Business Context and Reporting Period
PPG Industries, Inc. is a global manufacturer and distributor of paints, coatings and specialty materials serving construction, consumer, industrial, transportation and aftermarket markets in more than 70 countries. The company reports two segments: Performance Coatings and Industrial Coatings.
This Form 10-K covers the fiscal year ended December 31, 2019, with fourth-quarter information included. The financial statements were audited by PricewaterhouseCoopers LLP, which reported that the statements and internal control over financial reporting were effective as of year-end.
Financial Performance and Liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $15,146 million | $15,374 million | (1.5%) |
| Income before income taxes | $1,661 million | $1,693 million | (1.9%) |
| Income from continuing operations attributable to PPG | $1,243 million | $1,323 million | (6.0%) |
| Diluted EPS from continuing operations | $5.22 | $5.40 | (3.3%) |
| Adjusted diluted EPS | $6.22 | $5.92 | 5.1% |
| Cash from operating activities | $2,084 million | $1,487 million | 40.1% |
| Cash and short-term investments | $1,273 million | $963 million | 32.2% |
- Reported gross margin was approximately 42.9%, compared with approximately 41.5% in 2018, based on net sales and cost of sales.
- Cost of sales declined 3.9% to $8,653 million, while selling, general and administrative expense increased 0.9% to $3,604 million.
- The reported effective tax rate increased to 23.6% from 20.9%, primarily because 2018 benefited from favorable Tax Cuts and Jobs Act adjustments.
- Performance Coatings generated $9,034 million of sales and $1,409 million of segment income; Industrial Coatings generated $6,112 million of sales and $862 million of segment income.
- Cash used for investing activities was $1,009 million, including $643 million for acquisitions and $413 million of capital expenditures. Cash used for financing activities was $758 million.
- Total debt, including finance leases, was approximately $5,042 million. The debt-to-total-debt-and-equity ratio was 49%, compared with 52% in 2018. The company had $100 million of commercial paper outstanding and no borrowings under its $2.2 billion revolving credit facility.
- Operating working capital was $2,215 million, or 15.1% of annualized fourth-quarter sales, versus 15.3% in 2018.
- Fourth-quarter 2019 net sales were $3,672 million and diluted EPS from continuing operations was $1.23, compared with $3,645 million and $1.07, respectively, in fourth-quarter 2018.
Material Changes Versus the Prior Comparable Period
- Sales declined because of a 3% volume reduction and 2% unfavorable currency translation, partly offset by 2% higher selling prices and 2% acquisition-related sales.
- Foreign currency translation reduced full-year sales by approximately $400 million and income before taxes by approximately $50 million.
- Performance Coatings sales fell 0.6%, but segment income increased 8.4% to $1,409 million, supported by pricing and restructuring savings.
- Industrial Coatings sales fell 2.8%, while segment income increased 5.4% to $862 million, also benefiting from pricing, restructuring and acquisitions.
- Reported earnings declined despite lower raw-material costs, reflecting weaker volumes, higher restructuring charges, increased tax expense and the absence of certain 2018 gains and tax benefits.
- PPG recorded $194 million of pretax restructuring charges in 2019, partially offset by $18 million of releases related to prior programs. The new 2019 restructuring program is expected to be substantially completed by the end of 2020, with remaining actions completed in 2022.
- Acquisition spending increased to $643 million from $378 million. Key acquisitions included Whitford, Hemmelrath, Dexmet and Texstars.
- Share repurchases declined to $325 million, or 2.7 million shares, from $1,721 million, or 15.9 million shares, in 2018. Approximately $1.5 billion remained under the repurchase authorization at year-end.
Guidance, Outlook, Risks and Unusual Items
- Management expected modest and uneven global market growth in 2020, with the softest conditions in EMEA and continued weakness in industrial demand. Aerospace was expected to support North American growth, although production curtailments by a customer were expected to reduce first-half demand.
- Management forecast a 2020 effective tax rate of 22% to 24%, aggregate restructuring savings of at least $75 million, capital expenditures excluding acquisitions of approximately 2.5% to 3.0% of sales, and continued strong cash generation.
- Management noted that raw-material prices were expected to remain affected by weak industrial supply and demand conditions, while wage, benefit and logistics costs were expected to increase. Additional selling-price actions were considered necessary to recover operating margins.
- The filing identified the coronavirus outbreak in China as a potential negative factor for 2020 results; this disclosure predates the subsequent global pandemic.
- Environmental remediation reserves totaled $304 million at year-end, with additional reasonably possible unreserved environmental losses estimated at $100 million to $200 million. Expected 2020 environmental cash outlays were $80 million to $100 million.
- PPG had approximately 605 open and active asbestos-related claims and reserves of approximately $190 million for claims not channeled to the Pittsburgh Corning trust. A $10 million asbestos-related charge was recorded in the fourth quarter.
- The company accrued a $25 million securities class-action settlement, fully covered by insurance, with payment expected in 2020. PPG also disclosed a shareholder derivative action filed in January 2020.
- Key ongoing risks include raw-material availability and pricing, weak industrial and automotive demand, competition and pricing pressure, foreign exchange, environmental and asbestos liabilities, litigation, tax audits, cybersecurity, business disruptions and acquisition integration.
- PPG had previously restated certain financial statements and disclosed related SEC and legal matters. The SEC settlement announced in 2019 imposed no financial penalty, and the U.S. Attorney’s Office indicated it would not pursue action against the company.
Most Important Facts for Investors to Verify
- Whether volume trends and industrial demand stabilize sufficiently to support the company’s 2020 margin-recovery plan.
- Whether restructuring savings are realized on schedule and offset wage, logistics and other cost inflation.
- The sustainability of pricing gains and the effect of raw-material cost changes on gross and segment margins.
- The cash-flow impact of acquisitions, debt maturities, share repurchases, dividends, pension contributions and environmental spending.
- Changes in environmental, asbestos and other litigation reserves, including the $100 million to $200 million range of unreserved environmental exposure.
- Progress integrating the 2019 acquisitions and the contribution of expected acquisition-related sales.
- Actual 2020 effects from currency movements, aerospace customer production reductions, automotive demand and the coronavirus-related disruption.
- The company’s continued compliance with debt covenants and the availability of its revolving credit facility.