Restatement of Previously Reported Condensed Consolidated Quarterly Financial Statements

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 investigation identified 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 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.

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

As a result of the restatement, reported net income from continuing operations and earnings per diluted share from continuing operations was adjusted for the quarter ended March 31, 2017 as follows:


•	For the three months ended March 31, 2017, net income from continuing operations increased $3 million, or $0.01 per diluted share, and there was no impact to income from discontinued operations, net of tax

The categories of misstatements and their impact on previously reported consolidated financial statements 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 the first quarter of 2017. The misstatements overstated previously reported Income before income taxes by $0.4 million.


(b)	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 the first quarter of 2017. The misstatements understated previously reported Income before income taxes by $6.8 million for the quarter ended March 31, 2017.


(c)	Environmental Reserve

In the first quarter of 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 in the quarter. The misstatement overstated previously reported Income before taxes by $0.5 million for the quarter ended March 31, 2017.


(d)	Income Taxes

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

The financial statements included in this Form 10-Q have been restated to reflect the adjustments described above. The table below summarizes the effects of the restatement on the Consolidated Statements of Income for the three months ended March 31, 2017.

Consolidated Statement of Income (unaudited) - Summary of Restatement



	Three Months Ended March 31, 2017
($ in millions)	As Previously Reported ⁽¹⁾			Restatement Adjustment			Reference	As Restated
Net sales		$3,486			$—		(a)		$3,486
Selling, general and administrative	881			(6		)	(b)	875
Other charges	25			—			(c)	25

Income from continuing operations before income taxes		$440			$6				$446
Income tax expense	107			3			(d)	110
Income from continuing operations		$333			$3				$336
Income from discontinued operations, net of tax	6			—				6
Net income attributable to the controlling and noncontrolling interests		$339			$3				$342
Less: Net income attributable to noncontrolling interests	(5		)	—				(5		)
Net income (attributable to PPG)		$334			$3				$337
Amounts attributable to PPG:
Income from continuing operations, net of tax		$328			$3				$331
Income from discontinued operations, net of tax	6			—				6
Net income (attributable to PPG)		$334			$3				$337

Earnings per common share:
Income from continuing operations, net of tax		$1.28			$0.01				$1.29
Income from discontinued operations, net of tax	0.02			—				0.02
Net income (attributable to PPG)		$1.30			$0.01				$1.31
Earnings per common share – assuming dilution:
Income from continuing operations, net of tax		$1.27			$0.01				$1.28
Income from discontinued operations, net of tax	0.02			—				0.02
Net income (attributable to PPG)		$1.29			$0.01				$1.30

Dividends per common share		$0.40			$—				$0.40


(1)	Certain "As Previously Reported" amounts have been reclassified to reflect the adoption of ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" as of January 1, 2018.

Quarterly Condensed Consolidated Statement of Comprehensive Income (unaudited) - Summary of Restatement

In the Statement of Comprehensive Income for the interim period ended March 31, 2018, Net income attributable to the controlling and noncontrolling interests reflects the impact of the restatement adjustments. The restatement adjustments had no impact to the previously disclosed components of Other comprehensive income, net of tax.

Quarterly Condensed Consolidated Statement of Cash Flows (unaudited) - Summary of Restatement

There was no net impact of the restatement adjustments on net cash provided by operating activities, net cash provided by investing activities or net cash used in financing activities in the Consolidated Statement of Cash Flows. The adjustments only had an impact on certain captions within cash from operating activities.