All other schedules are omitted, because they are not required, are not applicable, or the information is included in the consolidated financial statements and notes thereto.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1.
BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our'') supplies high-performance polishing slurries and pads used in the manufacture of advanced integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP). CMP polishes surfaces at an atomic level, thereby helping to enable IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. We develop, produce and sell CMP slurries for polishing many of the conducting and insulating materials used in IC devices. 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.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
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, 2017.
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
bad debt expense, inventory valuation, valuation and classification of auction rate securities, impairment of long-lived assets and investments, business combinations, goodwill, other intangible assets, interest rate swaps, net investment hedge, share-based compensation, income taxes and contingencies.
We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates under different assumptions or conditions.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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 as of September 30, 2017 or 2016. See Note 4 for a more detailed discussion of other financial instruments.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. Our allowance for doubtful accounts is based on historical collection experience, adjusted for any specific known conditions or circumstances such as customer bankruptcies and increased risk due to economic conditions. 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, 2017 as follows:
Balance as of September 30, 2016
|
|
$
|
1,828
|
|
Amounts charged to expense
|
|
|
26
|
|
Deductions and adjustments
|
|
|
(107
|
)
|
Balance as of September 30, 2017
|
|
$
|
1,747
|
|
CONCENTRATION OF CREDIT RISK
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 one customer bankruptcy in fiscal 2012 and 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.
Customers who represented more than 10% of revenue are as follows:
|
Year Ended September 30,
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
Samsung Group (Samsung)
|
16%
|
|
15%
|
|
15%
|
Taiwan Semiconductor Manufacturing Co. (TSMC)
|
13%
|
|
15%
|
|
18%
|
Micron Technology Inc.
|
10%
|
|
*
|
|
*
|
* Not a customer with more than 10% revenue in fiscal 2016 and 2015.
TSMC accounted for 12.2% and 12.9% of net accounts receivable at September 30, 2017 and 2016, respectively. Samsung accounted for 11.9% and 8.3% of net accounts receivable at September 30, 2017 and 2016, respectively. Micron accounted for 10.7% and 7.2% of net accounts receivable at September 30, 2017 and 2016, respectively.
Due to recent financial challenges experienced by Toshiba, we continue to monitor their financial condition and ability to make the required payments due on our receivables. At September 30, 2017 our accounts receivable balance with Toshiba represented a U.S. dollar equivalent of $2,323, which equates to 3.6% of our total accounts receivable balance of $64,793, net of allowance for doubtful accounts, and of which no amounts are past due. At present, we do not believe it is probable that the receivables from Toshiba are impaired, and accordingly, we have not recorded a related allowance for doubtful accounts.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, and accounts payable approximate their fair values due to their short-term, highly liquid characteristics. See Note 4 for a more detailed discussion of the fair value of financial instruments.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or market. 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
|
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
Reviews are regularly performed to determine whether facts and circumstances exist that indicate the carrying amount of assets may not be recoverable or the useful life is shorter than originally estimated. Asset recoverability assessment begins by comparing the projected undiscounted cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If assets are determined to be recoverable, but their useful lives are shorter than originally estimated, the net book value of the asset is depreciated over the newly determined remaining useful life. We recorded impairment expense on a certain long-lived asset of $860 in fiscal year 2017, which was subsequently sold for a gain. We did not record any impairment expense on property, plant and equipment in fiscal 2016 and 2015. See Note 6 for more information regarding impairment.
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
We amortize intangible assets with finite lives over their estimated useful lives, which range from one to eleven years. Intangible assets with finite lives are reviewed 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 the 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, referred to as a component. 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 four reporting units, all of which have goodwill as of September 30, 2017. Goodwill impairment testing requires a comparison of the fair value of each reporting unit to the carrying value. If the carrying value exceeds fair value, then the fair value of the assets and liabilities for the reporting unit is used to determine the "implied" fair value of goodwill. The amount of the impairment is the difference between the carrying value and the implied fair value of goodwill. 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"). In fiscal 2015, 2016 and 2017, we chose to use a step one analysis for goodwill impairment. 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 2015, 2016 and 2017, we used a step one analysis to determine the recoverability of indefinite-lived intangible assets. As discussed in more detail in Note 3, we recorded $1,000 in impairment expense on an in-process technology asset during the fourth quarter of fiscal 2016. We determined that goodwill and the other intangible assets were not impaired as of September 30, 2017.
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 fiscal years 2015, 2016 and part of 2017, 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 11 for a discussion of derivative financial instruments.
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. The fair value of our interest rate swaps is estimated using standard valuation models using market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value. We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income. Hedge effectiveness is tested quarterly to determine if hedge treatment is appropriate.
NET INVESTMENT HEDGE
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 transaction is designated as a net
investment hedge and accounted for under hedge accounting.
The fair value of our forward foreign exchange contracts is estimated using a standard valuation model and market-based observable inputs over the contractual term, including forward rates and/or the Overnight Index Swap (OIS) curve as of the valuation date. Unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Hedge effectiveness is assessed using the Forward Method, consistent with guidance in ASC 815. Consistent with this guidance, the entire change in fair value of the forward contracts is recorded in the same manner as the related currency translation adjustments, within other comprehensive income, as the hedging instruments are expected to be fully effective unless the amount hedged exceeds the net investment in the foreign operation, or the foreign operation is liquidated.
As these contracts will settle on September 26, 2022 and there are no periodic settlements, we recorded the liability in other long-term liabilities on our Consolidated Balance Sheets as of September 30, 2017.
See Note 11 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 18 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 Engineered Surface Finishes (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 based on differences between the book and tax bases of recorded assets and liabilities, using enacted tax rates. The effect on deferred tax assets and liabilities of a change 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 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 years 2015, 2016 and 2017 we elected to permanently reinvest the earnings of all of our foreign subsidiaries rather than repatriate the earnings to the U.S. See Note 17 for additional information on income taxes.
SHARE-BASED COMPENSATION
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards expected to vest, which requires the use of an estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield, and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement eligible pursuant to their grants during the contractual term of the grant. The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
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.
For additional information regarding our share-based compensation plans, refer to Note 13.
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.
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 will be effective for us beginning October 1, 2018, and may be applied on a full retrospective or modified retrospective approach. In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" (Topic 606). ASU 2016-08 provides clarification for the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, ASU No. 2016-11, and ASU 2016-12, and ASU 2017-13 issued in September 2017, all of which provide additional clarification of the original revenue standard. We are working to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts, and identify and implement changes to business processes, systems and controls to support recognition and disclosure under the new standard. We anticipate any changes to revenue recognition for our Company are likely to be related to certain pricing and incentive arrangements with our customers within our CMP consumables business, but we believe the recognition of revenue will remain substantially unchanged for the majority of our contracts with customers. We anticipate we will use the modified retrospective approach to adoption, which will require us to record the cumulative effect of adopting the standard as an adjustment to the beginning balance of retained earnings. We continue to evaluate the impact of the implementation of these standards on our financial statements.
In July 2015, the FASB issued ASU No, 2015-11, "Simplifying the Measurement of Inventory" (Topic 330). The provisions of ASU 2015-11 require an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 will be effective for us beginning October 1, 2017, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" (Subtopic 825-10). The provision of ASU 2016-01 requires equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation, to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 simplifies the impairment assessment of equity securities by permitting a qualitative assessment each reporting period, and makes changes to presentation and disclosure of certain classes of financial assets and liabilities. ASU 2016-01 will be effective for us beginning October 1, 2018, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The provisions of ASU 2016-02 require a dual approach for lessee accounting under which a lessee would recognize a right-of-use asset and a corresponding lease liability. Leases will be classified as either finance or operating leases. For finance leases, a lessee will recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee will recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements, to afford better understanding of an entity's leasing activities, including any significant judgments and estimates. ASU 2016-02 will be effective for us beginning October 1, 2019, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In March 2016, the FASB issued ASU No. 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" (Topic 815). The provisions of ASU 2016-05 provide clarification that a change in a counterparty of a derivative instrument that has been designated as a hedging instrument does not require dedesignation of that hedging relationship, provided that all other hedge accounting criteria is met. ASU 2016-05 will be effective for us beginning October 1, 2018, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements.
In March 2016, the FASB issued ASU No. 2016-07, "Simplifying the Transition to the Equity Method of Accounting" (Topic 323). The provisions of ASU 2016-07 require equity method investors to add the cost of acquiring additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method prospectively as of the date the investment qualifies for the equity method of accounting. ASU 2016-07 will be effective for us beginning October 1, 2018, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements as we currently have no equity method investments.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718). The provisions of this standard involve several aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will be effective for us beginning October 1, 2017, but early adoption is permitted. We currently expect that the adoption of this standard will introduce additional variability in our effective tax rate; however, the impact will not be known until the related share-based award activity occurs. The adoption will also impact the classification of excess tax benefits on the Consolidated Statements of Cash Flows.
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 August 2016, the FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments" (Topic 230). The provisions of this standard provide guidance on the classification within the statement of cash flows of certain types of cash receipts and cash payments in an effort to eliminate diversity in practice. ASU 2016-15 will be effective for us beginning October 1, 2018, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements as we currently do not have any of the cash receipts or payments discussed in this standard.
In October 2016, the FASB issued ASU No. 2016-16 "Intra-Entity Transfers of Assets Other Than Inventory" (Topic 740). The provisions of this standard provide guidance on recognition of taxes related to intra-entity transfer of assets other than inventory when the transfer occurs. ASU 2016-16 will be effective for us beginning October 1, 2018, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In October 2016, the FASB issued ASU No. 2016-17 "Interest Held through Related Parties That Are under Common Control" (Topic 810). The provisions of this standard provide further guidance related to ASU 2015-02, and also provide guidance on consolidation in relation to VIEs and related parties. ASU 2016-17 will be effective for us beginning October 1, 2017, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements as we currently have no interest in any entities that may be considered VIE.
In January 2017, the FASB issued ASU No. 2017-01 "Clarifying the Definition of a Business" (Topic 805). The provisions of this standard provide guidance to determine whether the acquisition or sale of a set of assets or activities constitutes a business. The standard requires that an integrated set of assets and activities include an input and a substantive process that together contribute to the ability to create output. ASU 2017-01 will be effective for us beginning October 1, 2017, and early adoption is permitted under specified conditions. We do not believe the adoption of this standard will have a material effect on our financial statements.
In January 2017, the FASB issued ASU No. 2017-04 "Simplifying the Test for Goodwill Impairment" (Topic 350). The provisions of this standard eliminate Step 2 from the goodwill impairment test, which required an entity to determine the fair value of its assets and liabilities at the impairment testing date of its goodwill and compare it to its carrying amount to determine a possible impairment loss. Goodwill impairment testing will now be done by comparing the fair value of a reporting unit and its carrying amount. ASU 2017-04 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2017. We are currently evaluating the impact of implementation of this standard on our financial statements.
In March 2017, the FASB issued ASU No. 2017-07 "Improving the Presentation of Net Period Pension Cost and Net Period Postretirement Benefit Cost" (Topic 715). The provisions of ASU 2017-07 provided specific guidance on the presentation of the components of net benefit cost. ASU 2017-07 will be effective for us beginning October 1, 2018. We are currently evaluating the impact of implementation of this standard on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09 "Scope of Modification Accounting" (Topic 718). The provisions of ASU 2017-09 provide specific guidance about which changes to the term or conditions of a share-based payment require an entity to apply modification accounting. ASU 2017-09 will be effective for us beginning October 1, 2018. We are currently evaluating the impact of implementation of this standard on our financial statements.
In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging" (Topic 815). The provisions of this standard amend the hedge accounting model in ASC 815 to expand an entity's ability to hedge nonfinancial and financial risk components, reduce complexity in fair value hedges of interest rate risk, eliminate the requirement to separately measure and report hedge ineffectiveness, and generally require the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU 2017-09 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.
On October 22, 2015, the Company completed the acquisition of 100% of the outstanding stock of NexPlanar Corporation (NexPlanar), which was a privately held, U.S. based company that specialized in the development, manufacture and sale of advanced CMP pad solutions for the semiconductor industry. We acquired NexPlanar to expand our polishing pad portfolio by adding a complementary pad technology for which we believe we can leverage our global infrastructure to better serve customers on a global basis, including offering performance-advantaged slurry and pad consumable sets. We paid a total of $
126,976
, including total purchase consideration of $142,237
, less cash acquired of $15,261
. The purchase consideration includes $
142,167
paid at the date of acquisition and $70 for a post-closing adjustment.
In addition, we paid $154
in compensation expense related to certain unvested NexPlanar stock options settled in cash at the acquisition date.
The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition:
Total purchase consideration
|
|
$
|
142,237
|
|
|
|
|
|
|
Cash
|
|
$
|
15,261
|
|
Accounts receivable
|
|
|
3,052
|
|
Inventories
|
|
|
2,768
|
|
Prepaid expenses and other current assets
|
|
|
1,712
|
|
Property, plant and equipment
|
|
|
6,901
|
|
Intangible assets
|
|
|
55,000
|
|
Deferred tax assets
|
|
|
20,509
|
|
Other long-term assets
|
|
|
1,458
|
|
Accounts payable
|
|
|
(1,057
|
)
|
Accrued expenses and other current liabilities
|
|
|
(1,472
|
)
|
Deferred tax liabilities
|
|
|
(20,313
|
)
|
Total identifiable net assets
|
|
|
83,819
|
|
Goodwill
|
|
|
58,418
|
|
|
|
$
|
142,237
|
|
The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. We finalized the purchase price allocation during the fourth quarter of fiscal 2016. We believe that the information we used provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed.
The fair values of identifiable assets and liabilities acquired were developed with the assistance of third party valuation firms. The fair value of acquired property, plant and equipment is valued at its "value-in-use" as there are no known plans to dispose of any assets. The fair value of acquired identifiable intangible assets was determined using the "income approach" on an individual asset basis. The key assumptions used in the calculation of the discounted cash flows include projected revenue, gross margin, operating expenses, and discount rate. The valuations and the underlying assumptions have been deemed reasonable by Company management. There are inherent uncertainties and management judgment required in these determinations.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:
|
|
Fair
|
|
Useful
|
|
|
Value
|
|
Life
|
Trade name
|
|
$
|
8,000
|
|
7 years
|
Customer relationships
|
|
|
8,000
|
|
11 years
|
Developed technology - product family A
|
|
|
32,000
|
|
7 years
|
Developed technology - product family B
|
|
|
2,000
|
|
9 years
|
In-process technology
|
|
|
5,000
|
|
|
Total intangible assets
|
|
$
|
55,000
|
|
|
The trade name represents the estimated fair value of the brand and name recognition associated with the marketing of NexPlanar's product offerings. Customer relationships represent the estimated fair value of the underlying relationships and agreements with NexPlanar customers. Developed technology represents the estimated fair value of NexPlanar's technology, processes and knowledge regarding its product offerings. In-process technology represents the fair value assigned to technology projects under development as of the acquisition date. The in-process technology assets are capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, we will make a determination of the appropriate useful life and the related amortization will be recorded as an expense over the estimated useful life based on the future expected cash flow stream. In the fourth quarter of fiscal 2016, we recorded impairment expense of $1,000 representing the entire fair value of one of the in-process technology assets as management determined that expected future cash flows were insufficient to support the value of the asset. The intangible assets subject to amortization have a weighted average useful life of 7.7 years and are being amortized on a straight-line basis.
The excess of purchase consideration over the fair value of net assets acquired was recorded as goodwill, and is not deductible for income tax purposes. The goodwill is primarily attributable to anticipated revenue growth from the combination of our and NexPlanar pad technologies, expected synergies from the combined operations, and the assembled workforce of NexPlanar. NexPlanar's results of operations have been included in our unaudited consolidated statements of income and comprehensive income from the date of acquisition.
The following supplemental pro forma information summarizes the combined results of operations for Cabot Microelectronics and NexPlanar as if the acquisition had occurred on October 1, 2014.
|
|
Year Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
431,856
|
|
|
$
|
437,326
|
|
Net income
|
|
|
60,620
|
|
|
|
46,928
|
|
Earnings per share - basic
|
|
|
2.50
|
|
|
|
1.93
|
|
Earnings per share - diluted
|
|
$
|
2.46
|
|
|
$
|
1.89
|
|
The historical financial information has been adjusted to give effect to the pro forma adjustments, which consist of amortization expense associated with intangible assets, and the elimination of interest expense on NexPlanar debt repaid prior to the acquisition. The pro forma amounts for the years ended September 30, 2016 and 2015 exclude the impact of compensation expense related to unvested NexPlanar stock options settled in cash, and the step-up of inventory as these items are assumed to have occurred during the quarter ended December 31, 2014 had the acquisition been completed on October 1, 2014. The pro forma consolidated results are not necessarily indicative of what the consolidated results actually would have been had the acquisition been completed on October 1, 2014. The pro forma consolidated results do not purport to project future results of combined operations, nor do they reflect the expected realization of any revenue or cost synergies associated with the acquisition.
4.
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,
2017 and 2016
. See Note 10 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, 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
|
|
September 30, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
287,479
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
287,479
|
|
Other long-term investments
|
|
|
1,028
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,028
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
28
|
|
Total assets
|
|
$
|
288,507
|
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
288,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
1,469
|
|
|
|
-
|
|
|
|
1,469
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,469
|
|
|
$
|
-
|
|
|
$
|
1,469
|
|
Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active markets. We invest 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 $929 in the fourth quarter of fiscal 2017 to reflect its fair value as of September 30, 2017.
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. 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. 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. See Note 11 for more information on our use of derivative financial instruments.
5.
INVENTORIES
Inventories consisted of the following:
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Raw materials
|
|
$
|
36,415
|
|
|
$
|
45,109
|
|
Work in process
|
|
|
7,365
|
|
|
|
4,668
|
|
Finished goods
|
|
|
28,093
|
|
|
|
22,346
|
|
Total
|
|
$
|
71,873
|
|
|
$
|
72,123
|
|
6.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
17,823
|
|
|
$
|
18,636
|
|
Buildings
|
|
|
104,057
|
|
|
|
100,084
|
|
Machinery and equipment
|
|
|
187,649
|
|
|
|
198,870
|
|
Furniture and fixtures
|
|
|
6,770
|
|
|
|
6,642
|
|
Information systems
|
|
|
32,748
|
|
|
|
29,573
|
|
Construction in progress
|
|
|
10,439
|
|
|
|
6,358
|
|
Total property, plant and equipment
|
|
|
359,486
|
|
|
|
360,163
|
|
Less: accumulated depreciation
|
|
|
(253,125
|
)
|
|
|
(253,667
|
)
|
Net property, plant and equipment
|
|
$
|
106,361
|
|
|
$
|
106,496
|
|
Depreciation expense was $17,195, $16,915 and $16,060 for the years ended September 30, 2017, 2016 and 2015, 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 the sale of surplus research and development equipment. We did not record any impairment expense on property, plant and equipment in fiscal 2016 and 2015.
7.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $101,932 and $100,639 as of September 30, 2017 and 2016, respectively. The increase in goodwill was due to $1,147 in foreign exchange fluctuations of the New Taiwan dollar and an adjustment of $146 to a deferred tax liability.
The components of other intangible assets are as follows:
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated Amortization
|
|
Other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product technology
|
|
$
|
42,287
|
|
|
$
|
17,604
|
|
|
$
|
42,194
|
|
|
$
|
12,718
|
|
Acquired patents and licenses
|
|
|
8,270
|
|
|
|
8,241
|
|
|
|
8,270
|
|
|
|
8,155
|
|
Trade secrets and know-how
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
Customer relationships, distribution rights and other
|
|
|
28,229
|
|
|
|
15,421
|
|
|
|
27,900
|
|
|
|
12,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets subject to amortization
|
|
|
81,336
|
|
|
|
43,816
|
|
|
|
80,914
|
|
|
|
35,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process technology
|
|
|
4,000
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
Other indefinite-lived intangibles*
|
|
|
1,190
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
Total other intangible assets not subject to amortization
|
|
|
5,190
|
|
|
|
|
|
|
|
5,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
86,526
|
|
|
$
|
43,816
|
|
|
$
|
86,104
|
|
|
$
|
35,628
|
|
|
*
|
Other indefinite-lived intangibles not subject to amortization primarily consist of trade names.
|
Amortization expense was $7,795, $8,176 and $2,346 for fiscal 2017, 2016 and 2015, respectively. Estimated future amortization expense of intangible assets as of September 30, 2017 for the five succeeding fiscal years is as follows:
|
Fiscal Year
|
|
Estimated Amortization
Expense
|
|
|
|
|
|
|
|
2018
|
|
$
|
7,118
|
|
|
2019
|
|
|
6,675
|
|
|
2020
|
|
|
6,670
|
|
|
2021
|
|
|
6,664
|
|
|
2022
|
|
|
6,664
|
|
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 2016 and 2017, we chose to use a step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment.
We completed our annual impairment test during our fourth quarter of fiscal 2017 and concluded that no impairment existed. During the fourth quarter of fiscal 2016, as discussed in Note 3, 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. No impairment existed as a result of our impairment test during the fourth quarter of fiscal 2015. There have been no cumulative impairment charges recorded on the goodwill for any of our reporting units.
8.
OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Auction rate securities (ARS)
|
|
$
|
5,319
|
|
|
$
|
5,494
|
|
Long-term contract asset
|
|
|
2,115
|
|
|
|
3,055
|
|
Other long-term assets
|
|
|
2,154
|
|
|
|
2,465
|
|
Other long-term investments
|
|
|
929
|
|
|
|
1,028
|
|
Total
|
|
$
|
10,517
|
|
|
$
|
12,042
|
|
We classify our ARS investments as held-to-maturity and have recorded them at cost. Our ARS investments at September 30, 2017 consisted of two tax exempt municipal debt securities with a total par value of $5,319, both of which have maturities greater than ten years. The ARS market began to experience illiquidity in early 2008, and this illiquidity continues. Despite this lack of liquidity, there have been no defaults in payment of the underlying securities and interest income on these holdings continues to be received on scheduled interest payment dates. Our ARS, when purchased, were issued by A-rated municipalities. Although the credit ratings of both municipalities have been downgraded since our original investment, one of the ARS is credit enhanced with bond insurance, and the other has become an obligation of the bond insurer. Both ARS currently carry a credit rating of AA- by Standard & Poor's.
The fair value of our ARS, determined using level 2 fair value inputs, was $4,884 as of September 30, 2017. We have classified our ARS as held-to-maturity based on our intention and ability to hold the securities until maturity. We believe the gross unrecognized loss of $435 is due to the illiquidity in the ARS market, rather than to credit loss. Although we believe these securities will ultimately be collected in full, we believe that it is not likely that we will be able to monetize the securities in our next business cycle (which for us is generally one year). We will continue to monitor our ARS for impairment indicators, which may require us to record an impairment charge that is deemed other-than-temporary.
In the third quarter of fiscal 2015, we amended a supply contract with an existing supplier. The amended agreement includes a fee of $4,500, which provides us the option to purchase certain raw materials beyond calendar 2016. This fee was recorded as a long-term asset at its present value and is being amortized into cost of goods sold on a straight-line basis through December 31, 2019, the expiration date of the agreement. See Note 18 for more information regarding this contract.
Other long-term assets are comprised of the long-term portion of prepaid unamortized debt costs, related to our Revolving Credit Facility, as well as miscellaneous deposits and prepayments on contracts extending beyond the next 12 months. As discussed in Note 10, we reclassified $435 of prepaid debt costs related to our Term Loan out of other long-term assets as of September 30, 2016, in accordance with the adoption of a new accounting pronouncement. As discussed in Note 4, we recorded a long-term asset and a corresponding long-term liability of $929 representing the fair value of our SERP investments as of September 30, 2017.
9.
ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued compensation
|
|
$
|
35,332
|
|
|
$
|
17,856
|
|
Dividends payable
|
|
|
5,314
|
|
|
|
4,502
|
|
Goods and services received, not yet invoiced
|
|
|
2,172
|
|
|
|
2,648
|
|
Deferred revenue and customer advances
|
|
|
1,559
|
|
|
|
782
|
|
Warranty accrual
|
|
|
247
|
|
|
|
243
|
|
Income taxes payable
|
|
|
9,717
|
|
|
|
7,878
|
|
Taxes, other than income taxes
|
|
|
1,688
|
|
|
|
775
|
|
Current portion of long-term contract liability
|
|
|
1,500
|
|
|
|
1,500
|
|
Other
|
|
|
5,122
|
|
|
|
5,211
|
|
Total
|
|
$
|
62,651
|
|
|
$
|
41,395
|
|
10.
DEBT
On February 13, 2012, we entered into a credit agreement (the "Credit Agreement") among the Company, as Borrower, Bank of America, N.A., as administrative agent, swing line lender and an L/C issuer, Bank of America Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, JPMorgan Chase Bank, N.A., as syndication agent, and Wells Fargo Bank, N.A. as documentation agent. The Credit Agreement provided us with a $175,000 term loan (the "Term Loan"), which we drew on February 27, 2012 to fund approximately half of the special cash dividend we paid to our stockholders on March 1, 2012, and a $100,000 revolving credit facility (the "Revolving Credit Facility"), which has never been drawn, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans. The Term Loan and the Revolving Credit Facility are referred to as the "Credit Facilities." On June 27, 2014, we entered into an amendment (the "Amendment") to the Credit Agreement, which (i) increased term loan commitments by $17,500, from $157,500 to $175,000, the same level as the original amount under the Credit Agreement at its inception in 2012; (ii) increased the uncommitted accordion feature on the Revolving Credit Facility from $75,000 to $100,000; (iii) extended the expiration date of the Credit Facilities from February 13, 2017 to June 27, 2019; (iv) relaxed the consolidated leverage ratio financial covenant; and (v) revised certain pricing terms and other terms within the Credit Agreement. On June 27, 2014, we drew the $17,500 of increased term loan commitments, bringing the total outstanding commitments under the Term Loan to $175,000.
Borrowings under the amended Credit Facilities (other than in respect of swing-line loans) bear interest at a rate per annum equal to the "Applicable Rate" (as defined below) plus, at our option, either (1) a LIBOR rate determined by reference to the cost of funds for deposits in the relevant currency for the interest period relevant to such borrowing or (2) the "Base Rate", which is the highest of (x) the prime rate of Bank of America, N.A., (y) the federal funds rate plus 1/2 of 1.00% and (z) the one-month LIBOR rate plus 1.00%. The current Applicable Rate for borrowings under the Credit Facilities is 1.50%, as amended, with respect to LIBOR borrowings and 0.25% with respect to Base Rate borrowings, with such Applicable Rate subject to adjustment based on our consolidated leverage ratio. Swing-line loans bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the Revolving Credit Facility. In addition to paying interest on outstanding principal under the Credit Agreement, we pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. As amended, the fee ranges from 0.20% to 0.30%, based on our consolidated leverage ratio. Interest expense and commitment fees are paid according to the relevant interest period and no less frequently than at the end of each calendar quarter. We also pay letter of credit fees as necessary. The Term Loan has periodic scheduled repayments; however, we may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary "breakage" fees and reemployment costs in the case of LIBOR borrowings. All obligations under the Credit Agreement are guaranteed by certain of our existing and future direct and indirect domestic subsidiaries. The obligations under the Credit Agreement and guarantees of those obligations are secured, subject to certain exceptions, by first priority liens and security interests in the assets of the Company and certain of its domestic subsidiaries.
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, 2017, our consolidated leverage ratio was 0.91 to 1.00 and our consolidated fixed charge coverage ratio was 3.41 to 1.00. The Credit Agreement also contains customary affirmative covenants and events of default. We believe we are in compliance with these covenants.
At September 30, 2017, the fair value of the Term Loan, using level 2 inputs, approximates its carrying value of $144,376 as the loan bears a floating market rate of interest. As of September 30, 2017, $10,938 of the debt outstanding is classified as short-term.
In the first quarter of fiscal 2017, we adopted the provisions of Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03) and ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements". The provisions of ASU 2015-03 require an entity to present the debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction to the carrying amount of that debt liability. ASU 2015-03 requires adoption on a retrospective basis, wherein the balance sheet of each individual period should be adjusted to reflect the period-specific effects of the guidance. ASU 2015-15 provides guidance on the treatment of debt issuance costs related to line-of-credit arrangements based on comments provided by the SEC staff. The SEC staff stated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. In accordance with this guidance, we have separated our debt issuance costs between those attributable to our Term Loan and those attributable to our Revolving Credit Facility. The debt issuance costs attributable to our Term Loan are presented as a reduction of the long-term debt balance on our Consolidated Balance Sheet, while the debt issuance costs attributable to our Revolving Credit Facility remain in prepaid expenses and other current assets, and other long-term assets. As of September 30, 2017, $441 of debt issuance costs related to our Term Loan are presented as a reduction of long-term debt. Debt issuance costs related to our Revolving Credit Facility are not material. As of September 30, 2016, we reclassified $261 and $435 of debt issuance costs related to our Term Loan from prepaid expenses and other current assets, and other long-term assets, respectively, and presented them as a reduction of our long-term debt on our Consolidated Balance Sheet.
Principal repayments of the Term Loan are generally made on the last calendar day of each quarter if that day is considered to be a business day. As of September 30, 2017, scheduled principal repayments of the Term Loan were as follows:
|
Fiscal Year
|
|
Principal
Repayments
|
|
|
2018
|
|
$
|
10,938
|
|
|
2019
|
|
|
133,438
|
|
|
Total
|
|
$
|
144,376
|
|
11.
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 notional value of the swaps was $72,188 as of September 30, 2017, and the swaps are scheduled to expire on June 27, 2019.
We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income. Hedge effectiveness is tested quarterly to determine if hedge treatment continues to be appropriate.
Foreign Currency Contracts Not Designated as Hedges
Periodically we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. 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, 2017 and September 30, 2016, respectively, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign currencies were $8,176 and $8,858, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $
24,295
and $15,635, 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 these contracts will settle on September 26, 2022. We have designated these forward contracts as an effective net investment hedge. The total notional amount under the contracts is 100 billion Korean won. As of September 30, 2017, the change in the fair value of the forward contracts in the net investment hedge relationship was $1,442, which was recorded in foreign currency translation adjustments within other comprehensive income.
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
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Other long-term assets
|
|
$
|
117
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Accrued expenses, income taxes payable and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31
|
|
|
$
|
612
|
|
|
Other long-term liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Accrued expenses, income taxes payable and other current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
408
|
|
|
$
|
202
|
|
The following table summarizes the effect of our derivative instrument on our Consolidated Statements of Income for the fiscal years ended September 30, 2017, 2016 and 2015:
|
|
|
Gain (Loss) Recognized in Consolidated Statements of Income
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
Derivatives not designated as hedging instruments
|
Consolidated Statements of Income Location
|
|
2017
|
|
2016
|
|
2015
|
|
Foreign exchange contracts
|
Other income (expense), net
|
|
|
$
|
(1,462
|
)
|
|
$
|
676
|
|
|
$
|
(1,674
|
)
|
The interest rate swap agreements have been deemed to be effective since inception, so there has been no impact on our Consolidated Statement of Income. We recorded a $46 unrealized gain, net of tax, in accumulated comprehensive income during the year ended September 30, 2017 for these interest rate swaps. During the next 12 months, we expect approximately $31 to be reclassified from accumulated other comprehensive income into interest expense related to our interest rate swaps based on projected rates of the LIBOR forward curve as of September 30, 2017.
Amounts recognized in Other comprehensive income (loss) for our net investment hedge during the fiscal year ended September 30, were as follows:
|
|
2017
|
|
|
|
|
|
|
Loss on net investment hedge
|
|
$
|
1,442
|
|
|
Tax benefit
|
|
|
(522
|
)
|
|
Loss on net investment hedge, net of tax
|
|
$
|
920
|
|
12.
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, 2017, 2016, and 2015.
|
Foreign
Currency
Translation
|
|
|
Cash
Flow
Hedges
|
|
|
Pension and Other
Postretirement
Liabilities
|
|
|
Total
|
|
Balance at September 30, 2014
|
$
|
10,115
|
|
|
$
|
-
|
|
|
$
|
(860
|
)
|
|
$
|
9,255
|
|
Foreign currency translation adjustment, net of tax of $(1,731)
|
|
(14,126
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,126
|
)
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(833)
|
|
-
|
|
|
|
(1,511
|
)
|
|
|
-
|
|
|
|
(1,511
|
)
|
Reclassification adjustment into earnings, net of tax of $336
|
|
-
|
|
|
|
610
|
|
|
|
-
|
|
|
|
610
|
|
Change in pension and other postretirement, net of tax of $0
|
|
-
|
|
|
|
-
|
|
|
|
(318
|
)
|
|
|
(318
|
)
|
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
|
)
|
|
|
0
|
|
|
|
-
|
|
|
|
(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
|
|
The before tax amount reclassified from OCI to net income in fiscal 2017, 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 2017, 2016 and 2015.
13.
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, pursuant to the Merger Agreement for 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, 2017, no SARs or performance awards had 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 $5,500, $6,767 and $7,173 in fiscal 2017, 2016 and 2015, respectively. For additional information on our accounting for share-based compensation, see Note 2.
Under the OIP, as under the EIP, 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. Restricted stock units granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award 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 $6,730, $6,369 and $8,491 for fiscal 2017, 2016 and 2015, respectively.
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, 2017, a total of 435,400 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 69,751, 77,437, and 65,735 shares were issued under the ESPP during fiscal 2017, 2016 and 2015, respectively. Compensation expense related to the ESPP was $774, $763 and $686 in fiscal 2017, 2016 and 2015, respectively.
DIRECTORS' DEFERRED COMPENSATION PLAN
The Directors' Deferred Compensation Plan (DDCP), as amended and restated September 23, 2008, became effective in March 2001 and applies only to our non-employee directors. The cumulative number of shares deferred under the plan was 0 and 16,641 as of September 30, 2017 and 2016, respectively. Compensation expense related to the DDCP was $0, $42, and $95 for each of fiscal 2017, 2016 and 2015, respectively.
ACCOUNTING FOR SHARE-BASED COMPENSATION
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement-eligible pursuant to their grants during the contractual term of the grant. The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The fair value of our share-based awards, as shown below, was estimated using the Black-Scholes model with the following weighted-average assumptions, excluding the effect of our leveraged recapitalization:
|
Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Stock Options
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
|
$
|
16.50
|
|
|
$
|
14.47
|
|
|
$
|
16.99
|
|
Expected term (in years)
|
|
|
6.57
|
|
|
|
6.56
|
|
|
|
6.30
|
|
Expected volatility
|
|
|
27
|
%
|
|
|
26
|
%
|
|
|
33
|
%
|
Risk-free rate of return
|
|
|
2.1
|
%
|
|
|
1.9
|
%
|
|
|
1.9
|
%
|
Dividend yield
|
|
|
1.2
|
%
|
|
|
0.3
|
%
|
|
|
-
|
|
|
Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
ESPP
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
|
$
|
12.49
|
|
|
$
|
9.57
|
|
|
$
|
10.17
|
|
Expected term (in years)
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Expected volatility
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
24
|
%
|
Risk-free rate of return
|
|
|
0.6
|
%
|
|
|
0.4
|
%
|
|
|
0.1
|
%
|
Dividend yield
|
|
|
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, 2017, 2016 and 2015, is as follows:
|
|
Year Ended September 30,
|
|
Income statement classifications:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cost of goods sold
|
|
$
|
2,229
|
|
|
$
|
2,105
|
|
|
$
|
1,912
|
|
Research, development and technical
|
|
|
1,792
|
|
|
|
1,633
|
|
|
|
1,596
|
|
Selling and marketing
|
|
|
1,380
|
|
|
|
1,618
|
|
|
|
1,075
|
|
General and administrative
|
|
|
7,603
|
|
|
|
8,585
|
|
|
|
11,862
|
|
Tax benefit
|
|
|
(4,339
|
)
|
|
|
(4,341
|
)
|
|
|
(5,511
|
)
|
Total share-based compensation expense, net of tax
|
|
$
|
8,665
|
|
|
$
|
9,600
|
|
|
$
|
10,934
|
|
As discussed in Note 3, in 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 received annual equity awards in March 2017, pursuant to the OIP. The award agreements provide for immediate vesting of the award at the time of termination of service for any reason other than by reason of Cause, Death, Disability or a Change in Control, as defined in the OIP, if at such time the non-employee director has completed an equivalent of at least two full terms as a director of the Company, as defined in the Company's bylaws. Two of the Company's non-employee directors had completed at least two full terms of service as of the date of the March 2017 award. Consequently, the requisite service period for the award has already been satisfied and we recorded the fair value of $377 of the awards to these two directors to share-based compensation expense in the fiscal quarter ended March 31, 2017 rather than recording that expense over the one-year vesting period stated in the award agreement, as is done for the other non-employee directors who received an annual equity award in March 2017.
As discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, in conjunction with an executive officer transition, all unvested stock options and restricted stock held by our former President and Chief Executive Officer, who remains the Chairman of our Board of Directors in a non-executive capacity, vested in full on December 31, 2015, in accordance with the terms of his employment letter with the Company dated December 12, 2014. We applied the accounting guidance under Accounting Standards Codification (ASC) Topic 718 "Stock Compensation" to determine the additional share-based compensation expense to be recorded as part of the modification of the outstanding equity. The original fair value of his unvested equity totaling $5,033 was recorded ratably between the date of modification and December 31, 2015, rather than recording the expense over the original vesting period.
STOCK OPTION ACTIVITY
A summary of stock option activity under the EIP and OIP as of September 30, 2017, and changes during fiscal 2017 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, 2016
|
|
2,052,552
|
|
|
$
|
36.97
|
|
|
|
|
|
|
|
Granted
|
|
369,230
|
|
|
|
60.99
|
|
|
|
|
|
|
|
Exercised
|
|
(818,640
|
)
|
|
|
33.79
|
|
|
|
|
|
|
|
Forfeited or canceled
|
|
(86,081
|
)
|
|
|
43.38
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
1,517,061
|
|
|
$
|
44.17
|
|
|
|
7.0
|
|
|
$
|
54,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
726,897
|
|
|
$
|
36.34
|
|
|
|
5.5
|
|
|
$
|
31,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after September 30, 2017
|
|
788,676
|
|
|
$
|
51.36
|
|
|
|
8.3
|
|
|
$
|
22,535
|
|
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 of $79.93 per share on the last trading day of fiscal 2017 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 2017. The total intrinsic value of options exercised was $25,213, $12,317 and 31,546 for fiscal 2017, 2016 and 2015, respectively.
The total cash received from options exercised was $27,666, $16,623 and $33,177 for fiscal 2017, 2016 and 2015, respectively. The actual tax benefit realized for the tax deductions from options exercised was $8,743, $4,076 and $10,569 for fiscal 2017, 2016 and 2015, respectively. The total fair value of stock options vested during fiscal years 2017, 2016 and 2015 was $5,300, $7,880 and $7,005, respectively. As of September 30, 2017, there was $8,727 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 outstanding that were granted under the EIP and OIP as of September 30, 2017, and changes during fiscal 2017, are presented below:
|
Restricted Stock
Awards and Units
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
|
|
|
|
|
Nonvested at September 30, 2016
|
|
340,460
|
|
|
$
|
43.13
|
|
Granted
|
|
193,761
|
|
|
|
61.75
|
|
Vested
|
|
(154,526
|
)
|
|
|
44.64
|
|
Forfeited
|
|
(33,182
|
)
|
|
|
47.76
|
|
Nonvested at September 30, 2017
|
|
346,513
|
|
|
$
|
52.43
|
|
The total fair value of restricted stock awards and restricted stock units vested during fiscal years 2017, 2016 and 2015 was $6,898, $10,740 and $7,222, respectively. As of September 30, 2017, there was $13,058 of total unrecognized share-based compensation expense related to unvested restricted stock awards and restricted stock units under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.6 years.
14.
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 $5,256, $4,624 and $4,111 for the fiscal years ended September 30, 2017, 2016 and 2015, respectively.
15.
OTHER INCOME, NET
Other income, net, consisted of the following:
|
Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,351
|
|
|
$
|
949
|
|
|
$
|
365
|
|
Other income (expense)
|
|
|
(438
|
)
|
|
|
(296
|
)
|
|
|
316
|
|
Total other income, net
|
|
$
|
1,913
|
|
|
$
|
653
|
|
|
$
|
681
|
|
The following is a summary of our capital stock activity over the past three years:
|
Number of Shares
|
|
Common
Stock
|
|
Treasury
Stock
|
September 30, 2014
|
|
31,927,601
|
|
|
8,142,687
|
Exercise of stock options
|
|
1,324,646
|
|
|
|
Restricted stock under EIP and OIP, net of forfeitures
|
|
172,010
|
|
|
|
Restricted stock under Deposit Share Program, net of forfeitures
|
|
(811)
|
|
|
|
Common stock under ESPP
|
|
65,735
|
|
|
|
Repurchases of common stock under share repurchase plans
|
|
|
|
|
851,245
|
Repurchases of common stock – other
|
|
|
|
|
47,746
|
|
|
|
|
|
|
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 EIP and OIP, net of forfeitures
|
|
81,047
|
|
|
|
Restricted stock under Deposit Share Program, net of forfeitures
|
|
-
|
|
|
|
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
|
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 in fiscal 2017 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.
SHARE REPURCHASES
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 167,809 shares for $12,035 during fiscal 2017, 636,839 shares for $25,980 during fiscal 2016, and 851,245 shares for $40,026 during fiscal 2015. As of September 30, 2017, $121,993 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 35,739, 66,125 and 47,746 shares were purchased during fiscal 2017, 2016 and 2015, respectively, pursuant to the terms of our EIP and OIP as shares withheld from award recipients to cover payroll taxes on the vesting of shares of restricted stock granted under the EIP and OIP.
Income before income taxes was as follows:
|
Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
33,272
|
|
|
$
|
7,130
|
|
|
$
|
15,305
|
|
Foreign
|
|
|
76,100
|
|
|
|
63,308
|
|
|
|
55,892
|
|
Total
|
|
$
|
109,372
|
|
|
$
|
70,438
|
|
|
$
|
71,197
|
|
Taxes on income consisted of the following:
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S. federal and state:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
8,606
|
|
|
$
|
609
|
|
|
$
|
6,496
|
|
Deferred
|
|
|
1,550
|
|
|
|
(1,465
|
)
|
|
|
1,791
|
|
Total
|
|
$
|
10,156
|
|
|
$
|
(856
|
)
|
|
$
|
8,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
13,422
|
|
|
$
|
11,737
|
|
|
$
|
7,686
|
|
Deferred
|
|
|
(1,158
|
)
|
|
|
(292
|
)
|
|
|
(922
|
)
|
Total
|
|
|
12,264
|
|
|
|
11,445
|
|
|
|
6,764
|
|
Total U.S. and foreign
|
|
$
|
22,420
|
|
|
$
|
10,589
|
|
|
$
|
15,051
|
|
The provision for income taxes at our effective tax rate differed from the statutory rate as follows:
|
|
Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
35.0%
|
|
|
35.0%
|
|
|
35.0%
|
U.S. benefits from research and experimentation activities
|
|
(1.0)
|
|
|
(3.5)
|
|
|
(2.2)
|
State taxes, net of federal effect
|
|
0.4
|
|
|
(0.1)
|
|
|
0.6
|
Foreign income at other than U.S. rates
|
|
(14.7)
|
|
|
(16.9)
|
|
|
(21.4)
|
Executive compensation
|
|
0.3
|
|
|
0.0
|
|
|
0.6
|
Share-based compensation
|
|
0.1
|
|
|
0.7
|
|
|
0.1
|
Adjustment of prior amounts
|
|
0.0
|
|
|
0.0
|
|
|
1.4
|
Taiwan Restructuring
|
|
0.0
|
|
|
0.0
|
|
|
7.2
|
Domestic production deduction
|
|
0.0
|
|
|
(1.3)
|
|
|
(1.3)
|
Other, net
|
|
0.4
|
|
|
1.1
|
|
|
1.1
|
Provision for income taxes
|
|
20.5%
|
|
|
15.0%
|
|
|
21.1%
|
In fiscal years 2015, 2016, and 2017, we elected to permanently reinvest the historical earnings of all of our foreign subsidiaries. We have not provided for deferred taxes on approximately $254,800 of undistributed earnings of such subsidiaries. These earnings could become subject to additional income tax if they are remitted as dividends to the U.S. parent company, loaned to the U.S. parent company, or upon sale of subsidiary stock. Should we decide to repatriate these undistributed foreign earnings, we would need to record a deferred tax liability of approximately $49,000 related to earnings.
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 decrease in the effective tax rate during fiscal 2016 was primarily due to the absence of income taxes incurred in fiscal 2015 related to the restructuring of our operations in Taiwan, the reinstatement of the research and experimentation tax credit in December 2015, and the benefit of $928 related to domestic production deductions. This was partially offset by a change in the mix of earnings among various jurisdictions in which we operate, including a scheduled reduction in the benefit available under our tax holiday in South Korea from 100% to 50% of the statutory tax rate.
The results of operations for the fiscal year ended September 30, 2015 included tax adjustments to correct prior period amounts, which we determined to be immaterial to the prior periods to which they related. These adjustments, relating to the tax treatment of intercompany activities between certain of our foreign and U.S. operations, were recorded in fiscal 2015 and reduced full year net income by $868 and diluted earnings per share by approximately $0.04.
The Company had operated under a tax holiday in South Korea in conjunction with our investment in research, development and manufacturing facilities there, which expired at the end of fiscal 2017. This arrangement allowed for a tax at 50% of the statutory rate in effect in South Korea 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, 2016, and 2015 income tax provision by approximately $5,018, $3,771 and $5,446, respectively. This tax holiday increased our fiscal 2017, 2016, and 2015 diluted earnings per share by approximately $0.20, $0.15, and $0.22, 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, 2014
|
|
$
|
701
|
|
Additions for tax positions relating to the current fiscal year
|
|
|
194
|
|
Additions for tax positions relating to prior fiscal years
|
|
|
1,400
|
|
Settlements with taxing authorities
|
|
|
(522
|
)
|
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
|
|
The entire balance of unrecognized tax benefits shown above as of September 30, 2017 and 2016, 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 $100 and $65 at September 30, 2017 and 2016, respectively, and any interest and penalties charged to expense in fiscal years 2017, 2016 and 2015 was not material.
At September 30, 2017, the tax periods open to examination by the U.S. federal government included fiscal years 2014 through 2017. We believe the tax periods open to examination by U.S. state and local governments include fiscal years 2013 through 2017 and the tax periods open to examination by foreign jurisdictions include fiscal years 2012 through 2017. 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,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
5,307
|
|
|
$
|
4,612
|
|
Inventory
|
|
|
2,863
|
|
|
|
3,117
|
|
Bad debt reserve
|
|
|
585
|
|
|
|
615
|
|
Share-based compensation expense
|
|
|
6,611
|
|
|
|
8,262
|
|
Credit and other carryforwards
|
|
|
22,663
|
|
|
|
25,596
|
|
Other
|
|
|
1,488
|
|
|
|
1,487
|
|
Valuation allowance
|
|
|
(2,271
|
)
|
|
|
(3,022
|
)
|
Total deferred tax assets
|
|
$
|
37,246
|
|
|
$
|
40,667
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
14,671
|
|
|
$
|
17,374
|
|
Translation adjustment
|
|
|
300
|
|
|
|
2,079
|
|
Other
|
|
|
739
|
|
|
|
542
|
|
Total deferred tax liabilities
|
|
$
|
15,710
|
|
|
$
|
19,995
|
|
As of September 30, 2017, the Company had foreign, federal and state net operating loss carryforwards (NOLs) of $5,642, $26,075 and $35,999, respectively, which will expire over the period between fiscal year 2018 and fiscal year 2037, for which we have recorded a $1,039 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, 2017, the Company had $1,577 in state tax credit carryforwards, for which we have recorded a $1,409 gross valuation allowance. As of September 30, 2017, the Company had a capital loss carryforward of $2,772, for which we have recorded a full valuation allowance. As of September 30, 2017, the Company had foreign and federal tax credit carryforwards of $4,811 and $3,765, respectively, which will expire beginning in fiscal years 2028 through 2038.
18.
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.
PRODUCT WARRANTIES
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements, and costs related to such replacement. The warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Our warranty reserve requirements changed during fiscal 2017 as follows:
Balance as of September 30, 2016
|
|
$
|
243
|
|
Reserve for product warranty during the reporting period
|
|
|
530
|
|
Settlement of warranty
|
|
|
(526
|
)
|
Balance as of September 30, 2017
|
|
$
|
247
|
|
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, 2017, 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, 2017, and may be renewed by us. Rent expense under such arrangements during fiscal 2017, 2016 and 2015 totaled $3,120, $2,765 and $2,195, respectively.
Future minimum rental commitments under noncancelable leases as of September 30, 2017 are as follows:
|
Fiscal Year
|
|
Operating
|
|
|
|
|
|
|
|
2018
|
|
$
|
3,052
|
|
|
2019
|
|
|
2,587
|
|
|
2020
|
|
|
1,956
|
|
|
2021
|
|
|
1,392
|
|
|
2022
|
|
|
1,084
|
|
|
Thereafter
|
|
|
4,148
|
|
|
|
|
$
|
14,219
|
|
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 31, 2019. As of calendar year 2017, this agreement has provided us the option to purchase fumed silica, with minimum purchase requirements through 2018, for the term of the agreement, for which
we will pay a fee of $1,500 in each of calendar years 2017, 2018 and 2019, of which the 2017 payment has already been made. The present value of this fee was $2,933 as of September 30, 2017. The $1,500 payment due for 2018 is included in accrued expenses and the remaining $1,433 is included in other long-term liabilities on our Consolidated Balance Sheet
As of September 30, 2017, purchase obligations include $9,749 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 $
6,673
and $7,091 as of September 30, 2017 and 2016, respectively, and an accumulated benefit obligation of $
5,253
and $5,827 as of September 30, 2017 and 2016, respectively. Key assumptions used in the actuarial measurement of the Japan pension liability include weighted average discount rates of
0.50%
and 0.25% at September 30, 2017 and 2016, respectively, and an expected rate of compensation increase of
2.50% and
2.00%
at September 30, 2017 and 2016, respectively. Total future Japan pension costs included in accumulated other comprehensive income are $
1,837
and $1,667 at September 30, 2017 and 2016, respectively.
Our plans in Korea had defined benefit obligations of $
1,663
and $1,822 as of September 30, 2017 and 2016. Key assumptions used in the actuarial measurement of the Korea pension liability include weighted average discount rates of
4.00%
and 3.00% at September 30, 2017 and 2016, respectively, and an expected rate of compensation increase of
4.50%
and 5.00% at September 30, 2017 and 2016. Total future Korea pension costs included in accumulated other comprehensive income are $
6
and $530 at September 30, 2017 and 2016, respectively.
Benefit costs for the combined plans were $1,176
,
$1,024 and $962 in fiscal years 2017, 2016 and 2015, 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
|
|
|
2018
|
|
$
|
304
|
|
|
2019
|
|
|
336
|
|
|
2020
|
|
|
565
|
|
|
2021
|
|
|
412
|
|
|
2022
|
|
|
717
|
|
|
2023 to 2027
|
|
$
|
3,451
|
|
19.
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.
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
86,952
|
|
|
$
|
59,849
|
|
|
$
|
56,146
|
|
Less: income attributable to participating securities
|
|
|
(256
|
)
|
|
|
(361
|
)
|
|
|
(483
|
)
|
Net income available to common shareholders
|
|
$
|
86,696
|
|
|
$
|
59,488
|
|
|
$
|
55,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
25,015,458
|
|
|
|
24,076,549
|
|
|
|
24,039,692
|
|
(Denominator for basic calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
497,029
|
|
|
|
400,444
|
|
|
|
592,123
|
|
Diluted weighted-average common shares
|
|
|
25,512,487
|
|
|
|
24,476,993
|
|
|
|
24,631,815
|
|
(Denominator for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.47
|
|
|
$
|
2.47
|
|
|
$
|
2.32
|
|
Diluted
|
|
$
|
3.40
|
|
|
$
|
2.43
|
|
|
$
|
2.26
|
|
For the twelve months ended September 30, 2017, 2016, and 2015, approximately 0.4 million, 1.1 million and 0.7 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share.
20.
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
72,670
|
|
|
$
|
62,400
|
|
|
$
|
55,989
|
|
Asia
|
|
|
394,874
|
|
|
|
336,312
|
|
|
|
328,669
|
|
Europe
|
|
|
39,635
|
|
|
|
31,737
|
|
|
|
29,439
|
|
Total
|
|
$
|
507,179
|
|
|
$
|
430,449
|
|
|
$
|
414,097
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
52,155
|
|
|
$
|
50,595
|
|
|
$
|
43,239
|
|
Asia
|
|
|
54,201
|
|
|
|
55,893
|
|
|
|
50,504
|
|
Europe
|
|
|
5
|
|
|
|
8
|
|
|
|
-
|
|
Total
|
|
$
|
106,361
|
|
|
$
|
106,496
|
|
|
$
|
93,743
|
|
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 2017, 2016 and 2015:
|
Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
Taiwan
|
|
$
|
130,849
|
|
|
$
|
122,671
|
|
|
$
|
124,460
|
|
South Korea
|
|
|
95,414
|
|
|
|
76,082
|
|
|
|
70,608
|
|
China
|
|
|
74,781
|
|
|
|
59,239
|
|
|
|
49,350
|
|
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 2017, 2016 and 2015:
|
Year Ended September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
Japan
|
|
$
|
21,408
|
|
|
$
|
26,268
|
|
|
$
|
22,572
|
|
South Korea
|
|
|
16,915
|
|
|
|
11,135
|
|
|
|
9,658
|
|
Taiwan
|
|
|
15,119
|
|
|
|
17,949
|
|
|
|
17,419
|
|
The following table shows revenue generated by product area in fiscal 2017, 2016 and 2015:
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Tungsten slurries
|
|
$
|
221,493
|
|
|
$
|
185,365
|
|
|
$
|
178,770
|
|
Dielectric slurries
|
|
|
120,240
|
|
|
|
99,141
|
|
|
|
96,386
|
|
Polishing Pads
|
|
|
68,673
|
|
|
|
52,067
|
|
|
|
32,048
|
|
Other Metals slurries
|
|
|
62,829
|
|
|
|
63,960
|
|
|
|
71,640
|
|
Engineered Surface Finishes
|
|
|
27,900
|
|
|
|
22,369
|
|
|
|
21,534
|
|
Data storage slurries
|
|
|
6,044
|
|
|
|
7,547
|
|
|
|
13,719
|
|
Total
|
|
$
|
507,179
|
|
|
$
|
430,449
|
|
|
$
|
414,097
|
|
SELECTED QUARTERLY OPERATING RESULTS
The following table presents our unaudited financial information for the eight quarterly periods ended September 30, 2017. 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,
2017
|
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
|
Dec. 31,
2016
|
|
|
Sept. 30,
2016
|
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
|
Dec. 31,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
136,784
|
|
|
$
|
127,957
|
|
|
$
|
119,184
|
|
|
$
|
123,254
|
|
|
$
|
122,684
|
|
|
$
|
108,152
|
|
|
$
|
99,244
|
|
|
$
|
100,369
|
|
Cost of goods sold
|
|
|
66,734
|
|
|
|
65,414
|
|
|
|
59,153
|
|
|
|
61,749
|
|
|
|
61,598
|
|
|
|
56,127
|
|
|
|
52,348
|
|
|
|
50,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
70,050
|
|
|
|
62,543
|
|
|
|
60,031
|
|
|
|
61,505
|
|
|
|
61,086
|
|
|
|
52,025
|
|
|
|
46,896
|
|
|
|
50,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and technical
|
|
|
13,839
|
|
|
|
14,333
|
|
|
|
14,090
|
|
|
|
13,396
|
|
|
|
15,842
|
|
|
|
12,928
|
|
|
|
14,934
|
|
|
|
14,828
|
|
Selling and marketing
|
|
|
8,680
|
|
|
|
7,346
|
|
|
|
7,268
|
|
|
|
7,552
|
|
|
|
8,057
|
|
|
|
6,243
|
|
|
|
6,668
|
|
|
|
6,749
|
|
General and administrative
|
|
|
14,489
|
|
|
|
13,953
|
|
|
|
14,699
|
|
|
|
12,496
|
|
|
|
11,454
|
|
|
|
10,738
|
|
|
|
12,990
|
|
|
|
14,263
|
|
Total operating expenses
|
|
|
37,008
|
|
|
|
35,632
|
|
|
|
36,057
|
|
|
|
33,444
|
|
|
|
35,353
|
|
|
|
29,909
|
|
|
|
34,592
|
|
|
|
35,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
33,042
|
|
|
|
26,911
|
|
|
|
23,974
|
|
|
|
28,061
|
|
|
|
25,733
|
|
|
|
22,116
|
|
|
|
12,304
|
|
|
|
14,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,127
|
|
|
|
1,117
|
|
|
|
1,135
|
|
|
|
1,150
|
|
|
|
1,187
|
|
|
|
1,178
|
|
|
|
1,191
|
|
|
|
1,167
|
|
Other income (expense), net
|
|
|
798
|
|
|
|
(115
|
)
|
|
|
234
|
|
|
|
996
|
|
|
|
257
|
|
|
|
(246
|
)
|
|
|
452
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
32,713
|
|
|
|
25,679
|
|
|
|
23,073
|
|
|
|
27,907
|
|
|
|
24,803
|
|
|
|
20,692
|
|
|
|
11,565
|
|
|
|
13,378
|
|
Provision for income taxes
|
|
|
6,211
|
|
|
|
5,740
|
|
|
|
4,793
|
|
|
|
5,676
|
|
|
|
4,096
|
|
|
|
1,990
|
|
|
|
2,434
|
|
|
|
2,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,502
|
|
|
$
|
19,939
|
|
|
$
|
18,280
|
|
|
$
|
22,231
|
|
|
$
|
20,707
|
|
|
$
|
18,702
|
|
|
$
|
9,131
|
|
|
$
|
11,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.05
|
|
|
$
|
0.79
|
|
|
$
|
0.73
|
|
|
$
|
0.90
|
|
|
$
|
0.85
|
|
|
$
|
0.78
|
|
|
$
|
0.38
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
25,236
|
|
|
|
25,228
|
|
|
|
25,031
|
|
|
|
24,583
|
|
|
|
24,234
|
|
|
|
23,929
|
|
|
|
24,061
|
|
|
|
24,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.03
|
|
|
$
|
0.77
|
|
|
$
|
0.71
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
|
$
|
0.76
|
|
|
$
|
0.37
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
25,710
|
|
|
|
25,721
|
|
|
|
25,526
|
|
|
|
25,072
|
|
|
|
24,678
|
|
|
|
24,325
|
|
|
|
24,408
|
|
|
|
24,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
-
|
|