Share-Based Compensation | SHARE-BASED COMPENSATION In accordance with the Employee Matters Agreement entered into between Versum and Air Products on September 29, 2016 in connection with the Separation, all share-based compensation awards previously granted to Versum employees under Air Products’ Long-Term Incentive Plan that were outstanding on October 1, 2016, other than restricted stock, were adjusted and converted into Versum equity with substantially the same terms and conditions as the original Air Products awards. To preserve the aggregate intrinsic value of these share-based compensation awards, as measured immediately before and immediately after the Separation, each holder of Air Products share-based compensation awards generally received an adjusted award denominated in Versum equity as follows: (a) Air Products stock options were converted into options to purchase Versum common stock, with the number and exercise price adjusted to maintain economic value; (b) Air Products time-based restricted stock units were converted to Versum time-based restricted stock units, with the number adjusted to maintain economic value; (c) Air Products performance shares in the form of market-based restricted stock units were converted to Versum market-based restricted stock units, with the number adjusted to maintain economic value; and (d) holders of Air Products restricted stock received one-half of a fully vested share of Versum common stock for every share of Air Products restricted stock held at the time of the Separation, as if such holder held fully vested Air Products common stock on the record date. The converted awards will continue to vest over the original vesting period defined at the grant date. Versum was allocated share-based compensation expense associated with its employees based on these adjusted and converted share-based compensation awards. As a result of the conversion, we have the following outstanding share-based compensation awards: (a) stock options; (b) time-based restricted stock units; and (c) market-based restricted stock units. In addition, during the three months ended December 31, 2016, under the Versum Long-Term Incentive Plan we made a one-time Founders grant of time-based restricted stock units and we made fiscal 2017 annual awards of market-based restricted stock units, consisting of performance-based restricted stock units and performance-based market stock units. Under all programs, the terms of the awards are fixed at the grant date. We issue new shares upon the payout of restricted stock units and the exercise of stock options. As of March 31, 2017 , there were 3.3 million shares available for future grant under the Versum Long-Term Incentive Plan. Share-based compensation awards cost recognized in the consolidated income statement is summarized below: Three Months Ended March 31, 2017 Six Months Ended March 31, 2017 (In millions) Before-Tax Share-Based Compensation Award Cost $ 1.9 $ 3.5 Income Tax Benefit 0.7 1.2 After-Tax Share-Based Compensation Award Cost $ 1.2 $ 2.3 Before-tax share-based compensation award cost is primarily included in selling and administrative expense on our consolidated income statements. Total before-tax share-based compensation award cost by type of program was as follows: Three Months Ended March 31, 2017 Six Months Ended March 31, 2017 (In millions) Restricted stock units $ 1.9 $ 3.4 Stock options — 0.1 Before-Tax Share-Based Compensation Cost $ 1.9 $ 3.5 Restricted Stock Units Converted share-based compensation awards . As a result of the conversion in connection with the Separation described above, Versum executive officers and employees have outstanding time-based restricted stock units and market-based restricted stock units. These converted restricted stock units entitle the recipient to one share of common stock and accumulated dividends upon vesting. The payout of the converted market-based restricted stock units is conditioned on continued employment during a three year deferral period subject to payout upon death, disability, or retirement. The earn-out amount of these awards is based on a formula to be determined by the Versum Compensation Committee. The converted time-based restricted stock units vest four years after the grant date subject to payout upon death, disability or retirement. Upon involuntary termination without cause, a pro rata portion of restricted stock units will vest. Dividend equivalents are paid in cash and equal the dividends that would have accrued on a share of stock from the grant date to the vesting date. New share-based compensation awards During the three months ended December 31, 2016, under the Versum Long-Term Incentive Plan we made a one-time Founders grant of 424,247 time-based restricted stock units at a weighted-average grant-date fair value of $22.53 per unit. One third of the Founders RSUs vest on October 1, 2018, one third vest on October 1, 2019, and one third vest on October 1, 2020, subject to the holder’s continued employment with the Company. In addition, during the three months ended December 31, 2016, under its Long-Term Incentive Plan Versum granted 304,520 market-based restricted stock units, consisting of performance-based restricted stock units and performance-based market stock units. The performance-based restricted stock units are earned at the end of a performance period beginning October 1, 2016 and ending September 30, 2019, conditioned on the level of Versum’s total shareholder return in relation to a defined peer group over the three -year performance period. The performance-based market stock units are earned based on the percentage change in the price of Versum’s common stock over the performance period beginning October 1, 2016 and ending September 30, 2019. Subject to the recipient’s continued employment, these restricted stock units generally vest on the date that the Versum Committee certifies the payout determination under the performance goals, which date must be within 90 days after the end of the performance period. Vesting is subject to certain exceptions in the event of involuntary termination by Versum, death, disability or retirement. Under GAAP, both the performance-based restricted stock units and performance-based market stock units are considered market-based awards. Upon vesting, each restricted stock unit represents the right to receive one share of our common stock. Dividend equivalent rights accrue for these awards, but do not vest unless the underlying awards vest. The market-based restricted stock units awarded during the three months ended December 31, 2016 had an estimated grant-date fair value of $29.68 per unit for the performance-based restricted stock units and $28.37 for the performance-based market stock units. The fair value of market-based restricted stock units was estimated using a Monte Carlo simulation model as these equity awards are tied to a market condition. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period; however, expense recognition is accelerated for retirement eligible individuals who meet the requirements for vesting upon retirement. The calculation of the fair value of market-based restricted stock units during the three months ended December 31, 2016 used the following assumptions: (In percentages) Expected volatility 28.7 % Risk-free interest rate 1.4 % A summary of restricted stock unit activity is presented below: Shares Weighted Average Grant-Date Fair Value (In millions, except weighted average) Outstanding, September 30, 2016 — $ — Converted on October 1, 2016 0.5 22.85 Granted 0.7 25.30 Paid out (0.1 ) 15.55 Forfeited/adjustments — — Outstanding at March 31, 2017 1.1 $ 25.30 No cash payments were made for restricted stock units for the three and six months ended March 31, 2017 . As of March 31, 2017 , there was $18.1 million of unrecognized compensation cost related to restricted stock units. The cost is expected to be recognized over a weighted average period of 3.0 years . The total fair value of restricted stock units paid out during the three and six months ended March 31, 2017 , including shares vested in prior periods, was $0.2 million and $1.7 million , respectively. Stock Options We may grant awards of options to purchase common stock to executive officers and selected employees. All of our outstanding stock options are a result of the conversion in connection with the Separation as described above. The exercise price of stock options equals the market price of our stock on the date of the grant. Options generally vest incrementally over three years, and remain exercisable for ten years from the date of grant. During the three and six months ended March 31, 2017 , no stock options were granted. A summary of stock option activity is presented below: Shares Weighted Average Exercise Price (In millions, except weighted average) Outstanding, September 30, 2016 — $ — Converted on October 1, 2016 0.5 18.37 Granted — — Exercised — — Forfeited — — Outstanding at March 31, 2017 0.5 $ 18.36 Weighted Average Remaining Contractual Terms (In years) Aggregate Intrinsic Value (In millions, except years) Outstanding at March 31, 2017 5.9 $ 6.3 Exercisable at March 31, 2017 5.8 6.2 The aggregate intrinsic value represents the amount by which our closing stock price of $30.60 as of March 31, 2017 exceeds the exercise price multiplied by the number of in-the-money options outstanding or exercisable. The total intrinsic value of stock options exercised during the three and six months ended March 31, 2017 was $0.1 million . Compensation cost is generally recognized over the stated vesting period consistent with the terms of the arrangement (i.e., either on a straight-line or graded-vesting basis). Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. As of March 31, 2017 , there was $0.1 million of unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 0.6 years. |