PPG Industries, Inc. — 2020 Form 10-K Summary
Business context and reporting period
PPG manufactures and distributes paints, coatings and specialty materials globally through two reportable segments: Performance Coatings and Industrial Coatings. The filing covers the fiscal year ended December 31, 2020, with quarterly information including the fourth quarter. Approximately 65% of 2020 sales were generated outside the United States.
Operations were materially affected by the COVID-19 pandemic, particularly in aerospace, automotive refinish, automotive OEM and general industrial markets. Architectural do-it-yourself coatings and packaging coatings benefited from changes in consumer and food-related demand.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $13,834 million | $15,146 million | (8.7%) |
| Income from continuing operations | $1,071 million | $1,269 million | (15.6%) |
| Net income attributable to PPG | $1,059 million | $1,243 million | (14.8%) |
| Diluted EPS from continuing operations | $4.44 | $5.22 | (14.9%) |
| Adjusted diluted EPS from continuing operations | $5.70 | $6.22 | (8.4%) |
| Income before income taxes | $1,362 million | $1,661 million | (18.0%) |
| Effective tax rate | 21.4% | 23.6% | Down 2.2 points |
| Cash from operating activities | $2,129 million | $2,084 million | +2.2% |
| Capital expenditures | $304 million | $413 million | (26.4%) |
| Cash used for acquisitions | $1,169 million | $643 million | +81.8% |
Cost of sales declined to $7,777 million from $8,653 million, and cost of sales as a percentage of sales improved to 56.2% from 57.1%. Reported gross margin was therefore approximately 43.8%, versus approximately 42.9% in 2019. Selling, general and administrative expense declined 6.0%, but increased as a percentage of sales to 24.5% from 23.8%.
| Segment | 2020 sales | Sales change | 2020 segment income | Income change |
|---|---|---|---|---|
| Performance Coatings | $8,495 million | (6.0%) | $1,359 million | (3.5%) |
| Industrial Coatings | $5,339 million | (12.6%) | $750 million | (13.0%) |
| Total | $13,834 million | (8.7%) | $2,109 million | (7.1%) |
At December 31, 2020, cash and cash equivalents were $1,826 million and short-term investments were $96 million, compared with combined liquidity of $1,273 million at year-end 2019. Total debt, including current debt and finance lease obligations, was approximately $5,749 million, compared with approximately $5,052 million in 2019. Long-term debt had a carrying value of $5,296 million, excluding short-term borrowings and finance leases. The company had no outstanding borrowings under its $2.2 billion revolving credit facility, and its total indebtedness-to-total-capitalization ratio was 46%.
Material changes versus the prior comparable period
- Sales volume declined 10%, while unfavorable foreign currency translation reduced sales by approximately $150 million. Higher selling prices and acquisition-related sales each contributed approximately 1% of sales growth.
- Performance Coatings was pressured by lower aerospace, automotive refinish and protective and marine coatings demand. Aerospace coatings volumes declined approximately 25%, and automotive refinish sales declined approximately 15%.
- Industrial Coatings was affected by lower automotive OEM production, industrial shutdowns and lower specialty coatings and materials demand. Automotive OEM volumes declined approximately 15%, while specialty coatings and materials sales declined approximately 20%.
- Cost reductions and restructuring actions partially offset lower volumes. Aggregate restructuring savings were approximately $115 million in 2020.
- PPG recorded $93 million of impairment charges, including a $38 million trademark impairment and a $52 million charge related to planned divestitures of smaller non-strategic entities.
- PPG initiated a $176 million pretax restructuring program in June 2020; approximately $45 million of savings were realized in 2020 and most actions are expected to be completed by the end of 2021.
- Acquisition spending increased substantially, including the acquisitions of Ennis-Flint, Industria Chimica Reggiana and Alpha Coating Technologies. Ennis-Flint was acquired in December 2020 and created the traffic solutions business.
- No shares were repurchased in 2020. The company paid $496 million of dividends, increased its quarterly dividend by 6% to $0.54 per share and retained approximately $1.5 billion under its repurchase authorization.
Guidance, outlook, risks and unusual items
- Management expected 2021 global market growth to improve from 2020, although recovery would be uneven by region and end-use market.
- First-quarter 2021 Performance Coatings sales were expected to be generally similar to the fourth quarter, with continued sharp year-over-year declines in commercial aerospace and approximately $90 million of acquisition-related sales, primarily from Ennis-Flint.
- First-quarter 2021 Industrial Coatings volumes were expected to increase by a mid-to-high-single-digit percentage year over year, partly reflecting a favorable comparison with weak first-quarter 2020 activity in China.
- Management expected low-single-digit raw-material price increases in the first quarter of 2021, along with inflation in logistics, wages and benefits. Selling-price increases and cost savings were intended to mitigate these pressures.
- Expected 2021 effective tax rate was 22% to 24%, and planned capital expenditures were approximately $450 million. Environmental remediation cash outlays were expected to be $80 million to $100 million.
- Environmental reserves totaled $300 million at year-end 2020, with reasonably possible unreserved environmental losses estimated at $100 million to $200 million. Asbestos reserves totaled approximately $190 million, with approximately 840 open and active asbestos-related claims reported.
- COVID-19 remains a material uncertainty affecting demand, supply chains, logistics, customer solvency and liquidity. Other principal risks include raw-material availability and pricing, foreign currency, environmental regulation, litigation, tax audits, cybersecurity, acquisitions and competitive pressure.
- The company reported effective disclosure controls and effective internal control over financial reporting. Ennis-Flint was excluded from the 2020 internal-control assessment because it was acquired late in the year.
Important facts for investors to verify
- Reconcile reported EPS of $4.44 with adjusted EPS of $5.70 and assess the recurring nature of restructuring, impairment, environmental, disaster, acquisition and debt-extinguishment charges.
- Monitor whether selling-price increases and restructuring savings offset expected raw-material, logistics and labor inflation in 2021.
- Assess the pace of recovery in aerospace, automotive refinish, automotive OEM and general industrial markets, as well as the sustainability of architectural do-it-yourself and packaging demand.
- Review debt maturities, including the $400 million remaining under the 364-day term loan at December 31, 2020 and its April 2021 maturity, together with planned acquisition financing.
- Evaluate environmental and asbestos reserves, projected remediation spending and the estimated $100 million to $200 million of reasonably possible unreserved environmental exposure.
- Track the integration and financial contribution of Ennis-Flint and the announced or pending acquisitions of VersaFlex, Wörwag and Tikkurila.
- Consider foreign exchange sensitivity, including the approximately $150 million 2020 sales impact from currency translation and the company’s expectations for favorable translation in 2021.