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EX-32.1 - EXHIBIT 32.1 - Versum Materials, Inc.vsmexhibit3219302017.htm
EX-31.2 - EXHIBIT 31.2 - Versum Materials, Inc.vsmexhibit3129302017.htm
EX-31.1 - EXHIBIT 31.1 - Versum Materials, Inc.vsmexhibit3119302017.htm
EX-23 - EXHIBIT 23 - Versum Materials, Inc.vsmexhibit239302017.htm
EX-21 - EXHIBIT 21 - Versum Materials, Inc.vsmexhibit219302017.htm
EX-10.16 - EXHIBIT 10.16 - Versum Materials, Inc.vsmexhibit10169302017.htm
EX-10.15 - EXHIBIT 10.15 - Versum Materials, Inc.vsmexhibit10159302017.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-37644
VERSUM MATERIALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
47-5632014
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
8555 South River Parkway, Tempe, Arizona 85284
(Address of principal executive offices) (Zip code)

(602) 282-1000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $1.00 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
x
No
o
 
 
 
 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
¨
No
x
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
¨
 
 
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
x
No
¨
 
 
 
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x

 
Accelerated filer
¨
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
Emerging Growth Company
o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
¨
No
x
Based on the closing sale price as reported on the New York Stock Exchange, the aggregate market value of the voting common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, March 31, 2017, was approximately $3.3 billion. The registrant has no non-voting common stock.

At November 10, 2017, 108,816,851 shares of common stock, par value $1.00 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.



VERSUM MATERIALS, INC.
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended September 30, 2017
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 16.
 
 
 

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All references in this Annual Report on Form 10-K, unless the context otherwise requires:
“Versum,” “Versum Materials,” “we,” “our,” “us” and “the company” refer to Versum Materials, Inc. and its consolidated subsidiaries for periods subsequent to the Separation and Distribution completed on October 1, 2016;
“Air Products” refers to Air Products and Chemicals, Inc. and its consolidated subsidiaries, not including, for all periods following the Separation and Distribution, Versum.
References to the “Separation” refer to the October 1, 2016 legal separation resulting in the allocation, transfer and assignment to Versum of the assets, liabilities and operations of Air Products’ Electronic Materials business and the creation, as a result of the Distribution, of a separate, publicly traded company, Versum.
References to the “Distribution” refer to the distribution by Air Products to its stockholders completed on October 1, 2016, of 100% of the outstanding shares of Versum.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may be identified by references to future periods, and include statements about business strategies, operating plans, growth prospects, sales expectations, future operating income and Adjusted EBITDA, estimates regarding future capital requirements and needs for additional financing, estimates of expenses and cost reduction efforts, our future operating results on a segment basis, our ability to execute on our strategy, including our ability to enhance our portfolio positions through future organic and inorganic investments, to increase our share of next generation node opportunities and to and deliver on our commitments to customers and stakeholders, the success of our announced inorganic transactions, Dynaloy and NuMat, the impact of the Dynaloy acquisition, including our expectations as to earnings per share accretion and future profitability, anticipated cash flows, estimates of the size of the market for our products, forecasted industry demand, estimates of the success of other competing technologies that may become available, our ability to successfully compete as a leading materials supplier to the semiconductor industry, our future success as an independent public company, and other matters. The words “believe,” “expect,” “anticipate,” “project,” “estimate,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “objective,” “forecast,” “goal,” “guidance,” “outlook,” “target” and similar expressions, among others, generally identify forward-looking statements, which are based on management’s reasonable expectations and assumptions as of the date the statements were made. In particular, information included in “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements. Actual results and the outcomes of future events may differ materially from those expressed or implied in the forward-looking statements because of a number of risks and uncertainties, including, without limitation, product supply versus demand imbalances in the semiconductor industry or in certain geographic markets may decrease the demand for our goods and services; our concentrated customer base; the dependence of our DS&S segment upon the capital expenditure cycles of our customers; our ability to continue technological innovation and successfully introduce new products to meet the evolving needs of our customers; our ability to protect and enforce our intellectual property rights and to avoid violating any third party intellectual property or technology rights; unexpected interruption of or shortages in our raw material supply; inability of sole source, limited source or qualified suppliers to deliver to us in a timely manner or at all; hazards associated with specialty chemical manufacturing, such as fires, explosions and accidents, could disrupt our operations or the operations of our suppliers or customers; increased competition and new product development by our competitors, changing customer needs and price changes in materials and components could result in declining demand for our products; operational, political and legal risks of our international operations; the impact of changes in environmental and health and safety regulations, anticorruption enforcement, sanctions, import/export controls, tax and other legislation and regulations in jurisdictions in which Versum Materials and its affiliates operate; our available cash and access to additional capital may be limited by substantial leverage and debt service obligations; uncertainty regarding the availability of financing to us in the future and the terms of such financing; agreements governing our indebtedness may restrict our current and future operations, and hamper our ability to respond to changes or to take certain actions; government regulation of raw materials, products and facilities may impact our product manufacturing processes, handling, storage, transportation, uses and applications; possible liability for contamination, personal injury or third party impacts if hazardous materials are released into the environment; cyber security threats may compromise our data or disrupt our information technology applications or services; fluctuation of currency exchange rates; costs and outcomes of litigation or regulatory investigations; the timing, impact, and other uncertainties of future acquisitions or divestitures; restrictions in our governing documents and of Delaware law may prevent or delay an acquisition of us; our ability to complete, on a timely or cost-effective basis, the changes necessary to successfully

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complete our transition to an independent public company; our historical financial data as part of Air Products may not reflect what our financial results would have been had we been an independent company; the loss of certain benefits enjoyed as part of Air Products; increased costs as a separate public company; our ability to satisfy customers that our financial stability on a stand-alone basis is sufficient to satisfy their requirements; tax and other potential liabilities to Air Products assumed in connection with the separation and spin-off; restrictions against engaging in certain corporate transactions for two years following the Distribution; potential conflicts of interest between us and Air Products by our directors and officers; potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements with respect to the Separation and Distribution and related internal reorganization transactions; and other risk factors described in “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Versum Materials assumes no obligation to update any forward-looking statements or information contained in this document to reflect any subsequent change in assumptions, beliefs or expectations, or any change in events, conditions, or circumstances occurring after the date of this Annual Report on Form 10-K.

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Part 1


Item 1. Business

OUR COMPANY

Versum is a global provider of innovative solutions to the semiconductor and display industries with expertise in the development, manufacturing, transportation and handling of specialty materials. We employ expertise in molecular design and synthesis, purification, advanced analytics, formulation development and containers and delivery systems for the handling of high purity materials to deliver leading edge solutions and critical process support to our customers. Versum’s business consists of two operating segments, Materials and Delivery Systems and Services (“DS&S”), under which we manage our operations and assess performance, and a Corporate segment. Our two operating segments are not aggregated, and are reported separately.

We are a leading global supplier of critical materials through our Materials segment, including high purity specialty process gases, cleaners and etchants, slurries, organosilanes and organometallics deposition films, and through equipment in our DS&S segment, which we provide to the semiconductor and display industries. Our technical capabilities enable us to foster strong customer relationships which are critical to collaborative development. Unique product positioning and a strong global infrastructure with flexible manufacturing and supply chain capabilities are fundamental to our businesses. Our Corporate segment includes certain administrative costs associated with operating a public company, non-core operating activities, foreign exchange gains and losses, and other income and expense that cannot be directly associated with the operating segments.

Throughout its history, the business has been known for innovative product development and as a safe, reliable and sustainable supplier of materials needed to fabricate semiconductors and displays. Our business is supported by an in-depth knowledge of the chemistries and technologies which underlie the manufacturing process for these electronic devices. We first invested in the electronic materials business to provide specialty gas supply to the semiconductor industry in the 1980s to address the emerging need for higher purity materials. Over the years, we have grown our business both organically and through acquisitions into a supplier of broad based materials for the industry.

On October 1, 2016, Air Products completed the Separation by means of a tax-free spin-off to Air Products stockholders. As a result of the Distribution, Versum is now an independent public company and its common stock is listed under the symbol “VSM” on the New York Stock Exchange.

As an independent company, we believe Versum is well positioned to benefit from secular growth trends and a leading position in the semiconductor materials market, supported by its global manufacturing and research infrastructure, product innovation capabilities, a strong new product pipeline and low capital intensity. Our competitive strengths have enabled us to achieve strong earnings and cash flow. For the fiscal year ended September 30, 2017, our net sales were $1,126.9 million; operating income was $300.1 million, or 26.6% of sales; net income was $193.0 million; and Adjusted EBITDA was $371.6 million, or 33.0% of sales. For an explanation of Adjusted EBITDA and a reconciliation to generally accepted accounting principles in the United States of America ("GAAP") net income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliation of Non-GAAP Financial Measures” in Part II, Item 7 of this Annual Report on Form 10-K.


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Our revenues by segment and destination region are as follows:
vsm10k930_chart-01872a03.jpgvsm10k930_chart-02691a03.jpg
* Operating segments only, excludes corporate segment which is 0.3% of total revenue

Total Revenue $1,126.9 million

For more information about geographic areas, see Note 22, “Segment and Geographic Information”, to our Annual Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Our Competitive Strengths

Innovative Product Development

Collaborative product development, a high level of technical innovation, products vetted through customers’ rigorous qualification processes and safe, consistent and reliable supply and distribution have enabled the business to establish strong positions in key product areas. Using Versum products, semiconductor manufacturers create faster, smaller and more efficient devices for both the logic and memory market segments. Our innovative products deliver differentiated performance to our customers’ fabrication processes by enhancing their productivity, quality, and yield; yet they constitute in relative terms a small fraction of the overall costs to develop and manufacture the end product.

Longstanding Relationships with Key Industry Leaders

Versum has maintained long-term relationships, often spanning decades, with Integrated Device Manufacturers (“IDMs”), foundries and Original Equipment Manufacturers (“OEMs”). These collaborative relationships position us to understand the future requirements of our customers and to jointly develop innovative solutions that enable the development and manufacture of new products including next generation nodes. These relationships also position us to supply product delivery systems and on-site services to our customers.

Technology Leadership

To be an innovative supplier to the semiconductor industry requires a substantial long-term commitment of investing in technology. Our customers continually seek to introduce new generations of semiconductors and we often collaborate with them to develop new molecules, formulations and technological improvement to satisfy their needs. Historically, over the past four years, approximately 31% of annual revenues in our advanced materials product lines of our Materials segment were based on new products or applications introduced within the last five years. Versum currently has approximately 1,600 patents worldwide and has a highly qualified workforce comprising approximately 380 research scientists, lab technicians

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and engineers that allow us to sustain our competitive advantage.

Positioned to Take Advantage of Secular Growth Trends

Our business supplies materials used in the manufacture of semiconductors and displays supporting a wide range of electronic consumer products providing us with a diversified portfolio of growth opportunities into the future. We believe we will continue to witness the proliferation of semiconductors and displays into durable goods and other devices and growth will be further enhanced by the following secular trends:

The continued drive for chip productivity through improved scaling which we expect to drive the shift to new nodes and the need for new enabling materials;
Strong bit demand growth which we expect will continue to fuel underlying growth in the memory market, first increasing the demand for legacy materials and then driving the need for new materials as structural complexity increases;
The “Internet of Things”, cloud computing, need for data monitoring and storage which we expect will continue to drive the demand for semiconductors especially impacting legacy materials demand; and
Semiconductor growth in China and ultimately in other parts of the world which we expect will drive increased demand for future innovation and materials.

Strategically Located Global Manufacturing Footprint and Infrastructure

Versum has a well-established global infrastructure with fourteen strategically located manufacturing and seven research and development facilities in the Americas and Asia. We believe Versum’s global network of production and research facilities are geographically positioned to serve high growth areas and enable us to collaborate with our customers. Our manufacturing facilities include locations in the United States, South Korea and Taiwan.

Strong Financial Performance and Cash Flow Generation

Versum has a strong financial profile with net income of $193.0 million, operating margin of 26.6% and Adjusted EBITDA margin of 33.0% for the fiscal year ended September 30, 2017. We expect these strong margins to enable the business to service its debt obligations and generate significant cash flow to drive both future organic and inorganic growth. For an explanation of Adjusted EBITDA and Adjusted EBITDA Margin and a reconciliation to GAAP net income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Reconciliation of Non-GAAP Financial Measures” in Part II, Item 7 of this Annual Report on Form 10-K.


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Net income attributable to Versum was $193.0 million in 2017, $212.0 million in 2016, and $184.1 million in 2015. Our Adjusted EBITDA and EBITDA margins are as follows:
vsm10k930_chart-03502a03.jpg
Capital expenditures for the business have averaged approximately $41 million per year over the last three years including maintenance capital to support the business of about 1.5 - 2.0% of sales. Given the anticipated increasing market demand for new products combined with our own increased opportunities to enhance our geographic, cost and capacity positions, we expect to increase our level of growth capital in fiscal year 2018.

The combination of strong operating margins and low maintenance capital needs should allow us to generate substantial cash flow even with the increased level of expected growth capital opportunities.

Experienced Management Team

We have a strong management team which combines individuals with long-standing industry experience and leadership in specialty chemicals, materials and the semiconductor industry with key outside hires who bring a diverse perspective to the business from various other companies. Of our top seven senior leaders, five spent the majority of their careers with these businesses within Air Products while two joined our team from outside. Guillermo Novo, our Chief Executive Officer, has 30 years of materials industry operating and executive experience at Rohm & Haas Company and Dow Chemical Company.

Business Strategies

Drive Operational Excellence and Asset Efficiency

Driving operational excellence, including a commitment to safety, environmental stewardship and supply chain reliability, are critical to the success of our business. We maintain rigorous environmental, health and safety processes and believe excellence in safety performance translates to excellence in operational and financial performance. We also expect to continue to implement various initiatives to improve the efficiency, effectiveness and reliability of our operations including investing in state of the art manufacturing facilities, locating capacity and research capability close to our customers and continually globalizing our supply chain.

Maintain Strong Customer Focus

A key element of our success has been our ability to establish long-standing working relationships with most of the key semiconductor manufacturers as well as with OEMs. Our understanding and anticipation of our customer’s needs and our ability to develop innovative product solutions in a timely manner, together with providing safe and reliable supply, high

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quality products and analytical capabilities, have been critical in developing these long-term relationships.

Leverage our Leadership to Drive Growth

We have invested approximately 4% to 5% of total sales in new technology, primarily for our advanced materials business, over the last three years and expect to continue a similar level of spending to deliver innovative solutions for our customers. We expect our leadership position, together with the strength of our product portfolio, to drive growth in the markets we compete in. We also believe there are significant opportunities for us to invest capital in strategic acquisitions to strengthen our businesses, broaden our product offerings and geographic positioning, and expand our technology portfolio.

Focus on Cash-Flow Generation

Versum has a successful track record of delivering strong financial results. Given the low capital intensity of our business, this results in significant cash flow generation. We believe our anticipated strong future cash flow will enable us to service our debt obligations, fund organic and inorganic growth opportunities, return capital to stockholders or reduce leverage.

Operating Segments

Materials Segment

The Materials segment provides leading edge specialty materials focusing on IC and flat-panel display customers. Its products include specialty chemicals and materials utilized in the latest generation of semiconductors as well as high-purity specialty gases used in the semiconductor manufacturing process. These products include organosilanes, organometallics and other specialty precursors for thin film deposition, CMP slurries and post CMP cleans, formulated products for post etch and advanced packaging cleaning, process gases for deposition and metallization, chamber cleaning and etchant gases, as well as high purity gases that are used in ion implantation to alter the electrical properties of thin films. The semiconductor industry accounts for more than 80% of segment sales. Materials operates in two product categories: advanced materials and process materials. The segment benefits from synergies across the business units, including serving the same customer base, developing joint market strategies, sharing common supply chain processes and infrastructure, and utilizing common commercial resources.

Through our global network, our Materials segment positions its research, manufacturing and technical support close to customer facilities, enabling supply chain optimization and rapid response times to product and service needs. Many of our products have undergone rigorous product performance and quality reviews by our customers to be qualified for use in their products or manufacturing processes. Once these qualification processes are completed and our products are designated by our customers for use in their processes or products, it is often time consuming and costly for our customers to change suppliers. Our products perform critical tasks in customers’ products or manufacturing processes, yet typically represent a very small portion of the cost to manufacture the end products. Over nearly three decades, our Materials segment has developed strong customer relationships with the majority of the industry-leading IDMs, foundries and OEMs through joint product development and providing on-site service and technical personnel at our customers’ facilities.


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Materials sales were $829.7 million, $756.7 million, and $743.4 million for fiscal years 2017, 2016 and 2015 respectively. Materials operating income was $274.4 million, $252.3 million, and $213.7 million for fiscal years 2017, 2016 and 2015 respectively. Materials adjusted EBITDA was $317.5 million, $296.9 million, and $262.8 million for fiscal years 2017, 2016 and 2015 respectively. Materials products are sold on a global basis, with revenue by business unit (Process Materials “PM” and Advanced Materials “AM”) and destination region as follows:
vsm10k930_chart-04696a03.jpgvsm10k930_chart-05561a03.jpg

The Materials segment has approximately 1,000 employees, operates 12 production and 7 research and development facilities and serves more than 225 customers.

Materials Product Categories

Advanced Materials. Advanced materials supplies products and services through three key product platforms that are employed in the fabrication of ICs:

Advanced deposition materials (“ADM”) 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 (“PLA”) products include CMP slurries and post CMP cleans that are used to prepare chips with deposited thin films for the next stage of fabrication; and

Surface prep and clean (“SP&C”) formulated products are designed to selectively etch and remove debris and contamination during many stages of the wafer fabrication process including the advanced packaging activity.

For fiscal year 2017, approximately 85% of our advanced materials sales are based on proprietary or patent-protected positions. Product innovation is a key differentiator for advanced materials. For example, an organosilane precursor, which we developed in collaboration with a leading OEM, is an enabler for self-aligned double patterning, a process that has allowed device size to decrease far beyond expectations using present day lithography. We believe the move to more advanced transistors has created needs for new innovation in polishing dielectric materials. Our shallow trench isolation CMP slurries are exceeding the requirements for dishing control, selectivity, removal rate, and most importantly reduction in defects.

Advanced materials has seven technology centers strategically located near our customers, with four in the United States and three in Asia. Our focused research and development efforts offer customers the opportunity to collaborate on the joint development of new materials, align new materials requirements with their product technology cycles and enhance the quality and scale of their specialty material needs.


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In fiscal year 2018 we expect to continue to invest in enhancing our innovation capabilities including adding additional research and manufacturing capabilities in Korea.

Process Materials. Process materials 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 (“LED”) customers. Our cleaning and etchant gases, like nitrogen trifluoride (NF3) and hexafluorobutadiene (C4F6), are used for chamber cleaning and high aspect etching applications in the production of semiconductors. Our process gases for deposition and metallization, such as tungsten hexafluoride (WF6) are used in the process of depositing film layers to enable the continued advancement of the semiconductor industry. Our dopants such as arsine (AsH3) are used for ion implantation for semiconductors and our hydride gases such as ammonia (NH3) support applications in display and LEDs. Our process materials’ products are used in a wide variety of LCD-based displays and LED-based displays, and logic and memory technology. We supply these products to our customers throughout the U.S., Asia and Europe.

Process materials leverages its geographically situated asset capabilities and strong safety performance to maintain its position as a reliable and sustainable supplier of high purity specialty gases and chemicals. In fiscal year 2018 we expect to invest to improve our cost position and increase capacity in certain key products.

Delivery Systems & Services Segment

Our DS&S segment designs, manufactures, installs, operates, and maintains state-of-the-art chemical, gas and slurry delivery and distribution systems enabling the safe and cost efficient use of specialty gases and chemicals delivered directly to our customers’ manufacturing tools. Product development in this business is enhanced through close collaboration with our OEM customers as well as the advanced materials and process materials businesses of our Materials segment.

In addition to the safe distribution of specialty gases and chemicals by our employees and equipment located at customer facilities, we monitor the purity of the materials from the source container through the point of use as well as build and maintain monitoring and control systems that facilitate real-time metrics management of critical customer process conditions.

The business provides turnkey installation during facility construction and startup as well as onsite operating services. We supply trained and dedicated technical experts to manage all aspects of the customer’s gas and chemical distribution and handling needs through our MEGASYS branded services group. The scope of services offered includes inventory management, material handling, gas and chemical container change-out, equipment operation, maintenance, repair, engineering and safety management.

DS&S Product Categories

Our DS&S segment consists of the following product categories:

Equipment (Gas, chemical and slurry delivery systems): We develop, design, manufacture and sell 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. Our systems help our customers improve their productivity, manage the application and use of our products and other materials, and enable our customers to handle materials in a safe manner. We also provide flow and temperature control systems and analytical systems to capture key data for our customers.

Installation Services: We offer resources to assist a new semiconductor fab in the design, installation, startup, and commissioning of the gases and specialty materials delivery systems and quality assurance. Our scope includes project management for installation and startup of the gas and chemical delivery systems, and inventory management. In addition, we sell spare parts, equipment upgrades, equipment maintenance and provide training.


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On-Site Services (MEGASYS): We offer on-site services to assist our 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. In this part of our business, our employees are physically located at our customers’ fabs and are critical to the efficient operation of such facilities. MEGASYS employs more than 400 employees servicing more than 30 customer locations and has approximately 100 engineers to assist our customers with their delivery system and service needs.

DS&S sales were $293.6 million, $213.4 million, and $265.9 million for fiscal years 2017, 2016 and 2015 respectively. DS&S operating income was $71.7 million, $50.8 million, and $49.1 million for fiscal years 2017, 2016 and 2015 respectively. DS&S adjusted EBITDA was $73.1 million, $52.9 million, and $57.4 million for fiscal years 2017, 2016 and 2015 respectively. Our products are sold on a global basis, with revenue by product category and destination region as follows:
vsm10k930_chart-06324a03.jpgvsm10k930_chart-07139a03.jpg
The DS&S segment has approximately 750 employees and operates two production facilities with one in the U.S. and one in Asia. In fiscal year 2018 we anticipate commissioning an additional production facility in China.

Corporate Segment

In addition to our operating segments, our Corporate segment includes certain administrative costs associated with operating a public company, non-core operating activities, foreign exchange gains and losses, and other income and expense that cannot be directly associated with our operating segments. Assets in the Corporate segment include cash and deferred tax assets.

Additional financial and other information relating to our segments is further described in Note 22, “Segment and Geographic Information”, of our Annual Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.


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Products and End Uses
Segment
 
Key Products
 
Applications
 
End Uses
Materials
 
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CMP Slurries
 
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PLA via polishing
 
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Semiconductors
 
 
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Post-CMP Cleans
 
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Cleaning after polishing
 
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Semiconductors
 
 
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Organosilanes
 
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Thin film deposition
 
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Semiconductors
 
 
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Organometallics
 
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Thin film deposition
 
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Semiconductors
 
 
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Formulated Cleans
 
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Post-etch cleaning, advanced packaging
 
Ÿ
Semiconductors
 
 
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High-Purity Gases for Deposition & Metallization
 
Ÿ
Thin film deposition
 
Ÿ
Semiconductors
 
 
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Chamber Cleaning & Etching Gases
 
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Residue removal from deposition chambers and etching high aspect ratio features
 
Ÿ
Semiconductors and Displays
 
 
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Ion Implantation Gases
 
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Doping thin films to alter electrical properties
 
Ÿ
Semiconductors and LED
 
 
 
 
 
 
 
 
 
 
Delivery Systems
 
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Ultra-High Purity Gases and Chemical Supply Systems
 
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Safe storage and delivery of gases, liquids and solids
 
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Semiconductors, Displays and LEDs
 
 
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Slurry Delivery Systems
 
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Mixing and delivery of CMP slurries
 
Ÿ
Semiconductors

Competition. The semiconductor market is global in scope with nearly all major semiconductor manufacturers having operations in multiple countries. We serve our customers across three continents and participate in the specialty gases and materials space spanning six of the seven critical processes steps required for semiconductor manufacturing.

The competitive landscape is varied, from multinational chemical companies to small regional, narrow-portfolio focused companies. Overall, competitive trends are supporting the need for localized, cost competitive supply chains, which is especially critical for larger volume customers.

Because of our breadth, we do not believe there are any global competitors that compete with us across the full range of our product offerings. Many of our competitors are local companies that participate in only a few products or in specific geographies. While there are other broad-based materials suppliers, many are concentrated in specific product areas, such as CMP pads, photoresists or liquid crystals. Key competitors include Adeka, Air Liquide, Cabot Microelectronics, Dow/DuPont, Entegris, FujiFilm, Hyosung, Avantor, Merck EM, and SK Materials.

Customers

We primarily serve the semiconductor industry for both memory and logic. The semiconductor industry is characterized by large scale global players and, while we serve a variety of customers from smaller technology firms to OEMs to multinational semiconductor companies, the majority of our sales are concentrated to these large scale global players. In fiscal 2017, the top 20 customers accounted for 83% of our total sales with the top three, Intel, Samsung and Taiwan Semiconductor Manufacturing Company accounting for 48% of sales.

Sales, Marketing & Distribution

We sell our products and services globally through our direct sales force primarily directed to end use customers but also to OEMs. The direct sales force is organized based on geographic region and business units with coordinated teams for key industry players. As of September 30, 2017, total in-house sales forces consisted of approximately 200 personnel worldwide.


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Raw Materials

We purchase raw materials and chemical intermediates from a large number of third parties. Major requirements for our key raw materials and energy are typically satisfied pursuant to contractual agreements ranging from purchase orders to long-term relationships with suppliers. We are generally not dependent on any one supplier for a significant portion of our raw material requirements, but due to the specialty nature of our products there are a limited or a sole number of suppliers that are qualified to supply raw materials for use in our customers’ products. Where we have limited sources of supply, or a sole supplier, we generally have developed contingency plans to minimize the effect of interruption or reduction in supply, such as developing alternative or back-up suppliers, sourcing from suppliers with multiple facilities or utilizing alternative formulations.

Temporary shortages of raw materials may occasionally occur due to several factors such as supply-demand imbalances, supplier outages or regional market shifts. In recent years, these shortages have not resulted in long-term unavailability of raw materials. However, the continuing availability and price of raw materials are affected by other factors such as unscheduled plant interruptions occurring during periods of high demand, domestic and world market and political conditions, as well as the direct or indirect effect of governmental regulations. During periods of high demand, some raw materials may be subject to significant price fluctuations, and such fluctuations may have an adverse impact on the results of operations of our business. The impact of any future raw material shortages or price fluctuations on our business as a whole or in specific geographic regions or in specific business lines cannot be accurately predicted.

We have a broad raw material base with the cost of no single raw material representing more than 3% of our cost of goods sold in 2017. Raw material costs in total constituted 24% of our sales in our Materials segment in 2017. The table below lists the key raw materials and the principal product category for which the materials were used.
Raw Material
 
Segment
 
Principal Product Category
Specialty Silanes
 
Materials
 
Advanced Materials
Tungsten Powder
 
Materials
 
Process Materials
Metallic Oxide Abrasives
 
Materials
 
Advanced Materials
Controllers
 
DS&S
 
Equipment
Hydrogen Chloride
 
Materials
 
Process Materials
Hydrogen Fluoride
 
Materials
 
Process Materials
Etchant Gases
 
Materials
 
Process Materials
Nitrous Oxide
 
Materials
 
Process Materials
Phosphine
 
Materials
 
Process Materials
Ammonia
 
Materials
 
Process Materials

Specialty silanes are sourced from multiple sources under multi-year contracts. We source several types of silanes depending upon the application and prices are generally fixed for the term of the contract.

Tungsten powder is supplied from multiple sources under multi-year contracts. Prices are generally subject to periodic adjustments based upon pricing for a derivative of tungsten ore. A majority of tungsten resources are located in China, and supply and pricing is subject to fluctuation. There have been significant fluctuations in pricing in recent years.

Metallic oxide abrasives are sourced under multi-year contracts. We source different types of abrasives each from a single source. Pricing is generally subject to market conditions.

Controllers are critical to the operation of our delivery systems units. We source different types of controller units from a single source under a multi-year contract. These control units are built by the supplier to our design specifications. We believe there are other sources of supply for these controllers.

Hydrogen chloride is sourced in the U.S. through a production joint venture and in Asia through a sole supplier. Our sole supply in the U.S. is a by-product of another chemical production process and sold through our joint venture. Our hydrogen chloride in Asia is produced as a by-product of another chemical process of a major chemical company. Both supply arrangements are under multi-year contracts.

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Hydrogen fluoride is sourced in two countries from multiple suppliers under multi-year contracts. Prices under these contracts vary from fixed to market-based pricing.

Etchant gases are sourced from multiple suppliers under multi-year contracts. We have previously experienced some supply tightness for certain etchant gases and prices are generally subject to annual adjustment.

We source different grades of nitrous oxide in multiple countries from multiple sources under multi-year contracts. However, a customer may choose to qualify only one of those sources for its use. Our pricing is generally fixed for the term of such arrangements.

Phosphine is sourced from a single source under a multi-year contract. Our pricing is subject to periodic adjustment.

Ammonia is sourced from multiple sources under multi-year contracts. We believe there are a number of available sources. Pricing is generally tied to market conditions.

Key materials in our Delivery Systems & Services operating segment include valves, fittings and other components necessary to design and build our delivery systems and devices. We also purchase returnable containers that are a critical part of the quality and safe transportation, handling and use of our materials. We believe most of these materials are readily available from numerous sources.

Working Capital

Versum maintains inventory where required to facilitate the supply of products to customers on a specified delivery schedule. In some cases, higher inventory levels of certain products are maintained to manage specific supply chain risks and to meet customer requirements for responsiveness. For example, for some of the products, a higher level of inventory is maintained to mitigate the risk associated with a single manufacturing plant or single source of a critical raw material. A majority of our product inventory is maintained at warehouses in close proximity to our customers’ manufacturing locations to provide the responsiveness expected by our semiconductor customers.

Seasonality

Versum’s businesses are typically slightly stronger in fiscal third and fourth quarters due to the industry ramp up in advance of the holiday season. However, semiconductor industry technology ramps and materials market supply and demand dynamics can alter these seasonal trends. A portion of our DS&S segment is susceptible to the cyclical nature of capital investment in the semiconductor industry.

Employees

As of September 30, 2017, Versum and its subsidiaries had approximately 2,200 employees. Of our employees, approximately 200 are subject to collective bargaining agreements or other similar arrangements.

We observe local customs, legislation and practice in labor relations. Management believes that its relations with employees and their representatives are good. We have not suffered any material work stoppages or strikes in our worldwide operations in the last five years.


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Environmental and Regulatory Matters

Versum is subject to various environmental laws and regulations in the countries in which it has operations. Compliance with these laws and regulations results in capital expenditures and costs. Our expense related to compliance with environmental laws and regulations totaled $10.2 million, $9.5 million, and $11.0 million in 2017, 2016, and 2015, respectively. These amounts represent an estimate of expenses for compliance with environmental laws and activities undertaken to meet internal company standards.

Some of our operations are within jurisdictions that have or are developing regulations governing emissions of greenhouse gases (“GHG”). The U.S. Environmental Protection Agency is regulating GHG emissions for new construction and major modifications to existing facilities. Increased public awareness and concern may result in more international, U.S. federal, and regional requirements to reduce or mitigate the effects of GHG. Although uncertain, these developments could increase our costs related to consumption of electric power and the production of certain products, such as fluorinated gases. We believe we may be able to mitigate some of the potential costs through our contractual terms; however, we are unable to predict the impact of any potential changes in regulation or future regulation of GHG. Any legislation that limits or taxes GHG emissions from our facilities could impact our results of operations by increasing our operating costs or reducing demand for certain of our products.

The company is also subject to the Homeland Security Agency’s regulations, which address chemical plant safety and vulnerability. Similarly, the Frank R. Lautenberg Chemical Safety for the 21st Century Act, reforms the Toxic Control Substances Act (“TSCA”) by requiring the United States Environmental Protection Agency (“EPA”) to prioritize and evaluate the environmental and health risks of existing chemicals and providing EPA with greater authority to regulate chemicals posing unreasonable risks. The law also requires that EPA make an affirmative finding that a new chemical will not pose an unreasonable risk before such chemical can be manufactured or imported. TSCA reform also incorporates additional thresholds and checks to substantiate Confidential Business Information (“CBI”) claims. These reforms update TSCA so that it operates in a similar fashion to the Registration, Evaluation, and Authorization of Chemicals (“REACH”) legislation in Europe. Regulations similar to REACH have been enacted in South Korea and Taiwan. Based upon currently available information, the company does not believe that these regulations will have a material impact on its financial condition, results of operations or cash flows.

Research & Development

Versum is committed to further investing in its businesses through research and development. The objective of our research and development effort is to develop innovative chemistries and technologies with applications relevant within targeted key markets. Our technology spending comprised mainly of research and development costs were approximately 4% of our total sales in fiscal 2017. We staff our research and development resources based on the needs and requirements of each business line to develop innovative products. Research and development costs are charged to expense, as incurred. Such costs were $45.1 million, $43.9 million and $40.7 million for the years ended September 30, 2017, 2016 and 2015, respectively.

Research and development efforts are generally focused on both product and process development, which is the stage at which products move from development to manufacturing, and new product development.

Each of our segments manages its own research and development effort and has separate research and development facilities dedicated to its specific area. However, where technologically feasible, advances and findings are shared between business lines to foster greater cross-fertilization of ideas and applications. In certain cases, we conduct research and development efforts with third parties, including universities, customers and other entities. We endeavor to obtain ownership of or license to intellectual property developed with a third party on terms favorable to us.

Versum owns approximately 400 United States patents and 1,200 foreign patents, 600 pending patent applications globally and is a licensee under certain patents owned by others. While the patents and licenses are considered important, the company does not consider its business as a whole to be materially dependent upon any particular patent, patent license, or group of patents or licenses.


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Where You Can Find More Information

Our Internet address is www.versummaterials.com. On this website, under the “Investors” section, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (“SEC”): our annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K; our proxy statements; any amendments to those reports or statements, and Form SD. All such filings are available on our website free of charge. The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on our website, and any other website, as referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.

Item 1A. Risk Factors

You should carefully consider the following risks and other information in this Annual Report on Form 10-K in evaluating us and our common stock. Any of the following risks could materially and adversely affect our financial condition, results of operations or cash flows. Our operations could be affected by various risks, many of which are beyond our control. Based on current information, we believe that the following list identifies the most significant risk factors that could affect our financial condition, results of operations or cash flows. There may be additional risks and uncertainties that adversely affect our financial condition, results of operations or cash flows in the future that are not presently known, are not currently believed to be material, or are not identified below because they are common to all businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. For more information, see “Cautionary Statement Concerning Forward-Looking Statements.”

Risks Related to Our Business

Overall Economic and Supply/Demand Conditions - Economic conditions or product supply versus demand imbalance in the semiconductor industry or in certain geographic markets in which we do business may decrease the demand for our goods and services and adversely impact our financial condition, results of operations and cash flows.

Demand for our products and services depends in part on global and regional economic conditions affecting the countries in which we do business and the semiconductor industry. Our revenue is primarily dependent on semiconductor demand. Semiconductor demand, in turn, is impacted by changes in consumer demand, since in recent years the industry has seen a significant shift in demand from semiconductor devices for personal computers, which now are largely enterprise-related, to those for mobile devices, which are more consumer-oriented. Historically, semiconductor demand has fluctuated significantly due to economic and industry cycles and seasonal shifts in demand, which can dramatically affect our business, causing demand for our products to fluctuate. Furthermore, competitive dynamics within the semiconductor industry may impact our business. If the global economy or the semiconductor industry weakens, whether in general or as a result of specific factors, such as macroeconomic conditions, political instability or unpredictable events such as natural disasters, we could experience material adverse impacts on our results of operations and financial condition. In the past few years, uncertain or adverse economic conditions in certain geographies and changing supply and demand balances in areas served by us have impacted and may in the future impact demand for our products and services, in turn negatively impacting our results of operations. Any changes in capital spending by our customers or demand in the semiconductor industry may negatively impact our cash flow, our ability to service our debt and our results of operations.

Unfavorable global or regional economic conditions could have other negative impacts to our business or our results of operations, including depressing demand in a given region or industry, affecting our margins, constraining our operating flexibility and impacting our customers. Any excess capacity in our or our competitors’ manufacturing facilities, or due to new entrants into the industry, could decrease our ability to maintain pricing and margins and generate profits. Adverse global economic, political and industry conditions could have other negative effects on our company. For instance, we could experience negative impacts on cash flows due to the inability of our customers to pay their obligations to us or our production process could be harmed if our suppliers cannot fulfill their obligations to us. In such circumstances, we may also have to reduce the carrying value of goodwill and other intangible assets, which could harm our financial position and results of operations.

Some additional factors that affect demand for our products include: the types of electronic devices that are in demand;

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products that our customers may produce, such as logic IC devices versus memory devices; the various technology nodes at which those products are manufactured and whether our products are part of the production process; customers’ specific manufacturing process integration schemes; the short order to delivery time for our products; quarter-to-quarter changes in customer order patterns; market share gains and losses; and pricing changes by us and our competitors.

Concentrated Customer Base - We are exposed to risks associated with a concentrated customer base.

Our customer base historically has been, and is becoming even more, concentrated as a result of economic and industry conditions. In fiscal 2017, three customers accounted for approximately 48% percent of Versum’s global sales. In fiscal 2017, our top twenty customers accounted for approximately 83% of our global sales. Certain customers have experienced significant ownership or management changes, consolidated with other manufacturers, outsourced manufacturing activities, or engaged in collaboration arrangements with other manufacturers. Customers have entered into strategic alliances or industry consortia that have increased the influence of key industry participants in technology decisions made by their partners. Certain semiconductor and display customers are making an increasingly greater percentage of their respective industry’s capital equipment investments.

In this environment, contracts or orders from a relatively limited number of semiconductor and display manufacturers have accounted for, and are expected to continue to account for, a substantial portion of our business, which may result in added complexities in managing customer relationships and transactions. The mix and sales to any single customer may vary significantly from quarter to quarter and from year to year. If customers do not place orders, or they substantially reduce, delay or cancel orders, or if our products are not specified for our customers’ products or production processes we may not be able to replace the business. Because our products are configured to customer specifications, the changing, rescheduling or canceling of orders may result in significant, non-recoverable costs. Changes in customer qualification requirements could result in significant delays in the sale of our products. Major customers may also seek and on occasion receive, pricing, payment, intellectual property-related, or other commercial terms that are less favorable to Versum. These factors could have a material adverse effect on our financial condition, results of operations and cash flows.

Consolidation between customers, changes in technologies or solutions used by customers, changes in products manufactured by customers or in end-user demand for those products, selection of suppliers other than us, customer bankruptcies or customer departures from the industry may result in even fewer customers accounting for a high percentage of our revenue and reduced demand from any single major customer. The cancellation, reduction or deferral of purchases of our products by even a single customer could significantly reduce our revenues in any particular quarter. If we were to lose any of our significant customers, if our products are not specified for these customers’ products or production processes, or if we suffer a material reduction in their purchase orders, revenue could decline and our business, financial condition and results of operations could be materially and adversely affected. Furthermore, due to continued industry consolidation, the loss of any one customer or significant order may have a greater impact than we anticipate. We cannot guarantee that we will be able to continue to secure contracts with our more substantial customers in the future.

Capital Expenditure Cycle - Our DS&S segment is dependent upon the capital expenditure cycles of our customers.

Our DS&S operating segment is dependent upon the capital expenditures of manufacturers of microelectronics, semiconductors, computers, wireless communications and other electronic products. DS&S depends upon the sale of its gas and chemical delivery systems and bulk special gas projects which are tied to the capital expenditures of our customers. The capital equipment market for microelectronics, semiconductor, and consumer electronics manufacturers has historically been characterized by sudden and severe cyclical variations in product supply and demand due to a number of factors including capacity utilization, timing of customers’ new product introductions and demand for their products, inventory levels relative to demand and access to affordable capital. The timing, severity and duration of these market cycles are difficult or impossible to predict. As a result, business levels can vary significantly from quarter to quarter or year to year. Significant volatility in investment cycles in the market for microelectronics, and semiconductors used in electronic devices or in demand for consumer electronics may reduce demand for our products and may materially and adversely affect the DS&S operating segment. The degree of the impact of any downturn depends on a number of factors, including: the strength of the global economies, particularly those of Asia and the United States; the overall level of demand for consumer electronics products; the stability of global financial systems; and the overall health of the microelectronics, semiconductor, and consumer electronics industries.


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Product Innovation - If we are not able to continue our technological innovation and successful commercial introduction of new products, our financial condition, results of operations and cash flow could be adversely affected.

The electronics and semiconductor industries into which we sell our products experience periodic technological change and product improvement. Our customers continually introduce new generations of products or require new technological capacity to further develop their products. Our customers rely on us to develop new materials to support their new product development. Our future growth will depend on our ability to gauge the direction of the commercial and technological progress in all key end-use markets and upon our ability to fund and successfully develop, manufacture and market products in such changing end-use markets. We will have to continue to identify, develop and market innovative products on a timely basis to replace or enhance existing products in order to maintain our profit margins and our competitive position. We may not be successful in developing new products and technology, either alone or with third parties, or licensing intellectual property rights from third parties on a commercially competitive basis. Our new products may not be accepted by our customers. If we fail to keep pace with the evolving technological innovations in our end-use markets on a competitive basis, our financial condition, results of operations and cash flows could be adversely affected.

Intellectual Property Rights - If our intellectual property is compromised or copied by competitors, if our competitors were to develop similar or superior intellectual property or technology, or, if our intellectual property or technology violate third-party rights, our financial condition, results of operations and cash flow could be negatively affected.

Intellectual property rights, including patents, trade secrets, confidential information, trademarks, and trade names, are important to our business. Our success depends to a significant degree upon our ability to protect and preserve our intellectual property rights. We endeavor to protect our material intellectual property rights in the jurisdictions in which our products are produced and used, and also in the jurisdictions into which our products are imported and used. Although we seek to enforce our intellectual property, because of the limitations of the legal systems in many countries, the effectiveness of patents obtained or that may in the future be obtained, if any, is uncertain. While we own and have applied for numerous patents and trademarks throughout the world covering aspects and improvements for many of our technologies, we may be unable to obtain protection for our intellectual property in key jurisdictions. Although we own and have applied for numerous patents and trademarks throughout the world covering aspects and improvements for many of our technologies, we may be unable to obtain protection for our intellectual property in key jurisdictions where we rely on local judicial enforcement of our patents and other proprietary rights. For example, although patents were granted in several countries related to a key technology in our advanced deposition product portfolio, the relevant patent was invalidated in South Korea in 2015 and is currently being challenged in Taiwan. Patent protection for individual products extends for varying periods in accordance with the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. Our patents and other intellectual property rights may expire, be challenged, invalidated, circumvented, and rendered unenforceable or otherwise compromised. For example, some of our patents related to a key technology in our advanced deposition product portfolio will expire in 2018. An inability to protect, defend or enforce our intellectual property could have an adverse effect on our financial condition, results of operations and cash flows.

Similarly, third parties may assert claims against us and our customers and distributors alleging our products infringe upon or otherwise violate third party intellectual property rights. If we were to discover that our products infringe or otherwise violate the valid intellectual property rights of others, we might need to obtain licenses or substantially re-engineer our products to avoid infringement. We may not be able to obtain licenses on acceptable terms, or at all, or be able to re-engineer our products successfully.

We also rely materially upon unpatented proprietary technology, know-how and other trade secrets to maintain our competitive position. While we enter into confidentiality agreements with our employees and third parties to protect our proprietary expertise and other trade secrets, these agreements may not be enforceable in every jurisdiction or, even if legally enforceable, we may not have adequate remedies for breaches of such agreements. We also may not be able to readily detect breaches of such agreements. The failure of our patents or confidentiality agreements to protect our proprietary technology, know-how or trade secrets could negatively impact our financial condition, results of operations and cash flows.

If we must take legal action to protect, defend or enforce our intellectual property rights, any suits or proceedings could result in significant costs and diversion of our resources and our management’s attention, and we may not prevail in any such suits or proceedings. Any failure to protect, defend or enforce our intellectual property rights could have an adverse

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effect on our financial condition, results of operations and cash flows.

Raw Material Cost and Availability - Interruption in ordinary sources of supply or an inability to recover increases in raw material costs from customers could adversely impact our financial condition, results of operations and cash flows.

We use a wide variety of raw materials, including tungsten powder, hydrogen fluoride, specialty silanes, specialty abrasives, ammonia, and nitrous oxide. Shortages or price escalation in these materials could negatively impact our financial results. For example, starting in late 2016 we experienced an ongoing nitrous oxide supply disruption resulting from reduced production by a key supplier. We may not be able to find alternative sources of supply in sufficient quantities to meet the needs of our customers, and may not be able to raise prices to recover any increases in raw material costs due to competitive pressures. Increases in raw material costs that cannot be passed on to customers for competitive or other reasons could negatively impact our financial condition, results of operations and cash flows. Even where costs are successfully passed through, price increases may result in lower sales volume.

Suppliers - If any of our sole source or limited source suppliers, or suppliers that were required to satisfy our customers’ rigorous qualification requirements, were unable to deliver to us in a timely manner or at all, our financial condition, results of operations and cash flows could be adversely affected.

Our operations depend on obtaining sufficient supplies of raw materials and components used in our manufacturing processes. In certain cases, qualification requirements in customers’ manufacturing processes limit us to certain qualified suppliers. In the event that it becomes necessary for us to find another supplier, we would first be required to ensure such new supplier could be qualified through our customers’ rigorous qualification processes for suppliers. Additionally, certain of our businesses rely on limited source suppliers to provide raw materials, such as hydrogen chloride and nitrous oxide, which are critical materials for certain of our customers. Although we have business continuity plans in place, our customers may be unwilling to qualify a new supplier, such suppliers may experience financial difficulties, be unable to deliver products to us in a timely manner, have insufficient capacity to meet our requirements, or suffer business disruption resulting from damage to or destruction of their facilities due to accidents, natural disasters or other events, and we might not be able to secure an alternative source of supply in a timely manner or at all. These events could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Nature of Chemical Manufacturing Business - Hazards associated with specialty chemical manufacturing could disrupt our operations or the operations of our suppliers or customers, having a negative impact on our financial condition, results of operations, and cash flows.

Due to the nature of our business and those of some of our key suppliers, we are exposed to the hazards associated with specialty chemical manufacturing and the related storage and transportation of raw materials, products and waste in our manufacturing facilities or distribution centers and those of our suppliers, such as fires, explosions and accidents. Our operations could be impacted by catastrophic events outside our control, including natural disasters and severe weather conditions such as hurricanes, floods, earthquakes, and storms, epidemics, or acts of war and terrorism. Any such event could cause a material business disruption that could affect our ability to produce and distribute our products and have an adverse effect on the productivity and profitability of our Company.

Our operations by their nature involve the use and manufacture of hazardous materials. Other hazards include piping and storage tank leaks and ruptures, mechanical failure, employee or third-party exposure to hazardous substances, lack of process safety, chemical spills and other discharges or releases of toxic or hazardous substances or gases. These hazards may cause personal injury and loss of life, damage to property and contamination of the environment, which could lead to government fines or work stoppage injunctions and lawsuits by injured persons. Such events could impact our suppliers or customers, in which case raw materials may be unavailable to us, or our customers may be unable to purchase or accept our products and services. Any such occurrence could have a negative impact on our financial condition, results of operations and cash flows.


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Competition - The markets in which we compete are highly competitive. Our inability to compete effectively could adversely impact our financial condition, results of operations and cash flows.

We face significant competition from major international producers as well as smaller regional competitors. Our most significant competitors include major chemicals and materials manufacturers and diversified companies, a number of which have revenues and capital resources exceeding ours. In addition, our products are facing increasing competition from market participants in Asia. We expect to see more competition as China continues to invest in semiconductor manufacturing.

We face risk that certain events, such as new product development by our competitors, changing customer needs, production advances for competing products, price changes in raw materials and product components, our failure to secure or protect patents or the expiration of patents, could result in declining demand for our products as our customers switch to substitute products or undertake manufacturing of such products on their own. If we are unable to develop, produce or market our products to effectively compete against our competitors, our financial condition, results of operations and cash flows may materially suffer.

We believe that our customers are increasingly looking for strong, long-term relationships with a few key suppliers that help them improve product performance, reduce costs, or support new product development. As a result, we may need to invest and spend more on research and development and marketing costs to strengthen existing customer relationships, as well as attract new customers. Our indebtedness could limit our flexibility to react to these industry trends and our ability to remain competitive.

Operational, Political, and Legal Risks of International Operations - Our international operations may be adversely impacted by political or economic instability, nationalization or expropriation of property, or undeveloped property rights and legal systems.

The majority of our revenue is derived from international operations. For the period ended September 30, 2017, 73% of our revenue was generated by sales to customers outside of the United States, including in South Korea, Taiwan, China and the European Union. Our operations in certain foreign jurisdictions, including manufacturing, research and development, sales and customer support, may be affected directly and indirectly by global and local regulation, and economic and political conditions and may be subject to disruption due to:

the United Kingdom’s formal trigger of the process for its exit from the European Union, and related negotiations, may cause instability in European economies and may negatively impact the outlook for the global economy;

political, economic and social instability, including hyperinflationary conditions, regional and international hostilities and regional and international responses to these hostilities;

unanticipated government actions, such as trade wars, nationalization of private enterprises and expropriation risk;

failure to maintain compliance with multiple legal and regulatory systems and increased difficulty in ensuring compliance by employees, agents, and contractors with the laws of multiple jurisdictions;

increased difficulty in controlling and maintaining foreign operations from the United States;

potential difficulties in protecting intellectual property;

controls on the investment, repatriation and exchange rates of capital;

potentially adverse tax consequences, including the possible imposition of new taxes, a new corporate tax regime, increased taxes on repatriation or other payments, or challenges to the taxation of the Separation from Air Products in connection with the spin-off in such countries; and

cancellation of contractual relationships within these jurisdictions without full compensation for loss.

In addition, economic and political conditions within foreign jurisdictions, social unrest, or strained relations between

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countries can cause fluctuations in demand, price volatility, supply disruptions, or loss of property. Our developing market operations may be subject to greater risks than those faced by our operations in mature economies, including geopolitical, legal, economic and talent risks. The occurrence of any of these risks could have a material adverse impact on our financial condition, results of operations and cash flows.

Regulatory Compliance - We are subject to extensive government regulation in jurisdictions around the globe. Any changes in regulations addressing, among other things, environmental compliance, anticorruption, sanctions, import/export controls, and taxes, may negatively impact our financial condition, results of operations and cash flows.

We are subject to extensive government regulation in the United States and in the foreign jurisdictions in which we conduct our business, on matters as diverse as anticorruption, import/export controls, trade restrictions, tariffs, taxation, sanctions, anti-money-laundering, environmental and health and safety, and employment and labor relations. Compliance with laws and regulations, including as a result of changes in those laws and regulations from time to time, may involve significant costs or require changes in business practice that could materially impact our financial condition, results of operations and cash flow. For example, our subsidiaries are subject to rules and regulations related to anti-bribery prohibitions of the U.S. and other countries, including the U.S. Foreign Corrupt Practices Act (the “FCPA”), the United Kingdom Bribery Act, the Improper Solicitation and Graft Act of Korea (commonly known as the “Kim Young-ran Act”), and the China Anti-Unfair Competition Law. Moreover, export control and economic embargo regulations limit the ability to market, sell, distribute or otherwise transfer products or technology to prohibited countries or persons. In addition, we are subject to the extensive import, export, storage and transportation regulations of each of the countries where we operate due to the hazardous classification of our products. The international nature of our operations, where legal systems outside of the United States may be less understood by us, further increases the difficulty of compliance. Compliance with diverse legal requirements is costly, time-consuming and requires significant resources. The FCPA, the United Kingdom Bribery Act, Korea’s Kim Young-ran Act, the China Anti-Unfair Competition Law, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons. There has been an increase in anti-bribery law enforcement activity in recent years, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. We operate in parts of the world that are recognized as having government and commercial corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal control policies and procedures will always protect us from improper conduct of our employees or business partners. Actual or alleged violations can be expensive and require significant time and attention from senior management.

Our failure to comply with U.S. federal or state or non-U.S. laws, regulations or policies, many of which are aggressively enforced, could subject us to substantial fines, sanctions, civil and/or criminal penalties, and curtailment of operations in the U.S. or other applicable jurisdictions. Moreover, any violation of applicable laws or regulations by our suppliers could interrupt or otherwise disrupt our sourcing or adversely affect our reputation. While we do not control these suppliers or their labor practices, negative publicity regarding the management of facilities by, production methods of, or materials used by any of our suppliers could adversely affect our reputation and sales, and force us to locate alternative suppliers, which could materially adversely affect our business, financial conditions, and results of operations. Likewise, any public investigation or inquiry into alleged violations of these regulations could have an adverse effect on our reputation and the value of our common stock. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.

Substantial Leverage - Our available cash and access to additional capital may be limited by our leverage and debt service obligations.

We maintain significant leverage and have material debt service obligations. This level of indebtedness could have important negative consequences, including:

We will need to use a substantial portion of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities.



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We may have difficulty obtaining financing in the future for working capital, capital expenditures, research and development, acquisitions or other purposes.

Our debt level increases our vulnerability to general economic downturns and adverse industry conditions.

Our debt level could limit our flexibility in planning for, or reacting to, changes in our business and in our industry in general.

If our foreign cash is needed to pay interest or principal on our U.S. debt, we may be required to accrue and pay material amounts of tax on repatriation of that cash.

A portion of our debt has a variable interest rate, and if interest rates increase, our interest expense could increase significantly, affecting earnings and reducing cash flow available for working capital, expenditures, acquisitions, and other purposes.

Our substantial amount of debt and the amount we need to pay to service our debt obligations could place us at a competitive disadvantage compared to any competitors that have less debt.

Our failure to comply with the financial and other restrictive covenants in our debt instruments which, among other things, may require us to maintain specified financial ratios and limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could cause our lenders to terminate commitments under our debt agreements, declare all amounts, including accrued interest, due and payable, and enforce their rights in respect of collateral.

Additional Capital Needs - We may need additional capital in the future and may not be able to obtain it on favorable terms.

We may require additional capital in the future to finance our growth and development, implement further marketing and sales activities, fund ongoing research and development activities, fund mergers or acquisitions and meet general working capital needs. Our capital requirements will depend on many factors, including acceptance of and demand for our products, the extent to which we invest in new technology and research and development projects, and the status and timing of these developments, as well as general availability of capital from debt and equity markets.

However, debt or equity financing may not be available to us on terms we find acceptable, if at all. If we incur additional debt or raise equity through the issuance of preferred stock, the terms of the debt or the preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. If we raise funds through the issuance of additional equity, your ownership in us would be diluted. Also, regardless of the terms of our debt or equity financing, our agreements and obligations under the Tax Matters Agreement with Air Products entered into in connection with the Separation may limit our ability to issue stock. If we are unable to raise additional capital when needed, it may impact our financial condition, results of operations and cash flows.

Additionally, our failure to maintain expected credit ratings on our debt securities could negatively affect our ability to access capital and could increase our interest expense on certain existing and future indebtedness. We expect the credit rating agencies to periodically review our capital structure and the quality and stability of our earnings. Deterioration in our capital structure or the quality and stability of our earnings could result in a downgrade of the credit ratings on our debt securities. Any negative ratings actions could constrain the capital available to us and could limit our access to funding for our operations and increase the cost of such capital. If, as a result, our ability to access capital when needed becomes constrained, our interest costs could increase, which may impact our financial condition, results of operations and cash flows.

Restrictions Under Debt Agreements - The agreements governing our indebtedness may restrict our current and future operations, and hamper our ability to respond to changes or to take certain actions.

The agreements governing our indebtedness (including our senior credit facilities and senior notes) contain, and the agreements governing future indebtedness and future debt securities may contain, restrictive covenants, such as financial

22


maintenance covenants and other covenants restricting our ability to sell assets; pay dividends and make other distributions; redeem or repurchase our capital stock; incur additional debt and issue capital stock; create liens; consolidate, merge or sell substantially all of our assets; enter into certain transactions with our affiliates; make loans, investments or advances; repay subordinated indebtedness; undergo a change in control; and enter into sale and leaseback transactions, that may limit our operations, including our ability to engage in certain activities that may be in our long-term best interests. These restrictive covenants may limit us and our restricted subsidiaries from taking certain corporate actions, or may give rights to the holders of our indebtedness under the agreements governing our indebtedness if we or our restricted subsidiaries take such actions.

Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of some or all of our indebtedness, which could lead to bankruptcy, reorganization or insolvency.

Regulation of Raw Materials, Products and Facilities - Our financial condition, results of operations and cash flow could be adversely affected by regulation to which our raw materials, products and facilities are subject.

Some of the raw materials we handle, and our products and facilities, are subject to government regulation. These regulations affect the manufacturing processes, handling, storage, transportation, uses and applications of our products. In addition, some of our products contain raw materials, such as hydrogen chloride, that are deemed hazardous materials. The use and handling of these materials is regulated and some of these regulations require product registrations, which also are subject to renewal and potential revocation. These regulations and changes to the current regulatory framework under which we operate may affect our ability to market certain materials we produce. In addition, some of these products, such as certain process gases and hydrides, are subject to significant restrictions on storage and transportation via certain types of carriers.

There is also a risk that key raw materials or one or more of our products may be found to have, or be recharacterized as having, a toxicological or health-related impact on the environment or on our customers or employees. If such a finding or recharacterization occurs, the relevant raw materials or products, including products of customers incorporating our products, may be recalled or banned or we may incur increased costs in order to comply with new regulatory requirements. Changes in regulations, or their interpretation, may also affect the marketability of certain of our products. We cannot predict how these and other findings from regulatory agencies may affect our financial condition, results of operations and cash flows.

Environmental, Health and Safety Compliance - Costs and expenses resulting from compliance with environmental, health and safety regulations may negatively impact our financial condition, results of operations and cash flows.

We are subject to extensive federal, state, local, and foreign environmental and health and safety laws and regulations concerning, among other things, emissions in the air; discharges to land and water; transportation safety; safety of employees and end product consumers; and the generation, handling, treatment, and disposal of hazardous waste and other materials. Compliance with laws and regulations and any failure to comply with such laws and regulations may involve significant costs or require changes in business practice that could materially impact our financial condition, results of operations and cash flows. In addition, our production facilities require numerous operating permits that are subject to renewal requirements. Due to the nature of these requirements and changes in our operations, our operations may exceed limits under permits or we may not have proper permits. We may incur substantial costs, including fines, damages, criminal or civil sanctions and remediation costs, or experience interruptions in our operations, for violations arising under these laws or permit requirements.

The nature of our operations also exposes us to risk of liability for contamination, personal injury or third party impacts if hazardous materials are released into the environment, which could result in substantial losses, reputational harm, increase in our insurance cost or otherwise adversely impact our results of operations or our common stock.

Environmental and health and safety laws are subject to change and have tended to become more strict over time. Such changes in environmental or health and safety laws or their interpretation, or the enactment of new laws, could result in materially increased capital expenditures and compliance costs. For example, U.S. and international commitments to reduce world-wide emissions of greenhouse gases, including carbon dioxide, could result in legal requirements that materially and adversely impact our financial condition, results of operations and cash flow. Similarly, the Frank R. Lautenberg Chemical Safety for the 21st Century Act reforms the TSCA by requiring EPA to prioritize and evaluate the environmental and health risks of existing chemicals and providing EPA with greater authority to regulate chemicals posing unreasonable risks. The law also requires that EPA make an affirmative finding that a new chemical will not pose an unreasonable risk before such

23


chemical can be manufactured or imported. TSCA reform also incorporates additional thresholds and checks to substantiate CBI claims. These reforms update TSCA so that it operates in a similar fashion to the REACH legislation in Europe. Regulations similar to REACH have been enacted in South Korea and Taiwan. Any such changes could increase our cost of doing business and have a negative impact on our financial condition, results of operations and cash flows.

Cyber Security - The protection of the confidentiality, integrity and availability of our business applications, infrastructure services and data is important to our business. A compromise of our data or a disruption of our information technology applications or services could damage our reputation and adversely affect our financial condition, results of operations and cash flows.

We depend on information technology to protect the business applications and infrastructure services that enable our business to operate efficiently, interface with customers and maintain financial accuracy and efficiency. Our information technology capabilities are currently delivered through a combination of Air Products and other external service providers. As we separated our business applications and infrastructure services from Air Products, we adopted a ”cloud-first”, “software-as- a-service preferred” enterprise IT strategy that increases our dependency on the security controls of our external service providers. If we, together with our service providers, do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to our confidential business information through a security breach. As with all large systems, our information systems could be penetrated by outside parties’ intent on extracting information, corrupting information, or disrupting business processes. The business applications and infrastructure services we depend on may be subject to sophisticated cyber security threats. We rely on operations technology to protect the industrial controls systems at our manufacturing sites. A cyber breach that disrupts our process safety controls could cause the disruption of our operations and even cause a significant safety incident that threatens life or property. Unauthorized access could disrupt our business operations, result in the loss of assets, intellectual property, employee or customer data, and have a material adverse effect on our financial condition, results of operations and cash flows.

We rely on information security measures to protect our company, employee, customer and vendor information. Our business involves the use, storage, and transmission of this information. The protection of such information, as well as our information, is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new, differing and constantly changing requirements such as the General Data Protection Regulation in the European Union. We also, from time to time, export sensitive customer data and technical information to recipients outside the United States. Breaches of our security measures or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery, or other forms of deception, could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, result in fines and penalties, damage our reputation, or otherwise harm our business.

Foreign Currency Impacts - Our reported results could be adversely affected by currency exchange rates and currency devaluation could impair our competitiveness.

Due to our international operations, we transact in many foreign currencies, including but not limited to the South Korean Won, New Taiwan Dollar, Japanese Yen, Chinese Renminbi and the Euro. As a result, we are subject to the effects of changes in foreign currency exchange rates. During times of a strengthening U.S. dollar, our reported net revenues and operating income will be reduced because the local currency will be translated into fewer U.S. dollars. During periods of economic crisis, local currencies may be devalued significantly against the U.S. dollar, potentially reducing our margin.

We also incur currency transaction risk whenever we enter into a transaction using a currency other than the local currency of the transacting entity. We may not be able to effectively manage our currency translation and transaction risk, and, as a result, volatility of currency exchange rates may have a material adverse effect on our financial condition, results of operations and cash flow. We may enter into forward exchange contracts and other financial contracts in an attempt to mitigate the impact of transactional currency rate fluctuations. However, there can be no assurance that such actions will eliminate any adverse impact from variation in currency rates, and in some cases such actions may exacerbate the impact on our financial condition, results of operations and cash flows.


24


Litigation and Regulatory Proceedings - Our financial condition, results of operations and cash flows may be affected by various legal and regulatory proceedings, including those involving customer claims, antitrust, tax, environmental, or other matters.

We are subject to litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future, some of which could be material. We face risks arising from various unasserted and asserted litigation matters, including, but not limited to, product liability, patent infringement, regulatory claims, and claims for third party property damage or personal injury stemming from alleged environmental or other torts. In addition, we may have obligations to indemnify Air Products under the terms of the Separation Agreement we entered into with Air Products on September 29, 2016 (the “Separation Agreement”) for certain product liability, environmental, personal injury, tax or other claims. Due to the nature of our products and services and how they are used by our customers, we may be subject to claims by our customers alleging our products or services, or our failure or inability to deliver products and services, impacted their production yield. While we seek to limit our liability in our commercial contractual arrangements, there are no guarantees that each contract will contain suitable limitations of liability or that limitations of liability will be enforceable at law or that we will be able to obtain insurance for any losses we incur. Also, the outcome of existing legal proceedings may differ from our expectations because the outcomes of litigation, including regulatory matters, are often difficult to predict reliably. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables, where applicable, or make such estimates for matters previously not susceptible to reasonable estimates, such as a judicial ruling or judgment, a settlement, regulatory developments, or changes in applicable law. While we believe our existing legal proceedings and claims will not, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations and cash flows, a future adverse ruling, settlement, claim or unfavorable development could result in charges that could have such a material adverse effect.

Risks Associated with Acquisitions - We may not be able to complete acquisitions, or successfully integrate acquisitions we may undertake in the future.

Our strategy includes acquiring other businesses. The process of combining or acquiring businesses involves risks. We may face difficulty integrating the new operations, technologies, products and services of future acquisitions or combinations, and may incur unanticipated expenses related to such transactions. The difficulties of combining operations may be magnified by integrating personnel with differing business backgrounds and corporate cultures. Failure to successfully manage and integrate acquisitions with our existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences that could affect our financial condition and results of operations. Even if integration occurs successfully, failure of any future acquisition or combination to achieve levels of anticipated sales growth, and profitability, productivity comparable with our existing operations, or expected synergies related to such transaction, or to otherwise perform as expected, may adversely impact our financial condition, results of operations and cash flow. In addition, certain acquisitions may trigger regulations designed to monitor competition and would therefore require regulatory approval. We cannot predict whether such authorities will approve or whether we would be able to complete any acquisitions we seek to accomplish in the future.

Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.

Versum’s amended and restated certificate of incorporation and amended and restated by-laws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Versum’s board of directors rather than to attempt a hostile takeover. These provisions include, among others:

the inability of our stockholders to act by written consent;

the inability of our stockholders to call special meetings;

rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;


25


the right of our board of directors to issue preferred stock without stockholder approval; and

the ability of our directors, and not stockholders, to fill vacancies (including those resulting from an enlargement of our board of directors) on our board of directors.

In addition, we are subject to Section 203 of the DGCL. Section 203 provides that, subject to limited exceptions, persons that (without prior board approval) acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliate becomes the holder of more than 15 percent of the corporation’s outstanding voting stock.

We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions could have the effect of delaying, deferring or preventing a change in control or the removal of existing management, of deterring potential acquirers from making an offer to our stockholders and of limiting any opportunity to realize premiums over prevailing market prices for our common stock in connection therewith. This could be the case notwithstanding that a majority of our stockholders might benefit from such a change in control or offer.

Risks Related to the Separation

Our historical financial results are not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

Our historical financial results prior to our Separation may not reflect what our financial condition, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented or what our financial condition, results of operations and cash flows will be in the future when we are an independent company. This is primarily because:

Prior to our Separation, our business was operated by Air Products as part of its broader corporate organization, rather than as an independent, publicly traded company. In addition, prior to our Separation, Air Products, or one of its affiliates, performed significant corporate functions for us, including information technology, accounting, tax, finance, legal, insurance, human resources, compliance and other administrative activities. Our historical financial statements reflect allocations of corporate expenses from Air Products for these and similar functions, which are not necessarily representative of the costs we will incur for similar services as an independent company. We are responsible for the additional costs associated with being an independent, publicly traded company, including costs related to corporate governance and external reporting;

Our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, historically have been satisfied as part of the company-wide cash management practices of Air Products. While our business historically has generated sufficient cash to finance our working capital and other cash requirements, we no longer have access to Air Products’ cash pool. We may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities or other arrangements; and

Other significant changes may occur in our cost structure, management, financing, tax profile and business operations as a result of our operating as a company separate from Air Products. The historical combined financial data include deferred tax assets and associated valuation allowances for U.S. and certain foreign net operating losses and tax credit carryforwards that were utilized against Air Products income and are not available as future deductions or credits on our tax returns.

We incurred interest expense as part of our debt in connection with the Separation and Distribution, whereas our historical financial data only includes debt incurred by certain Versum subsidiaries and does not include an allocation of interest expense attributable to the portion of Air Products’ debt that has supported our operations.


26


We have incurred and expect to continue to incur significant costs completing our transition to an independent, publicly traded company, which may adversely affect our financial condition, results of operations and cash flows.

We have incurred and expect to incur certain ongoing costs associated with operating as an independent, publicly traded company. Prior to our Separation, we received a variety of services from Air Products, including information technology, accounting, tax, finance, legal, insurance, human resources, compliance and other administrative activities, the effective and appropriate performance of which is critical to our operations. In support of our transition to an independent company, we expect to spend $20-25 million of additional capital for relocating some of our infrastructure and establishing our own IT systems over fiscal year 2018. The ongoing costs of the Separation may adversely impact our financial condition, results of operations and cash flows. For more information regarding the Separation and our anticipated costs to operate as an independent, publicly traded company, see Note 1, “Basis of Presentation”, of the Annual Consolidated Financial Statements.

In connection with our Separation we assumed certain liabilities. If we are required to make payments pursuant to our indemnification obligations to Air Products, we may need to divert cash to meet those obligations and our financial condition, results of operations and cash flows could be negatively impacted. In addition, Air Products may indemnify us for certain liabilities. Air Products’ indemnity may not be sufficient to insure us against the full amount of liabilities for which it will be allocated responsibility, and Air Products may not be able to satisfy its indemnification obligations in the future.

Pursuant to the Separation Agreement, the Employee Matters Agreement and the Tax Matters Agreement, each of which we entered into with Air Products on September 29, 2016, we agreed to assume, and indemnify Air Products for, certain liabilities for uncapped amounts, which may include, among other items, associated defense costs, settlement amounts and judgments. Payments pursuant to these indemnities may be significant and could negatively impact our financial condition, results of operations and cash flows, particularly indemnities relating to our actions that could impact the tax-free nature of the Distribution and certain related transactions. Third parties could also seek to hold us responsible for liabilities of Air Products’ business. Air Products agreed to indemnify us for such liabilities, but such indemnity from Air Products may not be sufficient to protect us against the full amount of such liabilities, and Air Products may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Air Products any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our financial condition, results of operations and cash flows.

If the Distribution of Versum common stock from Air Products or certain related transactions were to fail to qualify as tax-free to Air Products stockholders, then Versum could be subject to significant tax liability or tax indemnity obligations.

Air Products received an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, tax counsel to Air Products, on the basis of certain facts, representations, covenants and assumptions set forth in such opinion, substantially to the effect that, for U.S. federal income tax purposes, the Distribution of Versum common stock from Air Products and certain related transactions should qualify as a transaction that generally is tax-free to Air Products and Air Products’ stockholders, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code.

Notwithstanding the tax opinion, the IRS could determine on audit that the Distribution should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations or covenants set forth in the tax opinion are not correct or have been violated, or that the Distribution should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the Distribution, or if the IRS were to disagree with the conclusions of the tax opinion. If the Distribution were determined to be taxable for U.S. federal income tax purposes, Air Products and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities.

Under the Tax Matters Agreement, Versum is generally required to indemnify Air Products against taxes incurred by Air Products that arise as a result of Versum taking or failing to take, as the case may be, certain actions that may result in the Distribution of Versum common stock from Air Products or certain related transactions failing to qualify as tax-free for U.S. federal income tax purposes. Under the Tax Matters Agreement, Versum may also be required to indemnify Air Products for other tax liabilities, which could materially adversely affect Versum’s financial condition, results of operations and cash flows.


27


We may not be able to engage in certain corporate transactions for two years following the Distribution.

To preserve the tax-free treatment for U.S. federal income tax purposes to Air Products and its stockholders of the Distribution and certain related transactions, under the Tax Matters Agreement, Versum is restricted from taking any action that prevents the Distribution and certain related transactions from qualifying as tax-free for U.S. federal income tax purposes. Accordingly, under the Tax Matters Agreement, we are prohibited, except in certain circumstances, from repurchasing or taking certain other actions with respect to certain of our debt issued in connection with the Distribution, or, for the two-year period following the Distribution:

entering into any transaction resulting in the acquisition of 40 percent or more of our stock or substantially all of our assets, whether by merger or otherwise;

merging, consolidating or liquidating;

issuing equity securities beyond certain thresholds;

repurchasing our capital stock;

ceasing to actively conduct our business; or

taking or failing to take any other action that would cause the Distribution or certain related transactions to fail to qualify as tax-free.

These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business. Under the Tax Matters Agreement, we are required to indemnify Air Products against any tax liabilities resulting from the acquisition of our stock or assets, even if we do not participate in or otherwise facilitate the acquisition.

Certain of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in Air Products, and one of our directors may have actual or potential conflicts of interest because he also serves as an officer and on the board of directors of Air Products.

Certain of our directors and executive officers may own shares of Air Products’ common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. In addition, Seifi Ghasemi, who serves as Chairman, President and Chief Executive Officer of Air Products, also serves as a director of Versum and our non-executive Chairman. This ownership or service to both companies may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for Air Products and us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between Air Products and us regarding the terms of the agreements governing the internal reorganization, the Distribution and the relationship thereafter between the companies, including with respect to the indemnification of certain matters. We have agreed with Air Products that officers and directors who serve at both companies will recuse themselves from decisions where conflicts arise due to their positions at both companies.

The Separation and Distribution and related internal reorganization transactions may expose Versum to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.

If Versum files for bankruptcy or is otherwise determined or deemed to be insolvent under federal bankruptcy laws, a court could deem the Separation and Distribution or certain internal reorganization transactions undertaken by Air Products in connection with the Separation to be a fraudulent conveyance or transfer. Fraudulent conveyances or transfers are defined to include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors or transfers made or obligations incurred for less than reasonably equivalent value when the debtor was insolvent, or that rendered the debtor insolvent, inadequately capitalized or unable to pay its debts as they become due. A court could void the transactions or impose substantial liabilities upon Versum, which could adversely affect Versum’s financial condition and its results of operations. Among other things, the court could require Versum stockholders to return to Air Products some or all of the shares of Versum common stock issued in the Separation and Distribution, or require Versum to fund

28


liabilities of other companies involved in the reorganization transactions for the benefit of creditors.

The Distribution of Versum common stock is also subject to review under state corporate distribution statutes. Under the Delaware General Corporation Law (the “DGCL”), a corporation may only pay dividends to its stockholders either (i) out of its surplus (net assets minus capital) or (ii) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared or the preceding fiscal year. Although Air Products intended to make the Distribution of Versum common stock entirely out of surplus, Versum cannot assure you that a court will not later determine that some or all of the Distribution to Air Products stockholders was unlawful.


29


Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate headquarters is located in Tempe, Arizona. We also maintain a global network of production facilities and technical centers in cost effective and strategic locations.

Production Facilities
Region
 
Segment
 
Location
 
Owned/Leased
Americas
 
Materials
 
Tempe, AZ
 
Lease
 
 
 
 
Carlsbad, CA
 
Own
 
 
 
 
Catoosa, OK
 
Lease
 
 
 
 
Allentown, PA
 
Lease
 
 
 
 
Dallas, TX
 
Own
 
 
 
 
Tamaqua, PA
 
Own
 
 
 
 
Indianapolis, IN
 
Lease
 
 
DS&S
 
Allentown, PA
 
Own
Asia
 
Materials
 
Banwol, South Korea
 
Own
 
 
 
 
Siheung, South Korea
 
Own
 
 
 
 
Pyeongtaek, South Korea
 
Own
 
 
 
 
Ulsan, South Korea
 
Own
 
 
 
 
Nanke, Taiwan
 
Own
 
 
DS&S
 
Ansan, South Korea
 
Own

Technical Centers
Americas
 
Materials
 
Tempe, AZ
 
Lease
 
 
 
 
Carlsbad, CA
 
Own
 
 
 
 
Tamaqua, PA
 
Own
 
 
 
 
Allentown, PA
 
Lease
 
 
 
 
Indianapolis, IN
 
Lease
Asia
 
Materials
 
Hsinchu, Taiwan
 
Lease
 
 
 
 
Banwol, South Korea
 
Lease


30


Item 3. Legal Proceedings

Refer to Note 21, “Commitments and Contingencies”, to our Annual Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Item 4. Mine Safety Disclosures

Not applicable.

Part II

Item 5. Market for Registrants Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “VSM”. The high and low common stock sales prices per share for 2017 are presented below.
 
High
 
Low
First quarter
$
28.72

 
$
22.46

Second quarter
31.17

 
26.78

Third quarter
33.65

 
28.91

Fourth quarter
38.82

 
31.35


Versum Materials, Inc. did not begin “regular way” trading on the NYSE until October 3, 2016.

Holders of the Company’s common stock are entitled to receive dividends when they are declared by the Company’s Board of Directors. All decisions regarding the payment of dividends to our stockholders will be made by our Board of Directors from time to time in accordance with applicable law and subject to the restrictions in our credit agreement and indenture governing our senior notes. See Note 11, “Debt”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

On November 10, 2017, we had 6,476 stockholders of record of our common stock. In March 2017, the Company’s Board of Directors declared a cash dividend of $0.05 per share, totaling $5.4 million, which was paid on April 19, 2017 to shareholders of record as of April 5, 2017. Additionally, on July 27, 2017, the Company’s Board of Directors declared a second cash dividend of $0.05 per share totaling $5.4 million, which was paid on August 21, 2017 to shareholders of record as of August 7, 2017.

Recent Sales of Unregistered Equity Securities

None.

Issuer Purchases of Equity Securities

None.


31


Performance Graph

The graph below shows the cumulative total stockholder return, assuming the investment of $100 on October 3, 2016 (and the reinvestment of dividends thereafter), in each of Versum’s common stock, the Standard & Poor's (S&P) 1500 Specialty Chemicals Index, S&P 400 Midcap Index and the Philadelphia Semiconductor Index. The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, future performance of our common stock.
chart-6671eea7551a4478d79.jpg
 
October 3, 2016
 
December 31, 2016
 
March 31, 2017
 
June 30, 2017
 
September 30, 2017
Versum Materials, Inc.
$
100

 
$
100

 
$
109

 
$
116

 
$
139

S&P 1500 Specialty Chemicals
100

 
97

 
106

 
111

 
113

S&P 400 Midcap Index
100

 
108

 
112

 
113

 
116

Philadelphia Semiconductor Index
100

 
109

 
122

 
125

 
141



32


Item 6. Selected Financial Data

The following table presents Versum’s selected historical condensed consolidated financial data. We derived the selected historical condensed consolidated financial data as of September 30, 2017 and 2016 and for the years ended September 30, 2017, 2016 and 2015 from the Annual Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. The selected historical condensed consolidated financial data as of September 30, 2015 and for the year ended September 30, 2014 are derived from our 2016 Annual Report on Form 10-K. The selected historical condensed consolidated financial data as of September 30, 2014 and as of and for the year ended September 30, 2013 are derived from the unaudited Annual Consolidated Financial Statements that are not included in this Annual Report on Form 10-K.

Prior to the Separation, the selected historical condensed consolidated financial data included certain expenses of Air Products that were allocated to Versum for certain functions, including general corporate expenses related to finance, legal, information technology, insurance, compliance and human resources activities, employee benefits and incentives and stock-based compensation. These past costs included in our historical information prior to the Separation may not be representative of the costs incurred after the Separation as an independent, publicly traded company.

In addition, our historical financial information prior to the Separation did not reflect changes as a result of our Separation from Air Products, including changes in Versum’s cost structure, personnel needs, tax structure, capital structure, financing and business operations. Prior to the Separation, Versum’s Annual Consolidated Financial Statements also did not reflect the assignment of certain assets and liabilities between Air Products and Versum. Consequently, the historical financial information prior to the Separation included here may not necessarily reflect what Versum’s financial position, results of operations, and cash flows would have been had it been an independent, publicly traded company during the periods presented prior to the Separation. Accordingly, these historical results prior to the Separation should not be relied upon as an indicator of Versum’s future performance.

For a better understanding of our business and results, this section should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Annual Consolidated Financial Statements and accompanying notes in Part II, Item 7 and Item 8, respectively, of this Annual Report on Form 10-K.
 
As of and for the year ended September 30,
 
2017
 
2016
 
2015
 
2014
 
2013
(In millions, except for per share data)
 
Operating Results (A)
 
 
 
 
 
 
 
 
 
Sales
$
1,126.9

 
$
970.1

 
$
1,009.3

 
$
942.5

 
$
852.8

Operating income (loss)
300.1

 
278.9

 
222.0

 
161.2

 
(46.5
)
Net income (loss) attributable to Versum
193.0

 
212.0

 
184.1

 
123.6

 
(80.6
)
Non-GAAP Measure (B)
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
371.6

 
326.9

 
301.5

 
223.7

 
145.1

Basic Earnings Per Share (C)
 
 
 
 
 
 
 
 
 
Net income attributable to Versum
1.78

 
1.95

 
1.69

 
1.14

 
(0.74
)
Basic shares
108.7

 
108.7

 
108.7

 
108.7

 
108.7

Diluted Earnings Per Share (C)
 
 
 
 
 
 
 
 
 
Net income attributable to Versum
1.76

 
1.95

 
1.69

 
1.14

 
(0.74
)
Diluted shares
109.4

 
108.7

 
108.7

 
108.7

 
108.7

Year-End Financial Position
 
 
 
 
 
 
 
 
 
Total assets (D)
1,246.8

 
1,043.8

 
887.4

 
1,034.0

 
1,112.8

Total debt (E)
982.8

 
986.1

 

 
5.1

 
6.7

Other Financial Data
 
 
 
 
 
 
 
 
 
Business separation, restructuring and cost reduction actions
25.5

 
0.9

 
21.6

 
1.3

 
132.6

Research and development
45.1

 
43.9

 
40.7

 
38.4

 
34.6

Depreciation and amortization
46.0

 
46.9

 
56.9

 
59.5

 
56.9


33


(A) 
Unless otherwise stated, selected financial data is presented on a GAAP basis. Our operating results were impacted by certain items which management does not believe to be indicative of ongoing business trends and are excluded from the non-GAAP measure.

For 2017, these items include a charge to operating income of $25.5 million related to stand up company costs.

For 2016, these items include: (i) a benefit of $0.7 million related to business reorganization and cost reduction actions, and (ii) a charge related to Separation costs of $1.6 million.

For 2015, these items include a charge to operating income of $21.6 million related to business reorganization and cost reduction actions.

For 2014, these items include a charge to operating income of $1.3 million related to business reorganization and cost reduction actions.

For 2013, these items include: (i) a charge to operating income of $74.1 million related to business restructuring and cost reduction actions and (ii) a loss of $58.5 million related to our exit from the photovoltaic market.

(B) 
Refer to the reconciliation of net income to Adjusted EBITDA in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, of this Annual Report on Form 10-K.

(C) 
Versum earnings per share for 2016, 2015, 2014 and 2013 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 Versum equity awards outstanding prior to the Separation.

(D) 
Reflects adoption of guidance on the presentation of deferred income taxes on a retrospective basis as of September 30, 2016.

(E) 
Total debt includes long-term debt, current portion of long-term debt, and short-term borrowings as of the end of the period shown above.


34


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s consolidated financial condition and results of operations should be read along with the consolidated financial statements and the accompanying notes to the consolidated financial information included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those provided in Item 1A. Risk Factors and under the heading “Cautionary Statement Concerning Forward-Looking Statements” above.

OVERVIEW

Separation and Distribution

On September 16, 2015, Air Products’ board of directors announced its intention to separate Air Products’ Materials Technologies business into a newly formed company and to distribute the common stock of that company, Versum, to stockholders of Air Products on a pro-rata basis. On October 1, 2016, as a result of the Distribution, Versum became an independent, publicly traded company.

Description of the Company

Versum is a global business that provides innovative solutions for specific customer applications based on our expertise in specialty materials for the semiconductor industry. Versum is comprised of two operating segments, Materials and DS&S, under which we manage our operations and assess performance, and a Corporate segment. Strong customer relationships, collaborative development, technology leadership, unique product positioning and a strong global infrastructure with in-region flexible manufacturing capabilities are fundamental to our business.

Versum is a leading global producer of critical materials, including high purity process materials, cleaners and etchants, slurries, organosilanes and organometallics, and equipment which we sell to the semiconductor and display industries. Through our global network, our business positions its research, manufacturing and technical support close to its customer facilities, enabling supply chain optimization and rapid response times to the product and service needs of our customers. Many of our products have undergone rigorous product performance and quality reviews by our customers to be qualified for use in their products or manufacturing processes. Once these qualification processes are completed and our products are designated by our customers for use in their processes or products, it is often time consuming and costly for our customers to change suppliers. Our products perform critical tasks in customers’ products or manufacturing processes, yet typically represent a very small portion of the cost of the end product. Over the last 20 plus years, we have developed strong relationships with the majority of the industry-leading IDMs, Foundries and OEMs through on-site service and technical personnel at these customers’ facilities.

In addition to our two operating segments, our Corporate segment includes certain administrative costs associated with operating a public company, foreign exchange gains and losses and other income and expense that cannot be directly associated with operating segments. Assets in the Corporate segment include cash and deferred tax assets.

Basis of Presentation

Prior to the Separation, the Annual Consolidated Financial Statements of Versum had been derived from the consolidated financial statements and accounting records of Air Products as if we operated on a stand-alone basis during the periods presented prior to the Separation. Subsequent to the Separation, the accompanying Annual 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 GAAP.

Prior to the Separation, the Annual Consolidated Income Statements of Versum reflected allocations of general corporate expenses from Air Products including, but not limited to, information technology, general services, human resources, legal, accounting and other services.


35


These expenses had been allocated to us 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 continue to be provided by Air Products under various agreements. We expect to finalize the administrative separation from Air Products including the transition to our own IT infrastructure in fiscal 2018.

For periods prior to October 1, 2016, the Annual Consolidated Balance Sheets of Versum included Air Products’ assets and liabilities that were specifically identifiable or were otherwise transferred to us, including subsidiaries and affiliates in which Air Products had a controlling financial interest. Also included within our Annual Consolidated Financial Statements prior to the Separation were the results of certain businesses which had historically been managed by us, but were retained by Air Products after the Separation.

Our Markets

Our business is driven primarily by the demand for semiconductors for both logic and memory and to a lower extent, displays. Growth in mobile devices, cloud computing, connectivity and data monitoring and storage are driving increasing demand for semiconductors and displays into durable goods and other devices. This has resulted in increased correlation between semiconductor demand and global gross domestic product. In our Materials segment, demand for our products is correlated to the level of semiconductor production which in turn is correlated to general GDP. Demand for our products is further enhanced by participation in the advanced technologies and changing architecture of semiconductor devices. In our DS&S segment, product demand more closely follows the amount of capital investment for equipment and manufacturing capacity in the semiconductor industry and sales are impacted by our customers investment in new or refurbishing existing fabrication facilities.

In fiscal 2017, we experienced growth in our business due to favorable trends in the underlying semiconductor market. This included strong VNAND memory demand fueled by the industry’s move to more vertical layers and the transition to 10 NM production in advanced logic devices. Capital spending by the semiconductor industry was at historically high levels, driving demand for equipment in our DS&S segment. In addition, increasing semiconductor output levels fueled demand for our products in the materials segment.

Longer term semiconductor industry growth is expected to remain attractive, growing at a multiple of GDP driven by the broadening use of technology into many market segments including automotive, industrial, medical, data analytic and consumer applications.

For 2018, we expect semiconductor growth to remain in the 4 to 6% range as measured by MSI (millions of square inches of silicon produced) and semiconductor capital spending, measured by WFE (wafer fab equipment spending) to be flat or slightly down.

We believe semiconductor growth will translate into strong demand for both new and legacy material products in our Materials segment. To take advantage of the strong market we expect to continue to innovate and increase manufacturing capability for our new products in our Advanced Materials product line. We expect to increase our investment to support organic growth to enhance our positions in key geographics such as Korea and China and improve our cost and capacity positions for key products in our Materials segment. We expect some headwinds from pricing and capacity constraints for certain products in our Process Materials product line.

We expect our Delivery System and Services segment to continue to grow based on the continued high level of industry capital spending, our position with key customers and the further development of the semiconductor market in China.


36


Performance Summary

September 30, 2017 vs. September 30, 2016

Sales of $1,126.9 million increased $156.8 million, or 16.2%. Underlying sales, which excludes changes in currency, increased by 15% due to higher volumes of 18% offset by unfavorable price/mix of 3%. The increase in sales was driven largely by strong volumes in both the Materials segment and the DS&S segment partially offset by unfavorable price/mix in the Materials segment primarily due to price pressure in specific Process Materials product lines. Currency changes had a favorable impact on sales of 1%.

Operating income of $300.1 million increased $21.2 million, or 7.6%, due to higher volumes of $88 million and favorable currency impacts of $8 million partially offset by unfavorable price/mix of $25 million, higher costs of $25 million including the increased cost of being a separate company and higher business separation, restructuring and cost reduction actions of $25 million. Operating income margin was 26.6%, down 210 basis points (“bp”).

Adjusted EBITDA of $371.6 million increased $44.7 million, or 13.7%, primarily due to higher volumes of $88 million and favorable currency impacts of $8 million partially offset by higher operating costs of $26 million and unfavorable price/mix of $25 million. The major drivers of the improved performance were the strong volumes in both the Materials and DS&S segments, partially offset by expected higher operating and selling and administrative costs associated with becoming an independent company and unfavorable price/mix in the Materials segment, primarily in Process Materials. Adjusted EBITDA margin was 33.0%, down 70 bp.

Cash flows from operations was $262.5 million, with cash used for capital spending of $64.0 million, including $25.2 million of capital spending related to one-time restructuring activities.


37


RESULTS OF OPERATIONS

Discussion of Consolidated Results-September 30, 2017 vs. September 30, 2016 vs. September 30, 2015
 
Year Ended September 30,
 
2017
 
2016
 
2015
(In millions)
 
 
 
 
 
Sales
$
1,126.9

 
$
970.1

 
$
1,009.3

Cost of sales
636.9

 
539.5

 
616.5

Selling and administrative
125.7

 
109.8

 
109.6

Research and development
45.1

 
43.9

 
40.7

Business separation, restructuring and cost reduction actions
25.5

 
0.9

 
21.6

Other (income) expense, net
(6.4
)
 
(2.9
)
 
(1.1
)
Operating Income
300.1

 
278.9

 
222.0

Equity affiliates’ income

 
0.2

 
1.0

Interest expense
47.4

 
0.4

 
0.1

Income Before Taxes
252.7

 
278.7

 
222.9

Income tax provision
52.8

 
58.8

 
31.7

Net Income
199.9

 
219.9

 
191.2

Less: Net Income Attributable to Non-controlling Interests
6.9

 
7.9

 
7.1

Net Income Attributable to Versum
$
193.0

 
$
212.0

 
$
184.1

Non-GAAP Basis
 
 
 
 
 
Adjusted EBITDA
$
371.6

 
$
326.9

 
$
301.5


Year ended September 30, 2017 vs. September 30, 2016
 
% Change from Prior Year
Sales
 
Underlying business
 
Volume
18
 %
Price/mix
(3
)%
Currency
1
 %
Total Versum Change
16
 %

38


Sales of $1,126.9 million increased $156.8 million, or 16.2%. Underlying sales, which excludes currency, increased by 15% due to higher volumes of 18% partially offset by unfavorable price/mix of 3%. Favorable currency impacts increased sales by 1%. The Materials segment’s sales increased 10% from strong memory market demand and advanced logic new node ramps partially offset by unfavorable price/mix. The DS&S segment’s sales increased 38% primarily due to higher volumes from equipment sales driven by the continued high level of semiconductor industry capital spending.

Operating Income and Margin

Operating income of $300.1 million increased $21.2 million, or 7.6%, due to higher volumes of $88 million and favorable currency impacts of $8 million offset by unfavorable price/mix of $25 million and higher costs of $25 million in part due to the increased cost of being a separate company and higher business separation, restructuring and cost reduction actions of $25 million. Operating margin decreased 210 bp, primarily due to the increased cost of being a separate company and higher business separation, restructuring and cost reduction actions.

Cost of Sales and Gross Profit Margin

Cost of sales of $636.9 million increased $97.4 million, or 18.1%, as a result of higher delivery systems activity of $58 million, and higher materials operating costs of $22 million and higher raw materials cost of $17 million due to higher volumes. Gross profit margin of 43.5% decreased by 90 bp primarily as a result of unfavorable price/mix of 200 bp partially offset by favorable volumes of 100 bp.

Selling and Administrative Expense

Selling and administrative expense of $125.7 million increased by $15.9 million. The increase was primarily due to increased staffing and costs associated with becoming an independent company. Selling and administrative expense as a percent of sales decreased to 11.2% from 11.3%.

Research and Development

Research and development expense of $45.1 million increased $1.2 million, or 2.7% primarily due to spending in key product areas. Research and development expense as a percent of sales decreased to 4.0% from 4.5%.

Business Separation, Restructuring and Cost Reduction Actions

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 IT infrastructure.

During fiscal year 2016, we recognized a net charge of $0.9 million. The charge included incurred costs of $1.6 million related to the Separation partially offset by a net gain of $0.7 million. The 2016 net gain of $0.7 million 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 final sale of the onsite ammonia assets.

Other Income (Expense), Net

Items recorded to other income (expense), net arise from transactions and events not directly related to our principal income earning activities.

39


Other income (expense), net was $6.4 million in 2017 compared to $2.9 million in 2016. No individual items were significant in comparison to the prior year.

Interest Expense

Interest expense increased $47.0 million in 2017 compared to 2016. The increase was driven by interest expensed on the debt incurred in September 2016 in connection with the Separation.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income before taxes. The effective tax rate was 20.9% and 21.1% in 2017 and 2016, respectively. The effective tax rate decreased in 2017 primarily due to (1) a shift in the geographic mix of pretax earnings; (2) an increase in benefits associated with tax holidays; and (3) a decrease in cost of repatriating foreign earnings. For more information, see Note 19, “Income Taxes”, to our Annual Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Year ended September 30, 2016 vs. September 30, 2015
 
% Change from Prior Year
Sales
 
Underlying business
 
Volume
(5
)%
Price/mix
3
 %
Currency
(2
)%
Total Versum Change
(4
)%

Sales of $970.1 million decreased $39.2 million, or 3.9%. Underlying sales, which excludes currency, decreased by 2% due to lower volumes of 5% partially offset by favorable price/mix of 3%. Unfavorable currency impacts decreased sales by 2%. The Materials segment’s underlying sales increased 3% from new advanced materials products, strong memory market demand and favorable price/mix. The DS&S segment’s underlying sales decreased 19% primarily due to lower volumes including turnkey installation activity.

Operating Income and Margin

Operating income of $278.9 million increased $56.9 million, or 25.6%, due to favorable price/mix of $34 million, lower operating costs of $25 million and lower restructuring charges of $21 million. These were partially offset by lower volume of $12 million and unfavorable currency impacts of $11 million. The lower costs included the benefits of recent cost reduction actions and benefits from lower depreciation. Operating margin increased 670 bp, primarily from higher pricing and lower operating costs.

Cost of Sales and Gross Profit Margin

Cost of sales of $539.5 million decreased $77.0 million, or 12.5%, as a result of lower delivery systems activity of $49 million, lower operating costs of $16 million, lower raw materials cost of $4 million, lower incentive compensation cost of $2 million and lower distribution and others costs of $6 million. Gross profit margin of 44.4% increased by 550 bp primarily as a result of favorable price/mix of 240 bp, lower operating costs of 230 bp and favorable volume of 66 bp.

Selling and Administrative Expense

Selling and administrative expense of $109.8 million increased slightly by $0.2 million. Higher incentive compensation cost was primarily offset by lower charges related to our cost reduction activities and less technical services activity by technology personnel. Selling and administrative expense as a percent of sales increased to 11.3% from 10.9%.


40


Research and Development

Research and development expense of $43.9 million increased $3.2 million, or 7.9%, due to adding capabilities in Asia and a higher level of research and development activity versus technical services activity. Research and development expense as a percent of sales increased to 4.5% from 4.0%.

Business Separation, Restructuring and Cost Reduction Actions

We recorded charges in 2016 and 2015 for business separation, restructuring and cost reduction actions.

In addition, 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 final sale of the onsite ammonia assets. The majority of these actions pertain to the Materials segment.

During fiscal year 2016, we incurred costs of $1.6 million related to the Separation.

In 2015, we recognized an expense of $21.6 million primarily relating to severance and other benefits relating to the elimination of approximately 260 positions. The optimization of our supply chain accounted for more than half of the eliminated positions, and elimination of administrative and management positions accounted for the balance of the reductions. Cost savings in 2015 were approximately $10 million and represented the impact over approximately half of a year.
 
Other Income (Expense), Net

Items recorded to other income (expense), net arise from transactions and events not directly related to our principal income earning activities.

Other income (expense), net was $2.9 million in 2016 compared to $1.1 million in 2015. No individual items were significant in comparison to the prior year.

Interest Expense

Interest incurred increased $0.3 million in 2016 compared to 2015. The increase was driven primarily by amortization of deferred debt costs and charges related to the 2016 debt activity.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income before taxes. The effective tax rate was 21.1% and 14.2% in 2016 and 2015, respectively. The effective tax rate was lower in 2015 due to the geographic mix of taxable income and net reduction in the tax reserves. Tax expense increased in 2016 due to (1) the cost of repatriating cash from South Korea; (2) the reduction in the benefits associated with tax holidays; and (3) a net increase in tax reserves as compared to a net decrease in 2015. For more information, see Note 19, “Income Taxes”, to our Annual Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The discussion of our annual results includes comparisons to non-GAAP financial measures, including Adjusted EBITDA and Adjusted EBITDA Margin. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures which management uses internally to evaluate our operating performance.

We use non-GAAP measures to assess our operating performance by excluding certain disclosed items that we believe are not representative of our underlying business. Management may use these non-GAAP measures to evaluate our performance period over period and relative to competitors in our industry, to analyze underlying trends in our business, to establish

41


operational budgets and forecasts or for incentive compensation purposes. We use Adjusted EBITDA to calculate performance-based cash bonuses and determine whether certain performance-based options and restricted stock units vest (as such cash bonuses, options and restricted stock units are tied to Adjusted EBITDA). Adjusted EBITDA is also used for certain covenants under our senior secured credit facilities. We use Segment Adjusted EBITDA as the primary measure to evaluate the ongoing performance of our business segments. We believe non-GAAP financial measures provide security analysts, investors and other interested parties with meaningful information to understand our underlying operating results and to analyze financial and business trends. Non-GAAP financial measures, including Adjusted EBITDA, should not be viewed in isolation, are not a substitute for GAAP measures, and have limitations which include but are not limited to:

Our measures exclude expenses related to business separation, restructuring and cost reduction actions, as detailed in Note 5, “Business Separation, Restructuring and Cost Reduction Actions”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, which we do not consider to be representative of our underlying business operations. However, these disclosed items represent costs to Versum.

Though not business operating costs, interest expense and income tax provision represent ongoing costs of Versum.

Depreciation, amortization, and impairment charges represent the wear and tear or reduction in value of the plant, equipment, and intangible assets which permit us to manufacture and market our products.

Other companies may define non-GAAP measures differently than we do, limiting their usefulness as comparative measures.

A reader may find any one or all of these items important in evaluating our performance. Management compensates for the limitations of using non-GAAP financial measures by using them only to supplement our GAAP results to provide a more complete understanding of the factors and trends affecting our business. In evaluating these financial measures, the reader should be aware that we may incur expenses similar to those eliminated in this presentation in the future.

Presented below is a reconciliation of the reported GAAP results to the non-GAAP measure:

Adjusted EBITDA and EBITDA Margin

We define Adjusted EBITDA as net income excluding certain disclosed items, which we do not believe to be indicative of underlying business trends, before interest expense, income tax provision, depreciation and amortization expense, non-controlling interest and business separation, restructuring, and cost reduction actions. Adjusted EBITDA provides a useful metric for management to assess operating performance. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by sales.

Below is a reconciliation of net income to Adjusted EBITDA:
 
Year Ended September 30,
 
2017
 
2016
 
2015
(In millions, except percentages)
 
Net Income Attributable to Versum
$
193.0

 
$
212.0

 
$
184.1

Add: Interest expense
47.4

 
0.4

 
0.1

Add: Income tax provision
52.8

 
58.8

 
31.7

Add: Depreciation and amortization
46.0

 
46.9

 
56.9

Add: Non-controlling interests
6.9

 
7.9

 
7.1

Add: Business separation, restructuring and cost reduction actions
25.5

 
0.9

 
21.6

Adjusted EBITDA
$
371.6

 
$
326.9

 
$
301.5

Adjusted EBITDA Margin
33.0
%
 
33.7
%
 
29.9
%
Change from prior year
$
44.7

 
$
25.4

 
$
77.8

% change from prior year
13.7
%
 
8.4
%
 
34.8
%

42


Year ended September 30, 2017 vs. September 30, 2016

Adjusted EBITDA of $371.6 million increased $44.7 million, or 13.7%, primarily due to higher volumes of $88 million and favorable currency impacts of $8 million partially offset by higher operating costs of $26 million and unfavorable price/mix of $25 million.

Year ended September 30, 2016 vs. September 30, 2015

Adjusted EBITDA of $326.9 million increased $25.4 million, or 8.4%, primarily due to favorable price/mix of $34 million and lower operating costs of $14 million, partially offset by lower volume of $12 million and unfavorable currency impacts of $11 million.

SEGMENT LEVEL FINANCIAL RESULTS
Sales
 
 
 
 
 
 
Year Ended September 30,
 
2017
 
2016
 
2015
(In millions)
 
Materials
$
829.7

 
$
756.7

 
$
743.4

DS&S
293.6

 
213.4

 
265.9

Corporate
3.6

 

 

Total Company Sales
$
1,126.9

 
$
970.1

 
$
1,009.3


Below is a reconciliation of segment operating income to segment adjusted EBITDA:
 
Year Ended September 30,
 
2017
 
2016
 
2015
(In millions, except percentages)
 
 
 
 
 
Materials
 
 
 
 
 
Operating income
$
274.4

 
$
252.3

 
$
213.7

Add: Depreciation and amortization
43.1

 
44.4

 
48.1

Add: Equity affiliates’ income

 
0.2

 
1.0

Segment Adjusted EBITDA
$
317.5

 
$
296.9

 
$
262.8

Segment Adjusted EBITDA margin(A)
38.3
%
 
39.2
%
 
35.4
%
DS&S
 
 
 
 
 
Operating income
$
71.7

 
$
50.8

 
$
49.1

Add: Depreciation and amortization
1.4

 
2.1

 
8.3

Segment Adjusted EBITDA
$
73.1

 
$
52.9

 
$
57.4

Segment Adjusted EBITDA margin(A)
24.9
%
 
24.8
%
 
21.6
%
Corporate
 
 
 
 
 
Operating loss
$
(20.5
)
 
$
(23.3
)
 
$
(19.2
)
Add: Depreciation and amortization
1.5

 
0.4

 
0.5

Segment Adjusted EBITDA
$
(19.0
)
 
$
(22.9
)
 
$
(18.7
)
 
 
 
 
 
 
Total Versum Adjusted EBITDA
$
371.6

 
$
326.9

 
$
301.5


(A) 
Segment adjusted EBITDA margin is calculated by dividing segment Adjusted EBITDA by segment sales.


43


Below is a reconciliation of segment total operating income to consolidated operating income:

Year Ended September 30,
(In millions)
2017
 
2016
 
2015
Operating Income
 
Segment total
$
325.6

 
$
279.8

 
$
243.6

Business separation, restructuring and cost reduction actions
(25.5
)
 
(0.9
)
 
(21.6
)
Consolidated Total
$
300.1

 
$
278.9

 
$
222.0


Materials
 
% Change from Prior Year
 
2017
 
2016
Sales
 
 
 
Underlying business
 
 
 
Volume
12
 %
 
 %
Price/mix
(3
)%
 
3
 %
Currency
1
 %
 
(1
)%
Total Materials Sales Change
10
 %
 
2
 %

Year ended September 30, 2017 vs. September 30, 2016

Sales of $829.7 million increased $73.0 million, or 9.6%, primarily due to higher volumes of 12% and favorable currency impacts of 1%. The higher volumes of 12% were driven by strong memory market growth and advanced logic new node ramps. These increases were partially offset by unfavorable price/mix of 3%.

Operating income of $274.4 million increased $22.1 million, or 8.8%, due to higher volumes of $60 million and favorable currency impacts of $8 million partially offset by higher costs of $23 million and unfavorable price/mix of $23 million.

Adjusted EBITDA of $317.5 million increased $20.6 million, or 6.9%, due to higher volumes of $60 million and favorable currency impacts of $8 million partially offset by higher operating costs of $24 million and unfavorable price/mix of $23 million. Adjusted EBITDA margin of 38.3% decreased 90 bp, primarily due to higher costs and unfavorable price/mix.

Year ended September 30, 2016 vs. September 30, 2015

Sales of $756.7 million increased $13.3 million, or 1.8%, primarily due to favorable price/mix of 3%. The favorable price/mix is primarily due to impacts early in the fiscal year as a result of the supply demand imbalance of process gases to the memory market. In addition, stronger volumes from new product growth in advanced materials were offset by lower spot sales and a product line exit in process materials. These increases were partially offset by unfavorable currency of 1%.

Operating income of $252.3 million increased $38.6 million, or 18.1%, due to favorable price/mix of $26 million, lower costs of $19 million and higher volumes of $3 million, partially offset by unfavorable currency of $9 million.

Adjusted EBITDA of $296.9 million increased $34.1 million, or 13.0%, due to favorable price/mix of $26 million, favorable operating costs of $14 million and higher volumes of $3 million, partially offset by unfavorable currency of $9 million. Adjusted EBITDA margin of 39.2% increased 380 bp, primarily due to favorable price/mix and lower costs partially offset by unfavorable currency.


44


Delivery Systems and Services
 
% Change from Prior Year
 
2017
 
2016
Sales
 
 
 
Underlying business
 
 
 
Volume
38
%
 
(19
)%
Price/mix
%
 
 %
Currency
%
 
(1
)%
Total DS&S Sales Change
38
%
 
(20
)%

Year ended September 30, 2017 vs. September 30, 2016

Sales of $293.6 million increased $80.2 million, or 37.6%, due to increased equipment sales driven by the continued high level of semiconductor industry capital spending.

Operating income of $71.7 million increased $20.9 million, or 41.1%, due to higher volumes of $28 million partially offset by higher costs of $5 million and unfavorable price/mix of $2 million.

Adjusted EBITDA of $73.1 million increased $20.2 million, or 38.2%, due to higher volumes of $28 million partially offset by higher costs of $6 million and unfavorable price/mix of $2 million. Adjusted EBITDA margin of 24.9% increased 10 bp.

Year ended September 30, 2016 vs. September 30, 2015

Sales of $213.4 million decreased $52.5 million, or 19.7%, due to lower equipment volumes and reduced turnkey and installation project activity.

Operating income of $50.8 million increased $1.7 million, or 3.5%, due to lower costs of $11 million and favorable price/mix of $8 million partially offset by lower volumes of $15 million and unfavorable currency impacts of $2 million.

Adjusted EBITDA of $52.9 million decreased $4.5 million, or 7.8%, due to lower volumes of $15 million and unfavorable currency impacts of $2 million partially offset by favorable price/mix of $8 million and lower costs of $4 million. Adjusted EBITDA margin of 24.8% increased 320 bp.

Corporate

Year ended September 30, 2017 vs. September 30, 2016

Operating loss of $20.5 million decreased by $2.8 million, or 12.0%, due to lower incentive compensation costs recorded in the corporate segment partially offset by the higher costs of becoming a stand-alone company.

Adjusted EBITDA loss of $19.0 million decreased by $3.9 million, or 17.0%, due to lower incentive compensation costs recorded in the corporate segment partially offset by higher cost of becoming a stand-alone company.

Year ended September 30, 2016 vs. September 30, 2015

Operating loss of $23.3 million increased by $4.1 million or 21.4%, primarily due to additional start up selling and administrative costs within the Corporate segment.

Adjusted EBITDA loss of $22.9 million increased by $4.2 million or 22.5%, primarily due to additional start up selling and administrative costs within the Corporate segment.


45


LIQUIDITY AND CAPITAL RESOURCES

Prior to the Separation we had received funding from Air Products for our operating and investing cash needs. Historically, a significant portion of our cash balances are generated by operating activities. Our primary sources of liquidity are cash on hand, which was $271.4 million at September 30, 2017, short-term investments, our cash flows from operations, our Revolving Facility and various non-U.S. credit facilities. We anticipate that our primary uses of cash will be for working capital, debt service, capital expenditures for expansion, productivity and maintenance, potential dividends, acquisitions and general corporate purposes. Our ability to fund these uses of liquidity also will often depend upon where we generate cash, our ability to reinvest in such countries and our ability to repatriate cash into the U.S. Our ability to fund operations and capital needs will depend upon our ongoing ability to generate cash from operations and access the capital markets. We believe that future cash from operations, our revolving credit facility, and access to capital markets will provide adequate resources to meet working capital needs, potential dividends, capital expenditures and strategic investments.

As of September 30, 2017, the majority of our cash and cash items of $271.4 million were held outside the U.S. If we elect to repatriate the foreign cash, we may be required to accrue and pay additional taxes on a portion of these amounts. We do not expect the need to repatriate foreign cash to finance our U.S. operations and service our debt.

As of September 30, 2017, we had availability of $200 million under our Revolving Facility and approximately $20.2 million under our various non-U.S. credit facilities.

As of September 30, 2017, we had $994.3 million of total debt. Our scheduled principal repayments on debt include $5.8 million due in 2018, $5.8 million due in 2019, $5.8 million due in 2020, $5.8 million due in 2021, $5.8 million due in 2022 and $965.3 million due thereafter. We were in compliance with all of our debt covenants at September 30, 2017, and we expect to remain in compliance with these covenants for at least the next twelve months.

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%. 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%.

For a summary of our Senior Credit Facilities and the Notes, see Note 11, “Debt”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

To take advantage of the continued strong market demand and the opportunity to drive organic growth, we anticipate increasing our capital expenditures in fiscal year 2018. This includes enhancing our research and manufacturing capabilities in key geographics such as Korea and China and improving our cost and capacity positions in certain Materials products.

Additionally, in support of finalizing our transition to an independent company, we expect to spend an additional $20-25 million of additional capital for relocating the remainder of our infrastructure and establishing our own IT systems during fiscal year 2018.


46


CASH FLOWS

For the year ended September 30, 2017, September 30, 2016 and September 30, 2015

Our cash flows provided by (used in) operating, investing, and financing activities as reflected in the consolidated statements of cash flows, are summarized in the following table:
 
Year Ended September 30,
 
2017
 
2016
 
2015
(In millions)
 
Operating activities
$
262.5

 
$
253.4

 
$
274.4

Investing activities
(73.6
)
 
(61.9
)
 
(19.7
)
Financing activities
(24.7
)
 
(105.5
)
 
(285.3
)

Operating Activities

For the year ended September 30, 2017, cash provided by operating activities was $262.5 million. Net income attributable to Versum of $193.0 million is adjusted for reconciling items that include depreciation and amortization, deferred income taxes, gain on sale of assets and share-based compensation expense. Working capital provided cash of $8.5 million. The change in working capital was primarily a result of an increase in payables and accruals partially offset by increases in trade receivables and inventory. The increase in payables and accruals was primarily the result of period to period timing differences related to payments including those associated with the Separation. The increases in trade receivables and inventory was primarily the result of increased sales activity and period over period timing differences related to collections.

For the year ended September 30, 2016, cash provided by operating activities was $253.4 million. Net income attributable to Versum of $212.0 million is adjusted for reconciling items that include depreciation and amortization, deferred income taxes, undistributed earnings of equity affiliates, gain on sale of assets, share-based compensation expense and write-down of long-lived assets associated with restructuring. We used cash of $6.6 million for working capital purposes. The increase in contracts in progress, less progress billings of $9.2 million primarily relates to spending on large projects.

For the year ended September 30, 2015, cash provided by operating activities was $274.4 million. Net income attributable to Versum of $184.1 million is adjusted for reconciling items that include depreciation and amortization, deferred income taxes, undistributed earnings of equity affiliates, gain on sale of assets, share-based compensation expense and write-down of long-lived assets associated with restructuring. Working capital was a source of cash of $16.1 million. The reduction in contracts in progress, less progress billings of $20.7 million primarily relates to collections from large projects.

Investing Activities

For the year ended September 30, 2017, cash used by investing activities was $73.6 million, primarily due to spending for plant and equipment and an acquisition. For the year ended September 30, 2016, cash used for investing activities was $61.9 million, as spending for plant and equipment and transfers to restricted cash were partially offset by proceeds from the sale of assets. For the year ended September 30, 2015, cash used for investing activities was $19.7 million, as spending for plant and equipment was partially offset by proceeds from the sale of assets.

Capital expenditures in the year ended September 30, 2017 totaled $64.0 million, including $25.2 million of capital spending related to one-time restructuring activities, compared to $35.8 million in the year ended September 30, 2016. The increase in capital expenditures of $28.2 million for the period was primarily due to restructuring capital expenditures associated with the relocation of or research and development activities and ERP project spending.

Capital expenditures in the year ended September 30, 2016 totaled $35.8 million, compared to $22.1 million in the year ended September 30, 2015. The increase in capital expenditures of $13.7 million for the period is primarily due to projects to increase capacity for certain product lines in the Materials segment.

Cash flow from operations is expected to fund anticipated production capacity project spending.

47


Financing Activities

For the year ended 2017, cash used for financing activities was $24.7 million primarily due to dividends paid to shareholders, distributions to non-controlling interests and payments on long-term debt. For the year ended 2016, cash used for financing activities was $105.5 million primarily due to net transfers to Air Products partially offset by proceeds from issuance of long-term debt. For the year ended 2015, cash used for financing activities was $285.3 million primarily due to net transfers from Air Products.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at September 30, 2017. Amounts in the table do not reflect the allocation of certain net liabilities between Air Products and us.
 
 
 
Payments Due for Year Ending September 30,
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
(In millions)
 
Operating leases
$
33.6

 
$
10.1

 
$
8.3

 
$
6.7

 
$
4.1

 
$
3.0

 
$
1.4

Unconditional purchase obligations
30.3

 
30.3

 

 

 

 

 

Long-term debt obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt
994.3

 
5.8

 
5.8

 
5.8

 
5.8

 
5.8

 
965.3

Expected interest payments on debt
275.3

 
43.7

 
42.0

 
41.8

 
41.7

 
41.5

 
64.6

Total Contractual Obligations
$
1,333.5

 
$
89.9

 
$
56.1

 
$
54.3

 
$
51.6

 
$
50.3

 
$
1,031.3


Leases

For more information on operating leases, see Note 12, “Leases”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Unconditional Purchase Obligations

The unconditional purchase obligations are primarily related to plant and equipment as well as R&D facility enhancements in 2017. Otherwise there are no material obligations.

Long-term Debt Obligations

The long-term debt obligations include the maturity payments of long-term debt, including current portion, and the related contractual interest obligations. Refer to Note 11, “Debt”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on long-term debt.

Contractual interest is the interest we are contracted to pay on the long-term debt obligations. We had $569.3 million of long-term debt subject to variable interest rates at September 30, 2017. The rate assumed for the variable interest component of the contractual interest obligation was the rate in effect at September 30, 2017. In addition, we had $425.0 million of Senior Notes subject to a 5.5% interest rate at September 30, 2017.

Income Tax Liabilities

Non-current deferred income tax liabilities as of September 30, 2017 were $37.3 million. Liabilities related to unrecognized tax benefits, including interest and penalties, as of September 30, 2017 were $19.9 million. These tax liabilities were excluded from the Contractual Obligations table, as it is impractical to determine a cash impact by year given that payments will vary according to changes in tax laws, tax rates, and our operating results. In addition, there are uncertainties in timing of the effective settlement of our uncertain tax positions with respective taxing authorities. For more information, see Note 19, “Income Taxes”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

48


LONG-TERM EMPLOYEE BENEFITS

Air Products sponsors defined benefit pension plans and defined contribution plans that are shared amongst its businesses. Prior to the Separation 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. In connection with the Separation, Versum assumed defined benefit pension plan assets for the plans in Germany, Korea and Taiwan of approximately $3 million and defined benefit liabilities of approximately $27 million.

Refer to Note 15, “Retirement Benefits”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2017, we did not have any off-balance sheet arrangements.

RELATED PARTY TRANSACTIONS

See Note 4, “Related Party Transactions”, to our Annual Consolidated Financial Statements in Part II, Item 8 on this Annual Report on Form 10-K for details.

INFLATION

We operate in many countries that experience volatility in inflation and foreign exchange rates. The ability to pass on inflationary cost increases is an uncertainty due to general economic conditions and competitive situations. It is estimated that the cost of replacing our plant and equipment today is greater than its historical cost. Accordingly, depreciation expense would be greater if the expense were stated on a current cost basis.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Note 2, “Major Accounting Policies”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K describes our major accounting policies. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. However, application of the critical accounting policies discussed below requires management’s significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. Our management has reviewed these critical accounting policies and estimates and related disclosures with our audit committee.

Principles of Consolidation

Prior to the Separation, the Annual Consolidated Financial Statements were derived from Air Products’ consolidated financial statements and accounting records where Versum was a division of Air Products. Subsequent to the Separation, the accompanying Annual Consolidated Financial Statements are presented on a consolidated basis and include all of the accounts and operations of Versum and its majority-owned subsidiaries as a stand alone company. The financial statements reflect the financial position, results of operations and cash flows of Versum in accordance with GAAP. Transactions between Versum and Air Products prior to the Separation were reflected in the consolidated balance sheets as “Air Products’ net investment” and in the 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. However, these allocations may not be indicative of the actual expenses we would have incurred as an independent public company or of the costs we will incur in the future. For the periods prior to October 1, 2016, the Annual Consolidated Balance Sheets

49


of Versum included Air Products’ assets and liabilities that were specifically identifiable or otherwise were transferred to us, including subsidiaries and affiliates in which Air Products had a controlling financial interest. Also included within our Annual Consolidated Financial Statements were the results of certain businesses which had historically been managed by us but were retained by Air Products after the Separation.

Impairment of Assets

Plant and Equipment

Plant and equipment held for use is grouped for impairment testing at the lowest level for which there is identifiable cash flows. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such circumstances would include a significant decrease in the market value of a long-lived asset grouping, a significant adverse change in the manner in which the asset grouping is being used or in its physical condition, a history of operating or cash flow losses associated with the use of the asset grouping, or changes in the expected useful life of the long-lived assets.

If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by that asset group is compared to the carrying value to determine whether impairment exists. If an asset group is determined to be impaired, the loss is measured based on the difference between the asset group’s fair value and its carrying value. An estimate of the asset group’s fair value is based on the discounted value of its estimated cash flows. Assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell.

The assumptions underlying cash flow projections represent management’s best estimates at the time of the impairment review. Factors that management must estimate include industry and market conditions, sales volumes and prices, costs to produce, inflation, etc. Changes in key assumptions or actual conditions that differ from estimates could result in an impairment charge. We use reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.

Intangible Assets

Intangible assets with determinable lives at September 30, 2017 totaled $70.8 million and consisted primarily of customer relationships, patents and technology. These intangible assets are tested for impairment as part of the long-lived asset grouping impairment tests. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. See the impairment discussion above under Plant and Equipment for a description of how impairment losses are determined. Disclosures related to intangible assets are included in Note 10 to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on form 10-K.

Goodwill

The acquisition method of accounting for business combinations currently requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the purchase price over the estimated fair value of net assets acquired, including identified intangibles. Goodwill was $182.6 million as of September 30, 2017. Disclosures related to goodwill are included in Note 9 to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on form 10-K.

We perform an impairment test annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The tests are done at the reporting unit level which is defined as equal to or one level below the operating segment. The first step of the quantitative test requires that we compare the fair value of business reporting units to carrying value, including assigned goodwill. To determine the fair value of a reporting unit, we primarily use either an income approach or market approach valuation model, representing the present value of future cash flows. Our valuation model uses a five-year growth period for the business and an estimated exit trading multiple. The principal assumptions utilized in our income approach valuation model include revenue growth rate, operating profit margins, discount rate, and exit multiple. Revenue growth rate and operating profit assumptions are consistent with those utilized in our operating plan and long-term financial planning process. The discount rate assumption

50


is calculated based upon an estimated weighted-average cost of capital, which includes factors such as the risk-free rate of return, cost of debt, and expected equity premiums. The exit multiple is determined from comparable industry transactions. If the first step of the quantitative test indicates potential impairment, the implied fair value of a reporting unit’s goodwill is compared to its carrying amount. If the carrying amount of the goodwill is greater than its implied fair value, an impairment loss is recorded. When the market approach is utilized, fair value is estimated based on market multiples of revenue and earnings derived from comparable publicly-traded companies engaged in the same or similar lines of business as the reporting unit, adjusted to reflect differences in size and growth prospects. When both the income and market approach are utilized, we review relevant facts and circumstances and make a qualitative assessment to determine the proper weighting. Management judgment is required in the determination of each assumption utilized in the valuation model, and actual results could differ from the estimates.

We have a total of three reporting units. There are two reporting units based on product lines within the Materials segment. The DS&S segment is also a reporting unit. We conducted impairment tests during the fourth quarter of 2017 and determined that there was no goodwill impairment. As of the fourth quarter of 2017, the fair value of each reporting unit substantially exceeded its carrying value.

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 the enacted tax rate. At September 30, 2017, accrued income tax payable and net deferred tax liabilities amounted to $31.4 million and $19.2 million, respectively. Tax liabilities related to uncertain tax positions as of September 30, 2017 were $19.9 million, including interest and penalties. Income tax expense for the year ended September 30, 2017 was $52.8 million. Disclosures related to income taxes are included in Note 19, “Income Taxes”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

For purposes of the Consolidated Financial Statements, our income tax expense and deferred tax balances for the fiscal years ended September 30, 2016 and September 30, 2015 have been estimated as if we filed income tax returns on a stand-alone basis separate from Air Products.

Management judgment is required concerning the ultimate outcome of tax contingencies and the realization of deferred tax assets.

Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We believe that our recorded tax liabilities adequately provide for these assessments.

Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when we do not expect sufficient sources of future taxable income to realize the benefit of the operating losses or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. Further, in situations where a cumulative loss for recent years exists, it may be difficult to support a conclusion that expected taxable income from future operations (excluding reversal of existing temporary differences) justifies recognition of deferred tax assets. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of the deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income, available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits, and the existence of a cumulative loss for recent years. The effect of a change in the valuation allowance is reported in income tax expense.

Loss Contingencies

In the normal course of business we encounter contingencies, i.e., situations involving varying degrees of uncertainty as to the outcome and effect on us. We accrue a liability for loss contingencies when it is considered probable that a liability has been incurred and the amount of loss 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.

51


Contingencies include those associated with litigation, for which our accounting policy is discussed in Note 2 and particulars are provided in Note 21, “Commitments and Contingencies”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Significant judgment is required in both determining probability and whether the amount of loss associated with a contingency can be reasonably estimated. These determinations are made based on the best available information at the time. As additional information becomes available, we reassess probability and estimates of loss contingencies. Revisions in the estimates associated with loss contingencies could have a significant impact on our results of operations in the period in which an accrual for loss contingencies is recorded or adjusted. For example, due to the inherent uncertainties related to environmental exposures, a significant increase to environmental liabilities could occur if a new site is designated, the scope of remediation is increased, or our proportionate share is increased. Similarly, a future charge for regulatory fines or damage awards associated with litigation could have a significant impact on our net income in the period in which it is recorded.

NEW ACCOUNTING GUIDANCE

See Note 3, “New Accounting Guidance”, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for information concerning the implementation and impact of new accounting guidance.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our earnings, cash flows, and financial position are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates. It is our policy to minimize our cash flow exposure to adverse changes in currency exchange rates and to manage the financial risks inherent in funding with debt capital.

We address these financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. Counterparties to all derivative contracts are major financial institutions, thereby minimizing the risk of credit loss. All instruments are entered into for other than trading purposes. For details on the types and use of these derivative instruments, see Note 14, Financial Instruments, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information.

Our derivative and other financial instruments consist of foreign exchange-forward contracts and long-term debt (including current portion). The net market value of these financial instruments combined is referred to below as the net financial instrument position and is disclosed in Note 13, Fair Value, to our Annual Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

At September 30, 2017, the net financial instrument position was a liability of $1.0 billion.

Interest Rate Risk

We have interest rate risk with respect to our long-term debt. Our fixed rate debt consists of senior notes and our variable rate debt consists of term loans under our term loan facility. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the fair value of the debt instrument but has no impact on interest expense or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and the fair value of the instrument.

The sensitivity analysis related to the interest rate risk on the fixed portion of our debt assumes an instantaneous 100 bp move in interest rates from the level at September 30, 2017, with all other variables held constant. A 100 bp increase in market interest rates would result in a decrease of $26.0 million in the fair value of our fixed rate debt at September 30, 2017.

Based on the variable-rate debt balance at September 30, 2017, a 100 bp increase in interest rates would result in an additional $5.7 million of interest incurred per year at the end of September 30, 2017.
 

52


Foreign Currency Exchange Rate Risk

Our earnings, cash flows, and financial position are exposed to market risks relating to foreign currency exchange rates. It is our policy to minimize our cash flow exposure to adverse changes in currency exchange rates and to manage the financial risks inherent in funding with debt capital.

The sensitivity analysis related to foreign currency exchange rates assumes an instantaneous 10% change in the foreign currency exchange rates from their levels at September 30, 2017, with all other variables held constant. A 10% strengthening or weakening of the functional currency of an entity versus all other currencies would result in a decrease or increase, respectively, of $2.8 million in the net asset position of financial instruments at September 30, 2017.

We enter into forward exchange contracts to hedge the cash flow exposure on inter-company loans. The primary currency pair for which we have exchange rate exposure is Korean Won and U.S. Dollars. There is fair value exposure related to all of the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and materially equal to the impact on the instruments in the analysis.

Approximately 50% of Versum’s sales are denominated in currencies other than the U.S. dollar. Financial results therefore will be affected by changes in currency exchange rates. If all foreign currencies were to see a 10% reduction versus the U.S. dollar during the year ended September 30, 2017 the operating income would be negatively impacted by approximately $14.5 million.


53


Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


54


Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Versum Materials, Inc.:

We have audited the accompanying consolidated balance sheets of Versum Materials, Inc. and subsidiaries as of September 30, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑year period ended September 30, 2017. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Versum Materials, Inc. and subsidiaries as of September 30, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three‑year period ended September 30, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Versum Materials, Inc.’s internal control over financial reporting as of September 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 22, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
Philadelphia, Pennsylvania
November 22, 2017

55


Versum Materials, Inc.
ANNUAL CONSOLIDATED INCOME STATEMENTS

 
Year Ended September 30,
 
2017
 
2016
 
2015
(In millions, except per share data)

 
 
 
 
Sales
$
1,126.9

 
$
970.1

 
$
1,009.3

Cost of sales
636.9

 
539.5

 
616.5

Selling and administrative
125.7

 
109.8

 
109.6

Research and development
45.1

 
43.9

 
40.7

Business separation, restructuring and cost reduction actions
25.5

 
0.9

 
21.6

Other (income) expense, net
(6.4
)
 
(2.9
)
 
(1.1
)
Operating Income
300.1

 
278.9

 
222.0

Equity affiliates’ income

 
0.2

 
1.0

Interest expense
47.4

 
0.4

 
0.1

Income Before Taxes
252.7

 
278.7

 
222.9

Income tax provision
52.8

 
58.8

 
31.7

Net Income
199.9

 
219.9

 
191.2

Less: Net Income Attributable to Non-controlling Interests
6.9

 
7.9

 
7.1

Net Income Attributable to Versum
$
193.0

 
$
212.0

 
$
184.1

Net income attributable to Versum per common share:
 
 
 
 
 
Basic
$
1.78

 
$
1.95

 
$
1.69

Diluted
$
1.76

 
$
1.95

 
$
1.69

Shares used in computing per common share amounts:
 
 
 
 
 
Basic
108.7

 
108.7

 
108.7

Diluted
109.4

 
108.7

 
108.7


The accompanying notes are an integral part of these statements.


56


Versum Materials, Inc.
ANNUAL CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

 
Year Ended September 30,
 
2017
 
2016
 
2015
(In millions)
 
 
 
 
 
Net Income
$
199.9

 
$
219.9

 
$
191.2

Other Comprehensive Income (Loss), net of tax
 
 
 
 
 
Translation adjustments, net of tax of $0, $0, and $0.7
(4.9
)
 
22.8

 
(48.4
)
Pension activity, net of tax of $0.5, $0, and $0
(2.2
)
 

 

Total Other Comprehensive Income (Loss)
(7.1
)
 
22.8

 
(48.4
)
Comprehensive Income
192.8

 
242.7

 
142.8

Net Income Attributable to Non-controlling Interests
6.9

 
7.9

 
7.1

Other Comprehensive Loss Attributable to Non-controlling Interests
1.3

 

 
(2.1
)
Comprehensive Income Attributable to Versum
$
184.6

 
$
234.8

 
$
137.8


The accompanying notes are an integral part of these statements.

57


Versum Materials, Inc.
ANNUAL CONSOLIDATED BALANCE SHEETS

 
September 30,
 
2017
 
2016
(In millions, except share data)

 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash items
$
271.4

 
$
105.6

Restricted cash

 
69.6

Trade receivables, net
145.3

 
130.0

Inventories
151.6

 
127.4

Contracts in progress, less progress billings
15.6

 
19.2

Prepaid expenses
12.2

 
3.8

Other current assets
10.8

 
12.4

Total Current Assets
606.9

 
468.0

Plant and equipment, net
330.3

 
296.5

Goodwill
182.6

 
180.1

Intangible assets, net
70.8

 
74.8

Other noncurrent assets
56.2

 
24.4

Total Non-current Assets
639.9

 
575.8

Total Assets
$
1,246.8

 
$
1,043.8

Liabilities and Stockholders’ Deficit
 
 
 
Current Liabilities
 
 
 
Payables and accrued liabilities
$
120.8

 
$
85.8

Accrued income taxes
31.4

 
12.7

Current portion of long-term debt
5.8

 
5.8

Total Current Liabilities
158.0

 
104.3

Long-term debt
977.0

 
980.3

Deferred tax liabilities
37.3

 
42.8

Other noncurrent liabilities
49.9

 
19.8

Total Non-current Liabilities
1,064.2

 
1,042.9

Total Liabilities
1,222.2

 
1,147.2

Commitments and Contingencies - See Note 21

 

Stockholders’ Equity (Deficit)
 
 
 
Air Products’ net investment

 
(127.3
)
Common stock (par value $1 per share; 250,000,000 shares; outstanding 108,815,330)
108.8

 

Capital in excess of par
4.8

 

Accumulated deficit
(105.2
)