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PPG Industries’ Earnings Miss and Accounting Issues

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PPG Industries’ 1Q18 adjusted EPS

PPG Industries (PPG) announced its 1Q18 earnings before the market opened on April 19. The company reported adjusted EPS (earnings per share) of $1.39 in 1Q18, a rise of ~3.0% over its 4Q16 EPS on a reporting basis. In 4Q16, PPG Industries reported adjusted EPS of $1.35. On a continuing operation basis, the earnings represent growth of 4.5%. However, PPG’s earnings missed analysts’ estimate of $1.40 adjusted EPS.

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Adjusted net income excludes direct cost realignment following a customer assortment change in US architectural coatings. The growth in adjusted earnings per share was mainly driven by higher price realization, share repurchases, and aggressive cost management. During the quarter, PPG’s selling, general, and administrative expenses were reported at $903 million, representing ~23.9% of sales. In 1Q17, it was 25.3% of the revenue, which reflects a gain of 140 basis points on a year-over-year basis. However, rising raw materials costs had an adverse impact on PPG’s earnings as its cost of goods sold (or COGS) increased as a percentage of sales. PPG’s COGS rose by 300 basis points on a YoY basis on a continuing operation basis.

PPG continued its share buyback and bought $600 million worth of outstanding shares. At the end of 1Q18, PPG has 251.4 million common outstanding shares, compared to 259.5 million shares in 1Q17.

Stock price reaction

The other important thing highlighted in 1Q18 was accounting issues. The initial review from PPG suggested the identification of a $1.4 million expense accrual should have been accrued in this quarter. It’s also alleged that there could be other expenses, up to $5 million. PPG is investigating the matter and didn’t specify the turnaround time.

The missed earnings and accounting issues led the PPG stock price to fall ~3.1% and close at $109.64. Sherwin-Williams (SHW), Axalta (AXTA), and RPM International (RPM) fell  1.2%, 2.20%, and 2.4%, respectively.

The Materials Select Sector SPDR ETF (XLB) has invested 4.5% of its portfolio in PPG Industries.

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