Ppg Industries Inc 10-Q for FY2022 Q2
Ppg Industries Inc (PPG)
10-Q
2022-07-22
For: 2022-06-30
View Original
Added on
April 08, 2026
About this 10-Q
Ppg Industries Inc filed this 10-Q on July 22, 2022, covering the quarter ended June 30, 2022 (FY2022 Q2).
Headline figures
Quarter ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.69B
- up 7.6% from $4.36B a year earlier
- Net income
- $441M
- up 2.3% from net income of $431M a year earlier
- Diluted EPS
- $1.85
- up 2.8% from $1.80 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
–––––––––––––––––––––––––––––––––––––––––––––––––
FORM 10-Q
–––––––––––––––––––––––––––––––––––––––––––––––––
For the quarterly period ended: June 30, 2022
or
For the transition period from _______ to _______
Commission file number 1-1687
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
(Exact name of registrant as specified in its charter)
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
(I.R.S. Employer Identification No.)
(State or Other Jurisdiction of Incorporation or Organization)
(Address of Principal Executive Offices)
(Zip Code)
(412 ) 434-3131
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated Filer | ☐ | |||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | |||||||||
| Emerging Growth Company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of June 30, 2022, 234,997,372 shares of the Registrant’s common stock, par value $1.66 2/3 per share, were outstanding.
PPG INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
| PAGE | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Income (Unaudited)
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions, except per share amounts) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization | |||||||||||||||||||||||
| Research and development, net | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | |||||||||||||||||||
| Impairment and other related (income)/charges, net | ( | ||||||||||||||||||||||
| Business restructuring, net | ( | ( | |||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Income from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||
| Net income attributable to controlling and noncontrolling interests | $ | $ | $ | $ | |||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Net income (attributable to PPG) | $ | $ | $ | $ | |||||||||||||||||||
| Amounts attributable to PPG: | |||||||||||||||||||||||
| Income from continuing operations, net of tax | $ | $ | $ | $ | |||||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||
| Net income (attributable to PPG) | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Income from continuing operations, net of tax | $ | $ | $ | $ | |||||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||
| Earnings per common share (attributable to PPG) | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per common share – assuming dilution: | |||||||||||||||||||||||
| Income from continuing operations, net of tax | $ | $ | $ | $ | |||||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||
| Earnings per common share (attributable to PPG) - assuming dilution | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.
2
Condensed Consolidated Statement of Comprehensive Income (Unaudited)
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net income attributable to controlling and noncontrolling interests | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive (loss)/income, net of tax: | |||||||||||||||||||||||
| Defined benefit pension and other postretirement benefits | ( | ( | |||||||||||||||||||||
| Unrealized foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive (loss)/income, net of tax | ($ | $ | ($ | ($ | |||||||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
| Less: amounts attributable to noncontrolling interests: | |||||||||||||||||||||||
| Net income | ( | ( | ( | ( | |||||||||||||||||||
| Unrealized foreign currency translation adjustments | |||||||||||||||||||||||
| Comprehensive income attributable to PPG | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.
3
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
| ($ in millions) | June 30, 2022 | December 31, 2021 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Receivables, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | $ | $ | |||||||||
Property, plant and equipment (net of accumulated depreciation of $ | |||||||||||
| Goodwill | |||||||||||
| Identifiable intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Investments | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Total | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | $ | |||||||||
| Restructuring reserves | |||||||||||
| Short-term debt and current portion of long-term debt | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Total current liabilities | $ | $ | |||||||||
| Long-term debt | |||||||||||
| Operating lease liabilities | |||||||||||
| Accrued pensions | |||||||||||
| Other postretirement benefits | |||||||||||
| Deferred income taxes | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
Commitments and contingent liabilities (Note 14) | |||||||||||
| Shareholders’ equity: | |||||||||||
| Common stock | $ | $ | |||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Treasury stock, at cost | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total PPG shareholders’ equity | $ | $ | |||||||||
| Noncontrolling interests | |||||||||||
| Total shareholders’ equity | $ | $ | |||||||||
| Total | $ | $ | |||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.
4
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
| ($ in millions) | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total PPG | Non-controlling Interests | Total | ||||||||||||||||||
| January 1, 2022 | $ | $ | $ | ($ | ($ | $ | $ | $ | ||||||||||||||||||
| Net income attributable to controlling and noncontrolling interests | — | — | — | — | ||||||||||||||||||||||
| Other comprehensive income/(loss), net of tax | — | — | — | — | ( | |||||||||||||||||||||
| Cash dividends | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||
| Issuance of treasury stock | — | — | — | — | ||||||||||||||||||||||
| Stock-based compensation activity | — | ( | — | — | — | ( | — | ( | ||||||||||||||||||
| Dividends paid on subsidiary common stock to noncontrolling interests | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
| Reductions in noncontrolling interests | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
| March 31, 2022 | $ | $ | $ | ($ | ($ | $ | $ | $ | ||||||||||||||||||
| Net income attributable to the controlling and noncontrolling interests | — | — | — | — | ||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||
| Cash dividends | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||
| Purchase of treasury stock | — | — | — | ( | — | ( | — | (150) | ||||||||||||||||||
| Issuance of treasury stock | — | — | — | — | ||||||||||||||||||||||
| Stock-based compensation activity | — | — | — | — | — | |||||||||||||||||||||
| Dividends paid on subsidiary common stock to noncontrolling interests | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
| Other | — | 3 | — | — | — | |||||||||||||||||||||
| June 30, 2022 | $ | $ | $ | ($ | ($ | $ | $ | $ | ||||||||||||||||||
5
| ($ in millions) | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total PPG | Non-controlling Interests | Total | ||||||||||||||||||
| January 1, 2021 | $ | $ | $ | ($ | ($ | $ | $ | $ | ||||||||||||||||||
| Net income attributable to controlling and noncontrolling interests | — | — | — | — | ||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||
| Cash dividends | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||
| Issuance of treasury stock | — | — | — | — | ||||||||||||||||||||||
| Stock-based compensation activity | — | ( | — | — | — | ( | — | ( | ||||||||||||||||||
| Reductions in noncontrolling interests | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
| March 31, 2021 | $ | $ | $ | ($ | ($ | $ | $ | $ | ||||||||||||||||||
| Net income attributable to the controlling and noncontrolling interests | — | — | — | — | ||||||||||||||||||||||
| Other comprehensive income/(loss), net of tax | — | — | — | — | ( | |||||||||||||||||||||
| Cash dividends | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||
| Issuance of treasury stock | — | — | — | — | ||||||||||||||||||||||
| Stock-based compensation activity | — | — | — | — | — | |||||||||||||||||||||
| Dividends paid on subsidiary common stock to noncontrolling interests | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
| Acquisition of noncontrolling interests | — | — | — | — | — | — | ||||||||||||||||||||
| Reductions in noncontrolling interests | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
| June 30, 2021 | $ | $ | $ | ($ | ($ | $ | $ | $ | ||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.
6
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited)
| Six Months Ended June 30 | |||||||||||
| ($ in millions) | 2022 | 2021 | |||||||||
| Operating activities: | |||||||||||
| Net income attributable to controlling and noncontrolling interests | $ | $ | |||||||||
| Less: Loss from discontinued operations | ( | ||||||||||
| Income from continuing operations | |||||||||||
| Adjustments to reconcile net income to cash from operations: | |||||||||||
| Depreciation and amortization | |||||||||||
| Pension income | ( | ( | |||||||||
| Environmental remediation charges | |||||||||||
| Business restructuring, net | ( | ||||||||||
| Impairment and other related charges, net | |||||||||||
| Stock-based compensation expense | |||||||||||
| Equity affiliate income, net of dividends | ( | ( | |||||||||
| Deferred income taxes | ( | ||||||||||
| Cash used for restructuring actions | ( | ( | |||||||||
| Change in certain asset and liability accounts (net of acquisitions): | |||||||||||
| Receivables | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Other current assets | ( | ||||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Taxes and interest payable | ( | ||||||||||
| Noncurrent assets and liabilities, net | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Cash (used for)/from operating activities | ($ | $ | |||||||||
| Investing activities: | |||||||||||
| Capital expenditures | ($ | ($ | |||||||||
| Business acquisitions, net of cash balances acquired | ( | ( | |||||||||
| Proceeds from asset sales | |||||||||||
| Other | |||||||||||
| Cash used for investing activities | ($ | ($ | |||||||||
| Financing activities: | |||||||||||
| Proceeds from Term Loan Credit Agreement, net of fees | |||||||||||
| Proceeds from commercial paper and short-term debt, net of payments | ($ | $ | |||||||||
| Repayment of term loan | ( | ||||||||||
| Proceeds from the issuance of debt, net of discounts and fees | |||||||||||
| Repayment of long-term debt | ( | ( | |||||||||
| Repayment of acquired debt | ( | ( | |||||||||
| Purchase of treasury stock | ( | — | |||||||||
| Issuance of treasury stock | |||||||||||
| Dividends paid on PPG common stock | ( | ( | |||||||||
| Payments related to tax withholding on stock-based compensation awards | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Cash from financing activities | $ | $ | |||||||||
| Effect of currency exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net decrease in cash and cash equivalents | ($ | ($ | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Interest paid, net of amount capitalized | $ | $ | |||||||||
| Taxes paid, net of refunds | $ | $ | |||||||||
| Supplemental disclosure of noncash investing and financing activities: | |||||||||||
| Capital expenditures accrued within Accounts payable and accrued liabilities at period-end | $ | $ | |||||||||
| Purchases of treasury stock transacted but not yet settled | $ | $ | |||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of this condensed consolidated statement.
7
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.Basis of Presentation
The condensed consolidated financial statements included herein are unaudited and have been prepared following the requirements of the Securities and Exchange Commission (the "SEC") and accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim reporting. Under these rules, certain footnotes and other financial information that are normally required for annual financial statements can be condensed or omitted. These statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the financial position and shareholders' equity of PPG as of June 30, 2022 and the results of its operations and cash flows for the three and six months ended June 30, 2022 and 2021. All intercompany balances and transactions have been eliminated. Material subsequent events are evaluated through the report issuance date and disclosed where applicable. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in PPG's 2021 Annual Report on Form 10-K (the "2021 Form 10-K").
Net sales, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results of operations for the three and six months ended June 30, 2022 and the trends in these unaudited condensed consolidated financial statements may not necessarily be indicative of the results to be expected for the full year.
2.New Accounting Standards
Accounting Standards Adopted in 2022
Effective January 1, 2022, PPG adopted Accounting Standards Update ("ASU") No. 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)." This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. Adoption of this standard did not materially impact PPG's consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform." This ASU provides optional expedients and exceptions to U.S. GAAP for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in this ASU are effective through December 31, 2022. As of June 30, 2022, PPG has not applied any of the optional expedients or exceptions allowed under this ASU. PPG does not believe that this ASU will have a material impact on its consolidated financial position, results of operations or cash flows.
3. Inventories
| ($ in millions) | June 30, 2022 | December 31, 2021 | |||||||||
| Finished products | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials | |||||||||||
| Supplies | |||||||||||
| Total Inventories | $ | $ | |||||||||
8
4. Goodwill and Other Identifiable Intangible Assets
The Company tests indefinite-lived intangible assets and goodwill for impairment by either performing a qualitative evaluation or a quantitative test at least annually, or more frequently if an indication of impairment arises. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit or asset is less than its carrying amount.
In the first quarter 2022, due to the adverse economic impacts of Russian military forces invading Ukraine, the Company identified indicators that the carrying value of an indefinite-lived intangible asset and certain definite-lived intangible assets associated with the Company's operations in Russia may not be recoverable as of March 31, 2022, and the carrying value of those assets was assessed for impairment. As a result of this assessment, the Company recorded impairment charges of $124 million related to the indefinite-lived intangible asset and $23 million related to definite-lived intangible assets in the condensed consolidated statement of income during the three months ended March 31, 2022. Refer to Note 7, "Impairment and Other Related (Income)/Charges, Net" for additional information.
The Company did not identify an indication of goodwill impairment for any of its reporting units or an indication of impairment of any of its indefinite-lived intangible assets as of June 30, 2022.
The change in the carrying amount of goodwill attributable to each reportable segment for the six months ended June 30, 2022 was as follows:
| ($ in millions) | Performance Coatings | Industrial Coatings | Total | ||||||||||||||
| January 1, 2022 | $ | $ | $ | ||||||||||||||
| Acquisitions, including purchase accounting adjustments | ( | ||||||||||||||||
| Divestitures | ( | ( | |||||||||||||||
| Foreign currency impact | ( | ( | ( | ||||||||||||||
| June 30, 2022 | $ | $ | $ | ||||||||||||||
A summary of the carrying value of the Company's identifiable intangible assets is as follows:
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| ($ in millions) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||
| Indefinite-Lived Identifiable Intangible Assets | |||||||||||||||||||||||||||||||||||
| Trademarks | $ | N/A | $ | $ | N/A | $ | |||||||||||||||||||||||||||||
| Definite-Lived Identifiable Intangible Assets | |||||||||||||||||||||||||||||||||||
| Acquired technology | $ | ($ | $ | $ | ($ | $ | |||||||||||||||||||||||||||||
| Customer-related | ( | ( | |||||||||||||||||||||||||||||||||
| Trade names | ( | ( | |||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||
| Total Definite-Lived Intangible Assets | $ | ($ | $ | $ | ($ | $ | |||||||||||||||||||||||||||||
| Total Identifiable Intangible Assets | $ | ($ | $ | $ | ($ | $ | |||||||||||||||||||||||||||||
The Company’s identifiable intangible assets with definite lives are being amortized over their estimated useful lives.
9
As of June 30, 2022, estimated future amortization expense of identifiable intangible assets is as follows:
| ($ in millions) | Future Amortization Expense | ||||
| Remaining six months of 2022 | $ | ||||
| 2023 | $ | ||||
| 2024 | $ | ||||
| 2025 | $ | ||||
| 2026 | $ | ||||
| 2027 | $ | ||||
| Thereafter | $ | ||||
5. Business Restructuring
The Company records restructuring liabilities that represent charges incurred in connection with consolidations of certain operations, including both operations from acquisitions and headcount reduction programs. These charges consist primarily of severance costs and certain other cash costs. As a result of these programs, the Company also incurs incremental non-cash accelerated depreciation expense for certain assets due to their reduced expected useful life. These charges are not allocated to the Company’s reportable business segments. Refer to Note 16, "Reportable Business Segment Information" for additional information.
In the fourth quarter 2021, the Company approved business restructuring actions related to recent acquisitions targeting further consolidation of its manufacturing footprint and headcount reductions. The majority of these restructuring actions are expected to be completed by the end of 2023.
In the second quarter 2020, the Company approved a business restructuring plan which included actions to reduce its global cost structure. The program addressed weakened global economic conditions stemming from COVID-19 and related pace of recovery in a few end-use markets along with further opportunities to optimize supply chain and functional costs. In the second quarter 2019, the Company approved a business restructuring plan which included actions to reduce its global cost structure. The remaining actions of the 2020 and 2019 restructuring programs are expected to be completed in 2022.
The following table summarizes restructuring reserve activity for the six months ended June 30, 2022 and 2021:
| Total Reserve | |||||||||||
| ($ in millions) | 2022 | 2021 | |||||||||
| January 1 | $ | $ | |||||||||
| Approved restructuring actions | |||||||||||
Release of prior reserves and other adjustments(a) | ( | ||||||||||
| Cash payments | ( | ( | |||||||||
| Foreign currency impact | ( | ( | |||||||||
| June 30 | $ | $ | |||||||||
(a)Certain releases were recorded to reflect the current estimate of costs to complete planned business restructuring actions.
10
6. Borrowings
In May 2022, PPG completed a public offering of €300 million 1.875 % Notes due 2025 and €700 million 2.750 % Notes due 2029. These notes were issued pursuant to PPG’s existing shelf registration statement and pursuant to an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented (the "2022 Indenture"). The 2022 Indenture governing these notes contains covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets. The terms of these notes also require the Company to make an offer to repurchase Notes upon a Change of Control Triggering Event (as defined in the 2022 Indenture) at a price equal to 101 % of their principal amount plus accrued and unpaid interest. The Company may issue additional debt from time to time pursuant to the Indenture. The aggregate cash proceeds from the notes, net of discounts and fees, was $1,061 million. The notes are denominated in euro and have been designated as hedges of net investments in the Company’s European operations. For more information, refer to Note 12 “Financial Instruments, Hedging Activities and Fair Value Measurements.”
In March 2022, PPG privately placed a 15 -year €50 million 1.95 % fixed interest note. This note contains covenants materially consistent with the 1.200 % notes discussed below. This debt arrangement is denominated in euros and has been designated as a net investment hedge of the Company's European operations. Refer to Note 12 "Financial Instruments, Hedging Activities and Fair Value Measurements" for additional information.
In the second quarter of 2021, two of PPG's long-term debt obligations matured; $134 million 9 % non-callable debentures and non-U.S. debt of €30 million. The Company paid $170 million to settle these obligations using cash on hand.
In March 2021, PPG completed a public offering of $700 million aggregate principal amount of 1.200 % notes due 2026. These notes were issued pursuant to PPG’s existing shelf registration statement and pursuant to the Indenture between the Company and the Bank of New York Mellon Trust Company, N.A., as trustee, as supplemented (the "2021 Indenture"). The 2021 Indenture governing these notes contains covenants that limit the Company’s ability to, among other things, incur certain liens securing indebtedness, engage in certain sale-leaseback transactions, and enter into certain consolidations, mergers, conveyances, transfers or leases of all or substantially all the Company’s assets. The terms of these notes also require the Company to make an offer to repurchase the notes upon a Change of Control Triggering Event (as defined in the 2021 Indenture) at a price equal to 101 % of their principal amount plus accrued and unpaid interest. The Company may issue additional debt from time to time pursuant to the 2021 Indenture. The aggregate cash proceeds from the notes, net of discounts and fees, was $692 million.
In February 2021, PPG entered into a $2.0 billion Term Loan Credit Agreement (the "Term Loan Credit Agreement") to finance the Company’s acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. The Term Loan Credit Agreement provided the Company with the ability to borrow up to an aggregate principal amount of $2.0 billion on an unsecured basis. In addition to the amounts borrowed to finance the acquisition of Tikkurila, the Term Loan Credit Agreement allowed the Company to make up to eleven additional borrowings prior to December 31, 2021, to be used for working capital and general corporate purposes. The Term Loan Credit Agreement contains covenants that are consistent with those in the Credit Agreement discussed below and that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Term Loan Credit Agreement matures and all outstanding borrowings are due and payable on the third anniversary of the date of the initial borrowing under the Agreement. In June 2021, PPG borrowed $700 million under the Term Loan Credit Agreement to finance the Company’s acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. In December 2021, PPG borrowed an additional $700 million under the Term Loan Credit Agreement. Borrowings of $1.4
In April 2020, PPG entered into a $1.5 billion 364 -Day Term Loan Credit Agreement (the “Term Loan”). The Term Loan contained covenants that are consistent with those in the Credit Agreement discussed below and that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. In 2020, PPG repaid $1.1 billion of the Term Loan using cash on hand. In the first quarter 2021, PPG repaid the remaining $400 million of the Term Loan using cash on hand. The Term Loan terminated on April 13, 2021.
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In August 2019, PPG amended and restated its five-year credit agreement (the “Credit Agreement”) with several banks and financial institutions. The Credit Agreement provides for a $2.2 billion unsecured revolving credit facility. The Company has the ability to increase the size of the Credit Agreement by up to an additional $750 million, subject to the receipt of lender commitments and other conditions precedent. The Credit Agreement will terminate on August 30, 2024. The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement. There were no
The Term Loan Credit Agreement and Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan Credit Agreement and Credit Agreement, of 60 % or less; provided, that for any fiscal quarter in which the Company has made an acquisition for consideration in excess of $1 billion and for the next five fiscal quarters thereafter, the ratio of Total Indebtedness to Total Capitalization may not exceed 65 % at any time. As of June 30, 2022, Total Indebtedness to Total Capitalization as defined under the Credit Agreement and Term Loan Credit Agreement was 51 %.
The Credit Agreement also supports the Company’s commercial paper borrowings which are classified as long-term based on PPG’s intent and ability to refinance these borrowings on a long-term basis. Commercial paper borrowings of zero and $440 million were outstanding as of June 30, 2022 and December 31, 2021, respectively.
Letters of Credit and Surety Bonds
7. Impairment and Other Related (Income)/Charges, Net
In the first quarter 2022, Russian military forces invaded Ukraine. This military action had significant and immediate adverse economic impacts on businesses operating in Russia and Ukraine. Based on deteriorating business conditions and regulatory restrictions, including the impact of economic sanctions imposed on Russia by the United States, the European Union and other governments, PPG immediately ceased sales to Russian state-owned entities, announced that the Company would cease all new investments in Russia and commenced actions to wind down most of the Company’s operations in Russia.
Based on this change in facts and circumstances, the long-term cash flow forecast for the Company’s operations in Russia was significantly reduced. This reduction in the long-term cash flow forecast indicated that the carrying amounts of long-lived assets and certain indefinite-lived intangible assets associated with the Company’s operations in Russia may not be recoverable, and the carrying value of these assets was tested for impairment. Additionally, the Company evaluated trade receivables for estimated future credit losses, inventories for declines in net realizable value and other current assets for impairment in light of the deteriorating economic conditions in Russia and Ukraine. As a result, during the three months ended March 31, 2022, the Company recognized $290 million of Impairment and other related (income)/charges, net in the condensed consolidated statement of income, comprised of $201 million of long-lived asset impairment charges and $89 million of other related charges.
The $201 million of long-lived asset impairment charges recorded during first quarter 2022 was comprised of $124 million related to indefinite-lived intangible assets, $54 million related to property, plant and equipment, net and $23 million related to definite-lived intangible assets. The $89 million of other related charges represented reserves established for receivables and other current assets and the write-down of inventories impacted by the adverse economic consequences of the Russian invasion of Ukraine.
In the second quarter 2022, the Company released a portion of the previously established reserves due to the collection of certain trade receivables and recorded recoveries due to the realization of certain previously written-down inventories, resulting in recognition of income of $60 million within Impairment and other related (income)/charges, net.
The Company continues to consider actions to exit Russia, including a possible sale of its Russian business or controlled withdrawal from the Russia market.
During the three and six months ended June 30, 2022 and the twelve months ended December 31, 2021, net sales in Russia represented approximately 1
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8. Earnings Per Common Share
The effect of dilutive securities on the weighted average common shares outstanding included in the calculation of earnings per diluted common share for the three and six months ended June 30, 2022 and 2021 were as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| (number of shares in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Other stock compensation plans | |||||||||||||||||||||||
| Potentially dilutive common shares | |||||||||||||||||||||||
| Adjusted weighted average common shares outstanding | |||||||||||||||||||||||
| Dividends per common share | $ | $ | $ | $ | |||||||||||||||||||
Excluded from the computation of earnings per diluted share due to their antidilutive effect were 1.0 million and 0.5 million of outstanding stock options for the three and six months ended June 30, 2022, respectively, and zero outstanding stock options for the three and six months ended and June 30, 2021.
9. Income Taxes
| Six Months Ended June 30 | |||||||||||
| 2022 | 2021 | ||||||||||
| Effective tax rate on pretax income | % | % | |||||||||
The effective tax rate of 26.9 % for the six months ended June 30, 2022 reflects a tax benefit of $27 million on the $230 million Impairment and other related (income)/charges, net associated with PPG’s operations in Russia. Income tax expense for the six months ended June 30, 2021 includes expense of $15 million for discrete items associated with PPG's U.S. and foreign jurisdictions.
10. Pensions and Other Postretirement Benefits
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Net periodic pension benefit income and other postretirement benefit (income)/cost for the three and six months ended June 30, 2022 and 2021 was as follows:
| Pension | |||||||||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of actuarial losses | |||||||||||||||||||||||
| Net periodic benefit income | ($ | ($ | ($ | ($ | |||||||||||||||||||
| Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||
| Amortization of actuarial losses | |||||||||||||||||||||||||||||||||||
| Amortization of prior service credit | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Net periodic benefit cost/(income) | $ | ($ | $ | ($ | |||||||||||||||||||||||||||||||
Net periodic other postretirement expense was higher for both the three and six months ended June 30, 2022 compared to 2021 due to a decrease in the benefit associated with a 2017 other postretirement benefit plan design change. The 2017 plan design change resulted in a significant reduction in the Company’s postretirement benefit obligation, the impact of which was amortized as a reduction of net periodic benefit cost through 2021.
PPG expects 2022 full year net periodic pension income of approximately $25 million and net periodic other postretirement expense of approximately $25 million.
Contributions to Defined Benefit Pension Plans
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Non-U.S. defined benefit pension mandatory contributions | $ | $ | $ | $ | |||||||||||||||||||
PPG expects to make contributions to its defined benefit pension plans in the range of $5 million to $10 million during the remaining six months of 2022. PPG may make voluntary contributions to its defined benefit pension plans in 2022 and beyond.
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11. Accumulated Other Comprehensive Loss (AOCL)
| ($ in millions) | Foreign Currency Translation Adjustments (a) | Pension and Other Postretirement Benefit Adjustments, net of tax (b) | Unrealized Gain on Derivatives, net of tax | Accumulated Other Comprehensive Loss | |||||||||||||||||||
| January 1, 2021 | ($ | ($ | $ | ($ | |||||||||||||||||||
| Current year deferrals to AOCL | ( | ( | ( | ||||||||||||||||||||
| Reclassifications from AOCL to net income | |||||||||||||||||||||||
| June 30, 2021 | ($ | ($ | $ | ($ | |||||||||||||||||||
| January 1, 2022 | ($ | ($ | $ | ($ | |||||||||||||||||||
| Current year deferrals to AOCL | ( | ( | ( | ||||||||||||||||||||
| Reclassifications from AOCL to net income | |||||||||||||||||||||||
| June 30, 2022 | ($ | ($ | $ | ($ | |||||||||||||||||||
(a)The tax cost related to unrealized foreign currency translation adjustments on tax inter-branch transactions and net investment hedges as of June 30, 2022 and 2021 was $46 million and $22 million, respectively.
(b)The tax cost related to the adjustment for pension and other postretirement benefits as of June 30, 2022 and 2021 was $5 million and $1 million, respectively. Reclassifications from AOCL are included in the computation of net periodic benefit costs (See Note 10, "Pensions and Other Postretirement Benefits").
12. Financial Instruments, Hedging Activities and Fair Value Measurements
Financial instruments include cash and cash equivalents, short-term investments, cash held in escrow, marketable equity securities, accounts receivable, company-owned life insurance, accounts payable, short-term and long-term debt instruments, and derivatives. The fair values of these financial instruments approximated their carrying values at June 30, 2022 and December 31, 2021, in the aggregate, except for long-term debt instruments.
Hedging Activities
The Company has exposure to market risk from changes in foreign currency exchange rates and interest rates. As a result, financial instruments, including derivatives, have been used to hedge a portion of these underlying economic exposures. Certain of these instruments may qualify as fair value, cash flow, and net investment hedges upon meeting the requisite criteria, including effectiveness of offsetting hedged or underlying exposures. Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in Income before income taxes in the period incurred.
PPG’s policies do not permit speculative use of derivative financial instruments. PPG enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties in order to reduce its exposure to credit losses. The Company did not realize a credit loss on derivatives during the three and six months ended June 30, 2022 and 2021.
All of PPG's outstanding derivative instruments are subject to accelerated settlement in the event of PPG’s failure to meet its debt or payment obligations under the terms of the instruments’ contractual provisions. In addition, if the Company would be acquired and its payment obligations under its derivative instruments’ contractual arrangements are not assumed by the acquirer, or if PPG would enter into bankruptcy, receivership or reorganization proceedings, its outstanding derivative instruments would also be subject to accelerated settlement.
There were no derivative instruments de-designated or discontinued as hedging instruments during the three and six months ended June 30, 2022 and 2021, and there were no gains or losses deferred in Accumulated other comprehensive loss on the condensed consolidated balance sheet that were reclassified to Income before income taxes in the condensed consolidated statement of income in the six months ended June 30, 2022 and 2021 related to hedges of anticipated transactions that were no longer expected to occur.
Fair Value Hedges
The Company uses interest rate swaps from time to time to manage its exposure to changing interest rates. When outstanding, the interest rate swaps are typically designated as fair value hedges of certain outstanding debt obligations of the Company and are recorded at fair value.
PPG has interest rate swaps which converted $525 million of fixed rate debt to variable rate debt. These swaps are designated as fair value hedges and are carried at fair value. Changes in the fair value of these swaps and changes
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in the fair value of the related debt are recorded in interest expense in the accompanying condensed consolidated statement of income. The fair value of these interest rate swaps was an asset of $1 million and $36 million at June 30, 2022 and December 31, 2021, respectively.
Cash Flow Hedges
At times, PPG designates certain foreign currency forward contracts as cash flow hedges of the Company’s exposure to variability in exchange rates on third party transactions denominated in foreign currencies. There were no outstanding cash flow hedges at June 30, 2022 and December 31, 2021.
Net Investment Hedges
PPG uses cross currency swaps and foreign currency euro-denominated debt to hedge a significant portion of its net investment in its European operations, as follows:
As of June 30, 2022 and December 31, 2021, PPG had U.S. dollar to euro cross currency swap contracts with total notional amounts of $775 99 million and $50 million, respectively.
As of June 30, 2022 and December 31, 2021, PPG had designated €2.5 billion and €1.4 billion, respectively, of euro-denominated borrowings as hedges of a portion of its net investment in the Company's European operations. The carrying value of these instruments were $2.6 billion and $1.6 billion as of June 30, 2022 and December 31, 2021, respectively.
Other Financial Instruments
PPG uses foreign currency forward contracts to manage certain net transaction exposures that either have not been elected, or do not qualify for hedge accounting; therefore, the change in the fair value of these instruments is recorded in Other income, net in the condensed consolidated statement of income in the period of change. Underlying notional amounts related to these foreign currency forward contracts were $1.9 10 million and $24 million, respectively.
Gains/Losses Deferred in Accumulated Other Comprehensive Loss
As of June 30, 2022 and December 31, 2021, the Company had accumulated pretax unrealized translation gains in Accumulated other comprehensive loss on the condensed consolidated balance sheet related to the euro-denominated borrowings, foreign currency forward contracts, and the cross currency swaps of $393 million and $204 million, respectively.
The following table summarizes the location within the condensed consolidated financial statements and amount of gains related to derivative and debt financial instruments for the six months ended June 30, 2022 and 2021. All amounts are shown on a pretax basis.
| June 30, 2022 | June 30, 2021 | Caption In Condensed Consolidated Statement of Income | |||||||||||||||||||||||||||
| ($ in millions) | Gain Deferred in OCI | Gain Recognized | Gain Deferred in OCI | Gain Recognized | |||||||||||||||||||||||||
| Economic | |||||||||||||||||||||||||||||
Foreign currency forward contracts | $— | $ | $— | $ | Other income, net | ||||||||||||||||||||||||
| Fair Value | |||||||||||||||||||||||||||||
Interest rate swaps | — | — | Interest expense | ||||||||||||||||||||||||||
| Total forward contracts and interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net Investment | |||||||||||||||||||||||||||||
| Cross currency swaps | $ | $ | $ | $ | Interest expense | ||||||||||||||||||||||||
| Foreign denominated debt | — | — | |||||||||||||||||||||||||||
| Total Net Investment | $ | $ | $ | $ | |||||||||||||||||||||||||
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Fair Value Measurements
The Company follows a fair value measurement hierarchy to measure its assets and liabilities. As of June 30, 2022 and December 31, 2021, the assets and liabilities measured at fair value on a recurring basis were cash equivalents, equity securities and derivatives. In addition, the Company measures its pension plan assets at fair value (see Note 13, "Employee Benefit Plans" under Item 8 in the 2021 Form 10-K for further details). The Company's financial assets and liabilities are measured using inputs from the following three levels:
Level 1 inputs are quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level 1 inputs are considered to be the most reliable evidence of fair value as they are based on unadjusted quoted market prices from various financial information service providers and securities exchanges.
Level 2 inputs are directly or indirectly observable prices that are not quoted on active exchanges, which include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of the derivative instruments reflect the instruments' contractual terms, including the period to maturity, and uses observable market-based inputs, including forward curves.
Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities. The Company did not have any recurring financial assets or liabilities that were recorded in its condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 that were classified as Level 3 inputs.
Assets and liabilities reported at fair value on a recurring basis:
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| ($ in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Other current assets: | |||||||||||||||||||||||||||||||||||
| Marketable equity securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Foreign currency forward contracts (a) | |||||||||||||||||||||||||||||||||||
Cross currency swaps (b) | |||||||||||||||||||||||||||||||||||
Interest rate swaps (c) | |||||||||||||||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||||||||||||||
| Marketable equity securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other assets: | |||||||||||||||||||||||||||||||||||
Cross currency swaps (b) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Interest rate swaps (c) | |||||||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
| Accounts payable and accrued liabilities: | |||||||||||||||||||||||||||||||||||
Foreign currency forward contracts (a) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(a)Derivatives not designated as hedging instruments
(b)Net investment hedges
(c)Fair value hedges
Long-Term Debt
| ($ in millions) | June 30, 2022 (a) | December 31, 2021 (b) | |||||||||
| Long-term debt - carrying value | $ | $ | |||||||||
| Long-term debt - fair value | $ | $ | |||||||||
(a)Excluding finance lease obligations of $11 million and short-term borrowings of $21 million as of June 30, 2022.
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13. Stock-Based Compensation
The Company’s stock-based compensation includes stock options, restricted stock units (“RSUs”) and grants of contingent shares that are earned based on achieving targeted levels of total shareholder return. All current grants of stock options, RSUs and contingent shares are made under the PPG Industries, Inc. Amended and Restated Omnibus Incentive Plan (“PPG Amended Omnibus Plan”), which was amended and restated effective April 21, 2016. There were 4.6 million shares available for future grants under the PPG Amended Omnibus Plan as of June 30, 2022.
Stock-based compensation expense and the associated income tax benefit recognized during the three and six months ended June 30, 2022 and 2021 were as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
| Income tax benefit recognized | $ | $ | $ | $ | |||||||||||||||||||
Grants of stock-based compensation during the six months ended June 30, 2022 and 2021 were as follows:
| Six Months Ended June 30 | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Grant Details | Shares | Fair Value | Shares | Fair Value | |||||||||||||||||||
| Stock options | $ | $ | |||||||||||||||||||||
| Restricted stock units | $ | $ | |||||||||||||||||||||
Contingent shares (a) | $ | $ | |||||||||||||||||||||
(a)The number of contingent shares represents the target value of the award.
Stock options are generally exercisable 36 months after being granted and have a maximum term of 10 years. Compensation expense for stock options is recorded over the vesting period based on the fair value on the date of grant. The fair value of the stock option grants issued during the six months ended June 30, 2022 was calculated with the following weighted average assumptions:
| Weighted average exercise price | $ | ||||
| Risk free interest rate | % | ||||
| Expected life of option in years | |||||
| Expected dividend yield | % | ||||
| Expected volatility | % | ||||
The risk-free interest rate is determined by using the U.S. Treasury yield curve at the date of the grant and using a maturity equal to the expected life of the option. The expected life of options is calculated using the average of the vesting term and the maximum term, as prescribed by accounting guidance on the use of the simplified method for determining the expected term of an employee share option. The expected dividend yield and volatility are based on historical stock prices and dividend amounts over past time periods equal in length to the expected life of the options.
Time-based RSUs generally vest over the three-year period following the date of grant, unless forfeited, and will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the vesting period. Performance-based RSUs vest based on achieving specific annual performance targets for earnings per share growth and cash flow return on capital over the three calendar year-end periods following the date of grant. Unless forfeited, the performance-based RSUs will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the three-year performance period if PPG meets the performance targets.
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The amount paid upon vesting of performance-based RSUs may range from 0 % to 200 % of the original grant, based upon the level of earnings per share growth achieved and frequency with which the annual cash flow return on capital performance target is met over the three calendar year periods comprising the vesting period. Performance against the earnings per share growth and the cash flow return on capital target is calculated annually, and the annual payout for each goal is weighted equally over the three-year period.
The Company also provides grants of contingent shares to selected key executives that may be earned based on PPG total shareholder return (“TSR”) over the three-year period following the date of grant. Contingent share grants (referred to as “TSR awards”) are made annually and are paid out at the end of each three-year period based on the Company’s stock performance. Performance is measured by determining the percentile rank of the total shareholder return of PPG common stock in relation to the total shareholder return of the S&P 500 Index for the three-year period following the date of grant. This comparison group represents the entire S&P 500 Index as it existed at the beginning of the performance period, excluding any companies that were removed from the index because they ceased to be publicly traded. The payment of awards following the three-year award period is based on performance achieved in accordance with the scale set forth in the plan agreement and may range from 0 % to 200 % of the initial grant. Contingent share awards earn dividend equivalents for the award period, which are paid to participants or credited to the participants’ deferred compensation plan accounts with the award payout at the end of the period based on the actual number of contingent shares that are earned. Any payments made at the end of the award period may be in the form of stock, cash or a combination of both. The TSR awards qualify as liability awards, and compensation expense is recognized over the three-year award period based on the fair value of the awards (giving consideration to the Company’s percentile rank of total shareholder return) remeasured in each reporting period until settlement of the awards.
14. Commitments and Contingent Liabilities
PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. These lawsuits and claims may relate to contract, patent, environmental, product liability, antitrust, employment and other matters arising out of the conduct of PPG’s current and past business activities. To the extent that these lawsuits and claims involve personal injury, property damage and certain other claims, PPG believes it has adequate insurance; however, certain of PPG’s insurers are contesting coverage with respect to some of these claims, and other insurers, as they had prior to the asbestos settlement described below, may contest coverage with respect to some of the asbestos claims. PPG’s lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental, asbestos and other matters.
The results of any current or future litigation and claims are inherently unpredictable. However, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG will not have a material effect on PPG’s consolidated financial position or liquidity; however, such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
Asbestos Matters
Prior to 2000, the Company had been named as a defendant in numerous claims alleging bodily injury from exposure to asbestos, including exposure to asbestos-containing products of Pittsburgh Corning Corporation (“PC”) for which the Company was alleged to be liable (the Company and Corning Incorporated were each 50 % shareholders in PC prior to April 27, 2016). In 2000, PC filed for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Pennsylvania, and the Bankruptcy Court enjoined the prosecution of asbestos litigation against the Company during the pendency of the bankruptcy proceeding.
Following a settlement with certain of the Company’s insurers that was incorporated into a plan of reorganization for PC, the Bankruptcy Court issued a channeling injunction that prohibits claimants from asserting claims against, among others, the Company arising out of exposure to asbestos or asbestos-containing products manufactured, sold or distributed by PC or asbestos on or emanating from any PC premises. The channeling injunction by its terms also precludes the prosecution of other asbestos-related claims against the Company arising out of prior relationships with PC. The foregoing PC-related claims are referred to as “PC Relationship Claims.” The channeling injunction channels the Company’s liability for PC Relationship Claims to a trust funded in part by the Company and certain of its insurers (the “Trust”), and this Trust is the sole recourse for holders of PC Relationship Claims.
The channeling injunction does not extend to claims against the Company alleging:
•exposure to asbestos or asbestos-containing products manufactured, sold or distributed by the Company or its subsidiaries that are not PC Relationship Claims (“Products Claims”); and
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•personal injury caused by asbestos on premises presently or formerly owned, leased or occupied by the Company (“Premises Claims”).
In 2009, the Company established a $162 million reserve for Products Claims that it has monitored and reviewed on a periodic basis, and until 2021, the Company had not had sufficient current claims information or settlement history on which to base a better estimate of this liability in light of the Bankruptcy Court’s injunction staying most asbestos claims against the Company which was in effect from April 2000 through May 2016.
Current open and active claims
The Company is aware of certain asbestos-related claims pending against the Company and certain of its subsidiaries, consisting of Products Claims, Premises Claims and claims against a subsidiary the Company acquired in 2013 (“Subsidiary Claims”). The Company is defending these claims vigorously.
In 2019, as certain claims data became available and as a supplement to its periodic monitoring and review, the Company began performing an annual valuation analysis, based in part on discussions with counsel and reports from valuation consultants, of its claims history and the amount of the Company’s potential liability for asbestos-related claims. As a result of the Company’s 2019 review of its asbestos-related liabilities, a charge of $12 million was recorded in the consolidated statement of income to increase the reserve to reflect the Company’s estimates of potential liability for Premises Claims and Subsidiary Claims.
In 2020, based on the results of the Company’s annual valuation analysis, no adjustments to the Company’s estimate of its asbestos-related liabilities were required.
In the fourth quarter of 2021, as additional claims data became available following the expiration of the Bankruptcy Court’s injunction in May 2016, the Company adjusted its estimate of potential liability for Products Claims. The 2021 valuation analysis with respect to Products Claims was based, in part, upon a review of claims data; annual filings by disease and year; pending, paid and dismissed claims; indemnity cash flows; and estimates of future claim, indemnity and acceptance rates. The Company also further adjusted its estimates of potential liability for Premises Claims and Subsidiary Claims in the fourth quarter of 2021.
As a result of the Company’s fourth quarter 2021 review of its asbestos-related liabilities, income of $133 million was recorded in the consolidated statement of income to reduce the reserve to reflect the Company’s current estimate of potential liability for asbestos-related bodily injury claims through December 31, 2057. As of December 31, 2021, the Company’s asbestos-related reserves totaled $54 million.
As of June 30, 2022, the Company's total asbestos-related reserves were $52 million. The Company believes that, based on presently available information, the total reserves of $52 million for asbestos-related claims will be sufficient to encompass all of the Company’s current and estimable potential future asbestos liabilities. These reserves, which are included within Other liabilities on the accompanying condensed consolidated balance sheets, involve significant management judgment and represent the Company’s current best estimate of its liability for these claims.
The Company monitors and reviews the activity associated with its asbestos claims and evaluates, on a periodic basis, its estimated liability for such claims and all underlying assumptions to determine whether any adjustment to the reserves for these claims is required.
The amount reserved for asbestos-related claims by its nature is subject to many uncertainties that may change over time, including (i) the ultimate number of claims filed; (ii) whether closed, dismissed or dormant claims are reinstituted, reinstated or revived; (iii) the amounts required to resolve both currently known and future unknown claims; (iv) the amount of insurance, if any, available to cover such claims; (v) the unpredictable aspects of the tort system, including a changing trial docket and the jurisdictions in which trials are scheduled; (vi) the outcome of any trials, including potential judgments or jury verdicts; (vii) the lack of specific information in many cases concerning exposure for which the Company is allegedly responsible, and the claimants’ alleged diseases resulting from such exposure; and (viii) potential changes in applicable federal and/or state tort liability law. All of these factors may have a material effect upon future asbestos-related liability estimates. While the ultimate outcome of the Company’s asbestos litigation cannot be predicted with certainty, the Company believes that any financial exposure resulting from its asbestos-related claims will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.
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Environmental Matters
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.
As remediation at certain environmental sites progresses, PPG continues to refine its assumptions underlying the estimates of the expected future costs of its remediation programs. PPG’s ongoing evaluation may result in additional charges against income to adjust the reserves for these sites. In 2022 and 2021, certain charges have been recorded based on updated estimates to increase existing reserves for these sites. Certain other charges related to environmental remediation actions are expensed as incurred.
As of June 30, 2022 and December 31, 2021, PPG had reserves for environmental contingencies associated with PPG’s former chromium manufacturing plant in Jersey City, New Jersey (“New Jersey Chrome”), glass and chemical manufacturing sites, and for other environmental contingencies, including current manufacturing locations and National Priority List sites. These reserves are reported as Accounts payable and accrued liabilities and Other liabilities in the accompanying condensed consolidated balance sheet.
| Environmental Reserves | |||||||||||
| ($ in millions) | June 30, 2022 | December 31, 2021 | |||||||||
| New Jersey Chrome | $ | $ | |||||||||
| Glass and chemical | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
| Current portion | $ | $ | |||||||||
Pretax charges against income for environmental remediation costs are included in Other income, net in the accompanying condensed consolidated statement of income. The pretax charges and cash outlays related to such environmental remediation for the three and six months ended June 30, 2022 and 2021 were as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Environmental remediation pretax charges | $ | $ | $ | $ | |||||||||||||||||||
| Cash outlays for environmental remediation activities | $ | $ | $ | $ | |||||||||||||||||||
Remediation: New Jersey Chrome
In June 2009, PPG entered into a settlement agreement with the New Jersey Department of Environmental Protection (“NJDEP”) and Jersey City, New Jersey (which had asserted claims against PPG for lost tax revenue) which was in the form of a Judicial Consent Order (the "JCO"). Under the JCO, PPG accepted sole responsibility for the remediation activities at its former chromium manufacturing location in Jersey City and 19 additional sites. The principal contaminant of concern is hexavalent chromium. The JCO also provided for the appointment of a court-approved Site Administrator who is responsible for establishing a master schedule for the remediation of the 20 PPG sites which existed at that time. Over the years, sites have been added as well as removed from the JCO process. Of the original sites in the JCO, a total of 6 soil sites and 11 groundwater sites remain subject to the JCO process.
The most significant assumptions underlying the estimate of remediation costs for the New Jersey Chrome sites are those related to the extent and concentration of chromium impacts in the soil, as these determine the quantity of soil that must be excavated and transported for offsite disposal, and the nature of disposal required. Remediation of chromium contaminated soils at the location of the former manufacturing site has been substantially completed pursuant to approved remedial action work plans. Remediation of chromium contaminated soils at certain other smaller sites is dependent on redevelopment activity by others, the timing of which is unknown. PPG regularly evaluates the assessments of costs incurred to date versus current progress and the potential cost impacts of the most recent information. Based on these assessments, the reserve is adjusted accordingly.
Groundwater remediation at the former Garfield Avenue chromium manufacturing site and adjacent sites is expected to occur over several years. A final groundwater remedial action work plan was submitted to NJDEP in the
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fourth quarter of 2021. The NJDEP approved the groundwater remediation action work plan in the first quarter of 2022.
PPG’s financial reserve for remediation of all New Jersey Chrome sites was $63 million at June 30, 2022. The major cost components of this liability are related to excavation of impacted soil as well as groundwater remediation. These components each account for approximately 60 % and 20 % of the accrued amount, respectively.
There are multiple, future events yet to occur, including further remedy selection and design, remedy implementation and execution and applicable governmental agency or community organization approvals. Considerable uncertainty exists regarding the timing of these future events for the New Jersey Chrome sites. Further resolution of these events is expected to occur over the next several years. As these events occur and to the extent that the cost estimates of the environmental remediation remedies change, the existing reserve for this environmental remediation matter will continue to be adjusted.
Remediation: Glass, Chemicals and Other Sites
Among other sites at which PPG is managing environmental liabilities, remedial actions are occurring at a chemical manufacturing site in Barberton, Ohio where PPG has completed a Facility Investigation and Corrective Measure Study under the United States Environmental Protection Agency's Resource Conservation and Recovery Act Corrective Action Program. PPG has also been addressing the impacts from a legacy plate glass manufacturing site in Kokomo, Indiana under the Voluntary Remediation Program of the Indiana Department of Environmental Management and a site associated with a legacy plate glass manufacturing site near Ford City, Pennsylvania under the Pennsylvania Land Recycling Program under the oversight of the Pennsylvania Department of Environmental Protection. PPG is currently performing additional investigation and remedial activities at these locations.
With respect to certain other waste sites, the financial condition of other potentially responsible parties also contributes to the uncertainty of estimating PPG’s final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agency assertions of joint and several liability, in general, final allocations of costs are made based on the relative contributions of wastes to such sites. PPG is generally not a major contributor to such sites.
Remediation: Reasonably Possible Matters
In addition to the amounts currently reserved for environmental remediation, the Company may be subject to loss contingencies related to environmental matters estimated to be as much as $100 million to $200 million. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. These reasonably possible unreserved losses relate to environmental matters at a number of sites, none of which are individually significant. The loss contingencies related to these sites include significant unresolved issues such as the nature and extent of contamination at these sites and the methods that may have to be employed to remediate them.
The impact of evolving programs, such as natural resource damage claims, industrial site re-use initiatives and domestic and international remediation programs, also adds to the present uncertainties with regard to the ultimate resolution of this unreserved exposure to future loss. The Company’s assessment of the potential impact of these environmental contingencies is subject to considerable uncertainty due to the complex, ongoing and evolving process of investigation and remediation, if necessary, of such environmental contingencies, and the potential for technological and regulatory developments.
15. Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales. For most transactions, control passes in accordance with agreed upon delivery terms.
The Company delivers products to company-owned stores, home centers and other regional or national consumer retail outlets, paint dealers, concessionaires and independent distributors, company-owned distribution networks, and directly to manufacturing companies and retail customers. Each product delivered to a third-party customer is considered to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates. Accounts receivable are recognized when there is an unconditional right to consideration. Payment terms vary from customer to customer, depending on creditworthiness, prior payment history and other considerations.
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The Company also provides services by applying coatings to customers' manufactured parts and assembled products and by providing technical support to certain customers. Performance obligations are satisfied over time as critical milestones are met and as services are provided. PPG is entitled to payment as the services are rendered. For the three and six months ended June 30, 2022 and 2021, service revenue constituted less than 5
Net sales by segment and region for the three and six months ended June 30, 2022 and 2021 were as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Performance Coatings | |||||||||||||||||||||||
| United States and Canada | $ | $ | $ | $ | |||||||||||||||||||
| Europe, Middle East and Africa ("EMEA") | |||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Industrial Coatings | |||||||||||||||||||||||
| United States and Canada | $ | $ | $ | $ | |||||||||||||||||||
| EMEA | |||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Total Net Sales | |||||||||||||||||||||||
| United States and Canada | $ | $ | $ | $ | |||||||||||||||||||
| EMEA | |||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||
| Total PPG | $ | $ | $ | $ | |||||||||||||||||||
Allowance for Doubtful Accounts
All trade receivables are reported on the condensed consolidated balance sheet at the outstanding principal amount adjusted for any allowance for doubtful accounts and any charge-offs. PPG provides an allowance for doubtful accounts to reduce trade receivables to their estimated net realizable value equal to the amount that is expected to be collected. This allowance is estimated based on historical collection experience, current regional economic and market conditions, the aging of accounts receivable, assessments of current creditworthiness of customers and forward-looking information. The use of forward-looking information is based on certain macroeconomic and microeconomic indicators including, but not limited to, regional business environment risk, political risk, and commercial and financing risks.
PPG reviews its allowance for doubtful accounts on a quarterly basis to ensure the estimate reflects regional risk trends as well as current and future global operating conditions.
The following table summarizes the activity for the allowance for doubtful accounts for the six months ended June 30, 2022 and 2021:
| Trade Receivables Allowance for Doubtful Accounts | |||||||||||
| ($ in millions) | 2022 | 2021 | |||||||||
| January 1 | $ | $ | |||||||||
| Bad debt expense | ( | ||||||||||
| Recoveries of previously reserved trade receivables | ( | ||||||||||
| Other | ( | ||||||||||
| June 30 | $ | $ | |||||||||
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16. Reportable Business Segment Information
PPG is a multinational manufacturer with 10 operating segments (which the Company refers to as “strategic business units”) that are organized based on the Company’s major products lines. The Company’s reportable business segments include the following two segments: Performance Coatings and Industrial Coatings. The operating segments have been aggregated based on economic similarities, the nature of their products, production processes, end-use markets and methods of distribution.
The Performance Coatings reportable business segment is comprised of the automotive refinish coatings, aerospace coatings, architectural coatings – Americas and Asia Pacific, architectural coatings – EMEA, protective and marine coatings and traffic solutions operating segments. This reportable business segment primarily supplies a variety of protective and decorative coatings, sealants and finishes along with paint strippers, stains and related chemicals, pavement marking products, transparencies and transparent armor.
The Industrial Coatings reportable business segment is comprised of the automotive original equipment manufacturer ("OEM") coatings, industrial coatings, packaging coatings and specialty coatings and materials operating segments. This reportable business segment primarily supplies a variety of protective and decorative coatings and finishes along with adhesives, sealants, metal pretreatment products, optical monomers and coatings, precipitated silicas and other specialty materials.
Reportable business segment net sales and segment income for the three and six months ended June 30, 2022 and 2021 were as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Performance Coatings | $ | $ | $ | $ | |||||||||||||||||||
| Industrial Coatings | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Segment income: | |||||||||||||||||||||||
| Performance Coatings | $ | $ | $ | $ | |||||||||||||||||||
| Industrial Coatings | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Corporate | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense, net of interest income | ( | ( | ( | ( | |||||||||||||||||||
Impairment and other related income/(charges), net (a) | ( | ||||||||||||||||||||||
Business restructuring-related costs, net (b) | ( | ( | |||||||||||||||||||||
Transaction-related costs (c) | ( | ( | ( | ( | |||||||||||||||||||
| Environmental remediation charges | ( | ( | |||||||||||||||||||||
Expenses incurred due to natural disasters (d) | ( | ( | |||||||||||||||||||||
| Decrease in allowance for doubtful accounts related to COVID-19 | |||||||||||||||||||||||
| Income from legal settlements | |||||||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
(a)In the first quarter 2022, the Company recorded impairment and other related charges associated with the wind down of the Company’s operations in Russia. In the second quarter 2022, the Company released a portion of the previously established reserves due to the collection of certain trade receivables and recorded recoveries due to the realization of certain previously written-down inventories.
(b)Included in business restructuring-related costs, net are business restructuring charges, accelerated depreciation of certain assets and other related costs, offset by releases related to previously approved programs.
(c)Transaction-related costs include advisory, legal, accounting, valuation, other professional or consulting fees, and certain internal costs directly incurred to effect acquisitions, as well as similar fees and other costs to effect disposals not classified as discontinued operations.
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These costs are included in Selling, general and administrative expense in the condensed consolidated statement of income. Transaction-related costs also include losses on the sale of certain assets, which are included in Other income, net in the condensed consolidated statement of income, and the impact for the step up to fair value of inventory acquired in certain acquisitions, which are included in Cost of sales, exclusive of depreciation and amortization in the condensed consolidated statement of income.
(d)In early 2021, a winter storm damaged a southern U.S. factory supporting the Company's specialty coatings and materials business as well as other Company factories in the southern U.S. Incremental expenses incurred due to this storm included costs related to maintenance and repairs of damaged property, freight and utility premiums and other incremental expenses directly related to the impacted areas.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the condensed consolidated financial statements in Part I, Item 1, “Financial Statements,” of this report and in conjunction with the 2021 Form 10-K.
Highlights
Net sales were approximately $4.7 billion for the three months ended June 30, 2022, an increase of 7.6% compared to the prior year, driven by higher selling prices and acquisition-related sales partially offset by lower sales volumes and unfavorable foreign currency translation impacts. The Company increased net sales despite softer demand conditions in Europe due to geopolitical issues, extended COVID-19 restrictions in China, and strong appreciation of the U.S. dollar versus many foreign currencies.
Income before income taxes was $566 million for the three months ended June 30, 2022, a decrease of $27 million compared to the prior year. This decrease was largely due to raw material and other cost inflation, lower sales volumes and unfavorable foreign currency translation impact. These impacts were partially offset by higher selling prices and income of $60 million recorded due to the collection of previously reserved trade receivables and the recovery of previously written-down inventories associated with the wind down of the Company’s operations in Russia.
Results of Operations
| Three Months Ended June 30 | Percent Change | Six Months Ended June 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||
| Net sales | $4,691 | $4,359 | 7.6 | % | $8,999 | $8,240 | 9.2 | % | |||||||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | 2,954 | 2,629 | 12.4 | % | 5,652 | 4,861 | 16.3 | % | |||||||||||||||||||||||||||
| Selling, general and administrative | 982 | 955 | 2.8 | % | 1,956 | 1,846 | 6.0 | % | |||||||||||||||||||||||||||
| Depreciation | 99 | 96 | 3.1 | % | 201 | 186 | 8.1 | % | |||||||||||||||||||||||||||
| Amortization | 42 | 41 | 2.4 | % | 85 | 80 | 6.3 | % | |||||||||||||||||||||||||||
| Research and development, net | 115 | 107 | 7.5 | % | 230 | 209 | 10.0 | % | |||||||||||||||||||||||||||
| Interest expense | 38 | 31 | 22.6 | % | 68 | 61 | 11.5 | % | |||||||||||||||||||||||||||
| Interest income | (11) | (6) | 83.3 | % | (20) | (12) | 66.7 | % | |||||||||||||||||||||||||||
| Impairment and other related (income)/charges, net | (60) | — | (100.0) | % | 230 | — | 100.0 | % | |||||||||||||||||||||||||||
| Business restructuring, net | — | (21) | (100.0) | % | — | (21) | (100.0) | % | |||||||||||||||||||||||||||
| Other income, net | (34) | (66) | (48.5) | % | (47) | (62) | (24.2) | % | |||||||||||||||||||||||||||
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Net Sales by Region
| Three Months Ended June 30 | Percent Change | Six Months Ended June 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||
| United States and Canada | $2,015 | $1,763 | 14.3 | % | $3,730 | $3,332 | 11.9 | % | |||||||||||||||||||||||||||
| Europe, Middle East and Africa ("EMEA") | 1,497 | 1,452 | 3.1 | % | 2,950 | 2,708 | 8.9 | % | |||||||||||||||||||||||||||
| Asia Pacific | 689 | 730 | (5.6) | % | 1,386 | 1,412 | (1.8) | % | |||||||||||||||||||||||||||
| Latin America | 490 | 414 | 18.4 | % | 933 | 788 | 18.4 | % | |||||||||||||||||||||||||||
| Total | $4,691 | $4,359 | 7.6 | % | $8,999 | $8,240 | 9.2 | % | |||||||||||||||||||||||||||
Three Months Ended June 30, 2022
Net sales increased $332 million due to the following:
● Higher selling prices (+12%)
● Acquisition-related sales (+4%)
Partially offset by:
● Lower sales volumes (-4%)
● Unfavorable foreign currency translation (-4%)
For specific business results, see the Performance of Reportable Business Segments section within Item 2 of this Form 10-Q.
Cost of sales, exclusive of depreciation and amortization, increased $325 million primarily due to raw material and energy cost inflation and cost of sales attributable to acquired businesses, partially offset by lower sales volumes and favorable foreign currency translation impacts.
Selling, general and administrative ("SG&A") expense increased $27 million primarily due to expenses from acquired businesses and wage and other cost inflation, partially offset by restructuring cost savings and favorable foreign currency translation impacts.
Impairment and other related charges of $290 million were recorded in the first quarter 2022 associated with the wind down of the Company's operations in Russia. In the second quarter 2022, the Company released a portion of the previously established reserves due to the collection of certain trade receivables and recorded recoveries due to the realization of certain previously written-down inventories, resulting in recognition of income of $60 million. Refer to Note 7, "Impairment and Other Related (Income)/Charges, Net" in Part I, Item 1 of this Form 10-Q for additional information.
Other income, net was lower in the three months ended June 30, 2022 compared to 2021 primarily due to favorable legal settlements in the second quarter 2021.
Six Months Ended June 30, 2022
Net sales increased $759 million due to the following:
● Higher selling prices (+11%)
● Acquisition-related sales (+5%)
Partially offset by:
● Unfavorable foreign currency translation (-4%)
● Lower sales volumes (-3%)
For specific business results, see the Performance of Reportable Business Segments section within Item 2 of this Form 10-Q.
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Cost of sales, exclusive of depreciation and amortization, increased $791 million primarily due to raw material and energy cost inflation and cost of sales attributable to acquired businesses, partially offset by lower sales volumes and favorable foreign currency translation impacts.
Selling, general and administrative ("SG&A") expense increased $110 million primarily due to expenses from acquired businesses and wage and other cost inflation, partially offset by favorable foreign currency translation impacts and restructuring cost savings.
Impairment and other related charges of $290 million were recorded in the first quarter 2022 associated with the wind down of the Company's operations in Russia. In the second quarter 2022, the Company released a portion of the previously established reserves due to the collection of certain trade receivables and recorded recoveries due to the realization of certain previously written-down inventories, resulting in recognition of income of $60 million. The Company continues to consider actions to exit Russia, including a possible sale of its Russian business or controlled withdrawal from the Russia market. Refer to Note 7, "Impairment and Other Related (Income)/Charges, Net" in Part I, Item 1 of this Form 10-Q for additional information.
Other income, net was lower in the six months ended June 30, 2022 compared to 2021 primarily due to favorable legal settlements in the second quarter 2021.
Effective tax rate and earnings per diluted share
| Three Months Ended June 30 | Percent Change | Six Months Ended June 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages and amounts per share) | 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||
| Income tax expense | $118 | $160 | (26.3) | % | $173 | $274 | (36.9) | % | |||||||||||||||||||||||||||
| Effective tax rate | 20.8 | % | 27.0 | % | (6.2) | % | 26.9 | % | 25.1 | % | 1.8 | % | |||||||||||||||||||||||
| Adjusted effective tax rate, continuing operations* | 22.6 | % | 23.2 | % | (0.6) | % | 22.6 | % | 23.1 | % | (0.5) | % | |||||||||||||||||||||||
| Earnings per diluted share, continuing operations | $1.86 | $1.80 | 3.3 | % | $1.94 | $3.38 | (42.6) | % | |||||||||||||||||||||||||||
| Adjusted earnings per diluted share* | $1.81 | $1.94 | (6.7) | % | $3.18 | $3.82 | (16.8) | % | |||||||||||||||||||||||||||
| *See Regulation G Reconciliation below | |||||||||||||||||||||||||||||||||||
The effective tax rate for the three months ended June 30, 2022 reflects the impact of certain discrete tax items for the quarter.
Adjusted earnings per diluted share for the three months ended June 30, 2022 decreased year-over-year primarily due to raw material and other cost inflation, lower sales volumes and unfavorable foreign currency translation impact compared to the prior year, partially offset by higher selling prices.
Adjusted earnings per diluted share for the six months ended June 30, 2022 decreased year-over-year primarily due to raw material cost inflation, lower sales volumes stemming from commodity raw material availability issues and semiconductor chip shortages and unfavorable foreign currency impacts, partially offset by higher selling prices.
Regulation G Reconciliations - Results from Operations
PPG believes investors’ understanding of the Company’s performance is enhanced by the disclosure of net income from continuing operations, earnings per diluted share from continuing operations, PPG’s effective tax rate and segment income adjusted for certain items. PPG’s management considers this information useful in providing insight into the Company’s ongoing performance because it excludes the impact of items that cannot reasonably be expected to recur on a quarterly basis or that are not attributable to our primary operations. Net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate and segment income adjusted for these items are not recognized financial measures determined in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and should not be considered a substitute for net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate, segment income or other financial measures as computed in accordance with U.S. GAAP. In addition, adjusted net income, adjusted earnings per diluted share and the adjusted effective tax rate may not be comparable to similarly titled measures as reported by other companies.
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Income before income taxes from continuing operations is reconciled to adjusted income before income taxes from continuing operations, the effective tax rate from continuing operations is reconciled to the adjusted effective tax rate from continuing operations and net income from continuing operations (attributable to PPG) and earnings per share – assuming dilution (attributable to PPG) are reconciled to adjusted net income from continuing operations (attributable to PPG) and adjusted earnings per share – assuming dilution below.
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Income Tax Expense | Effective Tax Rate | Net Income (attributable to PPG) | Earnings Per Diluted Share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $566 | $118 | 20.8 | % | $443 | $1.86 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 42 | 10 | 24.6 | % | 32 | 0.13 | |||||||||||||||||||||||
Business restructuring-related costs, net (b) | 8 | 2 | 25.7 | % | 6 | 0.03 | |||||||||||||||||||||||
Transaction-related costs(c) | 6 | (3) | (50.0 | %) | 9 | 0.04 | |||||||||||||||||||||||
Impairment and other related (income)/charges, net (d) | (60) | — | — | % | (60) | (0.25) | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $562 | $127 | 22.6 | % | $430 | $1.81 | |||||||||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Income Tax Expense | Effective Tax Rate | Net Income (attributable to PPG) | Earnings Per Diluted Share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $593 | $160 | 27.0 | % | $431 | $1.80 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 41 | 10 | 25.2 | % | 31 | 0.13 | |||||||||||||||||||||||
| Net tax charge related to UK statutory rate change | — | (22) | N/A | 22 | 0.09 | ||||||||||||||||||||||||
Transaction-related costs(c) | 14 | 1 | 9.7 | % | 13 | 0.05 | |||||||||||||||||||||||
| Environmental remediation charges | 10 | 3 | 24.3 | % | 7 | 0.03 | |||||||||||||||||||||||
Expenses incurred due to natural disasters (e) | 5 | 1 | 24.3 | % | 4 | 0.02 | |||||||||||||||||||||||
| Decrease in allowance for doubtful accounts related to COVID-19 | (14) | (3) | 24.7 | % | (11) | (0.05) | |||||||||||||||||||||||
Business restructuring-related costs, net (b) | (19) | (4) | 20.9 | % | (15) | (0.06) | |||||||||||||||||||||||
| Income from legal settlements | (22) | (5) | 24.3 | % | (17) | (0.07) | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $608 | $141 | 23.2 | % | $465 | $1.94 | |||||||||||||||||||||||
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Tax Expense | Effective Tax Rate | Net income from continuing operations (attributable to PPG) | Earnings per diluted share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $644 | $173 | 26.9 | % | $461 | $1.94 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
Impairment and other related (income)/charges, net (d) | 230 | 27 | 11.7 | % | 203 | 0.85 | |||||||||||||||||||||||
| Acquisition-related amortization expense | 85 | 20 | 23.5 | % | 65 | 0.27 | |||||||||||||||||||||||
Business restructuring-related costs, net (b) | 22 | 6 | 27.3 | % | 16 | 0.07 | |||||||||||||||||||||||
Transaction-related costs (c) | 10 | (2) | (20.0) | % | 12 | 0.05 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $991 | $224 | 22.6 | % | $757 | $3.18 | |||||||||||||||||||||||
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| Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Tax Expense | Effective Tax Rate | Net income from continuing operations (attributable to PPG) | Earnings per diluted share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $1,092 | $274 | 25.1 | % | $809 | $3.38 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 80 | 20 | 25.2 | % | 60 | 0.25 | |||||||||||||||||||||||
Transaction-related costs(c) | 38 | 6 | 15.8 | % | 32 | 0.13 | |||||||||||||||||||||||
| Net tax charge related to UK statutory rate change | — | (22) | N/A | 22 | 0.09 | ||||||||||||||||||||||||
| Environmental remediation charges | 26 | 7 | 24.3 | % | 19 | 0.08 | |||||||||||||||||||||||
Expenses incurred due to natural disasters (e) | 17 | 4 | 24.3 | % | 13 | 0.06 | |||||||||||||||||||||||
| Decrease in allowance for doubtful accounts related to COVID-19 | (14) | (3) | 24.7 | % | (11) | (0.05) | |||||||||||||||||||||||
Business restructuring-related costs, net (b) | (15) | (3) | 17.3 | % | (12) | (0.05) | |||||||||||||||||||||||
| Income from legal settlements | (22) | (5) | 24.3 | % | (17) | (0.07) | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $1,202 | $278 | 23.1 | % | $915 | $3.82 | |||||||||||||||||||||||
(a)Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.
(b)Included in business restructuring-related costs, net are business restructuring charges, accelerated depreciation of certain assets and other related costs, partially offset by releases related to previously approved programs.
(c)Transaction-related costs include advisory, legal, accounting, valuation, other professional or consulting fees, and certain internal costs directly incurred to effect acquisitions, as well as similar fees and other costs to effect disposals not classified as discontinued operations. These costs are included in Selling, general and administrative expense in the condensed consolidated statement of income. Transaction-related costs also include losses on the sale of certain assets, which are included in Other income, net in the condensed consolidated statement of income, and the impact for the step up to fair value of inventory acquired in certain acquisitions, which are included in Cost of sales, exclusive of depreciation and amortization in the condensed consolidated statement of income.
(d)In the first quarter 2022, the Company recorded impairment and other related charges due to the wind down of the company’s operations in Russia. In the second quarter 2022, the Company released a portion of the previously established reserves for Receivables and Inventories due to the collection of certain trade receivables and the realization of certain inventories.
(e)In early 2021, a winter storm damaged a southern U.S. factory supporting the Company's specialty coatings and materials business as well as other Company factories in the southern U.S. Incremental expenses incurred due to this storm included costs related to maintenance and repairs of damaged property, freight and utility premiums and other incremental expenses directly related to the impacted areas.
Performance of Reportable Business Segments
Performance Coatings
| Three Months Ended June 30 | $ Change | % Change | Six Months Ended June 30 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2022 | 2021 | 2022 vs. 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $2,929 | $2,749 | $180 | 6.5 | % | $5,499 | $5,068 | $431 | 8.5 | % | |||||||||||||||||||||||||||||||||||||
| Segment income | $446 | $454 | ($8) | (1.8) | % | $765 | $840 | ($75) | (8.9) | % | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $31 | $30 | $1 | 3.3 | % | $63 | $59 | $4 | 6.8 | % | |||||||||||||||||||||||||||||||||||||
| Segment income, excluding amortization expense | $477 | $484 | ($7) | (1.4) | % | $828 | $899 | ($71) | (7.9) | % | |||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2022
Performance Coatings net sales increased due to the following:
● Higher selling prices (+11%)
● Acquisition-related sales (+4%)
Partially offset by:
● Unfavorable foreign currency translation (-4%)
● Lower sales volumes (-4%)
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In the second quarter 2022, the acquisition of Tikkurila increased net sales in the Performance Coatings segment by about $120 million versus prior year.
Architectural coatings - Americas and Asia Pacific net sales, excluding the impact of currency and acquisitions ("organic sales"), increased by a mid-single-digit percentage. Sales in the U.S. and Canada were unfavorably impacted by ongoing raw material and transportation availability challenges. In Mexico, PPG-Comex architectural coatings organic sales increased compared to the prior year as concessionaire network demand continued to be strong throughout the quarter and further selling price increases were implemented.
Architectural coatings – EMEA organic sales decreased by a low-single-digit percentage year-over-year as selling price increases were offset by lower sales volumes due to softening do-it-yourself ("DIY") paint demand and some modest demand weakness related to geopolitical uncertainty in Europe.
Automotive refinish coatings organic sales increased by a low-teen-percentage, reflecting higher prices in all regions and improved body shop activity in the U.S. stemming from higher miles driven, increased collision claims, and more people returning to office work.
Aerospace coatings sales volumes increased by more than 10% compared to the prior year, as commercial aftermarket demand strengthened year-over-year but overall inventory demand remained below pre-pandemic levels. Net sales benefited from continued strong military demand.
Protective and marine coatings organic sales were higher by a low-single-digit percentage primarily due to strong selling price increases. Sales volumes were adversely impacted by COVID-19 restrictions in China.
Traffic solutions organic sales increased by a mid-teen-percentage year-over-year due to the benefit of higher selling prices and improved volumes in the U.S. and Latin America.
Segment income decreased $8 million year-over-year primarily due to higher manufacturing costs, raw material and logistics cost inflation, lower sales volumes and unfavorable foreign currency translation impact, partially offset by higher selling prices, acquisition-related earnings and savings from previously approved restructuring actions.
Six Months Ended June 30, 2022
Performance Coatings net sales increased due to the following:
● Higher selling prices (+10%)
● Acquisition-related sales (+6%)
Partially offset by:
● Unfavorable foreign currency translation (-4%)
● Lower sales volumes (-3%)
Architectural coatings - Americas and Asia Pacific organic sales increased by a mid-single-digit percentage primarily due to selling price increases. Sales in the U.S. and Canada were unfavorably impacted by ongoing raw material and transportation availability, which improved at the end of the second quarter. In Mexico, PPG-Comex architectural coatings organic sales increased compared to the prior year as concessionaire network demand continued to be strong throughout the first six months and further selling price increases were implemented.
Architectural coatings – EMEA organic sales decreased by a low-single-digit percentage year-over-year as selling price increases did not fully offset lower sales volumes. The first six months were negatively impacted by geopolitical uncertainty in Europe and lower demand for DIY paint products.
Automotive refinish coatings organic sales increased by a low-teen-percentage due to selling price increases in all regions and strong growth in the U.S. stemming from higher miles driven and increased collision claims.
Aerospace coatings sales volumes increased by a low-teen-percentage compared to the prior year but still remain lower than pre-pandemic levels. During the first six months of 2022, demand remained strong for commercial aftermarket and military applications.
Protective and marine coatings organic sales were higher by a high-single-digit percentage primarily due to strong selling price increases in all regions. While there was modest sales volume improvement in the first quarter 2022 due to improving demand in the oil and gas industry, sales volumes in the second quarter 2022 were adversely impacted by COVID-19 restrictions in China.
Traffic solutions organic sales increased by a high-teen-percentage year-over-year due to higher selling prices and increased sales volumes in the U.S. and Latin America.
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Segment income decreased $75 million year-over-year primarily due to raw material and logistics cost inflation, lower sales volumes and unfavorable foreign currency translation, partially offset by higher selling prices, acquisition-related earnings and savings from previously approved restructuring actions.
Looking Ahead
Looking ahead, demand conditions, with the exception of Europe, remain solid, and disruptions in the supply chain and manufacturing environment are expected to continue to gradually improve as the quarter progresses. The supply of several key inputs remains tight, which will continue to constrain certain sales activity, most notably in automotive refinish and aerospace coatings. Selling prices are expected to increase on a sequential basis from the second quarter. Aggregate sales volumes are anticipated to be flat to down a low-single-digit percentage compared to the third quarter 2021, including unfavorable impacts in Europe from the war in Ukraine. The impact of divestiture-related sales and sales related to the Russian business, which the Company is in the process of winding down, is estimated to be about $70 million for the third quarter. In addition to executing against various existing cost-savings initiatives, cost mitigation actions have been implemented in Europe and other contingency actions have been developed in case there is a broader economic downturn.
Industrial Coatings
| Three Months Ended June 30 | $ Change | % Change | Six Months Ended June 30 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2022 | 2021 | 2022 vs. 2021 | 2022 vs. 2021 | 2022 | 2021 | 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $1,762 | $1,610 | $152 | 9.4 | % | $3,500 | $3,172 | $328 | 10.3 | % | |||||||||||||||||||||||||||||||||||||
| Segment income | $156 | $190 | ($34) | (17.9) | % | $296 | $435 | ($139) | (32.0) | % | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $11 | $11 | $— | — | % | $22 | $21 | $1 | 4.8 | % | |||||||||||||||||||||||||||||||||||||
| Segment income, excluding amortization expense | $167 | $201 | ($34) | (16.9) | % | $318 | $456 | ($138) | (30.3) | % | |||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2022
Industrial Coatings segment net sales increased due to the following:
● Higher selling prices (+14%)
● Acquisition-related sales (+3%)
Partially offset by:
● Unfavorable foreign currency translation (-5%)
● Lower sales volumes (-3%)
Automotive OEM coatings organic sales increased by a high-single-digit percentage year-over-year led by higher selling prices, partially offset by lower sales volumes due to the ongoing shortage of semiconductor chips and lower automotive industry production due to geopolitical uncertainty in Europe and COVID-19 restrictions in China.
In the industrial coatings business, organic sales increased by about 10% year-over-year as strong selling price increases were partially offset by reduced sales volumes reflecting lower economic activity in China and Europe.
Packaging coatings organic sales increased by more than 10% year-over-year primarily due to selling price increases in all regions. While sales volumes were strong in the U.S., led by the canned beverage segment, sales activity was adversely impacted by geopolitical uncertainty in Europe and COVID-19 restrictions in China.
Segment income decreased $34 million year-over-year due to raw material and energy cost inflation, unfavorable foreign currency translation, elevated operating costs in China due to COVID-19 restrictions and lower sales volumes, partially offset by higher selling prices and savings from previously approved restructuring actions.
Six Months Ended June 30, 2022
Automotive OEM coatings organic sales increased by a mid-single-digit percentage year-over-year led by higher selling prices in all regions, partially offset by lower sales volumes due to the ongoing shortage of semiconductor chips and lower automotive industry production due to geopolitical uncertainty in Europe and COVID-19 restrictions in China.
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Organic sales in the industrial coatings business increased by a high-single-digit percentage year-over-year as strong selling price increases in all regions and solid volume growth in the U.S. were partially offset by reduced sales volumes reflecting lower economic activity in China and Europe.
Packaging coatings organic sales increased by more than 10% year-over-year primarily due to selling price increases in all regions. Sales volumes were strong in the U.S. led by the canned beverage segment. Sales activity was negatively impacted by the geopolitical uncertainty in Europe and COVID-19 restrictions in China.
Segment income decreased $139 million year-over-year due to raw material cost inflation and lower sales volumes, partially offset by higher selling prices and savings from previously approved restructuring actions.
Looking ahead
Looking ahead, aggregate sales volumes are expected to be up a low-single-digit percentage compared to the prior-year third quarter, including unfavorable impacts in Europe from the war in Ukraine. The year-over-year increase in sales volumes is expected to be led by the automotive OEM business supported by improving customer component availability and an easier comparison to a softer sales period in the third quarter 2021. The company continues to prioritize working with customers to secure further selling price increases in all businesses. Segment margins are expected to continue to improve on a sequential basis in the third quarter 2022. The impact of divestiture-related sales and sales related to the Russian business, which the Company is in the process of winding down, is estimated to be about $20 million for the third quarter. In addition to executing against various existing cost-savings initiatives, cost mitigation actions have been implemented in Europe and other contingency actions have been developed in case there is a broader economic downturn.
Liquidity and Capital Resources
PPG had cash and short-term investments totaling $1.0 billion and $1.1 billion at June 30, 2022 and December 31, 2021, respectively.
The Company continues to believe that cash on hand and short-term investments, cash from operations and the Company's access to capital markets will be sufficient to fund our operating activities, capital spending, acquisitions, dividend payments, debt service, share repurchases, contributions to pension plans and PPG's contractual obligations.
Cash (used for)/from operating activities
Cash used for operating activities for the six months ended June 30, 2022 was $136 million and cash from operating activities was $581 million for the six months ended June 30, 2021. The $717 million decrease was primarily due to a larger increase in working capital in the first six months of 2022 compared to the prior year, which reflects the impact of higher raw material costs on inventories and higher selling prices on trade receivables.
Operating working capital
Operating working capital is a subset of total working capital and represents (1) trade receivables – net of the allowance for doubtful accounts (2) FIFO inventories and (3) trade liabilities. We believe operating working capital represents the key components of working capital under the operating control of our businesses. A key metric we use to measure our working capital management is operating working capital as a percentage of sales (current quarter sales annualized).
| ($ in millions, except percentages) | June 30, 2022 | December 31, 2021 | June 30, 2021 | ||||||||||||||
| Trade receivables, net | $3,306 | $2,687 | $3,147 | ||||||||||||||
| Inventories, FIFO | 2,715 | 2,345 | 2,350 | ||||||||||||||
| Trade creditors’ liabilities | 2,940 | 2,734 | 2,770 | ||||||||||||||
| Operating working capital | $3,081 | $2,298 | $2,727 | ||||||||||||||
| Operating working capital as a % of Sales | 16.4 | % | 13.7 | % | 15.6 | % | |||||||||||
| Days sales outstanding | 58 | 53 | 59 | ||||||||||||||
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Environmental
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Cash outlays for environmental remediation activities | $24 | $8 | $47 | $17 | |||||||||||||||||||
| ($ in millions) | Remainder of 2022 | Annually 2023 - 2026 | |||||||||
| Projected future cash outlays for environmental remediation activities | $40 - $60 | $20 - $75 | |||||||||
Cash used for investing activities
Cash used for investing activities for the six months ended June 30, 2022 and 2021 was $150 million and $2,242 million, respectively. The $2,092 million decrease in cash used for investing activities was primarily due to lower spending on business acquisitions and an increase in proceeds from asset sales, partially offset by higher capital expenditures.
Total capital spending is expected to be approximately $450 million in 2022 in support of future organic growth opportunities and reflecting lower capital spending in the past two years due to COVID-19 constraints.
Cash from financing activities
Cash from financing activities for the six months ended June 30, 2022 and 2021 was $213 million and $1,054 million, respectively. The $841 million decrease in cash from financing activities was primarily due to the proceeds from the issuance of long-term debt in 2021 to finance the Company’s acquisition of Tikkurila and higher purchases of treasury stock in 2022.
Debt issued and repaid
In May 2022, PPG completed a public offering of €300 million 1.875% Notes due 2025 and €700 million 2.750% Notes due 2029. Refer to Note 6, “Borrowings” in Part I, Item 1 of this Form 10-Q for additional information.
In March 2022, PPG privately placed a 15-year €50 million 1.95% fixed interest note. Refer to Note 6, “Borrowings” in Part I, Item 1 of this Form 10-Q for additional information.
Credit Agreements
In February 2021, PPG entered into a $2.0 billion Term Loan Credit Agreement (the "Term Loan Credit Agreement") to finance the Company’s acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. The Term Loan Credit Agreement provided the Company with the ability to borrow up to an aggregate principal amount of $2.0 billion on an unsecured basis. In addition to the amounts borrowed to finance the acquisition of Tikkurila, the Term Loan Credit Agreement allowed the Company to make up to eleven additional borrowings prior to December 31, 2021, to be used for working capital and general corporate purposes. The Term Loan Credit Agreement contains covenants that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Term Loan Credit Agreement matures and all outstanding borrowings are due and payable on the third anniversary of the date of the initial borrowing under the Agreement. In June 2021, PPG borrowed $700 million under the Term Loan Credit Agreement to finance the Company’s acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. In December 2021, PPG borrowed an additional $700 million under the Term Loan Credit Agreement. Borrowings of $1.4 billion were outstanding under the Term Loan Credit Agreement as of June 30, 2022 and December 31, 2021.
In August 2019, PPG amended and restated its five-year credit agreement (the “Credit Agreement”) with several banks and financial institutions. The Credit Agreement provides for a $2.2 billion unsecured revolving credit facility. The Company has the ability to increase the size of the Credit Agreement by up to an additional $750 million, subject to the receipt of lender commitments and other conditions precedent. The Credit Agreement will terminate on August 30, 2024. The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement. There were no amounts outstanding under the credit agreement as of June 30, 2022 and December 31, 2021.
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The Term Loan Credit Agreement and Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan Credit Agreement and Credit Agreement, of 60% or less; provided, that for any fiscal quarter in which the Company has made an acquisition for consideration in excess of $1 billion and for the next five fiscal quarters thereafter, the ratio of Total Indebtedness to Total Capitalization may not exceed 65% at any time. As of June 30, 2022, Total Indebtedness to Total Capitalization as defined under the Credit Agreement and Term Loan Credit Agreement was 51%.
The Credit Agreement also supports the Company’s commercial paper borrowings which are classified as long-term based on PPG’s intent and ability to refinance these borrowings on a long-term basis. Commercial paper borrowings of zero and $440 million were outstanding as of June 30, 2022 and December 31, 2021, respectively.
Other Liquidity Information
Restructuring
Aggregate restructuring savings, including the impact of acquisition synergies, were approximately $15 million in the second quarter of 2022. Total restructuring savings are expected to be at least $65 million in 2022. In addition, the Company continues to review its cost structure to identify additional cost savings opportunities. Refer to Note 5, “Business Restructuring” in Part I, Item 1 of this Form 10-Q for further details on the Company's business restructuring programs. We expect cash outlays related to these actions of approximately $150 million in 2022.
Currency
Comparing spot exchange rates at December 31, 2021 and at June 30, 2022, the U.S. dollar strengthened against the currencies of many countries within the regions PPG operates. As a result, consolidated net assets at June 30, 2022 decreased by $181 million compared to December 31, 2021, primarily due to the weakening of the euro.
Comparing average exchange rates during the first six months of 2022 to those of the first six months of 2021, the U.S. dollar strengthened against the currencies of most countries within the EMEA region where PPG operates. This had an unfavorable impact on Income before income taxes for the` six months ended June 30, 2022 of $41 million from the translation of these foreign earnings into U.S. dollars.
New Accounting Standards
Refer to Note 2, “New Accounting Standards” in Part I, Item 1 of this Form 10-Q for further details on recently issued accounting guidance.
Commitments and Contingent Liabilities, including Environmental Matters
PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. See Part II, Item 1, “Legal Proceedings” of this Form 10-Q and Note 14, “Commitments and Contingent Liabilities” in Part I, Item 1 of this Form 10-Q for a description of certain of these lawsuits.
As discussed in Part II, Item 1 and Note 14, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims, will not have a material effect on PPG’s consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.
As also discussed in Note 14, PPG has significant reserves for environmental contingencies. Refer to the Environmental Matters section of Note 14 for details of these reserves. It is PPG’s policy to accrue expenses for contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are generally not discounted. In management’s opinion, the Company operates in an environmentally sound manner and the outcome of the Company’s environmental contingencies will not have a material effect on PPG’s financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution of the Company’s environmental contingencies will occur over an extended period of time.
Critical Accounting Estimates
Management has evaluated the accounting policies used in the preparation of the financial statements and related notes presented in this Form 10-Q and believes those policies to be reasonable and appropriate. We believe that the most critical accounting estimates made in the preparation of our financial statements are those related to accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and
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the amount can be reasonably estimated, and to accounting for pensions, other postretirement benefits, business combinations, goodwill and other identifiable intangible assets with indefinite lives because of the importance of management judgment in making the estimates necessary to apply these policies.
For a comprehensive discussion of the Company’s critical accounting estimates, see Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Form 10-K. There were no material changes in the Company’s critical accounting estimates from the 2021 Form 10-K.
Forward-Looking Statements
Management’s Discussion and Analysis and other sections of this Quarterly Report contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast” and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission ("SEC"). Also, note the following cautionary statements.
Many factors could cause actual results to differ materially from the Company’s forward-looking statements. Such factors include statements related to the expected effects on our business of COVID-19, global economic conditions, geopolitical uncertainty in Europe, increasing price and product competition by our competitors, fluctuations in cost and availability of raw materials, energy, labor and logistics, the ability to achieve selling price increases, the ability to recover margins, customer inventory levels, our ability to maintain favorable supplier relationships and arrangements, the timing of and the realization of anticipated cost savings from restructuring initiatives, the ability to identify additional cost savings opportunities, the timing and expected benefits of our acquisitions, difficulties in integrating acquired businesses and achieving expected synergies therefrom, economic and political conditions in the markets we serve, the ability to penetrate existing, developing and emerging foreign and domestic markets, foreign exchange rates and fluctuations in such rates, fluctuations in tax rates, the impact of future legislation, the impact of environmental regulations, unexpected business disruptions, the effectiveness of our internal control over financial reporting, the results of governmental investigations, and the unpredictability of existing and possible future litigation. However, it is not possible to predict or identify all such factors.
Consequently, while the list of factors presented here and in the 2021 Form 10-K under Item 1A is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements.
Consequences of material differences in the results compared with those anticipated in the forward-looking statements could include, among other things, lower sales or income, business disruption, operational problems, financial loss, legal liability to third parties, other factors set forth in Item 1A of the 2021 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 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
We conduct operations in many countries around the world. Our results of operations are subject to both currency transaction risk and currency translation risk. Certain foreign currency forward contracts outstanding during 2022 and 2021 served as a hedge of a portion of PPG’s exposure to foreign currency transaction risk. The fair value of these contracts was a net asset of $10 million and $24 million as of June 30, 2022 and December 31, 2021, respectively. The potential reduction in PPG's Income before income taxes resulting from the impact of adverse changes in exchange rates on the fair value of its outstanding foreign currency hedge contracts of 10% for European and Canadian currencies and 20% for Asian and Latin American currencies was $264 million for the three months ended June 30, 2022 and $306 million for the year ended December 31, 2021.
As of both June 30, 2022 and December 31, 2021, PPG had U.S. dollar to euro cross currency swap contracts with a total notional amount of $775 million. The fair value of these contracts were net assets of $99 million and $50 million as of June 30, 2022 and December 31, 2021, respectively. A 10% increase in the value of the euro to the U.S. dollar would have had an unfavorable effect on the fair value of these swap contracts by reducing the value of these instruments by $69 million and $77 million at June 30, 2022 and December 31, 2021, respectively.
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As of June 30, 2022 and December 31, 2021, PPG had non-U.S. dollar denominated borrowings outstanding of $2.6 billion and $1.6 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 on these borrowings of $288 million at June 30, 2022 and $178 million at December 31, 2021.
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. PPG has interest rate swaps which converted $525 million of fixed rate debt to variable rate debt. The fair values of these contracts was an asset of $1 million and $36 million as of June 30, 2022 and December 31, 2021, respectively. An increase in variable interest rates of 10% would lower the fair values of these swaps and increase interest expense by $6 million and $1 million for the periods ended June 30, 2022 and December 31, 2021, respectively. A 10% increase in interest rates in the U.S., Canada, Mexico and Europe and a 20% increase in interest rates in Asia and South America would have had an insignificant effect on PPG's variable rate debt obligations and interest expense for the periods ended June 30, 2022 and December 31, 2021. Further a 10% reduction in interest rates would have increased the fair value of the Company's fixed rate debt by approximately $113 million and $56 million at June 30, 2022 and December 31, 2021, respectively; however, such changes would not have had an effect on PPG's Income before income taxes or cash flows.
There were no other material changes in the Company’s exposure to market risk from December 31, 2021 to June 30, 2022. Refer to Note 12, “Financial Instruments, Hedging Activities and Fair Value Measurements” in Part I, Item 1 of this Form 10-Q for a description of our instruments subject to market risk.
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
b. Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. These lawsuits and claims may relate to contract, patent, environmental, product liability, asbestos exposure, antitrust, employment, securities and other matters arising out of the conduct of PPG’s current and past business activities. To the extent these lawsuits and claims involve personal injury, property damage and certain other claims, PPG believes it has adequate insurance; however, certain of PPG’s insurers are contesting coverage with respect to some of these claims, and other insurers may contest coverage. PPG’s lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental, asbestos and other matters.
As previously disclosed, the SEC is conducting a non-public investigation of accounting matters described in the Explanatory Note and in Note 2, “Restatement of Previously Reported Consolidated Annual Financial Statements" under Item 8 of the Company’s 2017 Form 10-K/A. On September 26, 2019, PPG announced a final settlement with the SEC as to the Company. Without admitting or denying the findings in the SEC’s administrative cease-and-desist order, the Company consented to the entry of the order, which imposed no financial penalty. The Company continues to cooperate fully with the SEC’s ongoing investigation relating to these accounting matters. The Company is also cooperating fully with an investigation into the same accounting matters commenced by the U.S. Attorney’s Office for the Western District of Pennsylvania (“USAO”). As previously disclosed, the USAO has informed PPG that it will not pursue any action as to the Company.
From the late 1880’s until the early 1970’s, PPG owned property located in Cadogan and North Buffalo Townships, Pennsylvania which was used for the disposal of solid waste from PPG’s former glass manufacturing facility in Ford
36
City, Pennsylvania. In October 2018, the Pennsylvania Department of Environmental Protection (the “DEP”) approved PPG’s cleanup plan for the Cadogan Property. In April 2019, PPG and the DEP entered into a consent order and agreement (“CO&A”) which incorporated PPG’s approved cleanup plan and a draft final permit for the collection and discharge of seeps emanating from the former disposal area. The CO&A includes a civil penalty of $1.2 million for alleged past unauthorized discharges. PPG’s former disposal area is also the subject of a citizens’ suit filed by the Sierra Club and PennEnvironment seeking remedial measures beyond the measures specified in PPG’s approved cleanup plan, a civil penalty in addition to the penalty included in the CO&A and plaintiffs’ attorneys fees. PPG and the plaintiffs settled plaintiffs’ claims for injunctive relief and PPG agreed to enhancements to the DEP approved cleanup plan and a $250,000 donation to a Pennsylvania nonprofit organization. This settlement has been memorialized by an amendment to the CO&A which was appended to a Consent Agreement between PPG and the plaintiffs which has been entered by the federal Court. The remaining claims in the case for attorneys’ fees and a civil penalty are not affected by this settlement. PPG believes that the remaining claims are without merit and intends to defend itself against these claims vigorously.
For many years, PPG has been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. For a description of asbestos litigation affecting the Company, see Note 14, “Commitments and Contingent Liabilities” in Part I, Item 1 of this Form 10-Q.
In the past, the Company and others have been named as defendants in several cases in various jurisdictions claiming damages related to exposure to lead and remediation of lead-based coatings applications. PPG has been dismissed as a defendant from most of these lawsuits and has never been found liable in any of these cases. After having not been named in a new lead-related lawsuit for 15 years, PPG was named as a defendant in two Pennsylvania state court lawsuits filed by Montgomery County and Lehigh County in the respective counties on October 4, 2018 and October 12, 2018. Both suits seek declaratory relief arising out of alleged public nuisances in the counties associated with the presence of lead paint on various buildings constructed prior to 1980. The Company believes these actions are without merit and intends to defend itself vigorously.
Item 1A. Risk Factors
There were no material changes in the Company’s risk factors from the risks disclosed in the 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table summarizes the Company's stock repurchase activity for the three months ended June 30, 2022:
| Month | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Number of Shares That May Yet Be Purchased Under the Programs (1) | |||||||||||||||||||
| April 2022 | |||||||||||||||||||||||
| Repurchase program | — | $— | — | — | |||||||||||||||||||
| May 2022 | |||||||||||||||||||||||
| Repurchase program | — | $— | — | — | |||||||||||||||||||
| June 2022 | |||||||||||||||||||||||
| Repurchase program | 1,269,830 | $118.09 | 1,269,830 | 9,710,533 | |||||||||||||||||||
| Total quarter ended June 30, 2022 | |||||||||||||||||||||||
| Repurchase program | 1,269,830 | $118.09 | 1,269,830 | 9,710,533 | |||||||||||||||||||
(1)In December 2017, PPG's board of directors approved a $2.5 billion share repurchase program. The remaining shares yet to be purchased under the program has been calculated using PPG’s closing stock price on the last business day of the respective month. This repurchase program has no expiration date.
Item 6. Exhibits
See the Index to Exhibits on page 38.
37
PPG INDUSTRIES, INC. AND SUBSIDIARIES
Index to Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Form 10-Q.
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.3 | ||||||||
| 10.1* | ||||||||
| †31.1 | ||||||||
| †31.2 | ||||||||
| ††32.1 | ||||||||
| ††32.2 | ||||||||
| 101.INS** | Inline XBRL Instance Document | |||||||
| 101.SCH*** | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL*** | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF*** | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB*** | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE*** | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. | |||||||
† Filed herewith.
†† Furnished herewith.
*Management contracts, compensatory plans or arrangements required to be filed as an exhibit hereto pursuant to Item 601 of Regulation S-K.
**The instance document does not appear in the Interactive Data File because its XBRL (Extensible Business Reporting Language) tags are embedded within the Inline XBRL document.
***Attached as Exhibit 101 to this report are the following documents formatted in Inline XBRL: (i) the Condensed Consolidated Statement of Income for the three and six months ended June 30, 2022 and 2021, (ii) the Condensed Consolidated Balance Sheet at June 30, 2022 and December 31, 2021, (iii) the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2022 and 2021, and (iv) Notes to Condensed Consolidated Financial Statements for the six months ended June 30, 2022.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PPG INDUSTRIES, INC. | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: | July 22, 2022 | By: | /s/ Vincent J. Morales | |||||||||||
| Vincent J. Morales | ||||||||||||||
| Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) | ||||||||||||||
| By: | /s/ Brian R. Williams | |||||||||||||
| Brian R. Williams | ||||||||||||||
| Vice President and Controller (Principal Accounting Officer and Duly Authorized Officer) | ||||||||||||||
39
Exhibit 10.1
GRANT NOTICE FOR
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK UNIT AWARD
[DATE]
PPG Industries, Inc. (the “Company”) and the Participant identified below are parties to a Non-Employee Director Restricted Stock Unit Award Agreement dated as of __________ (the “Agreement”). Capitalized terms used in this Grant Notice shall have the respective meanings given to such terms in the Agreement, unless otherwise defined in this Grant Notice. This Grant Notice confirms the grant to the Participant of an Award of Restricted Stock Units with the terms set forth below. This Grant Notice is hereby incorporated by reference into and forms a part of the Agreement.
Participant Name: | |||||
Date of Grant: | |||||
Number of Restricted Stock Units Granted: | |||||
Dividend Equivalents: | “Dividend Equivalents” are granted with respect to this Restricted Stock Unit Award and shall be credited to Participant in accordance with paragraph 1.B of the Agreement. “Dividend Equivalents” means the right to receive the equivalent value (in cash or shares) of dividends paid on one share of Common Stock for each share that may be issued under an Award. | ||||
Vesting Date: | The “Vesting Date” of the Award is __________ | ||||
Forfeiture: | This Award shall be forfeited as of the date of any termination of the Participant’s service as a member of the Board of the Company (“Director”) if such termination occurs prior to the Vesting Date (as set forth above). Notwithstanding the foregoing (but subject to the continuing conditions provisions of paragraph 3 of the Agreement), the Award will no longer be subject to forfeiture (i) upon a Change in Control or (ii) if the Participant’s service as a Director terminates (A) following the first anniversary of the Date of Grant and (B) such termination is not due to the Participant’s resignation or removal as a Director at the request of a majority of the Board. | ||||
| PPG Industries, Inc. | |||||||||||
/s/ K. R. Walling | |||||||||||
By: Kevin R. Walling, Vice President and Chief Human Resources Officer | |||||||||||
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK UNIT AWARD AGREEMENT
[DATE]
This NON-EMPLOYEE DIRECTOR RESTRICTED STOCK UNIT AWARD AGREEMENT (this “Agreement”) is entered into as of the date first written above by and between PPG Industries, Inc. (the “Company”) and ___________ (the “Participant”).
The Company maintains the PPG Industries, Inc. Omnibus Incentive Plan (as amended from time to time, the “Plan”), which is incorporated into and forms a part of this Agreement, and the Participant, a non-employee Director of the Company, has been selected by the Human Capital Management and Compensation Committee (the “Committee”) to receive an Award under the Plan. Capitalized terms used in this Agreement shall, unless defined elsewhere in this Agreement, have the respective meanings given to such terms in the Plan.
The Award of Restricted Stock Units shall be confirmed by a separate Grant Notice to which this Agreement is attached (“Grant Notice”), specifying the Date of Grant of the Award, the number of Restricted Stock Units granted and the terms and conditions applicable to the vesting or forfeiture of such Restricted Stock Units. Each Restricted Stock Unit is a bookkeeping entry representing the equivalent in value of a share of Common Stock. Such Award shall be subject to the terms and conditions of this Agreement and such Grant Notice shall be deemed incorporated by reference into this Agreement.
NOW, THEREFORE, the Company and the Participant, intending to be legally bound, agree as follows:
1.Terms and Conditions of the Award.
A.This Agreement sets forth the terms and conditions applicable to the Award of Restricted Stock Units confirmed in the Grant Notice. The Award of Restricted Stock Units is made under Article VII of the Plan. Unless and until the Restricted Stock Units are vested in the manner set forth in the Grant Notice and paragraph 2.A. hereof, the Participant shall have no right to settlement of any such Restricted Stock Units.
B.On each date that the Company pays a dividend on its Common Stock prior to the payment of the Award, the Participant shall be entitled to a Dividend Equivalent on each Restricted Stock Unit subject to this Agreement. Unless prohibited under applicable law or otherwise determined by the Committee in its discretion, in the event and to the extent the Participant is permitted and elects to defer payment of the Restricted Stock Units subject to this Agreement, the value of such Dividend Equivalents shall be automatically deferred, on behalf of the Participant, into the Company’s Deferred Compensation Plan for Directors. In the event such Dividend Equivalents are not so deferred, the Dividend Equivalents shall be paid to the Participant in the same form, based on the same record date and at the same time, as such dividend is paid by the Company on its Common Stock. For purposes of the time and form of payment requirements of Section 409A of the Code and the U.S. Treasury Regulations issued thereunder (collectively “Section 409A”), such Dividend Equivalents shall be treated separately from the Restricted Stock Units.
C.From the Date of Grant until the Restricted Stock Units become vested or are forfeited in accordance with the terms of the Grant Notice and this Agreement, the Restricted Stock Units granted under this Agreement shall be reflected in a bookkeeping account maintained by the Company.
D.Prior to settlement of any vested Restricted Stock Units, such Restricted Stock Units will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company. The Company’s obligations under this Agreement shall be unfunded and unsecured, and no special or separate fund shall be established and no other segregation of assets shall be made and the Participant shall have no greater rights than an unsecured general creditor of the Company. Except as otherwise specifically provided in the Grant Notice or this Agreement, the Participant shall have no rights as a stockholder of the Company by virtue of this Award unless and until such Award is determined to be vested and resulting shares of Common Stock are issued to the Participant. In addition, the Restricted Stock Units shall be subject to such restrictions as the Company may deem advisable under the rules, regulations and other requirements of
2
the Securities and Exchange Commission, any stock exchange upon which Common Stock is then listed, and any applicable federal or state securities law.
2.Provisions Applicable to Settlement of Restricted Stock Unit Awards.
A.Upon attainment of the Vesting Date (as defined in the Grant Notice) without a forfeiture of the Restricted Stock Units, and upon the satisfaction of all other applicable conditions as to the issuance of the Restricted Stock Units (including the payment by the Participant of all applicable Tax-Related Items as defined in paragraph 7), the Restricted Stock Unit Award granted under this Agreement shall be settled by issuance to the Participant of shares of Common Stock equal to the number of Restricted Stock Units set forth in the Grant Notice.
B.Any shares of Common Stock issued to the Participant with respect to his or her Award shall be subject to such restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, the New York Stock Exchange and any applicable state or foreign securities laws, and the Committee may cause a legend or legends to be endorsed on any stock certificates for such shares making appropriate references to such legal restrictions.
C.Except as otherwise provided in this Agreement, and except in the event the Participant is permitted and has made an election to defer payout of the Restricted Stock Units pursuant to the terms and conditions established by the Company, the issuance of the shares of Common Stock in accordance with the provisions of this paragraph 2 will be delivered within thirty (30) days following the Vesting Date. Payout of Restricted Stock Units that have been deferred shall be governed by the terms and conditions of the deferral election form. In addition, any distribution that becomes due under the terms of this Agreement will be delayed in the following circumstances: (i) if the Company reasonably anticipates that the distribution will violate Federal securities laws or other applicable law, provided that the distribution is made at the earliest date at which the Company reasonably anticipates that the distribution will no longer cause such violation; or (ii) upon such other events and conditions as the Commissioner of the Internal Revenue Service may prescribe in generally applicable guidance published in the Internal Revenue Bulletin.
3.Continuing Conditions. Notwithstanding any other provisions herein, the Participant, by execution of this Agreement, agrees and acknowledges that in return for the Award granted by the Company in this Agreement, the following continuing conditions shall apply:
A.If at any time prior to the Vesting Date or within one (1) year after the Vesting Date, without the prior written consent of the Company, the Participant engages in any activity in competition with any activity of the Company or any of its Subsidiaries, or contrary or harmful to the interests of the Company or any of its Subsidiaries, as determined in the sole discretion of the Board, including, but not limited to: (i) conduct related to the Participant’s service as a Director of the Company for which either criminal or civil penalties against the Participant may be sought; (ii) violation of Company (or Subsidiary) code of ethics or similar policy ; (iii) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of the Company or any of its Subsidiaries, including employing or recruiting any present, former or future employee of the Company or any of its Subsidiaries; (iv) disclosing or misusing any confidential information or material concerning the Company or any of its Subsidiaries; or (v) participating in a hostile takeover attempt, then this Award shall terminate effective as of the date on which the Participant enters into such activity, unless terminated sooner by operation of another term or condition of this Agreement, and any “Award Gain” realized by the Participant shall be paid by the Participant to the Company. “Award Gain” shall mean the cash and the Fair Market Value of the Common Stock delivered to the Participant pursuant to paragraph 2 on the date of such delivery times the number of shares so delivered. Any shares of Common Stock deferred by the Participant shall be considered to have been delivered for the purpose of this paragraph 3.
3
B.By accepting this Agreement, the Participant consents to a deduction from any amounts the Company or any of its Subsidiaries owes the Participant from time to time (including amounts owed the Participant as a retainer, wages or other compensation, fringe benefits or vacation pay, as well as any other amounts owed to the Participant by the Company or any of its Subsidiaries), to the extent of the amounts payable to the Company by the Participant under paragraph 3.A. above. Whether or not the Company elects to make any set-off in whole or in part, if the Company does not recover by means of set-off the full amount payable by the Participant, calculated as set forth above, the Participant agrees to pay immediately the unpaid balance to the Company.
4.Award Subject to Plan Provisions. Unless otherwise expressly provided in the Grant Notice or this Agreement, the Restricted Stock Unit Award shall be subject to the provisions of the Plan, including, without limitation, Article XI. In the event of any conflict between this Agreement and either the Grant Notice or the Plan, the Grant Notice or Plan, as applicable, shall control over this Agreement.
5.Applicable Law; Entire Agreement; Venue. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without reference to any choice of law principles. The Grant Notice, this Agreement and the Plan contain all terms and conditions with respect to the subject matter hereof.
For purposes of litigating any dispute that arises under the Award or this Agreement, the parties hereby submit to and consent to the jurisdiction of the Commonwealth of Pennsylvania, and agree that such litigation shall be conducted in the courts of Allegheny County, Pennsylvania, or other federal courts for the United States for the Western District of Pennsylvania, and no other courts, where this Award of Restricted Stock Units is made and/or to be performed. The parties agree that, if suit is filed in Allegheny County courts, application will be made by one or both parties, without objection, to have the case heard in the Center for Commercial and Complex Litigation of the Court of Common Pleas of Allegheny County.
6.Further Assurances. The Participant agrees, upon demand of the Company or the Committee, to do all acts and execute, deliver and perform all additional documents, instruments and agreements (including, without limitation, stock powers with respect to shares of Common Stock issued or otherwise distributed in relation to the Restricted Stock Units) which may be reasonably required by the Company or the Committee, as the case may be, to implement the provisions and purposes of the Grant Notice, this Agreement and the Plan.
7.Taxes. Regardless of any action the Company and/or the Subsidiary retaining the Participant (the “Service Recipient”) take with respect to any or all income tax (including U.S. federal, state, and local tax and/or non-U.S. tax), social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant is and remains the Participant’s responsibility and that the Company and/or the Service Recipient (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant and vesting of the Restricted Stock Units, the conversion of the Restricted Stock Units into shares or the receipt of an equivalent cash payment, the subsequent sale of any shares acquired pursuant to the Restricted Stock Units and the receipt of any dividends or Dividend Equivalents; and (ii) do not commit to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items.
Prior to the relevant taxable event, the Participant shall pay or make adequate arrangements satisfactory to the Company and/or the Service Recipient to satisfy all Tax-Related Items.
In this regard, the Company will withhold in shares of Common Stock upon the relevant taxable or tax withholding event, as applicable, unless the use of such withholding method is problematic under applicable tax or securities law or has materially adverse accounting consequences, in which case, the obligation for Tax-Related Items may be satisfied by one or a combination of the following methods:
(i) arranging for the sale of shares of Common Stock acquired upon the vesting of the Award (on the Participant’s behalf and at the Participant’s direction pursuant to this authorization) and withholding from the cash proceeds; and /or
4
(ii) withholding from any wages or other cash compensation paid to the Participant by the Company and/or the Service Recipient or from any equivalent cash payment received in connection with the Award.
The Company may withhold or account for Tax-Related Items by considering applicable minimum statutory withholding amounts or other applicable withholding rates, including maximum applicable rates in the Participant’s jurisdictions(s). In the event of over-withholding, the Participant may receive a refund of any over-withheld amount in cash and will have no entitlement to the equivalent in Common Stock or if not refunded, the Participant may seek a refund from the local tax authorities. In the event of under-withholding, the Participant may be required to pay any additional Tax-Related Items directly to the applicable tax authority or to the Company. If the obligation for Tax-Related Items is satisfied by withholding a number of shares as described herein, the Participant shall be deemed, for tax purposes only, to have been issued the full number of shares of Common Stock subject to the vested portion of the Award, notwithstanding that a number of shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Award. The Participant shall pay to the Company and/or the Employer any amount of Tax-Related Items that is required to be withheld or accounted for in connection with the Restricted Stock Units that cannot be satisfied by the means previously described. The Company may refuse to deliver to the Participant any shares of Common Stock pursuant to the Award if the Participant fails to comply with his or her obligations in connection with the Tax-Related Items.
8.Transfer Restrictions. This Award and the Restricted Stock Units are not transferable other than by will or the laws of descent and distribution, and may not be assigned, hypothecated or otherwise pledged and shall not be subject to execution, attachment or similar process. Upon any attempt to effect any such disposition, or upon the levy of any such process, the Award shall immediately become null and void and the Restricted Stock Units shall be forfeited.
9.Capitalization Adjustments. The number of Restricted Stock Units awarded is subject to adjustment as provided in Section 11.07(a) of the Plan. The Participant shall be notified of such adjustment and such adjustment shall be binding upon the Company and the Participant.
10.Securities Law Compliance. Notwithstanding anything to the contrary contained herein, no shares of Common Stock shall be issued to the Participant upon vesting of this Restricted Stock Unit Award unless the Common Stock is then registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or, if such Common Stock is not then so registered, the Company has determined that such vesting and issuance would be exempt from the registration requirements of the Securities Act. By accepting this Award, the Participant agrees not to sell any of the shares of Common Stock received under this Award at a time when the applicable laws or Company policies prohibit a sale.
11.Award Confers No Rights to Continued Service. Nothing contained in the Plan or this Agreement shall give the Participant the right to be retained in the service of the Company or any Subsidiary or affect the right of any such service recipient to terminate the Participant’s service.
12.Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, that provision will be enforced to the maximum extent permissible and the legality, validity and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
13.Waiver. The Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach of this Agreement.
14.Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to the Award or future awards under the Plan by electronic means or request the Participant’s consent to participate in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
15.Code Section 409A. It is the intent that the Restricted Stock Units shall be exempt from or comply with the requirements of Section 409A, and any ambiguities herein will be interpreted in accordance with this intent. The Company reserves the right, to the extent the Company deems
5
necessary or advisable in its sole discretion, to unilaterally amend or modify this Agreement as may be necessary to ensure that all vesting or payouts provided under this Agreement are made in a manner that complies with Section 409A or to mitigate any additional tax, interest and/or penalties or other adverse tax consequences that may apply under Section 409A if compliance is not practical; provided, however, that nothing in this paragraph 15 creates an obligation on the part of the Company to modify the terms of this Agreement or the Plan, and the Company makes no representation that the terms of the Restricted Stock Units will comply with Section 409A or that payments under the Restricted Stock Units will not be subject to taxes, interest and penalties or other adverse tax consequences under Section 409A. In no event whatsoever shall the Company or any of its Subsidiaries or affiliates be liable to any party for any additional tax, interest or penalties that may be imposed on the Participant by Section 409A or any damages for failing to comply with Section 409A.
| Director | |||||||||||
| [Full Name] | |||||||||||
| PPG Industries, Inc. | |||||||||||
/s/ K. R. Walling | |||||||||||
By: Kevin R. Walling, Vice President and Chief Human Resources Officer | |||||||||||
6
Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
I, Michael H. McGarry, certify that:
1.I have reviewed this quarterly report on Form 10-Q of PPG Industries, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | July 22, 2022 | /s/ Michael H. McGarry | ||||||
| Michael H. McGarry Chairman and Chief Executive Officer | ||||||||
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
I, Vincent J. Morales, certify that:
1.I have reviewed this quarterly report on Form 10-Q of PPG Industries, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | July 22, 2022 | /s/ Vincent J. Morales | ||||||
| Vincent J. Morales Senior Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of PPG Industries, Inc. for the period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael H. McGarry, Chairman and Chief Executive Officer of PPG Industries, Inc., certify to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PPG Industries, Inc.
| /s/ Michael H. McGarry | ||
| Michael H. McGarry Chairman and Chief Executive Officer | ||
| July 22, 2022 | ||
A signed original of this written statement required by Section 906 has been provided to PPG Industries, Inc. and will be retained by PPG Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of PPG Industries, Inc. for the period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vincent J. Morales, Senior Vice President and Chief Financial Officer of PPG Industries, Inc., certify to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PPG Industries, Inc.
| /s/ Vincent J. Morales | ||
| Vincent J. Morales Senior Vice President and Chief Financial Officer (Principal Financial Officer) | ||
| July 22, 2022 | ||
A signed original of this written statement required by Section 906 has been provided to PPG Industries, Inc. and will be retained by PPG Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.