NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
Versum is 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
operating segments, Materials and Delivery Systems and Services, under which we manage our operations and assess performance, and a Corporate segment. Versum’s common stock is listed under the symbol “VSM” on the New York Stock Exchange.
Basis of Presentation
The accompanying Consolidated Financial Statements are presented on a consolidated basis and include all of the accounts and operations of Versum and its majority-owned subsidiaries. The financial statements reflect the financial position, results of operations and cash flows of Versum in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information.
The financial statements are unaudited and should be read in conjunction with the Annual Consolidated Financial Statements presented in the Company's Annual Report on Form 10-K for our fiscal year ended
September 30, 2018
. The financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented; all adjustments have been included to provide a fair statement of the results for the reporting periods presented. All significant inter-company accounts and transactions have been eliminated. The results of operations for the
three months ended December 31, 2018
are not necessarily indicative of the results of operations for the full year.
Accounting Policies
The policies used in preparing the Consolidated Financial Statements are the same as those used in our Annual Report on Form 10-K for our fiscal year ended
September 30, 2018
. Other than our adoption of a new revenue recognition policy which did not have a material impact on the Consolidated Financial Statements, there have been no significant changes to these accounting policies during the
three months ended December 31, 2018
. See
Note 3
,
Revenue from Contracts with Customers
, for a discussion on the impacts of the new revenue recognition policy on our Consolidated Financial Statements.
Estimates and Assumptions
The Consolidated Financial Statements have been prepared in conformity with GAAP, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.
2.
NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented
Income Taxes
In March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance relative to Incomes 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. Through December 31, 2018, we have accounted for the tax effects of the Tax Act under the guidance of SAB 118, on a provisional basis. Our accounting for income tax effects associated with the Tax Act are complete and recorded in our Consolidated Financial Statements as of December 31, 2018. See
Note 8
for further discussion.
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 annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The components of the net (benefit) cost are shown in
Note 11
,
Retirement Benefits
. The Company adopted the standard effective October 1, 2018. The adoption required us to reclassify amounts out of Operating Income. This resulted in a decrease to Cost of Sales of
$0.2 million
and an increase to Operating Income of
$0.2 million
for the three month period ending December 31, 2017. No other financial statement line items were impacted. We do not consider this to be 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 adopted the standard effective October 1, 2018. The adoption did not have a material impact on the 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 Company adopted the standard effective October 1, 2018. See
Note 3
,
Revenue from Contracts with Customers
, for a discussion on the impacts 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 adopted the standard effective October 1, 2018. The adoption did not have a material impact on the Consolidated Financial Statements.
New Accounting Guidance to be Implemented
Leases
In February 2016, with updates in July 2018 and January 2019, 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 originally required to be applied using a modified retrospective approach. The Company is currently the lessee under various agreements for distribution equipment, vehicles and buildings that are currently accounted for as operating leases. The new guidance requires the lessee to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. 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.
3.
REVENUE FROM CONTRACTS WITH CUSTOMERS
The company adopted ASC 606 on October 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the three months ended December 31, 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605). The company has determined the impact of ASC 606 on opening retained earnings was immaterial as of October 1, 2018. The impact to revenues for the quarter ended December 31, 2018 was immaterial as a result of applying ASC 606.
The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the company's goods or services and will provide financial statement readers with enhanced disclosures. To achieve this core principle, the company applies the following five steps:
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Identify the contract with a customer
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•
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Identify the performance obligations in the contract
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•
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Determine the transaction price
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•
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Allocate the transaction price to performance obligations in the contract
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•
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Recognize revenue when or as the Company satisfies a performance obligation
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Revenue under ASC 606 is recognized when or as obligations under the terms of a contract with the company's customer have been satisfied and control has transferred to the customer. The majority of the company's performance obligations, and associated revenue, are transferred to customers at a point in time, generally upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Installation services are not significant and are usually completed in a short period of time and therefore, recorded at a point in time when the installation services are completed, rather than over time as they are not material. Service contracts, which are transferred to the customer over time, are recorded as revenue as the services are performed. Customized equipment with no alternative future use to the company, and that have an enforceable right to payment for performance completed to date, are also recorded over time. The company considers this to be a faithful depiction of the transfer to the customer of revenue over time as the work or service is performed.
Revenue is measured as the amount of consideration the company expects to receive in exchange for transferring goods or providing services. Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the company, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. Sales, value add, and other taxes the company collects concurrent with revenue-producing activities are excluded from revenue. The company's normal payment terms vary by the type and location of its customers and the products or services offered. The time between invoicing and when payment is due is not significant. None of the company's contracts as of December 31, 2018 contain a significant financing component.
The company does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Costs to Obtain and Fulfill a Contract
The company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the company otherwise would have recognized is one year or less. The incremental costs to obtain contracts was not material.
In most transactions, we have no obligations to our customers after the date products are shipped, other than pursuant to warranty obligations. Our standard warranties provide assurance to customers that the goods as delivered are free from defect or within their provided specifications. Shipping and handling fees billed to customers, if any, are recognized as revenue. The related shipping and handling costs are recognized in cost of sales. Based on the nature of our business returns are not material.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.
The company estimates its allowance for doubtful accounts. The company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that it has identified.
Disaggregation of Revenue
We are comprised of
two
primary operating segments, Materials and Delivery Systems and Services (“DS&S”), under which we manage our operations and assess performance, and a Corporate segment. Our segments are differentiated by the types of product groups they sell.
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 Materials segment is further divided into
two
main product groups.
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•
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Advanced Materials (“AM”)- AM supplies products and services through
three
key product platforms that are employed in the fabrication of ICs. Advanced deposition materials products include high purity specialty gases and chemicals, such as organosilane and organometallic precursors that are used to deposit thin films which comprise an IC. Planarization products include chemical mechanical planarization (“CMP”) slurries and post CMP cleans that are used to prepare chips with deposited thin films for the next stage of fabrication. Surface prep and clean formulated products are designed to selectively etch and remove debris and contamination during multiple stages of the wafer fabrication process including advanced packaging.
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•
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Process Materials (“PM”) - PM supplies products such as high-purity gases and chemicals utilized in the processes of cleaning, etching, doping, and film deposition for our semiconductor, displays and light emitting diode customers.
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Given the nature of the Materials segment the majority of revenue is recognized at a point in time.
DS&S
The DS&S 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. Below are the
two
product groups for DS&S.
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Equipment and installation (Gas, chemical and slurry delivery systems) - DS&S develops, designs, manufactures and sells bulk gas, specialty gas and specialty chemical cabinets and systems that are critical to managing the delivery of key materials into the semiconductor manufacturing process. DS&S also offers resources to assist both new and refurbished semiconductor fabs in the design, installation, startup, and commissioning of the gases and specialty materials delivery systems and quality assurance. The scope of installation services includes project management for installation and startup of the gas and chemical delivery systems, and inventory management. Given the nature of equipment and installation services for DS&S the majority of the revenue is recognized at a point in time.
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•
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On-Site Services (MEGASYS): DS&S offers on-site contract services to assist customers in managing their inventory of gases and chemicals, including ordering, product changes and monitoring, quality assurance, operating our delivery systems, and managing the bulk gas and specialty gas operations. These services are typically performed on the customer site. Given the nature of the site services for DS&S the revenue is recognized over time.
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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.
The company disaggregates its revenue from contracts with customers by product group, which it believes best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The following table summarizes revenue from contracts with customers disaggregated by product group:
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Three Months Ended December 31,
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2018
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2017
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(In millions)
|
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Materials
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Advanced Materials
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$
|
123.6
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$
|
111.9
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Process Materials
|
98.1
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|
|
102.7
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Total Materials
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221.7
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|
214.6
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DS&S
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Equipment and Installations
|
100.9
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100.4
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Site Services
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16.3
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|
|
14.9
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Total DS&S
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117.2
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|
|
115.3
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Corporate
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0.6
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|
|
0.9
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Total
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$
|
339.5
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$
|
330.8
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The following table summarizes revenue from contracts with customers related to the geographic area in which the company operates:
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Three Months Ended December 31,
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2018
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2017
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(In millions)
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Sales to External Customers
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United States
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$
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100.1
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|
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$
|
95.0
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Taiwan
|
64.6
|
|
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59.3
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South Korea
|
116.0
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118.5
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China
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19.2
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21.0
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Europe
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15.7
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15.5
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Asia, excluding China, Taiwan, and South Korea
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23.9
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|
21.5
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Total
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$
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339.5
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$
|
330.8
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Contract Balances
The following tables provide information about contract assets and contract liabilities from contracts with customers. The contract assets primarily relate to our rights to consideration for products produced but not billed at the reporting date on contracts with certain customers. The contract assets are recognized as accounts receivables when the rights become unconditional and the customer has been billed. Contract liabilities represent obligations to transfer goods to a customer for which we have received consideration from our customer.
A roll-forward of the company’s contracts in progress, less progress billings is as follows:
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Three Months Ended December 31, 2018
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(In millions)
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Beginning balance
(1)
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$
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20.3
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Change related to revenue in excess of billings
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4.3
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Ending balance
(1)
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$
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24.6
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(1)
Beginning and ending balances are current
A roll-forward of the company’s deferred revenue is as follows:
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Three Months Ended December 31, 2018
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(In millions)
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Beginning balance
(1)
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$
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18.7
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Amount of deferred revenue recognized in income
|
(11.7
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)
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Additions to deferred revenue
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9.5
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Ending balance
(1)
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$
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16.5
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(1)
Beginning and ending balances are current
4.
BUSINESS SEPARATION, RESTRUCTURING AND COST REDUCTION ACTIONS
The charges we record for business restructuring and cost reduction actions have been excluded from segment operating income.
During the
three months ended December 31, 2018
, we recognized a net charge of
$1.1 million
.
The net charge primarily consisted of additional costs as a result of the relocation of assets from a former acquisition.
During the
three months ended December 31, 2017
, we recognized a net charge of
$1.8 million
. The net charge primarily consisted of additional costs as a result of the relocation of certain research and development activities and our headquarters and set up of the stand-alone organization and infrastructure.
The following table summarizes the carrying amount of the accrual for the business separation, restructuring and cost reduction actions at
December 31, 2018
:
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Severance and
Other Benefits
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(In millions)
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Balance, September 30, 2018
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$
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3.2
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Current Period Charge
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0.2
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Cash Payments
|
(0.6
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)
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Balance, December 31, 2018
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$
|
2.8
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5.
INVENTORIES
The components of inventories are as follows:
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December 31, 2018
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September 30, 2018
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(In millions)
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Inventories at FIFO cost
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Finished goods
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$
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112.2
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$
|
104.3
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Work in process
|
14.9
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|
15.1
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Raw materials, supplies and other
|
62.9
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|
57.7
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Inventories
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$
|
190.0
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$
|
177.1
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The September 30, 2018 inventory amounts have been adjusted for the company’s election to change its inventory valuation method of accounting for its U.S. inventories from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method effective the fourth quarter of fiscal 2018. The cost for FIFO inventory approximates replacement cost.
6.
GOODWILL
Changes to the carrying amount of goodwill by segment are as follows:
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Materials
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Delivery
Systems and
Services
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Total
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(In millions)
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Balance, September 30, 2018
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$
|
165.6
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$
|
17.4
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$
|
183.0
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Currency translation adjustment
|
0.7
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|
—
|
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|
0.7
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Balance, December 31, 2018
|
$
|
166.3
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|
$
|
17.4
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$
|
183.7
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Goodwill is subject to impairment testing in the fourth quarter of each fiscal year and whenever events and changes in circumstances indicate that the carrying value of goodwill might not be recoverable. There were no events or circumstances indicating that goodwill might be impaired at
December 31, 2018
.
7.
DEBT
Components of Debt
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December 31, 2018
|
|
September 30, 2018
|
(In millions)
|
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Short-term borrowings
(A)
|
$
|
—
|
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|
$
|
—
|
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Current portion of long-term debt
|
5.8
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|
|
5.8
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Long-term debt
|
973.2
|
|
|
974.2
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Total Debt
|
$
|
979.0
|
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|
$
|
980.0
|
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(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
December 31, 2018
was
$20.3 million
.
|
Long-term debt
|
|
|
|
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|
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|
December 31, 2018
|
|
September 30, 2018
|
(In millions)
|
|
|
|
Term loan facility under Credit Agreement
|
$
|
562.1
|
|
|
$
|
563.5
|
|
Revolving facility under Credit Agreement
|
—
|
|
|
—
|
|
5.5% Senior Notes due 2024
|
425.0
|
|
|
425.0
|
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Total debt
|
987.1
|
|
|
988.5
|
|
Less debt discount
|
1.7
|
|
|
1.8
|
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Less deferred debt costs
|
6.4
|
|
|
6.7
|
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Less current portion of long-term debt
|
5.8
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|
|
5.8
|
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Long-term debt payable after one year
|
$
|
973.2
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|
|
$
|
974.2
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Credit Agreement
On September 30, 2016, Versum entered into a credit agreement (the “Credit Agreement”) providing for a senior secured first lien term loan B facility of
$575 million
(the “Term Facility”) and a senior secured first lien revolving credit facility of
$200 million
(the “Revolving Facility” and, together with the Term Facility, the “Senior Credit Facilities”). The Senior Credit Facilities are guaranteed by Versum’s material direct and indirect wholly-owned domestic restricted subsidiaries and secured by substantially all of the assets of Versum and its subsidiary guarantors.
Borrowings under the Term Facility 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
4.80%
as of
December 31, 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
December 31, 2018
, we had availability of
$200 million
under the 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
December 31, 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
December 31, 2018
.
8.
INCOME TAXES
For fiscal year 2019, Versum’s statutory income tax rate increased in non-U.S. jurisdictions including Taiwan and Korea, which increased Versum’s global effective tax rate by
1.6%
. The statutory tax rate in Taiwan increased to
20.0%
in fiscal year 2019. This is an increase from fiscal year 2018’s statutory tax rate of
17.0%
. Korea had unfavorable changes in their tax laws that effectively increased Versum’s tax rate in Korea by approximately
2.0%
.
In fiscal 2019, Versum became subject to additional provisions in accordance with the effective dates in the U.S. Tax Act, which was enacted into law on December 22, 2017. The statutory U.S. federal income tax rate is
21.0%
for the fiscal year 2019. This is a decrease from fiscal year 2018’s U.S. federal tax rate of
24.5%
which represented a blending of the
35.0%
statutory rate under prior law and the new
21.0%
statutory rate effective January 1, 2018. Additionally, Versum became subject to other new U.S. provisions including the Global Intangible Low Taxed Income (GILTI), Foreign Derived Intangible Income (FDII) deduction, Base Erosion and Anti-Abuse Tax (BEAT) and expanded business interest limitation provisions. The Company is electing to treat changes to the GILTI inclusion as a period cost in the period incurred. The income tax effect of all U.S. Tax Act provisions has been considered in the current period tax expense and their net impact on the global effective tax rate for fiscal year 2019 was minor. The Company will continue to actively monitor and analyze legal developments and new guidance throughout the year and adjust applicable calculations as necessary.
In accordance with the SEC’s Staff Accounting Bulletin No. 118, the
three months ended December 31, 2018
was the final measurement period available for the Company for recording provisional adjustments related to the U.S. Tax Act. As of
December 31, 2018
, the accounting for the income tax effects of the U.S. Tax Act have been completed and recorded in the Company’s financial statements. The final measurement period adjustment of
$1.7 million
is the only provisional adjustment made in fiscal year 2019 related to the U.S. Tax Act and no further provisional measurement period adjustments will be made.
The measurement period adjustment recorded in the current quarter was a benefit related to federal and state taxes on the mandatory deemed repatriation of certain of the Company’s foreign accumulated earnings and reduces the Company’s tax on the mandatory deemed repatriation to
$52.1 million
. The measurement period adjustment is non-recurring and it reduced our U.S. GAAP effective tax rate by
2.1%
for the
three months ended December 31, 2018
. 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 U.S. Tax Act, with
$3.1 million
of the federal liability and
$1.2 million
of the state liability payable in January 2019.
Versum records U.S. income and foreign withholding taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested. For the
three months ended December 31, 2018
, the accrued expense related to withholding taxes on undistributed earnings is
$0.7 million
.
9.
FINANCIAL INSTRUMENTS
We enter into forward exchange contracts to hedge the fair value exposure on inter-company loans. During the
three months ended December 31, 2018
and
2017
, this portfolio of forward exchange contracts consisted primarily of Japanese Yen and U.S. Dollars as well as Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding at
December 31, 2018
and
2017
was approximately
9
months. At
December 31, 2018
and
September 30, 2018
, the total notional principal amount of our outstanding hedge contracts was
$33.7 million
and
$36.1 million
, respectively.
As of
December 31, 2018
and
September 30, 2018
, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Balance Sheet Location
|
|
Amount
|
|
Balance Sheet Location
|
|
Amount
|
(In millions)
|
|
|
|
|
|
|
|
Forward exchange contracts
|
Other current assets
|
|
$
|
0.1
|
|
|
Payables and accrued liabilities
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
—
|
|
Refer to
Note 10
,
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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(In millions)
|
2018
|
|
2017
|
Forward Exchange Contracts, net of tax:
|
|
|
|
Net loss recognized in other (income) expense, net
(A)
|
$
|
0.9
|
|
|
$
|
—
|
|
|
|
(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.
10.
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 is 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 9
,
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
(In millions)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Forward Exchange Contracts
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Forward Exchange Contracts
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term Debt
|
|
|
|
|
|
|
|
Senior Notes
|
$
|
422.9
|
|
|
$
|
425.0
|
|
|
$
|
435.6
|
|
|
$
|
425.0
|
|
Term Facility
|
553.6
|
|
|
562.1
|
|
|
567.0
|
|
|
563.5
|
|
Total Long-term Debt
|
$
|
976.5
|
|
|
$
|
987.1
|
|
|
$
|
1,002.6
|
|
|
$
|
988.5
|
|
The carrying amounts reported in the consolidated balance sheet for cash and cash items, trade receivables, payables and accrued liabilities, and accrued income taxes approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.
11.
RETIREMENT BENEFITS
Defined Benefit Pensions
Our plans provide certain international employees in Germany, Korea and Taiwan various pension benefits. Charges to expense are based upon actuarial analysis.
The components of net periodic pension costs for Versum’s defined benefit pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Service cost
|
$
|
0.5
|
|
|
$
|
0.5
|
|
Interest cost
|
0.2
|
|
|
0.2
|
|
Net periodic pension cost
|
$
|
0.7
|
|
|
$
|
0.7
|
|
Defined Contribution Plan
Versum provides benefits for all U.S. employees and certain non-U.S. employees under a Versum defined contribution plan.
The following table summarizes our defined contribution expense:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Defined contribution expense
|
$
|
2.2
|
|
|
$
|
2.1
|
|
12.
SHARE-BASED COMPENSATION
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.
During the
three months ended December 31, 2018
, under the Versum Long-Term Incentive Plan we granted annual awards of time-based restricted stock units and market-based restricted stock units, consisting of performance-based restricted stock units. In addition, during the
three months ended December 31, 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. Generally we issue new shares upon the payout of restricted stock units and the exercise of stock options. For our Korean employees we pay cash in lieu of issuing shares with respect to restricted stock units. As of
December 31, 2018
, there were
4.5 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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Before-Tax Share-Based Compensation Award Cost
|
$
|
2.6
|
|
|
$
|
2.4
|
|
Income Tax Benefit
|
0.5
|
|
|
0.6
|
|
After-Tax Share-Based Compensation Award Cost
|
$
|
2.1
|
|
|
$
|
1.8
|
|
Before-tax share-based compensation award cost is primarily included in selling and administrative expense on our consolidated income statements.
Total before-tax share-based compensation award cost by type of program was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Restricted stock units
|
$
|
2.4
|
|
|
$
|
2.3
|
|
Director awards
|
0.2
|
|
|
0.1
|
|
Before-Tax Share-Based Compensation Cost
|
$
|
2.6
|
|
|
$
|
2.4
|
|
Restricted Stock Units
New share-based compensation awards
During the
three months ended December 31, 2018
, under its Long-Term Incentive Plan Versum granted
270,861
time-based restricted stock units and market based restricted stock units, consisting of performance-based restricted stock units. The time-based restricted stock units were granted at a weighted-average grant-date fair value of
$31.83
per unit which vest on September 30, 2021, subject to the holder’s continued employment with the Company. The performance-based restricted stock units are earned at the end of a performance period beginning October 1, 2018 and ending September 30, 2021, conditioned on the level of Versum’s total shareholder return in relation to a defined peer group over the
three
-year performance period.
In addition, during the
three months ended December 31, 2017
, under its Long-Term Incentive Plan Versum granted
200,088
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.
Subject to the recipient’s continued employment, these market-based restricted stock units granted during the
three months ended December 31, 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. Under GAAP, both the performance-based restricted stock units and performance-based market stock units are considered market-based awards.
Vesting for time-based restricted stock units and market based restricted stock units is subject to certain exceptions in the event of involuntary termination by Versum, death, disability or retirement. Upon vesting, restricted stock units represent the right to receive shares of our common stock with the exception of our Korean employees. Our Korean employees are paid in cash based on the fair value of their vested units. Dividend equivalent rights accrue for these awards, but do not vest unless the underlying awards vest.
The time-based restricted stock units awarded during the
three months ended December 31, 2018
had an estimated grant-date fair value of
$31.83
per unit. The market based restricted stock units awarded during the
three months ended December 31, 2018
and
2017
had an estimated grant-date fair value of
$40.86
and
$50.18
, respectively, per unit for the performance-based restricted stock units. The market based restricted stock units awarded during the
three months ended December 31, 2017
had an estimated grant-date fair value of
$45.71
per unit for the performance-based market stock units. The fair value of market-based restricted stock units was estimated using a Monte Carlo simulation model as these equity awards are tied to a market condition. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards.
We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period; however, expense recognition is accelerated for retirement eligible individuals who meet the requirements for vesting upon retirement.
The calculation of the fair value of market-based restricted stock units during the
three months ended December 31, 2018
and
2017
used the following assumptions:
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2018
|
|
2017
|
(In percentages)
|
|
|
|
Expected volatility
|
29.0
|
%
|
|
28.0
|
%
|
Risk-free interest rate
|
2.8
|
%
|
|
1.9
|
%
|
Expected dividend yield
|
0.7
|
%
|
|
0.5
|
%
|
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, 2018
|
1.1
|
|
|
$
|
29.47
|
|
Granted
|
0.3
|
|
|
36.58
|
|
Paid out
|
(0.3
|
)
|
|
23.62
|
|
Outstanding, December 31, 2018
|
1.1
|
|
|
$
|
32.58
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant-Date Fair Value
|
(In millions, except weighted average)
|
|
|
|
Outstanding, September 30, 2017
|
1.1
|
|
|
$
|
25.30
|
|
Granted
|
0.2
|
|
|
48.39
|
|
Paid out
|
(0.2
|
)
|
|
29.68
|
|
Outstanding, December 31, 2017
|
1.1
|
|
|
$
|
29.31
|
|
Cash payments of
$0.2 million
for the
three months ended December 31, 2018
and
2017
were made for restricted stock units paid out of Korea. As of
December 31, 2018
and
2017
, there was
$20.6 million
and
$21.2 million
, respectively, of unrecognized compensation cost related to restricted stock units. The cost is expected to be recognized over a weighted average period of
2.3
and
2.6
years, respectively. The total fair value of restricted stock units paid out during the
three months ended December 31, 2018
and
2017
was
$5.8 million
and
$4.8 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. The exercise price of stock options equals the market price of our stock on the date of the grant. Options generally vest incrementally over
three
years and remain exercisable for
ten
years from the date of grant.
During the
three months ended December 31, 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, 2018
|
0.5
|
|
|
$
|
18.66
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Outstanding, December 31, 2018
|
0.5
|
|
|
$
|
18.66
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
(In millions, except weighted average)
|
|
|
|
Outstanding, September 30, 2017
|
0.5
|
|
|
$
|
18.55
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Outstanding, December 31, 2017
|
0.5
|
|
|
$
|
18.56
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Contractual Terms (In years)
|
|
Aggregate Intrinsic Value
|
(In millions, except years)
|
|
|
|
Outstanding, December 31, 2018
|
4.5
|
|
$
|
4.1
|
|
Exercisable, December 31, 2018
|
4.5
|
|
4.1
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Contractual Terms (In years)
|
|
Aggregate Intrinsic Value
|
(In millions, except years)
|
|
|
|
Outstanding, December 31, 2017
|
5.4
|
|
$
|
9.1
|
|
Exercisable, December 31, 2017
|
5.4
|
|
9.1
|
|
The aggregate intrinsic value represents the amount by which our closing stock price of
$27.72
and
$37.85
as of
December 31, 2018
and
2017
exceeds the exercise price multiplied by the number of in-the-money options outstanding or exercisable.
The total intrinsic value of stock options exercised was zero during the
three months ended December 31, 2018
and
2017
.
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
December 31, 2018
, the stock options were fully expensed.
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 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
three months ended December 31, 2018
and
2017
,
$0.2 million
and
$0.1 million
, respectively, in share-based compensation expense was recognized related to these awards.
13.
STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Income (Loss)
The table below summarizes changes in accumulated other comprehensive income (loss) (“AOCL”), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income on derivatives qualifying as hedges
|
|
Foreign currency translation adjustments
|
|
Pension and postretirement benefits
|
|
Total
|
(In millions)
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
$
|
—
|
|
|
$
|
(14.8
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
(18.2
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
Amounts reclassified from AOCL
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current period other comprehensive income
|
—
|
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
Other comprehensive income attributable to non-controlling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, December 31, 2018
|
$
|
—
|
|
|
$
|
(13.9
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
(17.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income 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 before reclassifications
|
0.1
|
|
|
19.7
|
|
|
—
|
|
|
19.8
|
|
Amounts reclassified from AOCL
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current period other comprehensive income
|
0.1
|
|
|
19.7
|
|
|
—
|
|
|
19.8
|
|
Other comprehensive income attributable to non-controlling interest
|
—
|
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Balance, December 31, 2017
|
$
|
(0.1
|
)
|
|
$
|
3.0
|
|
|
$
|
(2.2
|
)
|
|
$
|
0.7
|
|
The amounts reclassified out of accumulated other comprehensive income (loss) for the
three months ended December 31, 2018
and
2017
were
zero
.
Cash Dividend
On October 31, 2018, the company’s Board of Directors declared a quarterly cash dividend of
$0.08
per share, totaling
$8.8 million
, which was paid on November 27, 2018 to shareholders of record as of November 13, 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.
14.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2018
|
|
2017
|
(In millions, except per share data)
|
|
|
|
Numerator
|
|
|
|
Net Income Attributable to Versum
|
$
|
61.1
|
|
|
$
|
18.7
|
|
Denominator
|
|
|
|
|
Weighted average number of common shares - Basic
|
109.1
|
|
|
108.9
|
|
Effect of dilutive securities
|
|
|
|
Employee stock option and other award plans
|
0.7
|
|
|
0.8
|
|
Weighted average number of common shares - Diluted
|
109.8
|
|
|
109.7
|
|
|
|
|
|
Earnings Per Common Share Attributable to Versum
|
|
|
|
Net Income Attributable to Versum - Basic
|
$
|
0.56
|
|
|
$
|
0.17
|
|
Net Income Attributable to Versum - Diluted
|
0.56
|
|
|
0.17
|
|
For the
three months ended December 31, 2018
and
2017
, outstanding share-based awards of
0.2 million
and
0.1 million
shares were anti-dilutive and therefore excluded from the computation of diluted earnings per share.
15.
COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of business, Versum may be involved in various legal proceedings, including commercial, environmental, health, safety, and product liability matters. Although litigation with respect to these matters is routine and incidental to the conduct of our business, such litigation may result in large monetary awards for compensatory and punitive damages. Versum does not currently believe that there are any legal proceedings, individually or in the aggregate, that are reasonably possible to have a material impact on its financial condition, results of operations, or cash flows. While Versum cannot predict the outcome of any litigation, environmental, or regulatory matter or the potential for future litigation or regulatory action, we have evaluated all litigation, environmental and regulatory proceedings, claims and assessments in which Versum is involved, and do not believe that any of these matters, individually or in the aggregate, will result in losses that are materially in excess of amounts already recognized, if any.
Refer to Note 21 of "Notes to the Annual Consolidated Financial Statements" in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended
September 30, 2018
, for additional information regarding commitments and contingencies.
16.
SEGMENT INFORMATION
We are comprised of
two
primary operating segments, Materials and Delivery Systems and Services, under which we manage our operations and assess performance, and a Corporate segment. Our segments are differentiated by the types of products sold.
Segment
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2018
|
|
2017
|
(In millions)
|
|
|
|
Sales
|
|
|
|
Materials
|
$
|
221.7
|
|
|
$
|
214.6
|
|
Delivery Systems and Services
|
117.2
|
|
|
115.3
|
|
Corporate
|
0.6
|
|
|
0.9
|
|
Total
|
$
|
339.5
|
|
|
$
|
330.8
|
|
Operating Income (Loss)
|
|
|
|
Materials
|
$
|
67.6
|
|
|
$
|
66.1
|
|
Delivery Systems and Services
|
34.7
|
|
|
33.5
|
|
Corporate
|
(5.4
|
)
|
|
(8.5
|
)
|
Segment Total
|
$
|
96.9
|
|
|
$
|
91.1
|
|
Business separation, restructuring and cost reduction actions
|
(1.1
|
)
|
|
(1.8
|
)
|
Total
|
$
|
95.8
|
|
|
$
|
89.3
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
(In millions)
|
|
|
|
Total Assets
|
|
|
|
Materials
|
$
|
876.0
|
|
|
$
|
862.5
|
|
Delivery Systems and Services
|
160.3
|
|
|
144.9
|
|
Corporate
|
509.1
|
|
|
497.9
|
|
Total
|
$
|
1,545.4
|
|
|
$
|
1,505.3
|
|
17.
SUBSEQUENT EVENT
Cash Dividend
On January 29, 2019, the Company’s Board of Directors declared a quarterly cash dividend of
$0.08
per share, to be paid on February 26, 2019 to all shareholders of record as of February 12, 2019.
Merger
On January 28, 2019, the company announced its entry into an agreement and plan of merger with Entegris, Inc. (“Entegris”). Under the terms of the agreement, which was unanimously approved by the Boards of Directors of both companies, Versum stockholders will receive
1.120
shares of Entegris for each existing Versum share. Upon completion of the merger, Entegris stockholders will own approximately
52.5%
and Versum stockholders will own approximately
47.5%
of the combined company (based on fully diluted shares outstanding including exercisable options only). The transaction is expected to close in the second half of 2019, subject to the satisfaction of customary closing conditions, including receipt of U.S. and international regulatory approvals and approval by the stockholders of each company.