NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
On September 16, 2015, the Air Products and Chemicals, Inc. (“Air Products”) Board of Directors announced its intention to separate (the “Separation”) Air Products’ Materials Technologies business, into a newly formed company, Versum Materials, LLC. In September 2016, Versum Materials, LLC was converted from a limited liability company to a Delaware corporation, Versum Materials, Inc. On October 1, 2016, Air Products completed the Separation by distributing to its stockholders
one
share of common stock of Versum for every
two
shares of Air Products common stock in a distribution intended to be tax-free to Air Products stockholders (the “Distribution”). As a result of the Distribution, Versum is now an independent public company and its common stock is listed under the symbol “VSM” on the New York Stock Exchange.
We are a global business that provides innovative solutions for specific customer applications within niche markets based upon expertise in specialty materials. Our business employs applications technology to provide solutions to the semiconductor industry through chemical synthesis, analytical technology, process engineering, and surface science. We are comprised of
two
primary operating segments, Materials and Delivery Systems and Services, under which we manage our operations and assess performance, and a Corporate segment.
Basis of Presentation
Prior to the Separation the financial statements and information was prepared on a standalone basis and were derived from Air Products’ consolidated financial statements and accounting records where Versum was a division of Air Products. These financial statements reflect the historical basis and carrying values established when the Company was part of Air Products. Subsequent to the Separation, the accompanying Consolidated Financial Statements are presented on a consolidated basis and include all of the accounts and operations of Versum and its majority-owned subsidiaries. The financial statements reflect the financial position, results of operations and cash flows of Versum in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information.
The financial statements are unaudited and should be read in conjunction with the Annual Combined Financial Statements presented in the Company's Annual Report on Form 10-K for our fiscal year ended
September 30, 2016
. The financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented; all adjustments of a normal, recurring nature have been included to provide a fair statement of the results for the reporting periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the
three and six months ended March 31, 2017
are not necessarily indicative of the results of operations for the full year.
Prior to the Separation, Air Products provided us with centrally managed services and corporate functions. Accordingly, certain shared costs including but not limited to administrative expenses for information technology, general services, human resources, legal, accounting and other services, had been allocated to us and were reflected as expenses in the financial statements. Expenses had been allocated on the basis of direct usage when identifiable, with the remainder allocated on the basis of fixed costs, revenue, operating income or headcount. We consider the expense allocation methodology and results to be reasonable and consistently applied for all periods presented prior to the Separation.
After the Separation, Versum has performed most of these functions using its own resources or purchased services. However, the remainder of these functions will continue to be provided by Air Products under various agreements. See
Note 3
,
Related Party Transactions and Transactions with Air Products
, for a description of the agreements between Versum and Air Products.
For periods prior to October 1, 2016, the annual combined balance sheets of Versum included Air Products’ assets and liabilities that were specifically identifiable or were otherwise transferred to us, including subsidiaries and affiliates in which Air Products had a controlling financial interest. Also included within our financial statements were the results of certain product lines which had historically been managed by us but were retained by Air Products after the Separation. Air Products performed cash management and other treasury-related functions on a centralized basis for nearly all of its legal entities. Substantially all cash generated by our business was remitted to Air Products prior to the Separation and therefore accounted
for through Air Products’ net investment in the financial statements. Accordingly, Air Products had not allocated any centrally managed cash and cash items to us in the financial statements prior to the Separation. Air Products’ debt and related interest expense had not been allocated to us for any of the periods prior to the Separation since we are not the legal obligor of the debt, and Air Products’ borrowings were not directly attributable to us. There were no other financing arrangements between us and Air Products during the periods presented.
For periods prior to the Separation, Versum’s income tax expense was calculated using the separate return method as if Versum was a separate taxpayer. The majority of the accrued U.S. federal, state, and foreign income tax balances were treated as settled with Air Products as of the end of each year. After the Separation, income tax expense and income tax balances represent Versum’s federal, state and foreign income taxes as an independent company.
Accounting Policies
The policies used in preparing the Consolidated Financial Statements are the same as those used in our Annual Report on Form 10-K for our fiscal year ended
September 30, 2016
. There have been no significant changes to these accounting policies during the
three and six months ended March 31, 2017
.
Estimates and Assumptions
The Consolidated Financial Statements have been prepared in conformity with GAAP, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.
2.
NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented
Share-Based Compensation
In March 2016, the Financial Accounting Standards Board (“FASB”) issued an update to simplify the accounting for employee share-based payments, including the income tax impacts, the classification on the statement of cash flows, and forfeitures. The amendments are effective for fiscal year 2018, with early adoption permitted. As of the first quarter of fiscal year 2017, we have adopted this guidance.
New Accounting Guidance to be Implemented
Net Periodic Pension Costs
In March 2017, the Financial Accounting Standards Board (“FASB”) issued guidance which requires an entity to report the service cost component of pension expense in the same line item as other compensation costs. The other components of net (benefit) cost will be required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2017. The components of the net (benefit) cost are shown in
Note 12
,
Retirement Benefits
. The Company is currently evaluating the impact of adopting this guidance.
Derecognition of Non-financial Assets
In February 2017, the FASB issued guidance which clarifies the scope of the derecognition of nonfinancial assets, the definition of in-substance financial assets, and impacts the accounting for partial sales of nonfinancial assets by requiring full gain recognition upon the sale. The guidance is effective for reporting periods beginning after December 15, 2017 and permits the use of either retrospective or modified retrospective methods of adoption. In addition, an entity is required to apply the amendments in this update at the same time that it applies the amendments in the revenue recognition standard. The Company is currently evaluating the impact of adopting this guidance.
Goodwill Impairment
In January 2017, the FASB issued guidance simplifying the test for goodwill impairment, which removes certain steps from the goodwill impairment test. The guidance is effective for annual periods beginning after December 15, 2021, including interim periods within those periods, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance.
Business Combinations
In January 2017, the FASB issued guidance on the definition of a business in business combinations. The guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.
Revenue Recognition
In May 2014, the FASB issued guidance based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. In August 2015, the FASB deferred the effective date by one year, while providing the option to early adopt the standard on the original effective date. Accordingly, we will have the option to adopt the standard in either fiscal year 2018 or 2019. In December 2016 there were further updates to the original guidance that did not revise the effective date. The guidance can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The standard could impact the amount and timing of revenue that we recognize. We are currently evaluating the adoption alternatives and impact that this standard and respective updates will have on our Consolidated Financial Statements.
Going Concern
In August 2014, the FASB issued guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year of the issuance of the financial statements. If substantial doubt exists, additional disclosures would be required. This guidance will be effective beginning in the fourth quarter of fiscal year 2017, with early adoption permitted. This guidance is not expected to have a significant impact on our Consolidated Financial Statements.
Measurement of Inventory
In July 2015, the FASB issued guidance to simplify the measurement of inventory recorded using either the FIFO or average cost basis by changing the subsequent measurement guidance from lower of cost or market to the lower of cost or net realizable value. Inventory measured using LIFO is not impacted. The guidance is effective for us beginning in fiscal year 2018 and will be applied prospectively, with early adoption permitted. This guidance is not expected to have a significant impact on our Consolidated Financial Statements.
Leases
In February 2016, the FASB issued guidance which requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The guidance is effective in fiscal year 2020, with early adoption permitted, and must be applied using a modified retrospective approach. The Company is currently the lessee under various agreements for distribution equipment and vehicles that are currently accounted for as operating leases. The new guidance requires the lessee to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. We are currently evaluating the impact of adopting this new guidance on our Consolidated Financial Statements.
Cash Flow Statement Classification
In August 2016, the FASB issued guidance to reduce diversity in practice on how certain cash receipts and cash payments are classified in the statement of cash flows. The guidance is effective beginning fiscal year 2019, with early adoption permitted, and should be applied retrospectively. We are currently evaluating the impact of adopting this new guidance on our Consolidated Financial Statements.
3.
RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AIR PRODUCTS
Allocation of Expenses
Prior to the Separation, Air Products provided us with centrally managed services and corporate functions. Accordingly, certain shared costs including but not limited to administrative expenses for information technology, general services, human resources, legal, accounting and other services, had been allocated to us and are primarily reflected as expenses in the Corporate segment in the Consolidated Financial Statements. Expenses had been allocated on the basis of direct usage when identifiable, with the remainder allocated on the basis of fixed costs, revenue, operating income, or headcount. We consider the expense allocation methodology and results to be reasonable and consistently applied for all periods presented.
Total costs allocated to us in the consolidated income statements are summarized below:
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Three Months Ended March 31,
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Six Months Ended March 31,
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2017
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2016
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2017
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2016
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(In millions)
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Cost of sales
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$
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—
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$
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0.7
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$
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—
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$
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1.5
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Selling and administrative
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—
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4.1
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—
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8.1
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Research and development
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—
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0.2
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—
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0.5
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Business restructuring and cost reduction actions
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—
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0.2
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—
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0.3
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Total Allocated Costs
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$
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—
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$
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5.2
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$
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—
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$
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10.4
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These allocated costs are reflected in “Air Products’ net investment” and in the consolidated statements of cash flows as a financing activity in “Net transfers (to) from Air Products.” It is impracticable to quantify the amount of expenses that Versum would have incurred on a stand-alone basis for periods prior to the Separation.
Prior to the Separation, certain of our employees participated in share-based compensation plans and retirement benefit plans sponsored and administered by Air Products or its affiliates. The costs of these plans associated with our employees are included in the Consolidated Financial Statements, but excluded from the table of allocated costs above. Our consolidated balance sheet at
September 30, 2016
does not include the share-based compensation instrument.
Agreements with Air Products
In connection with the Separation and Distribution, Versum and its affiliates entered into various agreements with Air Products and its affiliates contemplated by the Separation Agreement, including the following agreements:
Transition Services Agreement.
Under the Transition Services Agreement, Air Products provides certain transition services to us and we provide certain transition services to Air Products. Each party provides these services for a limited time, generally for no longer than
12
to
24
months following the October 1, 2016 Distribution date, for specified fees, which are at cost for services provided by third parties and at cost plus approximately
5%
percent for services provided by either us or Air Products, as applicable.
Tax Matters Agreement.
The Tax Matters Agreement generally governs Air Products’ and Versum’s respective rights, responsibilities and obligations with respect to taxes (including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the contribution, the Distribution or certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes for any tax period ending on or before the Distribution date, as well
as tax periods beginning after the Distribution date. In addition, the Tax Matters Agreement imposes certain restrictions on us and our subsidiaries (including restrictions on share issuances, business combinations, sales of assets and similar transactions) designed to preserve the tax-free status of the contribution, the Distribution and certain related transactions. The Tax Matters Agreement includes special rules that allocate tax liabilities in the event the contribution, the Distribution, or certain related transactions fail to qualify as tax-free for U.S. federal income tax purposes. In general, Versum is liable for taxes incurred by Air Products that may arise if Versum takes, or fails to take, as the case may be, certain actions that may result in the contribution, the Distribution or certain related transactions failing to qualify as tax-free for U.S. federal income tax purposes.
Employee Matters Agreement
. The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to our current and former employees and those of Air Products. The Employee Matters Agreement allocates liabilities and responsibilities relating to employee compensation and benefits plans and programs and other related matters in connection with the Distribution including, without limitation, the treatment of outstanding Air Products’ equity awards, other outstanding incentive compensation awards, deferred compensation obligations and retirement and welfare benefit obligations.
4.
BUSINESS SEPARATION, RESTRUCTURING AND COST REDUCTION ACTIONS
The charges we record for business restructuring and cost reduction actions have been excluded from segment operating income.
During the
three and six months ended March 31, 2017
, we recognized a net charge of
$6.1 million
and
$9.3 million
, respectively.
The net charge primarily consisted of additional costs as a result of the relocation of certain research and development activities and our headquarters and set up of the stand-alone organization.
During the
three and six months ended March 31, 2016
, we recognized a net gain of
$1.8 million
and
$2.7 million
, respectively. The net gain for the six months ended March 31, 2016 included a charge of
$1.5 million
for severance and other benefits related to the elimination of approximately
30
positions as part of cost reduction activities. In addition, we recognized a
$4.2 million
gain on the sale of assets. The majority of these actions pertain to the Materials segment.
The following table summarizes the carrying amount of the accrual for the business realignment and reorganization at
March 31, 2017
:
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Severance and
Other Benefits
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Asset
Actions/Other
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Total
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(In millions)
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Balance, September 30, 2016
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$
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0.6
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|
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$
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—
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$
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0.6
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Current Period Charge
|
0.5
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|
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—
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0.5
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Cash Payments
|
(1.1
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)
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—
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(1.1
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)
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Balance, March 31, 2017
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$
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—
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$
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—
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$
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—
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5.
SALE OF EQUITY AFFILIATE
In December 2015, we sold our investment in our equity affiliate, Daido Air Products Electronics, Inc., for
$15.9 million
, which resulted in a before-tax gain of
$0.7 million
for the three months ending December 31, 2015. The carrying value at the time of sale included a
$12.8 million
investment in net assets of and advances to equity affiliates and a
$2.4 million
foreign currency translation loss that had been deferred in accumulated other comprehensive loss. In addition, the income tax provision, before the valuation allowance, for the three months ending December 31, 2015 included an expense of
$5.3 million
as a result of the sale.
6.
INVENTORIES
The components of inventories are as follows:
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March 31, 2017
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September 30, 2016
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(In millions)
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Inventories at FIFO cost
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Finished goods
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$
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81.1
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$
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94.0
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Work in process
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16.9
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12.3
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Raw materials, supplies and other
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46.5
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29.4
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144.5
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135.7
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Less: Excess of FIFO cost over LIFO cost
|
(8.0
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)
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(8.3
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)
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Inventories
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$
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136.5
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$
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127.4
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First-in, first- out (FIFO) cost approximates replacement cost.
7.
GOODWILL
Changes to the carrying amount of goodwill by segment are as follows:
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Materials
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Delivery
Systems and
Services
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Total
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(In millions)
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Balance at September 30, 2016
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$
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162.6
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$
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17.5
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$
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180.1
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Currency translation adjustment
|
(1.6
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)
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(0.1
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)
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|
(1.7
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)
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Balance at March 31, 2017
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$
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161.0
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$
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17.4
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$
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178.4
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Goodwill is subject to impairment testing in the fourth quarter of each fiscal year and whenever events and changes in circumstances indicate that the carrying value of goodwill might not be recoverable. There were no events or circumstances indicating that goodwill might be impaired at
March 31, 2017
.
8.
DEBT
Components of Debt
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March 31, 2017
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September 30, 2016
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(In millions)
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Short-term borrowings
(A)
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$
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1.5
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$
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—
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Current portion of long-term debt
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5.8
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5.8
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Long-term debt
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978.9
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980.3
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Total Debt
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$
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986.2
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$
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986.1
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(A)
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Represents borrowing under foreign lines of credit by non-U.S. subsidiaries which are short term in nature. Availability under these lines of credit at
March 31, 2017
is
$11.6 million
.
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Long-term debt
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March 31, 2017
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September 30, 2016
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(In millions)
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Term loan facility under Credit Agreement
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$
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572.1
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$
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575.0
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Revolving facility under Credit Agreement
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—
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—
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5.500% Senior Notes due 2024
|
425.0
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425.0
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Total debt
|
997.1
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|
1,000.0
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Less debt discount
|
2.6
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2.8
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Less deferred debt costs
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9.8
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11.1
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Less current portion of long-term debt
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5.8
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5.8
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Long-term debt payable after one year
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$
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978.9
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$
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980.3
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Credit Agreement
On September 30, 2016, Versum entered into a credit agreement (the “Credit Agreement”) providing for a senior secured first lien term loan B facility of
$575 million
(the “Term Facility”) and a senior secured first lien revolving credit facility of
$200 million
(the “Revolving Facility” and, together with the Term Facility, the “Senior Credit Facilities”). The Senior Credit Facilities are guaranteed by Versum’s material direct and indirect wholly-owned domestic restricted subsidiaries and secured by substantially all of the assets of Versum and its subsidiary guarantors.
Borrowings under the Term Facility bear interest at a rate of either
LIBOR
(adjusted for statutory reserve requirements), subject to a minimum floor of
0.75%
, plus a margin of
2.50%
or an alternate
base rate
, subject to a minimum floor of
1.75%
, plus a margin of
1.50%
(effective rate of
3.65%
as of
March 31, 2017
). The Term Facility matures on
September 30, 2023
, and will amortize in equal quarterly installments in aggregate annual amounts equal to
1.00%
of the original principal amount of the Term Facility, with the balance payable on
September 30, 2023
.
Borrowings under the Revolving Facility bear interest initially at a rate of either
LIBOR
(adjusted for statutory reserve requirements) plus a margin of
2.00%
or an alternate
base rate
plus a margin of
1.00%
, and after delivery of the financial statements for the first full fiscal quarter, subject to a
0.25%
margin reduction based on achieving a first lien net leverage ratio of
1.00
:1.00 for the prior four-quarter period. A commitment fee of
0.375%
initially, subject to a reduction to
0.25%
based on achieving a first lien net leverage ratio of
1.00
:1.00 for the prior four-quarter period after delivery of the financial statements for the first full fiscal quarter, on the unused portion of the Revolving Facility is payable quarterly in arrears. Letter of credit fees are payable on outstanding letters of credit under the Revolving Facility, and fronting fees equal to a percentage to be agreed with each issuing bank (not to exceed
0.125%
) are payable to the issuing banks. The Revolving Facility matures on
September 30, 2021
. A maximum first lien net leverage ratio covenant (total debt net of cash on hand to total adjusted EBITDA) of
3.25
:1.00 will apply if we draw upon the Revolving Facility. As of
March 31, 2017
, we had availability of
$200 million
under Revolving Facility.
The Credit Agreement provides that, commencing with Versum’s fiscal year ending on September 30, 2017, a percentage of excess cash flow ranging from
0%
to
50%
, depending on the first lien net leverage ratio, is required to be used to prepay the Term Facility.
Senior Notes
On September 30, 2016, Versum issued
$425 million
of
5.5%
Senior Notes due
2024
. The Notes are unsecured senior obligations of Versum, guaranteed by each of Versum’s subsidiaries that is a guarantor under the Senior Credit Facilities. The Notes bear interest at a rate of
5.5%
per annum payable semiannually on March 15 and September 15 of each year, commencing on March 15, 2017. The Notes will mature on September 30,
2024
.
Versum may, at its option, redeem some or all of the Notes during such times and at such prices as described in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption.
The agreements governing our indebtedness contain a number of affirmative and negative covenants. We were in compliance with all of our covenants at
March 31, 2017
.
9.
INCOME TAXES
As discussed in Note 1, the Separation of Versum from Air Products was completed on October 1, 2016. In connection with the Separation and as a result of the change from the separate return method under the carve-out financial statements, Versum adjusted certain current and deferred tax accounts, including a net decrease in deferred tax liabilities of approximately
$22.7 million
and a net increase in tax payable of approximately
$11.0 million
.
Versum records U.S. income and foreign withholding taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested. In conjunction with the Separation, Versum changed its indefinite reinvestment assertion on certain earnings of foreign subsidiaries. As a result, foreign withholding tax cost of
$1.1 million
was recognized.
10.
FINANCIAL INSTRUMENTS
We enter into forward exchange contracts to hedge the fair value exposure on intercompany loans. During the
three months ended March 31, 2017
, this portfolio of forward exchange contracts consisted primarily of Korean Won and U.S. dollars as well as Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding at
March 31, 2017
is approximately
6
months. At
March 31, 2017
, the total notional principal amount of our outstanding hedge contracts was
$93.1 million
.
As of
March 31, 2017
there were
no
derivatives designated as hedging instruments. The table below summarizes the fair values of our derivatives not designated as hedging instruments and balance sheet location of these outstanding derivatives:
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March 31, 2017
|
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Balance Sheet Location
|
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Amount
|
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Balance Sheet Location
|
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Amount
|
(In millions)
|
|
|
|
|
|
|
|
Forward exchange contracts
|
Other current assets
|
|
$
|
1.7
|
|
|
Payables and accrued liabilities
|
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$
|
0.1
|
|
Refer to
Note 11
,
Fair Value
, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.
The table below summarizes the gain or loss related to our forward contracts:
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Three Months Ended March 31, 2017
|
|
Six Months Ended March 31, 2017
|
(In millions)
|
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|
|
Forward Exchange Contracts, net of tax:
|
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|
|
Net loss recognized in other (income) expense, net
(A)
|
$
|
0.9
|
|
|
$
|
1.1
|
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|
(A)
|
The impact of the non-designated hedges noted above was largely offset by gains and losses resulting from the impact of changes in exchange rates on recognized assets and liabilities denominated in nonfunctional currencies.
|
The cash flows related to all derivative contracts are reported in the operating activities section of the consolidated statements of cash flows.
11.
FAIR VALUE
Fair value is defined as an exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3 - Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability).
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Derivatives
The fair value of our forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs which are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. Therefore, the fair value of our derivatives is classified as a level 2 measurement.
Refer to
Note 10
,
Financial Instruments
, for a description of derivative instruments, including details on the balance sheet line classifications.
Long-term Debt
The fair value of our senior notes is based primarily on quoted market prices reported on or near the respective balance sheet date and is therefore level 1. The fair value of our term loan facility debt is based on estimates using standard pricing models that take into account the value of future cash flows as of the balance sheet date, discounted to a present value using market based assumptions including published interest rates. This standard valuation model utilizes observable market data therefore, the fair value of our debt is classified as a level 2 measurement.
The carrying values and fair values of our derivatives and debt are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Fair Value
|
|
Carrying Value
|
(In millions)
|
|
Assets
|
|
|
|
Forward Exchange Contracts
|
$
|
1.7
|
|
|
$
|
1.7
|
|
|
|
|
|
Liabilities
|
|
|
|
Forward Exchange Contracts
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Long-term Debt
|
|
|
|
Senior Notes
|
$
|
440.4
|
|
|
$
|
425.0
|
|
Term Loan Facility
|
580.7
|
|
|
572.1
|
|
Total Long-term Debt
|
$
|
1,021.1
|
|
|
$
|
997.1
|
|
The carrying amounts reported in the consolidated balance sheet for cash and cash items, trade receivables, payables and accrued liabilities, and accrued income taxes approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.
12.
RETIREMENT BENEFITS
For periods prior to October 1, 2016, Air Products offered various long-term benefits to our employees through defined benefit pension plans and defined contribution plans. Prior to the Separation on October 1, 2016, participation of our employees in these plans is reflected in the Consolidated Financial Statements as though we participated in a multi-employer plan with Air Products.
Defined Benefit Pensions
In 2017, certain international pension plans were legally split from Air Products. Our plans provide certain international employees in Germany, Korea and Taiwan who previously participated in the Air Products plans the same defined benefit pension benefits that had previously been provided by Air Products. In connection with the Separation, during the first quarter of 2017, Versum assumed defined benefit pension plan assets of approximately
$3 million
and a benefit obligation of approximately
$27 million
. The net benefit obligation of
$24 million
is reflected on our consolidated balance sheet as of
March 31, 2017
.
The components of net periodic pension costs for Versum’s defined benefit pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Six Months Ended March 31, 2017
|
(In millions)
|
|
|
|
Service cost
|
$
|
0.5
|
|
|
$
|
1.1
|
|
Interest cost
|
0.2
|
|
|
0.3
|
|
Actuarial loss amortization
|
0.1
|
|
|
0.2
|
|
Net periodic pension cost
|
$
|
0.8
|
|
|
$
|
1.6
|
|
Defined Contribution Plan
Prior to the Separation, Air Products sponsored several defined contribution plans which covered all U.S. employees and certain non-U.S. employees. Versum received an allocation of the total cost of defined contribution plans from Air Products.
Upon Separation, our employees’ balances were transferred to a new Versum defined contribution plan.
The following table summarizes our defined contribution expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Six Months Ended March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
(In millions)
|
|
|
|
|
|
|
|
Defined contribution expense
|
$
|
1.8
|
|
|
$
|
1.3
|
|
|
$
|
3.7
|
|
|
$
|
2.7
|
|
13.
SHARE-BASED COMPENSATION
In accordance with the Employee Matters Agreement entered into between Versum and Air Products on September 29, 2016 in connection with the Separation, all share-based compensation awards previously granted to Versum employees under Air Products’ Long-Term Incentive Plan that were outstanding on October 1, 2016, other than restricted stock, were adjusted and converted into Versum equity with substantially the same terms and conditions as the original Air Products awards. To preserve the aggregate intrinsic value of these share-based compensation awards, as measured immediately before and immediately after the Separation, each holder of Air Products share-based compensation awards generally received an adjusted award denominated in Versum equity as follows: (a) Air Products stock options were converted into options to purchase Versum common stock, with the number and exercise price adjusted to maintain economic value; (b) Air Products
time-based restricted stock units were converted to Versum time-based restricted stock units, with the number adjusted to maintain economic value; (c) Air Products performance shares in the form of market-based restricted stock units were converted to Versum market-based restricted stock units, with the number adjusted to maintain economic value; and (d) holders of Air Products restricted stock received one-half of a fully vested share of Versum common stock for every share of Air Products restricted stock held at the time of the Separation, as if such holder held fully vested Air Products common stock on the record date. The converted awards will continue to vest over the original vesting period defined at the grant date.
Versum was allocated share-based compensation expense associated with its employees based on these adjusted and converted share-based compensation awards. As a result of the conversion, we have the following outstanding share-based compensation awards: (a) stock options; (b) time-based restricted stock units; and (c) market-based restricted stock units.
In addition, during the three months ended December 31, 2016, under the Versum Long-Term Incentive Plan we made a one-time Founders grant of time-based restricted stock units and we made fiscal 2017 annual awards of market-based restricted stock units, consisting of performance-based restricted stock units and performance-based market stock units. Under all programs, the terms of the awards are fixed at the grant date. We issue new shares upon the payout of restricted stock units and the exercise of stock options. As of
March 31, 2017
, there were
3.3 million
shares available for future grant under the Versum Long-Term Incentive Plan.
Share-based compensation awards cost recognized in the consolidated income statement is summarized below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Six Months Ended March 31, 2017
|
(In millions)
|
|
|
|
Before-Tax Share-Based Compensation Award Cost
|
$
|
1.9
|
|
|
$
|
3.5
|
|
Income Tax Benefit
|
0.7
|
|
|
1.2
|
|
After-Tax Share-Based Compensation Award Cost
|
$
|
1.2
|
|
|
$
|
2.3
|
|
Before-tax share-based compensation award cost is primarily included in selling and administrative expense on our consolidated income statements.
Total before-tax share-based compensation award cost by type of program was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Six Months Ended March 31, 2017
|
(In millions)
|
|
|
|
Restricted stock units
|
$
|
1.9
|
|
|
$
|
3.4
|
|
Stock options
|
—
|
|
|
0.1
|
|
Before-Tax Share-Based Compensation Cost
|
$
|
1.9
|
|
|
$
|
3.5
|
|
Restricted Stock Units
Converted share-based compensation awards
. As a result of the conversion in connection with the Separation described above, Versum executive officers and employees have outstanding time-based restricted stock units and market-based restricted stock units. These converted restricted stock units entitle the recipient to
one
share of common stock and accumulated dividends upon vesting. The payout of the converted market-based restricted stock units is conditioned on continued employment during a
three
year deferral period subject to payout upon death, disability, or retirement. The earn-out amount of these awards is based on a formula to be determined by the Versum Compensation Committee. The converted time-based restricted stock units vest
four
years after the grant date subject to payout upon death, disability or retirement. Upon involuntary termination without cause, a pro rata portion of restricted stock units will vest. Dividend equivalents are paid in cash and equal the dividends that would have accrued on a share of stock from the grant date to the vesting date.
New share-based compensation awards
During the three months ended December 31, 2016, under the Versum Long-Term Incentive Plan we made a one-time Founders grant of
424,247
time-based restricted stock units at a weighted-average grant-date fair value of
$22.53
per unit. One third of the Founders RSUs vest on October 1, 2018, one third vest on October 1, 2019, and one third vest on October 1, 2020, subject to the holder’s continued employment with the Company.
In addition, during the three months ended December 31, 2016, under its Long-Term Incentive Plan Versum granted
304,520
market-based restricted stock units, consisting of performance-based restricted stock units and performance-based market stock units. The performance-based restricted stock units are earned at the end of a performance period beginning October 1, 2016 and ending September 30, 2019, conditioned on the level of Versum’s total shareholder return in relation to a defined peer group over the
three
-year performance period. The performance-based market stock units are earned based on the percentage change in the price of Versum’s common stock over the performance period beginning October 1, 2016 and ending September 30, 2019. Subject to the recipient’s continued employment, these restricted stock units generally vest on the date that the Versum Committee certifies the payout determination under the performance goals, which date must be within
90
days after the end of the performance period. Vesting is subject to certain exceptions in the event of involuntary termination by Versum, death, disability or retirement. Under GAAP, both the performance-based restricted stock units and performance-based market stock units are considered market-based awards. Upon vesting, each restricted stock unit represents the right to receive
one
share of our common stock. Dividend equivalent rights accrue for these awards, but do not vest unless the underlying awards vest.
The market-based restricted stock units awarded during the three months ended December 31, 2016 had an estimated grant-date fair value of
$29.68
per unit for the performance-based restricted stock units and
$28.37
for the performance-based market stock units. The fair value of market-based restricted stock units was estimated using a Monte Carlo simulation model as these equity awards are tied to a market condition. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards.
We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period; however, expense recognition is accelerated for retirement eligible individuals who meet the requirements for vesting upon retirement.
The calculation of the fair value of market-based restricted stock units during the three months ended December 31, 2016 used the following assumptions:
|
|
|
|
(In percentages)
|
|
Expected volatility
|
28.7
|
%
|
Risk-free interest rate
|
1.4
|
%
|
A summary of restricted stock unit activity is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant-Date Fair Value
|
(In millions, except weighted average)
|
|
|
|
Outstanding, September 30, 2016
|
—
|
|
|
$
|
—
|
|
Converted on October 1, 2016
|
0.5
|
|
|
22.85
|
|
Granted
|
0.7
|
|
|
25.30
|
|
Paid out
|
(0.1
|
)
|
|
15.55
|
|
Forfeited/adjustments
|
—
|
|
|
—
|
|
Outstanding at March 31, 2017
|
1.1
|
|
|
$
|
25.30
|
|
No
cash payments were made for restricted stock units for the
three and six months ended March 31, 2017
. As of
March 31, 2017
, there was
$18.1 million
of unrecognized compensation cost related to restricted stock units. The cost is expected to be recognized over a weighted average period of
3.0 years
. The total fair value of restricted stock units paid out during the
three and six months ended March 31, 2017
, including shares vested in prior periods, was
$0.2 million
and
$1.7 million
, respectively.
Stock Options
We may grant awards of options to purchase common stock to executive officers and selected employees. All of our outstanding stock options are a result of the conversion in connection with the Separation as described above. The exercise price of stock options equals the market price of our stock on the date of the grant. Options generally vest incrementally over
three
years, and remain exercisable for
ten
years from the date of grant.
During the
three and six months ended March 31, 2017
,
no
stock options were granted.
A summary of stock option activity is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
(In millions, except weighted average)
|
|
|
|
Outstanding, September 30, 2016
|
—
|
|
|
$
|
—
|
|
Converted on October 1, 2016
|
0.5
|
|
|
18.37
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at March 31, 2017
|
0.5
|
|
|
$
|
18.36
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Contractual Terms (In years)
|
|
Aggregate Intrinsic Value
|
(In millions, except years)
|
|
|
|
Outstanding at March 31, 2017
|
5.9
|
|
$
|
6.3
|
|
Exercisable at March 31, 2017
|
5.8
|
|
6.2
|
|
The aggregate intrinsic value represents the amount by which our closing stock price of
$30.60
as of
March 31, 2017
exceeds the exercise price multiplied by the number of in-the-money options outstanding or exercisable.
The total intrinsic value of stock options exercised during the
three and six months ended March 31, 2017
was
$0.1 million
.
Compensation cost is generally recognized over the stated vesting period consistent with the terms of the arrangement (i.e., either on a straight-line or graded-vesting basis). Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. As of
March 31, 2017
, there was
$0.1 million
of unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of
0.6
years.
14.
STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
The table below summarizes changes in accumulated other comprehensive loss (AOCL), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on derivatives qualifying as hedges
|
|
Foreign currency translation adjustments
|
|
Pension and postretirement benefits
|
|
Total
|
(In millions)
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
$
|
(0.2
|
)
|
|
$
|
(9.8
|
)
|
|
$
|
—
|
|
|
$
|
(10.0
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(4.6
|
)
|
|
—
|
|
|
(4.6
|
)
|
Net transfers from Air Products
|
—
|
|
|
3.8
|
|
|
(5.9
|
)
|
|
(2.1
|
)
|
Amounts reclassified from AOCL
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
Net current period other comprehensive loss
|
—
|
|
|
(0.8
|
)
|
|
(5.7
|
)
|
|
(6.5
|
)
|
Other comprehensive loss attributable to non-controlling interest
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
Balance at March 31, 2017
|
$
|
(0.2
|
)
|
|
$
|
(12.0
|
)
|
|
$
|
(5.7
|
)
|
|
$
|
(17.9
|
)
|
The table below summarizes the reclassifications out of accumulated other comprehensive loss and the affected line item on the consolidated income statements:
|
|
|
|
|
|
Six Months Ended March 31, 2017
|
(In millions)
|
|
Pension and Postretirement Benefits, net of tax
(A)
|
$
|
0.2
|
|
|
|
(A)
|
The components include actuarial loss amortization and are reflected in net periodic benefit cost. Refer to
Note 12
,
Retirement Benefits
, for further information.
|
Cash Dividends
Holders of the Company’s common stock are entitled to receive dividends when they are declared by the Company’s Board of Directors. In March 2017, the Company’s Board of Directors declared a quarterly cash dividend of
$0.05
per share, totaling
$5.4 million
, which was paid on April 19, 2017 to shareholders of record as of April 5, 2017.
Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors.
15.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Six Months Ended March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
(In millions, except per share data)
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
Net Income Attributable to Versum
|
$
|
44.9
|
|
|
$
|
53.8
|
|
|
$
|
95.7
|
|
|
$
|
119.0
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - Basic
|
108.7
|
|
|
108.7
|
|
|
108.7
|
|
|
108.7
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
Employee stock option and other award plans
|
0.6
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
Weighted average number of common shares - Diluted
|
109.3
|
|
|
108.7
|
|
|
109.2
|
|
|
108.7
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share Attributable to Versum
|
|
|
|
|
|
|
|
Net Income Attributable to Versum - Basic
|
$
|
0.41
|
|
|
$
|
0.49
|
|
|
$
|
0.88
|
|
|
$
|
1.09
|
|
Net Income Attributable to Versum - Diluted
|
0.41
|
|
|
0.49
|
|
|
0.88
|
|
|
1.09
|
|
The computation of basic and diluted earnings per common share is calculated assuming the number of shares of Versum common stock outstanding on October 1, 2016 had been outstanding at the beginning of each period presented. For periods prior to the Separation, it is assumed that there are no dilutive equity instruments as there were no equity awards in Versum outstanding prior to the Separation. See
Note 1
for further discussion of the Separation.
For the
three and six months ended March 31, 2017
, outstanding share-based awards of
0.0 million
and
0.1 million
shares, respectively, were anti-dilutive and therefore excluded from the computation of diluted earnings per share.
16.
COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, Versum may be involved in various legal proceedings, including commercial, environmental, health, safety, and product liability matters. Although litigation with respect to these matters is routine and incidental to the conduct of our business, such litigation may result in large monetary awards for compensatory and punitive damages. Versum does not currently believe that there are any legal proceedings, individually or in the aggregate, that are reasonably possible to have a material impact on its financial condition, results of operations, or cash flows. While Versum cannot predict the outcome of any litigation, environmental, or regulatory matter or the potential for future litigation or regulatory action, we have evaluated all litigation, environmental and regulatory proceedings, claims and assessments in which Versum is involved, and do not believe that any of these matters, individually or in the aggregate, will result in losses that are materially in excess of amounts already recognized, if any.
Refer to Note 17 of "Notes to the Consolidated Financial Statements" in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, for additional information regarding commitments and contingencies.
17.
SEGMENT INFORMATION
We are comprised of
two
primary operating segments, Materials and Delivery Systems and Services, under which we manage our operations and assess performance, and a Corporate segment. Our segments are differentiated by the types of products sold.
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Six Months Ended March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
(In millions)
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
Materials
|
$
|
198.3
|
|
|
$
|
181.5
|
|
|
$
|
406.3
|
|
|
$
|
370.3
|
|
Delivery Systems and Services
|
71.7
|
|
|
52.0
|
|
|
133.6
|
|
|
108.7
|
|
Corporate
|
0.8
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
Total
|
$
|
270.8
|
|
|
$
|
233.5
|
|
|
$
|
541.6
|
|
|
$
|
479.0
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
Materials
|
$
|
65.1
|
|
|
$
|
60.1
|
|
|
$
|
138.0
|
|
|
$
|
128.6
|
|
Delivery Systems and Services
|
17.7
|
|
|
9.7
|
|
|
30.1
|
|
|
25.6
|
|
Corporate
|
(6.8
|
)
|
|
(3.7
|
)
|
|
(9.8
|
)
|
|
(8.4
|
)
|
Segment Total
|
$
|
76.0
|
|
|
$
|
66.1
|
|
|
$
|
158.3
|
|
|
$
|
145.8
|
|
Business separation, restructuring and cost reduction actions
|
(6.1
|
)
|
|
1.8
|
|
|
(9.3
|
)
|
|
2.7
|
|
Total
|
$
|
69.9
|
|
|
$
|
67.9
|
|
|
$
|
149.0
|
|
|
$
|
148.5
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
September 30, 2016
|
(In millions)
|
|
|
|
Total Assets
|
|
|
|
Materials
|
$
|
750.4
|
|
|
$
|
733.4
|
|
Delivery Systems and Services
|
118.3
|
|
|
104.0
|
|
Corporate
|
251.3
|
|
|
206.4
|
|
Total
|
$
|
1,120.0
|
|
|
$
|
1,043.8
|
|