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. 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.
The audited consolidated financial statements have been prepared by us 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). We operate predominantly in one reportable segment - the development, manufacture, and sale of CMP consumables.
The results of operations for the quarter ended December 31, 2017 and year ended September 30, 2018 include a correction to prior period amounts, which we determined to be immaterial to the prior periods to which they relate and to our fiscal 2018 results. The adjustments, relating primarily to accumulated earnings taxes of a foreign operation, increased the income tax expense for the first quarter of fiscal 2018 by $2,071. Separately, in Note 16 of this Report on Form 10-K, we discuss the effects of the Tax Cuts and Jobs Act ("Tax Act") on our financial statements.
The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated in the consolidated financial statements as of September 30, 2018.
We consider investments in all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Short-term investments include securities generally having maturities of 90 days to one year. We did not own any securities that were considered short-term investments as of September 30, 2018 or 2017. See Note 3 for a more detailed discussion of other financial instruments.
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. Uncollectible account balances are charged against the allowance when we believe that it is probable that the receivable will not be recovered. 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 which are included in the table below under deductions and adjustments.
Our allowance for doubtful accounts changed during the fiscal year ended September 30, 2018 as follows:
Financial instruments that subject us to concentrations of credit risk consist principally of accounts receivable. We perform ongoing credit evaluations of our customers' financial conditions and generally do not require collateral to secure accounts receivable. Our exposure to credit risk associated with nonpayment is affected principally by conditions or occurrences within the semiconductor industry and global economy. With the exception of a customer placed into receivership in fiscal 2016, we have not experienced significant losses relating to accounts receivable from individual customers or groups of customers.
TSMC accounted for 7.9% and 12.2% of net accounts receivable at September 30, 2018 and 2017, respectively. Samsung accounted for 11.4% and 11.9% of net accounts receivable at September 30, 2018 and 2017, respectively. SK Hynix accounted for 3.4% and 4.9% of net accounts receivable at September 30, 2018 and 2017, respectively. Micron accounted for 13.1% and 10.7% of net accounts receivable at September 30, 2018 and 2017, respectively.
The recorded amounts of cash, accounts receivable, and accounts payable approximate their fair values due to their short-term, highly liquid characteristics. See Note 3 for a more detailed discussion of the fair value of financial instruments.
Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or net realizable value. Finished goods and work in process inventories include material, labor and manufacturing overhead costs. We regularly review and write down the value of inventory as required for estimated obsolescence or lack of marketability. An inventory reserve is maintained based upon a historical percentage of actual inventories written off and applied against inventory value at the end of the period, adjusted for known conditions and circumstances.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is based on the following estimated useful lives of the assets using the straight-line method:
Buildings
|
15-25 years
|
Machinery and equipment
|
3-10 years
|
Furniture and fixtures
|
5-10 years
|
Information systems
|
3-5 years
|
Assets under capital leases
|
Term of lease or estimated useful life
|
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized and depreciated over the remaining useful lives. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. We capitalize the costs related to the design and development of software used for internal purposes; however, these costs are not material.
IMPAIRMENT OF LONG-LIVED ASSETS
We assess the recoverability of the carrying value of long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the assets may be impaired. We perform a periodic review of our long-lived assets to determine if such impairment indicators exist. We must exercise judgment in assessing whether an event of impairment has occurred. For purposes of recognition and measurement of an impairment loss, long-lived assets are either individually identified or grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in this grouping. If the sum of the undiscounted future cash flows expected to result from the identified asset group is less than the carrying value of the asset group, an impairment provision may be required. The amount of the impairment to be recognized is calculated by subtracting the fair value of the asset group from the net book value of the asset group. Determining future cash flows and estimating fair values require significant judgment and are highly susceptible to change from period to period because they require management to make assumptions about future sales and cost of sales generally over a long-term period. We did not record any impairment expense in fiscal 2018 and 2016. We recorded impairment expense on long-lived assets of $860 in fiscal 2017 related to surplus research and development equipment, which was subsequently sold for a gain. See Note 5 for more information regarding impairment.
We evaluate the estimated fair value of investments annually, or more frequently if indicators of potential impairment exist, to determine if an other-than-temporary impairment in the value of the investment has taken place.
WARRANTY RESERVE
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. The warranty reserve is based upon a historical product return rate, adjusted for any specific known conditions or circumstances. Adjustments to the warranty reserve are recorded in cost of goods sold.
GOODWILL AND INTANGIBLE ASSETS
Purchased intangible assets with finite lives are amortized over their estimated useful lives and are evaluated for impairment using a process similar to that used to evaluate other long-lived assets. Goodwill and indefinite lived intangible assets are not amortized and are tested annually in our fourth fiscal quarter 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. A component is a reporting unit when the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of the component. Components may be combined into one reporting unit when they have similar economic characteristics. We have three reporting units, all of which had goodwill as of September 30, 2018, the date of our annual impairment test. Two of the reporting units, CMP Slurries and CMP Pads, represent 95% of the goodwill balance on our Consolidated Balance Sheet as of September 30, 2018. The goodwill related to CMP Pads resulted from our acquisition of NexPlanar.
Accounting guidance provides an entity 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 step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2016, 2017 and 2018, we chose to use a step one analysis for both goodwill impairment and for the recoverability of indefinite-lived intangible assets, with the exception of our CMP Slurries reporting unit, for which we chose to use a step zero analysis for fiscal 2018.
Factors requiring significant judgment include the selection of valuation approach and assumptions related to future revenue and gross margin growth rates, discount factors and royalty rates, among others. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these assumptions may result in future impairment charges. The CMP Pads reporting unit and QED reporting unit each had a calculated fair value that was in excess of the carrying value by greater than 50%. As a result of the review performed in the fourth quarter of fiscal 2018, and the related sensitivity analysis, we determined that there was no impairment of our goodwill as of September 30, 2018. There was no goodwill impairment recorded in fiscal 2017. In fiscal 2016, we recorded a $1,000 impairment of certain NexPlanar in-process technology.
FOREIGN CURRENCY TRANSLATION
Certain operating activities in Asia and Europe are denominated in local currency, considered to be the functional currency. Assets and liabilities of these operations are translated using exchange rates in effect at the end of the year, and revenue and costs are translated using average exchange rates for the year. The related translation adjustments are reported in comprehensive income in stockholders' equity.
FOREIGN EXCHANGE MANAGEMENT
We transact business in various foreign currencies, primarily the Japanese yen, New Taiwan dollar and Korean won. Our exposure to foreign currency exchange risks has not been significant because a large portion of our business is denominated in U.S. dollars. However, there was a weakening of the Japanese yen against the U.S. dollar during the past few fiscal years, which had some net positive impact on our gross margin percentage and our net income. Periodically, we enter into certain forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. These 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. See Note 10 for a discussion of derivative financial instruments.
INTERCOMPANY LOAN ACCOUNTING
We maintain an intercompany loan agreement with our wholly-owned subsidiary, Nihon Cabot Microelectronics K.K. ("Nihon"), under which we provided funds to Nihon to finance the purchase of certain assets from our former Japanese branch at the time of the establishment of this subsidiary, for the purchase of land adjacent to our facility in Geino, Japan, for the construction of our Asia Pacific technology center, and for the purchase of a 300 millimeter polishing tool and related metrology equipment, all of which are assets of Nihon, as well as for general business purposes. Since settlement of the note is expected in the foreseeable future, and our subsidiary has made timely payments on the loan, the loan is considered a foreign-currency transaction. Therefore, the associated foreign exchange gains and losses are recognized as other income or expense rather than being deferred in the cumulative translation account in other comprehensive income.
We also maintain an intercompany loan between two of our wholly-owned foreign subsidiaries, from Cabot Microelectronics Singapore Pte. Ltd. to Hanguk Cabot Microelectronics, LLC in South Korea. This loan provided funds for the construction and operation of our research, development and manufacturing facility in South Korea. This loan is also considered a foreign currency transaction and is accounted for in the same manner as our intercompany loan to Nihon.
These intercompany loans are eliminated from our Consolidated Balance Sheet in consolidation.
PURCHASE COMMITMENTS
We have entered into unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. On an ongoing basis, we review our agreements and assess the likelihood of a shortfall in purchases and determine if it is necessary to record a liability. See Note 17 for additional discussion of purchase commitments. To date, we have not recorded such a liability.
REVENUE RECOGNITION
Revenue from CMP consumables products is recognized when title is transferred to the customer, assuming all revenue recognition criteria are met. Title transfer generally occurs upon shipment to the customer or when inventory held on consignment is consumed by the customer, subject to the terms and conditions of the particular customer arrangement. We have consignment agreements with a number of our customers that require, at a minimum, monthly consumption reports that enable us to record revenue and inventory usage in the appropriate period.
Although the majority of our products are sold directly, we market some of our products through distributors in certain areas of the world. We recognize revenue upon shipment and when title is transferred to the distributor. We do not have any arrangements with distributors that include payment terms, rights of return, or rights of exchange outside the ordinary course of business, or any other significant matters that we believe would impact the timing of revenue recognition.
Within our ESF business, sales of equipment are recorded as revenue upon delivery and customer acceptance. Amounts allocated to installation and training are deferred until those services are provided and are not material.
Revenues are reported net of any value-added tax or other such tax assessed by a governmental authority on our revenue-producing activities.
SHIPPING AND HANDLING
Costs related to shipping and handling are included in cost of goods sold.
RESEARCH, DEVELOPMENT AND TECHNICAL
Research, development and technical costs are expensed as incurred and consist primarily of staffing costs, materials and supplies, depreciation, utilities and other facilities costs.
INCOME TAXES
Current income taxes are determined based on estimated taxes payable or refundable on tax returns for the current year. Deferred income taxes are determined using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. Provisions are made for both U.S. and any foreign deferred income tax liability or benefit. We assess whether or not our deferred tax assets will ultimately be realized and record an estimated valuation allowance on those deferred tax assets that may not be realized. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position. In fiscal 2016 and 2017, we maintained an assertion to permanently reinvest the earnings of all of our foreign subsidiaries. In light of the Tax Act and the associated transition to a modified territorial tax system, we no longer considered our foreign earnings to be indefinitely reinvested and repatriated $197,932 in fiscal 2018, and plan to repatriate foreign earnings on an ongoing basis. Consequently, we recorded deferred tax liabilities associated with withholding taxes on actual and future distribution of such earnings. In addition, the Tax Act incudes complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate income tax rate to 21% effective January 1, 2018; and (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years. As a result of the Tax Act, the SEC staff issued accounting guidance that provides up to a one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act (SAB 118). To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but for which the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The final impact of the Tax Act may differ from the provisional estimates due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, by changes in accounting standard for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts.
See Note 16 for additional information on income taxes and permanent reinvestment.
SHARE-BASED COMPENSATION
We record share-based compensation expense for all share-based awards, including stock option grants, and restricted stock, restricted stock unit and performance share unit ("PSU") 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 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 for stock option grants made prior to December 2017, we have added a slight premium to this expected term for employees who meet the definition of retirement-eligible pursuant to their stock option grants during the contractual term of the grant. As of December 2017, the provisions of new stock option grants and restricted stock unit awards state that except in certain circumstances, including termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, for those employees who have met the retirement eligibility at the grant date, we now record the total share-based compensation expense upon award; for those employees who will meet the retirement eligibility during the four-year vesting period, we now record the share-based compensation expense over the period from the grant date through the date of retirement eligibility, rather than over the four-year vesting period stated in the award agreement.
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.
The PSUs that have been awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We use a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions, including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility.
In the first quarter of fiscal 2018, we adopted ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718) (ASU 2016-09) prospectively. The provisions of this standard relate to aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or liabilities, classification of excess tax benefits on the Consolidated Statements of Cash Flows and earnings per share calculations. During fiscal 2018, we have recorded a tax benefit of $7,294 in our Consolidated Statements of Income. The net income, including the impact of the tax benefits, was used to calculate our basic earnings per share under the new guidance. In addition, we have elected to continue to estimate forfeitures under ASC 718 pursuant to the adoption of ASU 2016-09.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award.
In fiscal 2016, related to our acquisition of NexPlanar, we granted incentive stock options (ISOs), as allowed under our current Omnibus Incentive Plan, to certain NexPlanar employees in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. We used the Black-Scholes option-pricing model to estimate the grant date fair value of these ISOs to calculate share-based compensation expense in fiscal 2016 and for future periods.
For additional information regarding our share-based compensation plans, refer to Note 12.
EARNINGS PER SHARE
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 with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC Topic 260, Earnings Per Share (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. We adopted ASU 2016-09 in fiscal 2018. Pursuant to the adoption, the proceeds from excess tax benefits are no longer included in the dilutive impact on the weighted average shares outstanding for dilutive EPS. The excess tax benefits were treated as a reduction to tax provision, rather than an increase to equity.
COMPREHENSIVE INCOME
Comprehensive income primarily differs from net income due to foreign currency translation adjustments.
EFFECTS OF RECENT 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 defers the effective date of ASU 2014-09 by one year. ASU 2014-09 was 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, and ASU 2017-13 issued in September 2017, all of which provide additional clarification of the original revenue standard. We have substantially completed the process to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts, and have identified and implemented changes to our business processes, systems and controls to support recognition and disclosure under the new standard. We believe the recognition of revenue will remain substantially unchanged for the majority of our contracts with customers. However, for our contracts containing certain pricing and incentive arrangements with our customers within our CMP consumables business, the new guidance will change the manner and timing in which we recognize the revenue. Based on our current assessment of the existing contracts at the time of the adoption containing nonstandard pricing and incentive arrangements, we do not expect the adoption of the new standard to have a material impact on our financial position and results of operations. We will adopt the new revenue standard in the first quarter of fiscal 2019 using the modified retrospective approach to adoption, which will require us to record an immaterial adjustment to the beginning balance of retained earnings for the cumulative effect of adopting the standard.
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. 2016-09, "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. We have adopted this standard in the first quarter of fiscal 2018
prospectively. As a result of the adoption, excess tax benefits were recorded as a reduction to the provision for income taxes, rather than an increase to equity. Therefore, we recorded a tax benefit of $7,294 in our Consolidated Statements of Income in fiscal 2018. Additionally, the proceeds from excess tax benefits are no longer included in the dilutive impact on the weighted average shares outstanding for dilutive EPS under the new guidance. Also, we have elected to continue to estimate forfeitures under ASC 718 pursuant to the adoption of ASU 2016-09.
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 expected 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 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 quantification will now be done by comparing the fair value of a reporting unit and its carrying amount. We adopted ASU 2017-04 effective October 1, 2017 and applied the new guidance in our annual test for goodwill impairment in the fourth quarter of fiscal 2018.
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 was effective for us beginning October 1, 2018. We currently do not expect this standard to have a material impact 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 was effective for us beginning October 1, 2018. We will apply this new standard to the awards, to the extent modified.
In February 2018, the FASB issued ASU No. 2018-02 "Income Statement – Reporting Comprehensive Income (Topic 220)". The amendments in this standard allow a company to reclassify the stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. ASU 2018-02 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 June 2018, the FASB issued ASU No. 2018-07 " Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting". The ASU simplified the accounting for share-based payments granted to nonemployees for goods and services, therefore guidance on such payments to nonemployees would be mostly aligned with the requirements for share-based payments granted to employees. ASU 2018-07 will be effective for us beginning October 1, 2019, but early adoption is permitted (but no earlier than the adoption date of Topic 606). We are currently evaluating the impact of implementation of this standard on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13 " Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement". The ASU provides specific guidance on various disclosure requirements in Topic 820, including removal, modification and addition to current disclosure requirements. ASU 2018-13 will be effective for us beginning October 1, 2020, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our disclosures.
In August 2018, the FASB issued ASU No. 2018-15 " Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)". The ASU Requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 will be effective for us beginning October 1, 2020, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
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
September 30,
2018 and 2017
. See Note 9 for a detailed discussion of our long-term debt. We have classified the following assets 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.
September 30, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
352,921
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
352,921
|
|
Other long-term investments
|
|
|
1,137
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,137
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
354,058
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
354,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
339
|
|
|
|
-
|
|
|
|
339
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
339
|
|
|
$
|
-
|
|
|
$
|
339
|
|
September 30, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
397,890
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
397,890
|
|
Other long-term investments
|
|
|
929
|
|
|
|
-
|
|
|
|
-
|
|
|
|
929
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
263
|
|
|
|
-
|
|
|
|
263
|
|
Total assets
|
|
$
|
398,819
|
|
|
$
|
263
|
|
|
$
|
-
|
|
|
$
|
399,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
1,881
|
|
|
|
-
|
|
|
|
1,881
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,881
|
|
|
$
|
-
|
|
|
$
|
1,881
|
|
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 only 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 a participant makes a qualifying withdrawal. The long-term asset was adjusted to $1,137 in the fourth quarter of fiscal 2018 to reflect its fair value as of September 30, 2018.
The fair value of our derivative instruments is estimated using standard valuation models and market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves for interest rate swaps, and forward rates and/or the Overnight Index Swap (OIS) curve for forward foreign exchange contracts, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments. Our derivative financial instruments include forward foreign exchange contracts and interest rate swaps. In 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. We terminated our interest rate swap agreements during the fiscal year, in connection with the extinguishment of debt. In the fourth quarter of fiscal 2017, we entered into forward foreign exchange contracts in an effort to protect our net investment in a foreign operation against potential adverse changes resulting from foreign currency fluctuation. This net investment hedge was terminated during the year driven by a significant repatriation of funds from this foreign operation. See Note 10 for more information on our use of derivative financial instruments.
4.
INVENTORIES
Inventories consisted of the following:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
35,150
|
|
|
$
|
36,415
|
|
Work in process
|
|
|
8,117
|
|
|
|
7,365
|
|
Finished goods
|
|
|
28,659
|
|
|
|
28,093
|
|
Total
|
|
$
|
71,926
|
|
|
$
|
71,873
|
|
5.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
17,525
|
|
|
$
|
17,823
|
|
Buildings
|
|
|
103,601
|
|
|
|
104,057
|
|
Machinery and equipment
|
|
|
195,434
|
|
|
|
187,649
|
|
Furniture and fixtures
|
|
|
7,575
|
|
|
|
6,770
|
|
Information systems
|
|
|
34,271
|
|
|
|
32,748
|
|
Capital lease
|
|
|
1,200
|
|
|
|
-
|
|
Construction in progress
|
|
|
17,001
|
|
|
|
10,439
|
|
Total property, plant and equipment
|
|
|
376,607
|
|
|
|
359,486
|
|
Less: accumulated depreciation
|
|
|
(265,204
|
)
|
|
|
(253,125
|
)
|
Net property, plant and equipment
|
|
$
|
111,403
|
|
|
$
|
106,361
|
|
Depreciation expense was $17,255, $17,195 and $16,915 for the years ended September 30, 2018, 2017 and 2016, respectively.
In fiscal 2017 we recorded $860 in impairment expense related to a surplus research and development asset, and we recorded a $1,820 gain on sale of surplus research and development equipment. We did not record any impairment expense on property, plant and equipment in fiscal 2018 and 2016.
6.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $101,083 and $101,932 as of September 30, 2018 and 2017, respectively. The decrease in goodwill was due to $154 in foreign exchange fluctuations of the New Taiwan dollar and a $695 decrease related to the sale of certain ESF assets. As a result of this sale of assets in March 2018, we received net proceeds of $3,277, of which $250 is held in escrow, and recorded a gain of $956 in other income in the Consolidated Statements of Income.
The components of other intangible assets are as follows:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated Amortization
|
|
Other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product technology
|
|
$
|
46,275
|
|
|
$
|
22,755
|
|
|
$
|
42,287
|
|
|
$
|
17,604
|
|
Acquired patents and licenses
|
|
|
8,270
|
|
|
|
8,252
|
|
|
|
8,270
|
|
|
|
8,241
|
|
Trade secrets and know-how
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
Customer relationships, distribution rights and other
|
|
|
28,068
|
|
|
|
17,574
|
|
|
|
28,229
|
|
|
|
15,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets subject to amortization
|
|
|
85,163
|
|
|
|
51,131
|
|
|
|
81,336
|
|
|
|
43,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process technology
|
|
|
-
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
Other indefinite-lived intangibles*
|
|
|
1,170
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
Total other intangible assets not subject to amortization
|
|
|
1,170
|
|
|
|
|
|
|
|
5,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
86,333
|
|
|
$
|
51,131
|
|
|
$
|
86,526
|
|
|
$
|
43,816
|
|
|
*
|
Other indefinite-lived intangibles not subject to amortization primarily consist of trade names.
|
During the first quarter of fiscal 2018, development of our in-process technology was completed, and we reclassified $4,000 to product technology under other intangible assets subject to amortization.
Amortization expense was $7,495, $7,795 and $8,176 for fiscal 2018, 2017 and 2016, respectively. Estimated future amortization expense of intangible assets as of September 30, 2018 for the five succeeding fiscal years is as follows:
|
Fiscal Year
|
|
Estimated Amortization
Expense
|
|
|
|
|
|
|
|
2019
|
|
$
|
7,119
|
|
|
2020
|
|
|
7,115
|
|
|
2021
|
|
|
7,108
|
|
|
2022
|
|
|
7,108
|
|
|
2023
|
|
|
1,717
|
|
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of our 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 2017 and 2018, we chose to use a step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment, with the exception of our CMP slurries reporting unit, for which we chose to use a step zero analysis for fiscal 2018.
We completed our annual impairment test during our fourth quarter of fiscal 2018 and concluded that no impairment existed. No impairment existed as a result of our impairment test during the fourth quarter of fiscal 2017. During the fourth quarter of fiscal 2016, we recorded $1,000 of impairment expense on one of the in-process technology assets acquired in the NexPlanar acquisition based on management's revised expected future cash flows for this asset. The impairment charge was included in research, development and technical expenses on our Consolidated Statements of Income. We concluded that no other impairment of goodwill or intangible assets was necessary. There have been no cumulative impairment charges recorded on the goodwill for any of our reporting units.
7.
OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Auction rate securities (ARS)
|
|
$
|
-
|
|
|
$
|
5,319
|
|
Long-term contract asset
|
|
|
1,548
|
|
|
|
2,115
|
|
Other long-term assets
|
|
|
1,979
|
|
|
|
2,154
|
|
Other long-term investments
|
|
|
1,137
|
|
|
|
929
|
|
Total
|
|
$
|
4,664
|
|
|
$
|
10,517
|
|
During the fiscal year we redeemed our ARS investments which consisted of two tax exempt municipal debt securities, both of which had maturities of greater than ten years.
Other long-term assets are primarily comprised of long-term miscellaneous deposits and prepayments on contracts extending beyond the next 12 months. As discussed in Note 3, we recorded a long-term asset and a corresponding long-term liability of $1,137 representing the fair value of our SERP investments as of September 30, 2018.
8.
ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued compensation
|
|
$
|
35,367
|
|
|
$
|
35,332
|
|
Income taxes payable
|
|
|
18,045
|
|
|
|
9,717
|
|
Dividends payable
|
|
|
10,822
|
|
|
|
5,314
|
|
Acquisition and integration related
|
|
|
2,701
|
|
|
|
-
|
|
Goods and services received, not yet invoiced
|
|
|
1,954
|
|
|
|
2,172
|
|
Deferred revenue and customer advances
|
|
|
4,894
|
|
|
|
1,559
|
|
Taxes, other than income taxes
|
|
|
1,976
|
|
|
|
1,688
|
|
Current portion of long-term contract liability
|
|
|
1,487
|
|
|
|
1,500
|
|
Other
|
|
|
5,737
|
|
|
|
5,369
|
|
Total
|
|
$
|
82,983
|
|
|
$
|
62,651
|
|
9.
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.
The enactment of the Tax Act in the United States in December 2017 facilitated the repatriation of a substantial amount of the Company's non-U.S. cash. In April 2018, the Company utilized these repatriated funds to pay off its remaining outstanding Term Loan pursuant to the Credit Agreement. There was no penalty upon the Company's prepayment of the Term Loan. As a result of this early extinguishment of the Term Loan, we expensed the remaining $315 of unamortized debt issuance cost in the third quarter of fiscal 2018, and we terminated the related interest rate swaps and recognized a gain of $532 in the Consolidated Statements of Income.
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.
As of September 30, 2017, unamortized debt issuance costs related to our Term Loan that were presented as a reduction of long-term debt were $441, and these cost were subsequently recorded in interest expense upon payoff of the Term Loan. Unamortized debt issuance costs related to our Revolving Credit Facility were not material.
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 September 30, 2018, our consolidated leverage ratio was 0.00 to 1.00 and our consolidated fixed charge coverage ratio was 3.93 to 1.00. The Credit Agreement also contains customary affirmative covenants and events of default. We believe we are in compliance with these covenants.
In connection with our pending acquisition of KMG, we expect to terminate our existing Credit Agreement and enter into a new credit agreement which will provide us with a New Term Loan in the amount of $1,065 million and a New Revolving Facility in the amount of $200 million. See Note 20 of this Report on Form 10-K for more information about the anticipated terms of the New Credit Facilities.
10.
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 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 payment of debt. The interest rate swap agreements were terminated during fiscal year 2018 in conjunction with the payoff of the Term Loan. We recorded a $532 gain in other income (expense) on our Consolidated Statement of Income as part of termination of interest rate swap agreements.
We designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains were recognized as assets and unrealized losses were recognized as liabilities. Unrealized gains and losses were 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 was recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion was recorded as a component of interest expense. Changes in the method by which we paid interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts which were reclassified from other comprehensive income into net income. Hedge effectiveness was 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. These 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 September 30, 2018 and September 30, 2017, respectively, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign currencies were $
7,652
and $8,176, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $
24,860
and $24,295, respectively.
Net Investment Hedge – Foreign Exchange Contracts
In September 2017, we entered into two forward foreign exchange contracts in an effort to protect the net investment of our Korean subsidiary against potential adverse changes resulting from currency fluctuations in the Korean won. We entered into forward contracts to sell Korean won and buy U.S. dollars, and had designated these forward contracts as an effective net investment hedge. As a result of cash repatriation facilitated by the Tax Act, the Company terminated these foreign exchange contracts during fiscal year 2018.
Amounts recognized in Consolidated Statements of Comprehensive Income for our net investment hedge during the fiscal year ended September 30, were as follows:
|
|
|
2018
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
920
|
|
|
Loss on net investment hedge
|
|
|
8,440
|
|
|
Tax benefit
|
|
|
(2,169
|
)
|
|
Balance at September 30, 2018
|
|
$
|
7,191
|
|
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
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Consolidated Balance Sheet Location
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Other long-term assets
|
|
$
|
-
|
|
|
$
|
117
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Accrued expenses, income taxes payable and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31
|
|
|
Other long-term liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts designated as net investment hedge
|
Other long-term liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
-
|
|
|
$
|
146
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Accrued expenses, income taxes payable and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
339
|
|
|
$
|
408
|
|
The following table summarizes the effect of our derivative instrument on our Consolidated Statements of Income for the fiscal years ended September 30, 2018, 2017 and 2016:
|
|
Gain (Loss) Recognized in Consolidated Statements of Income
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
Consolidated Statements of Income Location
|
2018
|
|
2017
|
|
2016
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other income (expense), net
|
|
$
|
(1,569
|
)
|
|
$
|
(1,462
|
)
|
|
$
|
676
|
|
11.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below summarizes the components of accumulated other comprehensive income (loss) (AOCI), net of tax provision/(benefit), for the years ended September 30, 2018, 2017, and 2016.
|
|
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 $1,854
|
|
|
15,996
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,996
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(274)
|
|
|
-
|
|
|
|
(499
|
)
|
|
|
-
|
|
|
|
(499
|
)
|
Reclassification adjustment into earnings, net of tax of $321
|
|
|
-
|
|
|
|
583
|
|
|
|
-
|
|
|
|
583
|
|
Change in pension and other postretirement, net of tax of $(584)
|
|
|
-
|
|
|
|
-
|
|
|
|
(434
|
)
|
|
|
(434
|
)
|
Balance at September 30, 2016
|
|
|
11,985
|
|
|
|
(817
|
)
|
|
|
(1,612
|
)
|
|
|
9,556
|
|
Foreign currency translation adjustment, net of tax of $(2,321)
|
|
|
(6,746
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,746
|
)
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(660)
|
|
|
-
|
|
|
|
1,161
|
|
|
|
-
|
|
|
|
1,161
|
|
Reclassification adjustment into earnings, net of tax of $170
|
|
|
-
|
|
|
|
(298
|
)
|
|
|
-
|
|
|
|
(298
|
)
|
Change in pension and other postretirement, net of tax of $79
|
|
|
-
|
|
|
|
-
|
|
|
|
276
|
|
|
|
276
|
|
Balance at September 30, 2017
|
|
|
5,239
|
|
|
|
46
|
|
|
|
(1,336
|
)
|
|
|
3,949
|
|
Foreign currency translation adjustment, net of tax of $(2,409)
|
|
|
679
|
|
|
|
-
|
|
|
|
-
|
|
|
|
679
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $111
|
|
|
-
|
|
|
|
319
|
|
|
|
-
|
|
|
|
319
|
|
Reclassification adjustment into earnings, net of tax of $(133)
|
|
|
-
|
|
|
|
(382
|
)
|
|
|
-
|
|
|
|
(382
|
)
|
Change in pension and other postretirement, net of tax of $1
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
(26
|
)
|
Balance at September 30, 2018
|
|
$
|
5,918
|
|
|
$
|
(17
|
)
|
|
$
|
(1,362
|
)
|
|
$
|
4,539
|
|
The before tax amount reclassified from OCI to net income in fiscal 2018, related to our cash flow hedges, was recorded as interest expense on our Consolidated Statement of Income. Amounts reclassified from OCI to net income, related to pension liabilities, were not material in fiscal years 2018, 2017 and 2016.
12.
SHARE-BASED COMPENSATION PLANS
EQUITY INCENTIVE PLAN AND OMNIBUS INCENTIVE PLAN
In March 2004, our stockholders approved our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (the "EIP"), as amended and restated September 23, 2008. In March 2012, our stockholders approved the Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan (the "OIP"), which is the successor plan to the EIP, and which was amended as of March 2017. All share-based awards have been made from the OIP as of its approval date, and the EIP is no longer available for any awards. The OIP is administered by the Compensation Committee of the Board of Directors and is intended to provide management with the flexibility to attract, retain and reward our employees, directors, consultants and advisors. The OIP allows for the granting of six
types of equity incentive awards: stock options, restricted stock, restricted stock units, stock appreciation rights (SARs), performance-based awards and substitute awards. The OIP also provides for cash incentive awards to be made. Substitute awards under the OIP are those awards that, in connection with an acquisition, may be granted to employees, directors, consultants or advisors of the acquired company, in substitution for equity incentives held by them in the seller or the acquired company. In fiscal 2016, related to our acquisition of NexPlanar, we granted incentive stock options (ISOs), as allowed under the OIP, to certain NexPlanar employees in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. As of September 30, 2018, no SARs have been granted to date under either plan. No awards of any type have been granted to date to consultants or advisors under either plan. The OIP authorizes up to 4,934,444 shares of stock to be granted thereunder, including up to 2,030,952 shares of stock in the aggregate of awards other than options or SARs, and up to 2,538,690 incentive stock options. The 4,934,444 shares of stock represents 2,901,360 shares of newly authorized shares and 2,033,084 shares previously available under the EIP. In addition, shares that become available from awards under the EIP and the OIP because of events such as forfeitures, cancellations or expirations, or because shares subject to an award are withheld to satisfy tax withholding obligations, will also be available for issuance under the OIP. Shares issued under our share-based compensation plans are issued from new shares rather than from treasury shares.
Non-qualified stock options issued under the OIP, as they were under the EIP, are generally time-based and provide for a ten-year term, with options generally vesting equally over a four-year period, with first vesting on the first anniversary of the award date. Non-qualified stock options granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date. Under the OIP, as under the EIP, employees may also be granted ISOs to purchase common stock at not less than the fair value on the date of the grant. Prior to fiscal 2016, no ISOs had been granted under either plan. In the first quarter of fiscal 2016, we substituted certain NexPlanar ISOs with Cabot Microelectronics Corporation ISOs, preserving the intrinsic value, including the original vesting periods, of the original awards. Compensation expense related to our stock option awards was $6,392, $5,500 and $6,767 in fiscal 2018, 2017 and 2016, respectively. For additional information on our accounting for share-based compensation, see Note 2.
Under the OIP, employees and non-employees may be awarded shares of restricted stock or restricted stock units, which generally vest over a four-year period, with first vesting on the anniversary of the grant date. In general, shares of restricted stock and restricted stock units may not be sold, assigned, transferred, pledged, disposed of or otherwise encumbered. Holders of restricted stock, and restricted stock units, if specified in the award agreements, have all the rights of stockholders, including voting and dividend rights, subject to the above restrictions, although the holders of restricted stock units awarded prior to fiscal 2016 do not have such rights. Holders of restricted stock units awarded as of fiscal 2016 have dividend equivalent rights pursuant to the terms of the OIP and respective award agreements. Restricted shares under the OIP, as under the EIP, also may be purchased and placed "on deposit" by executive officers pursuant to the 2001 Deposit Share Program. Shares purchased under this Deposit Share Program receive a 50% match in restricted shares ("Award Shares"). These Award Shares vest at the end of a three-year period, and are subject to forfeiture upon early withdrawal of the deposit shares. Compensation expense related to our restricted stock and restricted stock unit awards and restricted shares matched at 50% pursuant to the Deposit Share Program was $9,186, $6,730 and $6,369 for fiscal 2018, 2017 and 2016, respectively.
In December 2017, we granted performance share unit ("PSU") awards to certain employees. These PSUs fully vest on the third anniversary of the grant date. Stock-based compensation for the awards is recognized over the requisite service period (three years) beginning on the date of grant through the end of the performance period based on the number of PSUs expected to vest under the awards at the end of the performance period. The expected amount of vesting is determined using certain performance measures and is re-evaluated at the end of each fiscal year through the end of the performance period. In addition, the PSUs awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We used a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions, including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility. We have recorded $2,056 compensation expense related to our PSU awards in fiscal 2018.
In connection with our pending acquisition of KMG, immediately prior to the
closing, each KMG Equity Award granted on or following August 14, 2018 will be converted into a corresponding award relating to shares of CMC Common Stock and continue to vest post-closing in accordance with the terms of the OIP (which will include vesting on a qualifying termination of employment).
EMPLOYEE STOCK PURCHASE PLAN
In March 2008, our stockholders approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the "ESPP"), which amended the ESPP for the primary purpose of increasing the authorized shares of common stock to be purchased under the ESPP from 475,000 designated shares to 975,000 shares. As of September 30, 2018, a total of
385,504
shares are available for purchase under the ESPP. The ESPP allows all full-time, and certain part-time, employees of our Company and its subsidiaries to purchase shares of our common stock through payroll deductions. Employees can elect to have up to 10% of their annual earnings withheld to purchase our stock, subject to a maximum number of shares that a participant may purchase and a maximum dollar expenditure in any six-month offering period, and certain other criteria. The provisions of the ESPP allow shares to be purchased at a price no less than the lower of 85% of the closing price at the beginning or end of each semi-annual stock purchase period. A total of
49,896
, 69,751, and 77,437 shares were issued under the ESPP during fiscal 2018, 2017 and 2016, respectively. Compensation expense related to the ESPP was $885, $774 and $763 in fiscal 2018, 2017 and 2016, respectively.
ACCOUNTING FOR SHARE-BASED COMPENSATION
The fair value of our share-based awards, as shown below, was estimated using the Black-Scholes model with the following weighted-average assumptions:
|
Year Ended September 30,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Stock Options
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
|
$
|
26.59
|
|
|
$
|
16.50
|
|
|
$
|
14.47
|
|
Expected term (in years)
|
|
|
6.68
|
|
|
|
6.57
|
|
|
|
6.56
|
|
Expected volatility
|
|
|
26
|
%
|
|
|
27
|
%
|
|
|
26
|
%
|
Risk-free rate of return
|
|
|
2.4
|
%
|
|
|
2.1
|
%
|
|
|
1.9
|
%
|
Dividend yield
|
|
|
1.0
|
%
|
|
|
1.2
|
%
|
|
|
0.3
|
%
|
|
Year Ended September 30,
|
|
|
2018
|
|
2017
|
|
2016
|
|
ESPP
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
|
$
|
20.94
|
|
|
$
|
12.49
|
|
|
$
|
9.57
|
|
Expected term (in years)
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Expected volatility
|
|
|
26
|
%
|
|
|
24
|
%
|
|
|
24
|
%
|
Risk-free rate of return
|
|
|
1.5
|
%
|
|
|
0.6
|
%
|
|
|
0.4
|
%
|
Dividend yield
|
|
|
1.1
|
%
|
|
|
1.3
|
%
|
|
|
0.5
|
%
|
The Black-Scholes model is primarily used in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. Because employee stock options and ESPP purchases have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, our use of the Black-Scholes model for estimating the fair value of stock options and ESPP purchases may not provide an accurate measure. Although the value of our stock options and ESPP purchases are determined in accordance with applicable accounting standards using an option-pricing model, those values may not be indicative of the fair values observed in a willing buyer/willing seller market transaction.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award. Share-based compensation expense related to restricted stock and restricted stock unit awards is recorded net of expected forfeitures.
SHARE-BASED COMPENSATION EXPENSE
Total share-based compensation expense for the years ended September 30, 2018, 2017 and 2016, is as follows:
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income statement classifications:
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
2,450
|
|
|
$
|
2,229
|
|
|
$
|
2,105
|
|
Research, development and technical
|
|
|
1,940
|
|
|
|
1,792
|
|
|
|
1,633
|
|
Selling and marketing
|
|
|
1,277
|
|
|
|
1,380
|
|
|
|
1,618
|
|
General and administrative
|
|
|
12,851
|
|
|
|
7,603
|
|
|
|
8,585
|
|
Tax benefit
|
|
|
(4,306
|
)
|
|
|
(4,339
|
)
|
|
|
(4,341
|
)
|
Total share-based compensation expense, net of tax
|
|
$
|
14,212
|
|
|
$
|
8,665
|
|
|
$
|
9,600
|
|
The grant of December 2017 included the provisions of stock option grants and restricted stock unit awards such that except in certain circumstances including termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, for those employees who have met the retirement eligibility at the grant date, we now record the total share-based compensation expense upon award; for those employees who will meet the retirement eligibility during the four-year vesting period, we now record the share-based compensation expense over the period from the grant date through the date of retirement eligibility, rather than over the four-year vesting period stated in the award agreement. Restricted stock units granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date.
In fiscal 2018, we
recorded $2,602 of shared-based compensation expense associated with our executive officer transitions, which is included in the table above as general and administrative expense. I
n fiscal 2016, we recorded $154 in share-based compensation expense related to certain unvested NexPlanar ISOs settled in cash at the acquisition date. The $154 represents the portion of the fair value of the original awards related to the post-acquisition period had these awards not been settled in cash at the acquisition date. U.S. GAAP prescribes that the portion of fair value of equity awards related to pre-acquisition service periods represents purchase consideration, including equity awards vesting immediately upon a change-in-control, and the portion of fair value related to post-acquisition service periods represents compensation expense. Since the post-acquisition service requirement was eliminated through the cash settlement, the $154 in compensation expense was recorded immediately following the acquisition date. We accelerated the vesting on the substitute ISO awards made to certain individuals based on the terms of their employment agreements and recorded $492 of share-based compensation expense related to this acceleration. The total $646 of acquisition-related compensation is included in the table above as general and administrative expense.
Our non-employee directors receive annual equity awards in March, 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. Three of the Company's non-employee directors had completed at least two full terms of service as of the date of the March 2018 award. Consequently, the requisite service period for the award has already been satisfied and we recorded the fair value of $
586
of the awards to these directors to share-based compensation expense in the fiscal quarter ended March 31, 2018 rather than recording that expense over the one-year vesting period stated in the award agreement.
STOCK OPTION ACTIVITY
A summary of stock option activity under the EIP and OIP as of September 30, 2018, and changes during fiscal 2018 are presented below:
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at September 30, 2017
|
|
|
1,517,061
|
|
|
$
|
44.17
|
|
|
|
|
|
|
|
Granted
|
|
|
152,282
|
|
|
|
95.19
|
|
|
|
|
|
|
|
Exercised
|
|
|
(488,029
|
)
|
|
|
39.45
|
|
|
|
|
|
|
|
Forfeited or canceled
|
|
|
(49,833
|
)
|
|
|
53.09
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
1,131,481
|
|
|
$
|
52.68
|
|
|
|
6.8
|
|
|
$
|
57,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018
|
|
|
552,969
|
|
|
$
|
41.57
|
|
|
|
5.5
|
|
|
$
|
34,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after September 30, 2018
|
|
|
575,758
|
|
|
$
|
63.16
|
|
|
|
8.0
|
|
|
$
|
23,120
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., for all in-the-money stock options, the difference between our closing stock price per share on the last trading day of fiscal 2018 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on the last trading day of fiscal 2018. The total intrinsic value of options exercised was $30,345, $25,213 and $12,317 for fiscal 2018, 2017 and 2016, respectively.
The total cash received from options exercised was $19,247, $27,666 and $16,623 for fiscal 2018, 2017 and 2016, respectively. The actual tax benefit realized for the tax deductions from options exercised was $7,503, $8,743 and $4,076 for fiscal 2018, 2017 and 2016, respectively. The total fair value of stock options vested during fiscal years 2018, 2017 and 2016 was $5,008, $5,300 and $7,880, respectively. As of September 30, 2018, there was $6,723 of total unrecognized share-based compensation expense related to unvested stock options granted under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of
2.3
years.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
A summary of the status of the restricted stock awards and restricted stock unit awards, including PSUs outstanding that were awarded under the OIP as of September 30, 2018, and changes during fiscal 2018, are presented below:
|
|
Restricted Stock
Awards and Units
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2017
|
|
|
346,513
|
|
|
$
|
52.43
|
|
Granted *
|
|
|
140,084
|
|
|
|
93.16
|
|
Vested
|
|
|
(134,165
|
)
|
|
|
49.73
|
|
Forfeited
|
|
|
(24,285
|
)
|
|
|
58.64
|
|
Nonvested at September 30, 2018
|
|
|
328,147
|
|
|
$
|
70.42
|
|
* Includes the initial amount of PSUs granted,
which may be subject to downward or upward adjustment depending on the performance measures during the particular performance period pursuant to the PSU award agreement.
The total fair value of restricted stock awards and restricted stock units vested during fiscal years 2018, 2017 and 2016 was $6,669, $6,898 and $10,740, respectively. As of September 30, 2018, there was $20,955 of total unrecognized share-based compensation expense related to unvested restricted stock awards and restricted stock units, including PSUs under the OIP. That cost is expected to be recognized over a weighted-average period of
2.3
years.
13.
SAVINGS PLAN
Effective in May 2000, we adopted the Cabot Microelectronics Corporation 401(k) Plan (the "401(k) Plan"), which is a qualified defined contribution plan, covering all eligible U.S. employees meeting certain minimum age and eligibility requirements, as defined by the 401(k) Plan. Participants may make elective contributions of up to 60% of their eligible compensation. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The 401(k) Plan provides for matching and fixed non-elective contributions by the Company. Under the 401(k) Plan, the Company will match 100% of the first four percent of the participant's eligible compensation and 50% of the next two percent of the participant's eligible compensation that is contributed, subject to limitations required by government regulations. Under the 401(k) Plan, all U.S. employees, even those who do not contribute to the 401(k) Plan, receive a contribution by the Company in an amount equal to four percent of eligible compensation, and thus are participants in the 401(k) Plan. Participants are 100% vested in all Company contributions at all times. The Company's expense for the 401(k) Plan totaled $5,562, $5,256 and $4,624 for the fiscal years ended September 30, 2018, 2017 and 2016, respectively.
14.
OTHER INCOME, NET
Other income, net, consisted of the following:
|
Year Ended September 30,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Interest income
|
|
$
|
4,409
|
|
|
$
|
2,351
|
|
|
$
|
949
|
|
Other income (expense)
|
|
|
89
|
|
|
|
(438
|
)
|
|
|
(296
|
)
|
Total other income, net
|
|
$
|
4,498
|
|
|
$
|
1,913
|
|
|
$
|
653
|
|
The following is a summary of our capital stock activity over the past three years:
|
Number of Shares
|
|
Common
Stock
|
|
Treasury
Stock
|
September 30, 2015
|
|
33,489,181
|
|
|
9,041,678
|
Exercise of stock options
|
|
606,562
|
|
|
|
Restricted stock under EIP and OIP, net of forfeitures
|
|
86,277
|
|
|
|
Restricted stock under Deposit Share Program, net of forfeitures
|
|
1,847
|
|
|
|
Common stock under ESPP
|
|
77,437
|
|
|
|
Repurchases of common stock under share repurchase plans
|
|
|
|
|
636,839
|
Repurchases of common stock – other
|
|
|
|
|
66,125
|
|
|
|
|
|
|
September 30, 2016
|
|
34,261,304
|
|
|
9,744,642
|
Exercise of stock options
|
|
818,640
|
|
|
|
Restricted stock under OIP, net of forfeitures
|
|
81,047
|
|
|
|
Common stock under ESPP
|
|
69,751
|
|
|
|
Repurchases of common stock under share repurchase plans
|
|
|
|
|
167,809
|
Repurchases of common stock – other
|
|
|
|
|
35,739
|
|
|
|
|
|
|
September 30, 2017
|
|
35,230,742
|
|
|
9,948,190
|
Exercise of stock options
|
|
487,915
|
|
|
|
Restricted stock under OIP, net of forfeitures
|
|
93,817
|
|
|
|
Common stock under ESPP
|
|
49,991
|
|
|
|
Repurchases of common stock under share repurchase plans
|
|
|
|
|
369,791
|
Repurchases of common stock – other
|
|
|
|
|
38,166
|
|
|
|
|
|
|
September 30, 2018
|
|
35,862,465
|
|
|
10,356,147
|
COMMON STOCK
Each share of common stock, including those awarded as restricted stock, but not restricted stock units, entitles the holder to one vote on all matters submitted to a vote of Cabot Microelectronics' stockholders. Common stockholders are entitled to receive ratably the dividends, if any, as may be declared by the Board of Directors. Holders of restricted stock units awarded as of fiscal 2016 are entitled to dividend equivalents, which are paid to the holder upon the vesting of the restricted stock units. The number of authorized shares of common stock is 200,000,000 shares.
In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from $75,000 to $150,000. Under this program, we repurchased 369,791 shares for $40,726 during fiscal 2018, 167,809 shares for $12,035 during fiscal 2017, and 636,839 shares for $25,980 during fiscal 2016. As of September 30, 2018, $81,271 remains available under our share repurchase program. To date, we have funded share repurchases under our share repurchase program from our existing cash balance, and anticipate we will continue to do so. The program, which became effective on the authorization date, may be suspended or terminated at any time, at the Company's discretion. For additional information on share repurchases, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" and the section titled "Liquidity and Capital Resources" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Separate from this share repurchase program, a total of 38,166, 35,739 and 66,125 shares were purchased during fiscal 2018, 2017 and 2016, respectively, pursuant to the terms of our OIP as shares withheld from award recipients to cover payroll taxes on the vesting of shares of restricted stock granted under the OIP.
Income before income taxes was as follows:
|
Year Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Domestic
|
$
|
46,254
|
|
|
$
|
33,272
|
|
|
$
|
7,130
|
|
Foreign
|
|
115,457
|
|
|
|
76,100
|
|
|
|
63,308
|
|
Total
|
$
|
161,711
|
|
|
$
|
109,372
|
|
|
$
|
70,438
|
|
Taxes on income consisted of the following:
|
Year Ended September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
U.S. federal and state:
|
|
|
|
|
|
|
|
|
Current
|
$
|
14,698
|
|
|
$
|
8,606
|
|
|
$
|
609
|
|
Deferred
|
|
10,347
|
|
|
|
1,550
|
|
|
|
(1,465
|
)
|
Total
|
$
|
25,045
|
|
|
$
|
10,156
|
|
|
$
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
$
|
26,135
|
|
|
$
|
13,422
|
|
|
$
|
11,737
|
|
Deferred
|
|
488
|
|
|
|
(1,158
|
)
|
|
|
(292
|
)
|
Total
|
|
26,623
|
|
|
|
12,264
|
|
|
|
11,445
|
|
Total U.S. and foreign
|
$
|
51,668
|
|
|
$
|
22,420
|
|
|
$
|
10,589
|
|
The provision for income taxes at our effective tax rate differed from the statutory rate as follows:
|
Year Ended September 30,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Federal statutory rate
|
|
24.5%
|
|
|
35.0%
|
|
|
35.0%
|
|
U.S. benefits from research and experimentation activities
|
|
(0.8)
|
|
|
(1.0)
|
|
|
(3.5)
|
|
State taxes, net of federal effect
|
|
0.1
|
|
|
0.4
|
|
|
(0.1)
|
|
Foreign income at other than U.S. rates
|
|
1.2
|
|
|
(14.7)
|
|
|
(16.9)
|
|
Executive compensation
|
|
0.4
|
|
|
0.3
|
|
|
0.0
|
|
Share-based compensation
|
|
(4.3)
|
|
|
0.1
|
|
|
0.7
|
|
U.S. tax reform
|
|
11.2
|
|
|
0.0
|
|
|
0.0
|
|
Domestic production deduction
|
|
(0.2)
|
|
|
0.0
|
|
|
(1.3)
|
|
Other, net
|
|
(0.1)
|
|
|
0.4
|
|
|
1.1
|
|
Provision for income taxes
|
|
32.0%
|
|
|
20.5%
|
|
|
15.0%
|
|
The significant increase in our effective tax rate for fiscal 2018 was primarily driven by the changes introduced by the Tax Cuts and Jobs Act in the United States ("the Tax Act") in December 2017, which includes the deemed repatriation tax (transition tax). The Company made the decision to take the dividends received deduction (DRD) on its fiscal 2018 tax return and accordingly reflected a section 245A DRD with respect to the section 78 gross-up in its transition tax calculation. This benefit may be reduced or eliminated in future legislation. If such legislation is enacted, we will record the impact of the legislation in the quarter of enactment. Other factors that impacted the Company's effective tax rate for fiscal 2018 were primarily related to benefits in excess of compensation cost from share-based compensation recorded in the income statement (as opposed to equity prior to October 2017) and the absence of benefits of a tax holiday in South Korea that expired as of October 2017.
The increase in the effective tax rate during fiscal 2017 was primarily due to the absence of the retroactive reinstatement of the research and experimentation tax credit recorded in fiscal 2016, and changes in the jurisdictional mix of income.
The Tax Act includes broad and complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate income tax rate to 21.0% effective January 1, 2018; and (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years. For fiscal 2018, we recorded our income tax provision using a blended U.S. statutory tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after the Tax Act. The U.S. statutory tax rate of 21.0% will apply for fiscal 2019 and beyond.
As a result of the Tax Act, the SEC staff issued accounting guidance that provides up to a one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act (SAB 118). To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but for which the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The final impact of the Tax Act may differ from the provisional estimates due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, by changes in accounting standard for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts.
In connection with our analysis of the impact of the Tax Act, we recorded total tax expense of $18,178 for the year ended September 30, 2018. This amount is comprised of $11,340 of the U.S. transition tax on accumulated earnings of foreign subsidiaries, $5,555 of foreign withholding tax, and $1,283 of tax expense for re-measurement of deferred taxes. We have determined that these amounts were each provisional amounts and reasonable estimates for fiscal 2018. Estimates used in the provisional amounts include earnings, cash positions, foreign income taxes and withholding taxes attributable to foreign subsidiaries. The amounts recorded are reasonable estimates and are discussed more fully below.
Deemed Repatriation Transition Tax
: The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. taxes on such earnings. We were able to make a reasonable estimate, and recorded $11,340 of Transition Tax, which included U.S. federal and state tax implications, for the year ended September 30, 2018. In addition, we also recorded a provisional estimate of $5,555 for non-U.S. withholding taxes to be incurred on actual and future distributions of foreign earnings. We are monitoring U.S. federal and state legislative developments for further interpretative guidance and may further refine provisional estimates during the measurement period provided under SAB 118. Previously, the Company maintained an assertion to permanently reinvest the earnings of its non-U.S. subsidiaries outside of the U.S., with certain insignificant exceptions, and therefore, did not record U.S. deferred income taxes or foreign withholding taxes for these earnings. In light of the Tax Act and the associated transition to a modified territorial tax system, the Company no longer considered its foreign earnings to be indefinitely reinvested and repatriated $197,932 in fiscal 2018, and plan to repatriate foreign earnings on an ongoing basis. Consequently, the Company recorded deferred tax liabilities associated with withholding taxes on actual and future distribution of such earnings.
Reduction of U.S. Federal Corporate Tax Rate
: The Company re-measured its U.S. deferred tax assets and liabilities and recorded tax expense of $1,283 based on the rates at which the deferred tax assets and liabilities are expected to reverse in the future. We are still analyzing certain aspects of the Tax Act and the actual impact of the reduction in the U.S. federal corporate tax rate may be affected by the timing of the reversal of such balances.
The Company is also analyzing other provisions of the Tax Act to determine their impact on the Company's effective tax rate in fiscal year 2019 or in the future, including the following:
Global Intangible Low Taxed Income (GILTI):
Tax Act includes a provision designed to tax GILTI, which we are continuing to evaluate. Under U.S. GAAP, we are allowed to make an accounting policy choice of either: (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method"); or, (2) factoring such amounts into a company's measurement of its deferred taxes (the "deferred method"). We have not yet made the accounting policy election, and we are not yet able to reasonably estimate the effect of the GILTI provision and have not made any adjustments related to potential GILTI tax in our financial statements. If applicable, GILTI tax would first apply to our fiscal year 2019 and would be accounted for as incurred under the period cost method.
Base Erosion and Anti-Abuse Tax (BEAT):
The Tax Act creates a new minimum BEAT liability for corporations that make base erosion payments if the corporation has sufficient gross receipts and derives a sufficient level of "base erosion tax benefits". We are further assessing the provisions of the BEAT and will evaluate the effects on the Company's financial statements as further information becomes available. If applicable, any BEAT would first apply to the Company in fiscal year 2019 and would be accounted for as incurred under the period cost method.
Foreign Derived Intangible Income (FDII):
The Tax Act allows a domestic corporation an immediate deduction in U.S. taxable income for a portion of its FDII. The amount of the deduction will depend in part on the Company's U.S. taxable income. We are still assessing the benefits of the FDII deduction. If applicable, the FDII deduction would first be available to the Company in fiscal year 2019 and would be accounted for under the period cost method.
The Company previously operated under a tax holiday in South Korea in fiscal years 2013 through 2017 in conjunction with our investment in research, development and manufacturing facilities there, which expired at the end of fiscal year 2017. This arrangement allowed 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 fiscal 2017 and 2016 income tax provision by approximately $5,018 and $3,771, respectively. This holiday increased our fiscal 2017 and 2016 diluted earnings per share by approximately $0.20 and $0.15, respectively.
The accounting guidance regarding uncertainty in income taxes prescribes a threshold for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. Under these standards, we may recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position.
The following table presents the changes in the balance of gross unrecognized tax benefits during the last three fiscal years:
Balance September 30, 2015
|
|
$
|
1,773
|
|
Additions for tax positions relating to the current fiscal year
|
|
|
364
|
|
Additions for tax positions relating to prior fiscal years
|
|
|
200
|
|
Settlements with taxing authorities
|
|
|
(248
|
)
|
Balance September 30, 2016
|
|
|
2,089
|
|
Additions for tax positions relating to the current fiscal year
|
|
|
381
|
|
Additions for tax positions relating to prior fiscal years
|
|
|
44
|
|
Lapse of statute of limitations
|
|
|
(244
|
)
|
Balance September 30, 2017
|
|
|
2,270
|
|
Additions for tax positions relating to the current fiscal year
|
|
|
263
|
|
Additions for tax positions relating to prior fiscal years
|
|
|
116
|
|
Lapse of statute of limitations
|
|
|
(1,215
|
)
|
Balance September 30, 2018
|
|
$
|
1,434
|
|
The entire balance of unrecognized tax benefits shown above as of September 30, 2018 and 2017, would affect our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions as income tax expense in our financial statements. Interest accrued on our Consolidated Balance Sheet was $69 and $100 at September 30, 2018 and 2017, respectively, and any interest and penalties charged to expense in fiscal years 2018, 2017 and 2016 was not material.
At September 30, 2018, the tax periods open to examination by the U.S. federal government included fiscal years 2015 through 2018. We believe the tax periods open to examination by U.S. state and local governments include fiscal years 2014 through 2018 and the tax periods open to examination by foreign jurisdictions include fiscal years 2013 through 2018. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Significant components of net deferred tax assets and liabilities were as follows:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
3,995
|
|
|
$
|
5,307
|
|
Inventory
|
|
|
2,526
|
|
|
|
2,863
|
|
Bad debt reserve
|
|
|
361
|
|
|
|
585
|
|
Share-based compensation expense
|
|
|
5,379
|
|
|
|
6,611
|
|
Credit and other carryforwards
|
|
|
6,419
|
|
|
|
22,663
|
|
Other
|
|
|
1,336
|
|
|
|
1,488
|
|
Valuation allowance
|
|
|
(133
|
)
|
|
|
(2,271
|
)
|
Total deferred tax assets
|
|
$
|
19,883
|
|
|
$
|
37,246
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
8,007
|
|
|
$
|
14,671
|
|
Withholding on transition taxes
|
|
|
5,209
|
|
|
|
-
|
|
Translation adjustment
|
|
|
-
|
|
|
|
300
|
|
Other
|
|
|
908
|
|
|
|
739
|
|
Total deferred tax liabilities
|
|
$
|
14,124
|
|
|
$
|
15,710
|
|
As of September 30, 2018, the Company had foreign and federal net operating loss carryforwards (NOLs) of $2,163 and $14,765, respectively, which will expire over the period between fiscal year 2019 and fiscal year 2038, for which we have recorded a $423 gross valuation allowance, all of which was attributable to foreign NOLs. The majority of the federal and state NOLs are attributable to the NexPlanar acquisition. As of September 30, 2018, the Company had a state tax credit carryforward of $74 and no capital loss carryforwards. As of September 30, 2018, the Company had a federal tax credit carryforward of $737, which will expire beginning in fiscal years 2028 through 2038.
17.
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.
INDEMNIFICATION
In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Generally, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the other party harmless against losses arising from items such as a breach of certain representations and covenants including title to assets sold, certain intellectual property rights and certain environmental matters. These terms are common in the industries in which we conduct business. In each of these circumstances, payment by us is subject to certain monetary and other limitations and is conditioned on the other party making an adverse claim pursuant to the procedures specified in the particular agreement, which typically allow us to challenge the other party's claims.
We evaluate estimated losses for such indemnifications under the accounting standards related to contingencies and guarantees. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not experienced material costs as a result of such obligations and, as of September 30, 2018, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of such obligations is probable.
LEASE COMMITMENTS
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable leases, all of which expire within five years from September 30, 2018, and may be renewed by us. Rent expense under such arrangements during fiscal 2018, 2017 and 2016 totaled $4,307, $3,120 and $2,765, respectively.
Future minimum rental commitments under noncancelable leases as of September 30, 2018 are as follows:
|
Fiscal Year
|
|
Operating
|
|
|
2019
|
|
$
|
3,456
|
|
|
2020
|
|
|
2,466
|
|
|
2021
|
|
|
2,099
|
|
|
2022
|
|
|
1,853
|
|
|
2023
|
|
|
1,890
|
|
|
Thereafter
|
|
|
7,890
|
|
|
|
|
$
|
19,654
|
|
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 been operating under a fumed silica supply agreement with Cabot Corporation, our former parent company which is not a related party, the current term of which runs through December 2019. This agreement provides us the option to purchase fumed silica, with no purchase requirements as of 2017, for which we have paid a fee of $1,500 in each of the fiscal years 2017, 2018 and will pay in 2019. The
$1,500 payment due for 2019 is included in accrued expenses on our Consolidated Balance Sheet
As of September 30, 2018, purchase obligations include $11,208 of contractual commitments related to our Cabot Corporation supply agreement for fumed silica.
POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS
We have unfunded defined benefit plans covering employees in certain foreign jurisdictions as required by local law. Our plans in Japan, which represent the majority of our pension liability for such plans, had projected benefit obligations of $
6,621
and $6,673 as of September 30, 2018 and 2017, respectively, and an accumulated benefit obligation of $
5,234
and $5,253 as of September 30, 2018 and 2017, respectively. Key assumptions used in the actuarial measurement of the Japan pension liability include a weighted average discount rate of
0.50%
at September 30, 2018 and 2017, respectively, and an expected rate of compensation increase of
2.50% at
September 30, 2018 and 2017, respectively. Total future Japan pension costs included in accumulated other comprehensive income are $
1,735
and $
1,837
at September 30, 2018 and 2017, respectively.
Our plans in Korea had defined benefit obligations of $
1,731
and $1,663 as of September 30, 2018 and 2017. Key assumptions used in the actuarial measurement of the Korea pension liability include weighted average discount rates of
3.75%
and 4.00% at September 30, 2018 and 2017, respectively, and an expected rate of compensation increase of
4.50%
at September 30, 2018 and 2017. Total future Korea pension costs included in accumulated other comprehensive income are $
133
and $6 at September 30, 2018 and 2017, respectively.
Benefit costs for the combined plans were $1,236
,
$1,176 and $
1,024
in fiscal years 2018, 2017 and 2016, respectively, consisting primarily of service costs, and were recorded as fringe benefit expense under cost of goods sold and operating expenses in our Consolidated Statement of Income. Estimated future benefit payments are as follows:
|
Fiscal Year
|
|
Amount
|
|
|
2019
|
|
$
|
372
|
|
|
2020
|
|
|
611
|
|
|
2021
|
|
|
461
|
|
|
2022
|
|
|
642
|
|
|
2023
|
|
|
554
|
|
|
2024 to 2028
|
|
$
|
4,237
|
|
18.
EARNINGS PER SHARE
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 with 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.
Pursuant to the adoption of ASU 2016-09 in the first quarter of fiscal 2018, the tax benefits associated with share-based compensation plans were recorded as a tax benefit in our Consolidated Statements of Income. The number of shares that would be repurchased with the proceeds from the tax benefits was excluded from the diluted weighted average shares outstanding using treasury stock method under the new guidance.
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:
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
110,043
|
|
|
$
|
86,952
|
|
|
$
|
59,849
|
|
Less: income attributable to participating securities
|
|
|
(123
|
)
|
|
|
(256
|
)
|
|
|
(361
|
)
|
Net income available to common stockholders
|
|
$
|
109,920
|
|
|
$
|
86,696
|
|
|
$
|
59,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
25,517,825
|
|
|
|
25,015,458
|
|
|
|
24,076,549
|
|
(Denominator for basic calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
725,339
|
|
|
|
497,029
|
|
|
|
400,444
|
|
Diluted weighted-average common shares
|
|
|
26,243,164
|
|
|
|
25,512,487
|
|
|
|
24,476,993
|
|
(Denominator for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.31
|
|
|
$
|
3.47
|
|
|
$
|
2.47
|
|
Diluted
|
|
$
|
4.19
|
|
|
$
|
3.40
|
|
|
$
|
2.43
|
|
For the twelve months ended September 30, 2018, 2017, and 2016, approximately 0.1 million, 0.4 million and 1.1 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share.
19.
FINANCIAL INFORMATION BY INDUSTRY SEGMENT, GEOGRAPHIC AREA AND PRODUCT LINE
We operate predominantly in one industry segment – the development, manufacture, and sale of CMP consumables. Revenues are attributed to the United States and foreign regions based upon the customer location and not the geographic location from which our products were shipped. Financial information by geographic area was as follows:
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
79,019
|
|
|
$
|
72,670
|
|
|
$
|
62,400
|
|
Asia
|
|
|
471,215
|
|
|
|
394,874
|
|
|
|
336,312
|
|
Europe
|
|
|
39,889
|
|
|
|
39,635
|
|
|
|
31,737
|
|
Total
|
|
$
|
590,123
|
|
|
$
|
507,179
|
|
|
$
|
430,449
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
60,818
|
|
|
$
|
52,155
|
|
|
$
|
50,595
|
|
Asia
|
|
|
50,573
|
|
|
|
54,201
|
|
|
|
55,893
|
|
Europe
|
|
|
12
|
|
|
|
5
|
|
|
|
8
|
|
Total
|
|
$
|
111,403
|
|
|
$
|
106,361
|
|
|
$
|
106,496
|
|
The following table shows revenue from sales to customers in foreign countries that accounted for more than ten percent of our total revenue in fiscal 2018, 2017 and 2016:
|
Year Ended September 30,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
South Korea
|
|
$
|
136,403
|
|
|
$
|
95,414
|
|
|
$
|
76,082
|
|
Taiwan
|
|
|
130,500
|
|
|
|
130,849
|
|
|
|
122,671
|
|
China
|
|
|
97,254
|
|
|
|
74,781
|
|
|
|
59,239
|
|
The following table shows net property, plant and equipment in foreign countries that accounted for more than ten percent of our total net property, plant and equipment in fiscal 2018, 2017 and 2016:
|
Year Ended September 30,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
Japan
|
|
$
|
19,610
|
|
|
$
|
21,408
|
|
|
$
|
26,268
|
|
South Korea
|
|
|
16,857
|
|
|
|
16,915
|
|
|
|
11,135
|
|
Taiwan
|
|
|
13,592
|
|
|
|
15,119
|
|
|
|
17,949
|
|
The following table shows revenue generated by product area in fiscal 2018, 2017 and 2016:
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Tungsten slurries
|
|
$
|
253,069
|
|
|
$
|
221,493
|
|
|
$
|
185,365
|
|
Dielectric slurries
|
|
|
139,577
|
|
|
|
120,240
|
|
|
|
99,141
|
|
Polishing Pads
|
|
|
83,117
|
|
|
|
68,673
|
|
|
|
52,067
|
|
Other Metals slurries
|
|
|
69,317
|
|
|
|
62,829
|
|
|
|
63,960
|
|
ESF and other
|
|
|
45,043
|
|
|
|
33,944
|
|
|
|
29,916
|
|
Total
|
|
$
|
590,123
|
|
|
$
|
507,179
|
|
|
$
|
430,449
|
|
On August 14, 2018, we entered into a Merger Agreement with KMG and the Merger Sub, providing for the acquisition of KMG by Cabot Microelectronics. The Merger Agreement provides that, upon the terms and subject to the satisfaction or valid waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into KMG, with KMG continuing as the surviving corporation and a wholly owned subsidiary of Cabot Microelectronics. The Merger Agreement and the Acquisition were unanimously approved by the board of directors of each of Cabot Microelectronics and KMG. At the effective time of the Acquisition, each outstanding share of KMG common stock, par value $0.01 per share ("KMG Common Stock"), other than shares owned by KMG, Cabot Microelectronics and their subsidiaries, dissenting shares, or shares subject to a KMG Equity Award (as defined below), will automatically be converted into the right to receive the following Merger Consideration, without interest: $55.65 in cash (the "Cash Consideration"); and, 0.2000 shares of common stock of Cabot Microelectronics, par value $0.001 per share ("CMC Common Stock").
Based on the closing price of
CMC Common Stock
on November 9, 2018
,
the most recent practicable date prior to the date of this Report on Form 10-K, the Merger Consideration is approximately $1.5 billion, which will fluctuate as the market price of CMC Common Stock fluctuates because a portion of the Merger Consideration is payable in a fixed number of shares of CMC Common Stock. As a result, the value of the Merger Consideration upon completion of the Acquisition could be greater than, less than or the same as the value of the Merger Consideration on the date of this report.
Cabot Microelectronics and KMG have each made customary representations, warranties and covenants in the Merger Agreement. The Merger Agreement contains certain customary termination rights by either Cabot Microelectronics or KMG, including if the Acquisition is not consummated by February 14, 2019. If the Merger Agreement is terminated under certain circumstances, KMG will be obligated to pay to Cabot Microelectronics a termination fee equal to $38.8 million in cash.
Immediately prior to closing, each restricted stock unit award relating to shares of KMG Common Stock (each, a "KMG Equity Award") granted prior to August 14, 2018 will vest (with any applicable performance targets deemed satisfied at the level specified in the applicable award agreement) and be cancelled in exchange for the Merger Consideration in respect of each share of KMG Common Stock underlying the applicable KMG Equity Award. Each KMG Equity Award granted on or following August 14, 2018 will be converted into a corresponding award relating to shares of CMC Common Stock and continue to vest post-closing in accordance with the terms of the applicable award agreement (which will include vesting on a qualifying termination of employment).
The consummation of the Acquisition is subject to customary closing conditions, including the adoption of the Merger Agreement by KMG's shareholders, the meeting for which is scheduled to occur on November 13, 2018. Assuming such conditions are satisfied or validly waived, we expect the Acquisition to close in approximately mid-November 2018.
On August 14, 2018, in connection with the execution of the Merger Agreement, we entered into a commitment letter, dated as of August 14, 2018 (the "Commitment Letter"), with JPMorgan Chase Bank, N.A., Bank of America, N.A. and Goldman Sachs Bank USA (together with the additional commitment parties described below, the "Commitment Parties") and Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which the Commitment Parties have committed to arrange and provide, subject to the terms and conditions of the Commitment Letter, a senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million (the "New Revolving Facility") and a senior secured term loan facility in an aggregate principal amount of up to $1,065.0 million (the "New Term Loan Facility", and together with the New Revolving Facility, the "New Credit Facilities"). On September 4, 2018, we amended and restated the commitment letter to add BMO Harris Financing, Inc., U.S. Bank, National Association, HSBC Bank USA, N.A., and PNC Bank, National Association as additional commitment parties.
On November 1, 2018, we completed the syndication of the New Credit Facilities. We expect the New Credit Facilities to be made available pursuant to a credit agreement to be entered into on the closing date of the Acquisition. We expect the New Revolving Facility to mature five years after the closing date of the Acquisition and the New Term Loan Facility to mature seven years after the closing date of the Acquisition and to amortize in equally quarterly installments of 0.25% of the initial principal amount. We expect that the New Credit Facilities will be guaranteed by KMG and all of CMC's and KMG's wholly-owned domestic subsidiaries and will be secured by first priority liens and security interests in substantially all assets of CMC and each guarantor, in each case subject to certain exceptions. We expect borrowings under the New Term Loan Facility to bear interest at LIBOR plus 2.25% per annum and borrowings under the New Revolving Facility to bear interests at a rate per annum equal to LIBOR plus an applicable margin of 1.00% to 1.75% depending on our consolidated leverage ratio. We also expect to be required to pay certain fees and expenses in connection with the New Credit Facility, including an undrawn commitment fee of 0.175% to 0.30% per annum based on our consolidated leverage ratio. We expect that the New Credit Facilities will require us to comply with customary affirmative and negative covenants and events of default, and that the New Revolving Facility will require us to maintain a first lien secured net leverage ratio no greater than 4.00 to 1.00. Although the syndication of the New Credit Facilities is complete, we have not yet entered into definitive documentation with respect to the New Credit Facilities. Accordingly, the terms of the New Credit Facilities may vary from those described herein.
SELECTED QUARTERLY OPERATING RESULTS
The following table presents our unaudited financial information for the eight quarterly periods ended September 30, 2018. This unaudited financial information has been prepared in accordance with accounting principles generally accepted in the United States of America, applied on a basis consistent with the annual audited financial statements and in the opinion of management, include all necessary adjustments, which consist only of normal recurring adjustments necessary to present fairly the financial results for the periods. The results for any quarter are not necessarily indicative of results for any future period.
CABOT MICROELECTRONICS CORPORATION
SELECTED QUARTERLY OPERATING RESULTS
(Unaudited and in thousands, except per share amounts)
|
|
Sept. 30,
2018
|
|
|
June 30,
2018
|
|
|
March 31,
2018
|
|
|
Dec. 31,
2017
|
|
|
Sept. 30,
2017
|
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
|
Dec. 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
156,729
|
|
|
$
|
150,437
|
|
|
$
|
142,978
|
|
|
$
|
139,979
|
|
|
$
|
136,784
|
|
|
$
|
127,957
|
|
|
$
|
119,184
|
|
|
$
|
123,254
|
|
Cost of goods sold
|
|
|
72,383
|
|
|
|
69,737
|
|
|
|
67,933
|
|
|
|
65,965
|
|
|
|
66,734
|
|
|
|
65,414
|
|
|
|
59,153
|
|
|
|
61,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
84,346
|
|
|
|
80,700
|
|
|
|
75,045
|
|
|
|
74,014
|
|
|
|
70,050
|
|
|
|
62,543
|
|
|
|
60,031
|
|
|
|
61,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and technical
|
|
|
13,372
|
|
|
|
13,059
|
|
|
|
13,368
|
|
|
|
12,151
|
|
|
|
13,839
|
|
|
|
14,333
|
|
|
|
14,090
|
|
|
|
13,396
|
|
Selling and marketing
|
|
|
6,211
|
|
|
|
6,207
|
|
|
|
6,790
|
|
|
|
5,836
|
|
|
|
8,680
|
|
|
|
7,346
|
|
|
|
7,268
|
|
|
|
7,552
|
|
General and administrative
|
|
|
20,775
|
|
|
|
19,504
|
|
|
|
17,799
|
|
|
|
18,915
|
|
|
|
14,489
|
|
|
|
13,953
|
|
|
|
14,699
|
|
|
|
12,496
|
|
Total operating expenses
|
|
|
40,358
|
|
|
|
38,770
|
|
|
|
37,957
|
|
|
|
36,902
|
|
|
|
37,008
|
|
|
|
35,632
|
|
|
|
36,057
|
|
|
|
33,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
43,988
|
|
|
|
41,930
|
|
|
|
37,088
|
|
|
|
37,112
|
|
|
|
33,042
|
|
|
|
26,911
|
|
|
|
23,974
|
|
|
|
28,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
102
|
|
|
|
513
|
|
|
|
1,158
|
|
|
|
1,132
|
|
|
|
1,127
|
|
|
|
1,117
|
|
|
|
1,135
|
|
|
|
1,150
|
|
Other income (expense), net
|
|
|
1,137
|
|
|
|
1,627
|
|
|
|
1,062
|
|
|
|
672
|
|
|
|
798
|
|
|
|
(115
|
)
|
|
|
234
|
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
45,023
|
|
|
|
43,044
|
|
|
|
36,992
|
|
|
|
36,652
|
|
|
|
32,713
|
|
|
|
25,679
|
|
|
|
23,073
|
|
|
|
27,907
|
|
Provision for income taxes
|
|
|
(3,195
|
)
|
|
|
7,873
|
|
|
|
7,255
|
|
|
|
39,735
|
|
|
|
6,211
|
|
|
|
5,740
|
|
|
|
4,793
|
|
|
|
5,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
48,218
|
|
|
$
|
35,171
|
|
|
$
|
29,737
|
|
|
$
|
(3,083
|
)
|
|
$
|
26,502
|
|
|
$
|
19,939
|
|
|
$
|
18,280
|
|
|
$
|
22,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
1.89
|
|
|
$
|
1.37
|
|
|
$
|
1.16
|
|
|
$
|
(0.12
|
)
|
|
$
|
1.05
|
|
|
$
|
0.79
|
|
|
$
|
0.73
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
25,520
|
|
|
|
25,612
|
|
|
|
25,593
|
|
|
|
25,326
|
|
|
|
25,236
|
|
|
|
25,228
|
|
|
|
25,031
|
|
|
|
24,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
1.84
|
|
|
$
|
1.34
|
|
|
$
|
1.14
|
|
|
$
|
(0.12
|
)
|
|
$
|
1.03
|
|
|
$
|
0.77
|
|
|
$
|
0.71
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
26,213
|
|
|
|
26,319
|
|
|
|
26,161
|
|
|
|
25,326
|
|
|
|
25,710
|
|
|
|
25,721
|
|
|
|
25,526
|
|
|
|
25,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.18
|
|