PPG Industries, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
PPG manufactures and distributes paints, coatings and specialty materials through two reportable segments: Performance Coatings and Industrial Coatings. The company operates globally, with approximately 65% of 2021 sales generated outside the United States. This Form 10-K covers the fiscal year ended December 31, 2021, with comparisons to 2020 and 2019.
PPG completed five strategic acquisitions during or shortly before 2021, including Tikkurila, VersaFlex, Wörwag, Cetelon and Ennis-Flint. Tikkurila was acquired in June 2021 and represented approximately 2% of consolidated 2021 sales.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $16.802 billion | $13.834 billion | +21.5% |
| Income before income taxes | $1.815 billion | $1.362 billion | +33.2% |
| Income from continuing operations attributable to PPG | $1.420 billion | $1.056 billion | +34.5% |
| Net income attributable to PPG | $1.439 billion | $1.059 billion | +35.9% |
| Diluted EPS from continuing operations | $5.93 | $4.44 | +33.6% |
| Adjusted diluted EPS from continuing operations | $6.77 | $6.12 | +10.6% |
| Effective tax rate | 20.6% | 21.4% | Down 0.8 points |
| Cash from operating activities | $1.562 billion | $2.129 billion | Down 26.6% |
| Capital expenditures | $371 million | $304 million | +22.0% |
| Acquisitions, net of cash acquired | $2.137 billion | $1.169 billion | +82.8% |
Cost of sales excluding depreciation and amortization increased to 61.2% of sales from 56.2%, implying a corresponding decline in the reported gross margin before depreciation and amortization to 38.8% from 43.8%. Net income attributable to PPG represented approximately 8.6% of sales in 2021.
- Performance Coatings: Sales of $10.333 billion, up 21.6%; segment income of $1.491 billion, up 9.7%.
- Industrial Coatings: Sales of $6.469 billion, up 21.2%; segment income of $680 million, down 9.3%.
- Balance sheet: Cash and short-term investments totaled $1.072 billion at year-end, down from $1.922 billion. Total assets were $21.351 billion and total shareholders’ equity was $6.411 billion.
- Debt and liquidity: Balance-sheet long-term debt was $6.572 billion, with $9 million of current debt. Commercial paper outstanding was $440 million. PPG had a $2.2 billion undrawn revolving credit facility, and its total indebtedness-to-capitalization ratio was 48%, below the applicable covenant limit.
- Shareholder returns: PPG paid $536 million of dividends, repurchased $210 million of stock, and ended the year with approximately $1.3 billion remaining under its repurchase authorization.
Material changes versus the prior comparable period
- Sales growth reflected acquisition-related sales of approximately 9%, higher volumes of 5%, pricing of 5% and favorable foreign-currency translation of 2%.
- Operating costs increased by more than $1 billion, primarily because of raw-material inflation, supply constraints, higher energy and logistics costs, labor shortages and transportation disruptions.
- Performance Coatings income increased despite inflation, supported by pricing, volume, acquisitions and restructuring savings. Industrial Coatings income declined because raw-material inflation outpaced pricing and volume benefits.
- Cash from operations decreased by $567 million, primarily because of higher working-capital investment. Inventories increased to $2.171 billion from $1.735 billion, while operating working capital increased to $2.298 billion from $1.998 billion.
- Acquisition spending increased substantially, principally due to the $1.7 billion Tikkurila transaction. Goodwill increased to $6.248 billion from $5.102 billion and identifiable intangible assets increased to $2.783 billion from $2.351 billion.
- PPG issued approximately $1.4 billion under a new term loan and $700 million of 1.2% notes due 2026, while also repaying or redeeming several debt obligations. Interest expense, net of interest income, declined to $95 million from $115 million.
- Reported results included several unusual items, including a $133 million pretax reduction in the asbestos reserve, a $50 million pension settlement charge, $31 million of net restructuring charges, $21 million of impairment charges and $35 million of net environmental remediation charges.
Guidance, outlook, management commentary and risks
- Management expected solid but uneven global market growth in 2022, aided by economic reopening, inventory rebuilding, improved supply conditions and consumer spending. Recovery was anticipated in automotive refinish, automotive OEM and aerospace coatings.
- Supply-chain and manufacturing disruptions were expected to continue into the first quarter of 2022. Segment sales volumes were expected to decline by a mid-single-digit percentage versus the elevated first quarter of 2021, while segment margins were expected to begin improving in the first half of 2022.
- PPG expected first-quarter 2022 raw-material costs to be 25% to 30% higher year over year, with additional wage, benefit and logistics inflation. The company planned further price increases and cost-saving actions.
- The projected 2022 effective tax rate from continuing operations was 22% to 23%. Capital expenditures excluding acquisitions were expected to be $475 million to $525 million, and environmental remediation cash outlays were expected to be $80 million to $100 million.
- Management expected at least $70 million of restructuring savings in 2022, including acquisition synergies, and stated that continued strong cash generation was expected.
- Principal risks include COVID-19 and related disruptions, raw-material availability and pricing, logistics constraints, customer and supplier interruptions, semiconductor shortages, foreign-exchange volatility, competitive pressure, acquisition integration, cybersecurity, environmental regulation, litigation, asbestos claims, tax uncertainty and evolving chemical-registration requirements.
- Environmental remediation reserves totaled $282 million at year-end. Management identified reasonably possible but unreserved environmental losses of approximately $100 million to $200 million. Future environmental costs may be material to results in an individual period.
- Asbestos reserves declined to $54 million from $190 million following a fourth-quarter reassessment. The estimate remains subject to substantial uncertainty regarding future claims, insurance coverage, litigation outcomes and changes in liability law.
- The independent auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting. Tikkurila, representing approximately 2% of consolidated assets and revenue, was excluded from the 2021 internal-control assessment and is expected to be included in the 2022 assessment.
Most important facts for an investor to verify
- Whether pricing actions can offset raw-material, energy, labor and logistics inflation without weakening demand or market share.
- The pace of supply-chain normalization and recovery in automotive OEM, aerospace, architectural and refinish markets.
- Cash conversion and working-capital trends, particularly inventory levels and operating cash flow.
- The integration, margin profile and expected synergies of Tikkurila and the other recent acquisitions.
- Debt maturities, including approximately $2.136 billion of long-term debt maturities scheduled for 2024, and the company’s planned balance between acquisitions, debt reduction and share repurchases.
- The sensitivity of goodwill and intangible assets to changes in revenue forecasts, discount rates and segment profitability.
- Changes in asbestos, environmental, tax and other litigation reserves, including the identified $100 million to $200 million of reasonably possible unreserved environmental exposure.