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 | $1,336 | | | $1,175 | |
Work in process | 263 | | | 234 | |
Raw materials | 843 | | | 723 | |
Supplies | 39 | | | 39 | |
Total Inventories | $2,481 | | | $2,171 | |
Most U.S. inventories are valued using the last-in, first-out method. These inventories represented approximately 31% and 29% of total inventories at both June 30, 2022 and December 31, 2021. If the first-in, first-out method of inventory valuation had been used, inventories would have been $234 million and $174 million higher as of June 30, 2022 and December 31, 2021, respectively.
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 | $5,034 | | | $1,214 | | | $6,248 | |
Acquisitions, including purchase accounting adjustments | 31 | | | (6) | | | 25 | |
Divestitures | (40) | | | — | | | (40) | |
Foreign currency impact | (83) | | | (31) | | | (114) | |
June 30, 2022 | $4,942 | | | $1,177 | | | $6,119 | |
A summary of the carrying value of the Company's identifiable intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
($ in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Indefinite-Lived Identifiable Intangible Assets |
Trademarks | $1,301 | | | N/A | | $1,301 | | | $1,449 | | | N/A | | $1,449 | |
Definite-Lived Identifiable Intangible Assets |
Acquired technology | $840 | | | ($626) | | | $214 | | | $862 | | | ($616) | | | $246 | |
Customer-related | 1,828 | | | (1,060) | | | 768 | | | 1,956 | | | (1,064) | | | 892 | |
Trade names | 313 | | | (150) | | | 163 | | | 336 | | | (144) | | | 192 | |
Other | 49 | | | (46) | | | 3 | | | 51 | | | (47) | | | 4 | |
Total Definite-Lived Intangible Assets | $3,030 | | | ($1,882) | | | $1,148 | | | $3,205 | | | ($1,871) | | | $1,334 | |
Total Identifiable Intangible Assets | $4,331 | | | ($1,882) | | | $2,449 | | | $4,654 | | | ($1,871) | | | $2,783 | |
The Company’s identifiable intangible assets with definite lives are being amortized over their estimated useful lives.
As of June 30, 2022, estimated future amortization expense of identifiable intangible assets is as follows:
| | | | | |
($ in millions) | Future Amortization Expense |
Remaining six months of 2022 | $95 | |
2023 | $165 | |
2024 | $150 | |
2025 | $135 | |
2026 | $115 | |
2027 | $100 | |
Thereafter | $388 | |
5. Business Restructuring
The Company records restructuring liabilities that represent charges incurred in connection with consolidations of certain operations, including both operations from acquisitions and headcount reduction programs. These charges consist primarily of severance costs and certain other cash costs. As a result of these programs, the Company also incurs incremental non-cash accelerated depreciation expense for certain assets due to their reduced expected useful life. These charges are not allocated to the Company’s reportable business segments. Refer to Note 16, "Reportable Business Segment Information" for additional information.
In the fourth quarter 2021, the Company approved business restructuring actions related to recent acquisitions targeting further consolidation of its manufacturing footprint and headcount reductions. The majority of these restructuring actions are expected to be completed by the end of 2023.
In the second quarter 2020, the Company approved a business restructuring plan which included actions to reduce its global cost structure. The program addressed weakened global economic conditions stemming from COVID-19 and related pace of recovery in a few end-use markets along with further opportunities to optimize supply chain and functional costs. In the second quarter 2019, the Company approved a business restructuring plan which included actions to reduce its global cost structure. The remaining actions of the 2020 and 2019 restructuring programs are expected to be completed in 2022.
The following table summarizes restructuring reserve activity for the six months ended June 30, 2022 and 2021:
| | | | | | | | | | | |
| Total Reserve |
($ in millions) | 2022 | | 2021 |
January 1 | $231 | | | $293 | |
Approved restructuring actions | — | | | 2 | |
Release of prior reserves and other adjustments(a) | — | | | (23) | |
Cash payments | (52) | | | (48) | |
Foreign currency impact | (13) | | | (8) | |
June 30 | $166 | | | $216 | |
(a)Certain releases were recorded to reflect the current estimate of costs to complete planned business restructuring actions.
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 billion were outstanding under the Term Loan Credit Agreement as of June 30, 2022 and December 31, 2021.
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.
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.
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
The Company had outstanding letters of credit and surety bonds of $205 million as of June 30, 2022.
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% of PPG net sales.
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 | 236.4 | | | 237.8 | | | 236.5 | | | 237.6 | |
Effect of dilutive securities: | | | | | | | |
Stock options | 0.5 | | | 1.2 | | | 0.7 | | | 1.0 | |
Other stock compensation plans | 0.7 | | | 0.8 | | | 0.7 | | | 0.8 | |
Potentially dilutive common shares | 1.2 | | | 2.0 | | | 1.4 | | | 1.8 | |
Adjusted weighted average common shares outstanding | 237.6 | | | 239.8 | | | 237.9 | | | 239.4 | |
| | | | | | | |
Dividends per common share | $0.59 | | | $0.54 | | | $1.18 | | | $1.08 | |
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 | 26.9 | % | | 25.1 | % |
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 $15 million for discrete items associated with PPG's U.S. and foreign jurisdictions.
Income tax expense for the six months ended June 30, 2022 and 2021 is based on an estimated annual effective rate, which requires management to make its best estimate of annual pretax income or loss. During the year, PPG management regularly updates forecasted annual pretax results for the various countries in which PPG operates based on changes in factors such as prices, shipments, product mix, raw material inflation and manufacturing operations. To the extent that actual 2022 pretax results for U.S. and foreign income or loss vary from estimates, the actual Income tax expense recognized in 2022 could be different from the forecasted amount used to estimate the Income tax expense for the six months ended June 30, 2022.
10. Pensions and Other Postretirement Benefits
The service cost component of net periodic pension and other postretirement benefit (income)/costs is included in Cost of sales, exclusive of depreciation and amortization, Selling, general and administrative, and Research and development, net in the accompanying condensed consolidated statements of income. All other components of net periodic benefit cost are recorded in Other income, net in the accompanying condensed consolidated statements of income.
Net periodic pension benefit income and other postretirement benefit (income)/cost for the three and six months ended June 30, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension |
| Three Months Ended June 30 | | Six Months Ended June 30 |
($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | $2 | | | $2 | | | $4 | | | $5 | |
Interest cost | 18 | | | 16 | | | 37 | | | 32 | |
Expected return on plan assets | (35) | | | (38) | | | (71) | | | (76) | |
Amortization of actuarial losses | 9 | | | 10 | | | 17 | | | 20 | |
| | | | | | | |
| | | | | | | |
Net periodic benefit income | ($6) | | | ($10) | | | ($13) | | | ($19) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Postretirement Benefits | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 | | |
($ in millions) | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Service cost | $1 | | | $3 | | | $4 | | | $6 | | | | | |
Interest cost | 4 | | | 4 | | | 8 | | | 7 | | | | | |
| | | | | | | | | | | |
Amortization of actuarial losses | 2 | | | 4 | | | 6 | | | 10 | | | | | |
| | | | | | | | | | | |
Amortization of prior service credit | (2) | | | (13) | | | (5) | | | (27) | | | | | |
Net periodic benefit cost/(income) | $5 | | | ($2) | | | $13 | | | ($4) | | | | | |
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 | $1 | | | $1 | | | $2 | | | $2 | |
PPG expects to make contributions to its defined benefit pension plans in the range of $5 million to $10 million during the remaining six months of 2022. PPG may make voluntary contributions to its defined benefit pension plans in 2022 and beyond.
11. Accumulated Other Comprehensive Loss (AOCL)
| | | | | | | | | | | | | | | | | | | | | | | |
($ 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 | ($1,663) | | | ($937) | | | $1 | | | ($2,599) | |
Current year deferrals to AOCL | (58) | | | (9) | | | — | | | (67) | |
Reclassifications from AOCL to net income | — | | | 2 | | | — | | | 2 | |
June 30, 2021 | ($1,721) | | | ($944) | | | $1 | | | ($2,664) | |
| | | | | | | |
January 1, 2022 | ($1,988) | | | ($763) | | | $1 | | | ($2,750) | |
Current year deferrals to AOCL | (191) | | | (4) | | | — | | | (195) | |
Reclassifications from AOCL to net income | 10 | | | 13 | | | — | | | 23 | |
June 30, 2022 | ($2,169) | | | ($754) | | | $1 | | | ($2,922) | |
(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
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 million and designated these contracts as hedges of the Company's net investment in its European operations. During the term of these contracts, PPG will receive payments in U.S. dollars and make payments in euros to the counterparties. As of June 30, 2022 and December 31, 2021, the fair value of the U.S. dollar to euro cross currency swap contracts were net assets of $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 billion at June 30, 2022 and December 31, 2021. As of June 30, 2022 and December 31, 2021, the fair value of these contracts were net assets of $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 | $— | | | $25 | | | $— | | | $8 | | | Other income, net |
Fair Value | | | | | | | | | |
Interest rate swaps | — | | | 6 | | | — | | | 7 | | | Interest expense |
| | | | | | | | | |
| | | | | | | | | |
Total forward contracts and interest rate swaps | $— | | | $31 | | | $— | | | $15 | | | |
Net Investment | | | | | | | | | |
| | | | | | | | | |
Cross currency swaps | $49 | | | $7 | | | $23 | | | $7 | | | Interest expense |
Foreign denominated debt | 140 | | | — | | | 70 | | | — | | | |
Total Net Investment | $189 | | | $7 | | | $93 | | | $7 | | | |
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 | $9 | | | $— | | | $— | | | $6 | | | $— | | | $— | |
Foreign currency forward contracts (a) | — | | | 19 | | | — | | | — | | | 28 | | | — | |
Cross currency swaps (b) | — | | | 45 | | | — | | | — | | | — | | | — | |
Interest rate swaps (c) | — | | | 1 | | | — | | | — | | | — | | | — | |
Investments: | | | | | | | | | | | |
Marketable equity securities | $66 | | | $— | | | $— | | | $98 | | | $— | | | $— | |
Other assets: | | | | | | | | | | | |
Cross currency swaps (b) | $— | | | $54 | | | $— | | | $— | | | $50 | | | $— | |
Interest rate swaps (c) | — | | | — | | | — | | | — | | | 36 | | | — | |
Liabilities: | | | | | | | | | | | |
Accounts payable and accrued liabilities: | | | | | | | | | | | |
Foreign currency forward contracts (a) | $— | | | $9 | | | $— | | | $— | | | $4 | | | $— | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(a)Derivatives not designated as hedging instruments
(b)Net investment hedges
(c)Fair value hedges
Long-Term Debt
| | | | | | | | | | | |
($ in millions) | June 30, 2022 (a) | | December 31, 2021 (b) |
Long-term debt - carrying value | $7,059 | | | $6,565 | |
Long-term debt - fair value | $6,817 | | | $6,958 | |
(a)Excluding finance lease obligations of $11 million and short-term borrowings of $21 million as of June 30, 2022.
(b)Excluding finance lease obligations of $10 million and short-term borrowings of $6 million as of December 31, 2021.
The fair values of the debt instruments were based on discounted cash flows and interest rates then currently available to the Company for instruments of the same remaining maturities and were measured using Level 2 inputs.
13. Stock-Based Compensation
The Company’s stock-based compensation includes stock options, restricted stock units (“RSUs”) and grants of contingent shares that are earned based on achieving targeted levels of total shareholder return. All current grants of stock options, RSUs and contingent shares are made under the PPG Industries, Inc. Amended and Restated Omnibus Incentive Plan (“PPG Amended Omnibus Plan”), which was amended and restated effective April 21, 2016. There were 4.6 million shares available for future grants under the PPG Amended Omnibus Plan as of June 30, 2022.
Stock-based compensation expense and the associated income tax benefit recognized during the three and six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Stock-based compensation expense | $12 | | | $18 | | | $18 | | | $35 | |
Income tax benefit recognized | $3 | | | $4 | | | $4 | | | $8 | |
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 | 487,277 | | | $36.52 | | | 527,464 | | | $29.27 | |
Restricted stock units | 211,914 | | | $142.17 | | | 185,084 | | | $132.63 | |
Contingent shares (a) | 57,134 | | | $151.87 | | | 55,540 | | | $136.60 | |
(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 | $151.87 |
Risk free interest rate | 2.0 | % |
Expected life of option in years | 6.5 |
Expected dividend yield | 1.6 | % |
Expected volatility | 25.7 | % |
The risk-free interest rate is determined by using the U.S. Treasury yield curve at the date of the grant and using a maturity equal to the expected life of the option. The expected life of options is calculated using the average of the vesting term and the maximum term, as prescribed by accounting guidance on the use of the simplified method for determining the expected term of an employee share option. The expected dividend yield and volatility are based on historical stock prices and dividend amounts over past time periods equal in length to the expected life of the options.
Time-based RSUs generally vest over the three-year period following the date of grant, unless forfeited, and will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the vesting period. Performance-based RSUs vest based on achieving specific annual performance targets for earnings per share growth and cash flow return on capital over the three calendar year-end periods following the date of grant. Unless forfeited, the performance-based RSUs will be paid out in the form of stock, cash or a combination of both at the Company’s discretion at the end of the three-year performance period if PPG meets the performance targets.
The amount paid upon vesting of performance-based RSUs may range from 0% to 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
•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.
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 | $63 | | | $89 | |
Glass and chemical | 76 | | | 83 | |
Other | 108 | | | 110 | |
Total | $247 | | | $282 | |
Current portion | $78 | | | $97 | |
Pretax charges against income for environmental remediation costs are included in Other income, net in the accompanying condensed consolidated statement of income. The pretax charges and cash outlays related to such environmental remediation for the three and six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Environmental remediation pretax charges | $2 | | | $12 | | | $8 | | | $31 | |
Cash outlays for environmental remediation activities | $24 | | | $8 | | | $47 | | | $17 | |
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
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.
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% of total revenue.
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 | $1,329 | | | $1,199 | | | $2,392 | | | $2,197 | |
Europe, Middle East and Africa ("EMEA") | 994 | | | 970 | | | 1,943 | | | 1,781 | |
Asia Pacific | 287 | | | 312 | | | 561 | | | 588 | |
Latin America | 319 | | | 268 | | | 603 | | | 502 | |
Total | $2,929 | | | $2,749 | | | $5,499 | | | $5,068 | |
Industrial Coatings | | | | | | | |
United States and Canada | $686 | | | $564 | | | $1,338 | | | $1,135 | |
EMEA | 503 | | | 482 | | | 1,007 | | | 927 | |
Asia Pacific | 402 | | | 418 | | | 825 | | | 824 | |
Latin America | 171 | | | 146 | | | 330 | | | 286 | |
Total | $1,762 | | | $1,610 | | | $3,500 | | | $3,172 | |
Total Net Sales | | | | | | | |
United States and Canada | $2,015 | | | $1,763 | | | $3,730 | | | $3,332 | |
EMEA | 1,497 | | | 1,452 | | | 2,950 | | | 2,708 | |
Asia Pacific | 689 | | | 730 | | | 1,386 | | | 1,412 | |
Latin America | 490 | | | 414 | | | 933 | | | 788 | |
Total PPG | $4,691 | | | $4,359 | | | $8,999 | | | $8,240 | |
Allowance for Doubtful Accounts
All trade receivables are reported on the condensed consolidated balance sheet at the outstanding principal amount adjusted for any allowance for doubtful accounts and any charge-offs. PPG provides an allowance for doubtful accounts to reduce trade receivables to their estimated net realizable value equal to the amount that is expected to be collected. This allowance is estimated based on historical collection experience, current regional economic and market conditions, the aging of accounts receivable, assessments of current creditworthiness of customers and forward-looking information. The use of forward-looking information is based on certain macroeconomic and microeconomic indicators including, but not limited to, regional business environment risk, political risk, and commercial and financing risks.
PPG reviews its allowance for doubtful accounts on a quarterly basis to ensure the estimate reflects regional risk trends as well as current and future global operating conditions.
The following table summarizes the activity for the allowance for doubtful accounts for the six months ended June 30, 2022 and 2021:
| | | | | | | | | | | |
| Trade Receivables Allowance for Doubtful Accounts |
($ in millions) | 2022 | | 2021 |
January 1 | $31 | | | $44 | |
Bad debt expense | 45 | | | (11) | |
Recoveries of previously reserved trade receivables | (44) | | | — | |
Other | 7 | | | (8) | |
June 30 | $39 | | | $25 | |
In the first quarter 2022, PPG recorded a bad debt reserve of $43 million associated with the adverse economic impacts of the Russian invasion of Ukraine. During the second quarter 2022, the Company released a portion of this previously established bad debt reserve due to the collection of certain trade receivables, resulting in a bad debt reserve related to PPG's operations in Russia of $16 million at June 30, 2022. Refer to Note 7, "Impairment and Other Related (Income)/Charges, Net" for additional information.
16. Reportable Business Segment Information
PPG is a multinational manufacturer with 10 operating segments (which the Company refers to as “strategic business units”) that are organized based on the Company’s major products lines. The Company’s reportable business segments include the following two segments: Performance Coatings and Industrial Coatings. The operating segments have been aggregated based on economic similarities, the nature of their products, production processes, end-use markets and methods of distribution.
The Performance Coatings reportable business segment is comprised of the automotive refinish coatings, aerospace coatings, architectural coatings – Americas and Asia Pacific, architectural coatings – EMEA, protective and marine coatings and traffic solutions operating segments. This reportable business segment primarily supplies a variety of protective and decorative coatings, sealants and finishes along with paint strippers, stains and related chemicals, pavement marking products, transparencies and transparent armor.
The Industrial Coatings reportable business segment is comprised of the automotive original equipment manufacturer ("OEM") coatings, industrial coatings, packaging coatings and specialty coatings and materials operating segments. This reportable business segment primarily supplies a variety of protective and decorative coatings and finishes along with adhesives, sealants, metal pretreatment products, optical monomers and coatings, precipitated silicas and other specialty materials.
Reportable business segment net sales and segment income for the three and six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net sales: | | | | | | | |
Performance Coatings | $2,929 | | | $2,749 | | | $5,499 | | | $5,068 | |
Industrial Coatings | 1,762 | | | 1,610 | | | 3,500 | | | 3,172 | |
Total | $4,691 | | | $4,359 | | | $8,999 | | | $8,240 | |
Segment income: | | | | | | | |
Performance Coatings | $446 | | | $454 | | | $765 | | | $840 | |
Industrial Coatings | 156 | | | 190 | | | 296 | | | 435 | |
Total | $602 | | | $644 | | | $1,061 | | | $1,275 | |
Corporate | (55) | | | (52) | | | (107) | | | (104) | |
Interest expense, net of interest income | (27) | | | (25) | | | (48) | | | (49) | |
Impairment and other related income/(charges), net (a) | 60 | | | — | | | (230) | | | — | |
Business restructuring-related costs, net (b) | (8) | | | 19 | | | (22) | | | 15 | |
Transaction-related costs (c) | (6) | | | (14) | | | (10) | | | (38) | |
Environmental remediation charges | — | | | (10) | | | — | | | (26) | |
Expenses incurred due to natural disasters (d) | — | | | (5) | | | — | | | (17) | |
Decrease in allowance for doubtful accounts related to COVID-19 | — | | | 14 | | | — | | | 14 | |
Income from legal settlements | — | | | 22 | | | — | | | 22 | |
| | | | | | | |
Income before income taxes | $566 | | | $593 | | | $644 | | | $1,092 | |
(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.
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.