NOTES TO ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION
In September 2016, Versum Materials, Inc. was formed and after its Separation from Air Products on October 1, 2016, Versum began operating as 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.
Prior to the Separation, the accompanying Annual Consolidated Financial Statements of Versum, were prepared on a stand-alone basis and were derived from Air Products’ consolidated financial statements and accounting records where Versum was a division of Air Products. For all periods presented, the Annual Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Versum. All significant intercompany transactions and balances have been eliminated in the preparation of the accompanying Annual Consolidated Financial Statements. Prior to the Separation, transactions between Versum and Air Products were reflected in the annual consolidated statements of cash flows as a financing activity in “Net transfers to Air Products.”
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 Annual 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 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 continued to be provided by Air Products under various agreements. See
Note 4
,
Related Party Transactions
, for a description of the agreements between Versum and Air Products.
For periods prior to October 1, 2016, included within our Annual Consolidated 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. These product lines represented approximately
1%
and
1%
of annual combined sales and operating income, respectively, for fiscal year 2016.
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.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates and Assumptions
The preparation of the Annual Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the Annual Consolidated Financial Statements and accompanying notes, including allocations of costs during the reporting period. Management’s estimates are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed to be reasonable. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized as risk and title to the product transfer to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. Sales returns and allowances are generally not a business practice in the industry.
We use both the completed contract and percentage-of-completion methods to record revenue from equipment sale contracts. The completed contract method is used in circumstances in which financial position and results of operations are not materially different from those resulting from use of the percentage-of-completion method, e.g., certain short-term contracts. We use the percentage-of-completion method when we can make reasonably dependable estimates of progress toward completion and performance is expected.
Under the percentage-of-completion method, revenue from the sale of major equipment is recognized primarily based on costs incurred to date compared with total estimated costs. Under the completed contract method, revenue and cost is recognized when the equipment is completed and transferred to the customer. Changes to estimated labor hours under the percentage-of-completion method or anticipated losses under either method, if any, are recognized in the period determined.
Revenue from on-site services are generally fixed monthly fee arrangements for which we recognize revenue as the services are performed.
Amounts billed for shipping and handling fees are classified as sales in the consolidated income statements.
Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue-producing transactions are presented on a net basis and excluded from sales in the consolidated income statements. We record a liability until remitted to the respective taxing authority.
Cost of Sales
Cost of sales predominantly represents the cost of tangible products sold. These costs include labor, raw materials, depreciation, production supplies, and materials packaging costs. Costs incurred for shipping and handling are also included in cost of sales.
Depreciation
Depreciation is recorded using the straight-line method, which deducts equal amounts of the cost of each asset from earnings every year over its expected economic useful life. The principal lives for major classes of plant and equipment are summarized in
Note 8
, Plant and Equipment, Net.
Selling and Administrative
The principal components of selling and administrative expenses are compensation, advertising, and promotional costs.
Research and Development
Research and development costs are expensed as incurred. Research and development expenses include employee costs, materials, contract services, research agreements, and other external spending related to the discovery and development of new products, enhancement of existing products and regulatory approval of new and existing products.
Post-employment Benefits
We provide termination benefits to employees as part of ongoing benefit arrangements and record a liability for termination benefits when probable and estimable. These criteria are met when management, with the appropriate level of authority, approves and commits to its plan of action for termination; the plan identifies the employees to be terminated and their related benefits; and the plan is to be completed within one year. We typically do not provide one-time benefit arrangements of significance.
Fair Value Measurements
We are required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent accounting or reporting. For example, fair value is used in the initial measurement of net assets acquired in a business combination; on a recurring basis in the measurement of derivative financial instruments; and on a nonrecurring basis when long-lived assets are written down to fair value when held for sale or determined to be impaired. Refer to
Note 13
, “
Fair Value
”, for information on the methods and assumptions used in our fair value measurements.
Financial Instruments
We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. If the circumstances qualify and we designate hedge accounting, the hedging relationship between the underlying financial exposures and the related hedging instrument would be documented on the date the derivative is entered into with the counterparty. We have not designated hedge accounting for any of the forward exchange contracts. Our program currently includes the use of forward exchange contracts to hedge intercompany loans denominated in a foreign currency
Foreign Currency
Since we do business in many foreign countries, fluctuations in currency exchange rates affect our financial position and results of operations.
In certain of our foreign operations, the local currency is considered the functional currency. These foreign subsidiaries translate their assets and liabilities into U.S. dollars at current exchange rates in effect at the end of the fiscal period. The gains or losses that result from this process are shown as translation adjustments in accumulated other comprehensive income (loss) in the stockholders’ equity section of the annual consolidated balance sheets. The revenue and expense accounts of these foreign subsidiaries are translated into U.S. dollars at the average exchange rates that prevail during the period. Therefore, the U.S. dollar value of these items on the income statement fluctuates from period to period, depending on the value of the dollar against foreign currencies. Some transactions are made in currencies different from an entity’s functional currency. Gains and losses from these foreign currency transactions are generally included in other income (expense), net on our consolidated income statements as they occur.
Litigation
Accruals for litigation are made when the information available indicates that it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency includes estimates of potential damages and other directly related costs expected to be incurred. Litigation liabilities and expenditures included in the Annual Consolidated Financial Statements were not material for the periods presented.
Share-Based Compensation
Prior to the Separation, our employees participated in Air Products’ share-based compensation plans, which included stock options, deferred stock units, and restricted stock. Prior to the Separation, the Annual Consolidated Financial Statements included share-based compensation expense associated with our employees and Air Products’ costs that had been allocated to us based on awards and terms previously granted. 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.
The grant-date fair value of awards is expensed over the vesting period during which employees perform related services. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. The Black Scholes model is utilized to value new stock option awards. The grant date fair
value of the deferred stock units tied to a market condition is estimated using a Monte Carlo simulation model for new awards.
Income Taxes
We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities measured using enacted tax rates. The cumulative impact of a change in tax rates or regulations is included in income tax expense in the period that includes the enactment date.
For the fiscal year ended September 30, 2016, certain of our operations included in our Annual Consolidated Financial Statements were divisions of legal entities included in Air Products consolidated U.S. federal and state income tax returns, or tax returns of non-U.S. subsidiaries of Air Products. The provision for income taxes has been prepared and presented in the Annual Consolidated Financial Statements based on a stand-alone basis separate from Air Products. Differences between our separate return income tax provision and cash flows attributable to income taxes for operations that were divisions of legal entities have been recognized as capital contributions from, or dividends to, Air Products, within Air Products’ net investment.
For the fiscal year ended September 30, 2016, 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 the year. Therefore, this is included in Air Products’ net investment in the Annual Consolidated Financial Statements, for such periods.
Non-controlling Interests
We consolidate investments that we control but do not wholly own. The Annual Consolidated Financial Statements include all assets, liabilities, revenues, and expenses of our joint venture in Taiwan for which we have a
74%
ownership interest during the periods presented in the Annual Consolidated Financial Statements. The ownership interests held by third party non-controlling partners are presented as non-controlling interests in our annual consolidated balance sheets. Any net income or loss attributed to the non-controlling partners is presented as such in the consolidated income statements. The activity for non-controlling interests for the years ended
September 30, 2018
,
2017
and
2016
is presented in the annual consolidated statements of stockholders’ equity.
Cash and Cash Items
Cash and cash items generally include cash, time deposits, and certificates of deposit acquired with an original maturity of
three
months or less for our foreign entities.
Trade Receivables, net
Trade receivables comprise amounts owed to us through our operating activities and are presented net of allowances for doubtful accounts. The allowances for doubtful accounts represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations. A provision for customer defaults is made on a general formula basis when it is determined that the risk of some default is probable and estimable but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience, and existing economic conditions. The allowance also includes amounts for certain customers where a risk of default has been specifically identified, considering factors such as the financial condition of the customer and customer disputes over contractual terms and conditions. Allowance for doubtful accounts were
$1.1 million
and
$1.0 million
as of fiscal year end
September 30, 2018
and
2017
, respectively. Provisions to the allowance for doubtful accounts charged against income were not material in fiscal
2018
,
2017
, and
2016
.
Inventories
Inventories are stated at the lower of cost or net realizable value. We write down our inventories for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions.
Effective the fourth quarter of 2018, the company changed its method for inventory costing from the last-in, first-out (“LIFO”) cost method to the first-in, first-out (“FIFO”) cost method for inventory in the United States, which were the only operations that were using the LIFO cost method. All inventories outside the United States were already accounted for on the FIFO method. This change in accounting method was deemed preferable because the FIFO basis improves the matching of cost of sales with the related sales, causes inventory to be valued on a consistent basis throughout the entire company and valuation is on a more comparable basis with industry peer companies.
This change in accounting method was completed in accordance with US GAAP and all periods presented have been retrospectively adjusted to reflect the period-specific effects of applying the new accounting principle. The cumulative effect of this change in accounting principle, on periods prior to those presented, resulted in an increase in Air Products’ Net Investment of
$11.0 million
as of September 30, 2015, as presented in this Form 10-K.
The following table summarizes the effect of this accounting change on the company’s consolidated statements of income for each of the years ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally Reported under LIFO
|
|
As Adjusted under FIFO
|
|
Effect of Change
|
(In millions, except per share data)
|
|
|
|
|
|
Year ended September 30, 2016
|
|
|
|
|
|
Cost of sales
|
$
|
539.5
|
|
|
$
|
542.2
|
|
|
$
|
2.7
|
|
Net income
|
219.9
|
|
|
217.2
|
|
|
(2.7
|
)
|
Net income attributable to Versum
|
212.0
|
|
|
209.3
|
|
|
(2.7
|
)
|
Net income attributable to Versum per common share:
|
|
|
|
|
|
Basic
|
$
|
1.95
|
|
|
$
|
1.93
|
|
|
$
|
(0.02
|
)
|
Diluted
|
$
|
1.95
|
|
|
$
|
1.93
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
Year ended September 30, 2017
|
|
|
|
|
|
Cost of sales
|
$
|
636.9
|
|
|
$
|
636.4
|
|
|
$
|
(0.5
|
)
|
Income tax provision
|
52.8
|
|
|
53.0
|
|
|
0.2
|
|
Net income
|
199.9
|
|
|
200.2
|
|
|
0.3
|
|
Net income attributable to Versum
|
193.0
|
|
|
193.3
|
|
|
0.3
|
|
Net income attributable to Versum per common share:
|
|
|
|
|
|
Basic
|
$
|
1.78
|
|
|
$
|
1.78
|
|
|
$
|
—
|
|
Diluted
|
$
|
1.76
|
|
|
$
|
1.77
|
|
|
$
|
0.01
|
|
As of September 30, 2017, the cumulative effect of the change increased inventories and deferred tax liabilities by
$8.8 million
and
$3.2 million
, respectively. This resulted in a net change to total stockholders’ equity of
$5.6 million
.
For 2018 there was a reduction of
$0.2 million
to costs of sales and a
$0.1 million
increase in the income tax provision. The net impact to net income attributable to Versum was an increase of
$0.1 million
. There was
no
impact on basic or diluted net income attributable to Versum per common share for 2018.
There was
no
impact on the cash provided by operating activities on the statement of cash flows as a result of the above changes.
Equity Investments
The equity method of accounting is used when we exercise significant influence but do not have operating control, generally assumed to be
20%
to
50%
ownership. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these companies. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. The Annual Consolidated Financial Statements include our investment in and proportionate share of the income from our
20%
owned equity affiliate, Daido Air Products Electronics, Inc. During the first quarter of 2016, we sold our investment in this affiliate. Refer to
Note 6
, “
Sale of Equity Affiliate
”, for additional information.
Plant and Equipment
Plant and equipment is stated at cost less accumulated depreciation. Construction costs, labor, and applicable overhead related to installations are capitalized. Expenditures for additions and improvements that extend the lives or increase the capacity of plant assets are capitalized. The costs of maintenance and repairs of plant and equipment are charged to expense as incurred.
Fully depreciated assets are retained in the gross plant and equipment and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.
Impairment of Long-Lived Assets
Long-lived assets are grouped for impairment testing at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. We assess recoverability by comparing the carrying amount of the asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group’s carrying amount exceeds its fair value. Long-lived assets held for sale are reported at the lower of carrying amount or fair value less cost to sell.
Goodwill
The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair market values. Any excess purchase price over the fair market value of the net assets acquired, including identified intangibles, is recorded as goodwill. Preliminary purchase price allocations are made at the date of acquisition and finalized when information needed to affirm underlying estimates is obtained, within a maximum allocation period of
one
year.
Goodwill is subject to impairment testing at least annually. In addition, goodwill is tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists.
We conducted impairment tests during the fourth quarter of
2018
and determined that there was no goodwill impairment.
Intangible Assets
Intangible assets with determinable lives primarily consist of customer relationships and purchased patents and technology. The cost of intangible assets with determinable lives is amortized on a straight-line basis over the estimated period of economic benefit. Amortizable lives are adjusted whenever there is a change in the estimated period of economic benefit.
No
residual value is estimated for intangible assets.
Retirement Benefits
For periods prior to October 1, 2016, Air Products sponsored defined benefit pension plans, defined contribution plans, and other post-employment benefit plans that are shared amongst its businesses. Prior to the Separation on October 1, 2016, participation of our employees in these plans was reflected in the Annual Consolidated Financial Statements as though
Versum participated in a multi-employer plan with Air Products. A proportionate share of cost was reflected in these Annual Consolidated Financial Statements, primarily within selling and administrative expenses.
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. Versum assumed the defined benefit pension plan assets and liabilities of these plans.
Upon Separation from Air Products, our employees’ balances in the Air Products sponsored defined contribution plan was transferred to a Versum defined contribution plan.
Air Products’ Net Investment
Prior to the Separation, Air Products’ net investment in our business was presented as “Air Products’ net investment” in lieu of stockholders’ equity, as a stand-alone legal and capital structure did not exist for the historical periods presented.
Earnings Per Share
Prior to the Separation, Versum earnings per share for
2016
were calculated using the shares that were distributed to Air Products stockholders immediately following the Separation. 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.
3.
NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented
Income Taxes
In March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance relative to Income Taxes (Topic 740) that adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act (the “Tax Act”) in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible, to provide a reasonable estimate. We have accounted for the tax effects of the Tax Act under the guidance of SAB 118, on a provisional basis. Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects and have recorded provisional amounts in our Consolidated Financial Statements as of September 30, 2018.
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, 2019, 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 adopted the standard effective October 1, 2017. The adoption did not have a material impact on the Consolidated Financial Statements.
Measurement of Inventory
In July 2015, the FASB issued guidance to simplify the measurement of inventory recorded using either the first-in, first-out (“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 last-in, first-out (“LIFO”) is not impacted. The company adopted the standard effective October 1, 2017. This guidance did not have a significant impact on our Consolidated Financial Statements.
New Accounting Guidance to be Implemented
Collaborative Arrangements
In November 2018, the FASB issued guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The company is required to adopt this guidance beginning October 1, 2020. Early adoption is permitted. The company is currently assessing the impact of the guidance on its consolidated financial statements and related disclosures.
Internal Use Software
In August 2018, FASB issued guidance which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. The new guidance generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. The company is required to adopt this guidance beginning October 1, 2020. Early adoption is permitted. The company is currently assessing the impact of the guidance on its consolidated financial statements and related disclosures.
Defined Benefit Plan Disclosures
In August 2018, the FASB issued guidance which eliminates requirements for certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures under defined benefit pension plans and other post-retirement plans. The company is required to adopt this guidance beginning October 1, 2021. Early adoption is permitted. The amendments in the guidance would need to be applied on a retrospective basis. The company is currently evaluating the potential impact of the adoption of this guidance on our disclosures.
Net Periodic Pension Costs
In March 2017, the 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 15
, “
Retirement Benefits
”. The company will adopt the standard effective October 1, 2018. The adoption is not expected to have a material impact on the Consolidated Financial Statements.
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 will adopt the standard effective October 1, 2018. The adoption is not expected to have a material impact on the Annual Consolidated Financial Statements.
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. 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 company will adopt the standard effective October 1, 2018. The company will adopt the standard using the modified retrospective method, with a cumulative-effect adjustment recorded in retained earnings as of the beginning
of the period of adoption. The company has determined that the adoption of this new standard will not have a material impact to our consolidated financial statements. In addition, we do not expect major changes to the company’s existing accounting systems or internal controls as a result of the adoption. The company is finalizing the disclosures which will be included in its consolidated financial statements upon adoption of the new standard.
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. In July 2018, the FASB issued updates to the lease standard making transition requirements less burdensome. The update provides an option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in the company’s financial statements. The company is currently the lessee under various agreements for distribution equipment and vehicles that are currently accounted for as operating leases as discussed in
Note 12
, “
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. The company will adopt the standard effective October 1, 2019. 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. The company will adopt the standard effective October 1, 2018. The adoption is not expected to have a material impact on the Consolidated Financial Statements.
4.
RELATED PARTY TRANSACTIONS
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:
|
|
|
|
|
|
Year Ended
|
|
September 30, 2016
|
(In millions)
|
|
Cost of sales
|
$
|
2.8
|
|
Selling and administrative
|
16.8
|
|
Research and development
|
1.0
|
|
Business restructuring and cost reduction actions
|
0.7
|
|
Total Allocated Costs
|
$
|
21.3
|
|
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 not practicable 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 Annual 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 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 before and ending after the Distribution date. In addition, for 24 months following the October 1, 2016 Distribution date, the Tax Matters Agreement imposed 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 Distribution and certain related transactions. The Tax Matters Agreement includes special rules that allocate tax liabilities in the event 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 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.
5.
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 fiscal year 2018, we recognized a net charge of
$20.6 million
. 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 and infrastructure.
During fiscal year 2017, we recognized a net charge of
$25.5 million
. 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 and infrastructure.
During fiscal year 2016, we recognized a net gain of
$0.7 million
. The 2016 net gain included a charge of
$2.5 million
for severance and other benefits related to the elimination of approximately
90
positions as part of cost reduction actions. In addition, we recognized a gain of
$3.2 million
on assets that were previously written down to a carrying value of
$17.9 million
. The gain included
$1.4 million
related to the sale of the on-site ammonia assets. The majority of these actions pertain to the Materials segment.
During fiscal year 2016, we also incurred costs of
$1.6 million
related to the Separation.
The following table summarizes the carrying amount of the accrual for the business realignment and reorganization at
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Other Benefits
|
|
Asset
Actions/Other
|
|
Total
|
(In millions)
|
|
|
|
|
|
September 30, 2015
|
$
|
4.1
|
|
|
$
|
—
|
|
|
$
|
4.1
|
|
2016 Charge
|
2.5
|
|
|
(3.2
|
)
|
|
(0.7
|
)
|
Cash (payments) receipts
(A)
|
(6.0
|
)
|
|
4.2
|
|
|
(1.8
|
)
|
Non-cash expenses
|
—
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
September 30, 2016
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
2017 Charge
|
4.7
|
|
|
—
|
|
|
4.7
|
|
Cash payments
|
(1.1
|
)
|
|
—
|
|
|
(1.1
|
)
|
Non-cash expenses
|
—
|
|
|
—
|
|
|
—
|
|
September 30, 2017
|
$
|
4.2
|
|
|
$
|
—
|
|
|
$
|
4.2
|
|
2018 Charge
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Cash payments
|
(3.0
|
)
|
|
—
|
|
|
(3.0
|
)
|
Non-cash expenses
|
—
|
|
|
—
|
|
|
—
|
|
September 30, 2018
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
|
|
(A)
|
Cash payments include an allocation of severance and other benefits of Air Products’ employees within its Corporate and other segment which were paid by Air Products.
|
6.
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 year ended
September 30, 2016
. 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 (See
Note 19
), for the year ended
September 30, 2016
included an expense of
$5.3 million
as a result of the sale.
7.
INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Inventories at FIFO cost
|
|
|
|
Finished goods
|
$
|
104.3
|
|
|
$
|
87.6
|
|
Work in process
|
15.1
|
|
|
20.3
|
|
Raw materials, supplies and other
|
57.7
|
|
|
52.5
|
|
Inventories
|
$
|
177.1
|
|
|
$
|
160.4
|
|
Inventory amounts have been adjusted for the September 30, 2018 conversion from LIFO to FIFO. The cost for FIFO inventory approximates replacement cost. For a detailed description on impacts see
Note 2
, “
Summary of Significant Accounting Policies
”.
8.
PLANT AND EQUIPMENT, NET
The major classes of plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
Useful Life
in years
|
|
2018
|
|
2017
|
(In millions, except useful life)
|
|
|
|
Land
|
|
|
$
|
22.1
|
|
|
$
|
21.8
|
|
Buildings
|
30
|
|
168.6
|
|
|
149.3
|
|
Machinery and Equipment
|
|
|
|
|
|
Production facilities
|
10 to 15
|
|
467.4
|
|
|
479.9
|
|
Distribution and other
(A)
|
5 to 25
|
|
347.8
|
|
|
252.1
|
|
Total machinery and equipment
|
|
|
815.2
|
|
|
732.0
|
|
Construction in progress
|
|
|
66.2
|
|
|
52.1
|
|
Plant and equipment, at cost
|
|
|
1,072.1
|
|
|
955.2
|
|
Less: accumulated depreciation
|
|
|
667.0
|
|
|
624.9
|
|
Plant and equipment, net
|
|
|
$
|
405.1
|
|
|
$
|
330.3
|
|
|
|
(A)
|
The depreciable lives for various types of distribution equipment are
10
to
25
years for cylinders, depending on the nature and properties of the product, and generally
20
years for other distribution equipment such as tanks and trailers.
|
Depreciation expense was
$43.6 million
,
$38.4 million
, and
$39.4 million
in
2018
,
2017
, and
2016
, respectively.
In January 2016, we sold
two
onsite ammonia plants for
$17.1 million
, which resulted in a before-tax gain of
$1.4 million
during the second quarter of 2016. This gain is reflected in business separation, restructuring and cost reduction actions on our income statement. The income tax provision includes an expense of
$1.5 million
as a result of the sale.
9.
GOODWILL
Changes to the carrying amount of goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
|
|
Delivery
Systems and
Services
|
|
Total
|
(In millions)
|
|
|
|
|
|
Balance at September 30, 2016
|
$
|
162.6
|
|
|
$
|
17.5
|
|
|
$
|
180.1
|
|
Acquisition (Note 23)
|
5.0
|
|
|
—
|
|
|
5.0
|
|
Currency translation adjustment
|
(2.3
|
)
|
|
(0.2
|
)
|
|
(2.5
|
)
|
Balance at September 30, 2017
|
$
|
165.3
|
|
|
$
|
17.3
|
|
|
$
|
182.6
|
|
Currency translation adjustment
|
0.3
|
|
|
0.1
|
|
|
0.4
|
|
Balance at September 30, 2018
|
$
|
165.6
|
|
|
$
|
17.4
|
|
|
$
|
183.0
|
|
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.
We conducted impairment tests in the fourth quarter of
2018
and determined that there was
no
goodwill impairment. As of the fourth quarter of
2018
, the qualitative assessment did not indicate a need to perform a further quantitative analysis. Therefore, we believe the fair value of each reporting unit still exceeds its carrying value.
10.
INTANGIBLE ASSETS
The table below provides details of acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
79.5
|
|
|
$
|
(26.5
|
)
|
|
$
|
53.0
|
|
|
$
|
79.5
|
|
|
$
|
(22.7
|
)
|
|
$
|
56.8
|
|
Patents and technology
|
50.3
|
|
|
(41.3
|
)
|
|
9.0
|
|
|
50.3
|
|
|
(37.9
|
)
|
|
12.4
|
|
Other
|
3.2
|
|
|
(1.7
|
)
|
|
1.5
|
|
|
3.2
|
|
|
(1.6
|
)
|
|
1.6
|
|
Total Intangible Assets
|
$
|
133.0
|
|
|
$
|
(69.5
|
)
|
|
$
|
63.5
|
|
|
$
|
133.0
|
|
|
$
|
(62.2
|
)
|
|
$
|
70.8
|
|
The intangible assets primarily pertain to the Materials segment and have a remaining useful life of approximately
16
years for customer relationships and
4
years for patents and technology.
Amortization expense for intangible assets was
$7.2 million
,
$7.6 million
, and
$7.5 million
in
2018
,
2017
, and
2016
, respectively.
Projected annual amortization expense for intangible assets as of
September 30, 2018
is as follows:
|
|
|
|
|
2019
|
$
|
5.9
|
|
2020
|
5.8
|
|
2021
|
5.8
|
|
2022
|
4.9
|
|
2023
|
3.8
|
|
Thereafter
|
37.3
|
|
Total
|
$
|
63.5
|
|
In 2017, Versum acquired the intellectual property and related assets of Dynaloy through a business combination. Refer to
Note 23
, "
Acquisition
," for further discussion of the related intangible assets and goodwill.
11.
DEBT
Components of Debt
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Short-term borrowings
(A)
|
$
|
—
|
|
|
$
|
—
|
|
Current portion of long-term debt
|
5.8
|
|
|
5.8
|
|
Long-term debt
|
974.2
|
|
|
977.0
|
|
Total Debt
|
$
|
980.0
|
|
|
$
|
982.8
|
|
|
|
(A)
|
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
September 30, 2018
is
$20.3 million
.
|
Long-term Debt
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Term loan facility under Credit Agreement
|
$
|
563.5
|
|
|
$
|
569.3
|
|
Revolving facility under Credit Agreement
|
—
|
|
|
—
|
|
5.5% Senior Notes due 2024
|
425.0
|
|
|
425.0
|
|
Total debt
|
988.5
|
|
|
994.3
|
|
Less debt discount
|
1.8
|
|
|
2.5
|
|
Less deferred debt costs
|
6.7
|
|
|
9.0
|
|
Less current portion of long-term debt
|
5.8
|
|
|
5.8
|
|
Long-term debt payable after one year
|
$
|
974.2
|
|
|
$
|
977.0
|
|
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 bore 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%
. On October 10, 2017, Versum amended its Credit Agreement. The amendment decreased the interest rate on borrowings under the Term Facility to LIBOR plus a margin of
2.00%
, or an alternate base rate plus a margin of
1.00%
(effective rate of
4.39%
as of
September 30, 2018
). The amendment removed the minimum floor on LIBOR and the alternate base rate. If our total leverage ratio is equal to or less than
2.00
:1.00 (calculated without any netting of cash on hand) the interest rate will decrease further to LIBOR plus a margin of
1.75%
, or an alternate base rate plus a margin of
0.75%
. 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%
, subject to a
0.25%
margin reduction based on achieving a first lien net leverage ratio of
1.00
:1.00. 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, 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
September 30, 2018
, we had availability of
$200 million
under Revolving Facility.
The Credit Agreement, as amended, 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. As of
September 30, 2018
, there was no requirement to prepay due to excess cash flows.
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 governing the Senior Notes, 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
September 30, 2018
.
Maturities
Maturities of long-term debt are as follows:
|
|
|
|
|
|
Total Debt
|
(In millions)
|
|
Payments due for the year ended September 30,
|
|
2019
|
$
|
5.8
|
|
2020
|
5.8
|
|
2021
|
5.8
|
|
2022
|
5.8
|
|
2023
|
540.3
|
|
Thereafter
|
425.0
|
|
Total
|
$
|
988.5
|
|
12.
LEASES
Lessee Accounting
Operating leases principally relate to real estate and also include distribution equipment and vehicles. Certain leases include escalation clauses, renewal, and purchase options. Rent expense is recognized on a straight-line basis over the minimum lease term. Rent expense under operating leases, including month-to-month agreements, was
$10.8 million
in
2018
,
$12.2 million
in
2017
, and
$7.6 million
in
2016
.
At
September 30, 2018
, minimum payments due under leases are as follows:
|
|
|
|
|
(In millions)
|
|
2019
|
$
|
5.7
|
|
2020
|
4.5
|
|
2021
|
4.0
|
|
2022
|
3.5
|
|
2023
|
2.4
|
|
Thereafter
|
2.0
|
|
Total
|
$
|
22.1
|
|
13.
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 14
,
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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
(In millions)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Forward Exchange Contracts
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Forward Exchange Contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
Long-term Debt
|
|
|
|
|
|
|
|
Senior Notes
|
$
|
435.6
|
|
|
$
|
425.0
|
|
|
$
|
450.5
|
|
|
$
|
425.0
|
|
Term Facility
|
567.0
|
|
|
563.5
|
|
|
575.7
|
|
|
569.3
|
|
Total Long-term debt
|
$
|
1,002.6
|
|
|
$
|
988.5
|
|
|
$
|
1,026.2
|
|
|
$
|
994.3
|
|
The carrying amounts reported in the annual 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.
14.
FINANCIAL INSTRUMENTS
We enter into forward exchange contracts to hedge the fair value exposure on inter-company loans. During the year ended
September 30, 2018
, this portfolio of forward exchange contracts consisted primarily of Japanese Yen and U.S. dollars as well as Euros and U.S. dollars. During the year ended
September 30, 2017
, this portfolio of forward exchange contracts consisted primarily of Korean Won and U.S. dollars. The maximum remaining term of any forward exchange contract outstanding at
September 30, 2018
and
2017
was approximately
1
year. At
September 30, 2018
and
2017
, the total notional principal amount of our outstanding hedge contracts was
$36.1 million
and
$158.4 million
, respectively.
As of
September 30, 2018
and
2017
, there were
no
derivatives designated as hedging instruments. The tables below summarize the fair values of our derivatives not designated as hedging instruments and balance sheet location of these outstanding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Balance Sheet Location
|
|
Amount
|
|
Balance Sheet Location
|
|
Amount
|
(In millions)
|
|
|
|
|
|
|
|
Forward exchange contracts
|
Other current assets
|
|
$
|
0.4
|
|
|
Payables and accrued liabilities
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Balance Sheet Location
|
|
Amount
|
|
Balance Sheet Location
|
|
Amount
|
(In millions)
|
|
|
|
|
|
|
|
Forward exchange contracts
|
Other current assets
|
|
$
|
0.9
|
|
|
Payables and accrued liabilities
|
|
$
|
1.5
|
|
Refer to
Note 13
,
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:
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2018
|
|
Year Ended September 30, 2017
|
(In millions)
|
|
|
|
Forward Exchange Contracts, net of tax:
|
|
|
|
Net loss recognized in other (income) expense, net
(A)
|
$
|
0.4
|
|
|
$
|
2.2
|
|
|
|
(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.
15.
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 Annual 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.
The following table summarizes the benefit obligation, fair value of the plan assets and the funded status at
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
22.8
|
|
|
$
|
—
|
|
Converted on October 1, 2016
|
—
|
|
|
26.5
|
|
Service cost
|
2.0
|
|
|
2.3
|
|
Interest cost
|
0.7
|
|
|
0.6
|
|
Actuarial loss (gain)
|
1.3
|
|
|
(4.9
|
)
|
Benefits paid
|
(0.8
|
)
|
|
(1.2
|
)
|
Other
|
0.7
|
|
|
—
|
|
Foreign currency impact
|
0.4
|
|
|
(0.5
|
)
|
Benefit obligation at end of year
|
$
|
27.1
|
|
|
$
|
22.8
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
6.8
|
|
|
$
|
—
|
|
Converted on October 1, 2016
|
—
|
|
|
3.0
|
|
Employer contributions
|
0.8
|
|
|
5.0
|
|
Benefits paid
|
(0.8
|
)
|
|
(1.2
|
)
|
Foreign currency impact
|
0.1
|
|
|
—
|
|
Fair value of plan assets at end of year
|
$
|
7.1
|
|
|
$
|
6.8
|
|
Funded status:
|
|
|
|
Plan assets less than benefit obligation - Net amount recognized
|
$
|
(20.0
|
)
|
|
$
|
(16.0
|
)
|
Amounts recognized in the annual consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Non-current liabilities
|
$
|
(20.0
|
)
|
|
$
|
(16.0
|
)
|
Accumulated other comprehensive loss, net of taxes
|
(3.4
|
)
|
|
(2.2
|
)
|
Amounts recognized in accumulated other comprehensive loss, net of tax consist of:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Balance at beginning of year
|
$
|
(2.2
|
)
|
|
$
|
—
|
|
Converted on October 1, 2016
|
—
|
|
|
(6.2
|
)
|
Net actuarial loss amortized during the year
|
0.1
|
|
|
0.4
|
|
Net actuarial (loss) gain during the year
|
(1.4
|
)
|
|
3.7
|
|
Non-controlling interest
|
0.1
|
|
|
(0.1
|
)
|
Balance at end of year
|
$
|
(3.4
|
)
|
|
$
|
(2.2
|
)
|
The components of net periodic pension costs for our defined benefit pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Service cost
|
$
|
2.0
|
|
|
$
|
2.3
|
|
Interest cost
|
0.7
|
|
|
0.6
|
|
Expected return on plan assets
|
(0.1
|
)
|
|
(0.1
|
)
|
Actuarial loss amortization
|
0.1
|
|
|
0.5
|
|
Net periodic pension cost
|
$
|
2.7
|
|
|
$
|
3.3
|
|
The estimated amount that will be amortized from accumulated other comprehensive income into net periodic pension cost in
2019
is
$0.2 million
.
Assumptions used in determining the benefit obligation and net periodic pension cost for the years ended
September 30, 2018
and
2017
are presented in the following table as weighted-averages:
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Benefit obligations:
|
|
|
|
Discount rate
|
2.9
|
%
|
|
3.2
|
%
|
Rate of compensation increase
|
4.1
|
%
|
|
4.1
|
%
|
Net Periodic Pension Cost:
|
|
|
|
Discount rate
|
3.3
|
%
|
|
2.3
|
%
|
Rate of compensation increase
|
4.1
|
%
|
|
4.9
|
%
|
Expected rate of return on plan
|
1.7
|
%
|
|
2.0
|
%
|
The discount rate assumption is calculated based on market yields at the valuation date on government bonds and high quality corporate bonds as well as the estimated maturity of benefit payments. The expected rate of return assumption is based on weighted-average expected returns from each asset class. Expected returns reflect a combination of historical performance analysis and current market conditions and include input from our actuaries.
The fair value of our pension plan assets at
September 30, 2018
and
2017
, by asset category utilizing the fair value hierarchy discussed in
Note 13
, is as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Other investments (Level 2)
|
$
|
4.4
|
|
|
$
|
4.1
|
|
Insurance contract (Level 3)
|
2.7
|
|
|
2.7
|
|
Total
|
$
|
7.1
|
|
|
$
|
6.8
|
|
The Other investments category represents accounts our subsidiaries in Taiwan have invested in a government directed Labor Pension Fund in which the return is guaranteed by the government. Therefore it is characterized as Other and level 2. The Insurance contract category represents the Korea plan which is funded by an investment with Samsung Insurance and is classified as level 3, as they are carried at contract value which approximates fair value.
We expect to make contributions of approximately
$0.1 million
during
2019
. The expected future benefit payments related to the defined benefit plans are shown below:
|
|
|
|
|
|
Payments
|
(In millions)
|
|
2019
|
$
|
0.9
|
|
2020
|
1.0
|
|
2021
|
1.1
|
|
2022
|
1.3
|
|
2023
|
1.6
|
|
2024-2028
|
10.7
|
|
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 contributions 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
(In millions)
|
|
|
|
|
|
Defined contribution expense
|
$
|
12.4
|
|
|
$
|
11.0
|
|
|
$
|
5.5
|
|
16.
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. The converted awards will continue to vest over the original vesting period defined at the grant date.
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.
For the years ended
September 30, 2018
,
2017
, and
2016
, share-based compensation expense of
$10.1 million
,
$8.3 million
, and
$5.0 million
, respectively, was included in the Annual Consolidated Financial Statements.
During the year ended
September 30, 2017
, under the Versum Long-Term Incentive Plan we made a one-time Founders grant of time-based restricted stock units. In addition, during the years ended
September 30, 2018
and
2017
, we granted 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
September 30, 2018
, there were
4.7 million
shares available for future grant under the Versum Long-Term Incentive Plan.
Total after-tax share-based compensation awards cost recognized in the consolidated income statement is summarized below:
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2018
|
|
Year Ended September 30, 2017
|
(In millions)
|
|
|
|
Before-Tax Share-Based Compensation Award Cost
|
$
|
10.1
|
|
|
$
|
8.3
|
|
Income Tax Benefit
|
2.5
|
|
|
2.9
|
|
After-Tax Share-Based Compensation Award Cost
|
$
|
7.6
|
|
|
$
|
5.4
|
|
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:
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2018
|
|
Year Ended September 30, 2017
|
(In millions)
|
|
|
|
Restricted stock units
|
$
|
9.5
|
|
|
$
|
7.5
|
|
Stock options
|
—
|
|
|
0.2
|
|
Director awards
|
0.6
|
|
|
0.6
|
|
Before-Tax Share-Based Compensation Cost
|
$
|
10.1
|
|
|
$
|
8.3
|
|
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 shares 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 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 year ended
September 30, 2018
, under its Long-Term Incentive Plan, Versum granted
203,405
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, 2017 and ending September 30, 2020, 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, 2017 and ending September 30, 2020.
During the year ended
September 30, 2017
, 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 these restricted stock units 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 year ended
September 30, 2017
, 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 market-based restricted stock units granted during the years ended
September 30, 2018
and
2017
, generally vest on the date that the Versum Compensation 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, restricted stock units represent the right to receive shares 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 years ended
September 30, 2018
and
2017
had an estimated grant-date fair value of
$50.18
and
$29.68
, respectively, per unit for the performance-based restricted stock units and
$45.71
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 years ended
September 30, 2018
and
2017
used the following assumptions:
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2018
|
|
2017
|
(In percentages)
|
|
|
|
Expected volatility
|
28.0
|
%
|
|
28.7
|
%
|
Risk-free interest rate
|
1.9
|
%
|
|
1.4
|
%
|
Expected dividend yield
|
0.5
|
%
|
|
—
|
%
|
The term is assumed to be the full vesting period for each grant.
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, 2017
|
1.1
|
|
|
$
|
25.30
|
|
Granted
|
0.2
|
|
|
47.23
|
|
Paid out
|
(0.2
|
)
|
|
29.65
|
|
Forfeited/adjustments
|
—
|
|
|
—
|
|
Outstanding, September 30, 2018
|
1.1
|
|
|
$
|
29.47
|
|
|
|
|
|
|
|
|
|
|
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, September 30, 2017
|
1.1
|
|
|
$
|
25.30
|
|
No cash payments were made for restricted stock units for the years ended
September 30, 2018
and
2017
. As of
September 30, 2018
and
2017
, there was
$13.3 million
and
$13.9 million
, respectively, of unrecognized compensation cost related to restricted stock units. The cost is expected to be recognized over a weighted average period of
1.9
and
2.5
years, respectively. The total fair value of restricted stock units paid out during the years ended
September 30, 2018
and
2017
, including shares vested in prior periods, was
$5.0 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 years ended
September 30, 2018
and
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, 2017
|
0.5
|
|
|
$
|
18.55
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Outstanding, September 30, 2018
|
0.5
|
|
|
$
|
18.66
|
|
|
|
|
|
|
|
|
|
|
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
|
—
|
|
|
—
|
|
Outstanding, September 30, 2017
|
0.5
|
|
|
$
|
18.55
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Contractual Terms (In years)
|
|
Aggregate Intrinsic Value
|
(In millions, except years)
|
|
|
|
Outstanding, September 30, 2018
|
4.7
|
|
$
|
7.9
|
|
Exercisable, September 30, 2018
|
4.7
|
|
7.9
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Contractual Terms (In years)
|
|
Aggregate Intrinsic Value
|
(In millions, except years)
|
|
|
|
Outstanding, September 30, 2017
|
5.6
|
|
$
|
9.6
|
|
Exercisable, September 30, 2017
|
5.6
|
|
9.3
|
|
The aggregate intrinsic value represents the amount by which our closing stock price of
$36.01
and
$38.82
as of
September 30, 2018
and
2017
, respectively, 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 year ended
September 30, 2018
and
2017
was
$0.4 million
and
$0.9 million
, respectively.
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
September 30, 2018
, the stock options were fully expensed. As of
September 30, 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
0.3
years.
Director Awards
Non-employee directors were granted equity awards under the Versum Long-Term Incentive Plan, with a grant date fair value of
$100,000
annually. In the second quarter of 2018 non-employee directors were granted restricted stock units for service on our Board of Directors through the 2019 annual meeting of stockholders. Subject to continued service on the Board of Directors, the restricted stock units vest on the earlier of February 8, 2019, and the date immediately prior to Versum's next annual meeting of stockholders, and will be settled in common stock upon vesting. The grant date fair value per share is equal to the closing sales price of our common stock as reported on the New York Stock Exchange on the date of grant.
During the years ended
September 30, 2018
and
2017
,
$0.6 million
in share-based compensation expense was recognized related to these awards.
17.
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, September 30, 2017
|
$
|
(0.2
|
)
|
|
$
|
(16.0
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(18.4
|
)
|
Other comprehensive income (loss) before reclassifications
|
0.2
|
|
|
1.1
|
|
|
(1.4
|
)
|
|
(0.1
|
)
|
Amounts reclassified from AOCL
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Net current period other comprehensive income (loss)
|
0.2
|
|
|
1.1
|
|
|
(1.3
|
)
|
|
—
|
|
Other comprehensive income (loss) attributable to non-controlling interest
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Balance, September 30, 2018
|
$
|
—
|
|
|
$
|
(14.8
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
(18.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on derivatives qualifying as hedges
|
|
Foreign currency translation adjustments
|
|
Pension and postretirement benefits
|
|
Total
|
(In millions)
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
$
|
(0.2
|
)
|
|
$
|
(9.8
|
)
|
|
$
|
—
|
|
|
$
|
(10.0
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(8.7
|
)
|
|
3.7
|
|
|
(5.0
|
)
|
Net transfers from Air Products
|
—
|
|
|
3.8
|
|
|
(6.2
|
)
|
|
(2.4
|
)
|
Amounts reclassified from AOCL
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
Net current period other comprehensive loss
|
—
|
|
|
(4.9
|
)
|
|
(2.2
|
)
|
|
(7.1
|
)
|
Other comprehensive loss attributable to non-controlling interest
|
—
|
|
|
1.3
|
|
|
—
|
|
|
1.3
|
|
Balance, September 30, 2017
|
$
|
(0.2
|
)
|
|
$
|
(16.0
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(18.4
|
)
|
The table below summarizes the reclassifications out of accumulated other comprehensive loss and the affected line item on the consolidated income statements:
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2018
|
|
Year Ended September 30, 2017
|
(In millions)
|
|
|
|
Pension and Postretirement Benefits, net of tax
(A)
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
|
(A)
|
The components include actuarial loss amortization and are reflected in net periodic benefit cost. Refer to
Note 15
,
Retirement Benefits
, for further information.
|
Cash Dividend
Holders of the company’s common stock are entitled to receive dividends when they are declared by the company’s Board of Directors. On October 31, 2017, the company’s Board of Directors declared a quarterly cash dividend of
$0.05
per share, totaling
$5.5 million
, which was paid on November 27, 2017 to shareholders of record as of November 13, 2017. On January 30, 2018, the company’s Board of Directors declared a quarterly cash dividend of
$0.05
per share totaling
$5.4 million
, which was paid on February 27, 2018 to shareholders of record as of February 13, 2018. On May 1, 2018, the company’s Board of Directors declared a quarterly cash dividend of
$0.06
per share totaling
$6.5 million
, which was paid on May 29, 2018 to shareholders of record as of May 15, 2018. On July 31, 2018, the company’s Board of Directors declared a quarterly cash dividend of
$0.06
per share totaling
$6.6 million
, which was paid on August 28, 2018 to shareholders of record as of August 14, 2018.
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.
18.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2018
|
|
2017
|
|
2016
|
(In millions, except per share data)
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Net Income Attributable to Versum
|
$
|
197.5
|
|
|
$
|
193.3
|
|
|
$
|
209.3
|
|
Denominator
|
|
|
|
|
|
Weighted average number of common shares - Basic
|
108.9
|
|
|
108.7
|
|
|
108.7
|
|
Effect of dilutive securities
|
|
|
|
|
|
Employee stock option and other award plans
|
0.9
|
|
|
0.7
|
|
|
—
|
|
Weighted average number of common shares - Diluted
|
109.8
|
|
|
109.4
|
|
|
108.7
|
|
|
|
|
|
|
|
Earnings Per Common Share Attributable to Versum
|
|
|
|
|
|
Net Income Attributable to Versum - Basic
|
$
|
1.81
|
|
|
$
|
1.78
|
|
|
$
|
1.93
|
|
Net Income Attributable to Versum - Diluted
|
1.80
|
|
|
1.77
|
|
|
1.93
|
|
For periods prior to the Separation, 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 the 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
, “
Basis of Presentation
” for further discussion of the Separation.
For the year ended
September 30, 2018
, outstanding share-based awards of
0.2 million
shares were anti-dilutive and therefore excluded from the computation of diluted earnings per share. For the year ended
September 30, 2017
,
no
outstanding share-based awards were anti-dilutive.
19.
INCOME TAXES
The following table summarizes the income of U.S. and foreign operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
(In millions)
|
|
Income Before Taxes
|
|
|
|
|
|
United States
|
$
|
71.0
|
|
|
$
|
29.3
|
|
|
$
|
58.9
|
|
Foreign
|
252.6
|
|
|
223.9
|
|
|
217.1
|
|
Total
|
$
|
323.6
|
|
|
$
|
253.2
|
|
|
$
|
276.0
|
|
The following table shows the components of the provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
(In millions)
|
|
Current Tax Provision
|
|
|
|
|
|
Federal
|
$
|
44.5
|
|
|
$
|
2.4
|
|
|
$
|
—
|
|
State
|
4.0
|
|
|
0.6
|
|
|
0.6
|
|
Foreign
|
68.9
|
|
|
47.0
|
|
|
58.3
|
|
|
117.4
|
|
|
50.0
|
|
|
58.9
|
|
Deferred Tax Provision
|
|
|
|
|
|
Federal
|
0.4
|
|
|
1.3
|
|
|
1.3
|
|
State
|
(0.3
|
)
|
|
0.1
|
|
|
0.1
|
|
Foreign
|
1.4
|
|
|
1.6
|
|
|
(1.5
|
)
|
|
1.5
|
|
|
3.0
|
|
|
(0.1
|
)
|
Income Tax Provision
|
$
|
118.9
|
|
|
$
|
53.0
|
|
|
$
|
58.8
|
|
Income tax expense (benefit) differs from the expected amounts based on the statutory U.S. federal tax rate for the years ended
September 30, 2018
,
2017
and
2016
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
(In millions)
|
|
U.S. federal tax
|
$
|
79.4
|
|
|
$
|
88.4
|
|
|
$
|
97.5
|
|
State taxes, net of federal benefit
|
0.8
|
|
|
0.5
|
|
|
2.2
|
|
Foreign tax differentials
|
(3.6
|
)
|
|
(34.7
|
)
|
|
(30.7
|
)
|
U.S. taxes on foreign earnings
|
(0.9
|
)
|
|
(0.3
|
)
|
|
4.7
|
|
Other credit and incentives
|
(1.7
|
)
|
|
(0.8
|
)
|
|
(0.8
|
)
|
U.S. tax law change
|
41.7
|
|
|
—
|
|
|
—
|
|
Valuation allowance
|
0.6
|
|
|
0.9
|
|
|
(19.2
|
)
|
Other
|
2.6
|
|
|
(1.0
|
)
|
|
5.1
|
|
Income Tax Expense (Benefit)
|
$
|
118.9
|
|
|
$
|
53.0
|
|
|
$
|
58.8
|
|
On December 22, 2017, the Tax Act was enacted in the U.S. Certain provisions of the Tax Act are effective for the company’s fiscal year 2018, whereas other material provisions of the Tax Act will not apply to the company until the company’s fiscal year 2019.
For fiscal year ended September 30, 2018, the company’s statutory U.S. federal income tax rate was
24.5%
which represents a blending of the
35.0%
statutory rate under prior law and the new
21.0%
statutory rate effective January 1, 2018, prorated based on the number of days during the company’s current fiscal year that each rate was effective. For fiscal years 2019 and later, the company’s statutory U.S. federal income tax rate will be
21.0%
.
As a result of the Tax Act, and shown in the table above, the company recorded a provisional net one-time charge of
$41.7 million
for year ended September 30, 2018. This charge includes a
$53.8 million
charge for federal and state taxes on the mandatory deemed repatriation of certain of the company’s foreign accumulated earnings. We expect to elect to pay the federal portion of the resulting liability, net of available tax credits, over the eight-year period provided in the Tax Act, with
$3.2 million
of the federal liability payable in connection with our fiscal year 2018. The deemed repatriation charge was partially offset by a
$12.1 million
tax benefit related to the estimated revaluation of the company’s deferred tax assets and liabilities using the U.S. statutory federal and state income tax rates and compensation deductibility rules that are anticipated to apply when the deferred tax assets and liabilities will become current.
The methodology used in calculating these provisional items incorporates assumptions about required tax adjustments to book earnings, foreign taxes paid, future executive compensation levels, estimated temporary book to tax differences, pending guidance and other items. We will continue to obtain information, actively monitor factual and legal developments, complete our tax compliance cycles, analyze and review the available information, and expect to adjust the provisional tax accrual consistent with the SEC’s Staff Accounting Bulletin No. 118. The company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended September 30, 2018.
For the three months ended
September 30, 2018
, the adjustment to the provisional tax accrual recorded in nine months ended June 30, 2018, was a tax charge of
$7.2 million
. This resulted in an increase of
2.2%
to the company’s effective tax rate for the twelve months ended
September 30, 2018
. The adjustment was primarily due to a change in estimated cumulative earnings and profits, aggregate foreign cash position, and tax pools in foreign jurisdictions that reduced the company’s tax on the mandatory deemed repatriation.
Beginning in the company’s fiscal year 2019, Versum will be subject to additional provisions in accordance with the Tax Act. These provisions include income inclusions, deductions, limitations on interest expense and other deductions and our ability to utilize certain tax credits, and minimum taxes, among other things.
Foreign tax differentials represent the differences between foreign earnings subject to foreign tax rates lower than the U.S. federal statutory tax rate of
24.5%
for
September 30, 2018
. Foreign earnings are subject to local country tax rates that are generally below the
24.5%
U.S. federal statutory rate. As a result, our effective non-U.S. tax rate varies from the U.S. statutory rate. The decrease in foreign tax rate differential as shown in the table above is the result of the decreased statutory U.S. tax rate from
35.0%
to
24.5%
. As substantially all of our undistributed earnings are in countries with a statutory tax rate of
17.0%
or higher, we do not generate a disproportionate amount of taxable income in countries with very low tax rates. U.S. taxes on foreign earnings include the cost of foreign withholding taxes imposed on dividends paid to U.S. shareholders net of available US foreign tax credits.
We accrue 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. These cumulative undistributed earnings that were considered to be indefinitely reinvested in foreign subsidiaries and corporate joint ventures is estimated to be
$795.0 million
as of
September 30, 2018
. An estimated
$79.5 million
in foreign withholding taxes would be due if these earnings were remitted as dividends.
We have certain foreign subsidiaries that were granted seven-year tax holidays, the majority of which expired during the year ending
September 30, 2017
. The tax benefit of the holidays is reduced by
50%
in the last
two
years of the holiday period. The net benefit of the tax holidays was
$1.1 million
,
$8.0 million
, and
$7.1 million
in
2018
,
2017
and
2016
, respectively.
We maintained a valuation allowance in 2016 against U.S. deferred tax accounts resulting primarily from restructuring charges taken in prior periods, as we determined that it was more likely than not that U.S. deferred tax assets would not be realized. These deferred tax assets related primarily to net operating loss and tax credit carryforwards derived from the stand-alone basis calculation. The valuation allowance benefit in 2016 shown in the table above relate to the utilization of federal net operating losses as a result of favorable operations. These net operating losses and tax credit carryforwards were utilized against Air Products’ income and are not available as future deductions on Versum tax returns. The fiscal years 2017 and 2018 effective tax rates, therefore, includes no valuation allowance benefit related to U.S. deferred tax assets. The valuation allowance cost for 2017 and 2018 relates to certain foreign tax credits accrued outside the U.S.
The significant components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Gross Deferred Tax Assets
|
|
|
|
Tax loss carryforwards
|
$
|
0.4
|
|
|
$
|
0.5
|
|
Tax credit carryforwards
|
3.1
|
|
|
0.9
|
|
Retirement benefits and compensation accruals
|
9.3
|
|
|
10.9
|
|
Reserves and accruals
|
6.2
|
|
|
—
|
|
Other
|
4.0
|
|
|
1.5
|
|
Valuation allowance
|
(1.4
|
)
|
|
(0.9
|
)
|
Deferred Tax Assets
|
21.6
|
|
|
12.9
|
|
Gross Deferred Tax Liabilities
|
|
|
|
Intangible assets
|
4.1
|
|
|
9.1
|
|
Reserves and accruals
|
—
|
|
|
1.6
|
|
Plant and equipment
|
35.2
|
|
|
22.9
|
|
Unremitted earnings of foreign entities
|
—
|
|
|
0.7
|
|
Partnership investments
|
0.3
|
|
|
0.8
|
|
Accounting method change
|
4.6
|
|
|
—
|
|
Other
|
0.4
|
|
|
0.2
|
|
Deferred Tax Liabilities
|
44.6
|
|
|
35.3
|
|
Net Deferred Income Tax Liability
|
$
|
23.0
|
|
|
$
|
22.4
|
|
Deferred tax assets and liabilities are included within the Annual Consolidated Financial Statements as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2018
|
|
2017
|
(In millions)
|
|
Other non-current assets
|
$
|
18.3
|
|
|
$
|
18.1
|
|
Deferred tax liabilities
|
41.3
|
|
|
40.5
|
|
Net Deferred Income Tax Liability
|
$
|
23.0
|
|
|
$
|
22.4
|
|
The federal and state research credit carryforwards as of
September 30, 2018
were
$1.7 million
, which begin to expire in 2032. Gross foreign net operating loss carryforwards as of
September 30, 2018
were
$1.3 million
, and expire in 2026.
The valuation allowance as of
September 30, 2018
is related to the tax benefit of foreign tax credits accrued in jurisdictions outside the U.S. As of
September 30, 2018
, we believed it would be more likely than not that future earnings and reversal of deferred tax liabilities would be sufficient to utilize the deferred tax asset reflected on the financial statements, net of existing valuation allowance.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits excluding interest and penalties is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
(In millions)
|
2018
|
|
2017
|
Unrecognized Tax Benefits
|
|
|
|
Balance at beginning of year
|
$
|
15.7
|
|
|
$
|
12.9
|
|
Additions for tax positions for the current year
|
2.8
|
|
|
2.1
|
|
Additions for tax positions of prior years
|
1.8
|
|
|
1.0
|
|
Reductions for tax positions of prior years
|
(4.9
|
)
|
|
(0.2
|
)
|
Statute of limitations expiration
|
(1.9
|
)
|
|
(0.1
|
)
|
Balance at End of Year
|
$
|
13.5
|
|
|
$
|
15.7
|
|
At
September 30, 2018
and
2017
, we had
$13.5 million
and
$15.7 million
of unrecognized tax benefits of which
$13.5 million
and
$15.7 million
, respectively, would impact the tax rate, if recognized. The current year decrease in unrecognized tax benefits relates, primarily, to an income tax audit settlement in a foreign jurisdiction. Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense. The cumulative amount of interest and penalties accrued on the balance sheet as of September 30, 2018 was
$1.3 million
.
We are currently under examination in a number of tax jurisdictions, some of which may be resolved in the next twelve months. As a result, it is reasonably possible that a change in the unrecognized tax benefits may occur during the next twelve months. However, quantification of an estimated range cannot be made at this time.
We generally remain subject to examination in the following major tax jurisdictions for the years indicated below:
|
|
|
|
Open Tax Years
|
Major Tax Jurisdiction
|
|
United States
|
2017-2018
|
China
|
2008-2018
|
South Korea
|
2010-2018
|
Taiwan
|
2013-2018
|
20.
SUPPLEMENTAL INFORMATION
|
|
|
|
|
|
|
|
|
|
September 30,
|
(In millions)
|
2018
|
|
2017
|
Payables and Accrued Liabilities
|
|
Trade creditors
|
$
|
65.5
|
|
|
$
|
56.0
|
|
Customer advances
|
18.7
|
|
|
5.3
|
|
Accrued payroll and employee benefits
|
39.1
|
|
|
41.2
|
|
Other costs associated with business separation, restructuring and cost reduction actions
|
3.9
|
|
|
7.9
|
|
Derivatives
|
—
|
|
|
1.5
|
|
Other
|
11.4
|
|
|
8.9
|
|
|
$
|
138.6
|
|
|
$
|
120.8
|
|
21.
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.
Environmental and Regulatory Proceedings
From time to time, Versum may be involved in proceedings, investigations, and audits involving governmental authorities in connection with environmental, health, safety, competition, and tax matters. In addition, pursuant to the Separation Agreement, Versum is liable to Air Products for proceedings by the Environmental Protection Agency under the Comprehensive Environmental Response, Compensation, and Liability Act, the federal Superfund law (“CERCLA”); the Resource Conservation and Recovery Act (“RCRA”); and similar state and foreign environmental laws relating to current or former Electronic Materials business sites, and third-party waste disposal facilities used by the Electronic Materials business, that have been designated for investigation or remediation. Versum may be liable for any unknown environmental liabilities related to legacy businesses and sites formerly owned and operated by Air Products related to its former electronics businesses. Versum does not currently believe that there are any environmental or regulatory matters, individually or in the aggregate, that are reasonably possible to have a material impact on our financial condition, results of operations, or cash flows.
Any future charges related to the costs of litigation, environmental, or regulatory proceedings for fines, settlements or damages related to any such matters could have a material impact on our results of operations or cash flows in the period incurred. 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.
Unconditional Purchase Obligations
We have unconditional purchase obligations of approximately
$44.5 million
for plant and equipment purchases as well as R&D facility enhancements. Otherwise, there are no material obligations.
22.
SEGMENT AND GEOGRAPHIC 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.
Materials
The Materials operating segment is an integrated provider of specialty materials for the high-growth electronics industry, focusing on the integrated circuit and flat-panel display markets. This segment provides the global semiconductor industry with high purity process materials for deposition, metallization, chamber cleaning and etching, chemicals mechanical planarization slurries, organosilanes, organometallics and liquid dopants for thin film deposition, and formulated chemical products for post-etch cleaning primarily for the manufacture of silicon and compound semiconductors and thin film transistor liquid crystal displays. The majority of our sales to the semiconductor industry are to large scale multinational companies.
Delivery Systems and Services
The Delivery Systems and Services operating segment designs, manufactures, installs, operates, and maintains chemical and gas delivery and distribution systems for specialty gases and chemicals delivered directly to our customers’
manufacturing tools. In addition, the business provides turnkey installation services during facility construction and startup as well as onsite operating services.
Corporate
The Corporate segment includes certain administrative costs such as information technology, general services, human resources, legal, accounting, and other services, as well as foreign exchange gains and losses, and other income and expense that cannot be directly associated with operating segments. Corporate assets primarily include cash and deferred tax assets.
Customers
For the fiscal year ended
September 30, 2018
,
four
customers each accounted for
10%
or more of combined sales from both the Materials and Delivery Systems and Services segments. These customers accounted for
20%
,
13%
,
10%
and
10%
of our combined sales. For the fiscal years ended
September 30, 2017
and
2016
, three customers accounted for
10%
or more of combined sales from both the Materials and Delivery Systems and Services segments. In
2017
, these customers accounted for
22%
,
13%
and
12%
of our combined sales. In
2016
, these customers accounted for
21%
,
13%
, and
13%
of our combined sales. No other customer accounted for more than
10%
of combined sales in any period.
Products
For the fiscal year ended
September 30, 2018
, a Delivery Systems and Services segment product accounted for 10% or more of combined sales from both the Materials and Delivery Systems and Services segments. For the fiscal year ended
September 30, 2018
, this product accounted for
10%
of our combined sales. For the fiscal years ended
September 30, 2017
and
2016
, a Materials segment product accounted for 10% or more of combined sales from both the Materials and Delivery Systems and Services segments. For the fiscal years ended
September 30, 2017
and
2016
, this product accounted for
11%
and
12%
of our combined sales, respectively.
Accounting Policies
The accounting policies of the segments are the same as those described in
Note 2
, Major Accounting Policies. We evaluate the performance of segments based upon reported segment operating income. Intersegment sales are not material and are recorded at selling prices that approximate market prices.
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
(In millions)
|
|
|
|
|
|
Sales
|
|
|
|
|
|
Materials
|
$
|
885.6
|
|
|
$
|
829.7
|
|
|
$
|
756.7
|
|
Delivery Systems and Services
|
483.7
|
|
|
293.6
|
|
|
213.4
|
|
Corporate
|
3.0
|
|
|
3.6
|
|
|
—
|
|
Combined Total
|
$
|
1,372.3
|
|
|
$
|
1,126.9
|
|
|
$
|
970.1
|
|
Operating Income (Loss)
|
|
|
|
|
|
Materials
|
$
|
286.5
|
|
|
$
|
274.9
|
|
|
$
|
249.6
|
|
Delivery Systems and Services
|
135.5
|
|
|
71.7
|
|
|
50.8
|
|
Corporate
|
(27.4
|
)
|
|
(20.5
|
)
|
|
(23.3
|
)
|
Segment Total
|
394.6
|
|
|
326.1
|
|
|
277.1
|
|
Business separation, restructuring and cost reduction actions
|
(20.6
|
)
|
|
(25.5
|
)
|
|
(0.9
|
)
|
Combined Total
|
$
|
374.0
|
|
|
$
|
300.6
|
|
|
$
|
276.2
|
|
Depreciation and Amortization
|
|
|
|
|
|
Materials
|
$
|
47.7
|
|
|
$
|
43.1
|
|
|
$
|
44.4
|
|
Delivery Systems and Services
|
2.1
|
|
|
1.4
|
|
|
2.1
|
|
Corporate
|
1.0
|
|
|
1.5
|
|
|
0.4
|
|
Combined Total
|
$
|
50.8
|
|
|
$
|
46.0
|
|
|
$
|
46.9
|
|
Equity Affiliates’ Income
|
|
|
|
|
|
Materials
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
Combined Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
Total Assets
|
|
|
|
|
|
Materials
|
$
|
862.5
|
|
|
$
|
782.6
|
|
|
$
|
741.7
|
|
Delivery Systems and Services
|
144.9
|
|
|
110.9
|
|
|
104.0
|
|
Corporate
|
497.9
|
|
|
362.1
|
|
|
206.4
|
|
Combined Total
|
$
|
1,505.3
|
|
|
$
|
1,255.6
|
|
|
$
|
1,052.1
|
|
Expenditures for Long-Lived Assets
|
|
|
|
|
|
Materials
|
$
|
93.1
|
|
|
$
|
45.7
|
|
|
$
|
34.4
|
|
Delivery Systems and Services
|
1.0
|
|
|
1.7
|
|
|
0.7
|
|
Corporate
|
21.3
|
|
|
16.6
|
|
|
0.7
|
|
Combined Total
|
$
|
115.4
|
|
|
$
|
64.0
|
|
|
$
|
35.8
|
|
Sales by Product Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
(In millions)
|
|
Process Materials
|
$
|
408.0
|
|
|
$
|
401.8
|
|
|
$
|
387.4
|
|
Advanced Materials
|
477.6
|
|
|
427.9
|
|
|
369.3
|
|
Equipment and Installations
|
421.1
|
|
|
235.4
|
|
|
150.8
|
|
Site Services
|
62.6
|
|
|
58.2
|
|
|
62.6
|
|
Corporate
|
3.0
|
|
|
3.6
|
|
|
—
|
|
Total
|
$
|
1,372.3
|
|
|
$
|
1,126.9
|
|
|
$
|
970.1
|
|
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
(In millions)
|
|
|
|
|
|
Sales to External Customers
|
|
|
|
|
|
United States
|
$
|
418.9
|
|
|
$
|
375.7
|
|
|
$
|
349.4
|
|
Taiwan
|
249.1
|
|
|
242.8
|
|
|
230.8
|
|
South Korea
|
459.5
|
|
|
304.1
|
|
|
217.2
|
|
China
|
94.2
|
|
|
64.9
|
|
|
53.8
|
|
Europe
|
61.7
|
|
|
63.1
|
|
|
57.8
|
|
Asia, excluding China, Taiwan, and South Korea
|
88.9
|
|
|
76.3
|
|
|
61.1
|
|
Total
|
$
|
1,372.3
|
|
|
$
|
1,126.9
|
|
|
$
|
970.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2018
|
|
2017
|
|
2016
|
(In millions)
|
|
|
|
|
|
Long-Lived Assets
(A)
|
|
|
|
|
|
United States
|
$
|
224.0
|
|
|
$
|
170.3
|
|
|
$
|
138.3
|
|
South Korea
|
130.7
|
|
|
112.2
|
|
|
112.2
|
|
Taiwan
|
38.2
|
|
|
38.2
|
|
|
36.8
|
|
Asia, excluding Taiwan and South Korea
|
11.1
|
|
|
9.2
|
|
|
9.0
|
|
Europe
|
1.1
|
|
|
0.4
|
|
|
0.2
|
|
Total
|
$
|
405.1
|
|
|
$
|
330.3
|
|
|
$
|
296.5
|
|
|
|
(A)
|
Long-lived assets include plant and equipment, net.
|
Geographic information is based on country of origin. Included in United States revenues are export sales to third-party customers of
$99.5 million
in
2018
,
$68.7 million
in
2017
, and
$75.8 million
in
2016
.
23.
ACQUISITION
On August 1, 2017, the company completed the acquisition of 100% of Dynaloy, LLC (“Dynaloy”) from Eastman Chemical Co. Dynaloy is a supplier of formulated cleaning solutions for the semiconductor and specialty manufacturing industries. The purchase price of approximately
$13 million
was paid in cash from our available cash balance. The acquisition of Dynaloy does not constitute a material business combination.
The company has accounted for the acquisition as a business combination in accordance with ASC 805, Business Combinations ("ASC 805"), and has included Dynaloy within the Materials reportable segment. In applying the provisions of ASC 805 and determining that Dynaloy represents a business, the company elected to early adopt and apply ASU 2017-01 (refer to Note 1). Under ASU 2017-01, the company first assessed whether all of the fair value of the acquired Dynaloy gross assets is concentrated in a single identifiable asset or group of identifiable assets. If that concentration existed, Dynaloy would not be considered a business. The company concluded that there was not such a concentration, as the fair value of the acquired gross assets is distributed between various intangible and tangible assets.
The company has allocated the acquisition purchase price to the tangible net assets and identifiable intangible assets acquired based on their estimated fair values at the acquisition date and recorded the excess as goodwill. The valuation of the assets and liabilities acquired was based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by the company’s management. In performing these valuations, the company used discounted cash flows and other factors as the best evidence of fair value. The key underlying assumptions of the discounted cash flows were projected revenues and royalty rates. The company has recognized
$5.0 million
of goodwill, which is attributable to the revenue growth and operating synergies that Versum expects to realize from this acquisition.
The company’s estimates and assumptions used in determining the estimated fair values of the net assets acquired are subject to change within the measurement period (up to one year from the acquisition date) as a result of additional information obtained with regards to facts and circumstances that existed as of the acquisition date.
The following table presents the final aggregate purchase price allocation:
|
|
|
|
|
|
Net Assets Acquired
|
(In millions)
|
|
Accounts receivable
|
$
|
1.0
|
|
Other current assets
|
0.1
|
|
Inventories
|
1.4
|
|
Properties and Equipment, net
|
2.4
|
|
Goodwill
|
5.0
|
|
Intangible assets
|
3.7
|
|
Other current liabilities
|
(0.4
|
)
|
Net assets acquired
|
$
|
13.2
|
|
The table below presents the intangible assets acquired as part of the acquisition of Dynaloy and the periods over which they will be amortized on a straight line basis:
|
|
|
|
|
|
|
|
Amount
|
|
Weighted Average Amortization Period
|
(In millions, except years)
|
|
|
|
Technology
|
$
|
2.8
|
|
|
7
|
Trademarks
|
0.9
|
|
|
5
|
Total
|
$
|
3.7
|
|
|
|
24.
SUBSEQUENT EVENTS
Cash Dividend
On October 31, 2018, the company’s Board of Directors declared a quarterly cash dividend of
$0.08
per share, an increase of
33%
from previous dividends of
$0.06
per share, to be paid on November 27, 2018 to shareholders of record as of November 13, 2018.
25.
SUMMARY BY QUARTER (UNAUDITED)
These tables summarize the unaudited results of operations for each quarter of fiscal
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
December 31, 2017
(A)
|
|
March 31, 2018
(A)
|
|
June 30, 2018
(A)
|
|
September 30, 2018
(B)
|
|
Total
|
(In millions)
|
|
Sales
|
$
|
330.8
|
|
|
$
|
340.7
|
|
|
$
|
350.0
|
|
|
$
|
350.8
|
|
|
$
|
1,372.3
|
|
Cost of sales
|
191.4
|
|
|
195.9
|
|
|
200.4
|
|
|
200.4
|
|
|
788.1
|
|
Selling and administrative
|
35.3
|
|
|
36.6
|
|
|
35.2
|
|
|
36.0
|
|
|
143.1
|
|
Research and development
|
12.7
|
|
|
11.1
|
|
|
12.4
|
|
|
12.9
|
|
|
49.1
|
|
Business separation, restructuring and cost reduction actions
|
1.8
|
|
|
8.2
|
|
|
6.7
|
|
|
3.9
|
|
|
20.6
|
|
Other (income) expense, net
|
0.5
|
|
|
(0.5
|
)
|
|
(0.9
|
)
|
|
(1.7
|
)
|
|
(2.6
|
)
|
Operating Income
|
89.1
|
|
|
89.4
|
|
|
96.2
|
|
|
99.3
|
|
|
374.0
|
|
Interest expense
|
11.3
|
|
|
11.9
|
|
|
12.5
|
|
|
12.6
|
|
|
48.3
|
|
Write-off of financing costs
|
2.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.1
|
|
Income Before Taxes
|
75.7
|
|
|
77.5
|
|
|
83.7
|
|
|
86.7
|
|
|
323.6
|
|
Income tax provision
|
55.0
|
|
|
14.2
|
|
|
19.6
|
|
|
30.1
|
|
|
118.9
|
|
Net Income
|
20.7
|
|
|
63.3
|
|
|
64.1
|
|
|
56.6
|
|
|
204.7
|
|
Less: Net Income Attributable to Non-controlling Interests
|
2.0
|
|
|
1.7
|
|
|
0.8
|
|
|
2.7
|
|
|
7.2
|
|
Net Income Attributable to Versum
|
$
|
18.7
|
|
|
$
|
61.6
|
|
|
$
|
63.3
|
|
|
$
|
53.9
|
|
|
$
|
197.5
|
|
Net income attributable to Versum per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.17
|
|
|
$
|
0.57
|
|
|
$
|
0.58
|
|
|
$
|
0.49
|
|
|
$
|
1.81
|
|
Diluted
|
$
|
0.17
|
|
|
$
|
0.56
|
|
|
$
|
0.58
|
|
|
$
|
0.49
|
|
|
$
|
1.80
|
|
(A) As adjusted, Note 2. The effects of the change were not material to any quarter.
(B) As reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended (as adjusted, Note 2)
|
|
December 31, 2016
|
|
March 31, 2017
|
|
June 30, 2017
|
|
September 30, 2017
|
|
Total
|
(In millions)
|
|
Sales
|
$
|
270.8
|
|
|
$
|
270.8
|
|
|
$
|
290.8
|
|
|
$
|
294.5
|
|
|
$
|
1,126.9
|
|
Cost of sales
|
151.2
|
|
|
154.5
|
|
|
159.6
|
|
|
171.1
|
|
|
636.4
|
|
Selling and administrative
|
30.2
|
|
|
29.5
|
|
|
34.5
|
|
|
31.5
|
|
|
125.7
|
|
Research and development
|
10.3
|
|
|
10.9
|
|
|
11.9
|
|
|
12.0
|
|
|
45.1
|
|
Business separation, restructuring and cost reduction actions
|
3.2
|
|
|
6.1
|
|
|
6.0
|
|
|
10.2
|
|
|
25.5
|
|
Other (income) expense, net
|
(2.9
|
)
|
|
(0.1
|
)
|
|
(2.2
|
)
|
|
(1.2
|
)
|
|
(6.4
|
)
|
Operating Income
|
78.8
|
|
|
69.9
|
|
|
81.0
|
|
|
70.9
|
|
|
300.6
|
|
Interest expense
|
11.5
|
|
|
11.6
|
|
|
11.9
|
|
|
12.4
|
|
|
47.4
|
|
Income Before Taxes
|
67.3
|
|
|
58.3
|
|
|
69.1
|
|
|
58.5
|
|
|
253.2
|
|
Income tax provision
|
15.2
|
|
|
11.5
|
|
|
14.4
|
|
|
11.9
|
|
|
53.0
|
|
Net Income
|
52.1
|
|
|
46.8
|
|
|
54.7
|
|
|
46.6
|
|
|
200.2
|
|
Less: Net Income Attributable to Non-controlling Interests
|
1.5
|
|
|
1.9
|
|
|
2.0
|
|
|
1.5
|
|
|
6.9
|
|
Net Income Attributable to Versum
|
$
|
50.6
|
|
|
$
|
44.9
|
|
|
$
|
52.7
|
|
|
$
|
45.1
|
|
|
$
|
193.3
|
|
Net income attributable to Versum per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.47
|
|
|
$
|
0.41
|
|
|
$
|
0.48
|
|
|
$
|
0.41
|
|
|
$
|
1.78
|
|
Diluted
|
$
|
0.46
|
|
|
$
|
0.41
|
|
|
$
|
0.48
|
|
|
$
|
0.41
|
|
|
$
|
1.77
|
|