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
% Change
Europe, Middle East and Africa (EMEA) 5,458 5,436 0.4%
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
% Change
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%
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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
% Change
Selling, general and administrative expenses $3,842 $3,780 1.6%
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
% Change
Impairment and other related charges, net $245 $21 1,066.7%
Pension settlement charge $— $50 N/A
Asbestos-related claims reserve adjustment $— ($133) N/A
Business restructuring, net $33 $31 6.5%
Other (income)/charges, net ($60) ($143) (58.0)%
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.
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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
% Change
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
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
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dilution (attributable to PPG) are reconciled to adjusted net income from continuing operations (attributable to PPG) and adjusted earnings per share – assuming dilution below.
Includes:
Includes:
Net charges related to environmental remediation 35 9 24.3 % 26 0.11
Net tax charge related to U.K. statutory rate change — (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
Income from legal settlements (22) (5) 24.3 % (17) (0.07)
Asbestos-related claims reserve adjustment(6) (133) (32) 24.3 % (101) (0.42)
(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.
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Performance of Reportable Business Segments
Performance Coatings
$ Change % Change
Segment income, excluding amortization expense $1,522 $1,617 ($95) (5.9)%
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.
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Industrial Coatings
$ Change % Change
Amortization expense $43 $46 ($3) (6.5)%
Segment income, excluding amortization expense $686 $726 ($40) (5.5)%
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
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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
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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
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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.
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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
Short-term investments 55 67
Cash from operating activities - continuing operations
($ in millions, except percentages) % Change
2022 vs. 2021
The $599 million decrease in Cash from operating activities - continuing operations was primarily due to a larger increase in working capital in 2022 compared to the prior year, which reflects the impact of higher raw material costs on inventories and higher selling prices on trade receivables.
Operating working capital
Operating working capital is a subset of total working capital and represents (1) receivables from customers, net of allowance for doubtful accounts, (2) inventories, and (3) trade liabilities. Refer to Note 3, “Working Capital Detail” in Item 8 of this Form 10-K for further information related to the components of the Company’s operating working capital. We believe operating working capital represents the key components of working capital under the operating control of our businesses.
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A key metric we use to measure our working capital management is operating working capital as a percentage of sales (fourth quarter sales annualized).
($ in millions, except percentages) 2022 2021
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
Environmental expenditures
Cash outlays related to environmental remediation activities $78 $56
We expect cash outlays for environmental remediation activities in 2023 to be between $40 million and $60 million.
Cash used for investing activities
($ in millions, except percentages) % Change
Cash used for investing activities $461 $2,404 (80.8)%
2022 vs. 2021
The $1,943 million decrease in cash used for investing activities was primarily due to the Company’s prior year acquisition of Tikkurila.
Capital expenditures, including business acquisitions
($ in millions, except percentages) % Change
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%
(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
% Change
Cash (used for)/from financing activities ($409) $93 N/A
2022 vs. 2021
The $502 million change was primarily due to the proceeds from the issuance of long-term debt in 2021 to finance the Company’s acquisition of Tikkurila.
Share repurchase activity
($ in millions, except number of shares) 2022 2021
Number of shares repurchased (millions) 1.5 1.3
Cash paid for shares repurchased $190 $210
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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
Dividends paid to shareholders $570 $536
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
Debt Issued (net of premium/discount and issuance costs) Year $ in millions
Debt Repaid Year $ in millions
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.
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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.
Obligations Due In:
(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
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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.
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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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
PPG is exposed to market risks related to changes in foreign currency exchange rates and interest rates. The Company may enter into derivative financial instrument transactions in order to manage or reduce these market risks. A detailed description of these exposures and the Company’s risk management policies are provided in Note 11, “Financial Instruments, Hedging Activities and Fair Value Measurements” in Item 8 of this Form 10-K.
The following disclosures summarize PPG’s exposure to market risks and information regarding the use of and fair value of derivatives employed to manage its exposure to such risks. Quantitative sensitivity analyses have been provided to reflect how reasonably possible, unfavorable changes in market rates could impact PPG’s consolidated results of operations, cash flows and financial position.
Foreign Currency Risk
We conduct operations in many countries around the world. Our results of operations are subject to both currency transaction and currency translation risk. Certain foreign currency forward contracts outstanding during 2022 and 2021 served as a hedge of a portion of PPG’s exposure to foreign currency transaction risk. The fair value of these contracts was a net asset of $24 million as of both December 31, 2022 and December 31, 2021. The potential reduction in PPG’s Income before income taxes resulting from the impact of adverse changes in exchange rates on the fair value of its outstanding foreign currency hedge contracts of 10% for European and Canadian currencies and 20% for Asian and Latin American currencies for the years ended December 31, 2022 and 2021 would have been $304 million and $306 million, respectively.
As of both December 31, 2022 and December 31, 2021, PPG had U.S. dollar to euro cross currency swap contracts with notional amounts of $775 million. The fair value of these contracts were net assets of $88 million and $50 million as of December 31, 2022 and 2021, respectively. A 10% increase in the value of the euro to the U.S. dollar would have had an unfavorable effect on the fair value of these swap contracts by reducing the value of these instruments by $73 million and $77 million at December 31, 2022 and 2021, respectively.
As of December 31, 2022 and 2021, PPG had non-U.S. dollar denominated debt outstanding of $2.6 billion and $1.6 billion, respectively. A weakening of the U.S. dollar by 10% against European currencies and by 20% against Asian and South American currencies would have resulted in unrealized translation losses of $293 million and $178 million as of December 31, 2022 and 2021, respectively.
Interest Rate Risk
The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to minimize its interest costs. PPG has interest rate swaps which converted $525 million of fixed rate debt to variable rate debt. The fair values of these contracts was a liability of $20 million and an asset of $36 million as of December 31, 2022 and 2021, respectively. An increase in variable interest rates of 10% would have lowered the fair values of these swaps and increased interest expense by $7 million and $1 million for the periods ended December 31, 2022 and 2021. A 10% increase in interest rates in the U.S., Canada, Mexico and Europe and a 20% increase in interest rates in Asia and South America would have increased annual interest expense associated with PPG's variable rate debt obligations by $4 million and by less than $1 million for the periods ended December 31, 2022 and 2021, respectively. Further, a 10% reduction in interest rates would have increased the fair value of the Company’s fixed rate debt by approximately $116 million and $56 million as of December 31, 2022 and 2021, respectively; however, such changes would not have had an effect on PPG’s annual Income before income taxes or cash flows.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of PPG Industries, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of PPG Industries, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2022 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Establishing and Maintaining Adequate Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
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inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Quantitative Goodwill Impairment Test
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was $6,078 million as of December 31, 2022, of which a portion was subject to a quantitative goodwill impairment test. Management tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test, at least annually, or more frequently if an indication of impairment exists. Management’s quantitative goodwill impairment testing, if deemed necessary, is performed during the fourth quarter of each year by comparing the estimated fair value of an associated reporting unit as of September 30 to its carrying value. Fair value is estimated using a discounted cash flow model. Key assumptions and estimates used in the discounted cash flow model include projected future revenues, discount rates, operating cash flows, capital expenditures and tax rates.
The principal considerations for our determination that performing procedures relating to the quantitative goodwill impairment test is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the reporting unit where a quantitative test was performed; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumption related to projected future revenues.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s quantitative goodwill impairment test, including controls over the valuation of the reporting unit where a quantitative test was performed. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the reporting unit where a quantitative test was performed; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow model; and (iv) evaluating the reasonableness of management’s significant assumption related to projected future revenues. Evaluating management’s significant assumption related to projected future revenues involved evaluating whether the significant assumption used by management was reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether the assumption was consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 16, 2023
We have served as the Company’s auditor since 2013.
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Management Report
Responsibility for Preparation of the Financial Statements and Establishing and Maintaining Adequate Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this evaluation, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this evaluation we have concluded that, as of December 31, 2022, the Company’s internal control over financial reporting were effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has issued their report, included on pages 30-31 of this Form 10-K, regarding the Company’s internal control over financial reporting.
/s/ Timothy M. Knavish /s/ Vincent J. Morales
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Consolidated Statement of Income
For the Year
Cost of sales, exclusive of depreciation and amortization 11,096 10,286 7,777
Impairment and other related charges, net 245 21 93
Pension settlement charge — 50 —
Asbestos-related claims reserve adjustment — (133) —
Business restructuring, net 33 31 174
Other (income)/charges, net (60) (143) 36
(Loss)/income from discontinued operations, net of tax (2) 19 3
Less: Net income attributable to noncontrolling interests 28 21 15
Amounts attributable to PPG
Income from continuing operations, net of tax $1,028 $1,420 $1,056
(Loss)/income from discontinued operations, net of tax (2) 19 3
Earnings per common share
Income from continuing operations, net of tax $4.35 $5.98 $4.46
(Loss)/income from discontinued operations, net of tax (0.01) 0.08 0.01
Net income (attributable to PPG) $4.34 $6.06 $4.47
Earnings per common share - assuming dilution
Income from continuing operations, net of tax $4.33 $5.93 $4.44
(Loss)/income from discontinued operations, net of tax (0.01) 0.08 0.01
Net income (attributable to PPG) $4.32 $6.01 $4.45
Consolidated Statement of Comprehensive Income
For the Year
Other comprehensive income/(loss), net of tax
Defined benefit pension and other postretirement benefits 206 174 (213)
Unrealized foreign currency translation adjustments (279) (330) (36)
Other comprehensive loss, net of tax (73) (156) (249)
Less: amounts attributable to noncontrolling interests:
Unrealized foreign currency translation adjustments 13 5 —
Comprehensive income attributable to PPG $966 $1,288 $810
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
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Consolidated Balance Sheet
December 31
Assets
Current assets
Short-term investments 55 67
Property, plant and equipment, net 3,328 3,442
Identifiable intangible assets, net 2,414 2,783
Deferred income taxes 95 197
Operating lease right-of-use assets 829 891
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities $4,087 $4,392
Short-term debt and current portion of long-term debt 313 9
Current portion of operating lease liabilities 183 192
Operating lease liabilities 636 693
Other postretirement benefits 476 672
Commitments and contingent liabilities (See Note 15)
Shareholders’ equity
Accumulated other comprehensive loss (2,810) (2,750)
Total PPG shareholders’ equity $6,592 $6,286
Noncontrolling interests 117 125
The accompanying notes to the consolidated financial statements are an integral part of this consolidated statement.
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Consolidated Statement of Shareholders’ Equity
Other comprehensive loss, net of tax — — — — (249) (249) — (249)
Issuance of treasury stock — 45 — 33 — 78 — 78
Stock-based compensation activity — 13 — — — 13 — 13
Reductions in noncontrolling interests — — — — — — (4) (4)
Other comprehensive loss, net of tax — — — — (151) (151) (5) (156)
Purchase of treasury stock — — — (250) — (250) — (250)
Issuance of treasury stock — 48 — 22 — 70 — 70
Stock-based compensation activity — 25 — — — 25 — 25
Reductions in noncontrolling interests — — — — — — (11) (11)
Other comprehensive loss, net of tax — — — — (60) (60) (13) (73)
Purchase of treasury stock — — — (150) — (150) — (150)
Issuance of treasury stock — 36 — 11 — 47 — 47
Stock-based compensation activity — 10 — — — 10 — 10
Reductions in noncontrolling interests — — — — — — (10) (10)
Other — 3 — — — 3 — 3
The accompanying notes to the consolidated financial statements are an integral part of this consolidated statement.
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Consolidated Statement of Cash Flows
For the Year
Operating activities
Adjustments to reconcile net income to cash from operations:
Asbestos-related claims reserve adjustment — (133) —
Business restructuring, net 33 31 174
Impairment and other related charges, net 245 21 93
Stock-based compensation expense 35 57 44
Cash contributions to pension plans (11) (10) (17)
Cash used for restructuring actions (85) (77) (126)
Change in certain asset and liability accounts (net of acquisitions):
Other current assets (60) 32 49
Accounts payable and accrued liabilities (8) 295 127
Noncurrent assets and liabilities, net (136) (109) (25)
Taxes and interest payable 143 (64) (108)
Investing activities
Business acquisitions, net of cash balances acquired (114) (2,137) (1,169)
Proceeds from asset sales 117 47 —
Cash used for investing activities ($461) ($2,404) ($1,447)
Financing activities
Proceeds from Term Loan Credit Agreement, net of fees $— $1,399 $—
Repayment of Term Loan Credit Agreement (300) — —
Proceeds from Term Loan, net of fees — — 1,497
Repayment of Term Loan — (400) (1,100)
Proceeds from revolving credit facility — — 800
Repayment of revolving credit facility — — (800)
Proceeds from the issuance of debt, net of discounts and fees 1,116 692 415
Repayment of long-term debt — (847) (500)
Repayment of acquired debt (2) (207) (13)
Purchase of treasury stock (190) (210) —
Dividends paid on PPG common stock (570) (536) (496)
Cash (used for)/from financing activities ($409) $93 ($59)
Effect of currency exchange rate changes on cash and cash equivalents 1 (72) 6
Cash reclassified to assets held for sale — — (20)
Net increase/(decrease) in cash and cash equivalents $94 ($821) $610
Cash and cash equivalents, beginning of year $1,005 $1,826 $1,216
Supplemental disclosures of cash flow information:
Interest paid, net of amount capitalized $156 $140 $153
Supplemental disclosure of noncash investing and financing activities:
Purchases of treasury stock transacted but not yet settled $— $40 $—
The accompanying notes to the consolidated financial statements are an integral part of this consolidated statement.
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1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of PPG Industries, Inc. (“PPG” or the “Company”) and all subsidiaries, both U.S. and non-U.S., that it controls. PPG owns more than 50% of the voting stock of most of the subsidiaries that it controls. For those consolidated subsidiaries in which the Company’s ownership is less than 100%, the outside shareholders’ interests are shown as noncontrolling interests. Investments in companies in which PPG owns 20% to 50% of the voting stock and has the ability to exercise significant influence over operating and financial policies of the investee are accounted for using the equity method of accounting. As a result, PPG’s share of income or losses from such equity affiliates is included in the consolidated statement of income and PPG’s share of these companies’ shareholders’ equity is included in Investments on the consolidated balance sheet. Transactions between PPG and its subsidiaries are eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Such estimates also include the fair value of assets acquired and liabilities assumed resulting from the allocation of the purchase price related to business combinations consummated. Actual outcomes could differ from those estimates.
Revenue Recognition
Revenue is recognized as performance obligations with the customer are satisfied, at an amount that is determined to be collectible. For the sale of products, this generally occurs at the point in time when control of the Company’s products transfers to the customer based on the agreed upon shipping terms.
Shipping and Handling Costs
Amounts billed to customers for shipping and handling are reported in Net sales in the consolidated statement of income. Shipping and handling costs incurred by the Company for the delivery of goods to customers are included in Cost of sales, exclusive of depreciation and amortization in the consolidated statement of income.
Selling, General and Administrative Costs
Amounts presented in Selling, general and administrative in the consolidated statement of income are comprised of selling, customer service, distribution and advertising costs, as well as the costs of providing corporate-wide functional support in areas such as finance, law, human resources and planning. Distribution costs pertain to the movement and storage of finished goods inventory at company-owned and leased warehouses and other distribution facilities.
Advertising Costs
Advertising costs are charged to expense as incurred and totaled $252 million, $243 million and $223 million in 2022, 2021 and 2020, respectively.
Research and Development
Research and development costs, which consist primarily of employee-related costs, are charged to expense as incurred.
Research and development – total $470 $463 $401
Less: depreciation on research facilities 22 24 22
Legal Costs
Legal costs, which primarily include costs associated with acquisition and divestiture transactions, general litigation, environmental regulation compliance, patent and trademark protection and other general corporate purposes, are charged to expense as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating losses and tax credit carryforwards as well as differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in Income tax expense in the consolidated statement of income in the period that includes the enactment date.
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A valuation allowance is provided against deferred tax assets in situations where PPG determines it is more likely than not such assets will not ultimately be realized.
PPG does not recognize a tax benefit unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, PPG recognizes a tax benefit measured at the largest amount of the tax benefit that, in PPG’s judgment, is greater than 50 percent likely to be realized. PPG records interest and penalties related to uncertain tax positions in Income tax expense in the consolidated statement of income.
Foreign Currency Translation
The functional currency of most significant non-U.S. operations is their local currency. Assets and liabilities of those operations are translated into U.S. dollars using year-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Unrealized foreign currency translation gains and losses are deferred in Accumulated other comprehensive loss on the consolidated balance sheet.
Cash Equivalents
Cash equivalents are highly liquid investments (valued at cost, which approximates fair value) acquired with an original maturity of three months or less.
Short-term Investments
Short-term investments are highly liquid, high credit quality investments (valued at cost plus accrued interest) that have stated maturities of greater than three months to less than one year. The purchases and sales of these investments are classified as Investing activities in the consolidated statement of cash flows.
Marketable Equity Securities
The Company’s investment in marketable equity securities is recorded at fair market value and reported as Other current assets and Investments on the consolidated balance sheet with changes in fair market value recorded in income.
Inventories
Inventories are stated at the lower of cost or net realizable value. Most U.S. inventories are stated at cost, using the last-in, first-out (“LIFO”) method of accounting, which does not exceed net realizable value. All other inventories are stated at cost, using the first-in, first-out (“FIFO”) method of accounting, which does not exceed net realizable value. PPG determines cost using either average or standard factory costs, which approximate actual costs, excluding certain fixed costs such as depreciation and property taxes. Refer to Note 3, “Working Capital Detail” for further information concerning the Company’s inventories.
Derivative Financial Instruments
The Company recognizes all derivative financial instruments (a “derivative”) as either assets or liabilities at fair value on the consolidated balance sheet. The accounting for changes in the fair value of a derivative depends on the use of the instrument.
For derivative instruments that are designated and qualify as cash flow hedges, the unrealized gains or losses on the derivatives are recorded in the consolidated statement of comprehensive income. Amounts in Accumulated other comprehensive loss on the consolidated balance sheet are reclassified into Income before income taxes in the consolidated statement of income in the same period or periods during which the hedged transactions are recorded in Income before income taxes in the consolidated statement of income.
For derivative instruments that are designated and qualify as fair value hedges, the change in the fair value of the derivatives are reported in Income before income taxes in the consolidated statement of income, offsetting the gain or loss recognized for the change in fair value of the asset, liability, or firm commitment that is being hedged.
For derivatives, debt or other financial instruments that are designated and qualify as net investment hedges, the gains or losses associated with the financial instruments are reported as translation gains or losses in Accumulated other comprehensive loss on the consolidated balance sheet. Gains and losses in Accumulated other comprehensive loss related to hedges of the Company’s net investments in foreign operations are reclassified out of Accumulated other comprehensive loss and recognized in Income before income taxes in the consolidated statement of income upon a substantial liquidation, sale or partial sale of such investments or upon impairment of all or a portion of such investments. The cash flow impact of these instruments is classified as Investing activities in the consolidated statement of cash flows.
Changes in the fair value of derivative instruments not designated as hedges for hedge accounting purposes are recognized in Income before income taxes in the consolidated statement of income in the period of change.
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Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is computed on a straight-line method based on the estimated useful lives of related assets. Accelerated depreciation expense is recorded when facilities or equipment are subject to abnormal economic conditions, restructuring actions or obsolescence.
The cost of significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When a capitalized asset is retired or otherwise disposed of, the original cost and related accumulated depreciation balance are removed from the accounts and any related gain or loss is recorded in Income before income taxes in the consolidated statement of income. The amortization cost of finance lease assets is recorded in Depreciation expense in the consolidated statement of income. Property and other long-lived assets are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Refer to Note 4, “Property, Plant and Equipment” for further details.
Goodwill and Identifiable Intangible Assets
Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets less liabilities assumed from acquired businesses. Identifiable intangible assets acquired in business combinations are recorded based upon their fair value at the date of acquisition.
PPG is a multinational manufacturer with 10 operating segments (which the Company refers to as “strategic business units”) that are organized based on the Company’s major products lines. These operating segments are also the Company’s reporting units for purposes of testing goodwill for impairment, which is tested at least annually in connection with PPG’s strategic planning process or more frequently if an indication of impairment exists. The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors, including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass this qualitative assessment for some or all of its reporting units and perform a quantitative test. Quantitative goodwill impairment testing, if deemed necessary, is performed during the fourth quarter of each year by comparing the estimated fair value of an associated reporting unit as of September 30 to its carrying value. Fair value is estimated using a discounted cash flow model. Key assumptions and estimates used in the discounted cash flow model include projected future revenues, discount rates, operating cash flows, capital expenditures and tax rates. In 2022, the annual impairment testing review of goodwill did not result in impairment of the Company’s reporting units.
The Company has determined that certain acquired trademarks have indefinite useful lives. The Company tests the carrying value of these trademarks for impairment at least annually, or as needed whenever events and circumstances indicate that their carrying amount may not be recoverable. In the first quarter 2022, due to the adverse economic impacts of Russian military forces invading Ukraine, the Company identified indicators that the carrying value of an indefinite-lived intangible asset and certain definite-lived intangible assets associated with the Company's operations in Russia may not be recoverable as of March 31, 2022, and the carrying value of those assets was assessed for impairment. As a result of this assessment, the Company recorded impairment charges of $124 million related to the indefinite-lived intangible asset and $23 million related to definite-lived intangible assets in the consolidated statement of income for the year ended December 31, 2022. Refer to Note 7, "Impairment and Other Related Charges, Net" for additional information.
The annual assessment takes place in the fourth quarter of each year either by completing a qualitative assessment or quantitatively by comparing the estimated fair value of each trademark as of September 30 to its carrying value. Fair value is estimated by using the relief from royalty method (a discounted cash flow methodology). The qualitative assessment includes consideration of factors, including revenue relative to the asset being assessed, the operating results of the related business as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. In 2022, the annual impairment testing review of indefinite-lived intangibles performed as of September 30, 2022 resulted in the Company recognizing a pretax impairment charge of $4 million. Refer to Note 6, “Goodwill and Other Identifiable Intangible Assets” for further details.
Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives (1 to 30 years) and are reviewed for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable.
Receivables and Allowances
All trade receivables are reported on the consolidated balance sheet at the outstanding principal adjusted for any allowance for doubtful accounts and any charge offs. The Company provides an allowance for doubtful accounts to reduce receivables to their estimated net realizable value when it is probable that a loss will be incurred. Those estimates are based on historical collection experience, current regional economic and market conditions, the aging of accounts
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receivable, assessments of current creditworthiness of customers, and forward-looking information. Refer to Note 20, “Revenue Recognition” for further details.
Leases
The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised. Certain real estate leases contain lease and non-lease components, which are accounted for separately. For certain equipment leases, lease and non-lease components are accounted for as a single lease component.
Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
Variable lease expense is based on contractual arrangements with PPG’s lessors determined based on external indices or other relevant market factors. In addition, PPG’s variable lease expense also includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.
Nearly all of PPG’s lease contracts do not provide a readily determinable implicit rate. For these contracts, PPG’s estimated incremental borrowing rate is based on information available at the inception of the lease.
Product Warranties
The Company accrues for product warranties at the time the associated products are sold based on historical claims experience. The reserve, pretax charges against income and cash outlays for product warranties were not significant to the consolidated financial statements of the Company for any year presented.
Asset Retirement Obligations
An asset retirement obligation represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development or normal operation of that long-lived asset. PPG recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligation is subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life. PPG’s asset retirement obligations are primarily associated with the retirement or closure of certain assets used in PPG’s manufacturing process. The accrued asset retirement obligation is recorded in Accounts payable and accrued liabilities and Other liabilities on the consolidated balance sheet and was $23 million and $22 million as of December 31, 2022 and 2021, respectively.
PPG’s only conditional asset retirement obligation relates to the possible future abatement of asbestos contained in certain PPG production facilities. The asbestos in PPG’s production facilities arises from the application of normal and customary building practices in the past when the facilities were constructed. This asbestos is encapsulated in place and, as a result, there is no current legal requirement to abate it. Because there is no requirement to abate, the Company does not have any current plans or an intention to abate and therefore the timing, method and cost of future abatement, if any, are not known. The Company has not recorded an asset retirement obligation associated with asbestos abatement, given the uncertainty concerning the timing of future abatement, if any.
Environmental Contingencies
It is PPG’s policy to accrue expenses for environmental 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.
Assets and Liabilities Held for Sale
The Company classifies assets and liabilities as held for sale (a “disposal group”) when management commits to a plan to sell the disposal group, the sale is probable within one year and the disposal group is available for immediate sale in its present condition. The Company considers various factors, particularly whether actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Assets held for sale are measured at the lower of carrying value or fair value less costs to sell. Any loss resulting from the measurement is recognized in the period the held-for-sale criteria are met. Conversely, gains are not recognized until the date of the sale. When the disposal group is classified as held for sale, depreciation and amortization ceases and the Company tests the assets for impairment.
Reclassifications
Certain reclassifications of prior years’ data have been made to conform to the current year presentation. These reclassifications had no impact on our previously reported Net income, cash flows or shareholders’ equity.
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Accounting Standards Adopted in 2022
Effective January 1, 2022, PPG adopted Accounting Standards Update ("ASU") No. 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)." This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. Adoption of this standard did not materially impact PPG's consolidated financial position, results of operations or cash flows.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform." This ASU provided optional expedients and exceptions to U.S. GAAP for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU applied only to contracts, hedging relationships, and other transactions that referenced LIBOR or another reference rate expected to be discontinued. The amendments in this ASU were effective through December 31, 2022. PPG did not apply any of the optional expedients or exceptions allowed under this ASU.
Accounting Standards to be Adopted in Future Years
There were no accounting pronouncements promulgated prior to December 31, 2022 that are not effective until a future date which are expected to have a material impact on PPG’s consolidated financial position, results of operations or cash flows.
2. Acquisitions
The pro-forma impact of the following acquisitions on PPG’s sales and results of operations, including the pro-forma effect of events that are directly attributable to each acquisition, was not significant.
Tikkurila
On June 10, 2021, PPG completed its tender offer for all of the outstanding shares of Tikkurila Oyj ("Tikkurila"). Tikkurila is a leading Nordic producer and distributor of decorative paint and coatings, including an industrial paint business that produces paints and coatings for the wood and metal industries, among others. Immediately prior to the June 10, 2021 acquisition date, PPG owned 9.3% of Tikkurila’s issued and outstanding shares. Immediately following the acquisition date, PPG owned 97.1% of Tikkurila’s issued and outstanding shares. PPG continued to acquire the remaining shares not tendered during the tender offer period through a squeeze out process, ultimately achieving 100% ownership of Tikkurila’s outstanding shares during the fourth quarter of 2021.
The results of this business since the date of acquisition have been reported within two operating segments: the architectural coatings – EMEA business and the industrial coatings business. The architectural coatings – EMEA business is included within the Performance Coatings reportable business segment and the industrial coatings business is included within the Industrial Coatings reportable business segment.
Ennis-Flint
On December 23, 2020, PPG completed the acquisition of Ennis-Flint, a global manufacturer of a broad portfolio of pavement marking products, including traffic paint, hot-applied and preformed thermoplastics and raised pavement markers. PPG funded this transaction using cash on hand. The results of this business since the date of acquisition have been reported within the traffic solutions business within the Performance Coatings reportable business segment.
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3. Working Capital Detail
Receivables
Inventories(1)
Accounts payable and accrued liabilities
Other postretirement and pension benefits 77 87
(1)Inventories valued using the LIFO method of inventory valuation comprised 21% and 29% of total gross inventory values as of December 31, 2022 and 2021, respectively. If the FIFO method of inventory valuation had been used, inventories would have been $272 million and $174 million higher as of December 31, 2022 and 2021, respectively.
4. Property, Plant and Equipment
($ in millions) Useful Lives (years) 2022 2021
Construction in progress 492 509
Less: accumulated depreciation 4,649 4,532
5. Investments
Investments in equity affiliates $134 $126
Marketable equity securities (See Note 11) 61 98
Investments in equity affiliates represent PPG’s ownership interests in entities between 20% and 50% that manufacture and sell coatings and certain chemicals.
PPG’s share of undistributed net earnings of equity affiliates was $25 million, $15 million and $8 million in 2022, 2021 and 2020, respectively. Dividends received from equity affiliates were $17 million, $9 million and $18 million in 2022, 2021 and 2020, respectively.
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6. Goodwill and Other Identifiable Intangible Assets
Goodwill
($ in millions) Performance Coatings Industrial Coatings Total
Acquisitions, including purchase accounting adjustments 1,188 177 1,365
Acquisitions, including purchase accounting adjustments 31 15 46
Divestitures (40) — (40)
Identifiable Intangible Assets
Indefinite-Lived Identifiable Intangible Assets
Definite-Lived Identifiable Intangible Assets
In the first quarter 2022, due to the adverse economic impacts of the Russian invasion in Ukraine, the Company recognized $147 million of Impairment and other related charges, net in the consolidated statement of income related to certain definite-lived and indefinite-lived intangible assets in the Performance Coatings segment. Refer to Note 7, “Impairment and Other Related Charges, Net” for further details.
In the fourth quarter, the Company tests the carrying value of indefinite-lived trademarks for impairment, as discussed in Note 1, “Summary of Significant Accounting Policies.” In conjunction with both the 2022 and 2020 annual impairment assessments, the long-term forecast of net sales for certain trademarks in the Performance Coatings segment was reduced as a result of historical performance, resulting in recognition of pretax impairment charges of $4 million and $38 million, respectively, in Impairment and other related charges, net in the accompanying consolidated statements of income. In 2021, the annual impairment testing review of indefinite-lived intangibles did not result in an impairment.
Aggregate amortization expense was $166 million, $172 million and $138 million in 2022, 2021 and 2020, respectively.
7. Impairment and Other Related Charges, Net
Wind Down of Russia Operations
In the first quarter 2022, Russian military forces invaded Ukraine. This military action had significant and immediate adverse economic impacts on businesses operating in Russia and Ukraine. Based on deteriorating business conditions and regulatory restrictions, including the impact of economic sanctions imposed on Russia by the United States, the European Union and other governments, PPG immediately ceased sales to Russian state-owned entities, announced that the Company would cease all new investments in Russia and commenced actions to wind down most of the Company’s operations in Russia.
Based on this change in facts and circumstances, the long-term cash flow forecast for the Company’s operations in Russia was significantly reduced. This reduction in the long-term cash flow forecast indicated that the carrying amounts of long-lived assets and certain indefinite-lived intangible assets associated with the Company’s operations in Russia may not be recoverable, and the carrying value of these assets was tested for impairment. Additionally, the Company evaluated trade receivables for estimated future credit losses, inventories for declines in net realizable value and other current assets for impairment in light of the deteriorating economic conditions in Russia and Ukraine. As a result, during the three months ended March 31, 2022, the Company recognized $290 million of Impairment and other related charges, net in the consolidated statement of income, comprised of $201 million of long-lived asset impairment charges and $89 million of other related charges.
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The $201 million of long-lived asset impairment charges recorded during first quarter 2022 was comprised of $124 million related to indefinite-lived intangible assets, $54 million related to property, plant and equipment, net and $23 million related to definite-lived intangible assets. The $89 million of other related charges represented reserves established for receivables and other current assets and the write-down of inventories impacted by the adverse economic consequences of the Russian invasion of Ukraine.
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 within Impairment and other related charges, net.
The Company continues to consider actions to exit Russia, including a possible sale of its Russian business or controlled withdrawal from the Russia market.
During both the years ended December 31, 2022 and 2021, net sales in Russia represented approximately 1% of PPG net sales.
Businesses Classified as Held for Sale
The Company recorded impairment charges of $14 million, $21 million and $52 million in Impairment and other related charges, net in the consolidated statement of income for the years ended December 31, 2022, 2021 and 2020, 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 revenue of these businesses represents less than 1% of PPG annual net sales. The impairment charges recorded represent the excess net book value of the net assets over the anticipated sales proceeds less costs to sell.
8. Business Restructuring
The Company records restructuring liabilities that represent charges incurred in connection with consolidations of certain operations, including operations from acquisitions, as well as headcount reduction programs. These charges consist primarily of severance costs and certain other cash costs. As a result of these programs, the Company will also incur incremental non-cash accelerated depreciation expense for certain assets due to their reduced expected asset life. These charges are not allocated to the Company’s reportable business segments. Refer to Note 21, “Reportable Business Segment Information” for additional information.
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, including softening demand in Europe and lower than expected demand recovery in China. The Company performed a comprehensive evaluation to identify opportunities to reduce costs and improve the profitability of the overall business portfolio. The program includes actions to right-size employee headcount, reductions in functional and administrative costs and other cost savings actions. The majority of these restructuring actions are expected to be completed by the end of 2023.
In the fourth quarter 2021, the Company approved business restructuring actions related to recent acquisitions targeting further consolidation of its manufacturing footprint and headcount reductions. The majority of these restructuring actions are expected to be completed by the end of 2023.
In the second quarter 2020, the Company approved a business restructuring plan which included actions to reduce its global cost structure. The program addressed weakened global economic conditions stemming from the pandemic and related pace of recovery in a few end-use markets along with further opportunities to optimize supply chain and functional costs. In the second quarter 2019, the Company approved a business restructuring plan which included actions to reduce its global cost structure. Substantially all actions of the 2020 and 2019 restructuring programs have been completed.
The following table summarizes restructuring reserve activity for the years ended December 31, 2022 and 2021:
Total Reserve
Approved restructuring actions 84 54
Release of prior reserves and other adjustments(a) (51) (23)
Cash payments (85) (77)
Foreign currency impact (10) (16)
(a)Certain releaseswere recorded to reflect the current estimate of costs to complete planned business restructuring actions.
9. Leases
PPG leases certain retail paint stores, warehouses, distribution facilities, office space, fleet vehicles and equipment.
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The components of lease expense for the years ended December 31, 2022, 2021 and 2020 were as follows:
Operating lease cost Selling, general and administrative 216 219 206
Finance lease cost:
Amortization of right-of-use assets Depreciation $2 $2 $2
Interest on lease liabilities Interest expense 1 1 1
Total finance lease cost $3 $3 $3
Total operating lease cost for the years ended December 31, 2022, 2021 and 2020 is inclusive of the following:
Variable lease costs $18 $18 $17