Restatement of Previously Reported Condensed Consolidated Quarterly Financial Statements

As described in additional detail in the Explanatory Note to its 2017 Form 10-K/A, the Company restated its audited consolidated financial statements for the years ended December 31, 2017 and 2016 and certain unaudited quarterly results related to the quarters ended December 31, 2016, March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017, including the nine months ended September 30, 2017.

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 of the Board of Directors (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 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; and 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.

The investigation also 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, PricewaterhouseCoopers LLP ("PwC"), concluded that the Company’s consolidated financial statements for the year ended December 31, 2017 included in the Company's originally filed 2017 Annual Report on Form 10-K 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 were adjusted for the interim period ended September 30, 2017 as follows:


•	For the quarter ended September 30, 2017, net income from continuing operations increased $1 million, or zero cents per diluted share, and there was no impact to income from discontinued operations, net of tax.


•	For the nine months ended September 30, 2017, net income from continuing operations decreased $3 million, or $0.01 per diluted share, and income from discontinued operations, net of tax, increased by $2 million, or$0.01 per diluted share.

The categories of misstatements and their impact on previously reported condensed consolidated financial statements are described below:


(a)	Pension Expense

The Company did not properly recognize pension expense in the third and fourth quarters of 2017. The misstatements overstated previously reported Income before income taxes by $1.0 million for the three and nine months ended September 30, 2017.


(b)	Employee Vacation Pay

The Company did not properly recognize expense associated with a change in the Company’s vacation policy in the second and third quarters of 2017. Rather, the entire amount of expense associated with this change was recognized in the fourth quarter of 2017, resulting in a misstatement of expense in the second, third and fourth quarters of 2017. The misstatements overstated previously reported Income from continuing operations before income taxes by $1.3 million and $2.2 million for the three and nine months ended September 30, 2017, respectively.


(c)	Compensation Expense

The Company did not properly record compensation expense related to a payment made to an employee upon his separation from the Company in the second quarter of 2017. Rather, the expense associated with this payment was recognized in the second, third and fourth quarters of 2017 resulting in a misstatement of expense in each of these periods. The misstatements understated previously reported Income from continuing operations before income taxes by $1.4 million for the three months ended September 30, 2017 and overstated previously reported Income from continuing operations before income taxes by $2.1 million for the nine months ended September 30, 2017.


(d)	Health Care Claims

The Company did not properly recognize expense associated with the Company’s liability for employee health care claims in the second quarter of 2017. Rather, this expense was recognized in the third quarter of 2017, resulting in a misstatement of expense in the second and third quarters of 2017. The misstatements understated previously reported Income from continuing operations before income taxes by $3.5 million for the three months ended September 30, 2017. The misstatements had no impact on Income before taxes for the nine months ended September 30, 2017.


(e)	Customer Rebates

The Company did not properly recognize expense associated with certain customer rebates, resulting in a misstatement of Net sales in the first and second quarters of 2017. The misstatements overstated previously reported Income from continuing operations before income taxes by $1.8 million for the nine months ended September 30, 2017.


(f)	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 from continuing operations before income taxes by $6.8 million for the nine months ended September 30, 2017.


(g)	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 from continuing operations before taxes by $0.5 million for the nine months ended September 30, 2017.


(h)	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 from continuing operations before income taxes by $2.5 million for the nine months ended September 30, 2017. The misstatements understated previously recorded Income from discontinued operations, net of tax, by $1.5 million for the nine months ended September 30, 2017.


(i)	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 tables below summarizes the effects of the restatement on the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017.

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



	Three Months Ended September 30, 2017
	As Previously Reported			Restatement Adjustment			Reference	As Restated
Cost of sales, exclusive of depreciation and amortization	2,100			1			(a)	2,101
Selling, general and administrative	905			(3		)	(b),(c),(d)	902

Income from continuing operations before income taxes		$521			$2				$523
Income tax expense	123			1			(i)	124
Income from continuing operations		$398			$1				$399
Loss from discontinued operations, net of tax	217			—				217
Net income attributable to the controlling and noncontrolling interests		$615			$1				$616
Less: Net income attributable to noncontrolling interests	(6		)	—				(6		)
Net income (attributable to PPG)		$609			$1				$610
Amounts attributable to PPG:
Income from continuing operations, net of tax		$392			$1				$393
Loss from discontinued operations, net of tax	217			—				217
Net income (attributable to PPG)		$609			$1				$610

Earnings per common share:
Income from continuing operations, net of tax		$1.53			$—				$1.53
Loss from discontinued operations, net of tax	0.85			—				0.85
Net income (attributable to PPG)		$2.38			$—				$2.38
Earnings per common share – assuming dilution:
Income from continuing operations, net of tax		$1.52			$—				$1.52
Loss from discontinued operations, net of tax	0.84			—				0.84
Net income (attributable to PPG)		$2.36			$—				$2.36

Dividends per common share		$0.45			$—				$0.45



	Nine Months Ended September 30, 2017
	As Previously Reported			Restatement Adjustment			Reference	As Restated
Net sales		$11,068			($2	)	(e)		$11,066
Cost of sales, exclusive of depreciation and amortization	6,087			1			(a)	6,088
Selling, general and administrative	2,658			(2		)	(b),(c),(f)	2,656
Other charges	39			—			(g)	39
Other income	(112		)	3			(h)	(109		)

Income from continuing operations before income taxes		$1,632			($4	)			$1,628
Income tax expense	392			(1		)	(i)	391
Income from continuing operations		$1,240			($3	)			$1,237
Income from discontinued operations, net of tax	220			2			(h)	222
Net income attributable to the controlling and noncontrolling interests		$1,460			($1	)			$1,459
Less: Net income attributable to noncontrolling interests	(16		)	—				(16		)
Net income (attributable to PPG)		$1,444			($1	)			$1,443
Amounts attributable to PPG:
Income from continuing operations, net of tax		$1,224			($3	)			$1,221
Income from discontinued operations, net of tax	220			2				222
Net income (attributable to PPG)		$1,444			($1	)			$1,443

Earnings per common share:
Income from continuing operations, net of tax		$4.76			($0.01	)			$4.75
Income from discontinued operations, net of tax	0.86			—				0.86
Net income (attributable to PPG)		$5.62			($0.01	)			$5.61
Earnings per common share – assuming dilution:
Income from continuing operations, net of tax		$4.73			($0.01	)			$4.72
Income from discontinued operations, net of tax	0.85			0.01				0.86
Net income (attributable to PPG)		$5.58			$—				$5.58

Dividends per common share		$1.25			$—				$1.25

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

In the condensed consolidated statement of comprehensive income for the three and nine months ended September 30, 2017, 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 condensed consolidated statement of cash flows for the nine months ended September 30, 2017. The adjustments only had an impact on certain captions within cash from operating activities.