The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share and per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our'') supplies high-performance polishing slurries and pads used in the manufacture of advanced integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP). CMP polishes surfaces at an atomic level, thereby helping to enable IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. We develop, produce and sell CMP slurries for polishing many of the conducting and insulating materials used in IC devices, and also for polishing the disk substrates and magnetic heads used in hard disk drives. We develop, manufacture and sell CMP polishing pads, which are used in conjunction with slurries in the CMP process. We also develop and provide products for demanding surface modification applications in other industries through our Engineered Surface Finishes (ESF) business. For additional information, refer to Part 1, Item 1, "Business", in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
The unaudited consolidated financial statements have been prepared by Cabot Microelectronics pursuant to the rules of the Securities and Exchange Commission (SEC) and accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, these unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of Cabot Microelectronics' financial position as of June 30, 2017, cash flows for the nine months ended June 30, 2017, and June 30, 2016, and results of operations for the three and nine months ended June 30, 2017, and June 30, 2016. The consolidated balance sheet as of September 30, 2016 was derived from audited financial statements, but does not contain all of the footnote disclosures from the annual financial statements. The results of operations for the three and nine months ended June 30, 2017 may not be indicative of results to be expected for future periods, including the fiscal year ending September 30, 2017. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated as of
June 30, 2017
.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management's most challenging and subjective judgments include, but are not limited to, those estimates related to
bad debt expense, inventory valuation, valuation and classification of auction rate securities, impairment of long-lived assets and investments, business combinations, goodwill, other intangible assets, interest rate swaps, share-based compensation, income taxes and contingencies.
We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates under different assumptions or conditions.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. Our allowance for doubtful accounts is based on historical collection experience, adjusted for any specific known conditions or circumstances such as customer bankruptcies and increased risk due to economic conditions. Amounts charged to bad debt expense are recorded in general and administrative expenses. A portion of our receivables and the related allowance for doubtful accounts is denominated in foreign currencies, so they are subject to foreign exchange fluctuations. Uncollectible account balances are charged against the allowance when we believe that it is probable that the receivable will not be recovered.
At June 30, 2017, our accounts receivable balance with Toshiba Corporation ("Toshiba") represented a U.S. dollar equivalent of $2,682, which equates to 4.0% of our total accounts receivable balance of $66,338, net of allowance for doubtful accounts, and of which no amounts are past due. We continue to monitor the financial condition of Toshiba and its ability to make the required payments due on our receivables. At present, we do not believe it is probable that the receivables from Toshiba are impaired, and accordingly, we have not recorded a related allowance for doubtful accounts
.
On October 22, 2015, the Company completed the acquisition of 100% of the outstanding stock of NexPlanar Corporation (NexPlanar), a privately held, U.S. based company specializing in the development, manufacture and sale of advanced CMP pad solutions for the semiconductor industry. We acquired NexPlanar to expand our polishing pad portfolio by adding a complementary pad technology and to leverage our global infrastructure to better serve customers on a global basis, including offering performance-advantaged slurry and pad consumable sets.
We paid a total of $126,976, including total purchase consideration of $142,237, less cash acquired of $15,261. The purchase consideration includes $142,167 paid at the date of acquisition and
$70 for a post-closing adjustment.
In addition, we paid $154 in compensation expense related to certain unvested NexPlanar stock options settled in cash at the acquisition date.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition:
Total purchase consideration
|
|
$
|
142,237
|
|
|
|
|
|
|
Cash
|
|
$
|
15,261
|
|
Accounts receivable
|
|
|
3,052
|
|
Inventories
|
|
|
2,768
|
|
Prepaid expenses and other current assets
|
|
|
1,712
|
|
Property, plant and equipment
|
|
|
6,901
|
|
Intangible assets
|
|
|
55,000
|
|
Deferred tax assets
|
|
|
20,509
|
|
Other long-term assets
|
|
|
1,458
|
|
Accounts payable
|
|
|
(1,057
|
)
|
Accrued expenses and other current liabilities
|
|
|
(1,472
|
)
|
Deferred tax liabilities
|
|
|
(20,313
|
)
|
Total identifiable net assets
|
|
|
83,819
|
|
Goodwill
|
|
|
58,418
|
|
|
|
$
|
142,237
|
|
The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. We finalized the purchase price allocation during the fourth quarter of fiscal 2016. We believe that the information we used provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed.
The fair values of identifiable assets and liabilities acquired were developed with the assistance of third party valuation firms. The fair value of acquired property, plant and equipment is valued at its "value-in-use" as there are no known plans to dispose of any assets. The fair value of acquired identifiable intangible assets was determined using the "income approach" on an individual asset basis. The key assumptions used in the calculation of the discounted cash flows include projected revenue, gross margin, operating expenses, and discount rate. The valuations and the underlying assumptions have been deemed reasonable by Company management. There are inherent uncertainties and management judgment required in these determinations.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:
|
|
Fair
|
|
Useful
|
|
|
Value
|
|
Life
|
Trade name
|
|
$
|
8,000
|
|
7 years
|
Customer relationships
|
|
|
8,000
|
|
11 years
|
Developed technology - product family A
|
|
|
32,000
|
|
7 years
|
Developed technology - product family B
|
|
|
2,000
|
|
9 years
|
In-process technology
|
|
|
5,000
|
|
|
Total intangible assets
|
|
$
|
55,000
|
|
|
The trade name represents the estimated fair value of the brand and name recognition associated with the marketing of NexPlanar's product offerings. Customer relationships represent the estimated fair value of the underlying relationships and agreements with NexPlanar customers. Developed technology represents the estimated fair value of NexPlanar's technology, processes and knowledge regarding its product offerings. In-process technology represents the fair value assigned to technology projects under development as of the acquisition date. The in-process technology assets are capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, we will make a determination of the appropriate useful life and the related amortization will be recorded as an expense over the estimated useful life based on the future expected cash flow stream. In the fourth quarter of fiscal 2016, we recorded impairment expense of $1,000 representing the entire fair value of one of the in-process technology assets as management determined that expected future cash flows were insufficient to support the value of the asset. The intangible assets subject to amortization have a weighted average useful life of 7.7 years and are being amortized on a straight-line basis.
The excess of purchase consideration over the fair value of net assets acquired was recorded as goodwill, and is not deductible for income tax purposes. The goodwill is primarily attributable to anticipated revenue growth from the combination of our and NexPlanar pad technologies, expected synergies from the combined operations, and the assembled workforce of NexPlanar. NexPlanar's results of operations have been included in our unaudited consolidated statements of income and comprehensive income from the date of acquisition.
The following supplemental pro forma information summarizes the combined results of operations for Cabot Microelectronics and NexPlanar as if the acquisition had occurred on October 1, 2014.
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Revenue
|
|
$
|
108,152
|
|
|
$
|
309,172
|
|
Net income
|
|
|
18,412
|
|
|
|
39,915
|
|
Earnings per share - basic
|
|
|
0.76
|
|
|
|
1.65
|
|
Earnings per share - diluted
|
|
$
|
0.75
|
|
|
$
|
1.62
|
|
The historical financial information has been adjusted to give effect to the pro forma adjustments, which consist of amortization expense associated with intangible assets, and the elimination of interest expense on NexPlanar debt repaid prior to the acquisition. The pro forma amounts for the nine months ended June 30, 2016 exclude the impact of compensation expense related to unvested NexPlanar stock options settled in cash, and the step-up of inventory as these items are assumed to have occurred during the quarter ended December 31, 2014 had the acquisition been completed on October 1, 2014. The pro forma consolidated results are not necessarily indicative of what the consolidated results actually would have been had the acquisition been completed on October 1, 2014. The pro forma consolidated results do not purport to project future results of combined operations, nor do they reflect the expected realization of any revenue or cost synergies associated with the acquisition.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB established a three-level hierarchy for disclosure based on the extent and level of judgment used to estimate fair value. Level 1 inputs consist of valuations based on quoted market prices in active markets for identical assets or liabilities. Level 2 inputs consist of valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in an inactive market, or other observable inputs. Level 3 inputs consist of valuations based on unobservable inputs that are supported by little or no market activity.
The following table presents financial instruments, other than long-term debt, that we measured at fair value on a recurring basis at June 30, 2017 and September 30, 2016. See Note 8 for a detailed discussion of our long-term debt. We have classified the following assets and liabilities in accordance with the fair value hierarchy set forth in the applicable standards. In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest-level input that is significant to the determination of the fair value.
June 30, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
363,902
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
363,902
|
|
Other long-term investments
|
|
|
1,153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,153
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
261
|
|
|
|
-
|
|
|
|
261
|
|
Total assets
|
|
$
|
365,055
|
|
|
$
|
261
|
|
|
$
|
-
|
|
|
$
|
365,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
822
|
|
|
|
-
|
|
|
|
822
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
822
|
|
|
$
|
-
|
|
|
$
|
822
|
|
September 30, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
287,479
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
287,479
|
|
Other long-term investments
|
|
|
1,028
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,028
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
28
|
|
Total assets
|
|
$
|
288,507
|
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
288,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
1,469
|
|
|
|
-
|
|
|
|
1,469
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,469
|
|
|
$
|
-
|
|
|
$
|
1,469
|
|
Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active markets. We invest exclusively in AAA- rated, prime institutional money market funds, comprised of high quality, short-term fixed income securities. Our other long-term investments represent the fair value of investments under the Cabot Microelectronics Supplemental Employee Retirement Plan (SERP), which is a nonqualified supplemental savings plan. The fair value of the investments is determined through quoted market prices within actively traded markets. Although the investments are allocated to individual participants and investment decisions are made solely by those participants, the SERP is a nonqualified plan. Consequently, the Company owns the assets and the related offsetting liability for disbursement until such time as participant makes a qualifying withdrawal. The long-term asset was adjusted to $1,153 in the third quarter of fiscal 2017 to reflect its fair value as of June 30, 2017.
Our derivative financial instruments include forward foreign exchange contracts and interest rate swaps. In the first quarter of fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. These interest rate swaps represent our primary use of derivative financial instruments. The fair value of our derivative instruments is estimated using standard valuation models using market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments. See Note 9 of this Form 10-Q for more information on our use of derivative financial instruments.
4. INVENTORIES
Inventories consisted of the following:
|
|
June 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
38,209
|
|
|
$
|
45,109
|
|
Work in process
|
|
|
6,332
|
|
|
|
4,668
|
|
Finished goods
|
|
|
26,218
|
|
|
|
22,346
|
|
Total
|
|
$
|
70,759
|
|
|
$
|
72,123
|
|
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $101,812 as of June 30, 2017, and $100,639 as of September 30, 2016. The increase in goodwill was due to $1,028 in foreign exchange fluctuations of the New Taiwan dollar and an adjustment of $145 to a deferred tax liability.
The components of other intangible assets are as follows:
|
|
June 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product technology
|
|
$
|
42,278
|
|
|
$
|
16,396
|
|
|
$
|
42,194
|
|
|
$
|
12,718
|
|
Acquired patents and licenses
|
|
|
8,270
|
|
|
|
8,239
|
|
|
|
8,270
|
|
|
|
8,155
|
|
Trade secrets and know-how
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
Customer relationships, distribution rights and other
|
|
|
28,194
|
|
|
|
14,654
|
|
|
|
27,900
|
|
|
|
12,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets subject to amortization
|
|
|
81,292
|
|
|
|
41,839
|
|
|
|
80,914
|
|
|
|
35,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process technology
|
|
|
4,000
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
Other indefinite-lived intangibles*
|
|
|
1,190
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
Total other intangible assets not subject to amortization
|
|
|
5,190
|
|
|
|
|
|
|
|
5,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
86,482
|
|
|
$
|
41,839
|
|
|
$
|
86,104
|
|
|
$
|
35,628
|
|
*Other indefinite-lived intangible assets not subject to amortization consist primarily of trade names.
Amortization expense on our intangible assets was $1,935 and $5,860 for the three and nine months ended June 30, 2017, respectively, and was $2,072 and $6,026 for the three and nine months ended and June 30, 2016, respectively. Estimated future amortization expense for the five succeeding fiscal years is as follows:
|
Fiscal Year
|
|
Estimated
Amortization
Expense
|
|
|
Remainder of 2017
|
|
$
|
1,934
|
|
|
2018
|
|
|
7,117
|
|
|
2019
|
|
|
6,675
|
|
|
2020
|
|
|
6,670
|
|
|
2021
|
|
|
6,664
|
|
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of the fiscal year or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. An entity has the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). Similarly, an entity has the option to use a step zero or a step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2016, we chose to use a step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment.
We completed our annual impairment test during our fourth quarter of fiscal 2016 and recorded $1,000 of impairment expense on one of the in-process technology assets acquired in the NexPlanar acquisition during the fourth quarter of 2016 based on management's expected future cash flows for this asset. There were no indicators of potential impairment during the quarter ended June 30, 2017, so it was not necessary to perform an impairment review for goodwill and indefinite-lived intangible assets during the quarter. There have been no cumulative impairment charges recorded on the goodwill for any of our reporting units.
6. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
|
|
June 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Auction rate securities (ARS)
|
|
$
|
5,319
|
|
|
$
|
5,494
|
|
Other long-term assets
|
|
|
2,505
|
|
|
|
2,620
|
|
Long-term contract asset
|
|
|
2,350
|
|
|
|
2,900
|
|
Other long-term investments
|
|
|
1,153
|
|
|
|
1,028
|
|
Total
|
|
$
|
11,327
|
|
|
$
|
12,042
|
|
Our ARS investments at June 30, 2017 consisted of two tax exempt municipal debt securities with a total par value of $5,319, both of which have maturities greater than ten years. The fair value of our ARS, determined using level 2 fair value inputs, was $4,877 as of June 30, 2017. We have classified our ARS as held-to-maturity based on our intention and ability to hold the securities until maturity. We believe the gross unrecognized loss of $442 is due to the illiquidity in the ARS market, rather than to credit loss. Although we believe these securities will ultimately be collected in full, we believe that it is not likely that we will be able to monetize the securities in our next business cycle (which for us is generally one year). We will continue to monitor our ARS for impairment indicators, which may require us to record an impairment charge that is deemed other-than-temporary.
In the third quarter of fiscal 2015, we amended a supply contract with an existing supplier. The amended agreement includes a fee of $4,500, which provides us the option to purchase certain raw materials beyond calendar 2016. This fee was recorded as a long-term asset at its present value and is being amortized into cost of goods sold on a straight-line basis through December 31, 2019, the expiration date of the agreement. See Note 10 for more information regarding this contract.
Other long-term assets are comprised of the long-term portion of prepaid unamortized debt costs, related to our Revolving Credit Facility, as well as miscellaneous deposits and prepayments on contracts extending beyond the next 12 months. As discussed in Note 8, we reclassified $435 of prepaid debt costs related to our Term Loan out of other long-term assets as of September 30, 2016, in accordance with the adoption of a new accounting pronouncement. As discussed in Note 3, we recorded a long-term asset and a corresponding long-term liability of $1,153 representing the fair value of our SERP investments as of June 30, 2017.
7. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
|
|
June 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
25,677
|
|
|
$
|
17,856
|
|
Income taxes payable
|
|
|
5,606
|
|
|
|
7,878
|
|
Dividends payable
|
|
|
5,267
|
|
|
|
4,502
|
|
Raw materials received, not yet invoiced
|
|
|
3,731
|
|
|
|
2,648
|
|
Deferred revenue and customer advances
|
|
|
1,264
|
|
|
|
782
|
|
Warranty accrual
|
|
|
249
|
|
|
|
243
|
|
Taxes, other than income taxes
|
|
|
1,583
|
|
|
|
775
|
|
Current portion of long-term contract liability
|
|
|
1,500
|
|
|
|
1,500
|
|
Other accrued expenses
|
|
|
4,418
|
|
|
|
5,211
|
|
Total
|
|
$
|
49,295
|
|
|
$
|
41,395
|
|
8. DEBT
On February 13, 2012, we entered into a credit agreement (the "Credit Agreement") among the Company, as Borrower, Bank of America, N.A., as administrative agent, swing line lender and an L/C issuer, Bank of America, Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, JPMorgan Chase Bank, N.A., as syndication agent, and Wells Fargo Bank, N.A. as documentation agent. The Credit Agreement provided us with a $175,000 term loan (the "Term Loan"), which we drew on February 27, 2012 to fund approximately half of the special cash dividend we paid to our stockholders on March 1, 2012, and a $100,000 revolving credit facility (the "Revolving Credit Facility"), which has never been drawn, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans. The Term Loan and the Revolving Credit Facility are referred to as the "Credit Facilities." On June 27, 2014, we entered into an amendment (the "Amendment") to the Credit Agreement, which (i) increased term loan commitments by $17,500 from $157,500 to $175,000, the same level as the original amount under the Credit Agreement at its inception in 2012; (ii) increased the uncommitted accordion feature on the Revolving Credit Facility from $75,000 to $100,000; (iii) extended the expiration date of the Credit Facilities from February 13, 2017 to June 27, 2019; (iv) relaxed the consolidated leverage ratio financial covenant; and (v) revised certain pricing terms and other terms within the Credit Agreement. On June 27, 2014, we drew the $17,500 of increased term loan commitments, bringing the total outstanding commitments under the Term Loan to $175,000.
Borrowings under the amended Credit Facilities (other than in respect of swing-line loans) bear interest at a rate per annum equal to the "Applicable Rate" (as defined below) plus, at our option, either (1) a LIBOR rate determined by reference to the cost of funds for deposits in the relevant currency for the interest period relevant to such borrowing or (2) the "Base Rate", which is the highest of (x) the prime rate of Bank of America, N.A., (y) the federal funds rate plus 1/2 of 1.00% and (z) the one-month LIBOR rate plus 1.00%. The current Applicable Rate for borrowings under the Credit Facilities is 1.50%, as amended, with respect to LIBOR borrowings and 0.25% with respect to Base Rate borrowings, with such Applicable Rate subject to adjustment based on our consolidated leverage ratio. Swing-line loans bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the Revolving Credit Facility. In addition to paying interest on outstanding principal under the Credit Agreement, we pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. As amended, the fee ranges from 0.20% to 0.30%, based on our consolidated leverage ratio. Interest expense and commitment fees are paid according to the relevant interest period and no less frequently than at the end of each calendar quarter. We also pay letter of credit fees as necessary. The Term Loan has periodic scheduled repayments; however, we may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary "breakage" fees and reemployment costs in the case of LIBOR borrowings. All obligations under the Credit Agreement are guaranteed by certain of our existing and future direct and indirect domestic subsidiaries. The obligations under the Credit Agreement and guarantees of those obligations are secured, subject to certain exceptions, by first priority liens and security interests in the assets of the Company and certain of its domestic subsidiaries.
In the first quarter of fiscal 2017, we adopted the provisions of Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03) and ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements". The provisions of ASU 2015-03 require an entity to present the debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction to the carrying amount of that debt liability. ASU 2015-03 requires adoption on a retrospective basis, wherein the balance sheet of each individual period should be adjusted to reflect the period-specific effects of the guidance. ASU 2015-15 provides guidance on the treatment of debt issuance costs related to line-of-credit arrangements based on comments provided by the SEC staff. The SEC staff stated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. In accordance with this guidance, we have separated our debt issuance costs between those attributable to our Term Loan and those attributable to our Revolving Credit Facility. The debt issuance costs attributable to our Term Loan are presented as a reduction of the long-term debt balance on our Consolidated Balance Sheet, while the debt issuance costs attributable to our Revolving Credit Facility remain in prepaid expenses and other current assets, and other long-term assets. As of June 30, 2017, $504 of debt issuance costs related to our Term Loan are presented as a reduction of long-term debt. Debt issuance costs related to our Revolving Credit Facility are not material. As of September 30, 2016, we have reclassified $261 and $435 of debt issuance costs related to our Term Loan from prepaid expenses and other current assets, and other long-term assets, respectively, and presented them as a reduction of our long-term debt on our Consolidated Balance Sheet.
The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents. The Credit Agreement requires us to comply with certain financial ratio maintenance covenants. These include a maximum consolidated leverage ratio of 2.75 to 1.00 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00 for the period January 1, 2016 through the expiration of the Credit Agreement. As of June 30, 2017, our consolidated leverage ratio was
0.97
to 1.00 and our consolidated fixed charge coverage ratio was
3.47
to 1.00. The Credit Agreement also contains customary affirmative covenants and events of default. We believe we are in compliance with these covenants.
At June 30, 2017, the fair value of the Term Loan, using level 2 inputs, approximates its carrying value of $147,657 as the loan bears a floating market rate of interest. As of June 30, 2017, $9,844 of the debt outstanding is classified as short-term.
Principal repayments of the Term Loan are generally made on the last calendar day of each quarter if that day is considered to be a business day. As of June 30, 2017, scheduled principal repayments of the Term Loan were as follows:
|
Fiscal Year
|
|
Principal
Repayments
|
|
|
2018
|
|
|
14,219
|
|
|
2019
|
|
|
133,438
|
|
|
Total
|
|
$
|
147,657
|
|
9. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates. We enter into certain derivative transactions to mitigate the volatility associated with these exposures. We have policies in place that define acceptable instrument types we may enter into and we have established controls to limit our market risk exposure. We do not use derivative financial instruments for trading or speculative purposes. In addition, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value on a gross basis.
Cash Flow Hedges – Interest Rate Swap Agreements
In the first quarter of fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on $86,406 of our outstanding variable rate debt. The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal repayment of debt. The notional value of the swaps was $73,828 as of June 30, 2017, and the swaps are scheduled to expire on June 27, 2019.
We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income. Hedge effectiveness is tested quarterly to determine if hedge treatment continues to be appropriate.
Foreign Currency Contracts Not Designated as Hedges
Periodically we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. Our foreign exchange contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on our forward foreign exchange contracts are recognized as other income or expense in the accompanying consolidated income statements in the period in which the exchange rates change. As of June 30, 2017 and September 30, 2016, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for other international currencies were $6,304 and $8,858, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for other international currencies were $20,145 and $15,635, respectively.
The fair value of our derivative instruments included in the Consolidated Balance Sheet, which was determined using level 2 inputs, was as follows:
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value at
June 30, 2017
|
|
|
Fair Value at September 30, 2016
|
|
|
Fair Value at
June 30, 2017
|
|
|
Fair Value at September 30, 2016
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Other noncurrent assets
|
|
$
|
152
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
724
|
|
|
$
|
612
|
|
|
Other long-term liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
109
|
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98
|
|
|
$
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effect of our derivative instruments on our Consolidated Statement of Income for the three and nine months ended June 30, 2017 and 2016:
|
|
Gain (Loss) Recognized in Statement of Income
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Statement of Income Location
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other income (loss), net
|
|
$
|
(235
|
)
|
|
$
|
440
|
|
|
$
|
(1,709
|
)
|
|
$
|
952
|
|
The interest rate swap agreements were deemed to be effective since inception, so there was no impact on our Consolidated Statement of Income. We recorded a $819 unrealized gain in accumulated comprehensive income during the nine months ended June 30, 2017 for these interest rate swaps. During the next 12 months, we expect approximately $98 may be reclassified from accumulated other comprehensive income into interest expense related to our interest rate swaps based on projected rates using the LIBOR forward curve as of June 30, 2017.
10. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we periodically become a party to legal proceedings in the ordinary course of business.
Refer to Note 18 of "Notes to the Consolidated Financial Statements" in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, for additional information regarding commitments and contingencies.
PRODUCT WARRANTIES
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements, and costs related to such replacement. The warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Our warranty reserve activity during the first nine months of fiscal 2017 was as follows:
Balance as of September 30, 2016
|
|
$
|
243
|
|
Reserve for product warranty during the reporting period
|
|
|
389
|
|
Settlement of warranty
|
|
|
(383
|
)
|
Balance as of June 30, 2017
|
|
$
|
249
|
|
POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS
We have defined benefit plans covering employees in certain foreign jurisdictions as required by local law, which are unfunded. Benefit costs, consisting primarily of service costs, are recorded as fringe benefit expense under cost of goods sold and operating expenses in our Consolidated Statements of Income. The projected benefit obligations and accumulated benefit obligations under all such unfunded plans are updated annually during the fourth quarter of the fiscal year. Benefit payments under all such unfunded plans to be paid over the next 10 years are expected to be approximately $3,888. For more information regarding these plans, refer to Note 18 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
PURCHASE OBLIGATIONS
Purchase obligations include our take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services. We have a fumed silica supply agreement with Cabot Corporation, which is not a related party and has not been one since 2002, the current term of which runs through December 31, 2019. It provides us the option to purchase fumed silica for the remaining term of the agreement beyond calendar year 2016, for which we will pay a fee of $1,500 in each of calendar years 2017, 2018 and 2019, of which the 2017 payment has already been made. The present value of the remaining fees was $2,920 as of June 30, 2017. The 2018 payment of $1,500 is included in accrued expenses and the remaining $1,420 is included in other long-term liabilities on our Consolidated Balance Sheet. As of June 30, 2017, purchase obligations include $
9,631
of contractual commitments related to our Cabot Corporation supply agreement for fumed silica.
CONTINGENCIES
Our subsidiary in South Korea was under an audit in the normal course of business by the Korean customs authority for the period from fiscal years 2011 through 2016. We recorded an assessment in cost of goods sold during the third quarter of fiscal 2017, which was not material to our financial statements. Subsequent to June 30, 2017, but prior to the issuance of our financial statements, we paid the assessment and received notice that this matter was closed.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (AOCI), including the reclassification adjustments for items that are reclassified from AOCI to net income, are shown below:
|
|
Foreign
Currency
Translation
|
|
|
Cash Flow
Hedges
|
|
|
Pension and
Other
Postretirement
Liabilities
|
|
|
Total
|
|
Balance at September 30, 2016
|
|
$
|
11,985
|
|
|
$
|
(817
|
)
|
|
$
|
(1,612
|
)
|
|
$
|
9,556
|
|
Foreign currency translation adjustment, net of tax of $(1,814)
|
|
|
(6,326
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,326
|
)
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $610
|
|
|
-
|
|
|
|
1,088
|
|
|
|
-
|
|
|
|
1,088
|
|
Reclassification adjustment into earnings, net of tax of $(150)
|
|
|
-
|
|
|
|
(269
|
)
|
|
|
-
|
|
|
|
(269
|
)
|
Balance at June 30, 2017
|
|
$
|
5,659
|
|
|
$
|
2
|
|
|
$
|
(1,612
|
)
|
|
$
|
4,049
|
|
|
|
Foreign
Currency
Translation
|
|
|
Cash Flow
Hedges
|
|
|
Pension and
Other
Postretirement
Liabilities
|
|
|
Total
|
|
Balance at September 30, 2015
|
|
$
|
(4,011
|
)
|
|
$
|
(901
|
)
|
|
$
|
(1,178
|
)
|
|
$
|
(6,090
|
)
|
Foreign currency translation adjustment, net of tax of $1,613
|
|
|
10,152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,152
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(90)
|
|
|
-
|
|
|
|
(164
|
)
|
|
|
-
|
|
|
|
(164
|
)
|
Reclassification adjustment into earnings, net of tax of $(56)
|
|
|
-
|
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
(101
|
)
|
Change in pension and other postretirement liabilities, net of tax of $287
|
|
|
-
|
|
|
|
-
|
|
|
|
287
|
|
|
|
287
|
|
Balance at June 30, 2016
|
|
$
|
6,141
|
|
|
$
|
(1,166
|
)
|
|
$
|
(891
|
)
|
|
$
|
4,084
|
|
The before tax amounts reclassified from OCI to net income during the nine months ended June 30, 2017 and 2016, related to our cash flow hedges, were recorded as interest expense on our Consolidated Statement of Income. For the nine month ended June 30, 2017, we recorded $6,326 in currency translation losses, net of tax, that are included in other comprehensive income, primarily due to exchange rate fluctuations in the Japanese yen and Korean won versus the U.S. dollar. These losses primarily relate to changes in the U.S. dollar value of assets and liabilities denominated in local currencies when these asset and liability amounts are translated at month-end exchange rates.
12. SHARE-BASED COMPENSATION PLANS
We issue share-based awards under the following programs: our Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 (OIP); our Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated January 1, 2010 (ESPP); and, pursuant to the OIP, our Directors' Deferred Compensation Plan, as amended September 23, 2008 (DDCP), and our 2001 Executive Officer Deposit Share Program (DSP). In March 2017, our stockholders reapproved the material terms of performance-based awards under the OIP for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended. Prior to March 2012, when our stockholders first approved the OIP, we issued share-based payments under our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan, as amended and restated September 23, 2008 (EIP); our ESPP, and, pursuant to the EIP, the DDCP and DSP. For additional information regarding these programs, refer to Note 13 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Other than the ESPP, all share-based payments granted beginning March 6, 2012 are made from the OIP, and since then, the EIP no longer has been available for any awards.
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement-eligible pursuant to their grants during the contractual term of the grant. The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
Share-based compensation expense for the three and nine months ended June 30, 2017, and 2016, was as follows:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
577
|
|
|
$
|
521
|
|
|
$
|
1,670
|
|
|
$
|
1,590
|
|
Research, development and technical
|
|
|
444
|
|
|
|
392
|
|
|
|
1,322
|
|
|
|
1,226
|
|
Selling and marketing
|
|
|
346
|
|
|
|
412
|
|
|
|
1,032
|
|
|
|
1,227
|
|
General and administrative
|
|
|
1,884
|
|
|
|
1,051
|
|
|
|
5,692
|
|
|
|
7,140
|
|
Total share-based compensation expense
|
|
|
3,251
|
|
|
|
2,376
|
|
|
|
9,716
|
|
|
|
11,183
|
|
Tax benefit
|
|
|
(1,052
|
)
|
|
|
(385
|
)
|
|
|
(3,219
|
)
|
|
|
(3,373
|
)
|
Total share-based compensation expense, net of tax
|
|
$
|
2,199
|
|
|
$
|
1,991
|
|
|
$
|
6,497
|
|
|
$
|
7,810
|
|
Our non-employee directors received annual equity awards in March 2017, pursuant to the OIP. The award agreements provide for immediate vesting of the award at the time of termination of service for any reason other than by reason of Cause, Death, Disability or a Change in Control, as defined in the OIP, if at such time the non-employee director has completed an equivalent of at least two full terms as a director of the Company, as defined in the Company's bylaws. Two of the Company's non-employee directors had completed at least two full terms of service as of the date of the March 2017 award. Consequently, the requisite service period for the award has already been satisfied and we recorded the fair value of $377 of the awards to these two directors to share-based compensation expense in the fiscal quarter ended March 31, 2017, rather than recording that expense over the one-year vesting period stated in the award agreement, as is done for the other non-employee directors who received an annual equity award in March 2017.
In conjunction with our acquisition of NexPlanar in October 2015, share-based compensation expense for the three months ended December 31, 2015, included $605 related to certain unvested NexPlanar incentive stock options (ISOs) settled in cash at the acquisition date, of which $451 was reversed in the third quarter of fiscal 2016. We also substituted certain NexPlanar ISOs with Cabot Microelectronics Corporation ISOs, preserving the intrinsic value, including the original vesting periods, of the original awards. We accelerated the vesting on the substitute awards made to certain individuals based on the terms of their employment agreements with NexPlanar, and recorded $492 of share-based compensation expense related to this acceleration. The total $1,097 of acquisition-related compensation is included in the table above as general and administrative expense for the nine months ended June 30, 2016.
For additional information regarding the estimation of fair value, refer to Note 13 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
13.
|
OTHER INCOME (EXPENSE), NET
|
Other income (expense), net, consisted of the following:
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
659
|
|
|
$
|
267
|
|
|
$
|
1,596
|
|
|
$
|
654
|
|
Other income (expense)
|
|
|
(774
|
)
|
|
|
(513
|
)
|
|
|
(481
|
)
|
|
|
(258
|
)
|
Total other income (expense), net
|
|
$
|
(115
|
)
|
|
$
|
(246
|
)
|
|
$
|
1,115
|
|
|
$
|
396
|
|
Other income (expense) primarily represents gains and losses recorded on transactions denominated in foreign currencies. The increase in other income was primarily due to the impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency, net of the gains and losses incurred on forward foreign exchange contracts discussed in Note 9.
14. INCOME TAXES
Our effective income tax rate was 22.4% and 21.1% for the three and nine months ended June 30, 2017, respectively, compared to a 9.6% and 14.2% effective income tax rate for the three and nine months ended June 30, 2016. The increase in the effective tax rate during the first nine months of fiscal 2017 was primarily due to changes in the jurisdictional mix of income, and the absence of the retroactive reinstatement of the research and experimentation tax credit in December 2015, and the benefit of $0.9 million in domestic production deductions recorded in fiscal 2016.
The Company is currently operating under a tax holiday in South Korea in conjunction with our investment in research, development and manufacturing facilities there. This arrangement allows for a tax at 50% of the local statutory rate in effect for fiscal years 2016 and 2017, following a 0% tax rate in fiscal years 2013, 2014 and 2015. This tax holiday reduced our income tax provision by approximately $3,094 and $2,717 in the first nine months of fiscal 2017 and 2016, respectively. This tax holiday increased our diluted earnings per share by approximately $0.12 and $0.11 during the nine month ended June 30, 2017 and 2016, respectively.
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards that have a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC 260. Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.
The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. Basic and diluted earnings per share were calculated as follows:
|
|
Three Months Ended
June 30,
|
|
|
Nine Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
19,939
|
|
|
$
|
18,702
|
|
|
$
|
60,450
|
|
|
|
39,142
|
|
Less: income attributable to participating securities
|
|
|
(52
|
)
|
|
|
(110
|
)
|
|
|
(191
|
)
|
|
|
(260
|
)
|
Earnings available to common shares
|
|
$
|
19,887
|
|
|
$
|
18,592
|
|
|
$
|
60,259
|
|
|
|
38,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
25,228,468
|
|
|
|
23,928,512
|
|
|
|
24,941,190
|
|
|
|
24,022,809
|
|
(Denominator for basic calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
492,247
|
|
|
|
396,654
|
|
|
|
508,317
|
|
|
|
380,071
|
|
Diluted weighted average common shares
|
|
|
25,720,715
|
|
|
|
24,325,166
|
|
|
|
25,449,507
|
|
|
|
24,402,880
|
|
(Denominator for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.79
|
|
|
$
|
0.78
|
|
|
$
|
2.42
|
|
|
|
1.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.77
|
|
|
$
|
0.76
|
|
|
$
|
2.37
|
|
|
|
1.59
|
|
For the three months ended June 30, 2017 and 2016, approximately 0.1 million and 1.2 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the options was greater than the average market price of our common stock and, therefore, their inclusion would have been anti-dilutive.
For the nine months ended June 30, 2017 and 2016, approximately 0.4 million and 1.2 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the options was greater than the average market price of our common stock and, therefore, their inclusion would have been anti-dilutive.
16. FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND PRODUCT LINE
We operate predominantly in one reportable segment, as defined under ASC 280 – the development, manufacture, and sale of CMP consumables.
Revenue generated by product line for the three and nine months ended June 30, 2017, and 2016, was as follows:
|
|
Three Months Ended
June 30,
|
|
|
Nine Months Ended
June 30,
|
|
Revenue:
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Tungsten slurries
|
|
$
|
54,731
|
|
|
$
|
46,559
|
|
|
$
|
161,867
|
|
|
$
|
134,856
|
|
Dielectric slurries
|
|
|
30,266
|
|
|
|
25,348
|
|
|
|
87,391
|
|
|
|
72,045
|
|
Polishing pads
|
|
|
17,599
|
|
|
|
16,048
|
|
|
|
50,947
|
|
|
|
46,586
|
|
Other Metals slurries
|
|
|
16,090
|
|
|
|
14,065
|
|
|
|
46,540
|
|
|
|
36,517
|
|
Engineered Surface Finishes
|
|
|
7,806
|
|
|
|
4,382
|
|
|
|
18,866
|
|
|
|
12,077
|
|
Data storage slurries
|
|
|
1,465
|
|
|
|
1,750
|
|
|
|
4,784
|
|
|
|
5,684
|
|
Total revenue
|
|
$
|
127,957
|
|
|
$
|
108,152
|
|
|
$
|
370,395
|
|
|
$
|
307,765
|
|
17. NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), an updated standard on revenue recognition
.
ASU 2014-09 provides enhancements to how revenue is reported and improves comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new standard is for companies to recognize revenue for goods or services in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard is intended to enhance disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, such as service revenue and contract modifications, and improve guidance for multiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, "Deferral of Effective Date" (Topic 606). This standard officially defers the effective date of ASU 2014-09 by one year. ASU 2014-09 will be effective for us beginning October 1, 2018, and may be applied on a full retrospective or modified retrospective approach. In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" (Topic 606). ASU 2016-08 provides clarification for the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, ASU No. 2016-11, and ASU 2016-12, all of which provide additional clarification of the original revenue standard. We are currently evaluating the impact of implementation of these standards on our financial statements.
In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis" (Topic 810)
.
ASU 2015-02 amends the criteria for determining which entities are considered variable interest entities (VIEs), amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. We adopted ASU 2015-02 effective October 1, 2016, and this pronouncement had no material effect on our financial statements as we had no interest in any entities that may be considered a VIE.
In July 2015, the FASB issued ASU No, 2015-11, "Simplifying the Measurement of Inventory" (Topic 330). The provisions of ASU 2015-11 require an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 will be effective for us beginning October 1, 2017, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" (Subtopic 825-10). The provision of ASU 2016-01 requires equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation, to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 simplifies the impairment assessment of equity securities by permitting a qualitative assessment each reporting period, and makes changes to presentation and disclosure of certain classes of financial assets and liabilities. ASU 2016-01 will be effective for us beginning October 1, 2018, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The provisions of ASU 2016-02 require a dual approach for lessee accounting under which a lessee would recognize a right-of-use asset and a corresponding lease liability. Leases will be classified as either finance or operating leases. For finance leases, a lessee will recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee will recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements, to afford better understanding of an entity's leasing activities, including any significant judgments and estimates. ASU 2016-02 will be effective for us beginning October 1, 2019, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In March 2016, the FASB issued ASU No. 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" (Topic 815). The provisions of ASU 2016-05 provide clarification that a change in a counterparty of a derivative instrument that has been designated as a hedging instrument does not require dedesignation of that hedging relationship, provided that all other hedge accounting criteria is met. ASU 2016-05 will be effective for us beginning October 1, 2017, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718). The provisions of this standard involve several aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will be effective for us beginning October 1, 2017, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (Topic 326). The provisions of this standard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would be established to present the net carrying value at the amount expect to be collected. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2019. We are currently evaluating the impact of implementation of this standard on our financial statements.
In October 2016, the FASB issued ASU No. 2016-16 "Intra-Entity Transfers of Assets Other Than Inventory" (Topic 740). The provisions of this standard provide guidance on recognition of taxes related to intra-entity transfer of assets other than inventory when the transfer occurs. ASU 2016-16 will be effective for us beginning October 1, 2018, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In October 2016, the FASB issued ASU No. 2016-17 "Interest Held through Related Parties That Are under Common Control" (Topic 810). The provisions of this standard provide further guidance related to ASU 2015-02, and also provide guidance on consolidation in relation to VIEs and related parties. ASU 2016-17 will be effective for us beginning October 1, 2017, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements as we currently have no interest in any entities that may be considered VIE.
In January 2017, the FASB issued ASU No. 2017-01 "Clarifying the Definition of a Business" (Topic 805). The provisions of this standard provide guidance to determine whether the acquisition or sale of a set of assets or activities constitutes a business. The standard requires that an integrated set of assets and activities include an input and a substantive process that together contribute to the ability to create output. ASU 2017-01 will be effective for us beginning October 1, 2017, and early adoption is permitted under specified conditions. We are currently evaluating the impact of implementation of this standard on our financial statements.
In January 2017, the FASB issued ASU No. 2017-04 "Simplifying the Test for Goodwill Impairment" (Topic 350). The provisions of this standard eliminate Step 2 from the goodwill impairment test, which required an entity to determine the fair value of its assets and liabilities at the impairment testing date of its goodwill and compare it to its carrying amount to determine a possible impairment loss. Goodwill impairment testing will now be done by comparing the fair value of a reporting unit and its carrying amount. ASU 2017-04 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2017. We are currently evaluating the impact of implementation of this standard on our financial statements.
In March 2017, the FASB issued ASU No. 2017-07 "Improving the Presentation of Net Period Pension Cost and net Period Postretirement Benefit Cost" (Topic 715). The provisions of ASU 2017-07 provided specific guidance on the presentation of the components of net benefit cost. ASU 2017-07 will be effective for us beginning October 1, 2018. We are currently evaluating the impact of implementation of this standard on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09 "Scope of Modification Accounting" (Topic 718). The provisions of ASU 2017-09 provide specific guidance about which changes to the term or conditions of a share-based payment require an entity to apply modification accounting. ASU 2017-09 will be effective for us beginning October 1, 2018. We are currently evaluating the impact of implementation of this standard on our financial statements.