Our common stock has traded publicly under the symbol "CCMP" since our initial public offering in April 2000, currently on the NASDAQ Global Select Market, and formerly the NASDAQ National Market. The following table sets forth the range of quarterly high and low sales prices for our common stock.
In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from the previously remaining $75.0 million to $150.0 million. Under this program, we repurchased 167,809369,791 shares for $12.0$40.7 million in fiscal 2017.2018. As of September 30, 2017, $122.02018, $81.3 million remains available under our share repurchase program. The manner in which the Company repurchases its shares is discussed in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, under the heading "Liquidity and Capital Resources", of this Form 10-K. To date, we have funded share purchases under our share repurchase program from our available cash balance, and currently anticipate we will continue to do so.
The following graph illustrates the cumulative total stockholder return on our common stock during the period from September 30, 20122013 through September 30, 20172018 and compares it with the cumulative total return on the NASDAQ Composite Index and the Philadelphia Semiconductor Index. The comparison assumes $100 was invested on September 30, 20122013 in our common stock and in each of the foregoing indices and assumes reinvestment of the quarterly cash dividends declared in fiscal 2016, 2017 and 2017.2018. The performance shown is not necessarily indicative of future performance. See "Risk Factors" in Part I, Item 1A above.
The following selected financial data for each year of the five-year period ended September 30, 2017,2018 has been derived from the audited consolidated financial statements.
The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes to those statements included in Items 7 and 8 of Part II of this Form 10-K, as well as Risk Factors included in Item 1A of Part I of this Form 10-K.
The following discussion and analysis should be read in conjunction with our historical financial statements and the notes to those financial statements which are included in Item 8 of Part II of this Form 10-K.
Operating expenses, which include research, development and technical, selling and marketing, and general and administrative expenses, were $154.0 million in fiscal 2018 compared to $142.1 million in fiscal 2017 compared to $135.7 million in fiscal 2016, including $1.9 million and $1.8 million, respectively of NexPlanar amortization expense.2017. The increase in operating expenses of 4.8%8.3%, or $6.4$11.8 million, from fiscal 20162017 was primarily due to executive officer transition costs, costs related to the proposed acquisition of KMG, as well as higher staffing-related costs, including costs associated with our STIP.expense. We currently expect total operating expenses for our full fiscal year 20182019 to be in the range of $142.0between $154.0 million to $147.0 million, includingand $158.0 million. This includes approximately $1.9 million of NexPlanar amortization expense.expense, but does not include any expenses related to KMG acquisition.
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. While historical experience may provide a reasonable estimate of uncollectible accounts, actual results may differ from what was recorded. We will continue to monitor the financial solvency of our customers and, if global economic, or individual customer, conditions weaken, we may have to record additional increases to our allowance for doubtful accounts. As of September 30, 2017,2018, our allowance for doubtful accounts represented 2.6%2.4% of gross accounts receivable. If we had increased our estimate of bad debts by 100 basis points to 3.6%3.4% of gross accounts receivable, our general and administrative expenses would have increased by $0.6$0.7 million.
We value inventory at the lower of cost or market and write down the value of inventory for estimated obsolescence or if inventory is deemed unmarketable. An inventory reserve is maintained based upon a historical percentage of actual inventories written off applied against the inventory value at the end of the period, adjusted for known conditions and circumstances. We exercise judgment in estimating the amount of inventory that is obsolete. Should actual product marketability be affected by conditions that are different from those projected by management, revisions to the estimated inventory reserve may be required. If we had increased our reserve for obsolete inventory at September 30, 20172018 by 10%, our cost of goods sold would have increased by $0.2$0.3 million.
We assess the recoverability of the carrying value of long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the assets may be impaired. We perform a periodic review of our long-lived assets to determine if such impairment indicators exist. We must exercise judgment in assessing whether an event of impairment has occurred. For purposes of recognition and measurement of an impairment loss, long-lived assets are either individually identified or grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in this grouping. If the sum of the undiscounted future cash flows expected to result from the identified asset group is less than the carrying value of the asset group, an impairment provision may be required. The amount of the impairment to be recognized is calculated by subtracting the fair value of the asset group from the net book value of the asset group. Determining future cash flows and estimating fair values require significant judgment and are highly susceptible to change from period to period because they require management to make assumptions about future sales and cost of sales generally over a long-term period. We did not record any impairment expense in fiscal 2018 and 2016. We recorded impairment expense on long-lived assets of $0.9 million in fiscal 2017 related to surplus research and development equipment, which was subsequently sold for a gain. We did not record any impairment expense in fiscal 2016 or 2015.
We evaluate the estimated fair value of investments annually, or more frequently if indicators of potential impairment exist, to determine if an other-than-temporary impairment in the value of the investment has taken place.
Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows related to acquired developed technologies and patents and assumptions about the period of time the technologies will continue to be used in the Company's product portfolio; expected costs to develop the in-process technology into commercially viable products and estimated cash flows from the products when completed; and discount rates. Management's estimates of value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may cause actual realized values to be different from management's estimates.
In fiscal 2016, we recorded $58.4 million of goodwill and $55.0 million of intangible assets related to our acquisition of NexPlanar. The intangible assets included $50.0 million with finite lives and $5.0 million of in-process technology. In the fourth quarter of fiscal 2016, we determined that one of the products under development was unlikely to meet our original cash flow projections based on information received subsequent to the date of acquisition. Consequently, we recorded a $1.0 million impairment of this intangible asset. The remaining $4.0 million was subsequently reclassified to developed technology and we began amortizing this intangible asset in fiscal 2018.
Purchased intangible assets with finite lives are amortized over their estimated useful lives and are evaluated for impairment using a process similar to that used to evaluate other long-lived assets. Goodwill and indefinite lived intangible assets are not amortized and are tested annually in our fourth fiscal quarter or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. A component is a reporting unit when the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of the component. Components may be combined into one reporting unit when they have similar economic characteristics. We have fourthree reporting units, all of which had goodwill as of September 30, 2017,2018, the date of our annual impairment test. Two of the reporting units, CMP Slurries and CMP Pads, represent 94%95% of the goodwill balance on our Consolidated Balance Sheet as of September 30, 2017.2018. The goodwill related to CMP Pads resulted from our acquisition of NexPlanar.
Accounting guidance provides an entity the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). Similarly, an entity has the option to use a step zero or step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2015, 2016, 2017 and 2017,2018, we chose to use a step one analysis for both goodwill impairment and for the recoverability of indefinite-lived intangible assets.assets, with the exception of our CMP Slurries reporting unit, for which we chose to use a step zero analysis for fiscal 2018.
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 restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award.
We have entered into certain unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. We review our agreements on a quarterly basis and make an assessment of the likelihood of a shortfall in purchases and determine if it is necessary to record a liability. In addition, we are subject to the possibility of various loss contingencies arising in the ordinary course of business, such as a legal proceeding or claim. An estimated loss contingency is accrued when it is probable that an asset has been impaired, or a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate information available to us to determine whether such accruals should be adjusted and whether new accruals are required.
See Note 2 to the Consolidated Financial Statements of this Form 10-K for a description of recent accounting pronouncements including the expected dates of adoption and effects on our results of operations, financial position and cash flows.
The following table sets forth, for the periods indicated, the percentage of revenue of certain line items included in our historical statements of income:
31
YEAR ENDED SEPTEMBER 30, 2018, VERSUS YEAR ENDED SEPTEMBER 30, 2017
REVENUE
Revenue was $590.1 million in fiscal 2018, which represented an increase of 16.4%, or 82.9 million, from fiscal 2017. The increase in revenue was driven by a $52.9 million increase due to higher sales volume, a $27.5 million increase due to a higher value product mix, and a $4.4 million increase due to foreign exchange fluctuations, partially offset by a $1.8 million decrease due to price changes. The increase in sales volume was consistent with continued overall strong demand conditions in the global semiconductor industry. Revenue from tungsten slurries, dielectrics slurries, polishing pads and ESF increased 14.3%, 16.1%, 21.0% and 36.4%, respectively, from fiscal 2017.
COST OF GOODS SOLD
Total cost of goods sold was $276.0 million in fiscal 2018, which represented an increase of 9.1%, or $23.0 million, from fiscal 2017. The increase in cost of goods sold was primarily driven by a $12.4 million increase due to higher sales volume, a $6.6 million increase in fixed manufacturing costs, including higher staffing-related expenses, a $2.9 million increase due to product mix, a $2.0 million increase due to foreign exchange fluctuations, partially offset by a $1.0 million decrease in other variable manufacturing costs, including material costs. Fixed manufacturing costs included $5.2 million of NexPlanar amortization expense compared to $4.8 million in the same period of fiscal 2017.
GROSS MARGIN
Our gross margin was 53.2% in fiscal 2018 compared to 50.1% for fiscal 2017. The increase in gross margin from last year was primarily due to higher sales volume and a higher value product mix, partially offset by higher fixed manufacturing costs, including higher staffing-related expenses.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $52.0 million in fiscal 2018, which represented a decrease of 6.7%, or $3.7 million, from fiscal 2017. The decrease was primarily due to lower professional expenses of $1.3 million, lower staffing-related costs of $1.0 million, the absence of an impairment charge of $0.9 million that occurred in fiscal 2017, and lower depreciation and amortization expense of $0.7 million, partially offset by the absence of a gain on equipment disposal of $1.8 million that occurred in fiscal 2017.
Our research, development and technical efforts are focused on the following main areas:
| ● | Research related to fundamental CMP technology; |
| ● | Development of new and enhanced CMP consumable products, including collaboration on joint development projects with technology-leading customers and suppliers; |
| ● | Process development to support rapid and effective commercialization of new products; |
| ● | Technical support of CMP products in our customers' research, development and manufacturing facilities; and, |
| ● | Development of polishing and metrology applications outside of the semiconductor industry. |
SELLING AND MARKETING
Selling and marketing expenses were $25.0 million in fiscal 2018, which represented a decrease of 18.8%, or $5.8 million, from fiscal 2017. The decrease was primarily due to lower staffing-related costs of $4.1 million, lower information technology expenses of $0.8 million, and the absence of amortization expense of $0.6 million resulting from intangible assets becoming fully amortized during fiscal 2018.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $77.0 million in fiscal 2018, which represented an increase of 38.4%, or $21.4 million, from fiscal 2017. The increase was primarily due to higher staffing-related costs of $5.7 million, $4.2 million in costs associated with executive officer transitions, $3.9 million in acquisition and integration related costs in connection with the proposed KMG acquisition, higher long-term incentive compensation expenses of $2.6 million, higher professional expenses of $1.8 million, and higher information technology expenses of $1.5 million.
INTEREST EXPENSE
Interest expense was $2.9 million in fiscal 2018, which represented a decrease of 35.9%, or $1.6 million, from fiscal 2017. The decrease resulted from the payoff of our Term Loan in April 2018.
OTHER INCOME, NET
Other income was $4.5 million in fiscal 2018, an increase of $2.6 million from fiscal 2017. The increase was primarily due to higher interest income of $2.1 million resulting from higher investment balances and higher average interest rates, and gain on the sale of certain ESF assets of $1.0 million in the second quarter of fiscal 2018.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 32.0% in fiscal 2018 compared to 20.5% in fiscal 2017. The increase in the effective tax rate during fiscal 2018 was primarily due to the unfavorable initial impact of the Tax Act, which was enacted in the first quarter of fiscal 2018, and the absence of benefits of the tax holiday in South Korea, which expired as of October 2017. These items were partially offset by the benefit from the adoption of ASU 2016-09 in fiscal 2018, which requires excess tax benefits of share based exercises to be recorded as a reduction to the provision for income taxes, rather than an increase to equity. Note 16 of the "Notes to the Consolidated Financial Statements" for more information on our income tax provision.
NET INCOME
Net income was $110.0 million in fiscal 2018, which represented an increase of 26.6%, or $23.1 million, from fiscal 2017. The increase was primarily due to higher revenue and a higher gross margin, partially offset by higher operating expenses and the $18.2 million unfavorable initial impact of the enactment of the Tax Act in December 2017.
YEAR ENDED SEPTEMBER 30, 2017, VERSUS YEAR ENDED SEPTEMBER 30, 2016
REVENUE
Revenue was $507.2 million in fiscal 2017, which represented an increase of 17.8%, or $76.7 million, from fiscal 2016. The increase in revenue was driven by a $58.0 million increase due to higher sales volume, a $23.0 million increase due to product mix, and a $1.9 million increase due to exchange rate fluctuations, partially offset by a $6.1 million decrease due to price changes. Revenue from polishing pads, ESF, dielectrics slurries, and tungsten slurries increased 31.9%, 24.7%, 21.3%, and 19.5%, respectively, from fiscal 2016.
COST OF GOODS SOLD
Total cost of goods sold was $253.0 million in fiscal 2017, which represented an increase of 14.9%, or $32.8 million, from fiscal 2016. The increase in cost of goods sold was primarily due to a $17.2 million increase in fixed manufacturing costs, including costs related to our STIP, a $15.8 million increase due to higher sales volume, a $2.0 million increase due to foreign exchange fluctuations, a $1.4 million increase due to higher logistics costs, and a $1.2 million increase due to product mix, partially offset by a $5.5 million decrease in other variable manufacturing costs. Fixed manufacturing costs in fiscal 2017 included $4.8 million of NexPlanar amortization expense, compared to $4.5 million in fiscal 2016.
GROSS PROFIT
Our gross profit as a percentage of revenue was 50.1% in fiscal 2017 compared to 48.8% for fiscal 2016. The increase in gross profit as a percentage of revenue from fiscal 2016 was primarily due to higher sales volume, a higher-valuedhigher-value product mix, and lower raw material costs, partially offset by higher fixed manufacturing costs, including costs associated with our STIP.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $55.7 million in fiscal 2017, which represented a decrease of 4.9%, or $2.9 million, from fiscal 2016. The decrease was primarily due to $1.1 million in lower clean room material costs, a $1.0 million decrease due to the absence of an impairment charge recorded in fiscal 2016 for a NexPlanar intangible asset related to a technology asset, a $0.9 million decrease for gains on sale of surplus research and development equipment, and $0.7 million in lower depreciation and amortization expense, partially offset by $1.8 million in higher staffing-related costs, including STIP costs.
Our research, development and technical efforts are focused on the following main areas:
| ● | Research related to fundamental CMP technology; |
| ● | Development of new and enhanced CMP consumable products, including collaboration on joint development projects with technology-leading customers and suppliers; |
| ● | Process development to support rapid and effective commercialization of new products; |
| ● | Technical support of CMP products in our customers' research, development and manufacturing facilities; and, |
| ● | Development of polishing and metrology applications outside of the semiconductor industry. |
SELLING AND MARKETING
Selling and marketing expenses were $30.8 million in fiscal 2017, which represented an increase of 11.3%, or $3.1 million, from fiscal 2016. The increase was primarily due to $2.8 million in higher staffing-related costs, including STIP costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $55.6 million in fiscal 2017, which represented an increase of 12.5%, or $6.2 million, from fiscal 2016. The increase was primarily due to $5.8 million in higher staffing-related costs, including STIP costs, and $0.4 million in higher travel-related costs, partially offset by $0.6 million in lower bad debt expense, primarily related to the absence of $0.5 million for a customer placed into receivership in the fourth quarter of fiscal 2016.
INTEREST EXPENSE
Interest expense was $4.5 million in fiscal 2017, and was comparable to $4.7 million in fiscal 2016.
OTHER INCOME, NET
Other income was $1.9 million in fiscal 2017, and increased $1.3 million from fiscal 2016. The increase was primarily due to higher interest income earned on our cash and investment balances.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 20.5% in fiscal 2017 compared to 15.0% in fiscal 2016. 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. See Note 1716 of the "Notes to the Consolidated Financial Statements" for more information on our income tax provision. The effective tax rate for full fiscal year 2017 was below the Company's expected effective tax rate range of 21.0% to 22.0%. We currently expect our effective tax rate for full fiscal 2018 to be in the range of 24.0% to 27.0%; the expected increase from fiscal 2017 is due to the expiration of a tax holiday benefit in South Korea.
NET INCOME
Net income was $87.0 million in fiscal 2017, which represented an increase of 45.3%, or $27.1 million, from fiscal 2016. The increase was primarily due to higher revenue and a higher gross profit margin, partially offset by a higher effective tax rate and higher operating expenses.
YEAR ENDED SEPTEMBER 30, 2016, VERSUS YEAR ENDED SEPTEMBER 30, 2015
REVENUE
Revenue was $430.4 million in fiscal 2016, which represented an increase of 3.9%, or $16.4 million, from fiscal 2015. The increase in revenue was driven by a $26.6 million increase due to favorable product mix, partially offset by a $5.6 million decrease due to lower overall sales volume and a $4.1 million decrease due to price changes. Revenue from polishing pads increased 62.5% from fiscal 2015, and included $23.5 million from our NexPlanar acquisition. Revenue from tungsten slurries and dielectrics slurries increased 3.7% and 2.9%, respectively, from fiscal 2015. The decrease in overall sales volume was consistent with soft demand conditions seen in the global semiconductor industry during the first half of fiscal 2016 and competitive dynamics within dielectrics and data storage applications.
COST OF GOODS SOLD
Total cost of goods sold was $220.2 million in fiscal 2016, which represented an increase of 9.1%, or $18.4 million, from fiscal 2015, which reflected the addition of NexPlanar. The increase in cost of goods sold was primarily due to a $13.5 million increase due to higher fixed manufacturing costs, including $4.5 million of NexPlanar amortization expense, a $10.1 million increase due to higher variable manufacturing costs, including higher material costs, and a $3.0 million increase due to product mix. These increases were partially offset by a $5.0 million decrease due to lower costs related to material quality, a $2.0 million decrease due to lower logistics costs, and a $1.6 million decrease due to lower sales volume.
GROSS PROFIT
Our gross profit as a percentage of revenue was 48.8% in fiscal 2016 compared to 51.3% for fiscal 2015. The decrease in gross profit percentage from fiscal 2015 was primarily due to higher fixed manufacturing costs, including NexPlanar amortization expense and other NexPlanar costs, and higher material costs, partially offset by a higher-valued product mix, and lower STIP costs.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $58.5 million in fiscal 2016, which represented a decrease of 2.1%, or $1.2 million, from fiscal 2015. The decrease was primarily due to $3.0 million in lower clean room material costs and $0.8 million in lower staffing-related costs, including costs associated with our STIP, partially offset by $1.1 million in higher professional and service fees, including costs of joint development arrangements, and a $1.0 million impairment of a NexPlanar intangible asset for certain in-process technology under development at the acquisition date.
SELLING AND MARKETING
Selling and marketing expenses were $27.7 million in fiscal 2016, which represented an increase of 10.9%, or $2.7 million, from fiscal 2015. The increase was primarily due to $1.8 million of NexPlanar amortization expense and $0.9 million in higher product sample costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $49.4 million in fiscal 2016, which represented a decrease of 5.7%, or $3.0 million, from fiscal 2015. The decrease was primarily due to $6.1 million in lower staffing-related costs, including costs associated with our STIP and the absence of costs associated with a fiscal 2015 executive officer transition. This decrease was partially offset by $0.8 million in higher professional fees, $0.7 million in higher bad debt expense, including $0.5 million for a customer placed into receivership in the fourth quarter of fiscal 2016, the absence of $0.6 million of certain foreign goods and services tax credits recorded in fiscal 2015, and $0.5 million in higher information technology costs. General and administrative expenses in fiscal 2016 included $1.3 million of NexPlanar acquisition-related costs.
INTEREST EXPENSE
Interest expense was $4.7 million in fiscal 2016, and increased $0.2 million from fiscal 2015. The increase was primarily due to higher variable interest rates on the portion of our outstanding debt on which we have not fixed the interest rate via interest rate swaps.
OTHER INCOME, NET
Other income was $0.7 million in both fiscal 2016 and fiscal 2015.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 15.0% in fiscal 2016 compared to 21.1% in fiscal 2015. The decrease in the effective tax rate during fiscal 2016 was primarily due to the absence of income taxes incurred in the first quarter of fiscal 2015 related to the restructuring of our operations in Taiwan, the reinstatement of the research and experimentation tax credit in December 2015, and a $0.9 million benefit 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. See Note 17 of the "Notes to the Consolidated Financial Statements" for more information on our income tax provision.
NET INCOME
Net income was $59.8 million in fiscal 2016, which represented an increase of 6.6%, or $3.7 million, from fiscal 2015. The increase was primarily due to higher revenue and a lower effective tax rate, partially offset by higher production costs.
LIQUIDITY AND CAPITAL RESOURCES
We
hadgenerated $168.9 million in cash flows from operating activities
ofin fiscal 2018, $141.4 million in fiscal 2017
and $95.2 million in fiscal
2016 and $98.2 million in fiscal 2015.2016. Our cash provided by operating activities in fiscal
2017 represented $126.02018 reflected net income of $110.0 million, $66.8 million in
net income plus non-cash items,
andincluding $11.3 million related to the deemed repatriation transition tax of the Tax Act, partially offset by a
$15.4$7.9 million
increasedecrease in cash flow due to a net
decreaseincrease in working capital. The increase in cash flows from operating activities
fromin fiscal
20162018 was primarily due to
a significant increase in net incomehigher revenue and
changes in the timing and amount of accrued expense payments, including payments related to our STIP,gross margin, partially offset by
higher accounts receivable balances at September 30, 2017, due to an increase in
revenue, compared to the same period in fiscal 2016. We accrued incentive compensation under our STIP at a much higher rate in fiscal 2017 than we recorded in fiscal 2016 based on performance against corporate goals. In addition, the cash incentive related to our performance against goals in fiscal 2016, which was paid in the first quarter of fiscal 2017, was $8.4 million lower than the cash incentive payment related to our performance against goals in fiscal 2015, which was paid in the first quarter of fiscal 2016. The decrease in cash flow from operations in fiscal 2016 from fiscal 2015 was primarily due to increases in working
capital, partially offset by higher net income and non-cash items. The increase in working capital included higher accounts receivable and lower accrued liabilities, including payments related to our STIP.capital.
In fiscal 2017,2018, cash flows used in investing activities were $19.8$22.8 million, representing $20.0 million in purchases of property, plant and equipment additions of $21.3 million and payment for net investment hedge termination of $1.2 million in proceeds from sales of property, plant and equipment, and$9.9 million. These items were partially offset by cash inflows of $0.2$5.3 million from other investingthe liquidation of auction rate securities and $3.0 million of cash activity. In fiscal 2016, cash flows used in investing activities were $144.4 million, representing $127.0 millionreceived for the NexPlanar acquisition, which was netsale of $15.3 millioncertain ESF assets that occurred in the second quarter of fiscal 2018. Our priority for use of cash acquired,continues to be investing in the organic growth of our business. For example, we plan to continue to invest in our pads operations to improve automation, throughput, and $17.6 million for purchases of property, plant and equipment. We received $0.2 million from other investing activities. In fiscal 2015, we used $13.4 million in investing activities representing $13.8 million in purchases of property plant and equipment, partially offset by $0.4 million received from other investing activities.efficiency to support continued increasing customer demand. We currently estimate that our total capital expenditures in fiscal 20182019 will be in the range of $18.0$23.0 to $22.0 million.$26.0 million not taking into account any expected expenditures related to the KMG Acquisition.
In fiscal 2017,2018, cash flows used in financing activities were $7.0$197.6 million. We paid $19.0used $144.4 million to payoff our previously existing Term Loan in April 2018, $44.3 million to repurchase shares of our common stock, and $30.7 million to pay dividends and dividend equivalents on our common stock. We used $12.0 million to repurchase common stock under our share repurchase program and $2.2 million to repurchase common stock pursuant to the terms of our Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 (OIP), for shares withheld from award recipients to cover payroll taxes on the vesting of restricted stock and restricted stock units granted under this plan. We also paid $10.9 million to repay long-term debt. We received $30.6 million in issuance of common stock related to the exercise of stock options granted under our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (EIP) and our OIP, and for the sale of shares to employees under our 2007 Employee Stock Purchase Plan, as amended and restated September 23, 2013 (ESPP), and we received $6.5 million in tax benefits related to exercises of stock options and vesting of restricted stock and restricted stock units awarded under our EIP and OIP. In fiscal 2016, cash flows used in financing activities were $24.4 million. We used $26.0 million to repurchase common stock under our share repurchase program, and $2.8 million to repurchase common stock pursuant to the terms of our EIP and our OIP for shares withheld from award recipients to cover payroll taxes on the vesting of restricted stock and restricted stock units awarded under these plans. We also used $8.8 million to repay long-term debt, and we paid $8.6 million in dividends on our common stock. We received $19.5$23.0 million from the issuance of common stock related to the exercise of stock options granted under our EIP and our OIP, and for the sale of shares to employees under our ESPP, andESPP. We have a borrowing capacity of $100.0 million under Revolving Credit Facility, as well as a $100.0 million uncommitted accordion feature. The Revolving Credit Facility remains undrawn as of September 30, 2018.
Following the enactment of the Tax Act in December 2017, we received $2.3repatriated nearly $200 million inof overseas cash, enabling the payoff of our Term Loan, as noted above. In addition, the move to a territorial tax benefits related to exercises of stock options and vesting of restricted stock and restricted stock units awardedsystem under the EIPTax Act is expected to increase our ability to repatriate cash in the future. In light of these factors and OIP.our belief in our ability to continue to generate strong cash flows, in March 2018, we announced an update to our capital deployment strategy. This strategy included doubling our regular quarterly cash dividend, from $0.20 to $0.40 per share, and prior to the pending KMG acquisition, our stated intention to distribute at least 50 percent of prior fiscal year free cash flow to stockholders through a combination of cash dividends and share repurchases. In fiscal 2015, cash flows used in financing activities were $9.0 million. We used $40.0 million to repurchase common stock under our share repurchase program, and $2.2 million to repurchase common stock pursuant to the terms2018, we returned approximately 60 percent of our EIP and OIP for shares withheld from award recipientsfiscal 2017 cash flow to cover payroll taxes on the vesting of restricted stock and restricted stock units awarded under these plans. We also used $8.8 million to repay long-term debt. We received $35.8 million from the issuance of common stock related to the exercise of stock options granted under our EIP and our OIP and for the sale of shares to employees under our ESPP, and we received $6.2 million in tax benefits related to exercises of stock options and vesting of restricted stock and restricted stock units awarded under these plans.stockholders.
In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from the previously remaining $75.0 million to $150.0 million.
Under this program, we repurchased 167,809 shares for $12.0 million in fiscal 2017, 636,839 shares for $26.0 million in fiscal 2016, and 851,245 shares for $40.0 million in fiscal 2015. As of September 30,
2017, $122.02018, $81.3 million remains available under our share repurchase program. Share repurchases are made from time to time, depending on market
and other conditions. The timing, manner, price and amounts of repurchases are determined at the Company's discretion, and the share repurchase program may be suspended, terminated or modified at any time for any reason. The repurchase program does not obligate the Company to acquire any specific number of shares. To date, we have funded share purchases under our share repurchase program from our available cash balance, and anticipate we will continue to do so.
During fiscal years 2015, 2016 and 2017,Periodically, we
have entered into "10b5-1" stock purchase plan agreements with independent brokers to repurchase shares of our common stock in accordance with guidelines pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. A plan under Rule 10b5-1 allows a company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are subject to SEC regulations as well as certain conditions specified in the plan.
In January 2016, we announced that ourOur Board of Directors authorized the initiation of aour regular quarterly cash dividend program under which the Company intends to pay quarterly cash dividends on our common stock. Pursuant to this announcement, our Board of Directors declared quarterly cash dividends of $0.18 per share, during the second, third, and fourth quarters of fiscalin January 2016, and duringsince that time has increased the first quarterdividend twice, to its current level of fiscal 2017. In the second, third, and fourth quarters of fiscal 2017, our Board of Directors declared quarterly cash dividends of $0.20$0.40 per share, the latest of which we paid on or about October 30, 2017 to shareholders of record as of September 25, 2017.share. The declaration and payment of future dividends is subject to the discretion and determination of the Company's Board of Directors and management, based on a variety of factors, and the program may be suspended, terminated or modified at any time for any reason.
We entered intoexpect the pending acquisition of KMG to have a Credit Agreement in February 2012 and amended this Credit Agreement in June 2014. The amended Credit Agreement provided us with a $175.0 million Term Loan and a $100.0 million Revolving Credit Facility, with sub-limits for multicurrency borrowings, letters of credit, swing-line loans,significant impact on our liquidity. We intend to fund the Merger Consideration, as well as acquisition and integration-related costs, through our cash on hand and the entry into a $100.0senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million uncommitted accordion feature that allows usand a senior secured term loan facility in an aggregate principal amount of up to request$1,065.0 million, as described elsewhere in this Report on Form 10-K. At the closing of the transaction, we expect to terminate our existing lenders or, if necessary, third-party financial institutions, to provide additional capacityCredit Facility and draw down on this senior secured term loan facility in the Revolving Credit Facility. The Term Loan and Revolving Credit Facility are referredamount of $1,065.0 million. In addition, we expect to asissue common stock to satisfy the "Credit Facilities," and have a maturity date of June 27, 2019. The Term Loan has periodic scheduled principal repayments; however, we may prepay the loan without penalty. The Term Loan has $144.4 million outstanding as of September 30, 2017, while the Revolving Credit Facility remains undrawn. The Credit Agreement contains covenants that restrict the abilityequity portion of the CompanyMerger Consideration. Also, in connection with the Acquisition, we incurred $3,861 in acquisition and its subsidiariesintegration related costs in fiscal 2018, and expect to take certain actions, including, among other things and subject to certain significant exceptions and according to certain terms: creating liens, incurring indebtedness, making investments, engagingincur more 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 through the expirationfuture. See Note 9 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. See Note 10 of the "NotesNotes to the Consolidated Financial Statements"Statements of this Report on Form 10-K for additional information regarding the existing Credit Agreement.Agreement and Note 20 regarding the anticipated terms of the New Credit Facilities.
As of September 30, 2017,2018, we had $397.9$352.9 million of cash and cash equivalents, $233.4$130.3 million of which was held in foreign subsidiaries in Japan, the Netherlands, Singapore, South Korea and Taiwan where we have elected to permanently reinvest the earnings rather than repatriate the earnings to the U.S.subsidiaries. See Part I, Item 1A entitled "Risk Factors" in this Report on Form 10-K for additional discussion of our foreign operations.
We believe that our current balance of cash, cash generated by our operations, cash repatriation to the United States enabled by the Tax Act, and available borrowing capacity under expected debt financing following the close of our Credit Facilitiespending acquisition of KMG will be sufficient to fund our operations, expected capital expenditures, dividend payments, merger and acquisition activities, dividend payments, and share repurchases for at least the next twelve months. However, in pursuit of corporate development or other initiatives, we may need to raise additional funds in the future through equity or debt financing, strategic relationships or other arrangements. Depending on future conditions in the capital and credit markets, we could encounter difficulty securing additional financing in the type or amount necessary to pursue these objectives.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 20172018 and 2016,September 30, 2017, we did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at September 30, 2017,2018, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
CONTRACTUAL OBLIGATIONS (In millions) | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | | | After 5 Years | | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | | | After 5 Years | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | $ | 144.4 | | | $ | 10.9 | | | $ | 133.5 | | | $ | - | | | $ | - | | |
Interest expense and fees on long-term debt | | | 6.3 | | | | 3.6 | | | | 2.7 | | | | - | | | | - | | |
Purchase obligations | | | 38.8 | | | | 34.9 | | | | 3.9 | | | | - | | | | - | | | | 41.1 | �� | | | 34.0 | | | | 6.6 | | | | 0.5 | | | | - | |
Operating leases | | | 14.2 | | | | 3.1 | | | | 4.5 | | | | 2.5 | | | | 4.1 | | | | 19.6 | | | | 3.5 | | | | 4.5 | | | | 3.7 | | | | 7.9 | |
Severance agreements | | | 3.9 | | | | 3.7 | | | | 0.2 | | | | - | | | | - | | | | 1.9 | | | | 1.7 | | | | 0.2 | | | | - | | | | - | |
Other long-term liabilities * | | | 12.8 | | | | - | | | | 1.6 | | | | - | | | | 11.2 | | | | 12.3 | | | | 0.4 | | | | 1.0 | | | | 0.8 | | | | 10.1 | |
Total contractual obligations | | $ | 220.4 | | | $ | 56.2 | | | $ | 146.4 | | | $ | 2.5 | | | $ | 15.3 | | | $ | $ 74.9 | | | $ | $ 39.6 | | | $ | $ 12.3 | | | $ | $ 5.0 | | | $ | $ 18.0 | |
* We have excluded $0.1 million in deferred tax liabilities from the other long-term liability amounts presented, as the deferred taxes that will be settled in cash are not known and the timing of any such payments is uncertain. We have also excluded $0.3 million in deferred rent as the rent payments are included in the table above under the caption "Operating leases".
INTEREST EXPENSE AND FEES ON LONG-TERM DEBT
Interest payments on long-term debt reflect interest rates in effect at September 30, 2017. The interest payments reflect LIBOR rates currently in effect on $72.2 million of our outstanding debt, and reflect fixed interest rates on $72.2 million of outstanding debt for which we have executed interest rate swaps. Commitment fees are based on our estimated consolidated leverage ratio in future periods. See Note 10 of the "Notes to the Consolidated Financial Statements" of this Form 10-K for additional information regarding our long-term debt.
PURCHASE OBLIGATIONS
We have been operating under a multi-year supply agreement with Cabot Corporation, our former parent company which is not a related party and has not been one since 2002, for the purchase of fumed silica, the current term of which runs through December 31, 2019. As of calendar 2017, thisThis agreement has providedprovides us the option to purchase fumed silica with no minimum purchase requirements through 2018, for the termas of the agreement,2017, for which we will payhave paid a fee of $1.5 million in each of calendarfiscal years 2017 and 2018, and 2019, offor which we will pay the 2017 payment has already been made.same in 2019. The purchase obligationsobligation in the table above reflect management's expectation that we will meet our forecasted purchase quantities in calendar 20172018 and beyond. Purchase obligations include an aggregate amount of $9.7$11.2 million of contractual commitments related to our Cabot Corporation supply agreement for fumed silica. The $1.5 million payment due in calendarfiscal year 20182019 is included in accrued liabilities on our Consolidated Balance Sheet as of September 30, 2017, and the calendar 2019 payment is included in other long-term liabilities in the table above.2018.
OPERATING LEASES
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable operating leases, most of which expire within ten years of their respective commencement dates and may be renewed by us.
SEVERANCE AGREEMENTS
Liabilities for severance agreements at September 30, 20172018 represent payments to be made to former or to be former employees in accordance with individual agreements.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities at September 30, 20172018 primarily consist of liabilities related to our foreign benefit plans in Japan and Korea, which represents approximately $8.2$8.1 million, $2.5 million of liability for uncertain tax positions, and the $1.5$1.1 million total contract fees noted above under "Purchase Obligations," our liability for future payments to be made under our Cabot Microelectronics Supplemental Employee Retirement Plan,Plan.
PENDING ACQUISITION OF KMG
The table above excludes the purchase price and our liabilityrelated transaction costs for uncertain tax positions.the pending acquisition of KMG, which is expected to close in approximately mid-November 2018, subject to customary closing conditions, including the adoption of the Merger Agreement by KMG's shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our foreign operations. Some of our foreign operations maintain their accounting records in their local currencies. Consequently, period to period comparability of results of operations is affected by fluctuations in exchange rates. The primary currencies to which we have exposure are the Korean won, Japanese yen, and the New Taiwan dollar. Approximately 22%25% of our revenue is transacted in currencies other than the U.S. dollar. However, outside of the United States, we also incur expenses in foreign countries that are transacted in currencies other than the U.S. dollar, which mitigates the exposure on the Consolidated Statement of Income. We periodically enter into forward contracts in an effort to manage foreign currency exchange exposure on our Consolidated Balance Sheet. However, we are unlikely to be able to hedge these exposures completely. We do not enter into forward contracts or other derivative instruments for speculative or trading purposes.
Fluctuations of the won, yen, and New Taiwan dollar have not had a material impact on our Consolidated Income Statement during fiscal years 2018, 2017 and 2016; however, the significant weakening of the Japanese yen against the U.S. dollar in fiscal year 2015 adversely affected our revenue. The weakening of the yen in fiscal year 2015 had a net favorable impact on our gross profit percentage, as our yen-denominated cost of goods sold was greater than our yen-denominated revenue. Fluctuations2016. While fluctuations of the yen and won have not had a significant impact on other comprehensive income on our Consolidated Balance Sheet. DuringSheet in fiscal year2018, they did have a significant impact in fiscal years 2017 weand 2016. We recorded $6.7 million in currency translation losses net of tax, that are included in other comprehensive income. During fiscal year 2016, we recordedand $16.0 million in currency translation gains, net of tax, that areduring fiscal years 2017 and 2016, respectively, which was included in other comprehensive income. During fiscal 2015, we recorded $14.1 million in currency translation losses, net of tax, that are included in other comprehensive income. These gains and losses primarily relate to changes in the U.S. dollar value of assets and liabilities denominated in local currencies when these asset and liability amounts are translated at month-end exchange rates.
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 is accounted for under hedge accounting. In fiscal 2017, we recorded $1.4 million in gross currency translation losses related to this hedge, which are included in the total $6.7 million of total currency losses, net of tax, in other comprehensive income noted above.
MARKET RISK AND SENSITIVITY ANALYSIS RELATED TO FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10% additional adverse movement in foreign exchange rates. As of September 30, 2017,2018, the analysis demonstrated that such market movements would not have a material adverse effect on our consolidated financial position, results of operations or cash flows over a one-year period. Actual gains and losses in the future may differ materially from this analysis based on changes in the timing and amount of foreign currency rate movements and our actual exposures.
INTEREST RATE RISK
At September 30, 2017, we had $144.4 million in long-term debt outstanding on our Term Loan. In fiscal 2015, we entered into interest rate swap agreements to hedge the variability in LIBOR-based interest rate payments on half of our outstanding debt. The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal repayment to maintain a fixed rate of interest on half of our outstanding debt. As of September 30, 2017, the fair value of this cash flow hedge was $0.1 million. At September 30, 2017, we had $72.2 million of outstanding debt at a variable rate of interest. Assuming a hypothetical 100 basis point increase in our current variable interest rate, our interest expense would increase by approximately $0.2 million per quarter.
MARKET RISK RELATED TO INVESTMENTS IN AUCTION RATE SECURITIES
At September 30, 2017, we owned two auction rate securities (ARS) with a total estimated fair value of $4.9 million and par value of $5.3 million which were classified as other long-term assets on our Consolidated Balance Sheet. Beginning in 2008, general uncertainties in the global credit markets significantly reduced liquidity in the ARS market, and this illiquidity continues. For more information on our ARS, see "Critical Accounting Policies and Estimates" in MD&A in Part II, Item 7, and Note 8 of the "Notes to the Consolidated Financial Statements" in Part II, Item 8 of this Form 10-K.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
| | Page |
Consolidated Financial Statements: | |
| | 41 |
| | 42 |
| | 43 |
| | 44 |
| | 45 |
| | 46 |
| | 47 |
| | 8078 |
| | |
Financial Statement Schedule: | |
| | 8179 |
| | 80 |
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.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders of
Cabot Microelectronics Corporation:
In our opinion,Opinions on the consolidated financial statements listed inFinancial Statements and Internal Control over Financial Reporting
We have audited the accompanying index present fairly, in all material respects, the financial positionconsolidated balance sheets of Cabot Microelectronics Corporation and its subsidiaries (the "Company") as of September 30, 20172018 and September 30, 2016,2017, and the resultsrelated consolidated statements of their operationsincome, comprehensive income, changes in stockholders' equity and their cash flows for each of the three years in the period ended September 30, 2018, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and September 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017,2018, based on criteria established in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company's consolidated financial statements on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
November 15, 201713, 2018
We have served as the Company's auditor since 1999.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
| Year Ended September 30, | | | Year Ended September 30, | |
| 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Revenue | $ | 507,179 | | | $ | 430,449 | | | $ | 414,097 | | | $ | 590,123 | | | $ | 507,179 | | | $ | 430,449 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Cost of goods sold | | 253,050 | | | | 220,247 | | | | 201,866 | | | | 276,018 | | | | 253,050 | | | | 220,247 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | 254,129 | | | | 210,202 | | | | 212,231 | | | | 314,105 | | | | 254,129 | | | | 210,202 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | |
Research, development and technical | | 55,658 | | | | 58,532 | | | | 59,778 | | | | 51,950 | | | | 55,658 | | | | 58,532 | |
Selling and marketing | | 30,846 | | | | 27,717 | | | | 24,983 | | | | 25,044 | | | | 30,846 | | | | 27,717 | |
General and administrative | | 55,637 | | | | 49,445 | | | | 52,430 | | | | 76,993 | | | | 55,637 | | | | 49,445 | |
Total operating expenses | | 142,141 | | | | 135,694 | | | | 137,191 | | | | 153,987 | | | | 142,141 | | | | 135,694 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | 111,988 | | | | 74,508 | | | | 75,040 | | | | 160,118 | | | | 111,988 | | | | 74,508 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | 4,529 | | | | 4,723 | | | | 4,524 | | | | 2,905 | | | | 4,529 | | | | 4,723 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Other income, net | | 1,913 | | | | 653 | | | | 681 | | | | 4,498 | | | | 1,913 | | | | 653 | |
Income before income taxes | | 109,372 | | | | 70,438 | | | | 71,197 | | | | 161,711 | | | | 109,372 | | | | 70,438 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | 22,420 | | | | 10,589 | | | | 15,051 | | | | 51,668 | | | | 22,420 | | | | 10,589 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income | $ | 86,952 | | | $ | 59,849 | | | $ | 56,146 | | | $ | 110,043 | | | $ | 86,952 | | | $ | 59,849 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | $ | 3.47 | | | $ | 2.47 | | | $ | 2.32 | | | $ | 4.31 | | | $ | 3.47 | | | $ | 2.47 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average basic shares outstanding | | 25,015 | | | | 24,077 | | | | 24,040 | | | | 25,518 | | | | 25,015 | | | | 24,077 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share | $ | 3.40 | | | $ | 2.43 | | | $ | 2.26 | | | $ | 4.19 | | | $ | 3.40 | | | $ | 2.43 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average diluted shares outstanding | | 25,512 | | | | 24,477 | | | | 24,632 | | | | 26,243 | | | | 25,512 | | | | 24,477 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Dividends per share | $ | 0.78 | | | $ | 0.54 | | | $ | - | | | $ | 1.40 | | | $ | 0.78 | | | $ | 0.54 | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
| Year Ended September 30, | | | Year Ended September 30, | |
| 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net income | $ | 86,952 | | | $ | 59,849 | | | $ | 56,146 | | | $ | 110,043 | | | $ | 86,952 | | | $ | 59,849 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | (6,746 | ) | | | 15,996 | | | | (14,126 | ) | | | 679 | | | | (6,746 | ) | | | 15,996 | |
Minimum pension liability adjustment | | 276 | | | | (434 | ) | | | (318 | ) | | | (26 | ) | | | 276 | | | | (434 | ) |
Net unrealized gain (loss) on cash flow hedges | | 863 | | | | 84 | | | | (901 | ) | | | (63 | ) | | | 863 | | | | 84 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | (5,607 | ) | | | 15,646 | | | | (15,345 | ) | | | 590 | | | | (5,607 | ) | | | 15,646 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | $ | 81,345 | | | $ | 75,495 | | | $ | 40,801 | | | $ | 110,633 | | | $ | 81,345 | | | $ | 75,495 | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| September 30, | | | September 30, | |
| 2017 | | | 2016 | | | 2018 | | | 2017 | |
ASSETS | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 397,890 | | | $ | 287,479 | | | $ | 352,921 | | | $ | 397,890 | |
Accounts receivable, less allowance for doubtful accounts of $1,747 at September 30, 2017, and $1,828 at September 30, 2016 | | 64,793 | | | | 62,830 | | |
Accounts receivable, less allowance for doubtful accounts of $1,900 at September 30, 2018, and $1,747 at September 30, 2017 | | | | 75,886 | | | | 64,793 | |
Inventories | | 71,873 | | | | 72,123 | | | | 71,926 | | | | 71,873 | |
Prepaid expenses and other current assets | | 16,426 | | | | 14,398 | | | | 22,048 | | | | 16,426 | |
Total current assets | | 550,982 | | | | 436,830 | | | | 522,781 | | | | 550,982 | |
| | | | | | | | | | | | | | | |
Property, plant and equipment, net | | 106,361 | | | | 106,496 | | | | 111,403 | | | | 106,361 | |
Goodwill | | 101,932 | | | | 100,639 | | | | 101,083 | | | | 101,932 | |
Other intangible assets, net | | 42,710 | | | | 50,476 | | | | 35,202 | | | | 42,710 | |
Deferred income taxes | | 21,598 | | | | 20,747 | | | | 5,840 | | | | 21,598 | |
Other long-term assets | | 10,517 | | | | 12,042 | | | | 4,664 | | | | 10,517 | |
Total assets | $ | 834,100 | | | $ | 727,230 | | | $ | 780,973 | | | $ | 834,100 | |
| | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | |
Accounts payable | $ | 17,624 | | | $ | 16,834 | | | $ | 18,171 | | | $ | 17,624 | |
Current portion of long-term debt | | 10,938 | | | | 7,656 | | | | - | | | | 10,938 | |
Accrued expenses, income taxes payable and other current liabilities | | 62,651 | | | | 41,395 | | | | 82,983 | | | | 62,651 | |
Total current liabilities | | 91,213 | | | | 65,885 | | | | 101,154 | | | | 91,213 | |
| | | | | | | | | | | | | | | |
Long-term debt, net of current portion, less prepaid debt issuance cost of $441 at September 30, 2017 and $696 at September 30, 2016 | | 132,997 | | | | 146,961 | | |
Long-term debt, net of current portion, less prepaid debt issuance cost of $441 at September 30, 2017 | | | | - | | | | 132,997 | |
Deferred income taxes | | 63 | | | | 75 | | | | 81 | | | | 63 | |
Other long-term liabilities | | 14,790 | | | | 16,661 | | | | 13,046 | | | | 14,790 | |
Total liabilities | | 239,063 | | | | 229,582 | | | | 114,281 | | | | 239,063 | |
| | | | | | | | | | | | | | | |
Commitments and contingencies (Note 18) | | | | | | | | |
Commitments and contingencies (Note 17) | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stockholders' equity: | | | �� | | | | | | | | | | | | |
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 35,230,742 shares at September 30, 2017, and 34,261,304 shares at September 30, 2016 | | 35 | | | | 34 | | |
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 35,862,465 shares at September 30, 2018, and 35,230,742 shares at September 30, 2017 | | | | 36 | | | | 35 | |
Capital in excess of par value of common stock | | 580,938 | | | | 530,840 | | | | 622,498 | | | | 580,938 | |
Retained earnings | | 397,881 | | | | 330,776 | | | | 471,673 | | | | 397,881 | |
Accumulated other comprehensive income | | 3,949 | | | | 9,556 | | | | 4,539 | | | | 3,949 | |
Treasury stock at cost, 9,948,190 shares at September 30, 2017, and 9,744,642 shares at September 30, 2016 | | (387,766 | ) | | | (373,558 | ) | |
Treasury stock at cost, 10,356,147 shares at September 30, 2018, and 9,948,190 shares at September 30, 2017 | | | | (432,054 | ) | | | (387,766 | ) |
Total stockholders' equity | | 595,037 | | | | 497,648 | | | | 666,692 | | | | 595,037 | |
| | | | | | | | | | | | | | | |
Total liabilities and stockholders' equity | $ | 834,100 | | | $ | 727,230 | | | $ | 780,973 | | | $ | 834,100 | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended September 30, | | | Year Ended September 30, | |
| 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | |
Net income | $ | 86,952 | | | $ | 59,849 | | | $ | 56,146 | | | $ | 110,043 | | | $ | 86,952 | | | $ | 59,849 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | 25,930 | | | | 26,031 | | | | 18,719 | | | | 25,876 | | | | 25,930 | | | | 26,031 | |
Provision for doubtful accounts | | 26 | | | | 588 | | | | (84 | ) | | | 185 | | | | 26 | | | | 588 | |
Share-based compensation expense | | 13,004 | | | | 13,787 | | | | 16,445 | | | | 18,517 | | | | 13,004 | | | | 13,787 | |
Deemed repatriation transition tax | | | | 11,340 | | | | - | | | | - | |
Deferred income tax expense (benefit) | | 392 | | | | (1,757 | ) | | | 869 | | | | 10,835 | | | | 392 | | | | (1,757 | ) |
Non-cash foreign exchange (gain)/loss | | 435 | | | | (1,144 | ) | | | 1,391 | | | | (873 | ) | | | 435 | | | | (1,144 | ) |
(Gain)/Loss on disposal of property, plant and equipment | | (1,820 | ) | | | 103 | | | | (28 | ) | |
Loss/(Gain) on disposal of property, plant and equipment | | | | 91 | | | | (1,820 | ) | | | 103 | |
Impairment of assets | | 860 | | | | 1,079 | | | | - | | | | - | | | | 860 | | | | 1,079 | |
Realized loss on the sale of available-for-sale securities | | | | 96 | | | | - | | | | - | |
(Gain) on sale of assets | | | | (956 | ) | | | - | | | | - | |
Other | | 188 | | | | 815 | | | | (524 | ) | | | 1,666 | | | | 188 | | | | 815 | |
Changes in operating assets and liabilities, excluding amounts related to acquisition: | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | (3,986 | ) | | | (8,017 | ) | | | 9,013 | | | | (12,068 | ) | | | (3,986 | ) | | | (8,017 | ) |
Inventories | | (1,220 | ) | | | 3,351 | | | | (8,290 | ) | | | (442 | ) | | | (1,220 | ) | | | 3,351 | |
Prepaid expenses and other assets | | (1,576 | ) | | | 3,935 | | | | (3,662 | ) | | | (5,818 | ) | | | (1,576 | ) | | | 3,935 | |
Accounts payable | | 892 | | | | (478 | ) | | | 801 | | | | 128 | | | | 892 | | | | (478 | ) |
Accrued expenses, income taxes payable and other liabilities | | 21,292 | | | | (2,931 | ) | | | 7,390 | | | | 10,245 | | | | 21,292 | | | | (2,931 | ) |
Net cash provided by operating activities | | 141,369 | | | | 95,211 | | | | 98,186 | | | | 168,865 | | | | 141,369 | | | | 95,211 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | |
Additions to property, plant and equipment | | (21,174 | ) | | | (17,670 | ) | | | (13,812 | ) | | | (21,308 | ) | | | (21,174 | ) | | | (17,670 | ) |
Proceeds from the sale of property, plant and equipment | | 1,216 | | | | 17 | | | | 201 | | | | - | | | | 1,216 | | | | 17 | |
Acquisition of business, net of cash acquired | | - | | | | (126,976 | ) | | | - | | | | - | | | | - | | | | (126,976 | ) |
Proceeds from the sale of investments | | 175 | | | | 200 | | | | 202 | | |
Proceeds from the sales of assets | | | | 3,027 | | | | - | | | | - | |
Purchases of available-for-sale securities | | | | (209,048 | ) | | | - | | | | - | |
Proceeds from the sale and maturities of investment securities | | | | 214,460 | | | | 175 | | | | 200 | |
Settlement of net investment hedge | | | | (9,882 | ) | | | - | | | | - | |
Net cash used in investing activities | | (19,783 | ) | | | (144,429 | ) | | | (13,409 | ) | | | (22,751 | ) | | | (19,783 | ) | | | (144,429 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | |
Repayment of long-term debt | | (10,938 | ) | | | (8,750 | ) | | | (8,750 | ) | | | (144,375 | ) | | | (10,938 | ) | | | (8,750 | ) |
Dividends paid | | (19,041 | ) | | | (8,658 | ) | | | - | | | | (30,730 | ) | | | (19,041 | ) | | | (8,658 | ) |
Repurchases of common stock | | (14,208 | ) | | | (28,818 | ) | | | (42,247 | ) | | | (44,288 | ) | | | (14,208 | ) | | | (28,818 | ) |
Net proceeds from issuance of stock | | 30,615 | | | | 19,512 | | | | 35,782 | | | | 23,031 | | | | 30,615 | | | | 19,512 | |
Principal payments under capital lease obligations | | | | (1,200 | ) | | | - | | | | - | |
Tax benefits associated with share-based compensation expense | | 6,557 | | | | 2,305 | | | | 6,207 | | | | - | | | | 6,557 | | | | 2,305 | |
Net cash used in financing activities | | (7,015 | ) | | | (24,409 | ) | | | (9,008 | ) | | | (197,562 | ) | | | (7,015 | ) | | | (24,409 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | (4,160 | ) | | | 6,916 | | | | (5,734 | ) | | | 6,479 | | | | (4,160 | ) | | | 6,916 | |
Increase (decrease) in cash | | 110,411 | | | | (66,711 | ) | | | 70,035 | | | | (44,969 | ) | | | 110,411 | | | | (66,711 | ) |
Cash and cash equivalents at beginning of year | | 287,479 | | | | 354,190 | | | | 284,155 | | | | 397,890 | | | | 287,479 | | | | 354,190 | |
Cash and cash equivalents at end of year | $ | 397,890 | | | $ | 287,479 | | | $ | 354,190 | | | $ | 352,921 | | | $ | 397,890 | | | $ | 287,479 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for income taxes | $ | 13,321 | | | $ | 7,246 | | | $ | 8,543 | | | $ | 20,345 | | | $ | 13,321 | | | $ | 7,246 | |
Cash paid for interest | $ | 4,128 | | | $ | 4,307 | | | $ | 4,107 | | | $ | 2,464 | | | $ | 4,128 | | | $ | 4,307 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of period | $ | 1,488 | | | $ | 1,005 | | | $ | 1,503 | | | $ | 1,975 | | | $ | 1,488 | | | $ | 1,005 | |
| | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
| | Common Stock | | | Capital In Excess Of Par | | | Retained Earnings | | | Accumulated Other Comprehensive Income | | | Treasury Stock | | | Total | | |
Balance at September 30, 2014 | | $ | 32 | | | $ | 437,266 | | | $ | 227,942 | | | $ | 9,255 | | | $ | (302,493 | ) | | $ | 372,002 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | | | | | 16,445 | | | | | | | | | | | | | | | | 16,445 | | |
Repurchases of common stock under share repurchase plans, at cost | | | | | | | | | | | | | | | | | | | (40,026 | ) | | | (40,026 | ) | |
Repurchases of common stock - other, at cost | | | | | | | | | | | | | | | | | | | (2,221 | ) | | | (2,221 | ) | |
Exercise of stock options | | | 1 | | | | 33,175 | | | | | | | | | | | | | | | | 33,176 | | |
Issuance of Cabot Microelectronics restricted stock under Deposit Share Plan | | | | | | | 23 | | | | | | | | | | | | | | | | 23 | | |
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | | | | | | | 2,583 | | | | | | | | | | | | | | | | 2,583 | | |
Tax benefits from share-based compensation plans | | | | | | | 6,181 | | | | | | | | | | | | | | | | 6,181 | | |
Net income | | | | | | | | | | | 56,146 | | | | | | | | | | | | 56,146 | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | (14,126 | ) | | | | | | | (14,126 | ) | |
Interest rate swaps | | | | | | | | | | | | | | | (901 | ) | | | | | | | (901 | ) | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | (318 | ) | | | | | | | (318 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | | Capital In Excess Of Par | | | Retained Earnings | | | Accumulated Other Comprehensive Income | | | Treasury Stock | | | Total | |
Balance at September 30, 2015 | | $ | 33 | | | $ | 495,673 | | | $ | 284,088 | | | $ | (6,090 | ) | | $ | (344,740 | ) | | $ | 428,964 | | | $ | 33 | | | $ | 495,673 | | | $ | 284,088 | | | $ | (6,090 | ) | | $ | (344,740 | ) | | $ | 428,964 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | | | | | 13,787 | | | | | | | | | | | | | | | | 13,787 | | | | | | | | 13,787 | | | | | | | | | | | | | | | | 13,787 | |
Repurchases of common stock under share repurchase plans, at cost | | | | | | | | | | | | | | | | | | | (25,980 | ) | | | (25,980 | ) | | | | | | | | | | | | | | | | | | | (25,980 | ) | | | (25,980 | ) |
Repurchases of common stock - other, at cost | | | | | | | | | | | | | | | | | | | (2,838 | ) | | | (2,838 | ) | | | | | | | | | | | | | | | | | | | (2,838 | ) | | | (2,838 | ) |
Exercise of stock options | | | 1 | | | | 16,623 | | | | | | | | | | | | | | | | 16,624 | | | | 1 | | | | 16,623 | | | | | | | | | | | | | | | | 16,624 | |
Issuance of Cabot Microelectronics restricted stock under Deposit Share Plan | | | | | | | 52 | | | | | | | | | | | | | | | | 52 | | |
Issuance of Cabot Microelectronics restricted stock under Deposit Share Program | | | | | | | | 52 | | | | | | | | | | | | | | | | 52 | |
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | | | | | | | 2,837 | | | | | | | | | | | | | | | | 2,837 | | | | | | | | 2,837 | | | | | | | | | | | | | | | | 2,837 | |
Tax benefits from share-based compensation plans | | | | | | | 1,868 | | | | | | | | | | | | | | | | 1,868 | | | | | | | | 1,868 | | | | | | | | | | | | | | | | 1,868 | |
Net income | | | | | | | | | | | 59,849 | | | | | | | | | | | | 59,849 | | | | | | | | | | | | 59,849 | | | | | | | | | | | | 59,849 | |
Dividends | | | | | | | | | | | (13,161 | ) | | | | | | | | | | | (13,161 | ) | | | | | | | | | | | (13,161 | ) | | | | | | | | | | | (13,161 | ) |
Foreign currency translation adjustment | | | | | | | | | | | | | | | 15,996 | | | | | | | | 15,996 | | | | | | | | | | | | | | | | 15,996 | | | | | | | | 15,996 | |
Interest rate swaps | | | | | | | | | | | | | | | 84 | | | | | | | | 84 | | | | | | | | | | | | | | | | 84 | | | | | | | | 84 | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | (434 | ) | | | | | | | (434 | ) | | | | | | | | | | | | | | | (434 | ) | | | | | | | (434 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2016 | | $ | 34 | | | $ | 530,840 | | | $ | 330,776 | | | $ | 9,556 | | | $ | (373,558 | ) | | $ | 497,648 | | | $ | 34 | | | $ | 530,840 | | | $ | 330,776 | | | $ | 9,556 | | | $ | (373,558 | ) | | $ | 497,648 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | | | | | 13,004 | | | | | | | | | | | | | | | | 13,004 | | | | | | | | 13,004 | | | | | | | | | | | | | | | | 13,004 | |
Repurchases of common stock under share repurchase plans, at cost | | | | | | | | | | | | | | | | | | | (12,035 | ) | | | (12,035 | ) | | | | | | | | | | | | | | | | | | | (12,035 | ) | | | (12,035 | ) |
Repurchases of common stock - other, at cost | | | | | | | | | | | | | | | | | | | (2,173 | ) | | | (2,173 | ) | | | | | | | | | | | | | | | | | | | (2,173 | ) | | | (2,173 | ) |
Exercise of stock options | | | 1 | | | | 27,665 | | | | | | | | | | | | | | | | 27,666 | | | | 1 | | | | 27,665 | | | | | | | | | | | | | | | | 27,666 | |
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | | | | | | | 2,986 | | | | | | | | | | | | | | | | 2,986 | | | | | | | | 2,986 | | | | | | | | | | | | | | | | 2,986 | |
Tax benefits from share-based compensation plans | | | | | | | 6,443 | | | | | | | | | | | | | | | | 6,443 | | | | | | | | 6,443 | | | | | | | | | | | | | | | | 6,443 | |
Net income | | | | | | | | | | | 86,952 | | | | | | | | | | | | 86,952 | | | | | | | | | | | | 86,952 | | | | | | | | | | | | 86,952 | |
Dividends | | | | | | | | | | | (19,847 | ) | | | | | | | | | | | (19,847 | ) | | | | | | | | | | | (19,847 | ) | | | | | | | | | | | (19,847 | ) |
Foreign currency translation adjustment | | | | | | | | | | | | | | | (6,746 | ) | | | | | | | (6,746 | ) | | | | | | | | | | | | | | | (6,746 | ) | | | | | | | (6,746 | ) |
Interest rate swaps | | | | | | | | | | | | | | | 863 | | | | | | | | 863 | | | | | | | | | | | | | | | | 863 | | | | | | | | 863 | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | 276 | | | | | | | | 276 | | | | | | | | | | | | | | | | 276 | | | | | | | | 276 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2017 | | $ | 35 | | | $ | 580,938 | | | $ | 397,881 | | | $ | 3,949 | | | $ | (387,766 | ) | | $ | 595,037 | | | $ | 35 | | | $ | 580,938 | | | $ | 397,881 | | | $ | 3,949 | | | $ | (387,766 | ) | | $ | 595,037 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | | | | | | 18,518 | | | | | | | | | | | | | | | | 18,518 | |
Repurchases of common stock under share repurchase plans, at cost | | | | | | | | | | | | | | | | | | | | (40,726 | ) | | | (40,726 | ) |
Repurchases of common stock - other, at cost | | | | | | | | | | | | | | | | | | | | (3,562 | ) | | | (3,562 | ) |
Exercise of stock options | | | | 1 | | | | 19,278 | | | | | | | | | | | | | | | | 19,279 | |
Issuance of Cabot Microelectronics restricted stock under Deposit Share Program | | | | | | | | 300 | | | | | | | | | | | | | | | | 300 | |
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | | | | | | | | 3,464 | | | | | | | | | | | | | | | | 3,464 | |
Net income | | | | | | | | | | | | 110,043 | | | | | | | | | | | | 110,043 | |
Dividends | | | | | | | | | | | | (36,251 | ) | | | | | | | | | | | (36,251 | ) |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | 679 | | | | | | | | 679 | |
Interest rate swaps | | | | | | | | | | | | | | | | (63 | ) | | | | | | | (63 | ) |
Minimum pension liability adjustment | | | | | | | | | | | | | | | | (26 | ) | | | | | | | (26 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2018 | | | $ | 36 | | | $ | 622,498 | | | $ | 471,673 | | | $ | 4,539 | | | $ | (432,054 | ) | | $ | 666,692 | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
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.
The results of operations for the quarter ended December 31, 2017 and year ended September 30, 2018 include a correction to prior period amounts, which we determined to be immaterial to the prior periods to which they relate and to our fiscal 2018 results. The adjustments, relating primarily to accumulated earnings taxes of a foreign operation, increased the income tax expense for the first quarter of fiscal 2018 by $2,071. Separately, in Note 16 of this Report on Form 10-K, we discuss the effects of the Tax Cuts and Jobs Act ("Tax Act") on our financial statements.
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, 2017.2018.
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 investments as of September 30, 20172018 or 2016.2017. See Note 43 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, 20172018 as follows:
Balance as of September 30, 2016 | | $ | 1,828 | | |
Balance as of September 30, 2017 | | | $ | 1,747 | |
Amounts charged to expense | | | 26 | | | | 185 | |
Deductions and adjustments | | | (107 | ) | | | (32 | ) |
Balance as of September 30, 2017 | | $ | 1,747 | | |
Balance as of September 30, 2018 | | | $ | 1,900 | |
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, | Year Ended September 30, |
| 2017 | | 2016 | | 2015 | 2018 | | 2017 | | 2016 |
| | | | | | | | | | |
Samsung Group (Samsung) | 16% | | 15% | | 15% | 18% | | 16% | | 15% |
Taiwan Semiconductor Manufacturing Co. (TSMC) | 13% | | 15% | | 18% | 12% | | 13% | | 15% |
SK Hynix Inc. | | 10% | | * | | * |
Micron Technology Inc. | 10% | | * | | * | * | | 10% | | * |
* Not a customer with more than 10% revenue in fiscal 2016 and 2015.revenue.
TSMC accounted for 12.2%7.9% and 12.9%12.2% of net accounts receivable at September 30, 20172018 and 2016,2017, respectively. Samsung accounted for 11.9%11.4% and 8.3%11.9% of net accounts receivable at September 30, 2018 and 2017, and 2016, respectively. MicronSK Hynix accounted for 10.7%3.4% and 7.2%4.9% of net accounts receivable at September 30, 2018 and 2017, respectively. Micron accounted for 13.1% and 2016,10.7% of net accounts receivable at September 30, 2018 and 2017, 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 43 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.net realizable value. Finished goods and work in process inventories include material, labor and manufacturing overhead costs. We regularly review and write down the value of inventory as required for estimated obsolescence or lack of marketability. An inventory reserve is maintained based upon a historical percentage of actual inventories written off and applied against inventory value at the end of the period, adjusted for known conditions and circumstances.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is based on the following estimated useful lives of the assets using the straight-line method:
Buildings | 15-25 years |
Machinery and equipment | 3-10 years |
Furniture and fixtures | 5-10 years |
Information systems | 3-5 years |
Assets under capital leases | Term of lease or estimated useful life |
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized and depreciated over the remaining useful lives. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. We capitalize the costs related to the design and development of software used for internal purposes; however, these costs are not material.
IMPAIRMENT OF LONG-LIVED ASSETS
Reviews are regularly performed to determine whether facts and circumstances exist that indicateWe assess 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 value of long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the assets may be impaired. We perform a periodic review of our long-lived assets to determine if such impairment indicators exist. We must exercise judgment in assessing whether an event of impairment has occurred. For purposes of recognition and measurement of an impairment loss, long-lived assets are either individually identified or grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in this grouping. If the sum of the undiscounted future cash flows expected to result from the identified asset group is less than the carrying value of the asset group, an impairment provision may be required. The amount overof the impairment to be recognized is calculated by subtracting the fair value of those assets. If assets are determined to be recoverable, but their useful lives are shorter than originally estimated,the asset group from the net book value of the asset is depreciatedgroup. Determining future cash flows and estimating fair values require significant judgment and are highly susceptible to change from period to period because they require management to make assumptions about future sales and cost of sales generally over the newly determined remaining useful life.a long-term period. We did not record any impairment expense in fiscal 2018 and 2016. We recorded impairment expense on a certain long-lived assetassets of $860 in fiscal year 2017 related to surplus research and development equipment, 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 65 for more information regarding impairment.
We evaluate the estimated fair value of investments annually, or more frequently if indicators of potential impairment exist, to determine if an other-than-temporary impairment in the value of the investment has taken place.
WARRANTY RESERVE
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements. The warranty reserve is based upon a historical product return rate, adjusted for any specific known conditions or circumstances. Adjustments to the warranty reserve are recorded in cost of goods sold.
GOODWILL AND INTANGIBLE ASSETS
We amortizePurchased intangible assets with finite lives are amortized over their estimated useful lives which range from one to eleven years. Intangible assets with finite livesand are reviewedevaluated for impairment using a process similar to that used to evaluate other long-lived assets. Goodwill and indefinite-livedindefinite lived intangible assets are not amortized and are tested annually in theour 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.segment. A component is a reporting unit when the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of the component. Components may be combined into one reporting unit when they have similar economic characteristics. We have fourthree reporting units, all of which havehad goodwill as of September 30, 2017. Goodwill2018, the date of our annual impairment testing requires a comparisontest. Two of the fair value of each reporting unit to the carrying value. If the carrying value exceeds fair value, then the fair valueunits, CMP Slurries and CMP Pads, represent 95% of the assets and liabilities for the reporting unit is usedgoodwill balance on our Consolidated Balance Sheet as of September 30, 2018. The goodwill related to determine the "implied" fair valueCMP Pads resulted from our acquisition of goodwill. The amount of the impairment is the difference between the carrying value and the implied fair value of goodwill. NexPlanar.
Accounting guidance provides an entity the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). 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, 2017 and 2017,2018, we usedchose to use a step one analysis to determinefor both goodwill impairment and for the recoverability of indefinite-lived intangible assets.assets, with the exception of our CMP Slurries reporting unit, for which we chose to use a step zero analysis for fiscal 2018.
Factors requiring significant judgment include the selection of valuation approach and assumptions related to future revenue and gross margin growth rates, discount factors and royalty rates, among others. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these assumptions may result in future impairment charges. The CMP Pads reporting unit and QED reporting unit each had a calculated fair value that was in excess of the carrying value by greater than 50%. As discusseda result of the review performed 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. We2018, and the related sensitivity analysis, we determined that there was no impairment of our goodwill and the other intangible assets were not impaired as of September 30, 2018. There was no goodwill impairment recorded in fiscal 2017. In fiscal 2016, we recorded a $1,000 impairment of certain NexPlanar in-process technology.
FOREIGN CURRENCY TRANSLATION
Certain operating activities in Asia and Europe are denominated in local currency, considered to be the functional currency. Assets and liabilities of these operations are translated using exchange rates in effect at the end of the year, and revenue and costs are translated using average exchange rates for the year. The related translation adjustments are reported in comprehensive income in stockholders' equity.
FOREIGN EXCHANGE MANAGEMENT
We transact business in various foreign currencies, primarily the Japanese yen, New Taiwan dollar and Korean won. Our exposure to foreign currency exchange risks has not been significant because a large portion of our business is denominated in U.S. dollars. However, there was a weakening of the Japanese yen against the U.S. dollar during the past few fiscal years, 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 1110 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 1817 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)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 onusing enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, using enacted tax rates.liabilities. The effect on deferred tax assets and liabilities of a changechanges in tax rates is recognized in income in the period that includes the enactment date. Provisions are made for both U.S. and any foreign deferred income tax liability or benefit. We assess whether or not our deferred tax assets will ultimately be realized and record an estimated valuation allowance on those deferred tax assets that may not be realized. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position. In fiscal years 2015, 2016 and 2017, we electedmaintained an assertion to permanently reinvest the earnings of all of our foreign subsidiaries rather thansubsidiaries. In light of the Tax Act and the associated transition to a modified territorial tax system, we no longer considered our foreign earnings to be indefinitely reinvested and repatriated $197,932 in fiscal 2018, and plan to repatriate foreign earnings on an ongoing basis. Consequently, we recorded deferred tax liabilities associated with withholding taxes on actual and future distribution of such earnings. In addition, the earningsTax Act incudes complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate income tax rate to 21% effective January 1, 2018; and (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years. As a result of the Tax Act, the SEC staff issued accounting guidance that provides up to a one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act (SAB 118). To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but for which the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The final impact of the Tax Act may differ from the provisional estimates due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, by changes in accounting standard for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts. See Note 1716 for additional information on income taxes.taxes and permanent reinvestment.
SHARE-BASED COMPENSATION
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock, restricted stock unit and performance share unit ("PSU") awards, and employee stock purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and for stock option grants made prior to December 2017, we addhave added a slight premium to this expected term for employees who meet the definition of retirement eligibleretirement-eligible pursuant to their stock option grants during the contractual term of the grant. As of December 2017, the provisions of new stock option grants and restricted stock unit awards state that except in certain circumstances, including termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, for those employees who have met the retirement eligibility at the grant date, we now record the total share-based compensation expense upon award; for those employees who will meet the retirement eligibility during the four-year vesting period, we now record the share-based compensation expense over the period from the grant date through the date of retirement eligibility, rather than over the four-year vesting period stated in the award agreement.
The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The PSUs that have been awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We use a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions, including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility.
In the first quarter of fiscal 2018, we adopted ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718) (ASU 2016-09) prospectively. The provisions of this standard relate to aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or liabilities, classification of excess tax benefits on the Consolidated Statements of Cash Flows and earnings per share calculations. During fiscal 2018, we have recorded a tax benefit of $7,294 in our Consolidated Statements of Income. The net income, including the impact of the tax benefits, was used to calculate our basic earnings per share under the new guidance. In addition, we have elected to continue to estimate forfeitures under ASC 718 pursuant to the adoption of ASU 2016-09.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award.
In fiscal 2016, related to our acquisition of NexPlanar, we granted incentive stock options (ISOs), as allowed under our current Omnibus Incentive Plan, to certain NexPlanar employees in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. We used the Black-Scholes option-pricing model to estimate the grant date fair value of these ISOs to calculate share-based compensation expense in fiscal 2016 and for future periods.
For additional information regarding our share-based compensation plans, refer to Note 13.12.
EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two classtwo-class method under ASC Topic 260, Earnings Per Share (ASC 260). Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method. We adopted ASU 2016-09 in fiscal 2018. Pursuant to the adoption, the proceeds from excess tax benefits are no longer included in the dilutive impact on the weighted average shares outstanding for dilutive EPS. The excess tax benefits were treated as a reduction to tax provision, rather than an increase to equity.
COMPREHENSIVE INCOME
Comprehensive income primarily differs from net income due to foreign currency translation adjustments.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), an updated standard on revenue recognition.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 bewas 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 workinghave substantially completed the process to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts, and identifyhave identified and implementimplemented changes to our 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. However, for our contracts containing certain pricing and incentive arrangements with our customers within our CMP consumables business, the new guidance will change the manner and timing in which we recognize the revenue. Based on our current assessment of the existing contracts at the time of the adoption containing nonstandard pricing and incentive arrangements, we do not expect the adoption of the new standard to have a material impact on our financial position and results of operations. We anticipate we will useadopt the new revenue standard in the first quarter of fiscal 2019 using the modified retrospective approach to adoption, which will require us to record the cumulative effect of adopting the standard as an immaterial adjustment to the beginning balance of retained earnings. We continue to evaluateearnings for the impactcumulative effect of adopting the implementation of these standards on our financial statements.standard.
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.
53
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 effectiveWe have adopted this standard in the first quarter of fiscal 2018 prospectively. As a result of the adoption, excess tax benefits were recorded as a reduction to the provision for us beginning October 1, 2017, but early adoption is permitted. We currently expect thatincome taxes, rather than an increase to equity. Therefore, we recorded a tax benefit of $7,294 in our Consolidated Statements of Income in fiscal 2018. Additionally, the proceeds from excess tax benefits are no longer included in the dilutive impact on the weighted average shares outstanding for dilutive EPS under the new guidance. Also, we have elected to continue to estimate forfeitures under ASC 718 pursuant to the adoption of 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.ASU 2016-09.
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (Topic 326). The provisions of this standard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would be established to present the net carrying value at the amount expected to be collected. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2019. We are currently evaluating the impact of implementation of this standard on our financial statements.
In 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 testingquantification will now be done by comparing the fair value of a reporting unit and its carrying amount. We adopted ASU 2017-04 will be effective for us beginning October 1, 2020, but early adoption is permitted as2017 and applied the new guidance in our annual test for goodwill impairment in the fourth quarter of October 1, 2017. We are currently evaluating the impact of implementation of this standard on our financial statements.fiscal 2018.
In March 2017, the FASB issued ASU No. 2017-07 "Improving the Presentation of Net Period Pension Cost and Net Period Postretirement Benefit Cost" (Topic 715). The provisions of ASU 2017-07 provided specific guidance on the presentation of the components of net benefit cost. ASU 2017-07 will bewas effective for us beginning October 1, 2018. We are currently evaluating the impact of implementation ofdo not expect this standard to have a material impact on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09 "Scope of Modification Accounting" (Topic 718). The provisions of ASU 2017-09 provide specific guidance about which changes to the term or conditions of a share-based payment require an entity to apply modification accounting. ASU 2017-09 will bewas effective for us beginning October 1, 2018. We are currently evaluatingwill apply this new standard to the impact of implementation of this standard on our financial statements.awards, to the extent modified.
In August 2017,February 2018, the FASB issued ASU No. 2017-12 "Derivatives and Hedging"2018-02 "Income Statement – Reporting Comprehensive Income (Topic 815)220)". The provisions ofamendments in this standard amendallow a company to reclassify 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 excludedstranded tax effects resulting from the assessment of hedge effectiveness.Tax Act from accumulated other comprehensive income to retained earnings. ASU 2017-092018-02 will be effective for us beginning October 1, 2019, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In June 2018, the FASB issued ASU No. 2018-07 " Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting". The ASU simplified the accounting for share-based payments granted to nonemployees for goods and services, therefore guidance on such payments to nonemployees would be mostly aligned with the requirements for share-based payments granted to employees. ASU 2018-07 will be effective for us beginning October 1, 2019, but early adoption is permitted (but no earlier than the adoption date of Topic 606). We are currently evaluating the impact of implementation of this standard on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13 " Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement". The ASU provides specific guidance on various disclosure requirements in Topic 820, including removal, modification and addition to current disclosure requirements. ASU 2018-13 will be effective for us beginning October 1, 2020, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our disclosures.
On October 22, 2015,In August 2018, the Company completed the acquisition of 100%FASB issued ASU No. 2018-15 " Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the 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 $15,261FASB Emerging Issues Task Force)". The purchase consideration includes $142,167 paid atASU Requires an entity (customer) in a hosting arrangement that is a service contract to follow the date of acquisition and $70 for a post-closing adjustment. In addition, we paid $154 guidance in compensation expenseSubtopic 350-40 to determine which implementation costs to capitalize as an asset related to certain unvested NexPlanar stock options settled in cash at the acquisition date.
The following table summarizes the fair values of assets acquiredservice contract 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 planswhich costs 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 andexpense. ASU 2018-15 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 deductibleeffective 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 onus beginning 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 exclude2020, but early adoption is permitted. We are currently evaluating the impact of compensation expense related to unvested NexPlanar stock options settled in cash, and the step-upimplementation of inventory as these items are assumed to have occurred during the quarter ended December 31, 2014 had the acquisition been completedthis standard 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.our financial statements.
4.3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB established a three-level hierarchy for disclosure based on the extent and level of judgment used to estimate fair value. Level 1 inputs consist of valuations based on quoted market prices in active markets for identical assets or liabilities. Level 2 inputs consist of valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in an inactive market, or other observable inputs. Level 3 inputs consist of valuations based on unobservable inputs that are supported by little or no market activity.
The following table presents financial instruments, other than long-term debt, that we measured at fair value on a recurring basis at September 30, 20172018 and 20162017. See Note 109 for a detailed discussion of our long-term debt. We have classified the following assets in accordance with the fair value hierarchy set forth in the applicable standards. In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest level input that is significant to the determination of the fair value.
September 30, 2018 | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | |
Assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 352,921 | | | $ | - | | | $ | - | | | $ | 352,921 | |
Other long-term investments | | | 1,137 | | | | - | | | | - | | | | 1,137 | |
Derivative financial instruments | | | - | | | | - | | | | - | | | | - | |
Total assets | | $ | 354,058 | | | $ | - | | | $ | - | | | $ | 354,058 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Derivative financial instruments | | | - | | | | 339 | | | | - | | | | 339 | |
Total liabilities | | $ | - | | | $ | 339 | | | $ | - | | | $ | 339 | |
September 30, 2017 | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | |
Assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 397,890 | | | $ | - | | | $ | - | | | $ | 397,890 | |
Other long-term investments | | | 929 | | | | - | | | | - | | | | 929 | |
Derivative financial instruments | | | - | | | | 263 | | | | - | | | | 263 | |
Total assets | | $ | 398,819 | | | $ | 263 | | | $ | - | | | $ | 399,082 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Derivative financial instruments | | | - | | | | 1,881 | | | | - | | | | 1,881 | |
Total liabilities | | $ | - | | | $ | 1,881 | | | $ | - | | | $ | 1,881 | |
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$1,137 in the fourth quarter of fiscal 20172018 to reflect its fair value as of September 30, 2017.2018.
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. 55
The fair value of our derivative instruments is estimated using standard valuation models and market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves for interest rate swaps, and forward rates and/or the Overnight Index Swap (OIS) curve for forward foreign exchange contracts, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments. Our derivative financial instruments include forward foreign exchange contracts and interest rate swaps. In fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. We terminated our interest rate swap agreements during the fiscal year, in connection with the extinguishment of debt. In the fourth quarter of fiscal 2017, we entered into forward foreign exchange contracts in an effort to protect our net investment in a foreign operation against potential adverse changes resulting from foreign currency fluctuation. This net investment hedge was terminated during the year driven by a significant repatriation of funds from this foreign operation. See Note 1110 for more information on our use of derivative financial instruments.
5.4. INVENTORIES
Inventories consisted of the following:
| September 30, | | |
| 2017 | | 2016 | | | September 30, | |
| | | | | | 2018 | | | 2017 | |
Raw materials | | $ | 36,415 | | | $ | 45,109 | | | $ | 35,150 | | | $ | 36,415 | |
Work in process | | | 7,365 | | | | 4,668 | | | | 8,117 | | | | 7,365 | |
Finished goods | | | 28,093 | | | | 22,346 | | | | 28,659 | | | | 28,093 | |
Total | | $ | 71,873 | | | $ | 72,123 | | | $ | 71,926 | | | $ | 71,873 | |
6.5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| | September 30, | | |
| | 2017 | | | 2016 | | | September 30, | |
| | | | | | | | 2018 | | | 2017 | |
Land | | $ | 17,823 | | | $ | 18,636 | | | $ | 17,525 | | | $ | 17,823 | |
Buildings | | | 104,057 | | | | 100,084 | | | | 103,601 | | | | 104,057 | |
Machinery and equipment | | | 187,649 | | | | 198,870 | | | | 195,434 | | | | 187,649 | |
Furniture and fixtures | | | 6,770 | | | | 6,642 | | | | 7,575 | | | | 6,770 | |
Information systems | | | 32,748 | | | | 29,573 | | | | 34,271 | | | | 32,748 | |
Capital lease | | | | 1,200 | | | | - | |
Construction in progress | | | 10,439 | | | | 6,358 | | | | 17,001 | | | | 10,439 | |
Total property, plant and equipment | | | 359,486 | | | | 360,163 | | | | 376,607 | | | | 359,486 | |
Less: accumulated depreciation | | | (253,125 | ) | | | (253,667 | ) | | | (265,204 | ) | | | (253,125 | ) |
Net property, plant and equipment | | $ | 106,361 | | | $ | 106,496 | | | $ | 111,403 | | | $ | 106,361 | |
Depreciation expense was $17,255, $17,195 $16,915 and $16,060$16,915 for the years ended September 30, 2018, 2017 2016 and 2015,2016, respectively.
In fiscal 2017 we recorded $860 in impairment expense related to a surplus research and development asset, and we recorded a $1,820 gain on the sale of surplus research and development equipment. We did not record any impairment expense on property, plant and equipment in fiscal 20162018 and 2015.2016.
7.6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $101,932$101,083 and $100,639$101,932 as of September 30, 20172018 and 2016,2017, respectively. The increasedecrease in goodwill was due to $1,147$154 in foreign exchange fluctuations of the New Taiwan dollar and an adjustmenta $695 decrease related to the sale of $146 tocertain ESF assets. As a deferred tax liability.result of this sale of assets in March 2018, we received net proceeds of $3,277, of which $250 is held in escrow, and recorded a gain of $956 in other income in the Consolidated Statements of Income.
The components of other intangible assets are as follows:
| | September 30, 2017 | | | September 30, 2016 | | | September 30, 2018 | | | September 30, 2017 | |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | | | 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 | | | $ | 46,275 | | | $ | 22,755 | | | $ | 42,287 | | | $ | 17,604 | |
Acquired patents and licenses | | | 8,270 | | | | 8,241 | | | | 8,270 | | | | 8,155 | | | | 8,270 | | | | 8,252 | | | | 8,270 | | | | 8,241 | |
Trade secrets and know-how | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | |
Customer relationships, distribution rights and other | | | 28,229 | | | | 15,421 | | | | 27,900 | | | | 12,205 | | | | 28,068 | | | | 17,574 | | | | 28,229 | | | | 15,421 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other intangible assets subject to amortization | | | 81,336 | | | | 43,816 | | | | 80,914 | | | | 35,628 | | | | 85,163 | | | | 51,131 | | | | 81,336 | | | | 43,816 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other intangible assets not subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In-process technology | | | 4,000 | | | | | | | | 4,000 | | | | | | | | - | | | | | | | | 4,000 | | | | | |
Other indefinite-lived intangibles* | | | 1,190 | | | | | | | | 1,190 | | | | | | | | 1,170 | | | | | | | | 1,190 | | | | | |
Total other intangible assets not subject to amortization | | | 5,190 | | | | | | | | 5,190 | | | | | | | | 1,170 | | | | | | | | 5,190 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other intangible assets | | $ | 86,526 | | | $ | 43,816 | | | $ | 86,104 | | | $ | 35,628 | | | $ | 86,333 | | | $ | 51,131 | | | $ | 86,526 | | | $ | 43,816 | |
| * | Other indefinite-lived intangibles not subject to amortization primarily consist of trade names. |
During the first quarter of fiscal 2018, development of our in-process technology was completed, and we reclassified $4,000 to product technology under other intangible assets subject to amortization.
Amortization expense was $7,495, $7,795 $8,176 and $2,346$8,176 for fiscal 2018, 2017 2016 and 2015,2016, respectively. Estimated future amortization expense of intangible assets as of September 30, 20172018 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 | |
| Fiscal Year | | Estimated Amortization Expense | |
| | | | |
| 2019 | | $ | 7,119 | |
| 2020 | | | 7,115 | |
| 2021 | | | 7,108 | |
| 2022 | | | 7,108 | |
| 2023 | | | 1,717 | |
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of our fiscal year or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. An entity has the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). Similarly, an entity has the option to use a step zero or a step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 20162017 and 2017,2018, we chose to use a step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment.impairment, with the exception of our CMP slurries reporting unit, for which we chose to use a step zero analysis for fiscal 2018.
We completed our annual impairment test during our fourth quarter of fiscal 20172018 and concluded that no impairment existed. No impairment existed as a result of our impairment test during the fourth quarter of fiscal 2017. During the fourth quarter of fiscal 2016, 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.
8.7. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
| September 30, | | |
| 2017 | | 2016 | | | September 30, | |
| | | | | | 2018 | | | 2017 | |
Auction rate securities (ARS) | | $ | 5,319 | | | $ | 5,494 | | | $ | - | | | $ | 5,319 | |
Long-term contract asset | | | 2,115 | | | | 3,055 | | | | 1,548 | | | | 2,115 | |
Other long-term assets | | | 2,154 | | | | 2,465 | | | | 1,979 | | | | 2,154 | |
Other long-term investments | | | 929 | | | | 1,028 | | | | 1,137 | | | | 929 | |
Total | | $ | 10,517 | | | $ | 12,042 | | | $ | 4,664 | | | $ | 10,517 | |
We classifyDuring the fiscal year we redeemed our ARS investments as held-to-maturity and have recorded them at cost. Our ARS investments at September 30, 2017which consisted of two tax exempt municipal debt securities, with a total par value of $5,319, both of which havehad maturities of 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 primarily 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 4,3, we recorded a long-term asset and a corresponding long-term liability of $929$1,137 representing the fair value of our SERP investments as of September 30, 2017.2018.
9.8. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2018 | | | 2017 | |
Accrued compensation | | $ | 35,332 | | | $ | 17,856 | | | $ | 35,367 | | | $ | 35,332 | |
Income taxes payable | | | | 18,045 | | | | 9,717 | |
Dividends payable | | | 5,314 | | | | 4,502 | | | | 10,822 | | | | 5,314 | |
Acquisition and integration related | | | | 2,701 | | | | - | |
Goods and services received, not yet invoiced | | | 2,172 | | | | 2,648 | | | | 1,954 | | | | 2,172 | |
Deferred revenue and customer advances | | | 1,559 | | | | 782 | | | | 4,894 | | | | 1,559 | |
Warranty accrual | | | 247 | | | | 243 | | |
Income taxes payable | | | 9,717 | | | | 7,878 | | |
Taxes, other than income taxes | | | 1,688 | | | | 775 | | | | 1,976 | | | | 1,688 | |
Current portion of long-term contract liability | | | 1,500 | | | | 1,500 | | | | 1,487 | | | | 1,500 | |
Other | | | 5,122 | | | | 5,211 | | | | 5,737 | | | | 5,369 | |
Total | | $ | 62,651 | | | $ | 41,395 | | | $ | 82,983 | | | $ | 62,651 | |
9. DEBT
On February 13, 2012, we entered into a credit agreement (the "Credit Agreement") among the Company, as Borrower, Bank of America, N.A., as administrative agent, swing line lender and an L/C issuer, Bank of America Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, JPMorgan Chase Bank, N.A., as syndication agent, and Wells Fargo Bank, N.A. as documentation agent. The Credit Agreement provided us with a $175,000 term loan (the "Term Loan"), which we drew on February 27, 2012 to fund approximately half of the special cash dividend we paid to our stockholders on March 1, 2012, and a $100,000 revolving credit facility (the "Revolving Credit Facility"), which has never been drawn, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans. The Term Loan and the Revolving Credit Facility are referred to as the "Credit Facilities." On June 27, 2014, we entered into an amendment (the "Amendment") to the Credit Agreement, which (i) increased term loan commitments by $17,500, from $157,500 to $175,000, the same level as the original amount under the Credit Agreement at its inception in 2012; (ii) increased the uncommitted accordion feature on the Revolving Credit Facility from $75,000 to $100,000; (iii) extended the expiration date of the Credit Facilities from February 13, 2017 to June 27, 2019; (iv) relaxed the consolidated leverage ratio financial covenant; and (v) revised certain pricing terms and other terms within the Credit Agreement. On June 27, 2014, we drew the $17,500 of increased term loan commitments, bringing the total outstanding commitments under the Term Loan to $175,000.
The enactment of the Tax Act in the United States in December 2017 facilitated the repatriation of a substantial amount of the Company's non-U.S. cash. In April 2018, the Company utilized these repatriated funds to pay off its remaining outstanding Term Loan pursuant to the Credit Agreement. There was no penalty upon the Company's prepayment of the Term Loan. As a result of this early extinguishment of the Term Loan, we expensed the remaining $315 of unamortized debt issuance cost in the third quarter of fiscal 2018, and we terminated the related interest rate swaps and recognized a gain of $532 in the Consolidated Statements of Income.
Borrowings under the amended Credit Facilities (other than in respect of swing-line loans) bear interest at a rate per annum equal to the "Applicable Rate" (as defined below) plus, at our option, either (1) a LIBOR rate determined by reference to the cost of funds for deposits in the relevant currency for the interest period relevant to such borrowing or (2) the "Base Rate", which is the highest of (x) the prime rate of Bank of America, N.A., (y) the federal funds rate plus 1/2 of 1.00% and (z) the one-month LIBOR rate plus 1.00%. The current Applicable Rate for borrowings under the Credit Facilities is 1.50%, as amended, with respect to LIBOR borrowings and 0.25% with respect to Base Rate borrowings, with such Applicable Rate subject to adjustment based on our consolidated leverage ratio. Swing-line loans bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the Revolving Credit Facility. In addition to paying interest on outstanding principal under the Credit Agreement, we pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. As amended, the fee ranges from 0.20% to 0.30%, based on our consolidated leverage ratio. Interest expense and commitment fees are paid according to the relevant interest period and no less frequently than at the end of each calendar quarter. We also pay letter of credit fees as necessary. The Term Loan has periodic scheduled repayments; however, we may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary "breakage" fees and reemployment costs in the case of LIBOR borrowings. All obligations under the Credit Agreement are guaranteed by certain of our existing and future direct and indirect domestic subsidiaries. The obligations under the Credit Agreement and guarantees of those obligations are secured, subject to certain exceptions, by first priority liens and security interests in the assets of the Company and certain of its domestic subsidiaries.
As of September 30, 2017, unamortized debt issuance costs related to our Term Loan that were presented as a reduction of long-term debt were $441, and these cost were subsequently recorded in interest expense upon payoff of the Term Loan. Unamortized debt issuance costs related to our Revolving Credit Facility were not material.
The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents. The Credit Agreement requires us to comply with certain financial ratio maintenance covenants. These include a maximum consolidated leverage ratio of 2.75 to 1.00 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00 for the period January 1, 2016 through the expiration of the Credit Agreement. As of September 30, 2017,2018, our consolidated leverage ratio was 0.910.00 to 1.00 and our consolidated fixed charge coverage ratio was 3.413.93 to 1.00. The Credit Agreement also contains customary affirmative covenants and events of default. We believe we are in compliance with these covenants.
At September 30, 2017,In connection with our pending acquisition of KMG, we expect to terminate our existing Credit Agreement and enter into a new credit agreement which will provide us with a New Term Loan in the fair valueamount of $1,065 million and a New Revolving Facility in the amount of $200 million. See Note 20 of this Report on Form 10-K for more information about the anticipated terms of the 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 RevolvingNew 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 | |
Facilities.
11.10. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates. We enter into certain derivative transactions to mitigate the volatility associated with these exposures. We have policies in place that define acceptable instrument types we may enter into and we have established controls to limit our market risk exposure. We do not use derivative financial instruments for trading or speculative purposes. In addition, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value on a gross basis.
Cash Flow Hedges – Interest Rate Swap Agreements
In fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on $86,406 of our outstanding variable rate debt. The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal payment of debt. The notional valueinterest rate swap agreements were terminated during fiscal year 2018 in conjunction with the payoff of the swaps was $72,188Term Loan. We recorded a $532 gain in other income (expense) on our Consolidated Statement of Income as part of September 30, 2017, and the swaps are scheduled to expire on June 27, 2019.termination of interest rate swap agreements.
We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains arewere recognized as assets and unrealized losses arewere recognized as liabilities. Unrealized gains and losses arewere 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 iswas recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion iswas recorded as a component of interest expense. Changes in the method by which we paypaid interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts beingwhich were reclassified from other comprehensive income into net income. Hedge effectiveness iswas 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, 20172018 and September 30, 2016,2017, respectively, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign currencies were $8,176$7,652 and $8,858,$8,176, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $24,29524,860 and $15,635,$24,295, respectively.
Net Investment Hedge – Foreign Exchange Contracts
In September 2017, we entered into two forward foreign exchange contracts in an effort to protect the net investment of our Korean subsidiary against potential adverse changes resulting from currency fluctuations in the Korean won. We entered into forward contracts to sell Korean won and buy U.S. dollars, and these contracts will settle on September 26, 2022. We havehad designated these forward contracts as an effective net investment hedge. The total notional amount underAs a result of cash repatriation facilitated by the Tax Act, the Company terminated these foreign exchange contracts is 100 billion Korean won. Asduring fiscal year 2018.
Amounts recognized in Consolidated Statements of September 30, 2017, the change in the fair value of the forward contracts in theComprehensive Income for our net investment hedge relationship was $1,442, which was recorded in foreign currency translation adjustments within other comprehensive income. during the fiscal year ended September 30, were as follows:
| | | 2018 | |
| | | | |
| Balance at September 30, 2017 | | $ | 920 | |
| Loss on net investment hedge | | | 8,440 | |
| Tax benefit | | | (2,169 | ) |
| Balance at September 30, 2018 | | $ | 7,191 | |
The fair value of our derivative instruments included in the Consolidated Balance Sheet, which was determined using level 2 inputs, was as follows:
| | | Asset Derivatives | | | Liability Derivatives | |
| | | September 30, | | | September 30, | |
Consolidated Balance Sheet Location | | 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 | |
| | | Asset Derivatives | | | Liability Derivatives | |
| | | September 30, | | | September 30, | |
| Consolidated Balance Sheet Location | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Derivatives designated as hedging instruments | | | | | | | | | | | | | |
Interest rate swap contracts | Other long-term assets | | $ | - | | | $ | 117 | | | $ | - | | | $ | - | |
| Accrued expenses, income taxes payable and other current liabilities | | $ | - | | | $ | - | | | $ | - | | | $ | 31 | |
| Other long-term liabilities | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
Foreign exchange contracts designated as net investment hedge | Other long-term liabilities | | $ | - | | | $ | - | | | $ | - | | | $ | 1,442 | |
| | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | Prepaid expenses and other current assets | | $ | - | | | $ | 146 | | | $ | - | | | $ | - | |
| Accrued expenses, income taxes payable and other current liabilities | | $ | - | | | $ | - | | | $ | 339 | | | $ | 408 | |
The following table summarizes the effect of our derivative instrument on our Consolidated Statements of Income for the fiscal years ended September 30, 2018, 2017 2016 and 2015:2016:
| | | 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 | |
| | Gain (Loss) Recognized in Consolidated Statements of Income | |
| | Fiscal Year Ended September 30, | |
| Consolidated Statements of Income Location | 2018 | | 2017 | | 2016 | |
Derivatives not designated as hedging instruments | | | | | | | | | | |
Foreign exchange contracts | Other income (expense), net | | $ | (1,569 | ) | | $ | (1,462 | ) | | $ | 676 | |
12.11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below summarizes the components of accumulated other comprehensive income (loss) (AOCI), net of tax provision/(benefit), for the years ended September 30, 2018, 2017, 2016, and 2015.2016.
| Foreign Currency Translation | | | Cash Flow Hedges | | | Pension and Other Postretirement Liabilities | | | Total | | | 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 | ) | | $ | (4,011 | ) | | $ | (901 | ) | | $ | (1,178 | ) | | $ | (6,090 | ) |
Foreign currency translation adjustment, net of tax of $1,854 | | 15,996 | | | | - | | | | - | | | | 15,996 | | | | 15,996 | | | | - | | | | - | | | | 15,996 | |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in fair value, net of tax of $(274) | | - | | | | (499 | ) | | | - | | | | (499 | ) | | | - | | | | (499 | ) | | | - | | | | (499 | ) |
Reclassification adjustment into earnings, net of tax of $321 | | - | | | | 583 | | | | - | | | | 583 | | | | - | | | | 583 | | | | - | | | | 583 | |
Change in pension and other postretirement, net of tax of $(584) | | - | | | | - | | | | (434 | ) | | | (434 | ) | | | - | | | | - | | | | (434 | ) | | | (434 | ) |
Balance at September 30, 2016 | | 11,985 | | | | (817 | ) | | | (1,612 | ) | | | 9,556 | | | | 11,985 | | | | (817 | ) | | | (1,612 | ) | | | 9,556 | |
Foreign currency translation adjustment, net of tax of $(2,321) | | (6,746 | ) | | | 0 | | | | - | | | | (6,746 | ) | | | (6,746 | ) | | | - | | | | - | | | | (6,746 | ) |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in fair value, net of tax of $(660) | | - | | | | 1,161 | | | | - | | | | 1,161 | | | | - | | | | 1,161 | | | | - | | | | 1,161 | |
Reclassification adjustment into earnings, net of tax of $170 | | - | | | | (298 | ) | | | - | | | | (298 | ) | | | - | | | | (298 | ) | | | - | | | | (298 | ) |
Change in pension and other postretirement, net of tax of $79 | | - | | | | - | | | | 276 | | | | 276 | | | | - | | | | - | | | | 276 | | | | 276 | |
Balance at September 30, 2017 | $ | 5,239 | | | $ | 46 | | | $ | (1,336 | ) | | $ | 3,949 | | | | 5,239 | | | | 46 | | | | (1,336 | ) | | | 3,949 | |
Foreign currency translation adjustment, net of tax of $(2,409) | | | | 679 | | | | - | | | | - | | | | 679 | |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | | | |
Change in fair value, net of tax of $111 | | | | - | | | | 319 | | | | - | | | | 319 | |
Reclassification adjustment into earnings, net of tax of $(133) | | | | - | | | | (382 | ) | | | - | | | | (382 | ) |
Change in pension and other postretirement, net of tax of $1 | | | | - | | | | - | | | | (26 | ) | | | (26 | ) |
Balance at September 30, 2018 | | | $ | 5,918 | | | $ | (17 | ) | | $ | (1,362 | ) | | $ | 4,539 | |
The before tax amount reclassified from OCI to net income in fiscal 2017,2018, related to our cash flow hedges, was recorded as interest expense on our Consolidated Statement of Income. Amounts reclassified from OCI to net income, related to pension liabilities, were not material in fiscal years 2018, 2017 2016 and 2015.
2016.
13.12. SHARE-BASED COMPENSATION PLANS
EQUITY INCENTIVE PLAN AND OMNIBUS INCENTIVE PLAN
In March 2004, our stockholders approved our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (the "EIP"), as amended and restated September 23, 2008. In March 2012, our stockholders approved the Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan (the "OIP"), which is the successor plan to the EIP, and which was amended as of March 2017. All share-based awards have been made from the OIP as of its approval date, and the EIP is no longer available for any awards. The OIP is administered by the Compensation Committee of the Board of Directors and is intended to provide management with the flexibility to attract, retain and reward our employees, directors, consultants and advisors. The OIP allows for the granting of six types of equity incentive awards: stock options, restricted stock, restricted stock units, stock appreciation rights (SARs), performance-based awards and substitute awards. The OIP also provides for cash incentive awards to be made. Substitute awards under the OIP are those awards that, in connection with an acquisition, may be granted to employees, directors, consultants or advisors of the acquired company, in substitution for equity incentives held by them in the seller or the acquired company. In fiscal 2016, pursuantrelated 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, 2017,2018, no SARs or performance awards hadhave been granted to date under either plan. No awards of any type have been granted to date to consultants or advisors under either plan. The OIP authorizes up to 4,934,444 shares of stock to be granted thereunder, including up to 2,030,952 shares of stock in the aggregate of awards other than options or SARs, and up to 2,538,690 incentive stock options. The 4,934,444 shares of stock represents 2,901,360 shares of newly authorized shares and 2,033,084 shares previously available under the EIP. In addition, shares that become available from awards under the EIP and the OIP because of events such as forfeitures, cancellations or expirations, or because shares subject to an award are withheld to satisfy tax withholding obligations, will also be available for issuance under the OIP. Shares issued under our share-based compensation plans are issued from new shares rather than from treasury shares.
Non-qualified stock options issued under the OIP, as they were under the EIP, are generally time-based and provide for a ten-year term, with options generally vesting equally over a four-year period, with first vesting on the first anniversary of the award date. Non-qualified stock options granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date. Under the OIP, as under the EIP, employees may also be granted ISOs to purchase common stock at not less than the fair value on the date of the grant. Prior to fiscal 2016, no ISOs had been granted under either plan. In the first quarter of fiscal 2016, we substituted certain NexPlanar ISOs with Cabot Microelectronics Corporation ISOs, preserving the intrinsic value, including the original vesting periods, of the original awards. Compensation expense related to our stock option awards was $6,392, $5,500 $6,767 and $7,173$6,767 in fiscal 2018, 2017 2016 and 2015,2016, 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 $9,186, $6,730 $6,369 and $8,491$6,369 for fiscal 2018, 2017 2016 and 2015,2016, respectively.
6763
In December 2017, we granted performance share unit ("PSU") awards to certain employees. These PSUs fully vest on the third anniversary of the grant date. Stock-based compensation for the awards is recognized over the requisite service period (three years) beginning on the date of grant through the end of the performance period based on the number of PSUs expected to vest under the awards at the end of the performance period. The expected amount of vesting is determined using certain performance measures and is re-evaluated at the end of each fiscal year through the end of the performance period. In addition, the PSUs awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We used a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions, including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility. We have recorded $2,056 compensation expense related to our PSU awards in fiscal 2018.
In connection with our pending acquisition of KMG, immediately prior to the closing, each KMG Equity Award granted on or following August 14, 2018 will be converted into a corresponding award relating to shares of CMC Common Stock and continue to vest post-closing in accordance with the terms of the OIP (which will include vesting on a qualifying termination of employment).
EMPLOYEE STOCK PURCHASE PLAN
In March 2008, our stockholders approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the "ESPP"), which amended the ESPP for the primary purpose of increasing the authorized shares of common stock to be purchased under the ESPP from 475,000 designated shares to 975,000 shares. As of September 30, 2017,2018, a total of 435,400385,504 shares are available for purchase under the ESPP. The ESPP allows all full-time, and certain part-time, employees of our Company and its subsidiaries to purchase shares of our common stock through payroll deductions. Employees can elect to have up to 10% of their annual earnings withheld to purchase our stock, subject to a maximum number of shares that a participant may purchase and a maximum dollar expenditure in any six-month offering period, and certain other criteria. The provisions of the ESPP allow shares to be purchased at a price no less than the lower of 85% of the closing price at the beginning or end of each semi-annual stock purchase period. A total of 49,896, 69,751, 77,437, and 65,73577,437 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 30,2018, 2017 and 2016, respectively. Compensation expense related to the DDCPESPP was $0, $42,$885, $774 and $95 for each of$763 in fiscal 2018, 2017 and 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:assumptions:
| Year Ended September 30, | | Year Ended September 30, | |
| 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 | |
Stock Options | | | | | | | | | | | | |
Weighted-average grant date fair value | | $ | 16.50 | | | $ | 14.47 | | | $ | 16.99 | | | $ | 26.59 | | | $ | 16.50 | | | $ | 14.47 | |
Expected term (in years) | | | 6.57 | | | | 6.56 | | | | 6.30 | | | | 6.68 | | | | 6.57 | | | | 6.56 | |
Expected volatility | | | 27 | % | | | 26 | % | | | 33 | % | | | 26 | % | | | 27 | % | | | 26 | % |
Risk-free rate of return | | | 2.1 | % | | | 1.9 | % | | | 1.9 | % | | | 2.4 | % | | | 2.1 | % | | | 1.9 | % |
Dividend yield | | | 1.2 | % | | | 0.3 | % | | | - | | | | 1.0 | % | | | 1.2 | % | | | 0.3 | % |
| Year Ended September 30, | |
| 2018 | | 2017 | | 2016 | |
ESPP | | | | | | |
Weighted-average grant date fair value | | $ | 20.94 | | | $ | 12.49 | | | $ | 9.57 | |
Expected term (in years) | | | 0.50 | | | | 0.50 | | | | 0.50 | |
Expected volatility | | | 26 | % | | | 24 | % | | | 24 | % |
Risk-free rate of return | | | 1.5 | % | | | 0.6 | % | | | 0.4 | % |
Dividend yield | | | 1.1 | % | | | 1.3 | % | | | 0.5 | % |
| 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, 2018, 2017 2016 and 2015,2016, is as follows:
| | | Year Ended September 30, | |
| | Year Ended September 30, | | | 2018 | | | 2017 | | | 2016 | |
Income statement classifications: | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | |
Cost of goods sold | | $ | 2,229 | | | $ | 2,105 | | | $ | 1,912 | | | $ | 2,450 | | | $ | 2,229 | | | $ | 2,105 | |
Research, development and technical | | | 1,792 | | | | 1,633 | | | | 1,596 | | | | 1,940 | | | | 1,792 | | | | 1,633 | |
Selling and marketing | | | 1,380 | | | | 1,618 | | | | 1,075 | | | | 1,277 | | | | 1,380 | | | | 1,618 | |
General and administrative | | | 7,603 | | | | 8,585 | | | | 11,862 | | | | 12,851 | | | | 7,603 | | | | 8,585 | |
Tax benefit | | | (4,339 | ) | | | (4,341 | ) | | | (5,511 | ) | | | (4,306 | ) | | | (4,339 | ) | | | (4,341 | ) |
Total share-based compensation expense, net of tax | | $ | 8,665 | | | $ | 9,600 | | | $ | 10,934 | | | $ | 14,212 | | | $ | 8,665 | | | $ | 9,600 | |
As discussed
The grant of December 2017 included the provisions of stock option grants and restricted stock unit awards such that except in Note 3,certain circumstances including termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, for those employees who have met the retirement eligibility at the grant date, we now record the total share-based compensation expense upon award; for those employees who will meet the retirement eligibility during the four-year vesting period, we now record the share-based compensation expense over the period from the grant date through the date of retirement eligibility, rather than over the four-year vesting period stated in the award agreement. Restricted stock units granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date.
In fiscal 2018, we recorded $2,602 of shared-based compensation expense associated with our executive officer transitions, which is included in the table above as general and administrative expense. 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 receivedreceive 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. TwoThree of the Company's non-employee directors had completed at least two full terms of service as of the date of the March 20172018 award. Consequently, the requisite service period for the award has already been satisfied and we recorded the fair value of $377$586 of the awards to these two directors to share-based compensation expense in the fiscal quarter ended March 31, 20172018 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.agreement.
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, 2017,2018, and changes during fiscal 20172018 are presented below:
| Stock Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value (in thousands) | | | 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 | | | | | | | | |
Outstanding at September 30, 2017 | | | | 1,517,061 | | | $ | 44.17 | | | | | | | |
Granted | | 369,230 | | | | 60.99 | | | | | | | | | | 152,282 | | | | 95.19 | | | | | | | |
Exercised | | (818,640 | ) | | | 33.79 | | | | | | | | | | (488,029 | ) | | | 39.45 | | | | | | | |
Forfeited or canceled | | (86,081 | ) | | | 43.38 | | | | | | | | | | (49,833 | ) | | | 53.09 | | | | | | | |
Outstanding at September 30, 2017 | | 1,517,061 | | | $ | 44.17 | | | | 7.0 | | | $ | 54,251 | | |
Outstanding at September 30, 2018 | | | | 1,131,481 | | | $ | 52.68 | | | | 6.8 | | | $ | 57,212 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable at September 30, 2017 | | 726,897 | | | $ | 36.34 | | | | 5.5 | | | $ | 31,687 | | |
Exercisable at September 30, 2018 | | | | 552,969 | | | $ | 41.57 | | | | 5.5 | | | $ | 34,063 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expected to vest after September 30, 2017 | | 788,676 | | | $ | 51.36 | | | | 8.3 | | | $ | 22,535 | | |
Expected to vest after September 30, 2018 | | | | 575,758 | | | $ | 63.16 | | | | 8.0 | | | $ | 23,120 | |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., for all in-the-money stock options, the difference between our closing stock price of $79.93 per share on the last trading day of fiscal 20172018 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 2017.2018. The total intrinsic value of options exercised was $30,345, $25,213 $12,317 and 31,546$12,317 for fiscal 2018, 2017 2016 and 2015,2016, respectively.
The total cash received from options exercised was $19,247, $27,666 $16,623 and $33,177$16,623 for fiscal 2018, 2017 2016 and 2015,2016, respectively. The actual tax benefit realized for the tax deductions from options exercised was $7,503, $8,743 $4,076 and $10,569$4,076 for fiscal 2018, 2017 2016 and 2015,2016, respectively. The total fair value of stock options vested during fiscal years 2018, 2017 and 2016 was $5,008, $5,300 and 2015 was $5,300, $7,880, and $7,005, respectively. As of September 30, 2017,2018, there was $8,727$6,723 of total unrecognized share-based compensation expense related to unvested stock options granted under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.3 years.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
A summary of the status of the restricted stock awards and restricted stock unit awards, including PSUs outstanding that were grantedawarded under the EIP and OIP as of September 30, 2017,2018, and changes during fiscal 2017,2018, are presented below:
| Restricted Stock Awards and Units | | | Weighted Average Grant Date Fair Value | | | 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 | | |
Nonvested at September 30, 2017 | | | | 346,513 | | | $ | 52.43 | |
Granted * | | | | 140,084 | | | | 93.16 | |
Vested | | (154,526 | ) | | | 44.64 | | | | (134,165 | ) | | | 49.73 | |
Forfeited | | (33,182 | ) | | | 47.76 | | | | (24,285 | ) | | | 58.64 | |
Nonvested at September 30, 2017 | | 346,513 | | | $ | 52.43 | | |
Nonvested at September 30, 2018 | | | | 328,147 | | | $ | 70.42 | |
* Includes the initial amount of PSUs granted, which may be subject to downward or upward adjustment depending on the performance measures during the particular performance period pursuant to the PSU award agreement.
The total fair value of restricted stock awards and restricted stock units vested during fiscal years 2018, 2017 and 2016 was $6,669, $6,898 and 2015 was $6,898, $10,740, and $7,222, respectively. As of September 30, 2017,2018, there was $13,058$20,955 of total unrecognized share-based compensation expense related to unvested restricted stock awards and restricted stock units, including PSUs under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.62.3 years.
14.13. SAVINGS PLAN
Effective in May 2000, we adopted the Cabot Microelectronics Corporation 401(k) Plan (the "401(k) Plan"), which is a qualified defined contribution plan, covering all eligible U.S. employees meeting certain minimum age and eligibility requirements, as defined by the 401(k) Plan. Participants may make elective contributions of up to 60% of their eligible compensation. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The 401(k) Plan provides for matching and fixed non-elective contributions by the Company. Under the 401(k) Plan, the Company will match 100% of the first four percent of the participant's eligible compensation and 50% of the next two percent of the participant's eligible compensation that is contributed, subject to limitations required by government regulations. Under the 401(k) Plan, all U.S. employees, even those who do not contribute to the 401(k) Plan, receive a contribution by the Company in an amount equal to four percent of eligible compensation, and thus are participants in the 401(k) Plan. Participants are 100% vested in all Company contributions at all times. The Company's expense for the 401(k) Plan totaled $5,562, $5,256 $4,624 and $4,111$4,624 for the fiscal years ended September 30, 2018, 2017 2016 and 2015,2016, respectively.
15.14. OTHER INCOME, NET
Other income, net, consisted of the following:
| Year Ended September 30, | | |
| 2017 | | 2016 | | 2015 | | Year Ended September 30, | |
| | | | | | | 2018 | | 2017 | | 2016 | |
Interest income | | $ | 2,351 | | | $ | 949 | | | $ | 365 | | | $ | 4,409 | | | $ | 2,351 | | | $ | 949 | |
Other income (expense) | | | (438 | ) | | | (296 | ) | | | 316 | | | | 89 | | | | (438 | ) | | | (296 | ) |
Total other income, net | | $ | 1,913 | | | $ | 653 | | | $ | 681 | | | $ | 4,498 | | | $ | 1,913 | | | $ | 653 | |
16.15. | STOCKHOLDERS' EQUITY |
The following is a summary of our capital stock activity over the past three years:
| Number of Shares | 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 | |
| | | | | | Common Stock | | Treasury Stock |
September 30, 2015 | | 33,489,181 | | | 9,041,678 | | 33,489,181 | | | 9,041,678 |
Exercise of stock options | | 606,562 | | | | | 606,562 | | | |
Restricted stock under EIP and OIP, net of forfeitures | | 86,277 | | | | | 86,277 | | | |
Restricted stock under Deposit Share Program, net of forfeitures | | 1,847 | | | | | 1,847 | | | |
Common stock under ESPP | | 77,437 | | | | | 77,437 | | | |
Repurchases of common stock under share repurchase plans | | | | | 636,839 | | | | | 636,839 |
Repurchases of common stock – other | | | | | 66,125 | | | | | 66,125 |
| | | | | | | | | | |
September 30, 2016 | | 34,261,304 | | | 9,744,642 | | 34,261,304 | | | 9,744,642 |
Exercise of stock options | | 818,640 | | | | | 818,640 | | | |
Restricted stock under EIP and OIP, net of forfeitures | | 81,047 | | | | |
Restricted stock under Deposit Share Program, net of forfeitures | | - | | | | |
Restricted stock under OIP, net of forfeitures | | | 81,047 | | | |
Common stock under ESPP | | 69,751 | | | | | 69,751 | | | |
Repurchases of common stock under share repurchase plans | | | | | 167,809 | | | | | 167,809 |
Repurchases of common stock – other | | | | | 35,739 | | | | | 35,739 |
| | | | | | | | | | |
September 30, 2017 | | 35,230,742 | | | 9,948,190 | | 35,230,742 | | | 9,948,190 |
Exercise of stock options | | | 487,915 | | | |
Restricted stock under OIP, net of forfeitures | | | 93,817 | | | |
Common stock under ESPP | | | 49,991 | | | |
Repurchases of common stock under share repurchase plans | | | | | | 369,791 |
Repurchases of common stock – other | | | | | | 38,166 |
| | | | | | |
September 30, 2018 | | | 35,862,465 | | | 10,356,147 |
COMMON STOCK
Each share of common stock, including those awarded as restricted stock, but not restricted stock units, entitles the holder to one vote on all matters submitted to a vote of Cabot Microelectronics' stockholders. Common stockholders are entitled to receive ratably the dividends, if any, as may be declared by the Board of Directors. Holders of restricted stock units awarded inas of fiscal 20172016 are entitled to dividend equivalents, which are paid to the holder upon the vesting of the restricted stock units. The number of authorized shares of common stock is 200,000,000 shares.
In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from $75,000 to $150,000. Under this program, we repurchased 369,791 shares for $40,726 during fiscal 2018, 167,809 shares for $12,035 during fiscal 2017, and 636,839 shares for $25,980 during fiscal 2016, and 851,245 shares for $40,026 during fiscal 2015.2016. As of September 30, 2017, $121,9932018, $81,271 remains available under our share repurchase program. To date, we have funded share repurchases under our share repurchase program from our existing cash balance, and anticipate we will continue to do so. The program, which became effective on the authorization date, may be suspended or terminated at any time, at the Company's discretion. For additional information on share repurchases, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" and the section titled "Liquidity and Capital Resources" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Separate from this share repurchase program, a total of 38,166, 35,739 66,125 and 47,74666,125 shares were purchased during fiscal 2018, 2017 2016 and 2015,2016, 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 | | Year Ended September 30, | |
| | | | | | | | 2018 | | 2017 | | 2016 | |
Domestic | | $ | 33,272 | | | $ | 7,130 | | | $ | 15,305 | | $ | 46,254 | | | $ | 33,272 | | | $ | 7,130 | |
Foreign | | | 76,100 | | | | 63,308 | | | | 55,892 | | | 115,457 | | | | 76,100 | | | | 63,308 | |
Total | | $ | 109,372 | | | $ | 70,438 | | | $ | 71,197 | | $ | 161,711 | | | $ | 109,372 | | | $ | 70,438 | |
Taxes on income consisted of the following:
| | Year Ended September 30, | | Year Ended September 30, | |
| | 2017 | | | 2016 | | | 2015 | | 2018 | | | 2017 | | | 2016 | |
U.S. federal and state: | | | | | | | | | | | | | | | | | |
Current | | $ | 8,606 | | | $ | 609 | | | $ | 6,496 | | $ | 14,698 | | | $ | 8,606 | | | $ | 609 | |
Deferred | | | 1,550 | | | | (1,465 | ) | | | 1,791 | | | 10,347 | | | | 1,550 | | | | (1,465 | ) |
Total | | $ | 10,156 | | | $ | (856 | ) | | $ | 8,287 | | $ | 25,045 | | | $ | 10,156 | | | $ | (856 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Foreign: | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 13,422 | | | $ | 11,737 | | | $ | 7,686 | | $ | 26,135 | | | $ | 13,422 | | | $ | 11,737 | |
Deferred | | | (1,158 | ) | | | (292 | ) | | | (922 | ) | | 488 | | | | (1,158 | ) | | | (292 | ) |
Total | | | 12,264 | | | | 11,445 | | | | 6,764 | | | 26,623 | | | | 12,264 | | | | 11,445 | |
Total U.S. and foreign | | $ | 22,420 | | | $ | 10,589 | | | $ | 15,051 | | $ | 51,668 | | | $ | 22,420 | | | $ | 10,589 | |
The provision for income taxes at our effective tax rate differed from the statutory rate as follows:
| | Year Ended September 30, | |
| | 2017 | | 2016 | | | 2015 | Year Ended September 30, | |
| | | | | | | | 2018 | | 2017 | | 2016 | |
Federal statutory rate | | 35.0% | | | 35.0% | | | 35.0% | | 24.5% | | 35.0% | | | 35.0% | |
U.S. benefits from research and experimentation activities | | (1.0) | | | (3.5) | | | (2.2) | | (0.8) | | (1.0) | | | (3.5) | |
State taxes, net of federal effect | | 0.4 | | | (0.1) | | | 0.6 | | 0.1 | | 0.4 | | | (0.1) | |
Foreign income at other than U.S. rates | | (14.7) | | | (16.9) | | | (21.4) | | 1.2 | | (14.7) | | | (16.9) | |
Executive compensation | | 0.3 | | | 0.0 | | | 0.6 | | 0.4 | | 0.3 | | | 0.0 | |
Share-based compensation | | 0.1 | | | 0.7 | | | 0.1 | | (4.3) | | 0.1 | | | 0.7 | |
Adjustment of prior amounts | | 0.0 | | | 0.0 | | | 1.4 | |
Taiwan Restructuring | | 0.0 | | | 0.0 | | | 7.2 | |
U.S. tax reform | | | 11.2 | | 0.0 | | 0.0 | |
Domestic production deduction | | 0.0 | | | (1.3) | | | (1.3) | | (0.2) | | 0.0 | | | (1.3) | |
Other, net | | 0.4 | | | 1.1 | | | 1.1 | | (0.1) | | | 0.4 | | | 1.1 | |
Provision for income taxes | | 20.5% | | | 15.0% | | | 21.1% | | 32.0% | | | 20.5% | | | 15.0% | |
In
The significant increase in our effective tax rate for fiscal years 2015, 2016,2018 was primarily driven by the changes introduced by the Tax Cuts and Jobs Act in the United States ("the Tax Act") in December 2017, we electedwhich includes the deemed repatriation tax (transition tax). The Company made the decision to permanently reinvesttake the historical earnings of all of our foreign subsidiaries. We have not provided for deferred taxesdividends received deduction (DRD) on approximately $254,800 of undistributed earnings of such subsidiaries. These earnings could become subject to additional incomeits fiscal 2018 tax if they are remitted as dividendsreturn and accordingly reflected a section 245A DRD with respect to the U.S. parent company, loaned tosection 78 gross-up in its transition tax calculation. This benefit may be reduced or eliminated in future legislation. If such legislation is enacted, we will record the U.S. parent company, or upon saleimpact of subsidiary stock. Should we decide to repatriate these undistributed foreign earnings, we would need to record a deferredthe legislation in the quarter of enactment. Other factors that impacted the Company's effective tax liability of approximately $49,000rate for fiscal 2018 were primarily related to earnings.benefits in excess of compensation cost from share-based compensation recorded in the income statement (as opposed to equity prior to October 2017) and the absence of benefits of a tax holiday in South Korea that expired as of October 2017.
The increase in the effective tax rate during fiscal 2017 was primarily due to the absence of the retroactive reinstatement of the research and experimentation tax credit recorded in fiscal 2016, and changes in the jurisdictional mix of income.
The decreaseTax Act includes broad and complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate income tax rate to 21.0% effective January 1, 2018; and (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years. For fiscal 2018, we recorded our income tax provision using a blended U.S. statutory tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after the Tax Act. The U.S. statutory tax rate of 21.0% will apply for fiscal 2019 and beyond.
As a result of the Tax Act, the SEC staff issued accounting guidance that provides up to a one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act (SAB 118). To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but for which the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The final impact of the Tax Act may differ from the provisional estimates due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, by changes in accounting standard for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the effective tax rate during fiscal 2016 was primarily due to the absence of income taxes incurred in fiscal 2015 related to the restructuring ofprovisional amounts.
In connection with our operations in Taiwan, the reinstatementanalysis 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%impact of the statutoryTax Act, we recorded total tax rate.
The resultsexpense of operations$18,178 for the fiscal year ended September 30, 2015 included2018. This amount is comprised of $11,340 of the U.S. transition tax adjustmentson accumulated earnings of foreign subsidiaries, $5,555 of foreign withholding tax, and $1,283 of tax expense for re-measurement of deferred taxes. We have determined that these amounts were each provisional amounts and reasonable estimates for fiscal 2018. Estimates used in the provisional amounts include earnings, cash positions, foreign income taxes and withholding taxes attributable to correct prior periodforeign subsidiaries. The amounts which we determined to be immaterial to the prior periods to which they related. These adjustments, relating to therecorded are reasonable estimates and are discussed more fully below.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (Transition Tax) is a tax treatmenton previously untaxed accumulated and current earnings and profits (E&P) of intercompany activities between certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. taxes on such earnings. We were able to make a reasonable estimate, and recorded $11,340 of Transition Tax, which included U.S. operations, werefederal and state tax implications, for the year ended September 30, 2018. In addition, we also recorded a provisional estimate of $5,555 for non-U.S. withholding taxes to be incurred on actual and future distributions of foreign earnings. We are monitoring U.S. federal and state legislative developments for further interpretative guidance and may further refine provisional estimates during the measurement period provided under SAB 118. Previously, the Company maintained an assertion to permanently reinvest the earnings of its non-U.S. subsidiaries outside of the U.S., with certain insignificant exceptions, and therefore, did not record U.S. deferred income taxes or foreign withholding taxes for these earnings. In light of the Tax Act and the associated transition to a modified territorial tax system, the Company no longer considered its foreign earnings to be indefinitely reinvested and repatriated $197,932 in fiscal 20152018, and reduced full year net incomeplan to repatriate foreign earnings on an ongoing basis. Consequently, the Company recorded deferred tax liabilities associated with withholding taxes on actual and future distribution of such earnings.
Reduction of U.S. Federal Corporate Tax Rate: The Company re-measured its U.S. deferred tax assets and liabilities and recorded tax expense of $1,283 based on the rates at which the deferred tax assets and liabilities are expected to reverse in the future. We are still analyzing certain aspects of the Tax Act and the actual impact of the reduction in the U.S. federal corporate tax rate may be affected by $868 and diluted earnings per share by approximately $0.04.the timing of the reversal of such balances.
The Company hadis also analyzing other provisions of the Tax Act to determine their impact on the Company's effective tax rate in fiscal year 2019 or in the future, including the following:
Global Intangible Low Taxed Income (GILTI): Tax Act includes a provision designed to tax GILTI, which we are continuing to evaluate. Under U.S. GAAP, we are allowed to make an accounting policy choice of either: (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method"); or, (2) factoring such amounts into a company's measurement of its deferred taxes (the "deferred method"). We have not yet made the accounting policy election, and we are not yet able to reasonably estimate the effect of the GILTI provision and have not made any adjustments related to potential GILTI tax in our financial statements. If applicable, GILTI tax would first apply to our fiscal year 2019 and would be accounted for as incurred under the period cost method.
Base Erosion and Anti-Abuse Tax (BEAT): The Tax Act creates a new minimum BEAT liability for corporations that make base erosion payments if the corporation has sufficient gross receipts and derives a sufficient level of "base erosion tax benefits". We are further assessing the provisions of the BEAT and will evaluate the effects on the Company's financial statements as further information becomes available. If applicable, any BEAT would first apply to the Company in fiscal year 2019 and would be accounted for as incurred under the period cost method.
Foreign Derived Intangible Income (FDII): The Tax Act allows a domestic corporation an immediate deduction in U.S. taxable income for a portion of its FDII. The amount of the deduction will depend in part on the Company's U.S. taxable income. We are still assessing the benefits of the FDII deduction. If applicable, the FDII deduction would first be available to the Company in fiscal year 2019 and would be accounted for under the period cost method.
The Company previously operated under a tax holiday in South Korea in fiscal years 2013 through 2017 in conjunction with our investment in research, development and manufacturing facilities there, which expired at the end of fiscal year 2017. This arrangement allowed for a tax at 50% of the local statutory rate in effect 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 20152016 income tax provision by approximately $5,018 $3,771 and $5,446,$3,771, respectively. This tax holiday increased our fiscal 2017 2016, and 20152016 diluted earnings per share by approximately $0.20 and $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 | | | $ | 1,773 | |
Additions for tax positions relating to the current fiscal year | | | 364 | | | | 364 | |
Additions for tax positions relating to prior fiscal years | | | 200 | | | | 200 | |
Settlements with taxing authorities | | | (248 | ) | | | (248 | ) |
Balance September 30, 2016 | | | 2,089 | | | | 2,089 | |
Additions for tax positions relating to the current fiscal year | | | 381 | | | | 381 | |
Additions for tax positions relating to prior fiscal years | | | 44 | | | | 44 | |
Lapse of statute of limitations | | | (244 | ) | | | (244 | ) |
Balance September 30, 2017 | | $ | 2,270 | | | | 2,270 | |
Additions for tax positions relating to the current fiscal year | | | | 263 | |
Additions for tax positions relating to prior fiscal years | | | | 116 | |
Lapse of statute of limitations | | | | (1,215 | ) |
Balance September 30, 2018 | | | $ | 1,434 | |
The entire balance of unrecognized tax benefits shown above as of September 30, 20172018 and 2016,2017, would affect our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions as income tax expense in our financial statements. Interest accrued on our Consolidated Balance Sheet was $100$69 and $65$100 at September 30, 20172018 and 2016,2017, respectively, and any interest and penalties charged to expense in fiscal years 2018, 2017 2016 and 20152016 was not material.
At September 30, 2017,2018, the tax periods open to examination by the U.S. federal government included fiscal years 20142015 through 2017.2018. We believe the tax periods open to examination by U.S. state and local governments include fiscal years 20132014 through 20172018 and the tax periods open to examination by foreign jurisdictions include fiscal years 20122013 through 2017.2018. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Significant components of net deferred tax assets and liabilities were as follows:
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2018 | | | 2017 | |
Deferred tax assets: | | | | | | | | | | | | |
Employee benefits | | $ | 5,307 | | | $ | 4,612 | | | $ | 3,995 | | | $ | 5,307 | |
Inventory | | | 2,863 | | | | 3,117 | | | | 2,526 | | | | 2,863 | |
Bad debt reserve | | | 585 | | | | 615 | | | | 361 | | | | 585 | |
Share-based compensation expense | | | 6,611 | | | | 8,262 | | | | 5,379 | | | | 6,611 | |
Credit and other carryforwards | | | 22,663 | | | | 25,596 | | | | 6,419 | | | | 22,663 | |
Other | | | 1,488 | | | | 1,487 | | | | 1,336 | | | | 1,488 | |
Valuation allowance | | | (2,271 | ) | | | (3,022 | ) | | | (133 | ) | | | (2,271 | ) |
Total deferred tax assets | | $ | 37,246 | | | $ | 40,667 | | | $ | 19,883 | | | $ | 37,246 | |
| | | | | | | | | | | | | | | | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 14,671 | | | $ | 17,374 | | | $ | 8,007 | | | $ | 14,671 | |
Withholding on transition taxes | | | | 5,209 | | | | - | |
Translation adjustment | | | 300 | | | | 2,079 | | | | - | | | | 300 | |
Other | | | 739 | | | | 542 | | | | 908 | | | | 739 | |
Total deferred tax liabilities | | $ | 15,710 | | | $ | 19,995 | | | $ | 14,124 | | | $ | 15,710 | |
As of September 30, 2017,2018, the Company had foreign federal and statefederal net operating loss carryforwards (NOLs) of $5,642, $26,075$2,163 and $35,999,$14,765, respectively, which will expire over the period between fiscal year 20182019 and fiscal year 2037,2038, for which we have recorded a $1,039$423 gross valuation allowance, all of which was attributable to foreign NOLs. The majority of the federal and state NOLs are attributable to the NexPlanar acquisition. As of September 30, 2017,2018, the Company had $1,577 ina state tax credit carryforwards, for which we have recorded a $1,409 gross valuation allowance.carryforward of $74 and no capital loss carryforwards. As of September 30, 2017,2018, 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 carryforwardscarryforward of $4,811 and $3,765, respectively,$737, which will expire beginning in fiscal years 2028 through 2038.
18.17. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we periodically become a party to legal proceedings in the ordinary course of business.
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, 2017,2018, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of such obligations is probable.
LEASE COMMITMENTS
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable leases, all of which expire within five years from September 30, 2017,2018, and may be renewed by us. Rent expense under such arrangements during fiscal 2018, 2017 and 2016 totaled $4,307, $3,120 and 2015 totaled $3,120, $2,765, and $2,195, respectively.
Future minimum rental commitments under noncancelable leases as of September 30, 20172018 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 | |
| Fiscal Year | | Operating | |
| 2019 | | $ | 3,456 | |
| 2020 | | | 2,466 | |
| 2021 | | | 2,099 | |
| 2022 | | | 1,853 | |
| 2023 | | | 1,890 | |
| Thereafter | | | 7,890 | |
| | | $ | 19,654 | |
PURCHASE OBLIGATIONS
Purchase obligations include our take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services. We have been operating under a fumed silica supply agreement with Cabot Corporation, our former parent company which is not a related party, the current term of which runs through December 31, 2019. As of calendar year 2017, thisThis agreement has providedprovides us the option to purchase fumed silica, with minimumno purchase requirements through 2018,as of 2017, for the term of the agreement, for which we will payhave paid a fee of $1,500 in each of calendarthe fiscal years 2017, 2018 and 2019, of which the 2017 payment has already been made.will pay in 2019. The present value of this fee was $2,933 as of September 30, 2017. The $1,500$1,500 payment due for 20182019 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, 2017,2018, purchase obligations include $9,749$11,208 of contractual commitments related to our Cabot Corporation supply agreement for fumed silica.
POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS
We have unfunded defined benefit plans covering employees in certain foreign jurisdictions as required by local law. Our plans in Japan, which represent the majority of our pension liability for such plans, had projected benefit obligations of $6,6736,621 and $7,091$6,673 as of September 30, 20172018 and 2016,2017, respectively, and an accumulated benefit obligation of $5,2535,234 and $5,827$5,253 as of September 30, 20172018 and 2016,2017, respectively. Key assumptions used in the actuarial measurement of the Japan pension liability include a weighted average discount ratesrate of 0.50% and 0.25% at September 30, 20172018 and 2016,2017, respectively, and an expected rate of compensation increase of 2.50% andat 2.00%at September 30, 20172018 and 2016,2017, respectively. Total future Japan pension costs included in accumulated other comprehensive income are $1,8371,735 and $1,667$1,837 at September 30, 20172018 and 2016,2017, respectively.
Our plans in Korea had defined benefit obligations of $1,6631,731 and $1,822$1,663 as of September 30, 20172018 and 2016.2017. Key assumptions used in the actuarial measurement of the Korea pension liability include weighted average discount rates of 4.00%3.75% and 3.00%4.00% at September 30, 20172018 and 2016,2017, respectively, and an expected rate of compensation increase of 4.50% and 5.00% at September 30, 20172018 and 2016.2017. Total future Korea pension costs included in accumulated other comprehensive income are $6133 and $530$6 at September 30, 2018 and 2017, and 2016, respectively.
Benefit costs for the combined plans were $1,176$1,236, $1,024$1,176 and $962$1,024 in fiscal years 2018, 2017 2016 and 2015,2016, respectively, consisting primarily of service costs, and were recorded as fringe benefit expense under cost of goods sold and operating expenses in our Consolidated Statement of Income. Estimated future benefit payments are as follows:
| Fiscal Year | | Amount | |
| 2018 | | $ | 304 | |
| 2019 | | | 336 | |
| 2020 | | | 565 | |
| 2021 | | | 412 | |
| 2022 | | | 717 | |
| 2023 to 2027 | | $ | 3,451 | |
| Fiscal Year | | Amount | |
| 2019 | | $ | 372 | |
| 2020 | | | 611 | |
| 2021 | | | 461 | |
| 2022 | | | 642 | |
| 2023 | | | 554 | |
| 2024 to 2028 | | $ | 4,237 | |
18. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC 260. Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.
Pursuant to the adoption of ASU 2016-09 in the first quarter of fiscal 2018, the tax benefits associated with share-based compensation plans were recorded as a tax benefit in our Consolidated Statements of Income. The number of shares that would be repurchased with the proceeds from the tax benefits was excluded from the diluted weighted average shares outstanding using treasury stock method under the new guidance.
The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. Basic and diluted earnings per share were calculated as follows:
| | Year Ended September 30, | | | Year Ended September 30, | |
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
Numerator: | | | | | | | | | | | | | | | | | | |
Net income | | $ | 86,952 | | | $ | 59,849 | | | $ | 56,146 | | | $ | 110,043 | | | $ | 86,952 | | | $ | 59,849 | |
Less: income attributable to participating securities | | | (256 | ) | | | (361 | ) | | | (483 | ) | | | (123 | ) | | | (256 | ) | | | (361 | ) |
Net income available to common shareholders | | $ | 86,696 | | | $ | 59,488 | | | $ | 55,663 | | |
Net income available to common stockholders | | | $ | 109,920 | | | $ | 86,696 | | | $ | 59,488 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average common shares | | | 25,015,458 | | | | 24,076,549 | | | | 24,039,692 | | | | 25,517,825 | | | | 25,015,458 | | | | 24,076,549 | |
(Denominator for basic calculation) | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | | 497,029 | | | | 400,444 | | | | 592,123 | | | | 725,339 | | | | 497,029 | | | | 400,444 | |
Diluted weighted-average common shares | | | 25,512,487 | | | | 24,476,993 | | | | 24,631,815 | | | | 26,243,164 | | | | 25,512,487 | | | | 24,476,993 | |
(Denominator for diluted calculation) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 3.47 | | | $ | 2.47 | | | $ | 2.32 | | | $ | 4.31 | | | $ | 3.47 | | | $ | 2.47 | |
Diluted | | $ | 3.40 | | | $ | 2.43 | | | $ | 2.26 | | | $ | 4.19 | | | $ | 3.40 | | | $ | 2.43 | |
For the twelve months ended September 30, 2018, 2017, and 2016, and 2015, approximately 0.1 million, 0.4 million 1.1 million and 0.71.1 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share.
20.19. FINANCIAL INFORMATION BY INDUSTRY SEGMENT, GEOGRAPHIC AREA AND PRODUCT LINE
We operate predominantly in one industry segment – the development, manufacture, and sale of CMP consumables. Revenues are attributed to the United States and foreign regions based upon the customer location and not the geographic location from which our products were shipped. Financial information by geographic area was as follows:
| | Year Ended September 30, | | | Year Ended September 30, | |
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
Revenue: | | | | | | | | | | | | | | | | | | |
United States | | $ | 72,670 | | | $ | 62,400 | | | $ | 55,989 | | | $ | 79,019 | | | $ | 72,670 | | | $ | 62,400 | |
Asia | | | 394,874 | | | | 336,312 | | | | 328,669 | | | | 471,215 | | | | 394,874 | | | | 336,312 | |
Europe | | | 39,635 | | | | 31,737 | | | | 29,439 | | | | 39,889 | | | | 39,635 | | | | 31,737 | |
Total | | $ | 507,179 | | | $ | 430,449 | | | $ | 414,097 | | | $ | 590,123 | | | $ | 507,179 | | | $ | 430,449 | |
Property, plant and equipment, net: | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | $ | 52,155 | | | $ | 50,595 | | | $ | 43,239 | | | $ | 60,818 | | | $ | 52,155 | | | $ | 50,595 | |
Asia | | | 54,201 | | | | 55,893 | | | | 50,504 | | | | 50,573 | | | | 54,201 | | | | 55,893 | |
Europe | | | 5 | | | | 8 | | | | - | | | | 12 | | | | 5 | | | | 8 | |
Total | | $ | 106,361 | | | $ | 106,496 | | | $ | 93,743 | | | $ | 111,403 | | | $ | 106,361 | | | $ | 106,496 | |
The following table shows revenue from sales to customers in foreign countries that accounted for more than ten percent of our total revenue in fiscal 2018, 2017 2016 and 2015:2016:
| Year Ended September 30, | | Year Ended September 30, | |
| 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 | |
Revenue: | | | | | | | | | | | | |
South Korea | | | $ | 136,403 | | | $ | 95,414 | | | $ | 76,082 | |
Taiwan | | $ | 130,849 | | | $ | 122,671 | | | $ | 124,460 | | | | 130,500 | | | | 130,849 | | | | 122,671 | |
South Korea | | | 95,414 | | | | 76,082 | | | | 70,608 | | |
China | | | 74,781 | | | | 59,239 | | | | 49,350 | | | | 97,254 | | | | 74,781 | | | | 59,239 | |
The following table shows net property, plant and equipment in foreign countries that accounted for more than ten percent of our total net property, plant and equipment in fiscal 2018, 2017 2016 and 2015:2016:
| Year Ended September 30, | | Year Ended September 30, | |
| 2017 | | 2016 | | 2015 | | 2018 | | 2017 | | 2016 | |
Property, plant and equipment, net: | | | | | | | | | | | | |
Japan | | $ | 21,408 | | | $ | 26,268 | | | $ | 22,572 | | | $ | 19,610 | | | $ | 21,408 | | | $ | 26,268 | |
South Korea | | | 16,915 | | | | 11,135 | | | | 9,658 | | | | 16,857 | | | | 16,915 | | | | 11,135 | |
Taiwan | | | 15,119 | | | | 17,949 | | | | 17,419 | | | | 13,592 | | | | 15,119 | | | | 17,949 | |
The following table shows revenue generated by product area in fiscal 2018, 2017 2016 and 2015:2016:
| | Year Ended September 30, | | | Year Ended September 30, | |
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
Revenue: | | | | | | | | | | | | | | | | | | |
Tungsten slurries | | $ | 221,493 | | | $ | 185,365 | | | $ | 178,770 | | | $ | 253,069 | | | $ | 221,493 | | | $ | 185,365 | |
Dielectric slurries | | | 120,240 | | | | 99,141 | | | | 96,386 | | | | 139,577 | | | | 120,240 | | | | 99,141 | |
Polishing Pads | | | 68,673 | | | | 52,067 | | | | 32,048 | | | | 83,117 | | | | 68,673 | | | | 52,067 | |
Other Metals slurries | | | 62,829 | | | | 63,960 | | | | 71,640 | | | | 69,317 | | | | 62,829 | | | | 63,960 | |
Engineered Surface Finishes | | | 27,900 | | | | 22,369 | | | | 21,534 | | |
Data storage slurries | | | 6,044 | | | | 7,547 | | | | 13,719 | | |
ESF and other | | | | 45,043 | | | | 33,944 | | | | 29,916 | |
Total | | $ | 507,179 | | | $ | 430,449 | | | $ | 414,097 | | | $ | 590,123 | | | $ | 507,179 | | | $ | 430,449 | |
On August 14, 2018, we entered into a Merger Agreement with KMG and the Merger Sub, providing for the acquisition of KMG by Cabot Microelectronics. The Merger Agreement provides that, upon the terms and subject to the satisfaction or valid waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into KMG, with KMG continuing as the surviving corporation and a wholly owned subsidiary of Cabot Microelectronics. The Merger Agreement and the Acquisition were unanimously approved by the board of directors of each of Cabot Microelectronics and KMG. At the effective time of the Acquisition, each outstanding share of KMG common stock, par value $0.01 per share ("KMG Common Stock"), other than shares owned by KMG, Cabot Microelectronics and their subsidiaries, dissenting shares, or shares subject to a KMG Equity Award (as defined below), will automatically be converted into the right to receive the following Merger Consideration, without interest: $55.65 in cash (the "Cash Consideration"); and, 0.2000 shares of common stock of Cabot Microelectronics, par value $0.001 per share ("CMC Common Stock"). Based on the closing price of CMC Common Stock on November 9, 2018, the most recent practicable date prior to the date of this Report on Form 10-K, the Merger Consideration is approximately $1.5 billion, which will fluctuate as the market price of CMC Common Stock fluctuates because a portion of the Merger Consideration is payable in a fixed number of shares of CMC Common Stock. As a result, the value of the Merger Consideration upon completion of the Acquisition could be greater than, less than or the same as the value of the Merger Consideration on the date of this report. Cabot Microelectronics and KMG have each made customary representations, warranties and covenants in the Merger Agreement. The Merger Agreement contains certain customary termination rights by either Cabot Microelectronics or KMG, including if the Acquisition is not consummated by February 14, 2019. If the Merger Agreement is terminated under certain circumstances, KMG will be obligated to pay to Cabot Microelectronics a termination fee equal to $38.8 million in cash.
Immediately prior to closing, each restricted stock unit award relating to shares of KMG Common Stock (each, a "KMG Equity Award") granted prior to August 14, 2018 will vest (with any applicable performance targets deemed satisfied at the level specified in the applicable award agreement) and be cancelled in exchange for the Merger Consideration in respect of each share of KMG Common Stock underlying the applicable KMG Equity Award. Each KMG Equity Award granted on or following August 14, 2018 will be converted into a corresponding award relating to shares of CMC Common Stock and continue to vest post-closing in accordance with the terms of the applicable award agreement (which will include vesting on a qualifying termination of employment).
The consummation of the Acquisition is subject to customary closing conditions, including the adoption of the Merger Agreement by KMG's shareholders, the meeting for which is scheduled to occur on November 13, 2018. Assuming such conditions are satisfied or validly waived, we expect the Acquisition to close in approximately mid-November 2018.
On August 14, 2018, in connection with the execution of the Merger Agreement, we entered into a commitment letter, dated as of August 14, 2018 (the "Commitment Letter"), with JPMorgan Chase Bank, N.A., Bank of America, N.A. and Goldman Sachs Bank USA (together with the additional commitment parties described below, the "Commitment Parties") and Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which the Commitment Parties have committed to arrange and provide, subject to the terms and conditions of the Commitment Letter, a senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million (the "New Revolving Facility") and a senior secured term loan facility in an aggregate principal amount of up to $1,065.0 million (the "New Term Loan Facility", and together with the New Revolving Facility, the "New Credit Facilities"). On September 4, 2018, we amended and restated the commitment letter to add BMO Harris Financing, Inc., U.S. Bank, National Association, HSBC Bank USA, N.A., and PNC Bank, National Association as additional commitment parties.
On November 1, 2018, we completed the syndication of the New Credit Facilities. We expect the New Credit Facilities to be made available pursuant to a credit agreement to be entered into on the closing date of the Acquisition. We expect the New Revolving Facility to mature five years after the closing date of the Acquisition and the New Term Loan Facility to mature seven years after the closing date of the Acquisition and to amortize in equally quarterly installments of 0.25% of the initial principal amount. We expect that the New Credit Facilities will be guaranteed by KMG and all of CMC's and KMG's wholly-owned domestic subsidiaries and will be secured by first priority liens and security interests in substantially all assets of CMC and each guarantor, in each case subject to certain exceptions. We expect borrowings under the New Term Loan Facility to bear interest at LIBOR plus 2.25% per annum and borrowings under the New Revolving Facility to bear interests at a rate per annum equal to LIBOR plus an applicable margin of 1.00% to 1.75% depending on our consolidated leverage ratio. We also expect to be required to pay certain fees and expenses in connection with the New Credit Facility, including an undrawn commitment fee of 0.175% to 0.30% per annum based on our consolidated leverage ratio. We expect that the New Credit Facilities will require us to comply with customary affirmative and negative covenants and events of default, and that the New Revolving Facility will require us to maintain a first lien secured net leverage ratio no greater than 4.00 to 1.00. Although the syndication of the New Credit Facilities is complete, we have not yet entered into definitive documentation with respect to the New Credit Facilities. Accordingly, the terms of the New Credit Facilities may vary from those described herein.
SELECTED QUARTERLY OPERATING RESULTS
The following table presents our unaudited financial information for the eight quarterly periods ended September 30, 2017.2018. This unaudited financial information has been prepared in accordance with accounting principles generally accepted in the United States of America, applied on a basis consistent with the annual audited financial statements and in the opinion of management, include all necessary adjustments, which consist only of normal recurring adjustments necessary to present fairly the financial results for the periods. The results for any quarter are not necessarily indicative of results for any future period.
CABOT MICROELECTRONICS CORPORATION
SELECTED QUARTERLY OPERATING RESULTS
(Unaudited and in thousands, except per share amounts)
| | Sept. 30, 2017 | | | June 30, 2017 | | | March 31, 2017 | | | Dec. 31, 2016 | | | Sept. 30, 2016 | | | June 30, 2016 | | | March 31, 2016 | | | Dec. 31, 2015 | | | Sept. 30, 2018 | | | June 30, 2018 | | | March 31, 2018 | | | Dec. 31, 2017 | | | Sept. 30, 2017 | | | June 30, 2017 | | | March 31, 2017 | | | Dec. 31, 2016 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 136,784 | | | $ | 127,957 | | | $ | 119,184 | | | $ | 123,254 | | | $ | 122,684 | | | $ | 108,152 | | | $ | 99,244 | | | $ | 100,369 | | | $ | 156,729 | | | $ | 150,437 | | | $ | 142,978 | | | $ | 139,979 | | | $ | 136,784 | | | $ | 127,957 | | | $ | 119,184 | | | $ | 123,254 | |
Cost of goods sold | | | 66,734 | | | | 65,414 | | | | 59,153 | | | | 61,749 | | | | 61,598 | | | | 56,127 | | | | 52,348 | | | | 50,174 | | | | 72,383 | | | | 69,737 | | | | 67,933 | | | | 65,965 | | | | 66,734 | | | | 65,414 | | | | 59,153 | | | | 61,749 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 70,050 | | | | 62,543 | | | | 60,031 | | | | 61,505 | | | | 61,086 | | | | 52,025 | | | | 46,896 | | | | 50,195 | | | | 84,346 | | | | 80,700 | | | | 75,045 | | | | 74,014 | | | | 70,050 | | | | 62,543 | | | | 60,031 | | | | 61,505 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research, development and technical | | | 13,839 | | | | 14,333 | | | | 14,090 | | | | 13,396 | | | | 15,842 | | | | 12,928 | | | | 14,934 | | | | 14,828 | | | | 13,372 | | | | 13,059 | | | | 13,368 | | | | 12,151 | | | | 13,839 | | | | 14,333 | | | | 14,090 | | | | 13,396 | |
Selling and marketing | | | 8,680 | | | | 7,346 | | | | 7,268 | | | | 7,552 | | | | 8,057 | | | | 6,243 | | | | 6,668 | | | | 6,749 | | | | 6,211 | | | | 6,207 | | | | 6,790 | | | | 5,836 | | | | 8,680 | | | | 7,346 | | | | 7,268 | | | | 7,552 | |
General and administrative | | | 14,489 | | | | 13,953 | | | | 14,699 | | | | 12,496 | | | | 11,454 | | | | 10,738 | | | | 12,990 | | | | 14,263 | | | | 20,775 | | | | 19,504 | | | | 17,799 | | | | 18,915 | | | | 14,489 | | | | 13,953 | | | | 14,699 | | | | 12,496 | |
Total operating expenses | | | 37,008 | | | | 35,632 | | | | 36,057 | | | | 33,444 | | | | 35,353 | | | | 29,909 | | | | 34,592 | | | | 35,840 | | | | 40,358 | | | | 38,770 | | | | 37,957 | | | | 36,902 | | | | 37,008 | | | | 35,632 | | | | 36,057 | | | | 33,444 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 33,042 | | | | 26,911 | | | | 23,974 | | | | 28,061 | | | | 25,733 | | | | 22,116 | | | | 12,304 | | | | 14,355 | | | | 43,988 | | | | 41,930 | | | | 37,088 | | | | 37,112 | | | | 33,042 | | | | 26,911 | | | | 23,974 | | | | 28,061 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 1,127 | | | | 1,117 | | | | 1,135 | | | | 1,150 | | | | 1,187 | | | | 1,178 | | | | 1,191 | | | | 1,167 | | | | 102 | | | | 513 | | | | 1,158 | | | | 1,132 | | | | 1,127 | | | | 1,117 | | | | 1,135 | | | | 1,150 | |
Other income (expense), net | | | 798 | | | | (115 | ) | | | 234 | | | | 996 | | | | 257 | | | | (246 | ) | | | 452 | | | | 190 | | | | 1,137 | | | | 1,627 | | | | 1,062 | | | | 672 | | | | 798 | | | | (115 | ) | | | 234 | | | | 996 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 32,713 | | | | 25,679 | | | | 23,073 | | | | 27,907 | | | | 24,803 | | | | 20,692 | | | | 11,565 | | | | 13,378 | | | | 45,023 | | | | 43,044 | | | | 36,992 | | | | 36,652 | | | | 32,713 | | | | 25,679 | | | | 23,073 | | | | 27,907 | |
Provision for income taxes | | | 6,211 | | | | 5,740 | | | | 4,793 | | | | 5,676 | | | | 4,096 | | | | 1,990 | | | | 2,434 | | | | 2,069 | | | | (3,195 | ) | | | 7,873 | | | | 7,255 | | | | 39,735 | | | | 6,211 | | | | 5,740 | | | | 4,793 | | | | 5,676 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 26,502 | | | $ | 19,939 | | | $ | 18,280 | | | $ | 22,231 | | | $ | 20,707 | | | $ | 18,702 | | | $ | 9,131 | | | $ | 11,309 | | |
Net income (loss) | | | $ | 48,218 | | | $ | 35,171 | | | $ | 29,737 | | | $ | (3,083 | ) | | $ | 26,502 | | | $ | 19,939 | | | $ | 18,280 | | | $ | 22,231 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 1.05 | | | $ | 0.79 | | | $ | 0.73 | | | $ | 0.90 | | | $ | 0.85 | | | $ | 0.78 | | | $ | 0.38 | | | $ | 0.46 | | |
Basic earnings (loss) per share | | | $ | 1.89 | | | $ | 1.37 | | | $ | 1.16 | | | $ | (0.12 | ) | | $ | 1.05 | | | $ | 0.79 | | | $ | 0.73 | | | $ | 0.90 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average basic shares outstanding | | | 25,236 | | | | 25,228 | | | | 25,031 | | | | 24,583 | | | | 24,234 | | | | 23,929 | | | | 24,061 | | | | 24,142 | | | | 25,520 | | | | 25,612 | | | | 25,593 | | | | 25,326 | | | | 25,236 | | | | 25,228 | | | | 25,031 | | | | 24,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 1.03 | | | $ | 0.77 | | | $ | 0.71 | | | $ | 0.88 | | | $ | 0.83 | | | $ | 0.76 | | | $ | 0.37 | | | $ | 0.46 | | |
Diluted earnings (loss) per share | | | $ | 1.84 | | | $ | 1.34 | | | $ | 1.14 | | | $ | (0.12 | ) | | $ | 1.03 | | | $ | 0.77 | | | $ | 0.71 | | | $ | 0.88 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average diluted shares outstanding | | | 25,710 | | | | 25,721 | | | | 25,526 | | | | 25,072 | | | | 24,678 | | | | 24,325 | | | | 24,408 | | | | 24,549 | | | | 26,213 | | | | 26,319 | | | | 26,161 | | | | 25,326 | | | | 25,710 | | | | 25,721 | | | | 25,526 | | | | 25,072 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends per share | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.18 | | | $ | 0.18 | | | $ | 0.18 | | | $ | 0.18 | | | $ | - | | | $ | 0.40 | | | $ | 0.40 | | | $ | 0.40 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.18 | |
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activities in our allowance for doubtful accounts:
Allowance For Doubtful Accounts | Balance At Beginning of Year | | Amounts Charged To Expenses | | Deductions and Adjustments | | Balance At End Of Year | |
| | | | | | | | |
Year ended: | | | | | | | | |
September 30, 2017 | | $ | 1,828 | | | $ | 26 | | | $ | (107 | ) | | $ | 1,747 | |
September 30, 2016 | | | 1,224 | | | | 588 | | | | 16 | | | | 1,828 | |
September 30, 2015 | | | 1,392 | | | | (84 | ) | | | (84 | ) | | | 1,224 | |
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. Charges to expenses and deductions, shown below, represent the net change required to maintain an appropriate reserve.
Warranty Reserves | Balance At Beginning of Year | | Reserve For Product Warranty During the Reporting Period | | AdjustmentsTo Pre-existing Warranty Reserve | | Settlement of Warranty | | Balance At End Of Year | | |
Allowance For Doubtful Accounts | | Balance At Beginning of Year | | Amounts Charged To Expenses | | Deductions and Adjustments | | Balance At End Of Year | |
| | | | | | | | | | | | | | | | | | |
Year ended: | | | | | | | | | | | | | | | | | | |
September 30, 2018 | | | $ | 1,747 | | | $ | 185 | | | $ | (32 | ) | | $ | 1,900 | |
September 30, 2017 | | $ | 243 | | | $ | 530 | | | $ | - | | | $ | (526 | ) | | $ | 247 | | | | 1,828 | | | | 26 | | | | (107 | ) | | | 1,747 | |
September 30, 2016 | | | 209 | | | | 595 | | | | - | | | | (561 | ) | | | 243 | | | | 1,224 | | | | 588 | | | | 16 | | | | 1,828 | |
September 30, 2015 | | | 246 | | | | 608 | | | | - | | | | (645 | ) | | | 209 | | |
We have provided a valuation allowance on certain deferred tax assets. The following table sets forth activities in our valuation allowance:
Valuation Allowance | Balance At Beginning of Year | | Amounts Charged To Expenses | | Deductions and Adjustments | | Balance At End Of Year | | Balance At Beginning of Year | | Amounts Charged To Expenses | | Deductions and Adjustments | | Balance At End Of Year | |
| | | | | | | | | | | | | | | | |
Year ended: | | | | | | | | | | | | | | | | |
September 30, 2018 | | | $ | 2,271 | | | $ | - | | | $ | (2,138 | ) | | $ | 133 | |
September 30, 2017 | | $ | 3,022 | | | $ | - | | | $ | (751 | ) | | $ | 2,271 | | | | 3,022 | | | | - | | | | (751 | ) | | | 2,271 | |
September 30, 2016 | | | 3,079 | | | | - | | | | (57 | ) | | | 3,022 | | | | 3,079 | | | | - | | | | (57 | ) | | | 3,022 | |
September 30, 2015 | | | 2,912 | | | | 167 | | | | - | | | | 3,079 | | |
MANAGEMENT RESPONSIBILITY
The accompanying consolidated financial statements were prepared by the Company in conformity with accounting principles generally accepted in the United States of America. The Company's management is responsible for the integrity of these statements and of the underlying data, estimates and judgments.
The Company's management establishes and maintains a system of internal accounting controls designed to provide reasonable assurance that its assets are safeguarded from loss or unauthorized use, transactions are properly authorized and recorded, and that financial records can be relied upon for the preparation of the consolidated financial statements. This system includes written policies and procedures, a code of business conduct and an organizational structure that provides for appropriate division of responsibility and the training of personnel. This system is monitored and evaluated on an ongoing basis by management in conjunction with its internal audit function.
The Company's management assesses the effectiveness of its internal control over financial reporting on an annual basis. In making this assessment, management uses the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Management acknowledges, however, that all internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, the Company's independent registered public accounting firm evaluates the Company's internal control over financial reporting and performs such tests and other procedures as it deems necessary to reach and express an opinion on the fairness of the financial statements.
In addition, the Audit Committee of the Board of Directors provides general oversight responsibility for the financial statements. Composed entirely of Directors who are independent and not employees of the Company, the Committee meets periodically with the Company's management, internal auditors and the independent registered public accounting firm to review the quality of financial reporting and internal controls, as well as results of auditing efforts. The internal auditors and independent registered public accounting firm have full and direct access to the Audit Committee, with and without management present.
/s/ David H. Li
David H. Li
Chief Executive Officer
/s/ William S. JohnsonScott D. Beamer
William S. JohnsonScott D. Beamer
Chief Financial Officer
/s/ Thomas S. Roman
Thomas S. Roman
Principal Accounting Officer
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange Act")), as of September 30, 2017.2018. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
While we believe the present design of our disclosure controls and procedures is effective enough to make known to our senior management in a timely fashion all material information concerning our business, we intend to continue to improve the design and effectiveness of our disclosure controls and procedures to the extent necessary in the future to provide our senior management with timely access to such material information, and to correct any deficiencies that we may discover in the future, as appropriate.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company's CEO and CFO to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of the Company's assets; provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; provide reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and provide reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that the Company's internal control over financial reporting was effective as of September 30, 2017.2018. The effectiveness of the Company's internal control over financial reporting as of September 30, 20172018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which appears under Item 8 of this Annual Report on Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because of inherent limitations, our disclosure controls or our internal control over financial reporting may not prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K with respect to identification of directors, the existence of a separately-designated standing audit committee, identification of members of such committee, and identification of an audit committee financial expert, is incorporated by reference from the information contained in the sections captioned "Election of Directors" and "Board Structure and Compensation" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 6, 20182019 (the "Proxy Statement"). In addition, for information with respect to the executive officers of our Company, see "Executive Officers" in Part I of this Form 10-K and the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. Information required by Item 405 of Regulation S-K is incorporated by reference from the information contained in the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.
We have adopted a code of business conduct for all of our employees and directors, including our principal executive officer, other executive officers, principal financial officer and senior financial personnel. A copy of our code of business conduct is available free of charge on our Company website at www.cabotcmp.com. We intend to post on our website any material changes to, or waivers from, our code of business conduct, if any, within two days of any such event.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
Shown below is information as of September 30, 2017,2018, with respect to the shares of common stock that may be issued under Cabot Microelectronics' existing equity compensation plans.
Plan category | | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | (b) Weighted-average exercise price of outstanding options, warrants and rights | | | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | (b) Weighted-average exercise price of outstanding options, warrants and rights | | | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
Equity compensation plans approved by security holders (1) | | | 1,798,707 | (2) | | $ | 44.17(2 | ) | | | 2,827,741 | (3) | | | 1,435,064 | (2) | | $ | 52.68(2 | ) | | | 2,434,912 | (3) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity compensation plans not approved by security holders | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 1,798,707 | (2) | | $ | 44.17(2 | ) | | | 2,827,741(3 | ) | | | 1,435,064 | (2) | | $ | 52.68(2 | ) | | | 2,434,912(3 | ) |
(1) | Equity Compensation plans consist of our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (EIP), as amended and restated September 23, 2008, our Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 (OIP), and our Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated September 23, 2013 (ESPP). As of March 6, 2012, all securities available for future issuance under the EIP were transferred to the OIP and the EIP is no longer available for any future awards. All share amounts in the above table reflect the effect of the leveraged recapitalization with a special cash dividend. See Note 1312 of the "Notes to the Consolidated Financial Statements" for more information regarding our equity compensation plans. |
(2) | Column (a) includes 281,646266,965 shares that employees and non-employee directors have the right to acquire upon the vesting of the equivalent restricted stock units that they have been awarded under our equity incentive plans. plans, and 36,618 initial granted shares that certain employees have the right to acquire upon the vesting of the performance-based restricted stock units that they have been awarded under our equity incentive plans, which may be subject to downward or upward adjustment depending on the performance measures during the particular performance period pursuant to the PSU award agreement. Column (b) excludes bothall of these from the weighted-average exercise price. |
(3) | Column (c) includes 435,400385,504 shares available for future issuance under the ESPP. |
The other information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the section captioned "Stock Ownership" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the section captioned "Certain Relationships and Related Transactions" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in the section captioned "Fees of Independent Auditors and Audit Committee Report" in the Proxy Statement.
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following Financial Statements and Financial Statement Schedule are included in Item 8 herein:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2018, 2017 2016 and 20152016
Consolidated Statements of Comprehensive Income for the years ended September 30, 2018, 2017 2016 and 20152016
Consolidated Balance Sheets at September 30, 20172018 and 20162017
Consolidated Statements of Cash Flows for the years ended September 30, 2018, 2017 2016 and 20152016
Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2018, 2017 2016 and 20152016
Notes to the Consolidated Financial Statements
2. | Financial Statement Schedule: Schedule II – Valuation and Qualifying Accounts |
3. | Exhibits - The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K: |
| | | Filed as an exhibit to, and incorporated by reference from |
| Description | | Form | | File No. | | Filing Date |
2.1 | | | 8-K | | 000-30205 | | September 28, 2015 |
2.2 | | | 8-K | | 000-30205 | | August 17, 2018 |
3.2 | | | 8-K | | 000-30205 | | March 6, 2017 |
3.3 | | | S-1 | | 333-95093 | | March 27, 2000 |
4.1 | | | S-1 | | 333-95093 | | April 3, 2000 |
10.1 | | | 10-K | | 000-30205 | | November 25, 2008 |
10.2 | | | 10-Q | | 000-30205 | | May 9, 2011 |
10.4 | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.5 | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.6 | | | 10-Q | | 000-30205 | | May 9, 2011 |
10.15 | | | 10-K | | 000-30205 | | November 20, 2013 |
10.22 | | | 10-Q | | 000-30205 | | February 8, 2010 |
10.23 | | | 10-K | | 000-30205 | | November 25, 2008 |
10.28 | | | 10-K | | 000-30205 | | November 25, 2008 |
10.30 | | | 10-Q | | 000-30205 | | February 8, 2013 |
10.33 | | | 10-K | | 000-30205 | | November 25, 2008 |
10.34 | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.36 | | | 10-K | | 000-30205 | | December 10, 2003 |
10.38 | | | 10-Q | | 000-30205 | | February 12, 2004 |
10.46 | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.51 | | | 10-K | | 000-30205 | | November 25, 2008 |
10.53 | | | 10-K | | 000-30205 | | November 25, 2008 |
10.54 | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.57 | | | 10-Q | | 000-30205 | | February 8, 2010 |
10.58 | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.60 | Conformed Credit Agreement dated February 13, 2012 among Cabot Microelectronics Corporation, as Borrower, Bank of America, N.A., as Administrative Agent, 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, National Association, as Documentation Agent. | | 10-Q | | 000-30205 | | August 8, 2014 |
10.61 | | | 10-Q | | 000-30205 | | May 5, 2017 |
10.62 | | | 10-Q | | 000-30205 | | February 8, 2013 |
10.63 | | | 10-Q | | 000-30205 | | February 8, 2013 |
10.64 | | | 10-Q | | 000-30205 | | August 8, 2012 |
10.65 | | | 10-Q | | 000-30205 | | August 8, 2012 |
10.66 | | | 10-Q | | 000-30205 | | August 8, 2014 |
10.67 | | | 10-Q | | 000-30205 | | February 6, 2015 |
10.68 | | | 10-Q | | 000-30205 | | February 6, 2015 |
10.69 | | | 10-Q | | 000-30205 | | February 8, 2016 |
10.70 | | | 10-Q | | 000-30205 | | February 8, 2016 |
10.71 | | | 10-Q | | 000-30205 | | February 7, 2018 |
10.72 | | | 10-Q | | 000-30205 | | February 7, 2018 |
10.73 | | | 10-Q | | 000-30205 | | February 7, 2018 |
21.1 | | | | | | | |
23.1 | | | | | | | |
24.1 | | | | | | | |
31.1 | | | | | | | |
31.2 | | | | | | | |
32.1 | | | | | | | |
* Management contract, or compensatory plan or arrangement.
** Substantially similar change in control severance protection agreements have been entered into with David H. Li, Scott D. Beamer, H. Carol Bernstein, Yumiko Damashek, Richard Hui, William S. Johnson, Thomas F. Kelly, Ananth Naman, Lisa A. Polezoes,Eleanor K. Thorp, Thomas S. Roman, and Daniel D. Woodland, with differences only in the amount of payments and benefits to be received by such persons.
*** Substantially similar deposit share agreements have been entered into with David H. Li H. Carol Bernstein, William S. Johnson, Lisa A. Polezoes, and Thomas S. RomanAnanth Naman, with differences only in the amount of initial deposit made and deposit shares purchased by such persons.
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
| CABOT MICROELECTRONICS CORPORATION | |
| | |
Date: November 15, 201713, 2018 | /s/ DAVID H. LI | |
| David H. Li | |
| President and Chief Executive Officer | |
| [Principal Executive Officer] | |
| | |
Date: November 15, 201713, 2018 | /s/ WILLIAM S. JOHNSONSCOTT D BEAMER | |
| William S. JohnsonScott D. Beamer | |
| Executive Vice President and Chief Financial Officer | |
| [Principal Financial Officer] | |
| | |
Date: November 15, 201713, 2018 | /s/ THOMAS S. ROMAN | |
| Thomas S. Roman | |
| Corporate Controller | |
| [Principal Accounting Officer] | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Date: November 15, 201713, 2018 | /s/ WILLIAM P. NOGLOWS* | |
| William P. Noglows | |
| Chairman of the Board | |
| [Director] | |
| | |
Date: November 15, 201713, 2018 | /s/ DAVID H. LI | |
| David H. Li | |
| President and Chief Executive Officer | |
| [Director] | |
| | |
Date: November 15, 201713, 2018 | /s/ RICHARD S. HILL* | |
| Richard S. Hill | |
| [Director] | |
| | |
Date: November 15, 201713, 2018 | /s/ BARBARA A. KLEIN* | |
| Barbara A. Klein | |
| [Director] | |
| | |
Date: November 15, 201713, 2018 | /s/ PAUL J. REILLY* | |
| Paul J. Reilly | |
| [Director] | |
| | |
Date: November 15, 201713, 2018 | /s/ SUSAN M. WHITNEY* | |
| Susan M. Whitney | |
| [Director] | |
| | |
Date: November 15, 201713, 2018 | /s/ GEOFFREY WILD* | |
| Geoffrey Wild | |
| [Director] | |
| | |
* by H. Carol Bernstein as Attorney-in-fact pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended.
9088