PPG INDUSTRIES INC (PPG) FY 2021 MD&A

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, 2021 and 2020. A discussion of changes in our results of operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019 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 2020 Form 10-K, filed with the Securities and Exchange Commission on February 18, 2021.

Performance Overview

Net Sales by Region

Net sales increased $2,968 million due to the following:

● Acquisition-related sales (+9%)

● Higher sales volumes (+5%)

● Higher selling prices (+5%)

● Favorable foreign currency translation (+2%)

Net sales increased versus prior year driven by higher sales volumes in each major region and higher selling prices across all businesses. Additionally, the five recent acquisitions (Ennis-Flint, VersaFlex, Cetelon, Wörwag and Tikkurila) increased net sales in 2021.

Foreign currency translation increased net sales by approximately 2% as the U.S. dollar, on an average basis, weakened against most foreign currencies versus the prior year, most notably the euro, the Chinese yuan, and the Mexican peso.

For specific business results, see the Performance of Reportable Business Segments section within Item 7 of this Form 10-K.

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Cost of sales, exclusive of depreciation and amortization

Cost of sales, exclusive of depreciation and amortization, increased $2,509 million due to the following:

● Raw material and logistics cost inflation

● Cost of sales attributable to acquired businesses

● Higher sales volumes

● Unfavorable foreign currency inflation

Selling, general and administrative expenses

Selling, general and administrative expenses increased $391 million primarily due to:

● Selling, general and administrative expenses from acquired businesses

● Wage and other cost inflation

● Unfavorable foreign currency inflation

Partially offset by:

● Cost savings initiatives, including restructuring actions

Other charges and other income

Interest expense, net of Interest income

Interest expense, net of Interest income decreased $20 million in 2021 versus 2020 primarily due to more favorable interest rates on outstanding debt.

Impairment charges

In 2021 and 2020, impairment charges were recorded for the write-down of certain assets related to the previously planned sale of certain smaller entities in non-strategic regions. Also, in 2020, an impairment charge was recorded to reduce the carrying value of an indefinite-lived trademark. Refer to Note 2, ”Acquisitions and Divestitures” and Note 6, “Goodwill and Other Identifiable Intangible Assets” 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 14 “Commitments and Contingent Liabilities” in Item 8 of this Form 10-K for additional information.

Business restructuring, net

Pretax restructuring charges of $54 million related to recent acquisitions were recorded in 2021, partially offset by certain changes in estimates to complete previously recorded programs of $23 million. Pretax restructuring charges of $203 million were recorded in 2020, offset by certain changes in estimates to complete previously recorded programs of $29 million. Refer to Note 7, "Business Restructuring" 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 13, “Employee Benefit Plans" in Item 8 of this Form 10-K for additional information.

Other charges

Other charges were lower in 2021 as compared to the prior year primarily due to lower non-service components of net periodic pension cost.

Other income

Other income was higher in 2021 than prior year primarily due to a $34 million gain on the sale of a production facility in connection with the Company’s manufacturing footprint consolidation plans and associated restructuring programs, as well as favorable legal settlements.

Effective tax rate and earnings per diluted share, continuing operations

The effective tax rate for the year-ended December 31, 2021 was 20.6%, a decrease of 0.8% from the prior year primarily driven by a benefit from releases of reserves for uncertain tax positions.

Earnings per diluted share and adjusted earnings per diluted share from continuing operations for the year ended December 31, 2021 increased year-over-year, driven by increased net sales in 2021 due to acquisition-related sales, higher sales volumes and higher selling prices. The impact of higher net sales on earnings was partially offset by higher raw material costs due to ongoing supply constraints and higher transportation costs driven by supply chain disruptions related to COVID-19. 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 dilution (attributable to PPG) are reconciled to adjusted net income from continuing operations (attributable to PPG) and adjusted earnings per share – assuming dilution below.

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(1)    Earnings per diluted share is calculated based on unrounded numbers. Figures in the table may not recalculate due to rounding.

(2)    Beginning in 2021, the Company reports adjusted earnings per diluted share excluding amortization expense relating to intangible assets from completed acquisitions. Adjusted earnings per diluted share for 2020, as shown in the table above, has been recast to exclude acquisition-related amortization expense.

(3)    Acquisition-related costs, net include advisory, legal, accounting, valuation, other professional or consulting fees, and certain internal costs directly incurred to effect acquisitions. These costs are included in Selling, general and administrative expense in the consolidated statement of income. Acquisition-related costs, net also include 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.

(4)    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 in the consolidated statement of income.

(5)    In 2020, two hurricanes damaged a southern U.S. factory supporting the Company's specialty coatings and materials business. In early 2021, a winter storm further damaged that factory as well as other company factories in the southern U.S. Incremental expenses incurred due to these storms 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 2021 and 2020, impairment charges were recorded for the write-down of certain assets related to the previously planned sale of certain smaller entities in non-strategic regions. Also in 2020, an impairment charge was recorded to reduce the carrying value of an indefinite-lived trademark. In 2021 and 2020, net loss of $3 million and $4 million, respectively, was attributable to noncontrolling interests.

(7)    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

Performance Coatings net sales increased due to the following:

● Acquisition-related sales (+12%)

● Higher selling prices (+4%)

● Higher sales volumes (+3%)

● Favorable foreign currency translation (+3%)

In 2021, the acquisitions of Ennis-Flint, Tikkurila and VersaFlex increased net sales in the Performance Coatings segment versus prior year.

Architectural coatings – Americas and Asia Pacific net sales increased a mid-single-digit percentage during the year with differences by channel and region. Despite a strong first quarter, the remaining nine months of the year were negatively impacted by raw material shortages. Favorable foreign currency benefited net sales due to the strengthening of the Mexican peso and certain currencies in the Asia Pacific region. In Mexico, PPG Comex architectural coatings business net sales, excluding the impact of currency and acquisitions (organic sales) increased by about 10% compared to the prior year as the concessionaire network sell-out of PPG products continued to be strong.

Architectural coatings – EMEA net sales increased about 25% versus prior year largely driven by acquisition-related sales from Tikkurila and higher selling prices. Favorable foreign currency translation benefited net sales compared to the prior year. Sales volumes were strong in the first half of the year but were negatively impacted by raw material shortages in the second half.

Net sales for automotive refinish coatings increased over 20%, with significant growth in each region versus prior year driven by an increase in global miles driven and traffic density in most of the world coupled with higher selling prices.

Aerospace coatings net sales increased a low-single-digit percentage during the year primarily due to favorable foreign currency translation. Sales volumes were flat compared to prior year as a modest increase in demand for the Company’s military applications was offset by a decline in commercial OEM.

Net sales in the protective and marine coatings business increased over 35% versus prior year due to higher selling prices, strong demand in the Asia Pacific region and acquisition-related sales from VersaFlex.

Segment income increased $132 million year-over-year due to higher selling prices, higher sales volumes, acquisition-related earnings and savings from previously approved restructuring actions, partially offset by raw material and logistics cost inflation.

Looking Ahead: First Quarter 2022

In the Performance Coatings reportable business segment, supply chain and manufacturing disruptions are expected to continue as the first quarter 2022 progresses. The supply of several key inputs remains tight, which will continue to constrain sales. Further selling price increases have been secured or are being initiated during the quarter for all businesses. The Company will continue to execute against various cost-savings initiatives. Aggregate sales volumes in the first quarter are anticipated to be lower by a mid-single-digit percentage compared to the first quarter 2021, which still exhibited elevated architectural do-it-yourself (“DIY”) demand in many regions. First quarter 2022 acquisition-related sales are estimated to be between $150 million and $170 million from Tikkurila and VersaFlex. Historically, Tikkurila sales improve sequentially in the first quarter compared to the fourth quarter as it supports building inventory in its distribution channel.

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Industrial Coatings

Industrial Coatings segment net sales increased due to the following:

● Higher sales volumes (+9%)

● Acquisition-related sales (+5%)

● Higher selling prices (+5%)

● Favorable foreign currency translation (+2%)

In 2021, the acquisitions of Wörwag, Tikkurila and Cetelon increased net sales in the Industrial Coatings segment versus prior year.

Automotive OEM coatings sales volumes increased by a mid-single-digit percentage year-over-year, with declines in the second half of the year. During the year, industry-wide production disruptions worsened at many automotive OEM customers due to semiconductor chip shortages. In the U.S., automotive OEM dealer inventories remained at historically low levels as consumer demand remained very robust while production levels were constrained.

For the industrial coatings business, organic sales increased by a high-teen-percentage year-over-year as global industrial production continued to improve in most regions. Selling prices and sales volumes were higher in all regions versus prior year, and growth was led by the appliance and heavy-duty equipment sub-segments.

Packaging coatings organic sales increased by a mid-teen-percentage year-over-year due to higher selling prices and sales volume growth, including strong growth across the canned beverage segment partially offset by softening demand for the canned food segment compared to elevated levels in the prior year.

Specialty coatings and materials net sales increased by about 35% versus the prior year driven by higher sales volumes in the U.S. and Europe.

Segment income decreased $70 million year-over-year due to raw material cost inflation, partially offset by higher selling prices, higher sales volumes and savings from previously approved restructuring actions.

Looking Ahead: First Quarter 2022

Aggregate sales volumes for the Industrial Coatings reportable business segment for the first quarter 2022 are expected to be lower by a mid-single-digit percentage compared to the prior-year first quarter, due to ongoing impacts from customer supply disruptions and coatings raw material shortages, along with continuing COVID-related operational challenges. Many of these factors are also expected to lead to additional raw material cost inflation in the first quarter sequentially versus the fourth quarter. The Company continues to prioritize working with customers to secure further selling price increases in all businesses. Segment margins are expected to begin improving on a sequential basis in the first half 2022. The Company will also continue to aggressively manage costs, which will include executing against various cost-savings initiatives. The acquisitions of Wörwag and Cetelon are expected to deliver sales of about $100 million in the first quarter, with margins below the segment’s average.

Review and Outlook

During 2021, supply disruptions, severe cost inflation, and continuing impacts from COVID-19 significantly impacted net sales and earnings and the Company’s ability to meet robust aggregate customer demand. There was partial recovery in end-use markets that were significantly impacted by mobility restrictions in 2020, such as automotive refinish coatings and aerospace coatings, but both remained below 2019 global demand levels. Demand for architectural products was mixed as DIY gradually moderated to pre-pandemic levels. This was partially offset by strong recovery in do-it-for-me (“DIFM”) activity as professional paint contractor project work improved from lower levels in 2020, supported by a strong U.S. housing market. A significant shortage of semiconductor chips developed as the year progressed which constrained automotive OEM manufacturers’ production, despite strong underlying demand in many regions. Raw material cost inflation trended higher throughout the year, finishing the fourth quarter about 30% above the prior year fourth quarter. Some other key costs continued to increase in 2021, such as logistics, employee wage and benefit costs. The Company took swift action to collaborate with its customers and increase selling prices to help mitigate the elevated input costs which drove a 5% increase in selling prices compared to 2020. PPG’s net sales, excluding foreign currency translation impact, increased approximately 19% versus the prior year and were a record $16.8 billion. Organic sales were up by about 10% and acquisition-related sales contributed 9% to net sales growth compared to prior year. The Company

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benefited from five strategic acquisitions that were completed between December 2020 and June 2021. Foreign currency translation was favorable for the year and impacted net sales by about 2%.

U.S. and Canada

In 2021, economic activity rebounded sharply from depressed levels experienced due to pandemic related restrictions in 2020. For the full year, U.S. GDP and industrial production both increased by nearly 6%. Demand in the residential and commercial construction markets also significantly improved during 2021. New home starts advanced by a low-teen percentage in 2021 versus approximately 8% in 2020. Residential remodeling was up by about 9% in 2021 versus 2020 supported by strong housing fundamentals. Commercial construction was down approximately 10% compared to 2020. Market demand for architectural paint shifted significantly back to 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. 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. Despite strong demand for automotive OEM products, the semiconductor chip shortage constrained production. Automotive OEM industry builds were similar to 2020 and remain about 20% below 2019 production levels. The aerospace coatings business began what is expected to be a multi-year recovery to regain 2019 activity levels. Before the pandemic, the Company’s sales mix was approximately 70% commercial and 30% military. During the pandemic and through 2021, sales volumes for military applications remained solid, in part due to specification of PPG products with advantaged technology. The commercial segment remains down about 40% due to lower passenger miles flown and significantly fewer international flights. The commercial aftermarket segment did show a strong recovery in the second half of 2021 as domestic flight activity improved throughout the world. The automotive refinish coatings business also experienced gradual improvement through the year as miles driven and collision claims trended toward pre-pandemic levels. Packaging coatings was favorably impacted by new business wins at a number of new packaged beverage can factories and overall solid demand for the Company’s sustainable products. Higher acquisition-related sales were mostly related to the Ennis-Flint acquisition which is now the traffic solutions business. Overall sales volumes in the region were higher by a mid-single-digit percentage compared to the prior year. Solid year-over year increases in automotive refinish, industrial, automotive OEM and packaging coatings businesses were partially offset by lower year-over-year sales volumes in architectural and aerospace coatings. Aggregate regional sales volumes remain about 10% lower than the fourth quarter 2019. The U.S. and Canada remained PPG’s largest region, representing approximately 40% of 2021 net sales.

Europe, Middle East and Africa

European economic activity improved in 2021, but was constrained by supply disruptions. Industrial production and manufacturing rates in the region were higher than 2020. Activity in this region was negatively impacted by mobility restrictions associated with COVID-19 and by the U.K.’s exit from the European Union which further disrupted logistics, especially to and from the U.K. Semiconductor chip shortages negatively impacted automotive OEM sales volumes versus prior year, despite strong demand. Architectural coatings – EMEA net sales were higher driven by strong demand by professional paint contractors and the June 2021 acquisition of Tikkurila, partially offset by lower demand for architectural DIY products from elevated levels in 2020. Net sales were aided by partial recovery in the aerospace and automotive refinish coatings businesses. Demand for packaging coatings and general industrial products was solid.

EMEA represented approximately 32% of PPG’s 2021 net sales, modestly higher than 2020. Net sales, excluding the impact of foreign currency translation, increased over 20%, led by higher selling prices and acquisition-related sales. Regional sales volumes were up a mid-single-digit percentage compared to 2020, but remain 8% below 2019.

Asia Pacific and Latin America

The emerging regions of Asia Pacific and Latin America represented 28% of PPG’s 2021 net sales in aggregate, similar to the prior year.

Asia Pacific remained the largest emerging region, with net sales of nearly $3 billion, led by China, which remained PPG’s second largest country by revenue. Net sales in 2021 were more than 20% higher than 2020 driven by strong organic growth that was up a mid-teen-percentage compared to 2020. The sales volume growth was led by recovering demand for coatings products from softer economic activity in 2020 and demand for the Company’s technologically advantaged products. Sales volumes were the strongest in the protective and marine, industrial, and packaging coatings businesses. Sales volumes in the automotive OEM end-use market were positive and above industry build rates, but were constrained by semiconductor chip shortages. Sales volumes in the region were slightly higher compared to 2019.

Overall, demand in Latin America sharply increased year-over-year driven by improved economic activity in most end-use markets. Organic sales were higher by a high-teen-percentage as compared to 2020. Strong contributions were made by the PPG Comex business, which continued to outpace the industry and added over 150 new concessionaire locations during 2021. Additionally, all the businesses in the industrial coatings reportable segment delivered strong year over year sales growth. Foreign currency translation finished about 3% favorable compared to 2020, principally driven by a weaker

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U.S. dollar compared to currencies, including the Mexican peso and Brazilian real. Sales volumes in the region were up a low-single-digit percentage compared to 2019.

Outlook

We expect solid global market growth in 2022 that will likely be uneven by region and end-use. As 2022 progresses, we expect demand for coatings products to benefit from more economic re-opening, an easing of supply chain problems, general inventory rebuilding across many end-use markets, and healthy consumer spending. 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.

The heightened supply and COVID-related disruptions experienced in the fourth quarter 2021 are expected to continue into the first quarter of 2022, impacting the Company’s ability to manufacture and deliver product. We anticipate more favorable economic conditions in the second quarter.

We anticipate that PPG’s U.S. and Canada regional growth will be led by aerospace and automotive OEM coatings as both end-use markets continue their recovery to pre-pandemic demand levels. Automotive OEM industry builds in the region are expected to be higher by a mid-teen-percentage compared to 2021. Architectural DIY demand is expected to remain at more moderate levels during 2022 and similar to 2019. Traffic solutions demand should be aided later in 2022 as infrastructure activity gains momentum.

We expect industry demand trends in 2022 in Europe to gradually improve from those experienced in 2021, particularly in the automotive OEM and refinish coatings businesses. The integration of Tikkurila will continue, and synergies from recent acquisitions should aid earnings growth. Regional growth is expected to remain mixed by sub-region and country. Favorable end-use trends are expected to continue in packaging, protective and marine, and general industrial coatings. Overall demand is expected to be similar but mixed by country in the architectural coatings business. Raw material availability is expected to gradually improve as the year progresses. We continue to monitor the economic environment in the U.K., as its exit from the European Union progresses and impacts consumer sentiment, logistics, labor availability and coatings demand.

In Asia Pacific, we expect economic activity to be soft in China during the first quarter as more severe operating restrictions have recently been imposed due to COVID and the Winter Olympics. The region is expected to receive stimulus support that should help aid economic activity as the year progresses. Economic output in Southeast Asia and India is still below 2019 levels, but is expected to improve in 2022. In China, we expect continued 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 recovery in marine coatings new-build demand is expected to gain momentum as order books for large vessels and container ships is at multi-year highs.

In Latin America, we anticipate slightly better economic conditions in Mexico, most of Central America and South America compared to 2021. 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 April 2018, June 2019 and June 2020. The April 2018 program has been substantially completed. In the fourth quarter 2021, the Company approved business restructuring plans related to recent acquisitions. Aggregate restructuring savings related to the 2020, 2019 and 2018 programs was approximately $135 million in 2021. Aggregate restructuring savings is expected to be at least $70 million in 2022, including the impact of acquisition synergies. 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.

In aggregate, average raw material costs were significantly higher in 2021 versus 2020. The increases in raw material costs were primarily driven by ongoing supply constraints, including various force majeure declarations, higher energy prices, maintenance 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 between 25% and 30% higher on a year-over-year basis in the first quarter 2022. Cost inflation is expected in several other areas, including wage, benefit and logistics costs in 2022.

We achieved selling price improvement across all businesses in 2021, reflecting the Company’s efforts to offset various inflationary pressures. The Company will continue to prioritize additional selling price increases in the first quarter 2022 and will seek additional increases throughout the year as necessary.

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In 2021, we experienced favorable foreign currency translation throughout the year. We expect unfavorable year-over-year foreign currency translation in 2022. The foreign currency environment continues to be volatile, and the impact on 2022 net sales and income before income taxes could differ from this expectation. 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 2022 effective tax rate from continuing operations is expected to be in the range of 22% to 23%, varying by quarter. This range represents the Company’s best estimate.

Over the past five years, the Company used over $3 billion of cash to repurchase approximately 27 million shares of PPG stock, including $210 million in 2021. The Company ended the year with approximately $1.3 billion remaining under its current share repurchase authorization. During 2021, the Company deployed $2.1 billion for acquisitions, $371 million for capital expenditures and $536 million for dividends. In 2021, PPG marked the 50th annual per share dividend increase and the 122nd successive year of annual dividend payments.

PPG ended 2021 with approximately $1.1 billion in cash and short-term investments. The Company expects continued strong cash generation in 2022.

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 14, “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 14, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims, will not have a material effect on PPG’s consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.

As also discussed in Note 14, PPG has significant reserves for environmental contingencies. Refer to the Environmental Matters section of Note 14 for details of these reserves. It is PPG’s policy to accrue expenses for contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are generally not discounted. In management’s opinion, the Company operates in an environmentally sound manner and the outcome of the Company’s environmental contingencies will not have a material effect on PPG’s financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized. Management anticipates that the resolution of the Company’s environmental contingencies will occur over an extended period of time.

Accounting Standards Adopted in 2021

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, 2021 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

Cash from operating activities - continuing operations

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2021 vs. 2020

The $567 million decrease in Cash from operating activities - continuing operations was primarily due to increases in working capital, excluding the impact of business acquisitions.

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.

A key metric we use to measure our working capital management is operating working capital as a percentage of sales (fourth quarter sales annualized).

Environmental expenditures

We expect cash outlays for environmental remediation activities in 2022 to be between $80 million and $100 million.

Cash used for investing activities

2021 vs. 2020

The $957 million increase in cash used for investing activities, was primarily due to higher spending on business acquisitions and capital expenditures, partially offset by proceeds from the sale of a production facility in connection with the Company’s manufacturing footprint consolidation plans and associated restructuring programs.

Capital expenditures, including business acquisitions

(1)Includes modernization and productivity improvements, expansion of existing businesses and environmental control projects.

Capital expenditures related to modernization and productivity improvements, expansion of existing businesses and environmental control projects is expected to be in the range of $475 million to $525 million in 2022 in support of future organic growth opportunities and reflecting lower capital spending in the past two years due to COVID-19 constraints.

In 2022, the Company will continue cash deployment focused on shareholder value creation, with a preference for business acquisitions, coupled with debt reduction to enhance financial flexibility.

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Cash from financing activities

2021 vs. 2020

The $152 million increase in cash from financing activities, was primarily due the issuance of long-term debt in 2021, partially offset by higher repayments of long-term debt, purchases of treasury stock and dividends paid year-over-year.

Share repurchase activity

The Company has approximately $1.3 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

PPG has paid uninterrupted annual dividends since 1899, and 2021 marked the 50th successive year of increased annual per-share dividend payments to shareholders. The Company raised its per-share quarterly dividend by more than 9% to $0.59 per share paid in December 2021.

Debt issued and repaid

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 9, "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 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 9, "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. In March 2020, PPG borrowed $800 million under the Credit Agreement and repaid that amount in full in April 2020. There were no amounts outstanding under the credit agreement as of December 31, 2021 and December 31, 2020.

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The Credit Agreement also supports the Company’s commercial paper borrowings which are classified as long-term based on PPG’s intent and ability to refinance these borrowings on a long-term basis. As of December 31, 2021 and 2020, there were $440 million and $250 million of commercial paper borrowings outstanding, respectively.

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, 2021, Total Indebtedness to Total Capitalization as defined under the Credit Agreement and the Term Loan was 48%.

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 9, “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.

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.

(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 9, “Borrowings and Lines of Credit” in Item 8 of this Form 10-K.

Other liquidity matters

At December 31, 2021, 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 $175 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

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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 14, “Commitments and Contingent Liabilities” and Note 12, “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 13, “Employee Benefit Plans” in Item 8 of this Form 10-K for information on these plans and the assumptions used.

Business Combinations

In accordance with the accounting guidance for 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 will be recognized as goodwill. The valuations of the acquired assets and liabilities will impact 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 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, 2021 and at December 31, 2020, the U.S. dollar strengthened against certain currencies in the countries where PPG operates, driven primarily by the euro and Mexican peso. As a result, consolidated net assets at December 31, 2021 decreased by $325 million from December 31, 2020.

Comparing average exchange rates during 2021 to those of 2020, the U.S. dollar weakened against currencies of the countries within the regions PPG operates. This had a favorable impact of approximately $60 million on full year 2021 income before Income taxes from the translation of this foreign income into U.S. dollars.

Forward-Looking Statements

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, increasing price and product competition by our competitors, fluctuations in cost and availability of raw materials, the ability to

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achieve selling price increases, the ability to recover margins, customer inventory levels, our ability to maintain favorable supplier relationships and arrangements, the timing of and the realization of anticipated cost savings from restructuring initiatives, the ability to identify additional cost savings opportunities, the timing and expected benefits of our acquisitions, difficulties in integrating acquired businesses and achieving expected synergies therefrom, economic and political conditions in the markets we serve, the ability to penetrate existing, developing and emerging foreign and domestic markets, foreign exchange rates and fluctuations in such rates, fluctuations in tax rates, the impact of future legislation, the impact of environmental regulations, unexpected business disruptions, the effectiveness of our internal control over financial reporting, the results of governmental investigations, and the unpredictability of existing and possible future litigation. However, it is not possible to predict or identify all such factors.

Consequently, while the list of factors presented here and in Item 1A is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements.

Consequences of material differences in the results compared with those anticipated in the forward-looking statements could include, among other things, lower sales or income, business disruption, operational problems, financial loss, legal liability to third parties, other factors set forth in Item 1A of 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.