# PPG INDUSTRIES INC (PPG) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from PPG INDUSTRIES INC's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/79879/000007987923000007/ppg-20221231.htm Accession: 0000079879-23-000007 Filing date: 2023-02-16 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/PPG/ All MD&A years: /company/PPG/mda/ Previous year: /company/PPG/mda/fy2021/ (FY 2021) Next year: /company/PPG/mda/fy2023/ (FY 2023) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion includes a comparison of our results of operations and liquidity and capital resources for the years ended December 31, 2022 and 2021. A discussion of changes in our results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020 has been omitted from this Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Form 10-K, filed with the Securities and Exchange Commission on February 17, 2022. Highlights Net sales were approximately $17.7 billion in 2022, an increase of 5% compared to the prior year, driven by higher selling prices resulting from continued selling price initiatives. The Company increased net sales despite softer demand conditions in Europe due in part to geopolitical issues, pandemic-related demand disruptions in China and unfavorable foreign currency translation impacts due to the strong appreciation of the U.S. dollar versus many foreign currencies. Income before income taxes was $1,381 million in 2022, a decrease of $434 million compared to the prior year. This decrease was primarily due to raw material and other cost inflation, lower sales volumes, unfavorable foreign currency translation impacts, higher manufacturing costs related to supply and labor disruptions and impairment and other related charges, partially offset by increased selling prices. Performance Overview Net Sales by Region [[GREPCENT_TABLE]] [["","","% Change"],["($ in millions, except percentages)","2022","2021","2022 vs. 2021"],["United States and Canada","$7,383","","$6,676","","10.6%"],["Europe, Middle East and Africa (EMEA)","5,458","","5,436","","0.4%"],["Asia Pacific","2,824","","2,977","","(5.1)%"],["Latin America","1,987","","1,713","","16.0%"],["Total","$17,652","","$16,802","","5.1%"]] [[/GREPCENT_TABLE]] Net sales increased $850 million due to the following: ● Higher selling prices (+11%) ● Acquisition-related sales (+3%) Partially offset by: ● Unfavorable foreign currency translation (-5%) ● Lower sales volumes (-3%) ● Divestiture-related sales and the wind down of Russia operations (-1%) For specific business results, see the Performance of Reportable Business Segments section within Item 7 of this Form 10-K. Cost of sales, exclusive of depreciation and amortization [[GREPCENT_TABLE]] [["","","% Change"],["($ in millions, except percentages)","2022","2021","2022 vs. 2021"],["Cost of sales, exclusive of depreciation and amortization","$11,096","","$10,286","","7.9%"],["Cost of sales as a % of net sales","62.9","%","61.2","%","1.7%"]] [[/GREPCENT_TABLE]] 2022 PPG ANNUAL REPORT AND FORM 10-K 15 Table of Contents Cost of sales, exclusive of depreciation and amortization, increased $810 million due to the following: ● Raw material, energy, wage and other cost inflation ● Cost of sales from acquired businesses Partially offset by: ● Favorable foreign currency translation ● Lower sales volumes Selling, general and administrative expenses [[GREPCENT_TABLE]] [["","","% Change"],["($ in millions, except percentages)","2022","2021","2022 vs. 2021"],["Selling, general and administrative expenses","$3,842","","$3,780","","1.6%"],["Selling, general and administrative expenses as a % of net sales","21.8","%","22.5","%","(0.7)%"]] [[/GREPCENT_TABLE]] Selling, general and administrative expenses increased $62 million primarily due to: ● Selling, general and administrative expenses from acquired businesses ● Wage and other cost inflation Partially offset by: ● Favorable foreign currency translation ● Restructuring cost savings Other charges and other income [[GREPCENT_TABLE]] [["","","% Change"],["($ in millions, except percentages)","2022","2021","2022 vs. 2021"],["Interest expense","$167","","$121","","38.0%"],["Interest income","($54)","","($26)","","107.7%"],["Impairment and other related charges, net","$245","","$21","","1,066.7%"],["Pension settlement charge","$\u2014","","$50","","N/A"],["Asbestos-related claims reserve adjustment","$\u2014","","($133)","","N/A"],["Business restructuring, net","$33","","$31","","6.5%"],["Other (income)/charges, net","($60)","","($143)","","(58.0)%"]] [[/GREPCENT_TABLE]] Interest expense Interest expense increased $46 million 2022 versus 2021 primarily due the unfavorable impact of higher interest rates on PPG’s variable rate debt obligations and slightly higher levels of debt in the current year. Interest income Interest income increased $28 million primarily due to higher interest rates. Impairment and other related charges, net Impairment and other related charges of $290 million were recorded in the first quarter 2022 associated with the wind down of the Company's operations in Russia. Subsequently, 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 $63 million. The Company continues to consider actions to exit Russia, including a possible sale of its Russian business or controlled withdrawal from the Russian market. During 2022 and 2021, the Company recorded impairment charges of $14 million and $21 million, respectively, related to certain smaller, non-strategic businesses. PPG committed to plans to sell these business and they were reclassified as held for sale. The impairment charges recorded represent the excess net book value of the net assets over the anticipated sales proceeds less costs to sell. The revenue of these businesses represent less than 1% of PPG annual net sales. In the fourth quarter 2022, the Company recorded an impairment charge of $4 million to reduce the carrying value of certain indefinite-lived trademarks based on the results of the annual impairment test. Refer to Note 6, “Goodwill and Other Identifiable Intangible Assets and Note 7 ”Impairment and Other Related Charges, Net” in Item 8 of this Form 10-K for additional information. 2022 PPG ANNUAL REPORT AND FORM 10-K 16 Table of Contents Pension settlement charge In December 2021, the Company purchased group annuity contracts that transferred pension benefit obligations for certain of the Company’s retirees in Canada to a third-party insurance company. This transaction resulted in a pension settlement charge of $50 million. Refer to Note 14, “Employee Benefit Plans" in Item 8 of this Form 10-K for additional information. Asbestos-related claims reserve adjustment In 2021, the reserve for asbestos-related claims was reduced to reflect the Company’s current estimate of potential liability for these claims. Refer to Note 15 “Commitments and Contingent Liabilities” in Item 8 of this Form 10-K for additional information. Business restructuring, net Pretax restructuring charges of $84 million related to recent acquisitions were recorded in 2022, partially offset by certain changes in estimates to complete previously recorded programs of $51 million. Pretax restructuring charges of $54 million were recorded in 2021, offset by certain changes in estimates to complete previously recorded programs of $23 million. Refer to Note 8, "Business Restructuring" in Item 8 of this Form 10-K for additional information. Other (income)/charges, net Other (income)/charges, net was lower in 2022 compared to the prior year primarily due to a $34 million gain on the sale of a production facility in 2021 in connection with the Company’s manufacturing footprint consolidation plans and associated restructuring programs as well as favorable legal settlements in 2021. Refer to Note 18, “Other (Income)/Charges, Net” in Item 8 of this Form 10-K for additional information. Effective tax rate and earnings per diluted share, continuing operations [[GREPCENT_TABLE]] [["","","% Change"],["($ in millions, except percentages)","2022","2021","2022 vs. 2021"],["Income tax expense","$325","","$374","","(13.1)%"],["Effective tax rate","23.5","%","20.6","%","2.9%"],["Adjusted effective tax rate, continuing operations*","22.0","%","20.0","%","2.0%"],["Earnings per diluted share, continuing operations","$4.33","","$5.93","","(27.0)%"],["Adjusted earnings per diluted share, continuing operations*","$6.05","","$6.77","","(10.6)%"],["*See the Regulation G reconciliations - results of operations"]] [[/GREPCENT_TABLE]] The effective tax rate for the year-ended December 31, 2022 was 23.5%, an increase of 2.9% from the prior year primarily driven by charges associated with PPG’s operations in Russia along with a reduction in the release of reserves for uncertain tax positions compared to the prior year. Earnings per diluted share and adjusted earnings per diluted share from continuing operations for the year ended December 31, 2022 decreased year over year primarily due raw material cost inflation, lower sales volumes, unfavorable foreign currency translation impact and higher manufacturing costs related to supply and labor disruptions, partially offset by increased selling prices. Refer to the Regulation G Reconciliations - Results from Operations for additional information. 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 2022 PPG ANNUAL REPORT AND FORM 10-K 17 Table of Contents dilution (attributable to PPG) are reconciled to adjusted net income from continuing operations (attributable to PPG) and adjusted earnings per share – assuming dilution below. [[GREPCENT_TABLE]] [["($ in millions, except percentages and per share amounts)","Income Before Income Taxes","","Income Tax Expense","","Effective Tax Rate","","Net income from continuing operations (attributable to PPG)","","Earnings per diluted share(1)"],["Year-ended December 31, 2022"],["As reported, continuing operations","$1,381","","","$325","","","23.5","%","","$1,028","","","$4.33"],["Includes:"],["Impairment and other related charges, net(2)","245","","","31","","","12.7","%","","214","","","0.90"],["Acquisition-related amortization expense","166","","","40","","","24.1","%","","126","","","0.53"],["Business restructuring-related costs, net(3)","75","","","19","","","25.3","%","","56","","","0.24"],["Transaction-related costs, net(4)","10","","","(2)","","","(20.0","%)","","12","","","0.05"],["Adjusted, continuing operations, excluding certain items","$1,877","","","$413","","","22.0","%","","$1,436","","","$6.05"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["($ in millions, except percentages and per share amounts)","Income Before Income Taxes","","Income Tax Expense","","Effective Tax Rate","","Net income from continuing operations (attributable to PPG)","","Earnings per diluted share(1)"],["Year-ended December 31, 2021"],["As reported, continuing operations","$1,815","","","$374","","","20.6","%","","$1,420","","","$5.93"],["Includes:"],["Acquisition-related amortization expense","172","","","42","","","24.4","%","","130","","","0.55"],["Transaction-related costs, net(4)","86","","","17","","","19.8","%","","69","","","0.29"],["Pension settlement charge","50","","","14","","","26.6","%","","36","","","0.15"],["Net charges related to environmental remediation","35","","","9","","","24.3","%","","26","","","0.11"],["Net tax charge related to U.K. statutory rate change","\u2014","","","(22)","","","N/A","","22","","","0.09"],["Business restructuring-related costs, net(3)","27","","","7","","","25.9","%","","20","","","0.08"],["Expenses incurred due to natural disasters(5)","17","","","4","","","24.3","%","","13","","","0.06"],["Impairment and other related charges, net(2)","21","","","6","","","29.2","%","","12","","","0.05"],["Decrease in allowance for doubtful accounts related to COVID-19","(14)","","","(3)","","","24.7","%","","(11)","","","(0.05)"],["Income from legal settlements","(22)","","","(5)","","","24.3","%","","(17)","","","(0.07)"],["Asbestos-related claims reserve adjustment(6)","(133)","","","(32)","","","24.3","%","","(101)","","","(0.42)"],["Adjusted, continuing operations, excluding certain items","$2,054","","","$411","","","20.0","%","","$1,619","","","$6.77"]] [[/GREPCENT_TABLE]] (1)Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding. (2)In the first quarter 2022, the Company recorded impairment and other related charges due to the wind down of the company’s operations in Russia. Subsequently, the Company released a portion of the previously established reserves for Receivables and Inventories due to the collection of certain trade receivables and the realization of certain inventories. Also in 2022, impairment and other related charges were recorded for the write-down of certain assets and liabilities related to the planned sale of a non-core business and for certain asset write downs. In 2021, an impairment charge was recorded for the write-down of certain assets related to the previously planned sale of certain smaller entities in non-strategic regions. Net loss of $3 million related to the 2021 impairment charge was attributable to noncontrolling interests. (3)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 and a $34 million gain on the sale of certain assets in 2021 in connection with the Company’s manufacturing footprint consolidation plans and associated restructuring programs. This gain is included in Other (income)/charges, net in the consolidated statement of income. (4)Transaction-related costs, net include advisory, legal, accounting, valuation, other professional or consulting fees, and certain internal costs directly incurred to effect acquisitions, as well as similar fees and other costs to effect disposals not classified as discontinued operations. These costs are included in Selling, general and administrative expense in the consolidated statement of income. Transaction-related costs also include losses on the sale of certain assets, which are included in Other income, net in the consolidated statement of income, and the impact for the step up to fair value of inventory acquired in certain acquisitions, which are included in Cost of sales, exclusive of depreciation and amortization in the consolidated statement of income. (5)In early 2021, a winter storm damaged a southern U.S. factory supporting the Company's specialty coatings and materials business as well as other Company factories in the southern U.S. Incremental expenses incurred due to this storm included costs related to maintenance and repairs of damaged property, freight and utility premiums and other incremental expenses directly related to the impacted areas. (6)In the fourth quarter 2021, the reserve for asbestos-related claims was reduced to reflect the Company’s current estimate of potential liability for these claims. 2022 PPG ANNUAL REPORT AND FORM 10-K 18 Table of Contents Performance of Reportable Business Segments Performance Coatings [[GREPCENT_TABLE]] [["","","","$ Change","","% Change"],["($ in millions, except percentages)","2022","2021","","2022 vs. 2021","","2022 vs. 2021"],["Net sales","$10,694","","$10,333","","","$361","","3.5%"],["Segment income","$1,399","","$1,491","","","($92)","","(6.2)%"],["Amortization expense","$123","","$126","","","($3)","","(2.4)%"],["Segment income, excluding amortization expense","$1,522","","$1,617","","","($95)","","(5.9)%"]] [[/GREPCENT_TABLE]] Performance Coatings net sales increased due to the following: ● Higher selling prices (+10%) ● Acquisition-related sales (+3%) Partially offset by: ● Unfavorable foreign currency translation (-5%) ● Lower sales volumes (-4%) ● Divestiture-related sales and the wind down of Russia operations (-1%) In 2022, all businesses within the Performance Coatings reportable business segment achieved higher selling prices consistent with our focus on mitigating raw material and other cost inflation. These price increases also helped to offset softer demand conditions in Europe due in part to geopolitical issues, the impact of pandemic-related restrictions in China, softening do-it-yourself (“DIY”) demand and unfavorable foreign currency translation. Architectural coatings – EMEA net sales, excluding the impact of currency, acquisitions, divestitures and the wind down of Russia operations (“organic sales”) were flat compared to prior year as selling price increases were offset by lower sales volumes. Sales were negatively impacted by geopolitical uncertainty, including the war in Ukraine, lower demand for DIY paint products and unfavorable foreign currency translation. Architectural coatings – Americas and Asia Pacific organic sales increased a mid-single-digit percentage during the year primarily due to selling price increases that more than offset lower sales volumes. Sales in the U.S. and Canada were unfavorably impacted by raw material availability, which improved as the year progressed, and softening DIY demand. In Mexico, PPG Comex architectural coatings organic sales increased compared to the prior year as concessionaire network demand continued to be strong throughout 2022 and further selling price increases were implemented. Automotive refinish coatings organic sales increased by a high-single-digit percentage due to selling price increases in all regions and volume growth in the U.S. stemming from higher miles driven, increased collision claims and more people returning to office work versus 2021. Sales were negatively impacted by softer demand in Europe and the impact of pandemic-related restrictions in China. Aerospace coatings organic sales increased by a high-teen-percentage due to increased selling prices and sales volumes in all regions. Sales volumes increased in all regions compared to prior year, but still remain below pre-pandemic levels. Net sales benefited from continued strong demand for military applications and for PPG’s technology-advantaged products. Organic sales in the protective and marine coatings business were higher by a mid-single-digit percentage due to selling price increases in all regions. Sales were negatively affected by pandemic-related restrictions in China. Traffic solutions organic sales increased by a low-teen-percentage as higher selling prices and solid volume growth in the U.S. and Latin America were partially offset by lower sales volumes in Europe and the Asia Pacific region. Segment income decreased $92 million year over year primarily due to raw material and logistics cost inflation, lower sales volumes and the impact of unfavorable foreign currency translation, partially offset by higher selling prices, savings from previously approved restructuring actions and acquisition-related earnings. Looking Ahead In the first quarter 2023, demand conditions in Europe and China are expected to remain similar to the fourth quarter 2022, including potential pandemic-related disruptions. Raw material and transportation availability continue to improve, with the biggest challenges remaining in the aerospace coatings business. Aggregate sales volumes are anticipated to be lower by a mid-single-digit percentage compared to the first quarter 2022 driven by the unfavorable impacts in Europe and China and continued soft architectural coatings DIY demand. The impact of divestiture-related sales and sales related to the Russia business, which the Company is in the process of winding down, are anticipated to reduce sales by about $40 million. The Company will continue to focus on executing various existing cost-savings initiatives. 2022 PPG ANNUAL REPORT AND FORM 10-K 19 Table of Contents Industrial Coatings [[GREPCENT_TABLE]] [["","","","$ Change","","% Change"],["($ in millions, except percentages)","2022","2021","","2022 vs. 2021","","2022 vs. 2021"],["Net sales","$6,958","","$6,469","","","$489","","7.6%"],["Segment income","$643","","$680","","","($37)","","(5.4)%"],["Amortization expense","$43","","$46","","","($3)","","(6.5)%"],["Segment income, excluding amortization expense","$686","","$726","","","($40)","","(5.5)%"]] [[/GREPCENT_TABLE]] Industrial Coatings segment net sales increased due to the following: ● Higher selling prices (+13%) ● Acquisition-related sales (+3%) Partially offset by: ● Unfavorable foreign currency translation (-4%) ● Lower sales volumes (-3%) ● Divestiture-related sales and the wind down of Russia operations (-1%) In 2022, all businesses within the Industrial Coatings reportable business segment achieved higher selling prices consistent with our focus on mitigating raw material and other cost inflation. These price increases also helped to offset softer demand conditions in Europe due in part to geopolitical issues, the impact of pandemic-related restrictions in China and unfavorable foreign currency translation. Automotive OEM coatings organic sales increased by more than 10% led by higher selling prices in all regions and higher sales volumes in the U.S. and Latin America. Sales were unfavorably impacted by industry-wide production disruptions due to semiconductor chip shortages, which continued in 2022 but improved as the year progressed. Sales volumes were also impacted by lower automotive industry production due to the geopolitical uncertainty in Europe and the impact of pandemic-related disruptions in China. For the industrial coatings business, organic sales increased by a high-single-digit percentage year over year as strong selling price increases in all regions and solid volume growth in the U.S. and Latin America were partially offset by reduced sales volumes in China and Europe reflecting lower economic activity in those regions. Packaging coatings organic sales increased by a high-single-digit percentage year over year due to higher selling prices in all regions. Sales volumes were strong in the U.S. but were negatively impacted by geopolitical uncertainty in Europe and pandemic-related restrictions in China. Specialty coatings and materials organic sales increased by nearly 20% versus the prior year driven by higher selling prices in all regions and volume growth in Europe. Segment income decreased $37 million year over year primarily due to raw material and logistics cost inflation, lower sales volumes and the impact of unfavorable foreign currency translation, partially offset by higher selling prices and savings from previously approved restructuring actions. Looking Ahead In the first quarter 2023, global industrial production is expected to remain at lower levels. In China, pandemic-related disruptions are expected to continue into the first quarter. Aggregate sales volumes are anticipated to decline by a mid-single-digit percentage compared to the first quarter 2022. Sales volumes are expected to be similar to the prior year quarter in the automotive OEM coatings business but lower in the industrial coatings, packaging coatings, and specialty coatings and materials businesses. Positive selling price is expected to continue, although some of the strong selling prices realized in 2022 will begin to reach their anniversary in the first quarter. Year-over-year segment margins are expected to continue to improve on a sequential basis in the first quarter 2023. The Company will continue to focus on executing against various existing cost-savings initiatives. Review and Outlook PPG’s net sales, excluding foreign currency translation impact, increased approximately 10% versus the prior year and were a record $17.7 billion. Organic sales increased by about 8% driven by higher selling prices, partially offset by lower sales volumes. Acquisition-related sales contributed 3% to net sales growth compared to prior year as the Company benefited from four strategic acquisitions that were completed in 2021. Foreign currency translation was unfavorable for the year and impacted net sales by about 5%. During 2022, severe cost inflation, supply disruptions, geopolitical issues in Europe and continuing impacts from the pandemic significantly impacted net sales and earnings. There was partial recovery in the end-use markets that were impacted by mobility restrictions in 2020 and 2021, such as automotive OEM, automotive refinish coatings and aerospace coatings, but all three remained below 2019 global demand levels. Demand 2022 PPG ANNUAL REPORT AND FORM 10-K 20 Table of Contents was mixed by geographic region. In the U.S. and Canada and Latin America regions, demand was solid throughout the year in most businesses despite supply disruptions constraining sales more than other regions. Demand was the softest in Europe due in part to geopolitical issues, including the war in Ukraine, with the largest impact on the architectural coatings business. In Asia, demand was mixed, as activity in China was impacted by ongoing pandemic-related restrictions and associated disruptions, while demand conditions in the rest of Asia were more stable. Despite ongoing component shortages that constrained global automotive OEM manufacturers’ production, global builds increased by about 6% versus 2021 due to strong underlying demand in most regions and supply deficits that are expected to remain into 2023. Raw material cost inflation trended higher for most of the year, finishing the fourth quarter about 35% above fourth quarter 2019 levels. In the fourth quarter 2022, raw material inflation began to moderate and is anticipated to ease further in 2023. Some other key costs continued to increase in 2022, including logistics, employee wage and benefit costs, and energy costs. The Company continued to collaborate with its customers to implement selling price increases to mitigate elevated input costs, resulting in an 11% increase in selling prices compared to 2021. U.S. and Canada In 2022, economic activity remained robust and continued to recover from the lower demand levels experienced in 2021 due to pandemic-related restrictions. For the full year, U.S. gross domestic product (“GDP”) and industrial production increased by approximately 2% and 4%, respectively. Demand in the residential and commercial construction markets was strong at the beginning of the year but softened as interest rates increased as the year progressed. New home starts decreased by a mid-single-digit percentage in 2022 versus a mid-teen percentage increase in 2021. Residential remodeling was down by approximately 10% in 2022 versus 2021 as solid housing fundamentals were offset by the impact of higher interest rates. Commercial construction was down approximately 10% compared to 2021. Market demand for architectural paint continued to shift back to do-it-for-me (“DIFM”) from the DIY channel during the year as lower U.S. unemployment and increased mobility resulted in consumers choosing to hire professional paint contractors. Earnings were aided by strong selling price increases, but negatively impacted by higher levels of inflation, including historically high raw material cost inflation and higher than normal salary and wage increases due to the high level of employment in the U.S. Architectural coatings sales volumes in the U.S. and Canada were negatively impacted by severe raw material shortages that prevented the Company from meeting the demand for its architectural products, mostly impacting the higher demand periods of spring and summer. Automotive OEM industry builds were up nearly 10% compared to 2021 as component shortages began to moderate and underlying demand for new automobiles was solid. The aerospace coatings business continued what is expected to be a multi-year recovery to return to 2019 activity levels. Before the pandemic, the Company’s sales mix was approximately 70% commercial and 30% military. During the pandemic and through 2022, sales volumes for military applications remained solid, in part due to specification of PPG products with advantaged technology. The commercial segment remains down about 15%, as overall improved flying activity still remains below 2019 levels, mostly impacted by lower activity in China. With the lifting of pandemic-related restrictions in China, it is expected that global commercial aftermarket and new build demand will continue to improve in 2023. The automotive refinish coatings business experienced strong demand through the year as miles driven and collision claims trended closer to pre-pandemic levels. Sales were constrained due to ongoing supply disruptions, which has led to lower industry inventory levels. The packaging coatings business was favorably impacted by new business wins at several new packaged beverage can customers and overall solid demand for the Company’s sustainable products. The traffic solutions business, which represents the Ennis-Flint acquisition completed in December 2020, made good progress realizing synergies and achieved a low-teen percentage growth in organic sales. U.S. and Canada organic sales increased by more than 10% compared to 2021 driven by higher selling prices in all businesses. Solid year-over-year sales volume increases in the aerospace, automotive refinish, industrial, automotive OEM and packaging coatings businesses were partially offset by lower year-over-year sales volumes in the architectural and protective and marine coatings businesses. Aggregate regional sales volumes remain more than 10% lower than the fourth quarter 2019. The U.S. and Canada remained PPG’s largest region, with sales of $7.4 billion, representing approximately 42% of 2022 net sales. Europe, Middle East and Africa European demand for coatings softened in 2022, mostly impacted by geopolitical issues and high levels of inflation. Supply chain disruptions lessened during 2022 but continued to impact certain end-use markets, most notably automotive OEM. In the first quarter, activity in this region was negatively impacted by mobility restrictions associated with pandemic-related disruptions. While the impact of the pandemic eased throughout the year, consumer confidence worsened as the year progressed due to elevated costs and the war in Ukraine, which significantly impacted demand for coating products. Component shortages continued to constrain automotive OEM sales volumes. Automotive builds in 2022 were at similar levels as 2021. Architectural coatings – EMEA organic sales were flat compared to the prior year as selling price increases were offset by lower sales volumes. Net sales for architectural DIFM products improved as compared to the prior year. Integration of the June 2021 acquisition of Tikkurila continued with good progress toward realizing targeted 2022 PPG ANNUAL REPORT AND FORM 10-K 21 Table of Contents synergies. In addition, the integration efforts continued for the two automotive OEM acquisitions made in 2021, Wörwag and Cetelon, with PPG continuing to realize acquisition-related synergies and leverage acquired product technologies to drive sales growth. Net sales were aided by partial recovery in the aerospace and automotive refinish coatings businesses. Demand was soft for architectural coatings, packaging coatings and general industrial coatings products. EMEA net sales of $5.5 billion represented 31% of PPG’s 2022 net sales, modestly higher than 2021. Organic sales improved by a mid-single-digit percentage compared to 2021 led by higher selling prices and acquisition-related sales, which were partially offset by lower sales volumes. Net sales, excluding the impact of foreign currency translation, increased by a low-teen percentage. Sales volumes in the region were down a mid-teen percentage compared to 2019. Asia Pacific and Latin America The regions of Asia Pacific and Latin America represented 27% of PPG’s 2022 net sales in aggregate, similar to the prior year. Net sales were $2.8 billion in the Asia Pacific region, led by China, which remained PPG’s second largest country by revenue. Net sales in 2022 decreased by 5% compared to 2021 as higher selling prices and solid sales volume growth in India were more than offset by lower sales volumes in China due to pandemic-related restrictions and the impact of unfavorable foreign currency translation. Sales activity was most impacted in China during a period of heightened mandated shut-downs in the second quarter and during the fourth quarter as the country began to move away from its zero-COVID policy. In China, demand for coatings products is expected to improve in 2023 driven by stronger domestic consumption and fewer mobility restrictions. In the region, sales volumes were most unfavorable in the protective and marine, industrial, automotive refinish and packaging coatings businesses. In 2022, there were periods of strong automotive retail sales activity, partially due to government stimulus and strong sales of electric vehicles in China. During 2022, sales volume growth was strongest in India as the easing of pandemic-related restrictions led to increased economic activity. Sales volumes in the region were lower by about 10% compared to 2021 and were lower by a mid-teen-percentage compared to 2019. Net sales in Latin America in 2022 were $2.0 billion, representing a 16% increase compared to 2021. Overall, demand in the region increased year over year driven by improved economic activity in most end-use markets. Organic sales were higher by a mid-teen-percentage compared to 2021 due to higher selling prices and sales volumes. The PPG Comex business made strong contributions, which continued to outpace the industry. The business added more concessionaire locations during 2022, bringing the total to over 5,100 locations. Additionally, both reportable segments delivered sales volume growth on a year-over-year basis. Sales volumes in the region increased by a low-single-digit percentage compared to 2019. Outlook We expect softening global economic activity in 2023 that will likely be uneven by region and end-use. As 2023 progresses, we expect demand for architectural coatings products in the U.S. to be negatively impacted by higher interest rates, while we anticipate demand to gradually improve in China as it transitions away from zero-COVID policies and supply chain disruptions continue to ease. In Europe, we expect demand to remain soft due to ongoing geopolitical issues and inflation. In general, most end-use markets do not have significant excess inventories, and any demand improvement should lead to a faster ramp-up of sales volumes. Continued recovery is expected in the automotive refinish, automotive OEM and aerospace coatings businesses, which collectively accounted for about 40% of the Company’s pre-pandemic sales and where the Company has broad, global businesses supported by advantaged technologies. Supply chain and pandemic-related disruptions experienced during the past three years are expected to ease as 2023 progresses, which should allow for ample supply of commodity-related raw materials in all regions. We also expect the Company’s ability to manufacture and deliver product to improve as the year progresses, leading to better manufacturing efficiencies. We anticipate that PPG’s growth in the U.S. and Canada will be led by the aerospace coatings, automotive refinish coatings and traffic solutions businesses. Automotive OEM industry builds in the region are expected to increase slightly compared to 2022. Architectural coatings demand is expected to moderate and may fall as the year progresses due to higher interest rates, lower single-family home construction and lower sales of existing homes. Traffic solutions and protective coatings demand should be aided later in 2023 as infrastructure spending continues to gain momentum. We expect European industry demand trends in 2023 to remain similar to those experienced in the second half of 2022. Automotive OEM builds are expected to increase modestly from historical lows, and aerospace demand is expected to continue to recover from its pandemic lows. Overall demand is expected to be similar to 2022 but mixed by country in the architectural coatings business. The integration of Tikkurila will continue, and synergies from recent acquisitions should aid earnings growth. Unfavorable demand trends are expected to continue to impact the packaging, protective and marine, and industrial coatings businesses. We will continue to monitor the impacts of higher energy prices and challenges with respect to energy procurement in Europe and adapt our footprint, as necessary, to best serve our 2022 PPG ANNUAL REPORT AND FORM 10-K 22 Table of Contents customers. Raw material availability is expected to continue to improve as the year progresses. A new cost savings program was announced in the third quarter 2022, which has a higher concentration of initiatives focused on Europe. We continue to monitor the economic environment in the U.K. as its exit from the European Union progresses, including monitoring the impacts on consumer sentiment, logistics, labor availability and coatings demand. To date, the U.K.'s exit from the European Union has not had a material impact on the Company's operations. In the Asia Pacific region, we expect economic activity to improve in China after the first quarter as supply chain activity and mobility levels move closer to 2019 levels. Stimulus support is expected in the region to aid economic activity. Economic output in India is expected to remain robust, and activity in Southeast Asia is expected to benefit from the reopening of China’s borders. In China, we expect growth above the global average despite challenges in the real estate market and heightened risks as the Chinese economy continues to rely more on domestic consumption. The growth of China’s electric vehicle subsegment, including significant opportunities for export activity, should benefit the Company’s automotive OEM business. Marine coatings new-build demand is expected to be stable as order books for large vessels and container ships remain close to multi-year highs. In Latin America, we anticipate continued stable economic conditions in Mexico, most of Central America and South America compared to 2022. We expect continued strong demand in the PPG Comex architectural coatings business. Significant other factors We made significant progress on the global restructuring programs that were announced in 2019, 2020 and 2021. The 2019 and 2020 programs have been substantially completed. In the third quarter 2022, the Company approved a business restructuring plan which included actions to reduce its global cost structure in response to current economic conditions. Total restructuring savings, including the impact of acquisition synergies, was approximately $65 million in 2022. Total restructuring savings are expected to be at least $60 million in 2023. We will continue to monitor and aggressively manage the Company’s cost structure to ensure alignment with the overall demand environment. Raw materials are our most significant input cost. PPG experiences fluctuating energy and raw material costs driven by various factors, including changes in supplier feedstock costs and inventories, global industry activity levels, foreign currency exchange rates, and global supply and demand factors. On an aggregate basis, average raw material costs were significantly higher in 2022 versus 2021. The increases in raw material costs were primarily driven by ongoing supply constraints, including various force majeure declarations, higher energy prices, production outages at many of our suppliers, energy surcharges in Europe, labor availability challenges, transportation shortages and higher ocean freight costs. PPG currently expects raw material costs to be higher by a low-single-digit percentage on a year-over-year basis in the first quarter 2023; however, we expect the negative impact of raw material inflation to lessen as 2023 progresses. We achieved selling price improvement across all businesses in 2022, reflecting the Company’s efforts to offset various inflationary pressures. The Company will carefully monitor all costs during 2023 and assess the need for additional selling price increases. In 2022, we experienced unfavorable foreign currency translation throughout the year, and we expect that foreign currency rates will continue to be volatile. However, the Company generally purchases raw materials, incurs manufacturing costs and sells finished goods in the same currency, so we typically incur only modest foreign currency transaction-related impacts. The 2023 effective tax rate from continuing operations is expected to be in the range of 22% to 24%, varying by quarter. This range represents the Company’s best estimate. Net periodic pension expense will be higher in 2023, primarily due to declines in the market value of pension investments during 2022, resulting in a lower asset base to generate returns on plan assets in 2023. The interest cost component of pension expense will also be higher due to an increase in discount rates. Over the past five years, the Company used over $2 billion of cash to repurchase approximately 21 million shares of PPG stock, including using $190 million to repurchase shares of PPG stock during 2022. The Company ended the year with approximately $1.1 billion remaining under its current share repurchase authorization. During 2022, the Company deployed $114 million for acquisitions, $518 million for capital expenditures and $570 million for dividends. In 2022, PPG marked the 51st annual per share dividend increase and the 123rd successive year of annual dividend payments. PPG ended 2022 with approximately $1.2 billion in cash and short-term investments. The Company expects strong cash generation in 2023. 2022 PPG ANNUAL REPORT AND FORM 10-K 23 Table of Contents 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. Refer to Item 3. “Legal Proceedings” and Note 15, “Commitments and Contingent Liabilities” in Item 8 of this Form 10-K for a description of certain of these lawsuits. As discussed in Item 3 and Note 15, 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 15, PPG has significant reserves for environmental contingencies. Refer to the Environmental Matters section of Note 15 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. Accounting Standards Adopted in 2022 Note 1, “Summary of Significant Accounting Policies” in Item 8 of this Form 10-K describes the Company’s recently adopted accounting pronouncements. Accounting Standards to be Adopted in Future Years Note 1, “Summary of Significant Accounting Policies” in Item 8 of this Form 10-K describes accounting pronouncements that have been promulgated prior to December 31, 2022 but are not effective until a future date. Liquidity and Capital Resources During the past two years, PPG had sufficient financial resources to meet its operating requirements, to fund our capital spending, including acquisitions, share repurchases and pension plans, and to pay increasing dividends to shareholders. Cash and cash equivalents and short-term investments [[GREPCENT_TABLE]] [["($ in millions)","2022","","2021"],["Cash and cash equivalents","$1,099","","","$1,005"],["Short-term investments","55","","","67"],["Total","$1,154","","","$1,072"]] [[/GREPCENT_TABLE]] Cash from operating activities - continuing operations [[GREPCENT_TABLE]] [["($ in millions, except percentages)","","% Change"],["","2022","2021","2022 vs. 2021"],["Cash from operating activities","$963","","$1,562","","(38.3)%"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 The $599 million decrease in Cash from operating activities - continuing operations was primarily due to a larger increase in working capital in 2022 compared to the prior year, which reflects the impact of higher raw material costs on inventories and higher selling prices on trade receivables. Operating working capital Operating working capital is a subset of total working capital and represents (1) receivables from customers, net of allowance for doubtful accounts, (2) inventories, and (3) trade liabilities. Refer to Note 3, “Working Capital Detail” in Item 8 of this Form 10-K for further information related to the components of the Company’s operating working capital. We believe operating working capital represents the key components of working capital under the operating control of our businesses. 2022 PPG ANNUAL REPORT AND FORM 10-K 24 Table of Contents A key metric we use to measure our working capital management is operating working capital as a percentage of sales (fourth quarter sales annualized).  [[GREPCENT_TABLE]] [["($ in millions, except percentages)","2022","","2021"],["Trade receivables, net","$2,824","","","$2,687"],["Inventories, FIFO","2,544","","","2,345"],["Trade creditors\u2019 liabilities","2,538","","","2,734"],["Operating working capital","$2,830","","","$2,298"],["Operating working capital as a % of fourth quarter sales, annualized","16.9","%","","13.7","%"],["Trade receivables, net as a % of fourth quarter sales, annualized","16.9","%","","16.0","%"],["Days sales outstanding","56","","","53"],["Inventories, FIFO as a % of fourth quarter sales, annualized","15.2","%","","14.0","%"],["Inventory turnover","4.5","","","4.9"]] [[/GREPCENT_TABLE]] Environmental expenditures [[GREPCENT_TABLE]] [["($ in millions)","2022","","2021"],["Cash outlays related to environmental remediation activities","$78","","","$56"]] [[/GREPCENT_TABLE]] We expect cash outlays for environmental remediation activities in 2023 to be between $40 million and $60 million. Cash used for investing activities [[GREPCENT_TABLE]] [["($ in millions, except percentages)","","% Change"],["","2022","2021","2022 vs. 2021"],["Cash used for investing activities","$461","","$2,404","","(80.8)%"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 The $1,943 million decrease in cash used for investing activities was primarily due to the Company’s prior year acquisition of Tikkurila. Capital expenditures, including business acquisitions [[GREPCENT_TABLE]] [["($ in millions, except percentages)","","% Change"],["","2022","2021","2022 vs. 2021"],["Capital expenditures (1)","$518","","$371","","39.6%"],["Business acquisitions, net of cash balances acquired","$114","","$2,137","","(94.7)%"],["Total capital expenditures, including acquisitions","$632","","$2,508","","(74.8)%"],["Capital expenditures, excluding acquisitions, as a % of sales","2.9","%","2.2","%","31.8%"]] [[/GREPCENT_TABLE]] (1)Includes modernization and productivity improvements, expansion of existing businesses and environmental control projects. During 2023, capital expenditures, which are expected to be in the range of $500 million to $550 million, will support future organic growth opportunities. The Company will continue to deploy cash focused on shareholder value creation, with a preference for business acquisitions, coupled with debt reduction to enhance financial flexibility. Cash (used for)/from financing activities [[GREPCENT_TABLE]] [["","","% Change"],["($ in millions, except percentages)","2022","2021","2022 vs. 2021"],["Cash (used for)/from financing activities","($409)","","$93","","N/A"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 The $502 million change was primarily due to the proceeds from the issuance of long-term debt in 2021 to finance the Company’s acquisition of Tikkurila. Share repurchase activity [[GREPCENT_TABLE]] [["($ in millions, except number of shares)","2022","2021"],["Number of shares repurchased (millions)","1.5","","1.3"],["Cash paid for shares repurchased","$190","","$210"]] [[/GREPCENT_TABLE]] 2022 PPG ANNUAL REPORT AND FORM 10-K 25 Table of Contents The Company has approximately $1.1 billion remaining under the current authorization from the Board of Directors, which was approved in December 2017. The current authorized repurchase program has no expiration date. Dividends paid to shareholders [[GREPCENT_TABLE]] [["($ in millions)","2022","2021"],["Dividends paid to shareholders","$570","","$536"]] [[/GREPCENT_TABLE]] PPG has paid uninterrupted annual dividends since 1899, and 2022 marked the 51st successive year of increased annual per-share dividend payments to shareholders. The Company raised its per-share quarterly dividend by more than 5% to $0.62 per share paid in September 2022. Debt issued and repaid [[GREPCENT_TABLE]] [["Debt Issued (net of premium/discount and issuance costs)","Year","$ in millions"],["1.875% notes (\u20ac300) due 2025","2022","$319"],["2.750% notes (\u20ac700) due 2029","2022","$742"],["1.95% note (\u20ac50) due 2037","2022","$55"],["Term Loan Credit Agreement, due 2024","2021","$1,399"],["$700 million 1.200% Notes due 2026","2021","$692"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Debt Repaid","Year","$ in millions"],["Term Loan Credit Agreement, due 2024","2022","$300"],["Acquired debt","2022","$2"],["0.875% notes (\u20ac600)","2021","$677"],["9% non-callable debentures ($134)","2021","$134"],["Non-U.S. debt (\u20ac30)","2021","$36"],["Acquired debt","2021","$207"],["$1.5 billion 364-Day Term Loan","2021","$400"]] [[/GREPCENT_TABLE]] The Company’s commercial paper borrowings are classified as long-term debt based on PPG’s intent and ability to refinance these borrowings on a long-term basis. Net payments on commercial paper were $440 million for the year ended December 31, 2022. Net proceeds from commercial paper were $190 million for the year ended December 31, 2021. Credit agreements and lines of credit In February 2021, PPG entered into a $2.0 billion Term Loan Credit Agreement (the "Term Loan Credit Agreement"). The Term Loan Credit Agreement provided the Company with the ability to borrow up to an aggregate principal amount $2.0 billion on an unsecured basis prior to December 31, 2021 as further discussed in Note 10, "Borrowings and Lines of Credit" in Item 8 of this Form 10-K. In June 2021, PPG borrowed $700 million under the $2.0 billion Term Loan Credit Agreement. In December 2021, PPG borrowed an additional $700 million under the Term Loan Credit Agreement. In 2022, PPG repaid $300 million of the Term Loan Credit Agreement using cash on hand. In August 2019, PPG amended and restated its five-year credit agreement (the “Credit Agreement”) with several banks and financial institutions as further discussed in Note 10, "Borrowings and Lines of Credit" in Item 8 of this Form 10-K. The Credit Agreement amends and restates the Company's existing five year credit agreement dated as of December 18, 2015. The Credit Agreement provides for a $2.2 billion unsecured revolving credit facility. The Credit Agreement will terminate on August 30, 2024. There were no amounts outstanding under the credit agreement as of December 31, 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 $1 billion and for the next five fiscal quarters thereafter, the ratio of Total Indebtedness to Total Capitalization may not exceed 65% at any time. As of December 31, 2022, Total Indebtedness to Total Capitalization as defined under the Credit Agreement and the Term Loan was 49%. In addition to the amounts available under lines of credit, the Company maintains access to the capital markets and may issue debt or equity securities from time to time, which may provide an additional source of liquidity.  Refer to Note 10, “Borrowings and Lines of Credit” in Item 8 of this Form 10-K for information regarding notes entered into and repaid as well as details regarding the use and availability of committed and uncommitted lines of credit, letters of credit and debt covenants. 2022 PPG ANNUAL REPORT AND FORM 10-K 26 Table of Contents Cash Requirements We continue to believe that our cash on hand and short-term investments, cash from operations and the Company’s access to capital markets will continue to be sufficient to fund our operating activities, capital spending, acquisitions, dividend payments, debt service, share repurchases, contributions to pension plans, and PPG’s significant cash requirements. The Company’s significant cash requirements include the following contractual obligations and commitments. [[GREPCENT_TABLE]] [["","","","Obligations Due In:"],["($ in millions)","Total","","2023","","2024-2025","","2026-2027","","Thereafter"],["Long-term debt","$6,806","","","$303","","","$2,355","","","$1,340","","","$2,808"],["Interest payments(1)","$1,238","","","$191","","","$312","","","$224","","","$511"],["Operating leases(2)","$893","","","$201","","","$295","","","$178","","","$219"],["Unconditional purchase commitments(3)","$262","","","$100","","","$106","","","$43","","","$13"]] [[/GREPCENT_TABLE]] (1)Interest on all outstanding debt. (2)Includes interest payments. (3)The unconditional purchase commitments are principally take-or-pay obligations related to the purchase of certain materials, including industrial gases and electricity, consistent with customary industry practice. The Company’s off-balance sheet arrangements include unconditional purchase commitments disclosed in the “Liquidity and Capital Resources” section in the cash requirements table as well as letters of credit as discussed in Note 10, “Borrowings and Lines of Credit” in Item 8 of this Form 10-K. Other liquidity matters At December 31, 2022, the total amount of unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was $162 million. The timing of payments will depend on the progress of examinations with tax authorities. PPG does not expect a significant tax payment related to these obligations within the next year. The Company is unable to make a reasonably reliable estimate as to if, or when, any significant cash settlements with taxing authorities may occur. Critical Accounting Estimates Management has evaluated the accounting policies used in the preparation of the financial statements and related notes presented in Item 8 of this Form 10-K and believes those policies to be reasonable and appropriate. We believe that the most critical accounting estimates made in the preparation of our financial statements are those related to accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and to accounting for pensions, other postretirement benefits, business combinations, goodwill and other identifiable intangible assets with indefinite lives because of the importance of management judgment in making the estimates necessary to apply these policies. Contingencies Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial statements are those related to environmental remediation, to pending, impending or overtly threatened litigation against the Company and to the resolution of matters related to open tax years. For more information on these matters, see Note 15, “Commitments and Contingent Liabilities” and Note 13, “Income Taxes” in Item 8 of this Form 10-K. Defined Benefit Pension and Other Postretirement Benefit Plans Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, we make extensive use of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. The Company has established a process by which management reviews and selects these assumptions annually. Refer to Note 14, “Employee Benefit Plans” in Item 8 of this Form 10-K for information on these plans and the assumptions used. Business Combinations The Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed is recognized as goodwill. The valuations of the acquired assets and liabilities impacts the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities including: third-party appraisals for the estimated value and lives of identifiable 2022 PPG ANNUAL REPORT AND FORM 10-K 27 Table of Contents intangible assets and property, plant and equipment; third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations; and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities. The business and technical judgment of management was used in determining which acquired intangible assets have indefinite lives and in determining the useful lives of acquired finite-lived intangible assets in accordance with the accounting guidance for goodwill and other intangible assets. Goodwill and Intangible Assets The Company tests indefinite-lived intangible assets and goodwill for impairment 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 quantitative test, fair values are estimated using a discounted cash flow model. Key assumptions and estimates used in the discounted cash flow model include discount rates, tax rates, future revenues, operating cash flows and capital expenditures. For more information on these matters, see Note 1, “Summary of Significant Accounting Policies” in Item 8 of this Form 10-K. We believe that the amounts recorded in the financial statements in Item 8 of this Form 10-K related to these contingencies, pensions, other postretirement benefits, business combinations, goodwill and other identifiable intangible assets with indefinite lives are based on the best estimates and judgments of the appropriate PPG management, although actual outcomes could differ from our estimates. Currency Comparing spot exchange rates at December 31, 2022 and at December 31, 2021, the U.S. dollar strengthened against the currencies of many countries within the regions where PPG operates, most notably the Chinese yuan, the euro, and the British pound. As a result, consolidated net assets at December 31, 2022 decreased by $266 million from December 31, 2021. Comparing average exchange rates during 2022 to those of 2021, the U.S. dollar strengthened against the currencies of many countries within the regions PPG operates, including most of the countries in the EMEA region. This had an unfavorable impact of approximately $86 million on full year 2022 income before Income taxes from the translation of this foreign income into U.S. dollars. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. Management’s Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. You can identify forward-looking statements by the fact that they do not relate strictly to current or historic facts. Forward-looking statements are identified by the use of the words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast” and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the 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 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. 2022 PPG ANNUAL REPORT AND FORM 10-K 28 Table of Contents 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 this Form 10-K and similar risks, any of which could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. PPG undertakes no obligation to update any forward-looking statement, except as otherwise required by applicable law.