01—Abstract
Summary
Summary of the 10-K/A filed June 28, 2018. Cited figures are marked; the original filing is the authoritative source.
PPG Industries, Inc. filed this Form 10-K/A on June 28, 2018 to restate its 2017 and 2016 financial statements after an internal investigation found misstatements tied to an improper override of controls in the financial close process by a former Vice President and Controller.
The restatement reduced 2017 income from continuing operations by $2 million (to $1,369 milliona, or $5.31 per diluted share) and increased income from discontinued operations by $5 million, leaving net income attributable to PPG at $1,594 million. Management concluded that internal control over financial reporting was not effective as of December 31, 2017 because of a material weakness in the financial close process, and the company is pursuing remediation steps. The filing also discloses an SEC investigation that the company self-reported, and a putative securities class action filed May 20, 2018 in the U.S. District Court for the Central District of California.
On an operating basis, 2017 net sales rose 3% to $14.7 billionb, driven mainly by higher sales volumes and acquisition-related sales, while cost of sales increased 7% to $8.2 billion. Income before income taxes was $2,005 million, up $1.2 billion from 2016, which benefited from the absence of a $968 million pension settlement charge and a $191 million business restructuring charge in the prior year. The 2017 effective tax rate was 30.7%, including a $134 million net charge from the U.S. Tax Cuts and Jobs Act; the adjusted effective tax rate was 24.3%.
Adjusted earnings per diluted share from continuing operations were $5.86c. Cash from continuing operating activities was $1,551 million, cash and short-term investments were about $1.5 billion at year-end, and the company returned cash to shareholders through $434 million in dividends and $813 million in share repurchases. The company also completed the sale of its North American fiber glass business in September 2017, which closed the exit from all glass operations and was reported as discontinued operations.
02—Key points
Key Highlights
- Restatement: 2017 income from continuing operations was reduced by $2 million (to $1,369 million, $5.31 per diluted share); 2016 continuing operations income was reduced by $4 million, and the restatement covers both years and several 2017 quarters.
- Material weakness: Management concluded internal control over financial reporting was not effective as of December 31, 2017, citing improper overrides of controls in the financial close process by a former Vice President and Controller, who has been terminated.
- Operating results: Net sales were $14.7 billion, up 3%; income before income taxes was $2,005 million, up $1.2 billion from 2016 due largely to absence of the 2016 pension settlement and restructuring charges.
- Tax: The 2017 effective tax rate was 30.7% including a $134 million net charge from the U.S. Tax Cuts and Jobs Act; the adjusted effective tax rate was 24.3%.
- Cash and capital deployment: Cash from continuing operating activities was $1,551 million; the company paid $434 million in dividends, repurchased $813 million of stock, and spent $325 million on acquisitions.
- Legal and regulatory exposure: PPG self-reported the accounting matters to the SEC, which is continuing its investigation, and a securities class action (Trevor Mild v. PPG Industries, Inc.) was filed on May 20, 2018.
- Portfolio change: The September 2017 sale of the North American fiber glass business for about $540 million in pre-tax proceeds completed the exit from all glass operations, which are reported as discontinued operations.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, PPG Industries kept $0.11.
- Revenue$14.75B100.0%
- Cost of revenue−$8.21B55.7%
- Gross profit$6.54B44.3%
- Operating costs−$4.25B28.8%
- Operating income$2.29B15.5%
- Interest, other & tax−$698.0M4.7%
- Net income$1.59B10.8%
Where FY2017 revenue went
$14.75B- Cost of revenue: $8.21B, 56% of revenue
- SG&A: $3.55B, 24% of revenue
- Net income: $1.59B, 11% of revenue
- R&D: $472.0M, 3.2% of revenue
- Other operating costs: $221.0M, 1.5% of revenue
- Interest, other & tax: $698.0M, 4.7% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-K/AFY2017filed June 28, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $14.75B$14.27B | +3.3% |
| Cost of Revenue | $8.21B— | — |
| Gross Profit | $6.54B— | — |
| R&D Expenses | $472.00M$473.00M | −0.2% |
| SG&A Expenses | $3.55B$3.56B | 0.0% |
| Operating Income | $2.29B$2.38B | −3.8% |
| Interest Expense | $105.00M$125.00M | −16.0% |
| Net Income | $1.59B$873.00M | +82.6% |
| EPS (Basic) | $6.22$3.29 | +89.1% |
| EPS (Diluted) | $6.18$3.27 | +89.0% |
| Shares Outstanding (Basic) | 256.10M265.60M | −3.6% |
| Shares Outstanding (Diluted) | 257.80M267.40M | −3.6% |
05—Questions
Frequently Asked Questions
Why was PPG restating its financial statements?
The company's Audit Committee investigated an internal report and found misstatements caused by improper overrides of internal controls during the financial close process, directed by a former Vice President and Controller and not disclosed to senior management, the Audit Committee or the auditor. The restatement corrects 2017 and 2016 annual results and several quarterly periods, with the net effect on 2017 income from continuing operations being a $2 million decrease.
What is the impact of the restatement on 2017 earnings?
Income from continuing operations was reduced by $2 million, or $0.01 per diluted share, to $1,369 million ($5.31 per diluted share). Income from discontinued operations, net of tax, was increased by $5 million, so net income attributable to PPG is $1,594 million, an increase of $3 million from the previously reported $1,591 million.
What is the status of the material weakness and remediation?
Management concluded that internal control over financial reporting was not effective as of December 31, 2017, because of the material weakness in the financial close process. The filing describes steps taken, including terminating the former Vice President and Controller, appointing an Acting Controller, and planned measures such as enhancing journal entry policies, expense accrual reviews and finance staff training. The company states the material weakness will continue until these measures are implemented, tested and operating effectively.
What legal and regulatory matters are disclosed?
PPG has self-reported the accounting matters to the SEC and is cooperating with an ongoing SEC investigation whose duration and outcome the company cannot predict. A putative securities class action, Trevor Mild v. PPG Industries, Inc., was filed on May 20, 2018 in the U.S. District Court for the Central District of California; the company believes it is without merit and intends to defend it vigorously.
What drove the year-over-year improvement in pre-tax income?
Income before income taxes was $2,005 million, up $1.2 billion from 2016. The filing attributes the increase primarily to the absence of the 2016 pension settlement charges of $968 million and the 2016 business restructuring charge of $191 million, partly offset by higher cost of sales and other factors discussed in the filing.
06—Continue