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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $1.00 per share
 
VSM
 
New York Stock Exchange

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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No
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
 
Accelerated filer
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
At July 26, 2019, 109,269,216 shares of common stock, par value $1.00 per share, were outstanding.



Table of Contents


TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

Table of Contents


PRESENTATION OF INFORMATION
All references in this Quarterly Report on Form 10-Q, unless the context otherwise requires:
“Versum,” “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 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, which holds the Electronic Materials business.
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, as further described herein.

2

Table of Contents


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Versum Materials, Inc.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
(In millions, except per share data)

 
 
 
 
 
 
Sales
$
324.3

 
$
350.0

 
$
990.0

 
$
1,021.5

Cost of sales
185.6

 
200.3

 
571.5

 
587.3

Selling and administrative
34.5

 
35.2

 
102.6

 
107.0

Research and development
11.9

 
12.4

 
35.9

 
36.2

Business separation, restructuring and cost reduction actions
141.4

 
6.7

 
156.3

 
16.7

Other (income) expense, net
(1.6
)
 
(0.9
)
 
(7.2
)
 
(0.9
)
Operating (Loss) Income
(47.5
)
 
96.3

 
130.9

 
275.2

Interest expense
13.0

 
12.5

 
39.0

 
35.7

Write-off of financing costs

 

 

 
2.1

Non-service components of net periodic pension cost
0.2

 
0.1

 
0.6

 
0.5

(Loss) Income Before Taxes
(60.7
)
 
83.7

 
91.3

 
236.9

Income tax provision
24.5

 
19.6

 
62.3

 
88.8

Net (Loss) Income
(85.2
)
 
64.1

 
29.0

 
148.1

Less: Net Income Attributable to Non-Controlling Interests
1.5

 
0.8

 
4.2

 
4.5

Net (Loss) Income Attributable to Versum
$
(86.7
)
 
$
63.3

 
$
24.8

 
$
143.6

Net (Loss) income attributable to Versum per common share:
 
 
 
 
 
 
 
Basic
$
(0.79
)
 
$
0.58

 
$
0.23

 
$
1.32

Diluted
$
(0.79
)
 
$
0.58

 
$
0.23

 
$
1.31

Shares used in computing per common share amounts:
 
 
 
 
 
 
 
Basic
109.2

 
108.9

 
109.1

 
108.9

Diluted
109.2

 
109.8

 
110.0

 
109.7


The accompanying notes are an integral part of these statements.


3

Table of Contents


Versum Materials, Inc.
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
(In millions)
 
 
 
 
 
 
 
Net (Loss) Income
$
(85.2
)
 
$
64.1

 
$
29.0

 
$
148.1

Other Comprehensive (Loss) Income, net of tax
 
 
 
 
 
 
 
Translation adjustments
(5.1
)
 
(23.3
)
 
(11.1
)
 
3.0

Gain from hedging activities

 
0.1

 

 
0.2

Pension activity, net of tax for the three and nine months ended June 30, 2019 of $0.0 and for the three and nine months ended June 30, 2018 of $0.1

 
(0.4
)
 
0.1

 
(0.4
)
Total Other Comprehensive (Loss) Income
(5.1
)
 
(23.6
)
 
(11.0
)
 
2.8

Comprehensive (Loss) Income
(90.3
)
 
40.5

 
18.0

 
150.9

Net Income Attributable to Non-controlling Interests
1.5

 
0.8

 
4.2

 
4.5

Other Comprehensive Loss Attributable to Non-controlling Interests
(0.2
)
 
(1.6
)
 
(0.5
)
 

Comprehensive (Loss) Income Attributable to Versum
$
(91.6
)
 
$
41.3

 
$
14.3

 
$
146.4


The accompanying notes are an integral part of these statements.

4

Table of Contents


Versum Materials, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30, 2019
 
September 30, 2018
(In millions, except share data)

 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash items
$
272.2

 
$
399.8

Trade receivables, net
166.3

 
184.4

Inventories
206.3

 
177.1

Contracts in progress, less progress billings
50.7

 
20.3

Prepaid expenses
21.2

 
13.6

Other current assets
18.5

 
17.9

Total Current Assets
735.2

 
813.1

Plant and equipment:
 
 
 
Plant and equipment, at cost
1,131.6

 
1,072.1

Less: accumulated depreciation
692.9

 
667.0

Plant and equipment, net
438.7

 
405.1

Goodwill
182.4

 
183.0

Intangible assets, net
59.3

 
63.5

Other noncurrent assets
43.1

 
40.6

Total Noncurrent Assets
723.5

 
692.2

Total Assets
$
1,458.7

 
$
1,505.3

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities
 
 
 
Payables and accrued liabilities
$
110.7

 
$
138.6

Accrued income taxes
53.1

 
43.3

Current portion of long-term debt
5.8

 
5.8

Total Current Liabilities
169.6

 
187.7

Long-term debt
971.2

 
974.2

Noncurrent income tax payable
30.9

 
37.3

Deferred tax liabilities
36.2

 
41.3

Other noncurrent liabilities
47.2

 
52.4

Total Noncurrent Liabilities
1,085.5

 
1,105.2

Total Liabilities
1,255.1

 
1,292.9

Commitments and Contingencies - See Note 15

 

Stockholders’ Equity
 
 
 
Common stock (par value $1 per share; 250,000,000 shares authorized; outstanding 109,254,724 and 108,951,596 at June 30, 2019 and September 30, 2018, respectively)
109.3

 
109.0

Capital in excess of par
11.5

 
6.1

Retained earnings
80.1

 
81.6

Accumulated other comprehensive loss
(28.7
)
 
(18.2
)
Total Versum’s Stockholders’ Equity
172.2

 
178.5

Non-controlling Interests
31.4

 
33.9

Total Stockholders’ Equity
203.6

 
212.4

Total Liabilities and Stockholders’ Equity
$
1,458.7

 
$
1,505.3


The accompanying notes are an integral part of these statements.

5

Table of Contents


Versum Materials, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended June 30,
 
2019
 
2018
(In millions)
 
 
 
Operating Activities
 
 
 
Net income
$
29.0

 
$
148.1

Less: Net income attributable to non-controlling interests
4.2

 
4.5

Net income attributable to Versum
24.8

 
143.6

Adjustments to reconcile income to cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
42.0

 
37.8

Deferred income taxes
(10.6
)
 
(3.9
)
Gain on sale of assets
(0.1
)
 
(0.3
)
Share-based compensation
7.9

 
7.4

Other adjustments
4.0

 
11.4

Working capital changes that provided (used) cash:
 
 
 
Trade receivables
14.5

 
(52.3
)
Inventories
(31.1
)
 
(14.6
)
Contracts in progress, less progress billings
(30.7
)
 
(21.8
)
Payables and accrued liabilities
(26.2
)
 
(7.7
)
Accrued income taxes
(1.6
)
 
35.9

Other working capital
(3.3
)
 
0.1

Cash (Used for) Provided by Operating Activities
(10.4
)
 
135.6

Investing Activities
 
 
 
Additions to plant and equipment
(75.4
)
 
(90.0
)
Proceeds from sale of assets
1.0

 
1.1

Cash Used for Investing Activities
(74.4
)
 
(88.9
)
Financing Activities
 
 
 
Payments on long-term debt
(4.3
)
 
(4.3
)
Short-term borrowings
0.3

 

Payments on short-term borrowings
(0.3
)
 

Dividends paid to shareholders
(26.3
)
 
(17.4
)
Dividends paid to non-controlling interests
(6.2
)
 
(6.1
)
Other financing activity
(2.2
)
 
(3.2
)
Cash Used for Financing Activities
(39.0
)
 
(31.0
)
Effect of Exchange Rate Changes on Cash
(3.8
)
 
2.4

(Decrease) Increase in Cash and Cash Items
(127.6
)
 
18.1

Cash and Cash items-Beginning of Year
399.8

 
271.4

Cash and Cash items-End of Period
$
272.2

 
$
289.5

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid for interest on debt
$
31.3

 
$
28.0

Cash paid for taxes
$
78.1

 
$
55.1


The accompanying notes are an integral part of these statements.

6

Table of Contents


Versum Materials, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Common Stock
 
Capital in Excess of Par
 
Retained Earnings (Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Versum’s Stockholders’
Equity (Deficit)
 
Non-controlling
Interests
 
Total
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2017
$
108.8

 
$
4.8

 
$
(99.6
)
 
$
(18.4
)
 
$
(4.4
)
 
$
34.6

 
$
30.2

Net income

 

 
18.7

 

 
18.7

 
2.0

 
20.7

Cash dividend declared

 
(4.9
)
 
(0.6
)
 

 
(5.5
)
 

 
(5.5
)
Issuance of common stock through shared based compensation plans
0.1

 

 

 

 
0.1

 

 
0.1

Other comprehensive income

 

 

 
19.1

 
19.1

 
0.7

 
19.8

Share-based compensation

 
0.1

 

 

 
0.1

 

 
0.1

Dividends to non-controlling interests

 

 

 

 

 

 

Balance, December 31, 2017
$
108.9

 
$

 
$
(81.5
)
 
$
0.7

 
$
28.1

 
$
37.3

 
$
65.4

Net income

 

 
61.6

 

 
61.6

 
1.7

 
63.3

Cash dividend declared

 
(2.8
)
 
(2.6
)
 

 
(5.4
)
 

 
(5.4
)
Issuance of common stock through shared based compensation plans

 

 

 

 

 

 

Other comprehensive income

 

 

 
5.7

 
5.7

 
0.9

 
6.6

Share-based compensation

 
2.8

 

 

 
2.8

 

 
2.8

Dividends to non-controlling interests

 

 

 

 

 

 

Balance, March 31, 2018
$
108.9

 
$

 
$
(22.5
)
 
$
6.4

 
$
92.8

 
39.9

 
$
132.7

Net income

 

 
63.3

 

 
63.3

 
0.8

 
64.1

Cash dividend

 

 
(6.5
)
 

 
(6.5
)
 

 
(6.5
)
Issuance of common stock through shared based compensation plans

 

 

 

 

 

 

Other comprehensive loss

 

 

 
(22.0
)
 
(22.0
)
 
(1.6
)
 
(23.6
)
Share-based compensation

 
2.4

 

 

 
2.4

 

 
2.4

Dividends to non-controlling interests

 

 

 

 

 
(6.1
)
 
(6.1
)
Balance, June 30, 2018
$
108.9

 
$
2.4

 
$
34.3

 
$
(15.6
)
 
$
130.0

 
$
33.0

 
$
163.0


The accompanying notes are an integral part of these statements.


7

Table of Contents


Versum Materials, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Cont)
(Unaudited)

Common Stock
 
Capital in Excess of Par
 
Retained Earnings (Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Versum’s Stockholders’
Equity (Deficit)
 
Non-controlling
Interests
 
Total
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
$
109.0

 
$
6.1

 
$
81.6

 
$
(18.2
)
 
$
178.5

 
$
33.9

 
$
212.4

Net income

 

 
61.1

 

 
61.1

 
2.0

 
63.1

Cash dividend declared

 

 
(8.8
)
 

 
(8.8
)
 

 
(8.8
)
Issuance of common stock through shared based compensation plans
0.1

 

 

 

 
0.1

 

 
0.1

Other comprehensive income

 

 

 
0.9

 
0.9

 

 
0.9

Share-based compensation

 
(0.9
)
 

 

 
(0.9
)
 

 
(0.9
)
Dividends to non-controlling interests

 

 

 

 

 

 

Balance, December 31, 2018
$
109.1

 
$
5.2

 
$
133.9

 
$
(17.3
)
 
$
230.9

 
$
35.9

 
$
266.8

Net income

 

 
50.4

 

 
50.4

 
0.7

 
51.1

Cash dividend declared

 

 
(8.8
)
 

 
(8.8
)
 

 
(8.8
)
Issuance of common stock through shared based compensation plans
0.1

 

 

 

 
0.1

 

 
0.1

Other comprehensive loss

 

 

 
(6.5
)
 
(6.5
)
 
(0.3
)
 
(6.8
)
Share-based compensation

 
3.5

 

 

 
3.5

 

 
3.5

Dividends to non-controlling interests

 

 

 

 

 

 

Balance, March 31, 2019
$
109.2

 
$
8.7

 
$
175.5

 
$
(23.8
)
 
$
269.6

 
$
36.3

 
$
305.9

Net (loss) income

 

 
(86.7
)
 

 
(86.7
)
 
1.5

 
(85.2
)
Cash dividend

 

 
(8.7
)
 

 
(8.7
)
 

 
(8.7
)
Issuance of common stock through shared based compensation plans
0.1

 

 

 

 
0.1

 

 
0.1

Other comprehensive loss

 

 

 
(4.9
)
 
(4.9
)
 
(0.2
)
 
(5.1
)
Share-based compensation

 
2.8

 

 

 
2.8

 

 
2.8

Dividends to non-controlling interests

 

 

 

 

 
(6.2
)
 
(6.2
)
Balance, June 30, 2019
$
109.3

 
$
11.5

 
$
80.1

 
$
(28.7
)
 
$
172.2

 
31.4

 
$
203.6


The accompanying notes are an integral part of these statements.

8

Table of Contents


Versum Materials, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES

Versum is a global business that provides innovative solutions for specific customer applications within niche markets based upon expertise in specialty materials. Our business employs applications technology to provide solutions to the semiconductor industry through chemical synthesis, analytical technology, process engineering, and surface science. We are comprised of two operating segments, Materials and Delivery Systems and Services, under which we manage our operations and assess performance, and a Corporate segment. Versum’s common stock is listed under the symbol “VSM” on the New York Stock Exchange.

Basis of Presentation

The accompanying Consolidated Financial Statements are presented on a consolidated basis and include all of the accounts and operations of Versum and its majority-owned subsidiaries. The financial statements reflect the financial position, results of operations and cash flows of Versum in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information.

The financial statements are unaudited and should be read in conjunction with the Annual Consolidated Financial Statements presented in the company's Annual Report on Form 10-K for our fiscal year ended September 30, 2018. The financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented; all adjustments have been included to provide a fair statement of the results for the reporting periods presented. All significant inter-company accounts and transactions have been eliminated. The results of operations for the three and nine months ended June 30, 2019 are not necessarily indicative of the results of operations for the full year.

Accounting Policies

The policies used in preparing the Consolidated Financial Statements are the same as those used in our Annual Report on Form 10-K for our fiscal year ended September 30, 2018. Other than our adoption of a new revenue recognition policy which did not have a material impact on the Consolidated Financial Statements, there have been no significant changes to these accounting policies during the three and nine months ended June 30, 2019. See Note 3, Revenue from Contracts with Customers, for a discussion on the impacts of the new revenue recognition policy on our Consolidated Financial Statements.

Estimates and Assumptions

The Consolidated Financial Statements have been prepared in conformity with GAAP, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.

2.NEW ACCOUNTING GUIDANCE

Accounting Guidance Implemented

Income Taxes

In March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance relative to Incomes Taxes (Topic 740) that adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act (the “Tax Act”) in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the

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Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. Our accounting for income tax effects associated with the enactment of the Tax Act are complete and recorded in our Consolidated Financial Statements as of December 31, 2018. See Note 8 for further discussion.

Net Periodic Pension Costs

In March 2017, the FASB issued guidance which requires an entity to report the service cost component of pension expense in the same line item as other compensation costs. The other components of net (benefit) cost will be required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The components of the net (benefit) cost are shown in Note 11, Retirement Benefits. The company adopted the standard effective October 1, 2018. The adoption required us to reclassify amounts out of Operating Income. This resulted in a decrease to Cost of Sales of $0.1 million and an increase to Operating Income of $0.1 million for the three month period ending June 30, 2018. For the nine months ending June 30, 2018 Cost of Sales decreased by $0.4 million, Selling and Administrative costs decreased by $0.1 million and Operating Income increased by $0.5 million. No other financial statement line items were impacted. We do not consider this to be a material impact on the Consolidated Financial Statements.

Business Combinations

In January 2017, the FASB issued guidance on the definition of a business in business combinations. The guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The company adopted the standard effective October 1, 2018. The adoption did not have a material impact on the Consolidated Financial Statements.

Revenue Recognition

In May 2014, the FASB issued guidance based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. In August 2015, the FASB deferred the effective date by one year, while providing the option to early adopt the standard on the original effective date. In December 2016 there were further updates to the original guidance that did not revise the effective date. The company adopted the standard effective October 1, 2018. See Note 3, Revenue from Contracts with Customers, for a discussion on the impacts on our Consolidated Financial Statements.

Cash Flow Statement Classification

In August 2016, the FASB issued guidance to reduce diversity in practice on how certain cash receipts and cash payments are classified in the statement of cash flows. The guidance is effective beginning fiscal year 2019, with early adoption permitted, and should be applied retrospectively. The company adopted the standard effective October 1, 2018. The adoption did not have a material impact on the Consolidated Financial Statements.

New Accounting Guidance to be Implemented

Leases

In February 2016, with updates in July 2018 and January 2019, the FASB issued guidance which requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The guidance is effective in fiscal year 2020, with early adoption permitted, and originally required to be applied using a modified retrospective approach. The company is currently the lessee under various agreements for distribution equipment, vehicles and buildings that are currently accounted for as operating leases. The new guidance requires the lessee to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. The company will adopt the standard effective October 1, 2019. We are currently evaluating the impact of adopting this new guidance on our Consolidated Financial Statements.

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3.REVENUE FROM CONTRACTS WITH CUSTOMERS

The company adopted ASC 606 on October 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the three and nine months ended June 30, 2019 reflect the application of ASC 606 guidance while the reported results for 2018 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605). The company has determined the impact of ASC 606 on opening retained earnings was immaterial as of October 1, 2018. The impact to revenues for the three and nine months ended June 30, 2019 was immaterial as a result of applying ASC 606.

The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the company's goods or services and will provide financial statement readers with enhanced disclosures. To achieve this core principle, the company applies the following five steps:

Identify the contract with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to performance obligations in the contract
Recognize revenue when or as the company satisfies a performance obligation

Revenue under ASC 606 is recognized when or as obligations under the terms of a contract with the company's customer have been satisfied and control has transferred to the customer. The majority of the company's performance obligations, and associated revenue, are transferred to customers at a point in time, generally upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Installation services are not significant and are usually completed in a short period of time and therefore, recorded at a point in time when the installation services are completed, rather than over time as they are not material. Service contracts, which are transferred to the customer over time, are recorded as revenue as the services are performed. Customized equipment with no alternative future use to the company, and that have an enforceable right to payment for performance completed to date, are also recorded over time. The company considers this to be a faithful depiction of the transfer to the customer of revenue over time as the work or service is performed.

Revenue is measured as the amount of consideration the company expects to receive in exchange for transferring goods or providing services. Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the company, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. Sales, value add, and other taxes the company collects concurrent with revenue-producing activities are excluded from revenue. The company's normal payment terms vary by the type and location of its customers and the products or services offered. The time between invoicing and when payment is due is not significant. None of the company's contracts as of June 30, 2019 contain a significant financing component.

The company does not disclose information about remaining performance obligations that have original expected durations of one year or less.
 
Costs to Obtain and Fulfill a Contract

The company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the company otherwise would have recognized is one year or less. The incremental costs to obtain contracts was not material.

In most transactions, we have no obligations to our customers after the date products are shipped, other than pursuant to warranty obligations. Our standard warranties provide assurance to customers that the goods as delivered are free from defect or within their provided specifications. Shipping and handling fees billed to customers, if any, are recognized as revenue. The related shipping and handling costs are recognized in cost of sales. Based on the nature of our business returns are not material.


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Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.
 
The company estimates its allowance for doubtful accounts. The company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that it has identified.

Disaggregation of Revenue

We are comprised of two primary operating segments, Materials and Delivery Systems and Services (“DS&S”), under which we manage our operations and assess performance, and a Corporate segment. Our segments are differentiated by the types of product groups they sell.

Materials

The Materials operating segment is an integrated provider of specialty materials for the high-growth electronics industry, focusing on the integrated circuit and flat-panel display markets. This segment provides the global semiconductor industry with high purity process materials for deposition, metallization, chamber cleaning and etching, chemicals mechanical planarization slurries, organosilanes, organometallics and liquid dopants for thin film deposition, and formulated chemical products for post-etch cleaning primarily for the manufacture of silicon and compound semiconductors and thin film transistor liquid crystal displays. The Materials segment is further divided into two main product groups.

Advanced Materials (“AM”) - AM supplies products and services through three key product platforms that are employed in the fabrication of ICs. Advanced deposition materials products include high purity specialty gases and chemicals, such as organosilane and organometallic precursors that are used to deposit thin films which comprise an IC. Planarization products include chemical mechanical planarization (“CMP”) slurries and post CMP cleans that are used to prepare chips with deposited thin films for the next stage of fabrication. Surface prep and clean formulated products are designed to selectively etch and remove debris and contamination during multiple stages of the wafer fabrication process including advanced packaging.

Process Materials (“PM”) - PM supplies products such as high-purity gases and chemicals utilized in the processes of cleaning, etching, doping, and film deposition for our semiconductor, displays and light emitting diode customers.

Given the nature of the Materials segment the majority of revenue is recognized at a point in time.

DS&S

The DS&S operating segment designs, manufactures, installs, operates, and maintains chemical and gas delivery and distribution systems for specialty gases and chemicals delivered directly to our customers’ manufacturing tools. In addition, the business provides turnkey installation services during facility construction and startup as well as onsite operating services. Below are the two product groups for DS&S.

Equipment and installation (Gas, chemical and slurry delivery systems) - DS&S develops, designs, manufactures and sells bulk gas, specialty gas and specialty chemical cabinets and systems that are critical to managing the delivery of key materials into the semiconductor manufacturing process. DS&S also offers resources to assist both new and refurbished semiconductor fabs in the design, installation, startup, and commissioning of the gases and specialty materials delivery systems and quality assurance. The scope of installation services includes project management for installation and startup of the gas and chemical delivery systems, and inventory management. Given the nature of equipment and installation services for DS&S the majority of the revenue is recognized at a point in time.

On-Site Services (MEGASYS): DS&S offers on-site contract services to assist customers in managing their inventory of gases and chemicals, including ordering, product changes and monitoring, quality assurance, operating our delivery systems, and managing the bulk gas and specialty gas operations. These services are typically performed on the customer site. Given the nature of the site services for DS&S the revenue is recognized over time.

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Corporate

The Corporate segment includes certain administrative costs such as information technology, general services, human resources, legal, accounting, and other services, as well as foreign exchange gains and losses, and other income and expense that cannot be directly associated with operating segments.

The company disaggregates its revenue from contracts with customers by product group, which it believes best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The following table summarizes revenue from contracts with customers disaggregated by product group:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
(In millions)
 
 
 
 
 
Materials
 
 
 
 
 
 
 
Advanced Materials
$
118.0

 
$
119.3

 
$
359.2

 
$
350.6

Process Materials
96.3

 
99.2

 
293.3

 
301.4

Total Materials
214.3

 
218.5

 
652.5

 
652.0

DS&S
 
 
 
 
 
 
 
Equipment and Installations
93.4

 
114.7

 
286.9

 
320.2

Site Services
16.0

 
16.0

 
48.8

 
46.9

Total DS&S
109.4

 
130.7

 
335.7

 
367.1

Corporate
0.6

 
0.8

 
1.8

 
2.4

Total
$
324.3

 
$
350.0

 
$
990.0

 
$
1,021.5



The following table summarizes revenue from contracts with customers related to the geographic area in which the company operates:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
(In millions)
 
 
 
 
 
 
 
Sales to External Customers
 
 
 
 
 
 
 
United States
$
100.0

 
$
111.4

 
$
296.6

 
$
308.8

Taiwan
61.7

 
57.7

 
185.9

 
180.3

South Korea
102.6

 
121.2

 
329.7

 
352.4

China
20.3

 
21.8

 
58.9

 
69.6

Europe
15.7

 
15.0

 
47.7

 
45.5

Asia, excluding China, Taiwan, and South Korea
24.0

 
22.9

 
71.2

 
64.9

Total
$
324.3

 
$
350.0

 
$
990.0

 
$
1,021.5



Contract Balances
 
The following tables provide information about contract assets and contract liabilities from contracts with customers. The contract assets primarily relate to our rights to consideration for products produced but not billed at the reporting date on contracts with certain customers. The contract assets are recognized as accounts receivables when the rights become unconditional and the customer has been billed. Contract liabilities represent obligations to transfer goods to a customer for which we have received consideration from our customer.


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A roll-forward of the company’s contracts in progress, less progress billings is as follows:
 
Nine Months Ended June 30, 2019
(In millions)
 
Beginning balance (1)
$
20.3

Change related to revenue in excess of billings
30.4

Ending balance (1)
$
50.7


(1) Beginning and ending balances are current

A roll-forward of the company’s deferred revenue is as follows:
 
Nine Months Ended June 30, 2019
(In millions)
 
Beginning balance (1)
$
18.7

Amount of deferred revenue recognized in income
(52.0
)
Additions to deferred revenue
39.0

Ending balance (1)
$
5.7


(1) Beginning and ending balances are current

4.BUSINESS SEPARATION, RESTRUCTURING AND COST REDUCTION ACTIONS

The charges we record for business restructuring and cost reduction actions have been excluded from segment operating income.

During the three and nine months ended June 30, 2019, we recognized a net charge of $141.4 million and $156.3 million, respectively. The net charge primarily consisted of the termination fee of $140.0 million paid to Entegris, Inc. (“Entegris”).

During the three and nine months ended June 30, 2018, we recognized a net charge of $6.7 million and $16.7 million, respectively. The net charge primarily consisted of additional costs as a result of the relocation of certain research and development activities and our headquarters and set up of the stand-alone organization and infrastructure.

The following table summarizes the carrying amount of the accrual for the business separation, restructuring and cost reduction actions at June 30, 2019:
 
Severance and
Other Benefits
(In millions)
 
Balance, September 30, 2018
$
3.2

Current Period Charge
0.1

Cash Payments
(1.1
)
Balance, June 30, 2019
$
2.2




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5.INVENTORIES

The components of inventories are as follows:
 
June 30, 2019
 
September 30, 2018
(In millions)

 
 
Inventories at FIFO cost
 
 
 
Finished goods
$
127.5

 
$
104.3

Work in process
14.7

 
15.1

Raw materials, supplies and other
64.1

 
57.7

Inventories
$
206.3

 
$
177.1



The cost for FIFO inventory approximates replacement cost.

6.GOODWILL

Changes to the carrying amount of goodwill by segment are as follows:
 
Materials
 
Delivery
Systems and
Services
 
Total
(In millions)
 
 
 
 
 
Balance, September 30, 2018
$
165.6

 
$
17.4

 
$
183.0

Currency translation adjustment
(0.4
)
 
(0.2
)
 
(0.6
)
Balance, June 30, 2019
$
165.2

 
$
17.2

 
$
182.4



Goodwill is subject to impairment testing in the fourth quarter of each fiscal year and whenever events and changes in circumstances indicate that the carrying value of goodwill might not be recoverable. There were no events or circumstances indicating that goodwill might be impaired at June 30, 2019.

7.DEBT

Components of Debt
 
June 30, 2019
 
September 30, 2018
(In millions)
 
 
 
Short-term borrowings(A)
$

 
$

Current portion of long-term debt
5.8

 
5.8

Long-term debt
971.2

 
974.2

Total Debt
$
977.0

 
$
980.0


(A)
Represents borrowing under foreign lines of credit by non-U.S. subsidiaries which are short term in nature. Availability under these lines of credit at June 30, 2019 was $19.9 million.


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Long-term debt
 
June 30, 2019
 
September 30, 2018
(In millions)
 
 
 
Term loan facility under Credit Agreement
$
559.2

 
$
563.5

Revolving facility under Credit Agreement

 

5.5% Senior Notes due 2024
425.0

 
425.0