NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation (“Cabot Microelectronics”, “the Company”, “us”, “we”, or “our”) is a leading global supplier of consumable materials to semiconductor manufacturers and pipeline companies. The Company's products play a critical role in the production of advanced semiconductor devices, helping to enable the manufacture of smaller, faster and more complex devices by its customers. The Consolidated Financial Statements included in this Report on Form 10-Q include the financial results of KMG Chemicals, Inc. (“KMG”) since the Company's acquisition of 100% of the outstanding stock of KMG (the "Acquisition") on November 15, 2018 (the “Acquisition Date”). We operate our business within two reportable segments: Electronic Materials and Performance Materials. The Electronic Materials segment consists of our heritage Chemical Mechanical Planarization ("CMP") slurries and polishing pads businesses, as well as the KMG electronic chemicals business. The Performance Materials segment includes KMG’s heritage pipeline performance and wood treatment businesses, and our heritage QED business. For additional information, refer to Item 1 of Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
The unaudited Consolidated Financial Statements have been prepared by Cabot Microelectronics pursuant to the rules of the Securities and Exchange Commission ("SEC") and accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP"). In the opinion of management, these unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of Cabot Microelectronics’ financial position as of June 30, 2020, cash flows for the nine months ended June 30, 2020 and June 30, 2019, and results of operations for the three and nine months ended June 30, 2020 and June 30, 2019. The Consolidated Balance Sheets as of September 30, 2019 were derived from audited financial statements. The results of operations for the three and nine months ended June 30, 2020 may not be indicative of results to be expected for future periods, including the fiscal year ending September 30, 2020. This Report on Form 10-Q does not contain all of the note disclosures from our annual financial statements and should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
The Consolidated Financial Statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management's most challenging and subjective judgments include, but are not limited to, those estimates related to impairment of long-lived assets, business combinations, asset retirement obligations, goodwill, other intangible assets, income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates under different assumptions or conditions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
Significant Accounting Policies and Estimates
There have been no material changes, except for those disclosed below, made to the Company’s significant accounting policies disclosed in Note 2 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, “Leases” (ASC 842) to change the criteria for recognizing leasing transactions. The provisions of this guidance require a lessee to recognize a right of use asset and a corresponding lease liability for operating leases. Under this guidance, rental expense for operating leases, continues to be recognized on a straight-line basis over the non-cancelable lease term. As of October 1, 2019, the Company began applying the provisions of this standard prospectively for all lease transactions as of and after the effective date. Upon adoption, the Company recorded a lease liability of $30,881 and a right of use asset of $30,115. The difference between the right of use asset and lease liability primarily relates to deferred rent recorded prior to adoption. The new guidance did not have a material impact on our results of operations or cash flows for the three and nine months ended June 30, 2020. Refer to Note 11 of this Report on Form 10-Q for additional information regarding the Company’s lease transactions.
In February 2018, the FASB issued ASU No. 2018-02 “Income Statement – Reporting Comprehensive Income” (Topic 220). The amendments in this standard allow for an optional one-time reclassification of the stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the Tax Cuts and Jobs Act (the "Tax Act") from Accumulated other comprehensive income to Retained earnings. The Company adopted this standard effective October 1, 2019, which resulted in an increase of $488 to both Retained earnings and Accumulated other comprehensive loss.
Accounting Pronouncements Issued But Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326). This standard requires financial assets measured at amortized cost to be presented at the net amount expected to be collected using an allowance account. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The guidance was amended through various ASU's subsequent to ASU 2016-13, all of which will be effective for the Company beginning October 1, 2020. We are assessing the impact of this guidance and currently do not expect it to have a material impact.
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. We are finalizing the impact of this standard on our disclosures and do not expect the adoption to have a material impact.
In December 2019, the FASB issued ASU No. 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The ASU was issued to simplify Topic 740 through improving consistency and removing certain exceptions to general principles. ASU 2019-12 will be effective for us beginning October 1, 2021. We are currently evaluating the impact of implementing this standard on our financial statements.
In March 2020, the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The standard provides optional guidance for accounting for contracts, hedging relationships, and other transactions affected by the reference rate reform, if certain criteria are met. The provisions of this standard are available for election through December 31, 2022. We are currently evaluating the impact of the reference rate reform on our contracts and the resulting impact of adopting this standard on our financial statements.
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregated Revenue
The Company disaggregates revenue by product area and segment as it best depicts the nature and amount of the Company’s revenue. See Note 18 of this Report on Form 10-Q for more information.
Contract Balances
The following table provides information about contract liability balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
September 30, 2019
|
Contract liabilities (current)
|
$
|
9,410
|
|
|
$
|
5,008
|
|
Contract liabilities (noncurrent)
|
1,019
|
|
|
1,130
|
|
At June 30, 2020, the current portion of contract liabilities of $9,410 is included in Accrued expenses, income taxes payable and other current liabilities, and the non-current portion of $1,019 is included in Other long-term liabilities in the Consolidated Balance Sheets. The amount of revenue recognized during the three and nine months ended June 30, 2020 that was included in the opening current contract liability balances in our Performance Materials segment were $400 and $3,427, respectively. The amount of revenue recognized during the three and nine months ended June 30, 2020 that was included in our opening contract liability balances in our Electronic Materials segment was not material.
Transaction Price Allocated to Remaining Performance Obligations
The table below discloses (1) the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period for contracts with an original duration of greater than one year and (2) when the Company expects to recognize this revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 1 Year
|
|
1-3 Years
|
|
|
|
Total
|
Revenue expected to be recognized on contract liability amounts as of June 30, 2020
|
$
|
1,426
|
|
|
$
|
1,019
|
|
|
|
|
$
|
2,445
|
|
4. BUSINESS COMBINATION
On the Acquisition Date, the Company completed the Acquisition and KMG’s results of operations have been included in our Consolidated Statements of Income and Consolidated Statements of Comprehensive Income (Loss) from that date. Refer to Note 4 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 for additional information on the Acquisition.
The following unaudited supplemental pro forma information summarizes the combined results of operations for Cabot Microelectronics and KMG as if the Acquisition had occurred on October 1, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30, 2019
|
Revenue
|
|
|
$
|
821,029
|
|
Net income
|
|
|
80,618
|
|
Earnings per share - basic
|
|
|
2.79
|
|
Earnings per share - diluted
|
|
|
2.74
|
|
The following costs are included in the nine months ended June 30, 2019:
•Non-recurring transaction costs of $1,568.
•Non-recurring transaction-related employee costs, such as accelerated stock compensation expense, retention and severance expense of $283.
The historical financial information has been adjusted by applying the Company’s accounting policies and giving effect to the pro forma adjustments, which consist of (i) amortization expense associated with identified intangible assets; (ii) depreciation of fixed asset step-up (for pre-Acquisition periods only); (iii) accretion of inventory step-up value; (iv) the elimination of Interest expense on pre-Acquisition KMG debt and replacement of Interest expense related to the Acquisition-related financing; (v) transaction-related costs; (vi) accelerated share-based compensation expense (pre-Acquisition periods only); (vii) retention and severance expense incurred as a direct result of the Acquisition; and (viii) an adjustment to tax-effect the aforementioned unaudited pro forma adjustments using an estimated weighted-average effective income tax rate of each entity and the jurisdictions to which the above adjustments relate. The pro forma consolidated results are not necessarily indicative of what the consolidated results actually would have been had the Acquisition been completed on October 1, 2017. The pro forma consolidated results do not purport to project future results of combined operations, nor do they reflect the expected realization of any revenue or cost synergies associated with the Acquisition.
5. 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 debt, that we measured at fair value on a recurring basis at June 30, 2020 and September 30, 2019. See Note 10 of this Report on Form 10-Q for a discussion of our debt. We have classified the following assets and liabilities in accordance with the fair value hierarchy set forth in the applicable standards. In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest-level input that is significant to the determination of the fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
354,708
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
354,708
|
|
Other long-term investments
|
|
1,147
|
|
|
—
|
|
|
—
|
|
|
1,147
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
355,855
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
355,855
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
—
|
|
|
41,692
|
|
|
—
|
|
|
41,692
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
41,692
|
|
|
$
|
—
|
|
|
$
|
41,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
188,495
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
188,495
|
|
Other long-term investments
|
|
980
|
|
|
—
|
|
|
—
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
189,475
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
189,475
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
—
|
|
|
24,244
|
|
|
—
|
|
|
24,244
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
24,244
|
|
|
$
|
—
|
|
|
$
|
24,244
|
|
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 non-qualified 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 non-qualified plan. Consequently, the Company owns the assets and the related offsetting liability for disbursement until such time as a participant makes a qualifying withdrawal.
Our derivative financial instruments include foreign exchange contracts and an interest rate swap contract. 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 London Inter-bank Offered Rate ("LIBOR") based yield curves for the interest rate swap, and forward rates and/or the Overnight Index Swap 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. See Note 12 of this Report on Form 10-Q for more information on our use of derivative financial instruments.
6. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
September 30, 2019
|
Raw materials
|
$
|
64,028
|
|
|
$
|
60,157
|
|
Work in process
|
17,706
|
|
|
12,940
|
|
Finished goods
|
80,071
|
|
|
72,181
|
|
Total
|
$
|
161,805
|
|
|
$
|
145,278
|
|
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill activity for each of the Company’s reportable segments for the nine months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Materials
|
|
Performance Materials
|
|
Total
|
Balance at September 30, 2019
|
|
$
|
352,797
|
|
|
$
|
357,274
|
|
|
$
|
710,071
|
|
|
|
|
|
|
|
|
Foreign currency translation impact
|
|
3,448
|
|
|
(844)
|
|
|
2,604
|
|
Other
|
|
—
|
|
|
1,205
|
|
|
1,205
|
|
Balance at June 30, 2020
|
|
$
|
356,245
|
|
|
$
|
357,635
|
|
|
$
|
713,880
|
|
The components of other intangible assets are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
September 30, 2019
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Product technology, trade secrets and know-how
|
|
$
|
121,979
|
|
|
$
|
45,722
|
|
|
$
|
123,948
|
|
|
$
|
37,993
|
|
Acquired patents and licenses
|
|
9,023
|
|
|
8,636
|
|
|
9,023
|
|
|
8,397
|
|
Customer relationships, trade names, and distribution rights
|
|
687,976
|
|
|
121,373
|
|
|
684,764
|
|
|
64,471
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets subject to amortization
|
|
818,978
|
|
|
175,731
|
|
|
817,735
|
|
|
110,861
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
Other indefinite-lived intangibles*
|
|
47,170
|
|
|
|
|
47,170
|
|
|
|
Total other intangible assets not subject to amortization
|
|
47,170
|
|
|
|
|
47,170
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
866,148
|
|
|
$
|
175,731
|
|
|
$
|
864,905
|
|
|
$
|
110,861
|
|
*Other indefinite-lived intangible assets not subject to amortization consist primarily of trade names.
Amortization expense was $20,788 and $64,166 for the three and nine months ended June 30, 2020, respectively, and was $16,926 and $43,244 for the three and nine months ended June 30, 2019, respectively. Estimated future amortization expense for the five succeeding fiscal years is as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Estimated
Amortization
Expense
|
Remainder of 2020
|
|
$
|
21,293
|
|
2021
|
|
89,952
|
|
2022
|
|
80,479
|
|
2023
|
|
68,039
|
|
2024
|
|
60,144
|
|
We continue to actively monitor the industries in which we operate and our businesses' performance for indicators of potential impairment. If current global macroeconomic conditions related to the COVID-19 pandemic ("Pandemic") persist and adversely impact our Company, we may have future impairments of goodwill or other intangible assets. Potential future impairments could be material to the Company’s Consolidated Balance Sheets and to the Consolidated Statements of Income, but we do not expect them to affect the Company’s reported Net cash provided by operating activities.
During the fiscal year ended September 30, 2019, the Company recognized asset impairment charges of $67,372 for the wood treatment asset group due to the previously announced planned closure of the Company's wood treatment business' facilities by approximately the end of calendar year 2021. The Company continues to monitor the wood treatment asset group, which is also a reporting unit, for further indicators of long-lived asset and goodwill impairment and determined that as of June 30, 2020, the wood treatment business had a triggering event, which required interim impairment tests to be performed. For the quarter ended June 30, 2020, the estimated future cash flows of the asset group and fair value of the reporting unit exceeded the carrying value by approximately 8% and 1%, respectively, and there was no impairment recognized for the wood treatment asset group or reporting unit. The fair value of the wood treatment reporting unit was determined using an income approach based upon an estimate of discounted future cash flows of the business through the expected closure date. As the Company approaches the closure date of the facilities and there are lower estimated future cash flows, it is probable that the carrying value of the wood treatment asset group and reporting unit will not be recoverable, resulting in future impairments. The carrying value of the wood treatment business includes $35 million and $8 million of goodwill and intangible assets, respectively. Absent a sale of the wood treatment business, the amount of impairments that we expect to recognize as we approach the closure date could be material.
8. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
September 30, 2019
|
Long-term right of use asset
|
$
|
31,241
|
|
|
$
|
—
|
|
Long-term vendor contract assets
|
3,346
|
|
|
1,164
|
|
Long-term SERP investment
|
1,147
|
|
|
980
|
|
Prepaid unamortized debt issuance cost - revolver
|
580
|
|
|
709
|
|
Other long-term assets
|
3,182
|
|
|
2,858
|
|
Total
|
$
|
39,496
|
|
|
$
|
5,711
|
|
9. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
September 30, 2019
|
Accrued compensation
|
$
|
43,414
|
|
|
$
|
33,809
|
|
Income taxes payable
|
16,954
|
|
|
15,725
|
|
Dividends payable
|
13,521
|
|
|
12,953
|
|
Interest rate swap liability
|
12,595
|
|
|
5,351
|
|
Contract liabilities (current)
|
9,410
|
|
|
5,008
|
|
Current portion of operating lease liability
|
6,313
|
|
|
—
|
|
Goods and services received, not yet invoiced
|
4,885
|
|
|
3,075
|
|
Taxes, other than income taxes
|
4,744
|
|
|
6,281
|
|
Accrued interest
|
2,144
|
|
|
3,739
|
|
KMG - Bernuth warehouse fire-related (See Note 13)
|
866
|
|
|
7,998
|
|
Other
|
11,553
|
|
|
9,679
|
|
Total
|
$
|
126,399
|
|
|
$
|
103,618
|
|
10. DEBT
Total debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
September 30, 2019
|
Senior Secured Term Loan Facility, one-month LIBOR plus 2.00% and one-month LIBOR plus 2.25%, respectively
|
$
|
941,688
|
|
|
$
|
959,676
|
|
Revolving Credit Facility, one-month LIBOR plus 1.50%
|
150,000
|
|
|
—
|
|
Total debt
|
1,091,688
|
|
|
959,676
|
|
Less: Unamortized debt issuance costs
|
(15,684)
|
|
|
(17,900)
|
|
Total debt, excluding unamortized debt issuance costs
|
1,076,004
|
|
|
941,776
|
|
Less: Current maturities and short-term debt
|
(163,313)
|
|
|
(13,313)
|
|
Total long-term debt excluding current maturities
|
$
|
912,691
|
|
|
$
|
928,463
|
|
|
|
|
|
During the first quarter of fiscal year 2020, the Company amended its credit agreement ("Amended Credit Agreement") to reduce the interest rate on term loan borrowings, which are defined as the Senior Secured Term Loan Facility under the Amended Credit Agreement ("Term Loan Facility"). Term Loan Facility borrowings under the Amended Credit Agreement bear an interest rate equal to, at the Company's option, either (a) a LIBOR, subject to a 0.00% floor, or (b) a base rate in each case, plus an applicable margin of 2.00% for LIBOR loans and 1.00% for base rate loans.
During the second quarter of fiscal year 2020, the Company drew $150.0 million under the Amended Credit Agreement's revolving credit facility ("Revolving Credit Facility") as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertain global economic conditions resulting from the Pandemic. The Revolving Credit Facility borrowing remains outstanding as of June 30, 2020. As of June 30, 2020, our available credit under the Revolving Credit Facility was $50,000, which includes our letter of credit sub-facility. The interest rate on the Revolving Credit Facility is either (a) a LIBOR, subject to a 0.00% floor, or (b) a base rate in each case, plus an applicable margin of 1.50% for LIBOR loans and 0.50% for base rate loans. The applicable margin for borrowings under the Revolving Credit Facility varies depending on the Company’s first lien secured net leverage ratio. Borrowings under the Revolving Credit Facility are classified as short-term debt and the proceeds are included in Cash and cash equivalents in the Company's Consolidated Balance Sheet as of June 30, 2020.
At June 30, 2020 and September 30, 2019, the fair value of the Term Loan Facility, using level 2 inputs, approximated its carrying value as the loan bears a floating market rate of interest. Due to the short-term nature of the borrowing under the Revolving Credit Facility, its carrying value approximates fair value.
As of June 30, 2020, scheduled principal repayments of the Term Loan Facility were:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Principal Repayments
|
Remainder of 2020
|
|
$
|
5,325
|
|
2021
|
|
10,650
|
|
2022
|
|
10,650
|
|
2023
|
|
10,650
|
|
2024
|
|
10,650
|
|
Greater than 5 years
|
|
893,763
|
|
Total
|
|
$
|
941,688
|
|
11. LEASES
Effective October 1, 2019, the Company adopted the new lease accounting guidance which requires the recognition of a right of use asset and a corresponding lease liability for operating leases. As part of the adoption, the Company elected to apply provisions of the guidance to operating leases with terms of more than twelve months for all lease classes except for real estate leases for which the guidance is applied to all leases. Additionally, the Company elected to account for non-lease components and lease components together as a single lease component for all asset classes. The Company’s lease transactions primarily consist of leases for facilities, equipment and vehicles under operating leases. The Company does not have any material finance leases. The weighted average remaining lease term for operating leases included in the lease liability was approximately six years as of June 30, 2020. Certain of the Company’s leases have an option to extend the lease term and the renewal period is included in determining the lease term for leases where the renewal option is reasonably certain to be exercised.
Total lease cost for the Company for the three months ended June 30, 2020 was $2,221, which included $1,868 related to operating lease cost and $353 related to short-term and variable lease costs. Total lease cost for the Company for the nine months ended June 30, 2020 was $7,027, which included $5,754 related to operating lease cost and $1,273 related to short-term and variable lease costs. The weighted average discount rate for operating leases as of June 30, 2020 was 3.06%, and was determined based on the secured incremental borrowing rate of the Company and its subsidiaries as the implicit rate is not readily determinable.
Future maturities of operating lease liabilities for the years ended September 30 are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
Remainder of 2020
|
|
$
|
1,865
|
|
2021
|
|
6,709
|
|
2022
|
|
6,234
|
|
2023
|
|
5,263
|
|
2024
|
|
4,179
|
|
2025 and future years
|
|
11,626
|
|
Total future lease payments
|
|
35,876
|
|
Less: Imputed interest
|
|
3,197
|
|
Operating lease liability
|
|
32,679
|
|
Less: Current portion of operating lease liability
|
|
6,313
|
|
Long-term portion of operating lease liability recorded in Other long-term liabilities
|
|
$
|
26,366
|
|
As of September 30, 2019, minimum lease payments under operating leases with noncancelable terms in excess of one are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2020
|
|
$
|
6,984
|
|
2021
|
|
4,941
|
|
2022
|
|
4,291
|
|
2023
|
|
4,122
|
|
2024
|
|
3,710
|
|
Thereafter
|
|
12,010
|
|
Total future minimum lease payments
|
|
$
|
36,058
|
|
12. 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 Consolidated Balance Sheets at fair value on a gross basis.
Cash Flow Hedges - Interest Rate Swap Contract
During the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap contract to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. As of June 30, 2020, the notional value of the interest rate swap was $652,000. This value is scheduled to decrease bi-annually and will expire on January 31, 2024.
We have designated this swap contract as a cash flow hedge. Based on certain quantitative and qualitative assessments, we have determined that the hedge is highly effective and qualifies for hedge accounting. Accordingly, unrealized gains and losses on the hedge are recorded in other comprehensive income. Realized gains and losses are recorded on the same financial statement line as the hedged item, which is Interest expense.
Foreign Currency Contracts Not Designated as Hedges
On a regular basis, 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 (expense), net in the accompanying Consolidated Statements of Income in the period in which the exchange rates change. As of June 30, 2020 and September 30, 2019, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign currencies were $6,419 and $6,239, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $26,800 and $24,270, respectively.
The fair value of our derivative instruments included in the Consolidated Balance Sheets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
|
Derivative Liabilities
|
|
|
|
Consolidated Balance Sheet Location
|
June 30, 2020
|
|
September 30, 2019
|
|
June 30, 2020
|
|
September 30, 2019
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
Accrued expenses, income taxes payable and other current liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,595
|
|
|
$
|
5,351
|
|
|
Other long-term liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,832
|
|
|
$
|
18,841
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accrued expenses, income taxes payable and other current liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
265
|
|
|
$
|
52
|
|
The following table summarizes the effect of our derivative instruments on our Consolidated Statements of Income for the three and nine months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Statement of Income
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
Consolidated Statement of Income Location
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
Interest expense
|
$
|
(3,262)
|
|
|
$
|
39
|
|
|
$
|
(5,799)
|
|
|
$
|
40
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other income (expense), net
|
$
|
(128)
|
|
|
$
|
(29)
|
|
|
$
|
(390)
|
|
|
$
|
(67)
|
|
We recorded an unrealized loss of $2,868 and $17,885, net of tax, in Accumulated other comprehensive income during the three and nine months ended June 30, 2020, respectively, for the interest rate swap. As of June 30, 2020, during the next twelve months, we expect approximately $12,595 to be reclassified from Accumulated other comprehensive income (loss) into Interest expense related to our interest rate swap based on projected rates of the LIBOR forward curve as of June 30, 2020.
13. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
We periodically become a party to legal proceedings, arbitrations, and regulatory proceedings (“contingencies”) arising in the ordinary course of our business operations. The ultimate resolution of these contingencies is subject to significant uncertainty, and should we fail to prevail in any of them or should several of them be resolved against us in the same reporting period, these matters could, individually or in the aggregate, be material to our consolidated financial statements. One of these contingencies, related to Star Lake Canal, which we assumed in connection with the Acquisition, is discussed below. The ultimate outcome of these matters, however, cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in our consolidated financial statements. The Company records legal costs associated with loss contingencies as expenses in the period in which they are incurred.
On May 31, 2019, a fire occurred at the warehouse of the wood treatment facility of KMG’s subsidiary, KMG-Bernuth, in Tuscaloosa, Alabama, which processes pentachlorophenol ("penta") for sale to customers in the United States and Canada. The warehouse fire, which we believe originated from non-hazardous waste materials temporarily stored in the warehouse for recycling purposes, caused no injuries and was extinguished in less than an hour. Company personnel investigated the incident, and KMG-Bernuth commenced cleanup with oversight from certain local, state and federal authorities. The carrying value of the warehouse and the affected inventory are not material. Applying the accounting guidance under ASC 410-30, Environmental Obligations and ASC 450, Contingencies, we determined that since we have environmental obligations as of the date of the fire, costs for the fire waste cleanup and disposal should be recognized to the extent they are probable and reasonably estimable. We recorded expense of $9,494 in fiscal year 2019 and $1,688 during the nine months ended June 30, 2020, of which $866 remains accrued as a loss contingency. These disposal costs were charged to Cost of sales. Although we believe we have completed cleanup efforts related to the fire incident and the assessment of materials in the warehouse that had been impacted by the incident, there are potential additional disposal and other costs that cannot be reasonably estimated as of this time related to these materials due to the nature of federally-regulated penta-related requirements. We incurred significant fire waste cleanup and disposal costs and certain other costs related to the assessment of the impacted warehouse material due to these requirements, and we may incur additional significant disposal costs related to such materials. We intend to continue to update the estimated losses as new information becomes available.
In addition, we are working with our insurance carriers on possible recovery of losses and costs related to the fire incident. We received $468 of insurance recovery during the three months ended June 30, 2020 which was recorded in Cost of sales. At this point we cannot reasonably estimate whether we will receive any additional insurance recoveries, or if so, the amount of any such recoveries. As such, no additional insurance recoveries have been recognized as of June 30, 2020.
Separately, in 2014, prior to the Acquisition, the United States Environmental Protection Agency (“EPA”) had notified KMG-Bernuth, that the EPA considered it to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, by virtue of its relationship with certain alleged predecessor companies, including Idacon, Inc (f/k/a Sonford Chemical Company) in connection with the Star Lake Canal Superfund Site near Beaumont, Texas. The EPA has estimated that the remediation will cost approximately $22.0 million. KMG-Bernuth and approximately seven other parties entered into an agreement with the EPA in September 2016 to complete a remedial design phase of the remediation of the site. The remediation work will be performed under a separate future agreement. Although KMG-Bernuth has not conceded liability, a reserve in connection with the remedial design was established, and as of June 30, 2020, the reserve remaining was $553.
We also may face other governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with this or other past and present operations. We accrue for environmental liabilities when a determination can be made that they are probable and reasonably estimable. Other than as described herein, we are not involved in any legal proceedings that we believe could have a material impact on our consolidated financial position, results of operations or cash flows.
In addition, our Company is subject to extensive federal, state and local laws, regulations and ordinances in the United States and in other countries. These regulatory requirements relate to the use, generation, storage, handling, emission, transportation and discharge of certain hazardous materials, substances and waste into the environment. The Company, including its KMG entities, manage Environmental, Health and Safety (“EHS”) matters related to protection of the environment and human health, the cleanup of contaminated sites, the treatment, storage and disposal of wastes, and the emission of substances into the air or waterways, among other EHS concerns. Governmental authorities can enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company devotes significant financial resources to compliance, including costs for ongoing compliance.
Certain licenses, permits and product registrations are required for the Company’s products and operations in the United States, Mexico and other countries in which it does business. The licenses, permits and product registrations are subject to revocation, modification and renewal by governmental authorities. In the United States in particular, producers and distributors of penta, which is a product manufactured and sold by KMG-Bernuth as part of the wood treatment business, are subject to registration and notification requirements under the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) and comparable state law in order to sell this product in the United States. Compliance with these requirements may have a significant effect on our business, financial condition and results of operations.
We are subject to contingencies, including litigation relating to EHS laws and regulations, commercial disputes and other matters. Certain of these contingencies are discussed above and below. The ultimate resolution of these contingencies is subject to significant uncertainty, and should we fail to prevail in any of them or should several of them be resolved against us in the same reporting period, these matters could, individually or in the aggregate, be material to the consolidated financial statements. The ultimate outcome of these matters cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in our consolidated financial statements.
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 June 30, 2020, 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.
POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS
We have defined benefit plans covering employees in certain foreign jurisdictions as required by local law that are unfunded. Net service costs are recorded as fringe benefit expense under Cost of sales and Operating expenses, and all other costs are recorded in the Other income (expense), net in our Consolidated Statements of Income. The projected benefit obligations and accumulated benefit obligations under all such unfunded plans are updated annually during the fourth quarter of our fiscal year. Benefit payments under all such unfunded plans to be paid over the next ten years are expected to be approximately $7,872. For more information regarding these plans, refer to Note 20 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
PURCHASE OBLIGATIONS
Purchase obligations include 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 an abrasive particle supply agreement with Cabot Corporation, our former parent company which is not a related party, the current term of which now runs through December 2022. As of June 30, 2020, purchase obligations include $24,729 of contractual commitments related to this agreement. In addition, we have a purchase commitment of $7,863 to purchase non-water based carrier fluid.
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below summarizes the components of Accumulated other comprehensive income (loss) (AOCI), net of Provision for income taxes/(benefit), for the three and nine months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Beginning Balance
|
$
|
(40,648)
|
|
|
$
|
(502)
|
|
|
$
|
(23,238)
|
|
|
$
|
4,539
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
9,048
|
|
|
3,284
|
|
|
5,113
|
|
|
4,696
|
|
Income taxes
|
38
|
|
|
(585)
|
|
|
99
|
|
|
(564)
|
|
Foreign currency translation adjustment, net of tax
|
9,086
|
|
|
2,699
|
|
|
5,212
|
|
|
4,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain loss on cash flow hedges:
|
|
|
|
|
|
|
|
Change in fair value
|
(3,694)
|
|
|
(11,635)
|
|
|
(23,034)
|
|
|
(19,987)
|
|
Reclassification adjustment into earnings
|
3,262
|
|
|
(39)
|
|
|
5,799
|
|
|
(40)
|
|
Income taxes
|
98
|
|
|
2,630
|
|
|
3,853
|
|
|
4,509
|
|
Unrealized loss on cash flow hedges, net of tax
|
(334)
|
|
|
(9,044)
|
|
|
(13,382)
|
|
|
(15,518)
|
|
|
|
|
|
|
|
|
|
Effect of the adoption of the stranded tax effect accounting standard
|
—
|
|
|
—
|
|
|
(497)
|
|
|
—
|
|
Income taxes
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
Effect of the adoption of the stranded tax effect accounting standard, net of tax
|
—
|
|
|
—
|
|
|
(488)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net Change
|
8,752
|
|
|
(6,345)
|
|
|
(8,658)
|
|
|
(11,386)
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
$
|
(31,896)
|
|
|
$
|
(6,847)
|
|
|
$
|
(31,896)
|
|
|
$
|
(6,847)
|
|
The before tax amount reclassified from AOCI to Net income during the three and nine months ended June 30, 2020 and 2019, related to cash flow hedges, were recorded as Interest expense on our Consolidated Statements of Income.
During the first quarter of fiscal 2020, the Company adopted ASU No. 2018-02 regarding the reclassification of stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the Tax Act and as a result, we reclassified $488 of stranded tax effects from Accumulated other comprehensive income to Retained earnings.
15. SHARE-BASED COMPENSATION PLANS
We issue share-based awards under the following programs: our Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 ("OIP"); our Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated January 1, 2010 ("ESPP"); and, pursuant to the OIP, our Directors' Deferred Compensation Plan, as amended September 23, 2008, and our 2001 Executive Officer Deposit Share Program. In March 2017, our stockholders approved the material terms of performance-based awards under the OIP for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended.
We record share-based compensation expense for all share-based awards, including stock option grants, and restricted stock, restricted stock unit ("RSU") and performance share unit ("PSU") awards, and ESPP 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 ESPP purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and 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 stock option grants and RSU awards stated 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, we record the total share-based compensation expense upon award for those employees who have met the retirement eligibility at the grant date. 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 an established market 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 the Company and index constituents, the risk-free interest rate and stock price volatility. Subsequent to the Acquisition, the performance metrics of the PSUs awarded in December 2017 were modified to reflect the performance metrics expected due to the Acquisition for the post-Acquisition time period subject to the PSUs.
KMG awards granted subsequent to the entry into the definitive agreement for the Acquisition, but prior to the Acquisition Date, were converted to our RSUs (“Replacement Awards”), with vesting in three equal installments on the first three anniversaries of the original award date. If the recipient was terminated without cause or resigned with good reason during the 18 months following the Acquisition Date, the Replacement Award will have vested as of such termination date in a number of shares equal to 150% of the Replacement Award.
The share-based compensation expense of $3,253 related to the Replacement Awards, including accelerated vesting, for the first quarter of fiscal 2019 is included in the table below. The expense for the second and third quarters of fiscal 2019 as well as the first, second, and third quarters of fiscal 2020 included in the table below is not material.
Share-based compensation expense for the three and nine months ended June 30, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cost of sales
|
$
|
625
|
|
|
$
|
540
|
|
|
$
|
2,154
|
|
|
$
|
2,169
|
|
Research, development and technical
|
411
|
|
|
390
|
|
|
1,618
|
|
|
1,733
|
|
Selling, general and administrative
|
2,158
|
|
|
2,410
|
|
|
8,419
|
|
|
11,146
|
|
Total share-based compensation expense
|
3,194
|
|
|
3,340
|
|
|
12,191
|
|
|
15,048
|
|
Tax benefit
|
(609)
|
|
|
(670)
|
|
|
(2,380)
|
|
|
(3,121)
|
|
Total share-based compensation expense, net of tax
|
$
|
2,585
|
|
|
$
|
2,670
|
|
|
$
|
9,811
|
|
|
$
|
11,927
|
|
For additional information regarding our share-based compensation plans and the estimation of fair value, refer to Note 16 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
16. INCOME TAXES
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted by the United States in March 2020. The CARES Act includes provisions to support individuals and businesses in the form of loans, grants, and tax changes, among other types of relief. The CARES Act did not have a material impact on our Provision for income taxes for the three and nine months ended June 30, 2020. We have not taken any loans or grants pursuant to the CARES Act or other United States Pandemic-related legislation.
The Company’s effective income tax rate was 27.0% and 22.5% for the three and nine months ended June 30, 2020, respectively, compared to an effective income tax rate of 52.1% and 36.9% for the three and nine months ended June 30, 2019, respectively. The decrease in our effective tax rate for the nine months ended June 30, 2020 compared to the prior year is primarily attributable to the absence of discrete charge recorded in Q3 of FY19 related to the final regulations issued under the 2017 Tax Act, higher tax benefit related to share based compensation, and the absence of non-deductible costs related to the Acquisition.
17. EARNINGS PER SHARE
Basic earnings per share 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 “Earnings per Share”. Diluted earnings per share 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 and units using the treasury stock method.
Basic and diluted earnings per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
Net income available to common shares
|
$
|
34,525
|
|
|
$
|
18,878
|
|
|
$
|
105,973
|
|
|
$
|
59,458
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares
|
29,079
|
|
|
29,064
|
|
|
29,157
|
|
|
28,399
|
|
(Denominator for basic calculation)
|
|
|
|
|
|
|
|
Weighted average effect of dilutive securities
|
377
|
|
|
504
|
|
|
446
|
|
|
525
|
|
Diluted weighted average common shares
|
29,456
|
|
|
29,568
|
|
|
29,603
|
|
|
28,924
|
|
(Denominator for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.19
|
|
|
$
|
0.65
|
|
|
$
|
3.63
|
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
Diluted
|
$
|
1.17
|
|
|
$
|
0.64
|
|
|
$
|
3.58
|
|
|
$
|
2.06
|
|
Approximately 124 and 96 shares for the three and nine months ended June 30, 2020, respectively, and 144 and 204 shares for the three and nine months ended June 30, 2019, respectively, attributable to outstanding stock options were excluded from the calculation of Diluted earnings per share as their inclusion would have been anti-dilutive.
18. SEGMENT REPORTING
We identify our segments based on our management structure and the financial information used by our chief executive officer, who is our chief operating decision maker, to assess segment performance and allocate resources among our operating units. We have the following two reportable segments:
Electronic Materials
Electronic Materials includes products and solutions for the semiconductor industry. We manufacture and sell CMP consumables, including CMP slurries and polishing pads, and high-purity process chemicals used to etch and clean silicon wafers in the production of semiconductors, photovoltaics (solar cells) and flat panel displays.
Performance Materials
Performance Materials includes pipeline performance products and services, wood treatment products, and products and equipment used in the precision optics industry.
Our chief operating decision maker evaluates segment performance based upon revenue and segment adjusted EBITDA. Segment adjusted EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, adjusted for certain items that affect comparability from period to period. These adjustments include items related to the Acquisition, such as Acquisition and integration-related expenses, the impact of fair value adjustments to inventory acquired from KMG, certain costs related to the KMG-Bernuth warehouse fire, net of insurance recovery, net restructuring charges related to the wood treatment reporting unit, and costs related to the Pandemic, net of grants received. We exclude these items from earnings when presenting our adjusted EBITDA measure because we believe they will be incurred infrequently and/or are otherwise not indicative of a segment's regular, ongoing operating performance. Adjusted EBITDA is also the basis of a performance metric for our fiscal 2020 Short-Term Incentive Program ("STIP"). In addition, our chief operating decision maker does not use assets by segment to evaluate performance or allocate resources. Therefore, we do not disclose assets by segment.
Revenue from external customers by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Segment Revenue:
|
|
|
|
|
|
|
|
Electronic Materials:
|
|
|
|
|
|
|
|
CMP Slurries
|
$
|
117,680
|
|
|
$
|
108,617
|
|
|
$
|
359,828
|
|
|
$
|
345,244
|
|
Electronic Chemicals
|
78,614
|
|
|
80,103
|
|
|
234,693
|
|
|
198,474
|
|
CMP Pads
|
24,073
|
|
|
23,403
|
|
|
65,476
|
|
|
71,868
|
|
Total Electronic Materials
|
220,367
|
|
|
212,123
|
|
|
659,997
|
|
|
615,586
|
|
|
|
|
|
|
|
|
|
Performance Materials
|
54,360
|
|
|
59,759
|
|
|
182,066
|
|
|
143,465
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
274,727
|
|
|
$
|
271,882
|
|
|
$
|
842,063
|
|
|
$
|
759,051
|
|
Capital expenditures by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Capital Expenditures:
|
|
|
|
|
|
|
|
Electronic Materials
|
$
|
6,141
|
|
|
$
|
11,293
|
|
|
$
|
19,720
|
|
|
$
|
27,842
|
|
Performance Materials
|
33,550
|
|
|
1,286
|
|
|
79,247
|
|
|
2,909
|
|
Corporate
|
3,900
|
|
|
852
|
|
|
8,967
|
|
|
3,096
|
|
Total
|
$
|
43,591
|
|
|
$
|
13,431
|
|
|
$
|
107,934
|
|
|
$
|
33,847
|
|
Adjusted EBITDA by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Segment adjusted EBITDA:
|
|
|
|
|
|
|
|
Electronic Materials
|
$
|
76,855
|
|
|
$
|
70,859
|
|
|
$
|
227,662
|
|
|
$
|
220,594
|
|
Performance Materials
|
26,959
|
|
|
27,425
|
|
|
84,370
|
|
|
63,152
|
|
Unallocated corporate expenses
|
(11,773)
|
|
|
(12,527)
|
|
|
(38,226)
|
|
|
(35,621)
|
|
Interest expense
|
(10,406)
|
|
|
(12,757)
|
|
|
(33,079)
|
|
|
(32,978)
|
|
Interest income
|
131
|
|
|
417
|
|
|
589
|
|
|
2,004
|
|
Depreciation and amortization
|
(31,324)
|
|
|
(26,587)
|
|
|
(95,516)
|
|
|
(70,476)
|
|
Acquisition and integration-related expenses
|
(2,735)
|
|
|
(2,910)
|
|
|
(7,785)
|
|
|
(33,108)
|
|
Charge for fair value write-up of acquired inventory sold
|
—
|
|
|
(42)
|
|
|
—
|
|
|
(14,869)
|
|
Costs related to KMG-Bernuth warehouse fire, net of insurance recovery
|
(622)
|
|
|
(4,450)
|
|
|
(1,220)
|
|
|
(4,450)
|
|
Net costs related to restructuring of the wood treatment business
|
293
|
|
|
—
|
|
|
293
|
|
|
—
|
|
Costs related to the Pandemic, net of grants received
|
(112)
|
|
|
—
|
|
|
(349)
|
|
|
—
|
|
Income before income taxes
|
$
|
47,266
|
|
|
$
|
39,428
|
|
|
$
|
136,739
|
|
|
$
|
94,248
|
|
The two segments operate independently and serve different markets and customers, as a result there are no sales between segments. The unallocated portions of corporate functions, including finance, legal, human resources, information technology, and corporate development, are not directly attributable to a reportable segment.