filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the condensed consolidated financial statements in Part I, Item 1, “Financial Statements,” of this report and in conjunction with the 2023 Form 10-K.
Highlights
Net sales were approximately $4.8 billion for the three months ended June 30, 2024, a decrease of 1.6% compared to the prior year, primarily due to the unfavorable impact of foreign currency translation and the divestitures of the non-North American portion of the traffic solutions business.
Income before income taxes was $693 million for the three months ended June 30, 2024, an increase of $47 million compared to the prior year. This increase was primarily due to the impact of moderating raw material costs partially offset by wage inflation.
Results of Operations
| Three Months Ended June 30 | Percent Change | Six Months Ended June 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||
| Net sales | $4,794 | $4,872 | (1.6) | % | $9,105 | $9,252 | (1.6) | % | |||||||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $2,734 | $2,866 | (4.6) | % | $5,179 | $5,462 | (5.2) | % | |||||||||||||||||||||||||||
| Selling, general and administrative | $1,077 | $1,069 | 0.7 | % | $2,141 | $2,061 | 3.9 | % | |||||||||||||||||||||||||||
| Depreciation | $98 | $93 | 5.4 | % | $201 | $185 | 8.6 | % | |||||||||||||||||||||||||||
| Amortization | $36 | $40 | (10.0) | % | $74 | $81 | (8.6) | % | |||||||||||||||||||||||||||
| Research and development, net | $111 | $110 | 0.9 | % | $220 | $214 | 2.8 | % | |||||||||||||||||||||||||||
| Interest expense | $62 | $67 | (7.5) | % | $117 | $126 | (7.1) | % | |||||||||||||||||||||||||||
| Interest income | ($45) | ($32) | 40.6 | % | ($87) | ($57) | 52.6 | % | |||||||||||||||||||||||||||
| Pension settlement charge | $— | $— | — | % | $— | $190 | (100.0) | % | |||||||||||||||||||||||||||
| Other charges/(income), net | $28 | $13 | 115.4 | % | $29 | ($9) | (422.2) | % | |||||||||||||||||||||||||||
Net Sales by Region
| Three Months Ended June 30 | Percent Change | Six Months Ended June 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||
| United States and Canada | $2,039 | $2,059 | (1.0) | % | $3,781 | $3,835 | (1.4) | % | |||||||||||||||||||||||||||
| EMEA | 1,454 | 1,520 | (4.3) | % | 2,813 | 2,948 | (4.6) | % | |||||||||||||||||||||||||||
| Asia Pacific | 734 | 736 | (0.3) | % | 1,390 | 1,383 | 0.5 | % | |||||||||||||||||||||||||||
| Latin America | 567 | 557 | 1.8 | % | 1,121 | 1,086 | 3.2 | % | |||||||||||||||||||||||||||
| Total | $4,794 | $4,872 | (1.6) | % | $9,105 | $9,252 | (1.6) | % |
Three Months Ended June 30, 2024
Net sales decreased $78 million due to the following:
● Unfavorable foreign currency translation (-1%)
● Divestiture-related sales (-1%)
For specific business results, see the Performance of Reportable Business Segments section within Item 2 of this Form 10-Q.
Cost of sales, exclusive of depreciation and amortization, decreased $132 million primarily due to moderating raw material costs.
Selling, general and administrative expense increased $8 million primarily due to wage inflation and growth-related investments.
Interest expense decreased $5 million primarily due to lower debt balances. Interest income increased $13 million primarily due to higher interest rates.
Other charges/(income), net increased by $15 million primarily due to higher environmental remediation charges and a non-cash loss on the sale of the traffic solutions business in Argentina, partially offset by an increase in realized foreign currency gains.
Six Months Ended June 30, 2024
Net sales decreased $147 million due to the following:
● Lower sales volumes (-1%)
● Divestiture-related sales (-1%)
For specific business results, see the Performance of Reportable Business Segments section within Item 2 of this Form 10-Q.
Cost of sales, exclusive of depreciation and amortization, decreased $283 million primarily due to moderating raw material costs.
Selling, general and administrative expense increased $80 million primarily due to wage inflation and growth-related investments.
Depreciation expense increased $16 million primarily due to higher accelerated depreciation related to previously approved restructuring actions.
Interest expense decreased $9 million primarily due to lower debt balances. Interest income increased $30 million primarily due to higher interest rates.
A pension settlement charge of $190 million was recorded in the first quarter 2023 associated with the Company's purchase of group annuity contracts that transferred pension benefit obligations for certain of the Company’s retirees in the U.S. to third-party insurance companies. Refer to Note 9, "Pensions and Other Postretirement Benefits" in Part I, Item 1 of this Form 10-Q for additional information.
Other charges/(income), net increased by $38 million primarily due to higher environmental remediation charges, a non-cash loss on the sale of the Argentina portion of the traffic solutions business and the absence of a first quarter 2023 insurance recovery related to hurricane damage at a southern US. factory, partially offset by an increase in realized foreign currency gains.
Effective Tax Rate and Earnings Per Diluted Share
| Three Months Ended June 30 | Percent Change | Six Months Ended June 30 | Percent Change | ||||||||||||||||||||||||||||||||
| ($ in millions, except percentages and amounts per share) | 2024 | 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||
| Income tax expense | $156 | $149 | 4.7 | % | $285 | $229 | 24.5 | % | |||||||||||||||||||||||||||
| Effective tax rate | 22.5 | % | 23.1 | % | (0.6) | % | 23.2 | % | 22.9 | % | 0.3 | % | |||||||||||||||||||||||
| Adjusted effective tax rate, continuing operations* | 23.1 | % | 23.2 | % | (0.1) | % | 23.5 | % | 23.2 | % | 0.3 | % | |||||||||||||||||||||||
| Earnings per diluted share, continuing operations | $2.24 | $2.06 | 8.7 | % | $3.93 | $3.18 | 23.6 | % | |||||||||||||||||||||||||||
| Adjusted earnings per diluted share* | $2.50 | $2.25 | 11.1 | % | $4.36 | $4.08 | 6.9 | % | |||||||||||||||||||||||||||
| *See Regulation G Reconciliation below |
Adjusted earnings per diluted share for both the three and six months ended June 30, 2024 increased year-over-year primarily due to moderating raw material costs, partially offset by wage inflation.
Regulation G Reconciliations - Results from Operations
PPG believes investors’ understanding of the Company’s performance is enhanced by the disclosure of net income from continuing operations, earnings per diluted share from continuing operations, PPG’s effective tax rate and segment income adjusted for certain items. PPG’s management considers this information useful in providing insight into the Company’s ongoing performance because it excludes the impact of items that cannot reasonably be expected to recur on a quarterly basis or that are not attributable to our primary operations. Net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate and segment income adjusted for these items are not recognized financial measures determined in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and should not be considered a substitute for net income from continuing operations, earnings per diluted share from continuing operations, the effective tax rate, segment income or other financial measures as computed in accordance with U.S. GAAP. In addition, adjusted net income, adjusted earnings per diluted share and the adjusted effective tax rate may not be comparable to similarly titled measures as reported by other companies.
Income before income taxes from continuing operations is reconciled to adjusted income before income taxes from continuing operations, the effective tax rate from continuing operations is reconciled to the adjusted effective tax rate from continuing operations and net income from continuing operations (attributable to PPG) and earnings per share – assuming dilution (attributable to PPG) are reconciled to adjusted net income from continuing operations (attributable to PPG) and adjusted earnings per share – assuming dilution below.
| Three Months Ended June 30, 2024 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Income Tax Expense | Effective Tax Rate | Net Income (attributable to PPG) | Earnings Per Diluted Share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $693 | $156 | 22.5 | % | $528 | $2.24 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 36 | 9 | 24.6 | % | 27 | 0.11 | |||||||||||||||||||||||
| Business restructuring-related costs, net(b) | 4 | 2 | 46.0 | % | 2 | 0.01 | |||||||||||||||||||||||
| Portfolio optimization(c) | 26 | 8 | 31.3 | % | 18 | 0.08 | |||||||||||||||||||||||
| Legacy environmental remediation charges(d) | 20 | 5 | 24.3 | % | 15 | 0.06 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $779 | $180 | 23.1 | % | $590 | $2.50 |
| Three Months Ended June 30, 2023 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Income Tax Expense | Effective Tax Rate | Net Income (attributable to PPG) | Earnings Per Diluted Share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $646 | $149 | 23.1 | % | $490 | $2.06 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 40 | 10 | 24.6 | % | 30 | 0.13 | |||||||||||||||||||||||
| Business restructuring-related costs, net(b) | 14 | 3 | 24.0 | % | 11 | 0.05 | |||||||||||||||||||||||
| Portfolio optimization(c) | 7 | 2 | 24.3 | % | 3 | 0.01 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $707 | $164 | 23.2 | % | $534 | $2.25 |
| Six Months Ended June 30, 2024 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Tax Expense | Effective Tax Rate | Net Income (attributable to PPG) | Earnings per Diluted share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $1,231 | $285 | 23.2 | % | $928 | $3.93 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Acquisition-related amortization expense | 74 | 18 | 24.6 | % | 56 | 0.23 | |||||||||||||||||||||||
| Business restructuring-related costs, net(b) | 15 | 5 | 31.5 | % | 10 | 0.04 | |||||||||||||||||||||||
| Portfolio optimization(c) | 32 | 10 | 31.3 | % | 22 | 0.10 | |||||||||||||||||||||||
| Legacy environmental remediation charges(d) | 20 | 5 | 24.3 | % | 15 | 0.06 | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $1,372 | $323 | 23.5 | % | $1,031 | $4.36 |
| Six Months Ended June 30, 2023 | |||||||||||||||||||||||||||||
| ($ in millions, except percentages and per share amounts) | Income Before Income Taxes | Tax Expense | Effective Tax Rate | Net Income (attributable to PPG) | Earnings per Diluted share(a) | ||||||||||||||||||||||||
| As reported, continuing operations | $999 | $229 | 22.9 | % | $754 | $3.18 | |||||||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Pension settlement charge (e) | 190 | 46 | 24.3 | % | 144 | 0.61 | |||||||||||||||||||||||
| Acquisition-related amortization expense | 81 | 20 | 24.6 | % | 61 | 0.26 | |||||||||||||||||||||||
| Business restructuring-related costs, net (b) | 14 | 3 | 24.0 | % | 11 | 0.05 | |||||||||||||||||||||||
| Portfolio optimization(c) | 7 | 2 | 24.3 | % | 3 | 0.01 | |||||||||||||||||||||||
| Insurance recovery of expenses incurred due to a natural disaster (f) | (9) | (2) | 24.3 | % | (7) | (0.03) | |||||||||||||||||||||||
| Adjusted, continuing operations, excluding certain items | $1,282 | $298 | 23.2 | % | $966 | $4.08 |
(a)Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.
(b)Business restructuring-related costs, net include business restructuring charges, offset by releases related to previously approved programs, which are included in Other charges/(income), net on the condensed consolidated statement of income, accelerated depreciation of certain assets, which is included in Depreciation on the condensed consolidated statement of income, and other restructuring-related costs, which are included in Cost of sales, exclusive of depreciation and amortization and Selling, general and administrative on the condensed consolidated statement of income.
(c)Portfolio optimization includes losses on the sale of non-core assets, including the loss recognized on the sale of the Company's traffic solutions business in Argentina which was completed during the second quarter 2024, which is included in Other charges/(income), net in the condensed consolidated statement of income. Portfolio optimization also includes advisory, legal, accounting, valuation, other professional or consulting fees and certain internal costs directly incurred to effect acquisitions, as well as similar fees and other costs to effect divestitures and other portfolio optimization exit actions. These costs are included in Selling, general and administrative expense on the condensed consolidated statement of income. In 2023, net loss of $2 million was attributable to noncontrolling interests.
(d)Legacy environmental remediation charges represent environmental remediation costs at certain non-operating PPG manufacturing sites. These charges are included in Other charges/(income), net in the condensed consolidated statement of income.
(e)In the first quarter 2023, PPG purchased group annuity contracts that transferred pension benefit obligations for certain of the Company’s retirees in the U.S. to third-party insurance companies, resulting in a non-cash pension settlement charge.
(f)In the first quarter 2023, the Company received reimbursement under its insurance policies for damages incurred at a southern U.S. factory from a winter storm in 2020.
Performance of Reportable Business Segments
Performance Coatings
| Three Months Ended June 30 | $ Change | % Change | Six Months Ended June 30 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2024 | 2023 | 2024 vs. 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $3,048 | $3,041 | $7 | 0.2 | % | $5,662 | $5,669 | ($7) | (0.1) | % | |||||||||||||||||||||||||||||||||||||
| Segment income | $570 | $537 | $33 | 6.1 | % | $972 | $932 | $40 | 4.3 | % | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $25 | $28 | ($3) | (10.7) | % | $52 | $58 | ($6) | (10.3) | % | |||||||||||||||||||||||||||||||||||||
| Segment income, excluding amortization expense | $595 | $565 | $30 | 5.3 | % | $1,024 | $990 | $34 | 3.4 | % |
Three Months Ended June 30, 2024
Performance Coatings net sales were flat due to the following:
● Higher selling prices (+2%)
Offset by:
● Unfavorable foreign currency translation (-1%)
● Divestiture-related sales (-1%)
Architectural coatings - Americas and Asia Pacific net sales, excluding the impact of currency, acquisitions and divestitures ("organic sales") increased by a low single-digit percentage compared to the prior-year second quarter driven by increased sales volumes in the U.S. and Latin America and higher prices. In Mexico, the business benefited from sales through our strong concessionaire network.
Architectural coatings – EMEA organic sales decreased by a low single-digit percentage year over year driven by lower sales volumes. Consumer confidence remained weak during the quarter, and regional demand was uneven by country, with strong sales volumes in central and eastern Europe offset by lower sales volumes in other parts of Europe.
Automotive refinish coatings organic sales decreased a mid-single-digit percentage compared to the prior year as higher prices were more than offset by lower sales volumes. In the U.S., sales volumes declined compared to record prior year results due to moderating body shop activity. In Europe, demand was comparable to the same quarter last year, and organic sales declined slightly in Latin America. In China, organic sales increased slightly as demand continues to recover.
Aerospace coatings organic sales increased by a double-digit percentage compared to the second quarter 2023, driven by higher price and sales volumes. Demand remained strong as customer order backlogs increased.
Protective and marine coatings organic sales were flat compared with the prior-year second quarter due to higher sales volumes in Europe and the Asia Pacific region offset by lower sales volumes in other regions.
Traffic solutions organic sales increased by a low-single-digit percentage compared with the prior-year second quarter due to increased sales volumes stemming from share gains. Seasonally, second quarter and third quarter sales in the traffic solutions business are typically more than 50% higher than the first quarter and fourth quarter due to the difficulty of applying traffic markings in colder temperatures.
Segment income was $570 million, an increase of 6% versus the prior year, primarily due to higher selling prices and moderating raw material costs, partially offset by higher growth-related spending and wage inflation.
Six Months Ended June 30, 2024
Performance Coatings net sales were flat due to the following:
● Higher selling prices (+2%)
Partially offset by:
● Lower sales volumes (-2%)
Architectural coatings - Americas and Asia Pacific organic sales decreased by a low single-digit percentage driven by lower sales volumes. In Mexico, PPG Comex architectural coatings organic sales increased compared to the prior year driven by selling price increases and continued strong demand in the concessionaire network.
Architectural coatings – EMEA organic sales decreased by a low single-digit percentage year over year driven by lower sales volumes. Regional demand was uneven by country, with strong sales volumes in central and eastern Europe offset by lower sales volumes in other parts of Europe.
Automotive refinish coatings organic sales decreased by a low single-digit percentage year over year as lower sales volumes in most regions more than offset selling price increases.
Aerospace coatings sales volumes increased by a high single-digit percentage as demand was strong in most regions. Sales also increased due to the benefit of higher selling prices.
Protective and marine coatings organic sales increased by a low single-digit percentage primarily due to strong demand in Europe and the Asia Pacific region.
Traffic solutions organic sales were flat as higher sales volumes in the U.S. were offset by lower selling prices.
Segment income increased $40 million year over year primarily due to higher selling prices and moderating raw material costs, which more than offset lower sales volumes and higher growth-related spending.
Looking Ahead
In the third quarter, we expect demand in Mexico to remain robust and consumer sentiment in Europe to be tepid. We anticipate continued strong demand in aerospace coatings and a benefit of summer seasonal sales in traffic solutions. Automotive refinish coatings sales are expected to benefit from incremental price increases and improved sales volume. Aggregate organic sales are anticipated to increase by a mid-single-digit percentage compared to the third quarter 2023.
Industrial Coatings
| Three Months Ended June 30 | $ Change | % Change | Six Months Ended June 30 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| ($ in millions, except percentages) | 2024 | 2023 | 2024 vs. 2023 | 2024 vs. 2023 | 2024 | 2023 | 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $1,746 | $1,831 | ($85) | (4.6) | % | $3,443 | $3,583 | ($140) | (3.9) | % | |||||||||||||||||||||||||||||||||||||
| Segment income | $259 | $250 | $9 | 3.6 | % | $508 | $490 | $18 | 3.7 | % | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $11 | $12 | ($1) | (8.3) | % | $20 | $23 | ($3) | (13.0) | % | |||||||||||||||||||||||||||||||||||||
| Segment income, excluding amortization expense | $270 | $262 | $8 | 3.1 | % | $528 | $513 | $15 | 2.9 | % |
Three Months Ended June 30, 2024
Industrial Coatings segment net sales decreased due to the following:
● Lower selling prices (-3%)
● Unfavorable foreign currency translation (-1%)
● Other (-1%)
Automotive OEM coatings organic sales decreased by a high single-digit percentage year over year driven by lower sales volumes and lower index-based selling prices for certain customer contracts. Sales volume increases in the Asia Pacific and Latin America regions were more than offset by declines in the U.S. and Europe. In Western Europe, automotive industry build rates were lower than prior year in the second quarter. In China, automotive retail sales activity continued to be solid, along with exports, which have grown compared to last year.
In the industrial coatings business, organic sales decreased by a low single-digit percentage compared to the prior year due to lower sales volumes and lower indexed-based prices. Overall, global industrial production remained sluggish resulting in lower sales volumes in all regions except Asia Pacific, where volumes increased by a mid-single-digit percentage.
Packaging coatings organic sales increased a mid-single-digit percentage compared to the prior year with higher sales volumes partially offset by lower, index-driven prices.
Specialty coatings and materials organic sales increased by a high single-digit percentage due to higher sales volumes partially offset by the absence of European energy-related surcharge pricing in the prior year period.
Segment income increased $9 million year over year primarily due to moderating input costs, partially offset by lower prices due to certain index-based customer contracts and wage cost inflation.
Six Months Ended June 30, 2024
Industrial Coatings segment net sales decreased due to the following:
● Lower selling price (-3%)
● Unfavorable foreign currency translation (-1%)
Automotive OEM coatings organic sales decreased by a mid-single-digit percentage year over year driven by lower sales volumes and lower index-based selling prices for certain customer contracts. Sales volume increases in the Asia Pacific and Latin America regions were more than offset by declines in the U.S. and Europe.
In the industrial coatings business, organic sales decreased by a mid-single-digit percentage year over year driven by lower sales volumes and indexed-based prices. Softening global industrial demand resulted in lower sales volumes in all regions except Asia Pacific where sales volumes increased by a high single-digit percentage.
Packaging coatings organic sales increased by a low single-digit percentage year over year as higher sales volumes were partially offset by lower selling prices in all regions.
Specialty coatings and materials organic sales increased by a high single-digit percentage primarily due to higher sales volumes, partially offset by the absence of European energy-related surcharge pricing in the prior year period.
Segment income increased $18 million year over year primarily due to moderating input costs which more than offset certain index-based selling price declines.
Looking Ahead
In the third quarter, global industrial production is expected to remain at a low level with improvement in the Asia Pacific and Latin America regions offset by sluggishness in Europe and the U.S. Automotive industry build rates are expected to decline in the third quarter with growth in Latin America more than offset by declining builds in all other regions. Additionally, packaging coatings is expected to have positive sales volume growth in all regions compared to the prior-year quarter. Aggregate organic sales are anticipated to decline a low single digit percentage compared to the third quarter 2023.
Liquidity and Capital Resources
PPG had cash and short-term investments totaling $1.2 billion and $1.6 billion at June 30, 2024 and December 31, 2023, respectively.
The Company continues to believe that cash on hand and short-term investments, cash from operations and the Company's access to capital markets will be sufficient to fund our operating activities, capital spending, acquisitions, dividend payments, debt service, share repurchases, contributions to pension plans and contractual obligations.
Cash from operating activities
Cash from operating activities for the six months ended June 30, 2024 and 2023 was $305 million and $621 million, respectively. The $316 million decrease in cash from operating activities was primarily due to unfavorable changes in working capital in the second quarter 2024 compared to the prior year.
Operating Working Capital
Operating working capital is a subset of total working capital and represents (1) trade receivables – net of the allowance for doubtful accounts (2) FIFO inventories and (3) trade liabilities. We believe operating working capital represents the key components of working capital under the operating control of our businesses. A key metric we use to measure our working capital management is operating working capital as a percentage of sales (current quarter sales annualized).
| ($ in millions, except percentages) | June 30, 2024 | December 31, 2023 | June 30, 2023 | ||||||||||||||
| Trade receivables, net | $3,418 | $2,881 | $3,426 | ||||||||||||||
| Inventories, FIFO | 2,546 | 2,376 | 2,776 | ||||||||||||||
| Trade creditors’ liabilities | 2,700 | 2,612 | 2,717 | ||||||||||||||
| Operating working capital | $3,264 | $2,645 | $3,485 | ||||||||||||||
| Operating working capital as a % of sales | 17.0 | % | 15.2 | % | 17.9 | % | |||||||||||
| Days sales outstanding | 59 | 55 | 57 |
Environmental
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Cash outlays for environmental remediation activities | $5 | $7 | $13 | $16 |
| ($ in millions) | Remainder of 2024 | Annually 2025 - 2028 | |||||||||
| Projected future cash outlays for environmental remediation activities | $30 - $50 | $20 - $75 |
Cash used for investing activities
Cash used for investing activities for the six months ended June 30, 2024 and 2023 was $370 million and $290 million, respectively. The $80 million increase in cash used for investing activities was primarily due to higher capital expenditures compared to the prior year.
Total capital spending is expected to be approximately $600 million to $650 million in 2024 in support of future organic growth opportunities.
Cash used for financing activities
Cash used for financing activities for the six months ended June 30, 2024 and 2023 was $185 million and $266 million, respectively. The $81 million decrease in cash used for financing activities was primarily due to higher net debt proceeds, partially offset by higher share repurchases compared to the prior year.
Credit Agreements
In April 2023, PPG entered into a €500 million term loan credit agreement (the "Term Loan"). The Term Loan provides the Company with the ability to increase the size of the loan by an amount not to exceed €250 million. The Term Loan contains covenants that are consistent with those in the Credit Agreement discussed below and that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Term Loan terminates and all amounts outstanding are payable in April 2026. In April 2023, PPG borrowed €500 million under the Term Loan. In December 2023, PPG obtained lender commitments sufficient to increase the size of the Term Loan by €250 million. In January 2024, PPG borrowed the additional €250 million.
In February 2021, PPG entered into a $2.0 billion Term Loan Credit Agreement (the "Term Loan Credit Agreement") to finance the Company’s acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. The Term Loan Credit Agreement provided the Company with the ability to borrow up to an aggregate principal amount of $2.0 billion on an unsecured basis. In addition to the amounts borrowed to finance the acquisition of Tikkurila, the Term Loan Credit Agreement allowed the Company to make up to eleven additional borrowings prior to December 31, 2021, to be used for working capital and general corporate purposes. The Term Loan Credit Agreement contains covenants that are consistent with those in the Credit Agreement discussed above and that are usual and customary restrictive covenants for facilities of its type, which include, with specified exceptions, limitations on the
Company’s ability to create liens or other encumbrances, to enter into sale and leaseback transactions and to enter into consolidations, mergers or transfers of all or substantially all of its assets. The Term Loan Credit Agreement was scheduled to mature and all outstanding borrowings were to be due and payable on the third anniversary of the date of the initial borrowing under the Agreement. In June 2021, PPG borrowed $700 million under Term Loan Credit Agreement to finance the Company’s acquisition of Tikkurila, and to pay fees, costs and expenses related thereto. In December 2021, PPG borrowed an additional $700 million under the Term Loan Credit Agreement. In 2022 and 2023, PPG repaid $300 million and $1.1 billion, respectively, of the Term Loan Credit Agreement using cash on hand. The Term Loan Credit Agreement was fully repaid as of December 31, 2023.
In March 2023, PPG amended its five-year credit agreement (the “Credit Agreement”) dated as of August 30, 2019. The amendments to the Credit Agreement replace the LIBOR-based reference interest rate option with a reference interest rate option based upon Term SOFR. The other terms of the Credit Agreement remained unchanged. In July 2023, PPG amended and restated the Credit Agreement, extending the term through July 27, 2028. The amended and restated Credit Agreement provides for a $2.3 billion unsecured revolving credit facility. The Company has the ability to increase the size of the Credit Agreement by up to an additional $750 million, subject to the receipt of lender commitments and other conditions precedent. The Company has the right, subject to certain conditions set forth in the Credit Agreement, to designate certain subsidiaries of the Company as borrowers under the Credit Agreement. In connection with any such designation, the Company is required to guarantee the obligations of any such subsidiaries under the Credit Agreement. There were $171 million commercial paper borrowings outstanding as of June 30, 2024 and no commercial paper borrowings outstanding as of December 31, 2023.
The Term Loan and the Credit Agreement require the Company to maintain a ratio of Total Indebtedness to Total Capitalization, as defined in the Term Loan and the Credit Agreement, of 60% or less; provided, that for any fiscal quarter in which the Company has made an acquisition for consideration in excess of $1 billion and for the next five fiscal quarters thereafter, the ratio of Total Indebtedness to Total Capitalization may not exceed 65% at any time. As of June 30, 2024, Total Indebtedness to Total Capitalization as defined under the Credit Agreement was 44%.
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. There were no commercial paper borrowings outstanding as of June 30, 2024 and December 31, 2023.
Other Debt Issued and Repaid
In March 2023, PPG's $300 million 3.2% notes matured, and the Company repaid this obligation using cash on hand.
Other Liquidity Information
Restructuring
Aggregate restructuring savings were approximately $10 million in the second quarter 2024. Total restructuring savings are expected to be at least $35 million in 2024. In addition, the Company continues to review its cost structure to identify additional cost savings opportunities. Refer to Note 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 $60 million in 2024.
Strategic Reviews
During the first quarter 2024, PPG announced that it would review strategic alternatives for its architectural coatings U.S. and Canada business and its global silicas products business. Through these strategic reviews, PPG will assess whether some or all of these businesses are better suited to grow faster with a partner or different owner, or may be better suited to operate as a core business within another company, as a standalone entity, or in a joint venture. PPG is executing on the strategic reviews and will communicate the path forward once determined.
Currency
Comparing spot exchange rates at June 30, 2024 and at December 31, 2023, the U.S. dollar strengthened against the currencies of many countries within the regions PPG operates, most notably the Mexican peso. As a result, consolidated net assets at June 30, 2024 decreased by $444 million compared to December 31, 2023.
Comparing average exchange rates during the first six months of 2024 to those of the first six months of 2023, the U.S. dollar weakened against the currencies of certain countries where PPG operates, including the Mexican peso, partially offset by strengthening against the Chinese yuan. This had a favorable impact on Income before income taxes for the six months ended June 30, 2024 of $6 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 13, “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 13, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims, 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 13, PPG has significant reserves for environmental contingencies. Refer to the Environmental Matters section of Note 13 for details of these reserves. It is PPG’s policy to accrue expenses for contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are generally not discounted. In management’s opinion, the Company operates in an environmentally sound manner and the outcome of the Company’s environmental contingencies will not have a material effect on PPG’s financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution of the Company’s environmental contingencies will occur over an extended period of time.
Critical Accounting Estimates
Management has evaluated the accounting policies used in the preparation of the financial statements and related notes presented in this Form 10-Q and believes those policies to be reasonable and appropriate. We believe that the most critical accounting estimates made in the preparation of our financial statements are those related to accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and to accounting for pensions, other postretirement benefits, business combinations, goodwill and other identifiable intangible assets with indefinite lives because of the importance of management judgment in making the estimates necessary to apply these policies.
For a comprehensive discussion of the Company’s critical accounting estimates, see Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K. There were no material changes in the Company’s critical accounting estimates from the 2023 Form 10-K.
Forward-Looking Statements
Management’s Discussion and Analysis and other sections of this Quarterly Report contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast,” "looking ahead" and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission ("SEC"). Also, note the following cautionary statements.
Many factors could cause actual results to differ materially from the Company’s forward-looking statements. Such factors include statements related to the expected effects on our business of COVID-19, global economic conditions, geopolitical issues 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, PPG 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, the amount of future share repurchases, economic and political conditions in the markets we serve, the ability to penetrate
existing, developing and emerging foreign and domestic markets, foreign exchange rates and fluctuations in such rates, fluctuations in tax rates, the impact of future legislation, the impact of environmental regulations, unexpected business disruptions, the unpredictability of existing and possible future litigation, including asbestos litigation, and government investigations. However, it is not possible to predict or identify all such factors.
Consequently, while the list of factors presented here and in the 2023 Form 10-K under Item 1A is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements.
Consequences of material differences in the results compared with those anticipated in the forward-looking statements could include, among other things, lower sales or income, business disruption, operational problems, financial loss, legal liability to third parties, other factors set forth in Item 1A of the 2023 Form 10-K and similar risks, any of which could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
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