PPG Industries, Inc. 2018 Form 10-K Summary
Business context and reporting period
PPG Industries 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, 2018; the source includes fourth-quarter and full-year information, although this is an annual Form 10-K rather than a quarterly filing.
PPG operated 128 manufacturing facilities in 39 countries and employed approximately 47,300 people. Approximately 62% of 2018 sales were generated outside the United States.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $15,374 million | $14,748 million | +4.2% |
| Income before income taxes | $1,693 million | $2,005 million | -15.6% |
| Income from continuing operations attributable to PPG | $1,323 million | $1,369 million | -3.4% |
| Diluted EPS from continuing operations | $5.40 | $5.31 | +1.7% |
| Net income attributable to PPG | $1,341 million | $1,594 million | -15.9% |
| Cash from operating activities, continuing operations | $1,487 million | $1,551 million | -4.1% |
| Capital expenditures | $411 million | $360 million | +14.2% |
| Business acquisitions, net of cash acquired | $378 million | $325 million | +16.3% |
Cost of sales increased to $9,001 million from $8,209 million, and cost of sales rose to 58.5% of sales from 55.7%. The increase reflected mid-single-digit raw-material inflation, higher logistics costs, acquisitions, volume growth and revenue-recognition-related cost reclassifications. Selling, general and administrative expense was $3,573 million, or 23.2% of sales, versus 24.1% in 2017.
The reported effective tax rate declined to 20.9% from 30.7%, primarily because 2017 included the U.S. Tax Cuts and Jobs Act toll charge and 2018 included favorable finalization adjustments. Adjusted continuing-operations EPS increased to $5.92 from $5.86, while adjusted income before tax was $1,882 million versus $2,025 million.
- Performance Coatings: Sales of $9,087 million increased 4.1%; segment income declined 1.0% to $1,300 million. Pricing, foreign exchange and growth in aerospace, protective and marine coatings were offset by raw-material and logistics inflation and weaker architectural coatings volumes.
- Industrial Coatings: Sales of $6,287 million increased 4.5%; segment income declined 16.4% to $818 million. Pricing, acquisitions and volume growth were more than offset by significant raw-material and logistics inflation, weaker automotive OEM conditions and other cost pressures.
At December 31, 2018, cash and short-term investments totaled $963 million, down from $1,491 million. Total debt, including capital leases, was approximately $5,012 million, compared with $4,138 million in 2017, and the debt-to-total-debt-and-equity ratio increased to 52% from 43%. PPG issued $1,000 million of notes in February 2018 and received $992 million net of issuance costs. Its $1.8 billion unsecured revolving credit facility had no borrowings outstanding and matures in December 2020.
PPG repurchased 15.9 million shares for $1,721 million, paid $453 million in dividends and ended the year with approximately $1.8 billion remaining under its repurchase authorization. The quarterly dividend was increased 7% to $0.48 per share. Operating working capital increased to $2,224 million, or 15.3% of annualized fourth-quarter sales, from $2,071 million, or 14.1%.
Material changes versus the prior comparable period
- Sales growth was supported by approximately 2% higher selling prices, slightly higher volumes, acquisitions and favorable foreign-exchange translation.
- Profitability weakened despite sales growth. Segment income fell 7.6% in aggregate, with Industrial Coatings accounting for most of the decline.
- Raw-material cost inflation increased at a mid-single-digit rate and freight and logistics costs increased at a low-teen-digit rate.
- U.S. architectural coatings sales were reduced by approximately $100 million from Lowe’s discontinuing OLYMPIC brand products, partly offset by expanded distribution through Home Depot.
- PPG recorded $66 million of net restructuring charges, $77 million of environmental remediation and other charges, $14 million of accounting investigation costs and other unusual items. These were partly offset by a $26 million gain on the sale of land.
- Income from discontinued operations declined to $18 million from $225 million because the former Glass segment divestiture program was substantially completed in 2017.
- PPG completed the acquisition of SEM Products in the fourth quarter and completed other smaller acquisitions. It announced agreements to acquire Whitford Worldwide and Hemmelrath, subject to closing conditions.
- Cash from operations declined primarily because of unfavorable working-capital changes and lower income, while investing cash use increased because 2017 included proceeds from the sale of the North American fiber-glass business.
Guidance, outlook, risks and unusual items
Management expected 2019 coatings raw-material costs to increase at a low-single-digit rate in the first half, with logistics costs also expected to rise. Additional pricing actions were considered necessary to recover margins. Restructuring savings were expected to be $60 million to $70 million in 2019, and the company expected to achieve the full annualized $125 million savings target from the 2016 program during 2019.
Management expected 2019 unfavorable foreign-exchange translation to reduce sales by approximately $400 million to $500 million and income before tax by $50 million to $70 million, based on mid-January 2019 exchange rates. The expected 2019 effective tax rate was 23% to 25%. Capital spending excluding acquisitions was expected to be approximately 2.5% to 3.0% of sales, and management expected continued strong cash generation.
Key operating risks include raw-material availability and pricing, transportation costs, weaker global industrial and automotive demand, customer inventory levels, foreign-exchange volatility, tariffs and trade restrictions, competition, acquisition integration, evolving chemical and environmental regulations, cybersecurity and business disruptions.
PPG disclosed approximately $291 million of environmental remediation reserves and estimated reasonably possible unreserved environmental losses of approximately $100 million to $200 million. Expected 2019 environmental cash outlays were $80 million to $100 million. The company also had approximately $180 million reserved for non-channeled asbestos claims and approximately 460 open and active asbestos-related claims.
Previously issued 2016 and 2017 financial statements were restated following identified accounting misstatements. The company reported continuing SEC and U.S. Attorney investigations, shareholder litigation and related accounting and legal costs. Management and the independent auditor concluded that internal control over financial reporting was effective at December 31, 2018 and that the previously identified material weakness had been remediated.
PPG adopted the new revenue-recognition standard in 2018. It also adopted the new lease standard on January 1, 2019, with an expected increase of approximately $700 million to $750 million in balance-sheet assets and liabilities and a corresponding impact on debt-related ratios.
Facts investors should verify
- Whether pricing actions and restructuring savings offset raw-material, freight and foreign-exchange pressures in 2019.
- The extent and timing of margin recovery in Industrial Coatings and Performance Coatings.
- The effects of U.S. DIY customer assortment changes, automotive weakness in China and Europe, and broader industrial-demand volatility.
- The closing, purchase price and integration results of the Whitford and Hemmelrath acquisitions.
- The impact of the lease-accounting adoption on reported debt, leverage and other financial ratios.
- The status and potential financial consequences of SEC, U.S. Attorney and shareholder matters related to the accounting restatement.
- Changes in environmental remediation reserves and cash outlays, particularly for the New Jersey Chrome sites.
- Future asbestos claim activity, insurance recoveries and the adequacy of the approximately $180 million reserve.
- Cash deployment among share repurchases, dividends, acquisitions, capital spending and debt repayment.