by favorable weather conditions, which was partially offset by lower year-over-year sales volumes late in the year.
The protective and marine coatings business experienced modest sales improvement, driven primarily by sales volume increases in the North American and European protective markets. Marine new-build sales volumes were negative early in the year, but positive late in the year.
The aerospace coatings and automotive refinish businesses both delivered slightly higher sales volumes year-over-year in each major region. Demand trends in the overall aerospace industry continued to remain favorable globally. Automotive refinish coatings sales growth was supported by higher emerging region activity and solid growth in the developed regions, including benefits from the expansion of the vehicle parc in Asia, higher North American demand and a partial demand recovery in Europe.
Excluding the impacts of acquisitions and currency, architectural coatings, America and Asia Pacific, net sales were up modestly year over year.
Segment income increased $162 million (16%) primarily due to the increase in organic net sales and acquisitions, including the further realization of cost synergies, partially offset by cost inflation.


Looking Ahead
In the first quarter of 2016, we expect recently completed acquisitions to add $25 million to $30 million to net sales. We also expect sales volume growth to continue in the architectural coatings - EMEA business in the first quarter of 2016; although, we expect results to vary by country. In addition, the protective and marine coatings business is expected to deliver modest year-over-year volume growth in the first quarter 2016. For the aerospace coatings business, we anticipate sales volume performance to be in line with industry rates as customer order patterns return to normal levels. In our architectural coatings Americas and Asia Pacific business, we are implementing various initiatives in our North American "Do it Yourself" business, consistent with PPG's multi-year rebranding strategy announced in 2015. These initiatives include investments in new product labeling and improved store displays, along with associated growth-oriented initiatives, which will result in incremental costs of approximately $15 million. Additionally, based on current exchange rates, we expect foreign currency translation on segment sales and income to be less unfavorable sequentially versus the fourth quarter of 2015 and year-over-year as the Euro and other major currencies weakened during 2015.

22 2015 PPG ANNUAL REPORT AND FORM 10-K



Industrial Coatings
 
December 31,
 
$ Change
 
Percent Change
($ in millions, except per share amounts)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
 
2015 vs. 2014
 
2014 vs. 2013
Net sales
$
5,476

 
$
5,552

 
$
5,264

 
$
(76
)
 
$
288

 
(1.4
)%
 
5.5
%
Segment income
$
985

 
$
951

 
$
824

 
$
34

 
$
127

 
3.6
 %
 
15.4
%

2015 vs. 2014
Industrial Coatings segment net sales decreased (1%) due to the following:
● Unfavorable foreign currency translation of nearly $400 million (8%)
● Lower sales prices (1%)
Partially offset by:
● Net sales from acquired businesses (4%)
● Higher sales volumes (3%), with growth in all regions, led by Asia-Pacific and EMEA
PPG’s global automotive OEM coatings business achieved sales volume growth in all regions, with an aggregate business unit growth rate of a high-mid-single-digit percentage year-over-year in comparison with the global auto industry production growth rate of approximately 2%. PPG sales volume growth was led by strong European and Asian demand. PPG continues to benefit from the adoption of new technologies and ongoing focus on customer service and customer process improvement initiatives.
Sales volumes declined modestly in PPG’s general industrial coatings and specialty coatings and materials businesses in comparison to strong volume growth in the prior year period. Demand was mixed across various end-use markets and regions.
Global packaging coatings sales volumes were up a high-mid-single-digit percentage, aided by new product introductions and continued emerging region growth.
Segment income increased $34 million (4%) primarily due to lower manufacturing costs, higher sales volumes and acquisitions, partially offset by unfavorable foreign currency translation.
 
2014 vs. 2013
Industrial Coatings segment net sales increased (6%) due to the following:
● Sales volume growth (6%) in all regions, led by North America
PPG’s global automotive OEM business grew net sales by a high-single-digit percentage year-over-year and continued a multi-quarter trend of outperforming global industry growth.
Growth accelerated in the industrial coatings business, aided by continued North American and emerging region strength, and European demand remained positive year-over-year.
Specialty coatings and materials net sales grew year-over-year aided by higher sales volumes in OLED materials, optical materials, precipitated silicas and Teslin substrate.
Packaging coatings year-over-year net sales were lower, reflecting continued weakness in Europe.
Segment income increased $127 million (15%) primarily due to the benefit from sales volume growth and lower manufacturing costs as a result of our continued focus on increased productivity and efficiency.

Looking ahead
In the first quarter of 2016, we expect recently completed acquisitions to add between $80 million and $90 million to net sales. We expect modest automotive industry production growth worldwide in the first quarter of 2016, with growth in all regions except South America. For the packaging coatings business, we expect a continued industry shift toward BPA non-intent (BPA-NI) products on the inside of food and beverage cans globally, resulting in sustained PPG sales volume growth in early 2016. Overall, we expect modest general industrial sales volume growth to continue, but to likely remain varied by region and industrial sub-sector. Additionally, based on current exchange rates, we expect foreign currency translation on segment sales and income to be less unfavorable sequentially versus the fourth quarter of 2015 and year-over-year as the Euro and other major currencies weakened during 2015.


2015 PPG ANNUAL REPORT AND FORM 10-K 23


Glass
 
December 31,
 
$ Change
 
Percent Change
($ in millions, except per share amounts)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
 
2015 vs. 2014
 
2014 vs. 2013
Net sales
$
1,089

 
$
1,110

 
$
1,067

 
$
(21
)
 
$
43

 
(1.9
)%
 
4.0
%
Segment income
$
137

 
$
81

 
$
56

 
$
56

 
$
25

 
69.1
 %
 
44.6
%

2015 vs. 2014
Glass segment net sales decreased (2%) due to the following:
● Lower sales stemming from a 2014 flat glass production facility divestiture (5%)
● Unfavorable foreign currency translation (4%)
Partially offset by:
● Higher selling prices (4%)
● Higher sales volumes (3%)
Flat glass organic sales grew modestly year-over-year aided by continued strong non-residential construction demand and improved pricing. Additionally, product mix was favorable from higher value-added and specialty glass stemming from end-use market growth coupled with an internal product mix shift related to the 2014 facility divestiture.
Fiber glass sales volumes increased a low-single-digit percentage in the U.S. market. Selling prices improved modestly year-over-year in the U.S. and Europe.
Segment income increased $56 million (69%) due to favorable flat glass product mix and lower manufacturing costs stemming from the reduction in PPG's system-wide flat glass capacity. Segment income was partially offset by weak manufacturing cost performance related to challenges at the Fresno, Ca flat glass facility. The facility was subject to a force majeure in the third quarter of 2015 due to manufacturing issues and is undergoing a major repair commencing in the first quarter of 2016. Segment income was also unfavorably impacted by higher pension costs.
 
2014 vs. 2013
Glass segment net sales increased (4%) due to the following:
● Higher selling prices (2%)
● Higher sales volumes (3%)
Partially offset by:
● Unfavorable foreign currency translation (1%)
Sales volumes in flat glass reflect improvements in residential and non-residential end-use market demand, partly offset by unfavorable currency translation, primarily the Canadian dollar.
Fiber glass sales volumes were higher year over year led by Europe, partly offset by declines in the U.S.
Segment income increased $25 million (45%) due to lower manufacturing costs and the increase in organic sales partially offset by higher costs stemming from scheduled maintenance projects. Higher natural gas-based energy costs early in the year were also a negative factor, although this impact declined later in the year.

Looking ahead
In the first quarter of 2016, we expect a relatively stable industry demand environment for the flat glass business, with lower PPG sales due to the Fresno facility maintenance outage. The maintenance expenses associated with the Fresno repair project are expected to be approximately $8 million. We anticipate fiber glass demand to be in line with the prior year. Additionally, based on current exchange rates, we expect foreign currency translation on segment sales and income to be less unfavorable sequentially versus the fourth quarter of 2015 and year-over-year as the Euro and other major currencies weakened during 2015.


24 2015 PPG ANNUAL REPORT AND FORM 10-K


Review and Outlook
During 2015, overall economic conditions remained mixed among the major global economies and across the various end-use markets PPG supplies. Despite the uneven overall market conditions, PPG’s aggregate sales volumes grew about 1%. In addition to the organic growth, acquisitions, led by Comex, contributed significantly to the Company sales, adding about 6% to net sales. These net sales additions were offset by 7% unfavorable foreign currency translation as the U.S. dollar strengthened versus most major foreign currencies.
The U.S. and Canada remained PPG’s largest region representing 46% of 2015 sales. During 2015, industrial activity was mixed by end-use market and by country, with modestly positive trends in the U.S., and lower demand in Canada largely due to lower commodity and energy prices. Certain consumer-facing industries, like automotive OEM, continued to expand. These gains were driven by lower unemployment rates and rising consumer disposable income, partly related to lower energy prices.
In addition to overall market gains, PPG’s leading products continued to gain broader market acceptance. Consistent with previous years, PPG automotive OEM coatings continued to outpace regional industry growth. In packaging coatings, PPG’s new interior can coatings contributed to above-market end-use growth rates, and PPG’s waterborne refinish coatings, continued to be a major factor in new customer adoption within the region.
Construction spending in the region continued to recover in a measured manner, building on the recovery in recent years. U.S. housing starts grew over 10% during the year and were supplemented by continued improvement in the residential remodeling market. Non-residential construction demand recovered as well, although the results were mixed across the different U.S. regions. Although smaller in size, Canadian construction market demand declined as regional gross domestic product (GDP) in the country was negative for a large portion of the year reflecting the impact from falling global energy prices, which is an important element of the Canadian economy.
European economic activity continued to modestly strengthen and broaden throughout the year. In general, economic factors, including GDP and industrial production, improved within the region. Demand remained mixed by country as some European countries experienced relatively strong growth rates while others were flat or declined. Regional demand for PPG products also strengthened throughout the year, with first quarter year-over-year sales volumes growing one percent, and performance steadily improving during the year ending with about 3% growth in the fourth quarter. Demand for PPG’s products in several end-use markets aided PPG’s overall regional growth rate, including automotive OEM and refinish coatings, aerospace coatings, and protective and marine coatings.
Europe remains a very large region for PPG, representing just under 30% of PPG’s 2015 sales, down slightly versus the prior year due to the impact of lower currency exchange rates and the addition of acquisition-related sales in other PPG regions. Company coatings sales volumes in the region are still down about 17%, or just under $900 million, when compared to 2008 pre-recession levels, reflecting economic weakness in the years during and following the recession, without a substantive recovery since. From a currency perspective, the Euro and other
 
currencies in the region weakened considerably against the U.S. dollar, resulting in unfavorable currency translation for the Company.
The emerging market regions of Asia and Latin America represented 26% of PPG’s 2015 sales versus 22% in 2014. This expansion was primarily due to the Comex acquisition that was completed in November 2014. In the aggregate, emerging region economies continued to expand during 2015, but at a lower rate than the previous year. Within the emerging regions, growth rates varied considerably by country. PPG sales volume growth of 4% in Asia was partly offset by a decline of less than 1% in Latin America.
Asia was the largest emerging region with sales of about $2.4 billion, led by China which remained PPG’s second largest individual country from a sales perspective in 2015. The largest gains in Asia were in the Industrial Coatings segment, including the benefit of 5% industry growth in Chinese automotive production. Offsetting these improvements was muted demand in several general industrial end-use markets, including heavy-duty equipment and construction-related metal products. In addition to the Industrial Coatings gains, protective and marine coatings, aerospace coatings, and other businesses experienced increased sales volumes.
Demand in the Latin American economies was bifurcated, with economic growth continuing in Mexico, aided by increased industrial production. This was partly offset by economic contraction in South America, particularly in Brazil, due to high inflation and unemployment rates. Also, weakening South American currencies versus the U.S. dollar were unfavorable to PPG net sales.
Looking ahead to 2016, we anticipate PPG volume growth rates to improve in each region and in aggregate versus the prior year. We expect broadening growth to continue in Europe, including a continuation of demand growth in automotive OEM and packaging coatings. We expect moderate growth trends to remain in most end-use markets in the U.S, with Canada stabilizing at lower demand levels. We anticipate emerging regions growth to remain mixed, but for PPG to post solid aggregate growth based on the specific end-use markets and countries that the Company supplies.
In November 2014, PPG completed the acquisition of Comex, Mexico’s leading architectural coatings company. The Company targeted $45 million to $50 million in annual savings from business synergies. Throughout 2015, PPG executed actions to capture these synergies and achieved the targeted annual run-rate savings. In addition to cost synergies, the company expects to realize $40 million to $50 million of annual revenue synergies related to the sale of legacy PPG products through Comex’s distribution network. Also anticipated are other additional annual revenue synergies of $60 million to $70 million in Central America by 2019.
During 2015, PPG announced a $140 million corporate restructuring program, with anticipated annual savings of about $105 million once fully implemented. The impact and expected cost saving encompass all major regions and most business units. The company achieved approximately $20 million (pre-tax) in restructuring-related savings in 2015 and expects to recognize an incremental $60 million to $70 million in additional restructuring savings in 2016. We expect substantially all 2015 restructuring actions to be completed in 2016. PPG


2015 PPG ANNUAL REPORT AND FORM 10-K 25


remains aggressive with respect to cost management, and will continually monitor the company’s cost structure relative to projected regional and end use-market demand levels. The Company will proactively make adjustments to its cost structure as appropriate.
Raw materials are a significant input cost in the manufacture of coatings. PPG typically experiences fluctuating prices for energy and raw materials driven by various factors, including supply and demand imbalances, global industrial activity levels, changes in supplier feedstock costs and inventories, and foreign currency exchange rates. Given the recent volatility in certain energy-based input costs and foreign currencies, the Company is not able to predict with certainty the 2016 full year impact of related changes in raw material pricing. Also, given the distribution nature of many of our businesses, logistics and distribution costs are sizable, as are wages and benefits to a lesser degree. In aggregate, raw material feedstock prices in 2015 were lower, including oil-related products. Since oil is traded in U.S. dollars globally, the strengthening of the dollar against a wide variety of foreign currencies muted some of the oil-related benefits in certain regions, and in certain cases resulted in inflationary raw material prices.
Pension and postretirement benefit costs, excluding curtailments and special termination benefits, were $173 million in 2015, up $50 million from $123 million in 2014. This change was principally due to a change in the mortality rates utilized to estimate the pension costs. In 2016, the Company will change the method it uses to estimate the service and interest cost components of net periodic benefit cost for pension and other postretirement benefit costs for substantially all of its U.S. and foreign plans. Historically, the service and interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach (“Split-rate”) to estimate these components of benefit cost by applying specific spot rates along the yield curve used to determine the benefit obligation to the relevant projected cash flows. The Company will make this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. This change does not affect the measurement of the Company’s total benefit obligations. The Company will account for this change as a change in estimate and, accordingly, will recognize its effect prospectively beginning in fiscal year 2016. We expect 2016 defined benefit expense to decrease by approximately $20 million to $25 million. During 2015, PPG's cash contributions to defined benefit pension plans totaled $289 million. Total cash contributions to global defined benefit pension plans were $41 million and $174 million in 2014 and 2013, respectively. We expect to make mandatory contributions to our non-U.S. plans in the range of $35 million to $40 million in 2016. We may also make voluntary contributions to our U.S. pension plans in 2016 and beyond.
In aggregate, the Company selling prices were flat in 2015 reflecting employee-related cost inflation, with energy-related cost inputs providing an offset. While selective pricing actions are currently planned in 2016, the Company expects flat aggregate pricing again in 2016.
 
A variety of foreign currencies weakened throughout 2015 versus the U.S. dollar. For 2015, foreign currency translation unfavorably impacted sales by $1.1 billion and pre-tax income by about $120 million. Based on mid-January 2016 exchange rates, the Company expects year-over-year currency translation to unfavorably impact 2016 sales by $550 million to $600 million, and 2016 pre-tax income by about $70 million to $80 million. Since mid-January, certain foreign currencies have strengthened versus the U.S. dollar, as the foreign currency environment continues to be volatile. Thus, the foreign currency impact on 2016 net sales and pre-tax income could differ from the mid-January guidance. The Company generally purchases raw materials, incurs manufacturing costs and sells finished products in the same currency, so it typically incurs modest transactional-related currency impacts to earnings.
The Company expects Interest expense, net of Interest income in 2016 to be approximately $20 million higher than 2015 due to debt issuances during 2015. We also expect somewhat lower Interest income in 2016.
We expect our adjusted effective tax rate from continuing operations to be in the range of 24.5% to 25.5% in 2016. This rate is slightly higher than the equivalent 2015 rate primarily due to a shift in the mix of earnings to jurisdictions with higher statutory tax rates. Other factors may impact the 2016 tax rate positively or negatively throughout the year, including changes to various tax regulations around the world.
Over the past five years, the Company has used $3.5 billion of cash to repurchase about 49 million shares of stock. The Company ended the year with approximately $920 million remaining under its current share repurchase authorization. During 2015, the Company deployed over $400 million for acquisitions (purchase price) and nearly $400 million for dividends. PPG increased its annual per-share dividend by 7% in 2015, marking the 44th annual increase and the 116th consecutive year of dividend payments. In January 2015, the Company announced a cash deployment target for acquisitions and share repurchases of between $1.5 billion and $2.5 billion for years 2015 and 2016 combined. The Company adjusted this range in September 2015 to reflect the year-to-date pace of cash deployment to between $2.0 billion and $2.5 billion. The Company expects continued strong free cash generation in 2016.
Accounting Standards Adopted in 2015
Note 1, “Summary of Significant Accounting Policies,” under Item 8 of this Form 10-K describes the Company’s recently adopted accounting pronouncements.
Accounting Standards to be Adopted in Future Years
Note 1, “Summary of Significant Accounting Policies,” under Item 8 of this Form 10-K describes accounting pronouncements that have been promulgated prior to December 31, 2015 but are not effective until a future date.


26 2015 PPG ANNUAL REPORT AND FORM 10-K


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 Item 3, “Legal Proceedings” and Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K for a description of certain of these lawsuits, including a description of the proposed asbestos settlement.
As discussed in Item 3 and Note 13, 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 in the event the proposed asbestos settlement described in Note 13 does not become effective, 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.
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.
The Company continues to analyze, assess and remediate the environmental issues associated with PPG’s former chromium manufacturing plant in Jersey City, N.J. and associated sites (“New Jersey Chrome”). Information will continue to be generated from the ongoing groundwater remedial investigation activities related to New Jersey Chrome and will be incorporated into a final draft remedial action work plan for groundwater expected to be submitted to the New Jersey Department of Environmental Protection no later than 2020.
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.
Liquidity and Capital Resources
During the past three years, PPG has had sufficient financial resources to meet its operating requirements, to fund our capital spending, including acquisitions, share repurchases and pension plans and to pay increasing dividends to shareholders.
 
Cash and Cash Equivalents and Short Term Investments
($ in millions)
December 31,
 
2015
 
2014
Cash and cash equivalents
$
1,311

 
$
686

Short term investments
144

 
497

Total
$
1,455

 
$
1,183

Summary Cash Flow Information
($ in millions, except percentages)
December 31,
Percent Change
 
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
Cash from operating activities - continuing operations
$
1,837

$
1,807

$
1,562

1.7
 %
15.7
 %
Cash (used for) from investing activities - continuing operations
$
(395
)
$
(856
)
$
22

(53.9
)%
(3,990.9
)%
Cash used for financing activities - continuing operations
$
(754
)
$
(929
)
$
(1,893
)
(18.8
)%
(50.9
)%
Cash from operating activities - continuing operations
Increases in cash from continuing operating activities in 2015 compared to 2014 and in 2014 compared to 2013 were aided by higher income from continuing operations, including income from acquired businesses.
Operating Working Capital
Operating Working Capital is a subset of total working capital and represents (1) receivables from customers, net of allowance for doubtful accounts, (2) inventories, and (3) trade liabilities. See Note 3, “Working Capital Detail” under Item 8 of this Form 10-K for further information related to the components of the Company’s Operating Working Capital. We believe Operating Working Capital represents the key components of working capital under the operating control of our businesses. Operating Working Capital at December 31, 2015 and 2014 was $2.3 billion and $2.5 billion, respectively.
A key metric we use to measure our working capital management is Operating Working Capital as a percentage of sales (fourth quarter sales annualized). 
($ in millions, except percentages)
2015
 
2014
Trade Receivables, net
$
2,413

 
$
2,366

Inventories, FIFO
1,868

 
2,007

Trade Creditor’s Liabilities
1,940

 
1,919

Operating Working Capital
$
2,341

 
$
2,454

Operating Working Capital as % of Sales
15.8
%
 
16.5
%
Operating working capital at December 31, 2015 decreased $113 million compared with the prior year. Trade receivables from customers, net, as a percentage of 2015 fourth quarter sales, annualized, was 16.3%, up slightly from 16.0% for 2014. Days sales outstanding was 54 days in 2015, consistent with 2014. Inventories on a FIFO basis as a percentage of 2015 fourth quarter sales, annualized, was 12.6% compared to 13.5% in 2014. Inventory turnover was 4.9 times in 2015 and 4.8 times in 2014.
Cash outlays related to environmental remediation were $109 million, $165 million, and $111 million in 2015, 2014 and 2013, respectively. We expect cash outlays in 2016 to be between $40 million and $60 million.


2015 PPG ANNUAL REPORT AND FORM 10-K 27


Defined Benefit Pension Plan Contributions
($ in millions)
December 31,
 
2015
2014
2013
U.S. defined benefit pension voluntary contributions
$
250

$
2

$
50

Non-U.S. defined benefit pension plans
$
39

$
39

$
124

We did not have a mandatory contribution to our U.S. defined benefit pension plans in 2015, 2014 or 2013, and we do not expect to be required to make contributions to our U.S. defined benefit pension plans in 2016. Some contributions to our non-U.S. defined benefit pension plans were required by local funding requirements. We expect to make mandatory contributions to our non-U.S. plans in the range of $35 million to $40 million in 2016. We may also make voluntary contributions to our U.S. pension plans in 2016 and beyond.
Cash used for investing activities - continuing operations
Total Capital Spending, Including Acquisitions
($ in millions, except percentages)
December 31,
Percent Change
 
2015
2014
2013
2015 vs. 2014
2014 vs. 2013
Capital spending (1)
$
476

$
587

$
494

(18.9
)%
18.8
%
Capital spending, business acquisitions, net of cash acquired (2)
$
320

$2,113
$
983

(84.9
)%
115.0
%
Total capital spending, including acquisitions
$
796

$2,700
$
1,477

(70.5
)%
82.8
%
Capital spending, excluding acquisitions as a percentage of sales
3.1
%
3.8
%
3.5
%
(18.4
)%
8.6
%
(1)
Includes modernization and productivity improvements, expansion of existing businesses and environmental control projects
(2)
Excluding cash acquired, Capital spending, business acquisitions totaled $440 million, $2,183 million and $997 million in 2015, 2014 and 2013, respectively.
Spending related to modernization and productivity improvements, expansion of existing businesses and environmental control projects is expected to be in the range of 3.0% to 3.5% of sales during 2016.
A primary focus for the Company in 2016 will continue to be prudent cash deployment focused on profitable income growth, including pursuing opportunities for additional strategic acquisitions.
In 2015, the Company spent $320 million, net of cash acquired, to make several strategic bolt-on business acquisitions with a total purchase price of $440 million. PPG also acquired approximately $40 million of third party debt.
In November 2014, the Company acquired Comex, an architectural coatings company with headquarters in Mexico City, Mexico. In 2014, PPG also completed the acquisition of several smaller companies. The total cost of the 2014 acquisitions, including acquired debt repaid, was $2,427 million, net of cash acquired.
In March 2014, PPG received $1.735 billion in cash proceeds for the sale of its 51% ownership interest in its Transitions Optical joint venture and 100% of its optical sunlens business to Essilor.
In April 2013, the Company acquired the North American architectural coatings business of Akzo Nobel, N.V., Amsterdam
 
and certain assets of a privately-owned U.S. based specialty coatings company. The total cost of 2013 acquisitions was $983 million.
In January 2013, PPG received $900 million in cash proceeds in connection with the closing of the separation of its commodity chemicals business and subsequent merger of the subsidiary holding the PPG commodity chemicals business with a subsidiary of Georgia Gulf. Refer to Note 2, “Acquisitions and Dispositions” under Item 8 of this Form 10-K for financial information regarding these discontinued operations.
Cash used for financing activities - continuing operations
Share Repurchase Activity
($ in millions, except number of shares)
December 31,
 
2015
2014
2013
Number of shares repurchased (millions)
7.0

7.6

11.5

Cost of shares repurchased
$
751

$
750

$
1,000

We anticipate completing additional share repurchases during 2016. The Company has approximately $920 million remaining under the current authorization from the Board of Directors, which was approved in 2014. The current authorized repurchase program has no expiration date.
Dividends paid to shareholders
($ in millions)
December 31,
 
2015
2014
2013
Dividends paid to shareholders
$
383

$
361

$
345

PPG has paid uninterrupted annual dividends since 1899, and 2015 marked the 44th consecutive year of increased annual per-share dividend payments to shareholders. The Company raised its per-share dividend by 7% to $0.36 per-share in April 2015.
Debt Issued and Repaid
In January 2016, PPG repaid its $250 million 1.9% notes upon their maturity, using cash on hand.
In June 2015, PPG's €300 million notes matured, upon which the Company paid $336 million to settle these obligations using cash on hand.
In March 2015, PPG completed a public offering of €600 million 0.875% Notes due 2022 and €600 million 1.400% Notes due 2027. These notes were issued pursuant to PPG’s existing shelf registration statement. The aggregate cash proceeds from the notes, net of discounts and fees, was approximately $1.24 billion.  The proceeds were used to repay outstanding borrowings and for general corporate purposes.
In the fourth quarter of 2014, PPG completed a debt refinancing which involved paying approximately $1.7 billion to redeem public notes which was funded by cash on hand and cash proceeds of approximately $1.2 billion from several debt issuances described below.
In November 2014, PPG completed a public offering of $300 million in principal amount of its 2.30% Notes due 2019. These notes were issued pursuant to PPG’s existing shelf registration statement. Also in November 2014, PPG entered into three Euro-denominated borrowings as follows:
3-year €500 million, EURIBOR based variable rate bank loan
15-year €80 million 2.5% fixed interest note
30-year €120 million 3.0% fixed interest note.


28 2015 PPG ANNUAL REPORT AND FORM 10-K


In 2013, PPG repaid its $600 million 5.75% notes upon maturity, using cash on hand.
The ratio of total debt, including capital leases, to total debt and equity was 46% at December 31, 2015 up from 44% in 2014.
In December 2015, PPG entered into a five-year credit agreement (the “Credit Agreement”) with several banks and financial institutions as further discussed in Note 8, “Borrowings and Lines of Credit” under Item 8 of this Form 10-K. The Credit Agreement replaces the Company's existing Five Year Credit Agreement dated as of September 12, 2012. The Credit Agreement provides for a $1.8 billion unsecured revolving credit facility. The Credit Agreement will terminate on December 18, 2020. During the years ended December 31, 2015 and 2014, there were no borrowings outstanding under the existing or the prior Credit Agreement.
In addition to the amounts available under the lines of credit, the Company has an automatic shelf registration statement on file with the SEC pursuant to which it may issue, offer and sell from time to time on a continuous or delayed basis any combination of securities in one or more offerings.
See Note 8, “Borrowings and Lines of Credit,” under Item 8 of this Form 10-K for information regarding notes entered entered into and repaid as well as details regarding the use and availability of committed and uncommitted lines of credit, letters of credit, guarantees and debt covenants.
Contractual Obligations
We continue to believe that our cash on hand and short term investments, cash from operations and the Company’s available debt capacity will continue to be sufficient to fund our operating activities, capital spending, including acquisitions, dividend payments, debt service, amounts due under the proposed asbestos settlement, share repurchases, contributions to pension plans, and PPG’s significant contractual obligations. These significant contractual obligations, along with amounts due under the proposed asbestos settlement are presented in the following table.
 
 
 
 
Obligations Due In:
($ in millions)
Total
 
2016
 
2017-2018
 
2019-2020
 
There-after
Contractual Obligations
 
 
 
 
 
 
 
 
 
Long-term debt
$
3,807

 
$
251

 
$
662

 
$
795

 
$
2,099

 
Short-term debt
29

 
29

 

 

 

 
Commercial paper
459

 

 

 
459

 

 
Capital lease obligations
30

 
3

 
6

 
5

 
16

 
Operating leases
787

 
177

 
266

 
146

 
198

 
Interest payments(1)
1,177

 
107

 
190

 
169

 
711

 
Pension contributions(2)
40

 
40

 

 

 

 
Unconditional purchase commitments(3)
288

 
100

 
89

 
36

 
63

 
Other commitments
37

 

 

 
37

 

 
Total
$
6,654

 
$
707

 
$
1,213

 
$
1,647

 
$
3,087

 
 
 
 
 
 
 
 
 
 
 
Asbestos Settlement(4)
 
 
 
 
 
 
 
 
 
Aggregate cash payments
$
825

 
$
485

 
$
67

 
$
91

 
$
182

 
PPG stock and other
290

 
290

 

 

 

 
Total
$
1,115

 
$
775

 
$
67

 
$
91

 
$
182

(1)
Includes interest on all outstanding debt.
 
(2)
Includes the high end of the range of the expected mandatory pension contributions for 2016 only, as PPG is unable to estimate the pension contributions beyond 2016.
(3)
The unconditional purchase commitments are principally take-or-pay obligations related to the purchase of certain materials, including industrial gases, natural gas, coal and electricity, consistent with customary industry practice.
(4)
We have recorded an obligation equal to the net present value of the aggregate cash payments, along with the PPG stock and other assets to be contributed to a trust under the proposed asbestos settlement. However, PPG has no obligation to pay any amounts under this settlement until the Funding Effective Date, as more fully discussed in Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K.
In January 2016, all pending appeals of the Pittsburgh Corning Plan of Reorganization were withdrawn. Under the plan, PPG and its participating insurers will make initial contributions to the asbestos trust established by the plan within 30 business days after the plan becomes effective and all conditions to funding have been met. PPG anticipates that those conditions to funding will be satisfied and funding will take place in the first half of 2016. Refer to Note 13, “Commitments and Contingent Liabilities” under Item 8 of this Form 10-K for additional information.
Other Liquidity Matters
At December 31, 2015, the total amount of unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $90 million. The timing of payments will depend on the progress of examinations with tax authorities. PPG does not expect a significant tax payment related to these obligations within the next year. The Company is unable to make a reasonably reliable estimate as to when any significant cash settlements with taxing authorities may occur.
The Company has $5.0 billion of undistributed earnings of non-U.S. subsidiaries as of December 31, 2015 and 2014.  These amounts relate to approximately 225 subsidiaries in more than 60 taxable jurisdictions. As discussed in Note 2, “Acquisitions and Dispositions,” PPG recorded a deferred U.S. income tax liability on the foreign earnings generated from the sale of its Transitions Optical joint venture in 2014. At December 31, 2015 and 2014, the expected future tax cost to repatriate these earnings totaled $142 million and $247 million, respectively. No significant deferred U.S. income taxes have been provided on the remaining $4.2 billion of PPG’s undistributed earnings as they are considered to be reinvested for an indefinite period of time or will be repatriated when it is tax effective to do so. The Company estimates repatriation of undistributed earnings of non-U.S. subsidiaries as of December 31, 2015 and 2014 would have resulted in a U.S. tax cost of approximately $375 million and $200 million, respectively.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include the operating leases and unconditional purchase commitments disclosed in the “Liquidity and Capital Resources” section in the contractual obligations table as well as letters of credit and guarantees as discussed in Note 8, “Borrowings and Lines of Credit,” under Item 8 of this Form 10-K.
Critical Accounting Estimates
Management has evaluated the accounting policies used in the preparation of the financial statements and related notes


2015 PPG ANNUAL REPORT AND FORM 10-K 29


presented under Item 8 of this Form 10-K 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.
Contingencies
Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial statements are those related to the collectability of accounts receivable, to environmental remediation, to pending, impending or overtly threatened litigation against the Company and to the resolution of matters related to open tax years. For more information on these matters, see Note 3, “Working Capital Detail,” Note 11, “Income Taxes” and Note 13, “Commitments and Contingent Liabilities” under Item 8 of this Form 10-K.
Defined Benefit Pension and Other Postretirement Benefit Plans
Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, we make extensive use of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. The Company has established a process by which management reviews and selects these assumptions annually. See Note 12, “Employee Benefit Plans,” under Item 8 for information on these plans and the assumptions used.
Business Combinations
In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed were recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities including: third-party appraisals for the estimated value and lives of identifiable intangible assets and property, plant and equipment; third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations; and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities. The business and technical judgment of management was used in determining which intangible assets have indefinite lives and in determining the useful lives of finite-lived intangible assets in accordance with the accounting guidance for goodwill and other intangible assets.
 
Goodwill and Intangible Assets
The Company tests indefinite-lived intangible assets and goodwill for impairment annually by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair values of a reporting unit or asset is less than its carrying amount. Fair values under the quantitative test are estimated using discounted cash flow methodologies that are based on projections of the amounts and timing of future revenues and cash flows. For more information on these matters, see Note 1, “Summary of Significant Accounting Policies,” under Item 8 of this Form 10-K.
We believe that the amounts recorded in the financial statements under Item 8 of this Form 10-K related to these contingencies, pensions, other postretirement benefits, business combinations, goodwill and other identifiable intangible assets with indefinite lives are based on the best estimates and judgments of the appropriate PPG management, although actual outcomes could differ from our estimates.
Currency
Throughout 2015 and the last six months of 2014, the U.S. dollar strengthened over prior year comparable periods against the currencies in most countries in which PPG operates, most notably the Euro and the Mexican Peso. As a result, consolidated net assets at December 31, 2015 and 2014 decreased by $704 million and $623 million, respectively.
Comparing exchange rates during 2015 to those of 2014, in the countries in which PPG operates, the U.S. dollar was stronger overall, which had an unfavorable impact on full year 2015 income before income taxes from the translation of these foreign earnings into U.S. dollars of approximately $120 million.
Comparing exchange rates during 2014 to those of 2013, in the countries in which PPG operates, the U.S. dollar was weaker overall, which had an immaterial favorable impact on full year 2014 income before income taxes from the translation of these foreign earnings into U.S. dollars.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. Management’s Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance.
You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast” and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission. 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 global economic conditions, increasing price and product competition by foreign and domestic competitors,


30 2015 PPG ANNUAL REPORT AND FORM 10-K


fluctuations in cost and availability of raw materials, the ability to maintain favorable supplier relationships and arrangements, the timing of and the realization of anticipated cost savings from restructuring initiatives, difficulties in integrating acquired businesses and achieving expected synergies therefrom, economic and political conditions in international markets, 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 and the unpredictability of existing and possible future litigation, including litigation that could result if the proposed asbestos settlement does not become effective. However, it is not possible to predict or identify all such factors.
Consequently, while the list of factors presented here and 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 earnings, business disruption, operational problems, financial loss, legal liability to third parties, other factors set forth in Item 1A of this 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
PPG is exposed to market risks related to changes in foreign currency exchange rates, interest rates, and to changes in PPG’s stock price. The Company may enter into derivative financial instrument transactions in order to manage or reduce these market risks. A detailed description of these exposures and the Company’s risk management policies are provided in Note 9, “Financial Instruments, Hedging Activities and Fair Value Measurements,” under Item 8 of this Form 10-K.
The following disclosures summarize PPG’s exposure to market risks and information regarding the use of and fair value of derivatives employed to manage its exposure to such risks. Quantitative sensitivity analyses have been provided to reflect how reasonably possible, unfavorable changes in market rates can impact PPG’s consolidated results of operations, cash flows and financial position.
Foreign Currency Risk
We conduct operations in many countries around the world. Our results of operations are subject to both currency transaction and currency translation risk. Foreign currency forward contracts outstanding during 2015 and 2014 were generally designated as a hedge of PPG’s exposure to foreign currency transaction risk. As of December 31, 2015 and 2014, the fair value of these contracts was immaterial. The potential reduction in PPG’s income from continuing operations resulting from the impact of adverse changes in exchange rates on the fair value of its outstanding foreign currency hedge contracts of 10% for European and Canadian currencies and 20% for Asian and Latin American currencies for the years ended December 31, 2015 and 2014 would have been $29 million and $24 million, respectively.
 
As of December 31, 2015 and 2014, PPG had U.S. dollar to Euro cross currency swap contracts with a total notional amount of $560 million outstanding. As of December 31, 2015 and 2014, the fair value of these contracts was a net asset of $41 million and a net liability of $32 million, respectively. A 10% increase in the value of the Euro to the U.S. dollar would have had an unfavorable effect on the fair value of these swap contracts by reducing the value of this instrument by $60 million as of December 31, 2015 and increasing the liability by $70 million at December 31, 2014.
As of December 31, 2015 and 2014, PPG had non-U.S. dollar denominated debt outstanding of $2.1 billion and $1.3 billion, respectively. A weakening of the U.S. dollar by 10% against European currencies and by 20% against Asian and South American currencies would have resulted in unrealized translation losses of approximately $242 million and $154 million as of December 31, 2015 and 2014, respectively.
Interest Rate Risk
The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to minimize its interest costs. A 10% increase in interest rates in the U.S., Canada, Mexico and Europe and a 20% increase in interest rates in Asia and South America would have an insignificant effect on PPG’s variable rate debt obligations and interest expense for the years ended December 31, 2015 and 2014, respectively. Further, a 10% reduction in interest rates would have increased the present value of the Company’s fixed rate debt by approximately $75 million and $62 million as of December 31, 2015 and 2014, respectively; however, such changes would not have had an effect on PPG’s annual income from continuing operations or cash flows.
Equity Price Risk
An equity forward arrangement was entered into to hedge the Company’s exposure to changes in fair value of its future obligation to contribute PPG stock to an asbestos settlement trust (see Note 9, “Financial Instruments, Hedging Activities and Fair Value Measurements” and Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K). The fair value of these instruments as of December 31, 2015 and 2014 was an asset of $223 million and $268 million, respectively. A 10% decrease in PPG’s stock price would have had an unfavorable effect on the fair value of these instruments of $27 million and $32 million at December 31, 2015 and 2014, respectively.


2015 PPG ANNUAL REPORT AND FORM 10-K 31


Item 8. Financial Statements and Supplementary Data
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of PPG Industries, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows present fairly, in all material respects, the financial position of PPG Industries, Inc. and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Establishing and Maintaining Adequate Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it presents deferred tax assets and liabilities on the balance sheet in 2015.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 18, 2016    

32 2015 PPG ANNUAL REPORT AND FORM 10-K


Management Report

Responsibility for Preparation of the Financial Statements and Establishing and Maintaining Adequate Internal Control Over Financial Reporting
We are responsible for the preparation of the financial statements included in this Annual Report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management.
We are also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting, no matter how well designed, have inherent limitations. Therefore, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. In addition, because of changing conditions, there is risk in projecting any evaluation of internal controls to future periods.
We conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this evaluation, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Our evaluation included reviewing the documentation of our controls, evaluating the design effectiveness of our controls and testing their operating effectiveness. Based on this evaluation we have concluded that, as of December 31, 2015, the Company’s internal controls over financial reporting were effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has issued their report, included on page 32 of this Form 10-K, regarding the Company’s internal control over financial reporting.
/s/ Michael H. McGarry
 
/s/ Frank S. Sklarsky
Michael H. McGarry
President and
Chief Executive Officer
February 18, 2016
 
Frank S. Sklarsky
Executive Vice President and
Chief Financial Officer
February 18, 2016

2015 PPG ANNUAL REPORT AND FORM 10-K 33


Consolidated Statement of Income
 
For the Year
($ in millions, except per share amounts)
2015
 
2014
 
2013
Net sales
$
15,330

 
$
15,360

 
$
14,265

Cost of sales, exclusive of depreciation and amortization
8,591

 
8,791

 
8,314

Selling, general and administrative
3,679

 
3,758

 
3,486

Depreciation
363

 
350

 
333

Amortization
132

 
126

 
119

Research and development, net
486

 
492

 
463

Interest expense
126

 
187

 
196

Interest income
(40
)
 
(50
)
 
(43
)
Asbestos settlement, net
12

 
12

 
11

Business restructuring
140

 

 
98

Debt refinancing charge

 
317

 

Other charges
104

 
221

 
189

Other income
(145
)
 
(260
)
 
(127
)
Income before income taxes
1,882

 
1,416

 
1,226

Income tax expense
456

 
259

 
253

Income from continuing operations
1,426

 
1,157

 
973

Income from discontinued operations, net of tax
1

 
1,002

 
2,380

Net income attributable to the controlling and noncontrolling interests
1,427

 
2,159

 
3,353

Less: net income attributable to noncontrolling interests
21

 
57

 
122

Net income (attributable to PPG)
$
1,406

 
$
2,102

 
$
3,231

Amounts Attributable to PPG
 
 
 
 
 
Continuing operations
$
1,405

 
$
1,133

 
$
950

Discontinued operations
1

 
969

 
2,281

Net income
$
1,406

 
$
2,102

 
$
3,231

Earnings per common share
 
 
 
 
 
Continuing operations
$
5.18

 
$
4.10

 
$
3.31

Discontinued operations

 
3.50

 
7.96

Net income (attributable to PPG)
$
5.18

 
$
7.60

 
$
11.27

Earnings per common share - assuming dilution
 
 
 
 
 
Continuing operations
$
5.14

 
$
4.05

 
$
3.27

Discontinued operations

 
3.47

 
7.86

Net income (attributable to PPG)
$
5.14

 
$
7.52

 
$
11.13

Consolidated Statement of Comprehensive Income
 
 
For the Year
($ in millions)
2015
 
2014
 
2013
Net income attributable to the controlling and noncontrolling interests
$
1,427

 
$
2,159

 
$
3,353

 
Unrealized foreign currency translation adjustment
(717
)
 
(596
)
 
(51
)
 
Defined benefit pension and other postretirement benefit adjustments
113

 
(335
)
 
440

 
Net change – derivative financial instruments
5

 
69

 
10

Other comprehensive (loss) / income, net of tax
(599
)
 
(862
)
 
399

Total comprehensive income
$
828

 
$
1,297

 
$
3,752

Less: amounts attributable to noncontrolling interests:
 
 
 
 
 
 
Net income
(21
)
 
(57
)
 
(122
)
 
Unrealized foreign currency translation adjustment
13

 
6

 
7

Comprehensive income attributable to PPG
$
820

 
$
1,246

 
$
3,637

The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.

34 2015 PPG ANNUAL REPORT AND FORM 10-K


Consolidated Balance Sheet
 
 
 
 
December 31
($ in millions)
2015
 
2014
Assets
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
1,311

 
$
686

 
 
Short-term investments
144

 
497

 
 
Receivables
2,788

 
2,815

 
 
Inventories
1,705

 
1,825

 
 
Other
606

 
620

 
Total current assets
6,554

 
6,443

Property, plant and equipment, net
3,017

 
3,092

Goodwill
3,669

 
3,801

Identifiable intangible assets, net
2,178

 
2,411

Deferred income taxes
672

 
875

Investments
367

 
443

Other assets
619

 
470

 
Total
$
17,076

 
$
17,535

 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable and accrued liabilities
$
3,490

 
$
3,547

 
 
Asbestos settlement
796

 
821

 
 
Restructuring reserves
87

 
26

 
 
Short-term debt and current portion of long-term debt
283

 
481

 
Total current liabilities
4,656

 
4,875

Long-term debt
4,042

 
3,533

Accrued pensions
712

 
995

Other postretirement benefits
1,021

 
1,132

Asbestos settlement
252

 
259

Deferred income taxes
460

 
666

Other liabilities
864

 
810

 
Total liabilities
12,007

 
12,270

Commitments and contingent liabilities (See Note 13)

 

Shareholders’ equity
 
 
 
 
 
Common stock
969

 
484

 
 
Additional paid-in capital
635

 
1,028

 
 
Retained earnings
15,521

 
14,498

 
 
Treasury stock, at cost
(9,440
)
 
(8,714
)
 
 
Accumulated other comprehensive loss
(2,702
)
 
(2,116
)
 
Total PPG shareholders’ equity
4,983

 
5,180

 
 
Noncontrolling interests
86

 
85

 
Total shareholders’ equity
5,069

 
5,265

 
Total
$
17,076

 
$
17,535


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

2015 PPG ANNUAL REPORT AND FORM 10-K 35


Consolidated Statement of Shareholders’ Equity
 
($ in millions)
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Total
PPG
 
Non-
controlling
Interests
 
Total
Balance, January 1, 2013
$
484

 
$
870

 
$
9,871

 
$
(5,496
)
 
$
(1,666
)
 
$
4,063

 
$
259

 
$
4,322

Net income attributable to the controlling and noncontrolling interests

 

 
3,231

 

 

 
3,231

 
122

 
3,353

Other comprehensive income/(loss), net of tax

 

 

 

 
406

 
406

 
(7
)
 
399

Cash dividends

 

 
(345
)
 

 

 
(345
)
 

 
(345
)
Purchase of treasury stock

 

 

 
(1,000
)
 

 
(1,000
)
 

 
(1,000
)
Issuance of treasury stock

 
25

 

 
55

 

 
80

 

 
80

Stock-based compensation activity

 
58

 

 

 

 
58

 

 
58

Separation and merger tender offer

 

 

 
(1,561
)
 

 
(1,561
)
 

 
(1,561
)
Dividends paid on subsidiary common stock to noncontrolling interests

 

 

 

 

 

 
(90
)
 
(90
)
Joint venture formation and consolidation

 

 

 

 

 

 
(18
)
 
(18
)
Balance, December 31, 2013
$
484

 
$
953

 
$
12,757

 
$
(8,002
)
 
$
(1,260
)
 
$
4,932

 
$
266

 
$
5,198

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to the controlling and noncontrolling interests

 

 
2,102

 

 

 
2,102

 
57

 
2,159

Other comprehensive loss, net of tax

 

 

 

 
(856
)
 
(856
)
 
(6
)
 
(862
)
Cash dividends

 

 
(361
)
 

 

 
(361
)
 

 
(361
)
Purchase of treasury stock

 

 

 
(750
)
 

 
(750
)
 

 
(750
)
Issuance of treasury stock

 
39

 

 
38

 

 
77

 

 
77

Stock-based compensation activity

 
64

 

 

 

 
64