Restatement of Previously Reported Consolidated Annual Financial Statements

Background

On April 16, 2018, PPG received a report through the Company’s internal reporting system alleging violations of the Company’s accounting policies and procedures regarding the failure to accrue certain specified expenses in the first quarter of 2018. Based on the Company’s initial review at that time, the Company identified approximately $1.4 million of expenses (including legal fees, property taxes and performance-based compensation) that should have been accrued in the first quarter of 2018 and that were then reflected in PPG’s earnings for the quarter ended March 31, 2018, released on April 19, 2018. In addition, the report alleged that there may have been other unspecified expenses, potentially up to $5 million in the aggregate, that were improperly not accrued in the first quarter.

The Audit Committee oversaw an investigation of the matters set forth in the internal report, with the assistance of outside counsel and forensic accountants. The investigation identified the following items with respect to the quarter ended March 31, 2018, in addition to the approximately $1.4 million of expenses described above: (1) failure to record amortization expense in the amount of $1.4 million to correct for amortization of an intangible asset that was inadvertently not recorded over a three-year period and discovered in March 2018; (2) understatement of a health insurance accrued liability in the amount of $0.5 million; and (3) failure to record an adjustment increasing the value of inventory in PPG’s Europe, Middle East and Africa region in the amount of $2.2 million due to inflation of raw materials costs which, when corrected, had a positive effect on income in the first quarter of 2018. These three items resulted in a net increase to income from continuing operations before income taxes of approximately $0.3 million.

The investigation also identified certain inadvertent errors with respect to the quarter ended March 31, 2018. Correction of such inadvertent errors, together with the matters discussed in the immediately preceding paragraph, resulted in a net decrease in income from continuing operations before income taxes of $5.7 million for the quarter ended March 31, 2018. The correction of these inadvertent errors also resulted in a net decrease in income from continuing operations before income taxes of $2.3 million for the year ended December 31, 2017.

The investigation identified the following items with respect to the year ended December 31, 2017: (1) improper reclassifications of gains from income from discontinued operations to income from continuing operations, in total pre-tax amounts of $2.5 million in the quarter ended June 30, 2017 and $4.7 million in the quarter ended December 31, 2017; (2) improper shifting of pre-tax expenses between quarterly periods in 2017, including a total of $3.5 million in compensation expense recorded in the third and fourth quarters of 2017 that should have been recorded in the quarter ended June 30, 2017; an additional expense accrual for health care claims in the amount of $3.5 million recorded in the third quarter of 2017 that should have been recorded in the quarter ended June 30, 2017; additional expense for paid vacation in the amount of $2.2 million recorded in the quarter ended December 31, 2017 that should have been recorded in the second and third quarters of 2017; and additional pension expense in the amount of $1.0 million recorded in the fourth quarter of 2017 that should have been recorded in the quarter ended September 30. 2017.

On May 10, 2018, management, in consultation with the Audit Committee and the Company’s independent registered public accounting firm, PwC, concluded that the Company’s consolidated financial statements for the year ended December 31, 2017 included in the Original Filing and the related report of PwC, and for the quarterly and year-to-date periods in 2017, should no longer be relied upon because of certain misstatements contained in those financial statements.

The investigation identified the following items with respect to the year ended December 31, 2016: (1) improper classification in the consolidated statement of income of the release of a reserve related to the Company’s 2015 business restructuring program in the amount of $3.4 million and (2) an improper reduction in the payout assumption for certain performance-based restricted stock units that had the impact of recognizing a $6.8 million reduction in stock-based compensation expense in the fourth quarter of 2016. In the first quarter of 2017, the payout assumption for these same performance-based restricted stock units was increased, resulting in $6.8 million of stock-based compensation expense in the first quarter of 2017 that would not have been recorded if the payout assumption had not been reduced in the fourth quarter of 2016.

On June 27, 2018, management, in consultation with the Audit Committee and PwC, concluded that the Company’s consolidated financial statements for the year ended December 31, 2016 included in the Original Filing and the related report of PwC, and for the final quarterly and year-to-date period in 2016, should no longer be relied upon because of certain misstatements contained in those financial statements.

On June 27, 2018, the Audit Committee determined that its investigation was complete, and authorized the filing of our restated audited consolidated financial statements for the years ended December 31, 2017 and 2016 and certain quarterly periods within those fiscal years in order to correct our previously issued financial statements.

Impact of the Restatement

Annual

As a result of the restatement, reported net income from continuing operations was decreased by $2 million, or $0.01 per diluted share, and income from discontinued operations, net of tax, was increased by $5 million, or $0.02 per diluted share, for the year ended December 31, 2017. Reported net income from continuing operations decreased by $4 million, or $0.01 per diluted share, and there was no impact to income from discontinued operations, net of tax, for the year ended December 31, 2016.

The categories of misstatements and their impact on previously reported consolidated financial statements for the 2017 and 2016 annual periods are described below:


(a)	Customer Rebates

The Company did not properly recognize expense associated with certain customer rebates, resulting in a misstatement of Net sales in 2017. The misstatement overstated previously reported Income before taxes by $1.8 million for the year ended December 31, 2017.


(b)	Classification of Continuing Operations and Discontinued Operations

Certain items of income related to PPG’s former Glass segment were inappropriately recorded in continuing operations rather than in discontinued operations. The misstatements overstated previously reported Income before income taxes from continuing operations by $7.2 million for the year ended December 31, 2017. The misstatement understated previously recorded Income from discontinued operations, net of tax, by $4.5 million for the year ended December 31, 2017.


(c)	Stock-Based Compensation

In the fourth quarter of 2016, the Company improperly reduced the payout assumption for the 2015 grant of performance-based restricted stock units from 150% to 100%, which had the effect of reducing stock-based compensation expense in that period by $6.8 million. In the first quarter of 2017, the Company increased the payout assumption for these same restricted stock units from 100% back to 150%. These improper changes to the payout assumption for these restricted stock units resulted in a misstatement of stock-based compensation expense in both 2016 and 2017. (See Note 18, “Stock-Based Compensation (As Restated),” for further information concerning the Company’s accounting for Restricted Stock Units.) The misstatements overstated previously reported Income before income taxes by $6.8 million for the year ended December 31, 2016 and understated previously reported Income before income taxes by $6.8 million for the year ended December 31, 2017.


(d)	Environmental Reserve

In 2017, the Company failed to appropriately update the discount rate used to calculate a long-term environmental remediation reserve, which had the effect of understating Other expense by $0.5 million. The misstatement overstated previously reported Income before taxes by $0.5 million for the year ended December 31, 2017.


(e)	Classification of Business Restructuring Expense

The Company misclassified the release of the unused portion of the reserve related to the 2015 business restructuring program in 2016 of $3.4 million. The income associated with the release of the reserve was classified as Other income rather than as a reduction to Business restructuring in the Consolidated Statement of Income. The misclassification had no impact on Income before taxes.


(f)	Income Taxes

Adjustments related to the income tax effects of other restatement adjustments noted above.

The financial statements included in this Form 10-K/A have been restated to reflect the adjustments described above. The tables below summarize the effects of the restatement on PPG’s Consolidated Statements of Income for the years ended December 31, 2017 and 2016, Consolidated Statements of Comprehensive Income for the years ended December 31, 2017 and 2016, and Consolidated Balance Sheets at December 31, 2017 and 2016.

In addition to the restatement of the financial statements, certain information within the following notes to the financial statements and financial statement schedule has been restated to reflect the corrections of misstatements discussed above as well as to add disclosure language as appropriate:

Note 3. Acquisitions and Divestitures

Note 4. Working Capital Detail

Note 8. Business Restructuring

Note 11. Earnings Per Common Share

Note 12. Income Taxes

Note 17. Other Income

Note 18. Stock-Based Compensation

Note 20. Reportable Business Segment Information

Additionally, see Note 19 “Quarterly Financial Information (unaudited) (As Restated)” for the Condensed Consolidated financial statements and notes to the condensed consolidated financial statements (unaudited) as well as tables that summarize the effects of the restatement on the Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Balance Sheets for the appropriate quarterly periods within 2017 and 2016.