INDEX
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2019March 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-30205
CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware36-4324765
(State of Incorporation)(I.R.S. Employer Identification No.)

870 North Commons Drive60504
AuroraIllinois(Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (630) (630) 375-6631

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareCCMPNASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☒No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” smaller“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer

 		☐Smaller reporting company☐Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ActAct.         ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐No☒
As of July 31, 2019,April 30, 2020, the Company had 29,036,38529,063,259 shares of Common Stock, par value $0.001 per share, outstanding.

INDEX

CABOT MICROELECTRONICS CORPORATION
INDEX
Part I. Financial Information
Page
Part I. Financial Information
Page
Item 1.
Consolidated Statements of Income
3
4
5
6
Consolidated Statements of Changes in Stockholders’ Equity
7
9
3028
5440
Item 4.
Controls and Procedures
5541
5642
5642
6552
6552
6552
6653
6754

2
INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)
Three Months Ended June 30, Nine Months Ended June 30,Three Months Ended March 31,Six Months Ended March 31,
2019 2018 2019 20182020201920202019
Revenue$271,882
 $150,437
 $759,051
 $433,394
Revenue$284,193  $265,391  $567,336  $487,169  
       
Cost of sales156,492
 69,737
 429,508
 203,635
Cost of sales163,091  150,571  317,552  273,016  
       
Gross profit115,390
 80,700
 329,543
 229,759
Gross profit121,102  114,820  249,784  214,153  
       
Operating expenses:       Operating expenses:
Research, development and technical12,191
 13,059
 39,009
 38,578
Research, development and technical13,230  12,778  26,041  26,818  
Selling, general and administrative50,959
 25,711
 162,415
 75,051
Selling, general and administrative56,209  50,328  110,648  111,456  
Total operating expenses63,150
 38,770
 201,424
 113,629
Total operating expenses69,439  63,106  136,689  138,274  
       
Operating income52,240
 41,930
 128,119
 116,130
Operating income51,663  51,714  113,095  75,879  
       
Interest expense12,757
 513
 32,978
 2,803
Interest expense10,753  13,331  22,673  20,221  
       
Interest income417
 1,141
 2,004
 3,248
Interest income143  568  458  1,587  
       
Other income (expense), net(472) 486
 (2,897) 113
Other income (expense), net(1,010) (1,014) (1,407) (2,425) 
Income before income taxes39,428
 43,044
 94,248
 116,688
Income before income taxes40,043  37,937  89,473  54,820  
       
Provision for income taxes20,550
 7,873
 34,790
 54,863
Provision for income taxes7,144  10,800  18,025  14,240  
       
Net income$18,878
 $35,171
 $59,458
 $61,825
Net income$32,899  $27,137  $71,448  $40,580  
       
Basic earnings per share (in dollars per share)$0.65
 $1.37
 $2.09
 $2.42
Basic earnings per share (in dollars per share)$1.12  $0.94  $2.45  $1.45  
       
Diluted earnings per share (in dollars per share)Diluted earnings per share (in dollars per share)$1.11  $0.92  $2.41  $1.42  
Weighted average basic shares outstanding29,064
 25,612
 28,399
 25,479
Weighted average basic shares outstanding29,287  28,998  29,183  28,066  
       
Diluted earnings per share (in dollars per share)$0.64
 $1.34
 $2.06
 $2.35
       
Weighted average diluted shares outstanding29,568
 26,319
 28,924
 26,222
Weighted average diluted shares outstanding29,725  29,479  29,666  28,607  
The accompanying notes are an integral part of these Consolidated Financial Statements.
INDEX3

INDEX
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
 Three Months Ended June 30, Nine Months Ended June 30,
 2019 2018 2019 2018
        
Net income$18,878
 $35,171
 $59,458
 $61,825
        
Other comprehensive income (loss), net of tax:       
Foreign currency translation adjustments2,699
 (8,829) 4,132
 2,276
Net unrealized loss on available-for-sale securities—
 (48) —
 (48)
Net unrealized loss on cash flow hedges(9,044) (210) (15,518) (63)
        
Other comprehensive income (loss), net of tax(6,345) (9,087) (11,386) 2,165
        
Comprehensive income$12,533
 $26,084
 $48,072
 $63,990
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Net income$32,899  $27,137  $71,448  $40,580  
Other comprehensive income, net of tax:
Foreign currency translation adjustments(19,725) (992) (3,874) 1,433  
Minimum pension liability adjustment—  251  —  —  
Net unrealized loss on cash flow hedges(17,307) (6,474) (13,048) (6,474) 
Other comprehensive income, net of tax(37,032) (7,215) (16,922) (5,041) 
Comprehensive income (loss)$(4,133) $19,922  $54,526  $35,539  
The accompanying notes are an integral part of these Consolidated Financial Statements.
INDEX4

INDEX
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share amounts)
June 30, 2019 September 30, 2018March 31, 2020September 30, 2019
ASSETS   ASSETS
Current assets:   Current assets:
Cash and cash equivalents$168,678
 $352,921
Cash and cash equivalents$340,702  $188,495  
Accounts receivable, less allowance for doubtful accounts of $1,923 at June 30, 2019, and $1,900 at September 30, 2018135,235
 75,886
Accounts receivable, less allowance for doubtful accounts of $2,718 at March 31, 2020 and $2,377 at September 30, 2019Accounts receivable, less allowance for doubtful accounts of $2,718 at March 31, 2020 and $2,377 at September 30, 2019151,959  146,113  
Inventories145,783
 71,926
Inventories157,872  145,278  
Prepaid expenses and other current assets25,296
 22,048
Prepaid expenses and other current assets25,768  28,670  
Total current assets474,992
 522,781
Total current assets676,301  508,556  
   
Property, plant and equipment, net266,391
 111,403
Property, plant and equipment, net320,846  276,818  
Goodwill708,390
 101,083
Goodwill709,823  710,071  
Other intangible assets, net838,034
 35,202
Other intangible assets, net708,659  754,044  
Deferred income taxes5,612
 5,840
Deferred income taxes6,607  6,566  
Other long-term assets5,658
 4,664
Other long-term assets37,724  5,711  
Total assets$2,299,077
 $780,973
Total assets$2,459,960  $2,261,766  
   
LIABILITIES AND STOCKHOLDERS’ EQUITY   LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:   Current liabilities:
Accounts payable$46,758
 $18,171
Accounts payable$58,803  $54,529  
Short-term debtShort-term debt150,000  —  
Current portion of long-term debt13,313
 —
Current portion of long-term debt10,650  13,313  
Accrued expenses, income taxes payable and other current liabilities95,261
 82,983
Accrued expenses, income taxes payable and other current liabilities109,389  103,618  
Total current liabilities155,332
 101,154
Total current liabilities328,842  171,460  
   
Long-term debt, net of current portion, less prepaid debt issuance costs of $18,655 at June 30, 2019930,370
 —
Long-term debt, net of current portion, less prepaid debt issuance costs of $16,420 at March 31, 2020 and $17,900 at September 30, 2019Long-term debt, net of current portion, less prepaid debt issuance costs of $16,420 at March 31, 2020 and $17,900 at September 30, 2019914,617  928,463  
Deferred income taxes144,704
 81
Deferred income taxes112,780  121,993  
Other long-term liabilities43,338
 13,046
Other long-term liabilities94,311  59,473  
Total liabilities1,273,744
 114,281
Total liabilities1,450,550  1,281,389  
   
Commitments and contingencies (Note 12)


 


Commitments and contingencies (Note 13)Commitments and contingencies (Note 13)
Stockholders’ equity:   Stockholders’ equity:
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 39,470,364 shares at June 30, 2019, and 35,862,465 shares at September 30, 201839
 36
Common Stock Authorized: 200,000,000 shares, $0.001 par value; Issued: 39,854,529 shares at March 31, 2020, and 39,592,468 shares at September 30, 2019Common Stock Authorized: 200,000,000 shares, $0.001 par value; Issued: 39,854,529 shares at March 31, 2020, and 39,592,468 shares at September 30, 201940  40  
Capital in excess of par value of common stock979,940
 622,498
Capital in excess of par value of common stock1,008,311  988,980  
Retained earnings494,009
 471,673
Retained earnings508,126  461,501  
Accumulated other comprehensive income (loss)(6,847) 4,539
Accumulated other comprehensive income (loss)(40,648) (23,238) 
Treasury stock at cost, 10,447,011 shares at June 30, 2019, and 10,356,147 shares at September 30, 2018(441,808) (432,054)
Treasury stock at cost, 10,672,652 shares at March 31, 2020, and 10,491,252 shares at September 30, 2019Treasury stock at cost, 10,672,652 shares at March 31, 2020, and 10,491,252 shares at September 30, 2019(466,419) (446,906) 
Total stockholders’ equity1,025,333
 666,692
Total stockholders’ equity1,009,410  980,377  
   
Total liabilities and stockholders’ equity$2,299,077
 $780,973
Total liabilities and stockholders’ equity$2,459,960  $2,261,766  
The accompanying notes are an integral part of these Consolidated Financial Statements.
INDEX5

INDEX
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and amounts in thousands)
Six Months Ended March 31,
20202019
Cash flows from operating activities:
Net income$71,448  $40,580  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization64,192  43,889  
Accretion on Asset Retirement Obligations - Liabilities255  —  
Provision for doubtful accounts185  (314) 
Share-based compensation expense8,997  11,708  
Deferred income tax expense (benefit)(7,117) (13,811) 
Non-cash foreign exchange (gain) loss325  354  
Loss (Gain) on disposal of property, plant and equipment(69) (58) 
Non-cash charge on inventory step up of acquired inventory sold—  14,827  
Amortization of debt issuance costs1,565  1,286  
Other959  2,337  
Changes in operating assets and liabilities:
Accounts receivable(6,386) 9,445  
Inventories(13,103) (21,100) 
Prepaid expenses and other assets5,020  5,415  
Accounts payable(1,102) (429) 
Accrued expenses, income taxes payable and other liabilities(12,830) (40,601) 
Net cash provided by operating activities112,339  53,528  
Cash flows from investing activities:
Additions to property, plant and equipment(59,192) (19,472) 
Proceeds from sales of property, plant and equipment1,587  1,210  
Acquisition of a business, net of cash acquired—  (1,182,186) 
Cash settlement of life insurance policy—  3,959  
Net cash used in investing activities(57,605) (1,196,489) 
Cash flows from financing activities:
Repayment of long-term debt(17,988) (45,000) 
Repurchases of common stock(19,513) (4,695) 
Proceeds from issuance of long-term debt—  1,062,337  
Proceeds from revolving line of credit150,000  —  
Debt issuance costs—  (18,745) 
Principal payments under financing lease obligations(4) —  
Proceeds from issuance of stock10,334  10,361  
Dividends paid(24,752) (21,934) 
Net cash provided by financing activities98,077  982,324  
Effect of exchange rate changes on cash(604) (24) 
Increase (decrease) in cash and cash equivalents152,207  (160,661) 
Cash and cash equivalents at beginning of period188,495  352,921  
Cash and cash equivalents at end of period$340,702  $192,260  
Supplemental Cash Flow Information:
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of the period$13,841  $2,425  
Equity consideration related to the acquisition of KMG Chemicals, Inc—  331,048  
Cash paid during the period for lease liabilities3,825  —  
Right of use asset obtained in exchange for lease liabilities3,334  —  
 Nine Months Ended June 30,
 2019 2018
Cash flows from operating activities:   
Net income$59,458
 $61,825
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization70,476
 19,527
Provision for doubtful accounts(75) 80
Share-based compensation expense15,048
 14,269
Deemed repatriation transition tax—
 24,641
Deferred income tax (expense) benefit(16,760) 9,280
Non-cash foreign exchange (gain) loss907
 (1,340)
(Gain) loss on disposal of property, plant and equipment(59) 45
Realized loss on the sale of available-for-sale securities—
 117
Non-cash charge on inventory step up of acquired inventory sold14,869
 —
Amortization of debt issuance costs2,086
 441
(Gain) on sale of assets—
 (956)
Other2,201
 3,589
Changes in operating assets and liabilities:   
Accounts receivable6,187
 (9,612)
Inventories(19,477) (5,526)
Prepaid expenses and other assets10,831
 (12,482)
Accounts payable(1,558) 473
Accrued expenses, income taxes payable and other liabilities(27,089) (375)
Net cash provided by operating activities117,045
 103,996
    
Cash flows from investing activities:   
Additions to property, plant and equipment(32,691) (15,245)
Acquisition of a business, net of cash acquired(1,182,186) —
Cash settlement of life insurance policy3,959
 —
Proceeds from the sale of assets1,210
 3,027
Purchases of available-for-sale securities—
 (178,412)
Proceeds from the sale and maturities of available-for-sale securities—
 55,194
Settlement of net investment hedge—
 (9,882)
Net cash used in investing activities(1,209,708) (145,318)
    
Cash flows from financing activities:   
Repayment of long-term debt(102,663) (144,375)
Repurchases of common stock(9,468) (33,072)
Proceeds from issuance of long-term debt1,062,337
 —
Debt issuance costs(18,745) —
Proceeds from issuance of stock11,349
 20,297
Dividends paid(34,132) (20,507)
Net cash provided by (used in) financing activities908,678
 (177,657)
    
Effect of exchange rate changes on cash(258) 7,213
Decrease in cash and cash equivalents(184,243) (211,766)
Cash and cash equivalents at beginning of period352,921
 397,890
Cash and cash equivalents at end of period$168,678
 $186,124
    
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 the period$3,085
 $1,588
Equity consideration related to the acquisition of KMG Chemicals, Inc331,048
 —
The accompanying notes are an integral part of these Consolidated Financial Statements.
INDEX
6

INDEX
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited and amounts in thousands)
 
Common
Stock
 
Capital
In Excess
Of Par
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 Total
Balance at September 30, 2018$36
 $622,498
 $471,673
 $4,539
 $(432,054) $666,692
            
Share-based compensation expense  8,170
       8,170
Repurchases of common stock - other, at cost        (4,001) (4,001)
Exercise of stock options  3,097
       3,097
Issuance of common stock in connection with acquisition of KMG Chemicals, Inc.3
 331,045
       331,048
Issuance of Cabot Microelectronics restricted stock under Deposit Share Program  75
       75
Net income    13,443
     13,443
Dividends ($0.40 per share in dollars)    (11,598)     (11,598)
Effect of the adoption of the revenue recognition accounting standards    (933)     (933)
Foreign currency translation adjustment      2,425
   2,425
Minimum pension liability adjustment      (251)   (251)
            
Balance at December 31, 201839
 964,885
 472,585
 6,713
 (436,055) 1,008,167
            
Share-based compensation expense  3,538
       3,538
Repurchases of common stock - other, at cost        (694) (694)
Exercise of stock options  5,080
       5,080
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan  2,109
       2,109
Net income    27,137
     27,137
Dividends ($0.42 per share in dollars)    (12,255)     (12,255)
Foreign currency translation adjustment      (992)   (992)
Interest rate swap      (6,474)   (6,474)
Minimum pension liability adjustment      251
   251
            
Balance at March 31, 201939
 975,612
 487,467
 (502) (436,749) 1,025,867
            
Share-based compensation expense  3,340
       3,340
Repurchases of common stock under share repurchase plans, at cost        (5,001) (5,001)
Repurchases of common stock - other, at cost        (58) (58)
Exercise of stock options  988
       988
Net income    18,878
     18,878
Dividends    (12,336)     (12,336)
Foreign currency translation adjustment      2,699
   2,699
Interest rate swap      (9,044)   (9,044)
            
Balance at June 30, 2019$39
 $979,940
 $494,009
 $(6,847) $(441,808) $1,025,333


Common
Stock		Capital
In Excess
of Par		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury
Stock		Total
Balance at September 30, 2019$40  $988,980  $461,501  $(23,238) $(446,906) $980,377  
Share-based compensation expense4,763  4,763  
Repurchases of common stock - other, at cost(2,897) (2,897) 
Exercise of stock options1,298  1,298  
Issuance of Cabot Microelectronics restricted stock under Deposit Share Program150  150  
Net income38,549  38,549  
Dividends ($0.42 per share in dollars)(12,351) (12,351) 
Effect of the adoption of the stranded tax effect accounting standards488  (488) —  
Foreign currency translation adjustment15,851  15,851  
Cash flow hedges4,259  4,259  
Balance at December 31, 2019$40  $995,191  $488,187  $(3,616) $(449,803) $1,029,999  
Share-based compensation expense4,234  4,234  
Repurchases of common stock under Share Repurchase Program, at cost(16,414) (16,414) 
Repurchases of common stock - other, at cost(202) (202) 
Exercise of stock options6,350  6,350  
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan2,536  2,536  
Net income32,899  32,899  
Dividends ($0.44 per share in dollars)(12,960) (12,960) 
Foreign currency translation adjustment(19,725) (19,725) 
Cash flow hedges(17,307) (17,307) 
Balance at March 31, 2020$40  $1,008,311  $508,126  $(40,648) $(466,419) $1,009,410  
The accompanying notes are an integral part of these Consolidated Financial Statements.

INDEX
7

INDEX
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited and amounts in thousands)
Common
Stock		Capital
In Excess
of Par		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury
Stock		Total
Balance at September 30, 2018$36  $622,498  $471,673  $4,539  $(432,054) $666,692  
Share-based compensation expense8,170  8,170  
Repurchases of common stock - other, at cost(4,001) (4,001) 
Exercise of stock options3,097  3,097  
Issuance of common stock in connection with acquisition of KMG Chemicals, Inc.3  331,045  331,048  
Issuance of Cabot Microelectronics restricted stock under Deposit Share Program75  75  
Net income13,443  13,443  
Dividends ($0.40 per share in dollars)(11,598) (11,598) 
Effect of the adoption of the revenue recognition accounting standards(933) (933) 
Foreign currency translation adjustment2,425  2,425  
Minimum pension liability adjustment(251) (251) 
Balance at December 31, 2018$39  $964,885  $472,585  $6,713  $(436,055) $1,008,167  
Share-based compensation expense3,538  3,538  
Repurchases of common stock - other, at cost(694) (694) 
Exercise of stock options5,080  5,080  
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan2,109  2,109  
Net income27,137  27,137  
Dividends ($0.42 per share in dollars)(12,255) (12,255) 
Foreign currency translation adjustment(992) (992) 
Interest rate swap(6,474) (6,474) 
Minimum pension liability adjustment251  251  
Balance at March 31, 2019$39  $975,612  $487,467  $(502) $(436,749) $1,025,867  
 
Common
Stock
 
Capital
In Excess
Of Par
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 Total
Balance at September 30, 2017$35
 $580,938
 $397,881
 $3,949
 $(387,766) $595,037
            
Share-based compensation expense  5,881
       5,881
Repurchases of common stock under share repurchase plans, at cost        (1,591) (1,591)
Repurchases of common stock - other, at cost        (3,160) (3,160)
Exercise of stock options  6,139
       6,139
Issuance of Cabot Microelectronics restricted stock under Deposit Share Program  300
       300
Net loss    (3,083)     (3,083)
Dividends ($0.20 per share in dollars)    (5,153)     (5,153)
Foreign currency translation adjustment      7,144
   7,144
Interest rate swaps      199
   199
Unrealized loss in short term available-for-sale securities      (46)   (46)
            
Balance at December 31, 201735
 593,258
 389,645
 11,246
 (392,517) 601,667
            
Share-based compensation expense  4,223
       4,223
Repurchases of common stock under share repurchase plans, at cost        (5,005) (5,005)
Repurchases of common stock - other, at cost        (300) (300)
Exercise of stock options1
 9,611
       9,612
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan  2,012
       2,012
Net income    29,737
     29,737
Dividends ($0.40 per share in dollars)    (10,390)     (10,390)
Foreign currency translation adjustment      3,961
   3,961
Interest rate swaps      (52)   (52)
Sale of short term available-for-sale securities      46
   46
            
Balance at March 31, 201836
 609,104
 408,992
 15,201
 (397,822) 635,511
            
Share-based compensation expense  4,236
       4,236
Repurchases of common stock under share repurchase plans, at cost        (23,508) (23,508)
Exercise of stock options  2,203
       2,203
Net income    35,171
     35,171
Dividends    (10,345)     (10,345)
Foreign currency translation adjustment      (8,829)   (8,829)
Interest rate swaps      (210)   (210)
Change in unrealized gain/(loss) in short term available-for-sale securities      (48)   (48)
            
Balance at June 30, 2018$36
 $615,543
 $433,818
 $6,114
 $(421,330) $634,181

`The accompanying notes are an integral part of these Consolidated Financial Statements.
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CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share and per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation (“Cabot Microelectronics”, “the Company”, “us”, “we”, or “our”') is a leading global supplier of consumable materials to semiconductor manufacturers and pipeline operators.companies. The Company's products play a critical role in the production of advanced semiconductor devices, helping to enable the manufacture of smaller, faster and more complex devices by its customers. On November 15, 2018 (“Acquisition(the “Acquisition Date”), we completed our acquisition of KMG Chemicals, Inc. (“KMG”), which produces and distributes specialty chemicals and performance materials for the semiconductor industry, pipeline operations, energyand adjacent industries, and industrial wood preservation industries (“Acquisition”industry (the “Acquisition”).  The Acquisition has extended and strengthened our position as one of the leading suppliers of consumable materials to the semiconductor industry and expandsexpanded our portfolio with the addition of KMG’s businesses, which we believe enables us to be a leading global provider of performance products and servicesmaterials to the pipeline companies and energy industries.operators. The Consolidated Financial Statements included in this Report on Form 10-Q include the financial results of KMG from the Acquisition Date. Subsequent toSince the Acquisition, we have operatednow operate our business within two2 reportable segments: Electronic Materials and Performance Materials. The Electronic Materials segment consists of our heritage CMP slurries and polishing pads businesses, as well as the KMG electronic chemicals business.  The Performance Materials segment includes KMG’s heritage pipeline performance and wood treatment businesses, and Cabot Microelectronics’our heritage QED business. For additional information, refer to Part 1, Item 1 “Business”, inof Part I of our and KMG’s Annual ReportsReport on Form 10-K for the fiscal year ended September 30, 2018 and July 31, 2018, respectively.2019.
The unaudited Consolidated Financial Statements have been prepared by Cabot Microelectronics pursuant to the rules of the Securities and Exchange Commission (SEC) and accounting principles generally accepted in the United States of America (U.S. GAAP).  In the opinion of management, these unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of Cabot Microelectronics’ financial position as of June 30, 2019,March 31, 2020, cash flows for the ninesix months ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, and results of operations for the three and ninesix months ended June 30, 2019March 31, 2020 and June 30, 2018.March 31, 2019.  The Consolidated Balance Sheets as of September 30, 20182019 were derived from audited financial statements. The results of operations for the three and ninesix months ended June 30, 2019March 31, 2020 may not be indicative of results to be expected for future periods, including the fiscal year ending September 30, 2019.  Certain prior period amounts have been reclassified to conform to the current period presentation.2020. This Report on Form 10-Q does not contain all of the footnote disclosures from our annual financial statements and should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in Cabot Microelectronics’our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.2019.
The Consolidated Financial Statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated as of June 30, 2019.March 31, 2020.
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 Statementsconsolidated financial statements and accompanying notes. The accounting estimates that require management's most difficultchallenging and subjective judgments include, but are not limited to, those estimates related to bad debt expense, inventory valuation, impairment of long-lived assets, business combinations, asset retirement obligations, goodwill, other intangible assets, 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.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
Significant Accounting Policies and Estimates
Except for the discussion on revenue recognition below,There have been no material changes, have beenexcept for those disclosed below, made to the Company’s significant accounting policies disclosed in Note 2 of the Notes"Notes to the Consolidated Financial StatementsStatements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.2019.
REVENUE RECOGNITION
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, “Leases” (ASC 842) to change the criteria for recognizing leasing transactions. The provisions of this guidance require a lessee to recognize a right of use asset and a corresponding lease liability for operating leases. Under this guidance, rental expense for operating leases, continues to be recognized on a straight-line basis over the non-cancelable lease term. As of October 1, 2018,2019, the Company began applying the provisions of Accounting Standards Codification 606-10, “Revenue from Contracts with Customers” (“ASC 606”), andthis standard prospectively for all related applicable guidance using the modified retrospective method applied to those contracts that were not completedlease transactions as of October 1, 2018.  The Company recognizes revenue underand after the core principle of depicting the transfer of control to the Company’s customers in an amount reflecting the consideration to whicheffective date. Upon adoption, the Company expectsrecorded a lease liability of $30,881 and a right of use asset of $30,115. The difference between the right of use asset and lease liability primarily relates to be entitled. In orderdeferred rent recorded prior to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and, (5) recognize revenue when a performance obligation is satisfied.
Upon adoption of ASC 606, we recognized a $933 decrease to the opening balance of retained earnings, net of tax, due to the cumulative impact of adopting theadoption. The new revenue standard. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.  The Company changed its accounting policy for revenue recognition for customer incentives that provide free products and tiered pricing.  For free products, the new revenue standard requires that a portion of the transaction price be allocated to the free product and deferred until the product has been delivered.  We previously accrued for undelivered free product as a charge to cost of sales.  In prior fiscal years, in accordance with ASC 605, weguidance did not consider prospective tiered pricing to representhave a material right.
The cumulative effectimpact on our results of the changes made to our Consolidated Balance Sheet as of October 1, 2018 for the adoption of the new revenue standardwas:
 Balance at
September 30, 2018		 
Adjustments Due
to ASC 606
 
Balance at October 1,
2018
Deferred income tax assets$5,840
 $261
 $6,101
Accrued expenses, income taxes payable and other current liabilities82,983
 (47) 82,936
Other long-term liabilities13,046
 1,241
 14,287
Retained earnings$471,673
 $(933) $470,740

We have determined that the effect of applying the new revenue standard during the three and nine months ended June 30, 2019 was immaterial to our financial statements compared to revenue guidance in effect before the adoption of the new revenue standard.  As a result,operations or cash flows for the three and ninesix months ended June 30, 2019, we are not disclosing the quantitative amount by which each financial statement line item is affected by the application of the new revenue standard.
As part of the adoption of ASU 606, the Company electedMarch 31, 2020. Refer to use certain allowed practical expedients. For the Company’s contracts that have an original duration of one year or less as of the adoption date, the Company uses the practical expedient applicable to such contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the future performance obligations as of the end of each reporting period for contracts having an expected duration of one year or less.  See Note 311 of this Report on Form 10-Q for disaggregated revenue, the reconciliation of contract balances and transaction price allocation to remaining performance obligations for contracts expected to remain effective beyond one year.
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Performance Obligations and Material Rights
At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each material promise to the customer.  A performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer, and is the unit of accounting under ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A majority ofadditional information regarding the Company’s contracts have a single performance obligation which represents, in most cases, the products, equipment or services being sold to the customer. Some contracts include multiple performance obligations, including prospective tiered price discounts or delivery of free product that we have concluded represents a material right. Contracts with prospective tiered price discounts require judgment in determining if that discount represents a material right.
Contracts vary in length, and payment terms vary by the type and location of the Company’s customers and the products or services offered. However, the period of time between invoicing and when payment is due is typically not significant and has no significant financing components.  Customers pay in accordance with negotiated terms upon receipt of goods or completion of services.  For these contracts, the transaction price is determined upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of goods or services purchased.  In certain instances, we receive consideration from a customer prior to transferring goods or services to the customer under the terms of a sales contract.  In such cases, we record deferred revenue until the performance obligation is satisfied, which represents a contract liability, and is included in the contract liabilities discussed in Note 3 of this Report on Form 10-Q.
The Company recognizes revenue related to product sales at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment, or delivery depending on the terms of the underlying contracts. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.  Revenue is recognized on consignment sales when control transfers to the customer, generally at the point of customer usage of the product. The Company also records revenue for services provided to the pipeline and oilfield energy industries.  These services include preventive maintenance, repair and specialized isolation sealing on pipelines and training. Revenue is recorded at a point in time when the services are completed as this is when right to payment and customer acceptance occurs.
For sales contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices or estimates of such prices.  Standalone selling price, once established, is then used to allocate total consideration proportionally to the various performance obligations within a contract. Most contracts where we have determined there to be multiple performance obligations relate to where we have identified the existence of a material right such that we provide prospective tiered pricing discounts or free product. When we invoice for products shipped under these contracts, we defer the revenue associated with these rights on the balance sheet as a contract liability. Revenue is recognized when the customer exercises the option to purchase goods at a discount in the case of the prospective tiered pricing discounts or when we ship the free product.
Variable Consideration
The primary type of variable consideration present in the Company’s contracts are rebates and early payment discounts, both of which are immaterial. Early payment discounts are offered on a limited basis and are not significant.  The Company also offers rebates based upon cumulative volume of purchases within a quarter and accrues for the rebate obligation within the quarter that the rebate is earned.  ASC 606 did not change the accounting for rebates under ASC 605.
Costs to Obtain and Fulfill a Contract
 For certain contracts within the Performance Materials segment, commissions are paid to sales agents based upon a percentage of end-customer invoice value. Agents are paid the commissions after funds are received by the Company from its customers.  Under ASC 340, sales commissions are required to be capitalized and expensed over the associated contract period.  However, as a practical expedient, the Company does not capitalize commissions as the associated contracts are generally one year or less in duration. For shipping and handling activities performed after a customer obtains control of the goods, the Company has elected to account for these costs as activities to fulfill the promise to transfer the goods and included in cost of sales.
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EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTSlease transactions.
In February 2016,2018, the FASB issued ASU No. 2016-02, "Leases"2018-02 “Income Statement – Reporting Comprehensive Income” (Topic 842)220). The provisions of ASU 2016-02 require a dual approachamendments in this standard allow 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 amortizationan optional one-time reclassification of the right-of-use asset, and for operating leases,stranded tax effects resulting from the lessee will recognize a straight-line total lease expense.  The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recordedchange in the financial statements,U.S. federal corporate income tax rate under the Tax Cuts and Jobs Act (the "Tax Act") from Accumulated other comprehensive income to afford better understanding of an entity's leasing activities, including any significant judgments and estimates.Retained earnings. The guidance was amended through various ASU's subsequent to ASU 2016-02, all of which will beCompany adopted this standard effective for us beginning October 1, 2019, but early adoption is permitted.  We have finished reviewing the populationwhich resulted in an increase of our lease contracts$488 to both Retained earnings and are in the process of implementing a new third party lease software system. The Company currently plans to elect the optional package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and therefore, does not expect the adoption of ASU 2016-02 to have a significant impact on the Consolidated Statements of Income. We expect to adopt the new standard in our first quarter of fiscal 2020 applying the optional transition method upon adoption. We continue to evaluate the amount of right-of-use asset and lease liability that will ultimately be recorded on the Consolidated Balance Sheets and the impact on the Consolidated Statements of Income.Accumulated other comprehensive loss.
In June 2016, the FASB issued ASU No. 2016-13, "Measurement“Measurement of Credit Losses on Financial Instruments"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. The guidance was amended through various ASU's subsequent to ASU 2016-13, all of which will be effective for usthe Company beginning October 1, 2020, but early adoption is permitted as of October 1, 2019.2020. We are currently evaluating the impact of implementation ofimplementing this standard on our financial statements.
In March 2017, the FASB issued ASU No. 2017-07 "Improving the Presentation of Net Period Pension Cost and Net Period Postretirement Benefit Cost" (Topic 715). The provisions of ASU 2017-07 provided specific guidance on the presentation of the components of net benefit cost.  We adopted this standard ASU 2017-07 effective October 1, 2018 and applied it retrospectively. Pursuant to the adoption, net service costs are recorded as fringe benefit expense under cost of sales and operating expenses, and all other costs are recorded in the Other income (expense), net in our Consolidated Statements of Income. The impact of the retrospective adoption in fiscal year 2018 is not material.
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.  We adopted ASU 2017-09 effective October 1, 2018 and will apply this new standard to our share-based compensation awards, to the extent modified.
In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging" (Topic 815). The provisions of this standard amend the hedge accounting model in ASC 815 to expand an entity's ability to hedge nonfinancial and financial risk components, reduce complexity in fair value hedges of interest rate risk, eliminate the requirement to separately measure and report hedge ineffectiveness, and generally require the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness.  We early adopted this guidance effective January 1, 2019, and we did not have any hedges that existed as of the initial application date.  We applied the new guidance to the interest rate swap that we entered into during our second quarter of fiscal 2019. Pursuant to the guidance, we performed initial quantitative hedge effectiveness testing upon the inception of the hedge, and determined the hedge to be highly effective.  Therefore, unrealized changes in fair value are recorded in other comprehensive income.  In addition, we reclassify the realized gains and losses out of other comprehensive income, and into interest expense in our Consolidated Statements of Income, which is the same financial statement line as the hedged item.  We will perform subsequent assessments of hedge effectiveness qualitatively on a quarterly basis.
In February 2018, the FASB issued ASU No. 2018-02 "Income Statement – Reporting Comprehensive Income (Topic 220)".  The amendments in this standard allow a company to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act") from accumulated other comprehensive income to retained earnings. ASU 2018-02 will be effective for us beginning October 1, 2019, but early adoption is permitted. We are currently evaluating and quantifying the amount to be reclassified into retained earnings and expect to record the reclassification on October 1, 2019.
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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 do not expect implementation of this standard to have material impact on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13 " Fair“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement"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, 2020,2020. We are currently evaluating the impact of implementing this standard on our disclosures.
In December 2019, the FASB issued ASU No. 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The ASU was issued to simplify Topic 740 through improving consistency and removing certain exceptions to general principles. ASU 2019-12 will be effective for us beginning October 1, 2021, but early adoption is permitted. We are currently evaluating the impact of implementation ofimplementing this standard on our disclosures.financial statements.
In August 2018,March 2020, the FASB issued ASU No. 2018-15 " Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus2020-04 "Reference Rate Reform (Topic 848) - Facilitation of the FASB Emerging Issues Task Force)".Effects of Reference Rate Reform on Financial Reporting.” The ASU Requires an entity (customer) in a hosting arrangement that is a service contract to followstandard provides optional guidance for accounting for contracts, hedging relationships, and other transactions affected by the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 will be effectivereference rate reform, if certain criteria are met. The provisions of this standard are available for us beginning October 1, 2020, but early adoption is permitted.election through December 31, 2022. We are currently evaluating the impact of implementationthe reference rate reform on our contracts and the resulting impact of adopting this standard on our financial statements.

3.  REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation ofDisaggregated Revenue
The Company disaggregates revenue by product area and segment as it best depicts the nature and amount of the Company’s revenue.
The following table shows revenue generated by product area during the three and nine months ended June 30, 2019 and 2018: See Note 18 of this Report on Form 10-Q for more information.
 Three Months Ended June 30, Nine Months Ended June 30,
 2019 2018 2019 2018
Revenue:       
Electronic Materials:       
CMP Slurries$108,617
 $122,893
 $345,244
 $352,414
Electronic Chemicals80,103
 —
 198,474
 —
CMP Pads23,403
 20,917
 71,868
 60,813
Total Electronic Materials212,123
 143,810
 615,586
 413,227
        
Performance Materials59,759
 6,627
 143,465
 20,167
        
Total revenue$271,882
 $150,437
 $759,051
 $433,394
10

INDEX
Reconciliation of Contract Liability Balances
The following table provides information about contract liability balances:
March 31, 2020September 30, 2019
Contract liabilities (current)$7,293  $5,008  
Contract liabilities (noncurrent)1,580  1,130  
 June 30, 2019 October 1, 2018
Contract liabilities (current)$3,958
 $5,310
Contract liabilities (noncurrent)1,378
 1,239

INDEX

The contract liability balances as of October 1, 2018 in the table above include the amounts recorded upon the adoption of ASC 606.  At June 30, 2019,March 31, 2020, the current portion of contract liabilities of $3,958$7,293 is included in accrued liabilities,Accrued expenses, income taxes payable and other current liabilities, and the noncurrentnon-current portion of $1,378$1,580 is included in otherOther long-term liabilities in the Consolidated Balance Sheets.  The amount of revenue recognized during the three and ninesix months ended June 30, 2019March 31, 2020 that was included in the opening current contract liability balances in our Performance Materials segment was $697were $769 and $4,857,$3,027, respectively.  The amount of revenue recognized during the three and ninesix months ended June 30, 2019March 31, 2020 that was included in our opening contract liability balances in our Electronic Materials segment was not material.
Transaction Price Allocated to Remaining Performance Obligations

The table below discloses (1) the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period for contracts with an original duration of greater than one year and (2) when the Company expects to recognize this revenue.
Less Than 1 Year1-3 YearsTotal
Revenue expected to be recognized on contract liability amounts as of March 31, 2020$1,182  $1,580  $2,762  
 Less Than 1 Year 1-3 Years 3-5 Years Total
Revenue expected to be recognized on contract liability amounts as of June 30, 2019$211
 $975
 $403
 $1,589



4. BUSINESS COMBINATION
On the Acquisition Date, the Company completed its acquisition of 100% of the outstanding stock of KMG, which was a publicly heldpublicly-held company headquartered in Fort Worth, Texas. KMG specialized in producing, processing, and distributing electronic chemicals for the semiconductor industry and performance materials for the pipeline operations and energy,adjacent industries, and industrial wood preservation industries.industry. We acquired KMG to extend and strengthen our position as one of the leading suppliers of consumable materials to the semiconductor industry and to expand our portfolio with the addition of KMG’s performance materials businesses, which we believe enables us to become a leading global provider of performance products and servicesmaterials to the pipeline operations and energy industries.operators. The purchase consideration was $1,513,235, including consideration transferred of $1,536,452, less cash acquired of $23,217. The consideration was comprised of cash consideration to KMG common shareholdersstockholders and equity award holders, stock consideration to KMG common shareholdersstockholders and equity award holders, and cash consideration in the form of the retirement of KMG’s preexisting debt obligations. Under the terms of the definitive agreement to acquire KMG, each share of KMG common stock was converted into the right to receive $55.65 in cash and 0.2000 of a share of Cabot Microelectronics common stock. As a result, we issued 3,237,005 shares of our common stock to KMG’s common stockholders, with a stock price of $102.27 on the Acquisition Date. In connection with the Acquisition, we entered into a credit agreement (the “Credit Agreement”), which provided us with a seven-year, $1,065,000seven-year, $1,065.0 million term loan facility (the “Term Loan Facility”), which we drewfacility. Refer to Note 10 of this Report on the Acquisition Date to fund the Acquisition along with cash on hand, and a five-year, $200,000 revolving credit facility (the “Revolving Credit Facility”), which has not been drawn. In connection with the borrowing, we incurred $21,408 in debt issuance costs and original issue discount fees, $859 of which relates to the Revolving Credit Facility and is recorded as a prepaid asset, and the remaining $20,549 in debt issuance costs relates to the Term Loan Facility and is presented as a reduction of long-term debt. These debt issuance costs are amortized and recorded in Interest expense in the Consolidated Statements of Income over the life of the Revolving Credit Facility and Term Loan Facility, respectively.Form 10-Q for additional information. See below for a summary of the different components that comprise the total consideration.
Amount
Total cash consideration paid for KMG outstanding common stock and equity awards$900,756 
Cash provided to payoff KMG debt304,648 
Total cash consideration paid1,205,404 
Fair value of Cabot Microelectronics common stock issued for KMG outstanding common stock and equity awards331,048 
Total consideration transferred$1,536,452 
 Amount
Total cash consideration paid for KMG outstanding common stock and equity awards$900,756
Cash provided to payoff KMG debt304,648
Total cash consideration paid1,205,404
Fair value of Cabot Microelectronics common stock issued for KMG outstanding common stock and equity awards331,048
Total consideration transferred$1,536,452



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11

INDEX
The following table summarizes the preliminary allocation of fair values of assets acquired and liabilities assumed as of the Acquisition Date.
Amount
Cash$23,217 
Accounts receivable63,950 
Inventories68,087 
Prepaid expenses and other current assets14,694 
Property, plant and equipment147,170 
Intangible assets844,800 
Other long-term assets5,805 
Accounts payable(28,835)
Accrued expenses and other current liabilities(44,216)
Deferred income taxes liabilities(156,474)
Other long-term liabilities(15,080)
Total identifiable net assets acquired923,118 
Goodwill613,334 
Total consideration transferred$1,536,452 
 Amount
Cash$23,217
Accounts receivable64,711
Inventories68,963
Prepaid expenses and other current assets14,798
Property, plant and equipment147,398
Intangible assets844,800
Other long-term assets6,208
Accounts payable(28,894)
Accrued expenses and other current liabilities(43,451)
Deferred income taxes liabilities(164,165)
Other long-term liabilities(3,754)
Total identifiable net assets acquired929,831
Goodwill606,621
Total consideration transferred$1,536,452


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. These valuations are preliminary based onWe believe that the information currently available, and the expectations and assumptions that have been deemedwe used provides a reasonable by the Company’s management.  The Company has not finalizedbasis for estimating the fair value determinations of the assets acquired and liabilities assumed and expects to finalize such as soon as practicable, but not later than one-year fromassumed. The Company finalized the Acquisition Date.  As a result, certainpurchase price allocation during the fourth quarter of fiscal 2019. During the first quarter of fiscal 2020, the Company made adjustments have been made and will continue to be made to the Company’s Consolidated Balance Sheet and Statements of Income.purchase price allocation to correct immaterial errors.
The fair values of identifiable assets and liabilities acquired were developed with the assistance of a third-party valuation firm. The fair value of acquired property, plant and equipment is primarily valued at its “value-in-use.” 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, discount raterates terminal growth rates, and customer attrition.attrition rates.  The valuations and the underlying assumptions have been deemed reasonable by the Company’s 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 Acquisition Date:
 Fair Value Estimated Useful Life
(years)
Customer relationships$704,000
 15-20
Technology and know-how85,500
 9-11
Trade name - Flowchem46,000
 Indefinite
Trade name - all other7,000
 1-15
EPA product registration rights2,300
 15
Total intangible assets$844,800
  

Fair ValueEstimated Useful Life
(years)
Customer relationships - Flowchem$315,000  20
Customer relationships - Electronic chemicals280,000  19
Customer relationships - all other109,000  15-16
Technology and know-how85,500  9-11
Trade name - Flowchem46,000  Indefinite
Trade name - all other7,000  1-15
EPA product registration rights2,300  15
Total intangible assets$844,800  
Customer relationships represent the estimated fair value of the underlying relationships and agreements with KMG’s customers, and are being amortized on an accelerated basis in order for the expense to most accurately match the periods of highest cash flows attributable to the identified relationships. Technology and know-how represent the estimated fair value of KMG’s technology, processes and knowledge regarding its product offerings, and are being amortized on a straight-line basis. Trade names represent the estimated fair value of the brand and name recognition associated with the marketing of KMG’s product offerings and are being amortized on a straight-line basis, except for the Flowchem trade name, which we believe has an indefinite life. These intangible assets are capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing. The intangible assets subject to amortization have a weighted average useful life of 17.9 years. For intangible assets related to the wood treatment business, the remaining useful lives were limited to the end of the calendar year 2021.
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As discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, the Company recognized asset impairment charges of $67,372, net for the wood treatment asset group due to triggering events that occurred in the fourth quarter of fiscal 2019. The Company continues to monitor the wood treatment asset group for indicators of long-lived asset or goodwill impairment. As the Company approaches the announced closure date of the facilities and there are lower estimated future cash flows, there is a potential for further impairments of long-lived assets and goodwill absent a sale of the business. While the timing and amounts of any further impairments are unknown, they could be material to the Company’s Consolidated Balance Sheets and to the Consolidated Statements of Income, but they will not affect the Company’s reported Net cash provided by operating activities. Refer to Note 10 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 for additional information.
The excess of consideration transferred over the fair value of net assets acquired was recorded as goodwill, and is not deductible for income tax purposes. The goodwill is primarily attributable to anticipated revenue growth from the combined company product portfolio, expected synergies of the combined company, and the assembled workforce of KMG. The preliminary allocation of goodwill to each of the Electronic Materials and Performance Materials segments as a result of the Acquisition was $261,733$259,859 and $344,888,$353,475, respectively.
For the three and ninesix months ended June 30, 2019,March 31, 2020, we recorded $2,910$2,285 and $33,108$5,050, respectively, in acquisitionAcquisition and integration-related expenses, including transaction costs, stock compensation expense, severanceprofessional fees and retention costs. These items are included within Selling, general and administrative in the Consolidated Statements of Income. In the same three and nine months ended June 30, 2019, we also recorded a charge of $42 and $14,869, respectively related to the fair value write-up of acquired inventory sold, which is included in Cost of sales in the Consolidated Statements of Income.
KMG’s results of operations have been included in our unaudited Consolidated Statements of Income and Consolidated Statements of Comprehensive Income (Loss) from the Acquisition Date. Net sales of the acquired KMG business sincebusinesses for the Acquisition Date through June 30, 2019three and six months ended March 31, 2020 were $316,690.$137,996 and $271,429, respectively. KMG’s netNet income sincefor the Acquisition Date was $4,782,three and six months ended March 31, 2020 were $16,604 and $31,290, respectively, which includes $21,889include Acquisition-related costs of acquisition-related costs$117 and a $14,869 charge for fair value write-up of inventory sold.$323, respectively. Further, additional amortization and depreciation expense associated with recording KMG’s net assets at fair value decreased KMG’s netNet income post-Acquisition.
The following unaudited supplemental pro forma information summarizes the combined results of operations for Cabot Microelectronics and KMG as if the Acquisition had occurred on October 1, 2017.
Three Months Ended
March 31, 2019		Six Months Ended
March 31, 2019
Revenue$265,391  $549,147  
Net income26,871  64,473  
Earnings per share - basic0.93  2.23  
Earnings per share - diluted0.91  2.19  
 Three Months Ended June 30, Nine Months Ended June 30,
 2019 2018 2019 2018
Revenues$271,882
 $272,589
 $821,029
 $784,694
Net income (loss)16,077
 33,211
 88,938
 (1,369)
Earnings per share - basic$0.55
 $1.15
 $3.07
 $(0.05)
Earnings per share - diluted$0.54
 $1.12
 $3.02
 $(0.05)

The following costs are included in the three and ninesix months ended June 30, 2018:March 31, 2019:
•Non-recurring transaction costs of $568$621 and $31,611,$1,436, respectively.
•Non-recurring transaction-related employee costs, such as accelerated stock compensation expense, retention and severance expense of $1,380$51 and $37,392,$154, respectively.
Non-recurring charge for fair value write-up of inventory sold of $0 and $14,859, respectively.
The historical financial information has been adjusted by applying the Company’s accounting policies and giving effect to the pro forma adjustments, which consist of (i) amortization expense associated with identified intangible assets; (ii) depreciation of fixed asset step-up (for pre-acquisitionpre-Acquisition periods only); (iii) accretion of inventory step-up value; (iv) the elimination of interestInterest expense on pre-acquisitionpre-Acquisition KMG debt and replacement of interestInterest expense related to the acquisition-relatedAcquisition-related financing; (v) transaction-related costs; (vi) accelerated share-based compensation expense (pre-acquisition(pre-Acquisition periods only); (vii) retention and severance expense incurred as a direct result of the Acquisition; and (viii) an adjustment to tax-effect the aforementioned unaudited pro forma adjustments using an estimated weighted-average effective income tax rate of each entity and the jurisdictions to which the above adjustments relate. The pro forma consolidated results are not necessarily indicative of what the consolidated results actually would have been had the Acquisition been completed on October 1, 2017. The pro forma consolidated results do not purport to project future results of combined operations, nor do they reflect the expected realization of any revenue or cost synergies associated with the Acquisition.
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Quarter over quarter and year over year numbers may not always roll forward when comparing to prior period pro forma reported results. Variances can be attributed to: changes in Purchase Price Allocation values and useful lives, differences in the allocation between Cost of sales and Selling, general and administrative expenses, transaction expenses that had not been incurred, tax rate assumptions and interest rate calculations.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The Financial Accounting Standards Board (“FASB”)FASB established a three-level hierarchy for disclosure based on the extent and level of judgment used to estimate fair value.  Level 1 inputs consist of valuations based on quoted market prices in active markets for identical assets or liabilities.  Level 2 inputs consist of valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in an inactive market, or other observable inputs.  Level 3 inputs consist of valuations based on unobservable inputs that are supported by little or no market activity.
The following table presents financial instruments, other than long-term debt, that we measured at fair value on a recurring basis at June 30, 2019March 31, 2020 and September 30, 2019.  See Note 10 of this Report on Form 10-Q for a detailed discussion of our long-term debt. We have classified the following assets and liabilities in accordance with the fair value hierarchy set forth in the applicable standards.  In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest-level input that is significant to the determination of the fair value. 
March 31, 2020Level 1Level 2Level 3Total Fair Value
Assets:
Cash and cash equivalents$340,702  $—  $—  $340,702  
Other long-term investments1,036  —  —  1,036  
Total assets$341,738  $—  $—  $341,738  
Liabilities:
Derivative financial instruments—  41,452  —  41,452  
Total liabilities$—  $41,452  $—  $41,452  
June 30, 2019 Level 1 Level 2 Level 3 
Total
Fair Value
Assets:        
Cash and cash equivalents $168,678
 $—
 $—
 $168,678
Other long-term investments 1,411
 —
 —
 1,411
Derivative financial instruments —
 $8
 —
 8
Total assets $170,089
 $8
 $—
 $170,097
         
Liabilities:        
Derivative financial instruments —
 20,217
 —
 20,217
Total liabilities $—
 $20,217
 $—
 $20,217
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
Total assets $354,058
 $—
 $—
 $354,058
         
Liabilities:        
Derivative financial instruments —
 339
 —
 339
Total liabilities $—
 $339
 $—
 $339

September 30, 2019Level 1Level 2Level 3Total Fair Value
Assets:
Cash and cash equivalents$188,495  $—  $—  $188,495  
Other long-term investments980  —  —  980  
Total assets$189,475  $—  $—  $189,475  
Liabilities:
Derivative financial instruments—  24,244  —  24,244  
Total liabilities$—  $24,244  $—  $24,244  

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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 nonqualifiednon-qualified supplemental savings plan. The fair value of the investments is determined through quoted market prices within actively traded markets. Although the investments are allocated to individual participants and investment decisions are made solely by those participants, the SERP is a nonqualifiednon-qualified plan. Consequently, the Company owns the assets and the related offsetting liability for disbursement until such time as a participant makes a qualifying withdrawal. The long-term investmentasset was adjusted to $1,411$1,036 in the thirdsecond quarter of fiscal 20192020 to reflect its fair value as of June 30, 2019.
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March 31, 2020.
Our derivative financial instruments include foreign exchange contracts and an interest rate swap.swap contract.  During the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap agreementcontract to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt.  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 the interest rate swap, and forward rates and/or the Overnight Index Swap (OIS) curve for forward foreign exchange contracts, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments.  See Note 1112 of this Report on Form 10-Q for more information on our use of derivative financial instruments.

6. INVENTORIES
Inventories consisted of the following:
March 31, 2020September 30, 2019
Raw materials$63,296  $60,157  
Work in process17,915  12,940  
Finished goods76,661  72,181  
Total$157,872  $145,278  
 June 30,
2019		 September 30, 2018
    
Raw materials$59,684
 $35,150
Work in process13,119
 8,117
Finished goods72,980
 28,659
Total$145,783
 $71,926


7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $708,390 as of June 30, 2019, and $101,083 as of September 30, 2018.  The increase in goodwill was due to $606,621 in goodwill related to the Acquisition offset by $686 in foreign exchange fluctuations.  The amount of goodwill assigned toactivity for each of the Company’s reportable segments, which carry goodwill, Electronic Materials and Performance Materials, segments was $358,108 and $350,282, respectively.for the six months ended March 31, 2020. 

Electronic MaterialsPerformance MaterialsTotal
Balance at September 30, 2019$352,797  $357,274  $710,071  
Foreign currency translation impact465  (1,918) (1,453) 
Other—  1,205  1,205  
Balance at March 31, 2020$353,262  $356,561  $709,823  

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The components of other intangible assets are:
 June 30, 2019 September 30, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
        
Other intangible assets subject to amortization:       
Product technology, trade secrets and know-how$134,415
 $34,598
 $48,825
 $25,305
Acquired patents and licenses10,570
 8,356
 8,270
 8,252
Customer relationships, trade names, and distribution rights740,058
 51,225
 28,068
 17,574
        
Total other intangible assets subject to amortization885,043
 94,179
 85,163
 51,131
        
Other intangible assets not subject to amortization:       
Other indefinite-lived intangibles*47,170
   1,170
  
Total other intangible assets not subject to amortization47,170
   1,170
  
        
Total other intangible assets$932,213
 $94,179
 $86,333
 $51,131

March 31, 2020September 30, 2019
Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
Other intangible assets subject to amortization:
Product technology, trade secrets and know-how$121,579  $42,230  $123,948  $37,993  
Acquired patents and licenses9,023  8,558  9,023  8,397  
Customer relationships, trade names, and distribution rights685,061  103,386  684,764  64,471  
Total other intangible assets subject to amortization815,663  154,174  817,735  110,861  
Other intangible assets not subject to amortization:
Other indefinite-lived intangibles*47,170  47,170  
Total other intangible assets not subject to amortization47,170  47,170  
Total other intangible assets$862,833  $154,174  $864,905  $110,861  
*Other indefinite-lived intangible assets not subject to amortization consist primarily of trade names.
As discussed in Note 4 of this Report on Form 10-Q, we recorded $844,800 of intangible assets related to the Acquisition.  The allocation of the amount into the various categories of intangible assets, as well as useful lives we have established, are discussed in Note 4.
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Amortization expense on our intangible assets was $16,926$22,014 and $43,244$43,378 for the three and ninesix months ended June 30, 2019,March 31, 2020, respectively, and was $1,780$16,960 and $5,716$26,318 for the three and ninesix months ended June 30, 2018,March 31, 2019, respectively. Estimated future amortization expense for the five succeeding fiscal years is as follows:
Fiscal Year Estimated Amortization Expense
Remainder of 2019 $16,931
2020 87,940
2021 87,243
2022 79,832
2023 67,674

Fiscal YearEstimated
Amortization
Expense
Remainder of 2020$42,429  
202190,474  
202280,974  
202368,480  
202460,528  
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 2018,fiscal year 2019, we chose to use a step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment, with the exception of our CMP slurries and QED reporting unit,units, for which we chose to use a step zero analysis for fiscal 2018.year 2019.
We completedcontinue to actively monitor the industries in which we operate and our annual impairment test during our fourth quarter of fiscal 2018 and concluded that no impairment existed.  There were nobusinesses' performance for indicators of potential impairment.  As of March 31, 2020, we have determined that a triggering event had not occurred that would require an interim impairment duringtest to be performed.  If current global macroeconomic conditions related to the quarter ended June 30, 2019, so it wasCOVID 19 pandemic ("Pandemic") persist and adversely impact our Company, we may have future impairments of goodwill of the underlying businesses. Potential future impairments could be material to the Company’s Consolidated Balance Sheets and to the Consolidated Statements of Income, but they will not necessary to perform an impairment review for goodwill and indefinite-lived intangible assets duringaffect the quarter.  There have been no impairment charges recorded on the goodwill for any of our reporting units.Company’s reported Net cash provided by operating activities.

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8. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
March 31, 2020September 30, 2019
Long-term right of use asset$29,715  $—  
Long-term contract assets3,776  1,164  
Long-term SERP investment1,036  980  
Prepaid unamortized debt issuance cost - revolver623  709  
Other long-term assets2,574  2,858  
Total$37,724  $5,711  
 June 30,
2019		 September 30,
2018
    
Long-term contract assets674
 1,548
Long-term SERP Investment1,411
 1,137
Prepaid unamortized debt issuance cost - revolver752
 —
Other long-term assets2,821
 1,979
Total$5,658
 $4,664


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9. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
March 31, 2020September 30, 2019
Accrued compensation$33,833  $33,809  
Income taxes payable16,470  15,725  
Dividends payable13,510  12,953  
Interest rate swap liability12,410  5,351  
Contract liabilities (current)7,293  5,008  
Current portion of operating lease liability5,498  —  
Taxes, other than income taxes5,330  6,281  
Goods and services received, not yet invoiced3,950  3,075  
KMG - Bernuth warehouse fire-related (See Note 13)—  7,998  
Accrued interest—  3,739  
Other11,095  9,679  
Total$109,389  $103,618  
 June 30,
2019		 September 30,
2018
    
Accrued compensation$31,362
 $35,367
Income taxes payable14,418
 18,045
Dividends payable12,879
 10,822
Taxes, other than income taxes6,806
 1,976
KMG - Bernuth warehouse fire related (See Note 12)4,450
 —
Accrued interest3,677
 —
Contract liabilities3,958
 4,894
Goods and services received, not yet invoiced3,772
 1,954
Other accrued expenses13,939
 9,925
Total$95,261
 $82,983


10. DEBT
OnIn connection with the Acquisition, Date, we entered into the Credit Agreementa seven-year credit agreement (the "Credit Agreement") by and among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, which provides for senior secured financing of up to $1,265.0 million, consisting of the Term Loan Facilitya term loan facility in an aggregate principal amount of $1,065.0 million (the "Term Loan Facility") and the Revolving Credit Facilitya revolving credit facility in an aggregate principal amount of up to $200.0 million (the "Revolving Credit Facility"), including a letter of credit sub-facility of up to $50.0 million. The Term Loan Facility and the Revolving Credit Facility are referred to as the “Credit Facilities.”
ProceedsFacilities". The Revolving Credit Facility requires that the Company maintain a maximum first lien secured net leverage ratio, as defined in the Credit Agreement, of 4.00 to 1.00 as of the last day of each fiscal quarter if any borrowing under the Revolving Credit Facility is outstanding, commencing with the first full fiscal quarter after the Acquisition Date. As of March 31, 2020, our maximum first lien secured net leverage ratio was 2.02 to 1.00.
The Term Loan Facility matures on November 15, 2025, the seven-year anniversary of the Acquisition Date, and amortizes in equal quarterly installments of 0.25% of the initial principal amount, starting with the first full fiscal quarter after the Acquisition Date. The Revolving Facility matures on November 15, 2023, the five-year anniversary of the Acquisition Date. In addition, the Company is required to prepay outstanding loans borrowed under the Term Loan Facility, onsubject to certain exceptions, with up to 50% of the Acquisition DateCompany’s annual excess cash flow, as defined under the Credit Agreement, and 100% of the net cash proceeds of certain recovery events and non-ordinary course asset sales.
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At March 31, 2020, the fair value of the Term Loan Facility, using level 2 inputs, approximated its carrying value of $941,687 as the loans bears a floating market rate of interest. As of March 31, 2020, $10,650 of the Term Loan Facility was classified as short-term, and $16,420 of debt issuance costs related to our Term Loan Facility were used to fund, in part,presented as a reduction of long-term debt.
On March 13, 2020, the Acquisition and certain of KMG’s existing indebtedness, and to pay related fees and expenses. TheCompany drew $150.0 million under the Revolving Credit Facility remains undrawn.as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertain global economic conditions resulting from the Pandemic. Prior to this, the Company had not drawn any amounts under the Revolving Credit Facility. As of March 31, 2020, $150.0 million was outstanding under the Revolving Credit Facility, and our available credit under the Revolving Credit Facility was $50.0 million, including our letter of credit sub-facility. Borrowings under the Revolving Credit Facility are classified as short-term debt. Proceeds from the Revolving Credit Facility are included in Cash and cash equivalents in the Company's Consolidated Balance Sheet as of March 31, 2020. Due to the short-term nature of the borrowing under the Revolving Credit Facility, its carrying value approximates fair value.
During the first quarter of fiscal year 2020, the Company amended the Credit Agreement to reduce the interest rate on term loan borrowings. The amended Term Loan Facility and amended Credit Facilities are guaranteed by each of the Company’s wholly-owned domestic subsidiaries, including KMGreferred to as "Amended Term Loan Facility" and its subsidiaries, and are secured by substantially all assets of the Company and of each subsidiary guarantor, in each case subject to certain exceptions.
"Amended Credit Facilities", respectively. Borrowings under the Amended Credit Facilities bear interest at a rate per annum equal to, at the Company’s option, either (a) a LIBOR, subject to a 0.00% floor, or (b) a base rate, in each case plus an applicable margin of, in the case of borrowings under the Amended Term Loan Facility, 2.25%2.00% for LIBOR loans and 1.25%1.00% for base rate loans and, in the case of borrowings under the Revolving Credit Facility, initially, 1.50% for LIBOR loans and 0.50% for base rate loans. The applicable margin for borrowings under the Revolving Credit Facility varies depending on the Company’s first lien secured net leverage ratio. The Company is also required to pay a commitment fee currently equal to 0.25% per annum to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The commitment fee under the Revolving Credit Facility varies depending on the Company’s first lien secured net leverage ratio.
The Term Loan Facility matures on November 15, 2025, the seven-year anniversary of the Acquisition Date, and amortizes in equal quarterly installments of 0.25% of the initial principal amount, starting with the first full fiscal quarter after the Acquisition Date. The Revolving Facility matures on November 15, 2023, the five-year anniversary of the Acquisition Date. In addition, the Company is required to prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with up to 50% of the Company’s annual excess cash flow, as defined under the Credit Agreement, and 100% of the net cash proceeds of certain recovery events and non-ordinary course asset sales.
The Company may generally prepay outstanding loans under the Credit Facilities at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans.  We made a prepayment of $55.0 million and a total prepayment of $100.0 million during the three and nine months ended June 30, 2019, respectively.
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The Revolving Credit Facility requires that the Company maintain a maximum first lien secured net leverage ratio, as defined in the Credit Agreement, of 4.00 to 1.00 as of the last day of each fiscal quarter if any revolving loans are outstanding, commencing with the first full fiscal quarter after the Acquisition Date.
The Credit Agreement contains certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, asset sales and acquisitions, pay dividends and make other restricted payments and enter into transactions with affiliates. We believe we are in compliance with these covenants.
The Credit Agreement contains certain events of default, including relating to a change of control. If an event of default occurs, the lenders under the Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the Credit Facilities.
At June 30, 2019, the fair value of the Term Loan Facility, using level 2 inputs, approximated its carrying value of $962,338 as the loan bears a floating market rate of interest. As of June 30, 2019, $13,313 of the debt outstanding was classified as short-term, and $18,655 of debt issuance costs related to our Term Loan were presented as a reduction of long-term debt.
In the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap agreementcontract to hedge the variability in our LIBOR-based interest payments on approximately 70% of our Term Loan Facility balance.  See Note 11 in12 of this Report on Form 10-Q for additional information.
Principal repayments of the Term Loan Facility are generally made on the last calendar day of each quarter if that day is considered to be a business day. 
As of June 30, 2019,March 31, 2020, scheduled principal repayments of the Term Loan were:
Fiscal YearPrincipal Repayments
Remainder of 2020$5,325  
202110,650  
202210,650  
202310,650  
202410,650  
Greater than 5 years893,762  
Total$941,687  
Fiscal Year Principal Repayments
Remainder of 2019 $5,325
2020 10,650
2021 10,650
2022 10,650
2023 10,650
Greater than 5 years 914,413
Total $962,338


11. LEASES
Effective October 1, 2019, the Company adopted the new lease accounting guidance which requires the recognition of a right of use asset and a corresponding lease liability for operating leases. As part of the adoption, the Company elected to apply provisions of the guidance to operating leases with terms of more than twelve months for all lease classes except for real estate leases for which the guidance is applied to all leases. Additionally, the Company elected to account for non-lease components and lease components together as a single lease component for all asset classes. The Company’s lease transactions primarily consist of leases for facilities, equipment and vehicles under operating leases. The Company does not have any material finance leases. The weighted average remaining lease term for operating leases included in the lease liability was approximately seven years, as of March 31, 2020. Certain of the Company’s leases have an option to extend the lease term and the renewal period is included in determining the lease term for leases where the renewal option is reasonably certain to be exercised.
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Total lease cost for the Company for the three months ended March 31, 2020 was $2,320, which included $1,903 related to operating lease cost and $417 related to short-term and variable lease costs. Total lease cost for the Company for the six months ended March 31, 2020 was $4,806, which included $3,886 related to operating lease cost and $920 related to short-term and variable lease costs. The right of use asset related to operating leases as of March 31, 2020 was $29,715 and was recorded in Other long-term assets. As of March 31, 2020, the current portion of the lease liability for operating leases was $5,498 and was included in Accrued expenses, income taxes payable and other current liabilities, and the long-term portion was $25,390 and was included in Other long-term liabilities. The weighted average discount rate for operating leases as of March 31, 2020 was 3.02%, and was determined based on the secured incremental borrowing rate of the Company and its subsidiaries as the implicit rate is not readily determinable.
Future maturities of operating lease liabilities for the years ended September 30 are as follows:
Fiscal YearAmount
Remainder of 2020$3,356  
20215,538  
20225,185  
20234,728  
20244,068  
2025 and future years11,544  
Total future lease payments34,419  
Less: Imputed interest3,531  
Operating lease liability30,888  
Less: Current portion of operating lease liability5,498  
Long-term portion of operating lease liability$25,390  

As of September 30, 2019, minimum lease payments under operating leases with noncancelable terms in excess of one are as follows:
Fiscal YearAmount
2020$6,984  
20214,941  
20224,291  
20234,122  
20243,710  
Thereafter12,010  
Total future minimum lease payments$36,058  

12. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates.  We enter into certain derivative transactions to mitigate the volatility associated with these exposures.  We have policies in place that define acceptable instrument types we may enter into and we have established controls to limit our market risk exposure.  We do not use derivative financial instruments for trading or speculative purposes.  In addition, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the Consolidated Balance Sheets at fair value on a gross basis.
Cash Flow Hedges - Interest Rate Swap AgreementContract
During the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap agreementcontract to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt.  As of June 30, 2019,March 31, 2020, the notional value of the interest rate swap was $746,000 and this$652,000. This value is scheduled to decrease bi-annually and towill expire on January 31, 2024.
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We have designated this swap agreementcontract as a cash flow hedge pursuant to ASC 815, "Derivatives and Hedging".  Based on certain quantitative and qualitative assessments, we have determined that the hedge is highly effective and qualifies for hedge accounting.  Accordingly, unrealized gains and losses on the hedge are recorded in other comprehensive income.  Realized gains and losses are recorded on the same financial statement line as the hedged item, which is Interest expense.
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Foreign Currency Contracts Not Designated as Hedges
On a regular basis, we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures.  These foreign exchange contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on our forward foreign exchange contracts are recognized as Other income (expense), net in the accompanying Consolidated Statements of Income in the period in which the exchange rates change.  As of June 30, 2019March 31, 2020 and September 30, 2018,2019, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign currencies were $9,636$5,746 and $7,652,$6,239, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $17,880$24,800 and $24,860,$24,270, respectively.
Net Investment Hedge - Foreign Exchange Contracts
In September 2017, we entered into forward contracts to sell 100 billion Korean won and buy U.S. dollars, which we subsequently terminated in the third quarter of fiscal 2018. We had designated these forward contracts as effective net investment hedges.
The fair value of our derivative instruments included in the Consolidated Balance Sheets, which was determined using Levellevel 2 inputs, was:was as follows:
Derivative AssetsDerivative Liabilities
Consolidated Balance Sheet LocationMarch 31, 2020September 30, 2019March 31, 2020September 30, 2019
Derivatives designated as hedging instruments
Interest rate swap contractAccrued expenses, income taxes payable and other current liabilities$—  $—  $12,410  $5,351  
Other long-term liabilities$—  $—  $28,585  $18,841  
Derivatives not designated as hedging instruments
Foreign exchange contractsAccrued expenses, income taxes payable and other current liabilities$—  $—  $458  $52  
  Derivative Assets Derivative Liabilities
 Consolidated Balance Sheet LocationJune 30, 2019 September 30, 2018 June 30, 2019 September 30, 2018
Derivatives designated as hedging instruments        
Interest rate swap contractAccrued expenses, income taxes payable and other current liabilities$—
 $—
 $4,274
 $—
 Other long-term liabilities—
 $—
 $15,753
 $—
Derivatives not designated as hedging instruments        
Foreign exchange contractsPrepaid expenses and other current assets$8
 $—
 $—
 $—
 Accrued expenses, income taxes payable and other current liabilities$—
 $—
 $190
 $339

The following table summarizes the effect of our derivative instruments on our Consolidated Statements of Income for the three and ninesix months ended June 30, 2019March 31, 2020 and 2018:2019:
Gain (Loss) Recognized in Statement of Income
Three Months Ended March 31,Six Months Ended March 31,
Statement of Income Location2020201920202019
Derivatives not designated as hedging instruments
Foreign exchange contractsOther income (expense), net$(268) $(348) $(262) $(38) 
  (Loss) Recognized in Statement of Income
  Three Months Ended Nine Months Ended
 Statement of Income LocationJune 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Derivatives not designated as hedging instruments        
Foreign exchange contractsOther income (expense), net$(29) $(1,080) $(67) $(1,002)

The interest rate swap agreementcontract has been deemed to be effective, and we realized gainsa loss of $1,366 and losses were immaterial to our Consolidated Statement of Income.$2,537 in Interest expense during the three and six months ended March 31, 2020, respectively.  We recorded an unrealized loss of $15,536,$18,367 and $15,017, net of tax, in Accumulated other comprehensive income during the ninethree and six months ended June 30, 2019March 31, 2020, respectively, for this interest rate swap.  As of June 30, 2019,March 31, 2020, during the next 12 months, we expect approximately $4,274$12,410 to be reclassedreclassified from Accumulated other comprehensive (loss) income (loss) into Interest expense related to our interest rate swap based on projected rates of the LIBOR forward curve as of June 30, 2019.March 31, 2020.

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12.13. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS AND OTHER CONTINGENCIES
We periodically become a party to legal proceedings, arbitrations, and regulatory proceedings (“contingencies”) arising in the ordinary course of our business operations. The ultimate resolution of these contingencies is subject to significant uncertainty, and should we fail to prevail in any of them or should several of them be resolved against us in the same reporting period, these matters could, individually or in the aggregate, be material to our consolidated financial statements. One of these contingencies, related to Star Lake Canal, which we assumed in connection with the Acquisition, is discussed below. The ultimate outcome of these matters, however, cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in our consolidated financial statements.  The Company records legal costs associated with loss contingencies as expenses in the period in which they are incurred.

On May 31, 2019, a fire occurred at the warehouse of the facility of KMG’s subsidiary, KMG-Bernuth, in Tuscaloosa, Alabama, which processes pentachlorophenol (“penta”("penta") for sale to customers in the United States and Canada. The warehouse fire, which we believe originated from non-hazardous waste materials temporarily stored in the warehouse for recycling purposes, caused no injuries and was extinguished in less than an hour. Company personnel investigated the incident, and KMG-Bernuth commenced cleanup with oversight from certain local, state and federal authorities. The carrying value of the warehouse and the affected inventory are not material. Applying the accounting guidance under ASC 410-30, Environmental Obligations and ASC 450, Contingencies, we determined that since we have environmental obligations as of the date of the fire, costs for the fire waste cleanup and disposal should be recognized to the extent they are probable and reasonably estimable. We have applied these criteriarecorded expense of $9,494 in fiscal year 2019 and recorded an undiscounted amount of $4,200 loss contingency regarding disposal costs that can be reasonably estimated at this time.$593 during the six months ended March 31, 2020. These disposal costs were charged to Cost of sales. ThereAlthough we believe we have completed cleanup efforts related to the fire incident, there are potential additional disposal and other costs that cannot be reasonably estimated as of this time related to materials in the warehouse or otherwise impacted by the incident.incident due to the nature of federally-regulated penta-related requirements. The fire waste cleanup and disposal costs were significant due to these requirements, and we may incur additional significant disposal costs related to the impacted warehouse materials. We will continue to update the estimated losses as new information becomes available. We also recognized $250 in Selling, general and administrative expense for professional fees incurred during the quarter related to the incident.

In addition, we are working with our insurance carriers on possible recovery of losses and costs, but at this point we cannot reasonably estimate whether we will receive any potential insurance recoveries, or if so, the amount of any potential insurancesuch recoveries. As such, no insurance recoveries have been recognized as of June 30, 2019.

March 31, 2020.
Separately, in 2014, prior to the Acquisition, the United States Environmental Protection Agency (“EPA”) hashad notified KMG-Bernuth, that the EPA considered it to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”) by virtue of its relationship with certain alleged predecessor companies, including Idacon, Inc (f/k/a Sonford Chemical Company) in connection with the Star Lake Canal Superfund Site near Beaumont, Texas. The EPA has estimated that the remediation will cost approximately $22.0 million. KMG-Bernuth and approximately seven7 other parties entered into an agreement with the EPA in September 2016 to complete a remedial design phase of the remediation of the site. The remediation work will be performed under a separate future agreement. Although KMG-Bernuth has not conceded liability, a reserve in connection with the remedial design has beenwas established, and as of June 30, 2019,March 31, 2020, the reserve remaining was $1,008.$553.
We also may face other governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with this or other past and present operations. We accrue for environmental liabilities when a determination can be made that they are probable and reasonably estimable. Other than as described herein, we are not involved in any legal proceedings that we believe could have a material impact on our consolidated financial position, results of operations or cash flows.
In addition, our Company is subject to extensive federal, state and local laws, regulations and ordinances in the U.S.United States and in other countries. These regulatory requirements relate to the use, generation, storage, handling, emission, transportation and discharge of certain hazardous materials, substances and waste into the environment.  The Company, including its KMG entities, manage Environmental, Health and Safety (“EHS”) matters related to protection of the environment and human health, the cleanup of contaminated sites, the treatment, storage and disposal of wastes, and the emission of substances into the air or waterways, among other EHS concerns.  Governmental authorities have the power tocan enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company devotes significant financial resources to compliance, including costs for ongoing compliance.
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Certain licenses, permits and product registrations are required for the Company’s products and operations in the U.S.,United States, Mexico and other countries in which it does business. The licenses, permits and product registrations are subject to revocation, modification and renewal by governmental authorities.  In the U.S.United States in particular, producers and distributors of penta, which is a product manufactured and sold by KMG-Bernuth as part of the wood treatment business, are subject to registration and notification requirements under the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) and comparable state law in order to sell this product in the U.S.United States. Compliance with these requirements may have a significant effect on our business, financial condition and results of operations.
We are subject to contingencies, including litigation relating to EHS laws and regulations, commercial disputes and other matters. Certain of these contingencies are discussed above and below. The ultimate resolution of these contingencies is subject to significant uncertainty, and should we fail to prevail in any of them or should several of them be resolved against us in the same reporting period, these matters could, individually or in the aggregate, be material to the consolidated financial statements. The ultimate outcome of these matters however, cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in our consolidated financial statements. The Company records legal costs associated
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 loss contingencies as expensesrespect to certain matters. Generally, these obligations arise in the periodcontext 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 they are incurred.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 March 31, 2020, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of such obligations is probable.
Refer to Note 1720 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018,2019, for additional information regarding commitments and contingencies.

POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS
We have defined benefit plans covering employees in certain foreign jurisdictions as required by local law which are unfunded. We adopted ASU 2017-7 during the first quarter of the fiscal year and pursuant to the adoption, netNet service costs are recorded as fringe benefit expense under Cost of sales and Operating expenses, and all other costs are recorded in the Other income (expense), net in our Consolidated Statements of Income.  The projected benefit obligations and accumulated benefit obligations under all such unfunded plans are updated annually during the fourth quarter of the fiscal year. Benefit payments under all such unfunded plans to be paid over the next ten years are expected to be approximately $7,906.$7,872.  For more information regarding these plans, refer to Note 1720 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.2019.
PURCHASE OBLIGATIONS
Purchase obligations include take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services.  We have been operating under a fumed silicaan abrasive particle supply agreement with Cabot Corporation, our former parent company which is not a related party, the current term of which now runs through December 2019.2022.  As of June 30, 2019,March 31, 2020, purchase obligations include $8,859$27,497 of contractual commitments related to this agreement. In addition, we have a purchase commitment of $10,216 to purchase non-water based carrier fluid, and have another purchase contract to purchase $3,638 of abrasive particles.

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13.14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below summarizes the components of accumulatedAccumulated other comprehensive income (loss) (AOCI), net of tax provision/Provision for income taxes/(benefit), as of June 30, 2019for the three and 2018:six months ended March 31, 2020 and 2019:
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Beginning Balance$(3,616) $6,713  $(23,238) $4,539  
Foreign currency translation adjustment(19,752) (1,621) (3,935) 1,412  
Income taxes27  629  61  21  
Foreign currency translation adjustment, net of tax(19,725) (992) (3,874) 1,433  
Change in pension and other postretirement—  251  —  —  
Unrealized gain loss on cash flow hedges:
Change in fair value(23,655) (8,352) (19,340) (8,352) 
Reclassification adjustment into earnings1,366  (1) 2,537  (1) 
Income taxes4,982  1,879  3,755  1,879  
Unrealized loss on cash flow hedges, net of tax(17,307) (6,474) (13,048) (6,474) 
Effect of the adoption of the stranded tax effect accounting standards—  —  (497) —  
Income taxes—  —  9  —  
Effect of the adoption of the stranded tax effect accounting standards, net of tax—  —  (488) —  
Net Change(37,032) (7,215) (17,410) (5,041) 
Ending Balance$(40,648) $(502) $(40,648) $(502) 
 
Foreign
Currency
Translation
 
Cash Flow
Hedges
 
Pension and
Other
Postretirement
Liabilities
 Total
Balance at September 30, 2018$5,918
 $(17) $(1,362) $4,539
Foreign currency translation adjustment, net of tax of $5644,132
 —
 —
 4,132
Unrealized gain (loss) on cash flow hedges:       
Change in fair value, net of tax of $(4,500)—
 (15,487) —
 (15,487)
Reclassification adjustment into earnings, net of tax of $(9)—
 (31) —
 (31)
Balance at June 30, 2019$10,050
 $(15,535) $(1,362) $(6,847)
 
Foreign
Currency
Translation
 
Cash Flow
Hedges
 
Pension and
Other
Postretirement
Liabilities
 Available-for-Sale Securities Total
Balance at September 30, 2017$5,239
 $46
 $(1,336) $—
 $3,949
Foreign currency translation adjustment, net of tax of $(2,303)2,276
 —
 —
   2,276
Unrealized loss on available-for-sale securities, net of tax of $0—
 —
 —
 (48) (48)
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)
Balance at June 30, 2018$7,515
 $(17) $(1,336) $(48) $6,114

The before tax amount reclassified from AOCI to netNet income during the three and ninesix months ended June 30,March 31, 2020 and 2019, and 2018, related to cash flow hedges, were recorded as Interest expense on our Consolidated StatementStatements of Income.

During the first quarter of fiscal 2020, the Company adopted ASU No. 2018-02 regarding the reclassification of stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the Tax Act and as a result, we reclassified $488 of stranded tax effects from Accumulated other comprehensive income to Retained earnings.

14.
15. SHARE-BASED COMPENSATION PLANS
We issue share-based awards under the following programs: our Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 (OIP); our Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated January 1, 2010 (ESPP); and, pursuant to the OIP, our Directors' Deferred Compensation Plan, as amended September 23, 2008 (DDCP), and our 2001 Executive Officer Deposit Share Program (DSP).  In March 2017, our stockholders reapprovedapproved the material terms of performance-based awards under the OIP for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended.  For additional information regarding these programs, refer to Note 1216 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.2019. 
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We record share-based compensation expense for all share-based awards, including stock option grants, and restricted stock, restricted stock unit and performance share unit ("PSU") awards, and employee stock purchase plan purchases.  We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate.  Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate.  We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases.  This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield and the risk-free interest rate.  We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock.  We calculate the expected term of our stock options using historical stock option exercise data, and for stock option grants made prior to December 2017, we have added a slight premium to this expected term for employees who meet the definition of retirement-eligible pursuant to their stock option grants during the contractual term of the grant.  As of December 2017, the provisions of stock option grants and restricted stock unit awards stated that, except in certain circumstances including termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, we record the total share-based compensation expense upon award for those employees who have met the retirement eligibility at the grant date. The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant.  The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The PSUs that have been awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of an established market index.  We use a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions, including the stock price of the Company and index constituents, the risk-free interest rate and stock price volatility.  Subsequent to the Acquisition, the performance metrics of the PSUs awarded in December 2017 were modified to reflect the performance resultsmetrics expected due to the Acquisition.Acquisition for the post-Acquisition time period subject to the PSUs.
KMG awards granted subsequent to the entry into the definitive agreement for the Acquisition, but prior to the Acquisition Date, were converted to our restricted stock units (“Replacement Award”Awards”), with vesting in three3 equal installments on the first three anniversaries of the original award date. If the recipient is terminated without cause or resigns with good reason during the 18 months following the Acquisition Date, the Replacement Award will vest as of such termination date in a number of shares equal to 150% of the Replacement Award.
The share-based compensation expense of $3,253 related to the Replacement Awards, including accelerated vesting, was $3,253 infor the first quarter of fiscal 2019 and not material in the second and third quarters of fiscal 2019. The expense wasis included in the table below. The expense for the second quarter of fiscal 2019 and the first and second quarters of fiscal 2020 included in the table below is not material.
Share-based compensation expense for the three and ninesix months ended June 30,March 31, 2020 and 2019, and 2018, was as follows:
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Cost of sales$617  $574  $1,529  $1,629  
Research, development and technical403  442  1,207  1,343  
Selling, general and administrative3,214  2,522  6,261  8,736  
Total share-based compensation expense4,234  3,538  8,997  11,708  
Tax benefit(833) (761) (1,771) (2,452) 
Total share-based compensation expense, net of tax$3,401  $2,777  $7,226  $9,256  
 Three Months Ended June 30, Nine Months Ended June 30,
 2019 2018 2019 2018
Cost of sales$540
 $542
 $2,169
 $1,896
Research, development and technical390
 445
 1,733
 1,491
Selling, general and administrative2,410
 3,199
 11,146
 10,882
Total share-based compensation expense3,340
 4,186
 15,048
 14,269
Tax benefit(670) (1,023) (3,121) (3,272)
Total share-based compensation expense, net of tax$2,670
 $3,163
 11,927
 $10,997

For additional information regarding the estimation of fair value, refer to Note 1216 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.2019.

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15.16. INCOME TAXES
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted by the United States in March 2020. The CARES Act includes provisions to support individuals and businesses in the form of loans, grants, and tax changes, among other types of relief. We are currently assessing the impact of this law, however it did not have a material impact on our provision for income taxes for the three months ended March 31, 2020. We did not and do not intend to take any loans or grants pursuant to the CARES Act or other U.S. Pandemic-related legislation.
The Company’s effective income tax rate was 52.1%17.8% and 36.9%20.1% for the three and ninesix months ended June 30, 2019,March 31, 2020, respectively, compared to an effective income tax rate of 18.3%28.5% and 47.0%26.0% for the three and ninesix months ended June 30, 2018,March 31, 2019, respectively. In the third quarter of fiscal 2019, the Company recorded a discrete charge of $9,128 related to newly issued final regulations related to U.S. Tax Reform which impacted the Company’s reserves for uncertain tax positions. Other factors that impacted the Company’sThe decrease in our effective income tax rate for the ninesix months ended June 30, 2019 wereMarch 31, 2020 compared to the prior year is primarily attributable to a higher tax benefit related to unfavorable tax treatmentshare based compensation and the favorable impact from the absence of certainnon-deductible KMG acquisition-related costs, such as compensation deduction limitations, as well as non-deductibility of certain professional fees.  Additionally, we recorded incremental tax expense for the Global Intangible Low Taxed Income (“GILTI”) provision of the Tax Act, which was effective for the first time during our fiscal 2019. Partially offsetting these adverse items, the Tax Act reduced the corporate income tax rate to 21.0% effective January 1, 2018, resulting in a change in our blended tax rate of 24.5% in fiscal 2018 to 21.0% beginning with our fiscal 2019.  In the quarter ended December 31, 2018, the Company completed its provisional estimates with regard to the Tax Act, and the Transition Tax and Withholding Tax obligations are now determined to be complete.costs.

16.
17. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing netNet income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards that havewith a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC 260 “Earnings per Share”.  Beginning in the first quarter of fiscal 2019, the amount of participating securities was no longer material and therefore, we have excluded such securities from our calculation of EPS in fiscal 2019.  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 and units using the treasury stock method.
The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations.  Basic and diluted earnings per share were calculated as follows:
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Numerator:
Net income available to common shares$32,899  $27,137  $71,448  $40,580  
Denominator:
Weighted average common shares29,287,211  28,997,632  29,182,528  28,065,759  
(Denominator for basic calculation)
Weighted average effect of dilutive securities437,968  481,482  483,908  541,274  
Diluted weighted average common shares29,725,179  29,479,114  29,666,436  28,607,033  
(Denominator for diluted calculation)
Earnings per share:
Basic$1.12  $0.94  $2.45  $1.45  
Diluted$1.11  $0.92  $2.41  $1.42  
 Three Months Ended June 30, Nine Months Ended June 30,
 2019 2018 2019 2018
Numerator:       
Net Income$18,878
 $35,171
 $59,458
 $61,825
Less: income attributable to participating securities—
 (34) —
 (73)
Earnings available to common shares$18,878
 $35,137
 $59,458
 $61,752
        
Denominator:       
Weighted average common shares29,063,907
 25,611,505
 28,398,960
 25,479,078
(Denominator for basic calculation)       
Weighted average effect of dilutive securities:       
Share-based compensation504,366
 707,133
 524,565
 742,786
Diluted weighted average common shares29,568,273
 26,318,638
 28,923,525
 26,221,864
(Denominator for diluted calculation)       
        
Earnings per share:       
        
Basic$0.65
 $1.37
 $2.09
 $2.42
        
Diluted$0.64
 $1.34
 $2.06
 $2.35

Approximately 0.1 million111 thousand and 0.2 million79 thousand shares for the three and ninesix months ended June 30, 2019,March 31, 2020, respectively, and 0.1 million shares216 thousand and 110 thousand for both the three and ninesix months ended June 30, 2018,March 31, 2019, respectively, attributable to outstanding stock options were excluded from the calculation of dilutedDiluted earnings per share.share because the exercise price of the options was greater than the average market price of our common stock and, therefore, their inclusion would have been anti-dilutive.
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17.18. SEGMENT REPORTING
We identify our segments based on our management structure and the financial information used by our chief executive officer, who is our chief operating decision maker, to assess segment performance and allocate resources among our operating units.  We historically had operated predominantly in one1 industry segment – the development, manufacture and sale of Chemical Mechanical Planarization (CMP) consumables products.  In connection with the Acquisition, we reassessed our operating and reportable segments, and determined that we have the following two2 reportable segments:
Electronic Materials
Electronic Materials includes products and solutions for the semiconductor industry.  We manufacture and sell CMP consumables, including CMP slurries and polishing pad products,pads, and high-purity process chemicals used to etch and clean silicon wafers in the production of semiconductors, photovoltaics (solar cells) and flat panel displays.
Performance Materials
Performance Materials includes pipeline performance products and services, for energy industries, wood treatment products, and products and equipment used in the precision optics industry.
Beginning in fiscal 2019 and with the Acquisition, our chief operating decision maker evaluates segment performance based upon revenue and segment adjusted EBITDA.  Segment adjusted EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, adjusted for certain items that affect comparability from period to period.  These adjustments include items related to the Acquisition, such as expenses incurred to complete the acquisition,Acquisition, integration-related expenses and the impact of fair value adjustments to inventory acquired from KMG, and certain costs related to the KMG-Bernuth warehouse fire.fire, asset impairment and restructuring charges related to the wood treatment reporting unit. We exclude these items from earnings when presenting our adjusted EBITDA measure because we believe they will be incurred infrequently and/or are otherwise not indicative of a segment's regular, ongoing operating performance. Adjusted EBITDA is also the basis of a performance metric for our fiscal 20192020 Short-Term Incentive Program (STIP).  In addition, our chief operating decision maker does not use assets by segment to evaluate performance or allocate resources. Therefore, we do not disclose assets by segment.
Revenue from external customers andby segment adjusted EBITDA were (in thousands):are as follows:
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Segment Revenue:
Electronic Materials:
CMP Slurries$119,822  $110,299  $242,148  $236,627  
Electronic Chemicals78,497  78,549  156,079  118,371  
CMP Pads20,590  23,998  41,403  48,464  
Total Electronic Materials218,909  212,846  439,630  403,462  
Performance Materials65,284  52,545  127,706  83,707  
Total$284,193  $265,391  $567,336  $487,169  
 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2019 2018 2019 2018
Segment Revenue       
Electronic Materials$212,123
 $143,810
 $615,586
 $413,227
Performance Materials59,759
 6,627
 143,465
 20,167
Total$271,882
 $150,437
 $759,051
 $433,394

Capital expenditures by segment are as follows:
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Capital Expenditures:
Electronic Materials$5,094  $10,150  $13,579  $16,549  
Performance Materials29,328  1,363  45,697  1,623  
Corporate3,555  1,018  5,067  2,244  
Total$37,977  $12,531  $64,343  $20,416  

 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2019 2018 2019 2018
Segment adjusted EBITDA:       
  Electronic Materials$70,859
 $57,460
 $220,594
 $162,641
  Performance Materials27,425
 1,081
 63,152
 3,600
  Unallocated corporate expenses(12,527) (9,715) (35,621) (30,471)
  Interest expense(12,757) (513) (32,978) (2,803)
  Interest income417
 1,141
 2,004
 3,248
  Depreciation and amortization(26,587) (6,410) (70,476) (19,527)
  Acquisition and integration related expenses(2,910) —
 (33,108) —
  Charge for fair value write-up of acquired inventory sold(42) —
 (14,869) —
  Costs related to KMG-Bernuth warehouse fire (See Note 12)(4,450) —
 (4,450) —
Income before income taxes$39,428
 $43,044
 $94,248
 $116,688
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Adjusted EBITDA by segment are as follows:
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Segment adjusted EBITDA:
Electronic Materials$69,603  $74,910  $150,807  $149,735  
Performance Materials29,932  22,660  57,411  35,727  
Unallocated corporate expenses(13,604) (12,052) (26,453) (23,094) 
Interest expense(10,753) (13,331) (22,673) (20,221) 
Interest income143  568  458  1,587  
Depreciation and amortization(32,550) (27,348) (64,192) (43,889) 
Acquisition and integration-related expenses(2,285) (2,904) (5,050) (30,198) 
Charge for fair value write-up of acquired inventory sold—  (4,566) —  (14,827) 
Costs related to KMG-Bernuth warehouse fire (See Note 13) and restructuring of wood treatment business(206) —  (598) —  
Costs related to the Pandemic(237) —  (237) —  
Income before income taxes$40,043  $37,937  $89,473  $54,820  

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We began to manage and report our results under the new organizational structure in conjunction with the Acquisition in fiscal 2019 and have reflected this change for all historical periods presented. Since the two segments operate independently and serve different markets and customers, there are no sales between segments. Revenue from external customers and segment adjusted EBITDA shown for Performance Materials for the quarter ended June 30, 2018 includes Cabot Microelectronics’ heritage QED business.  The adjustments to segment EBITDA for the three and ninesix months ended June 30,March 31, 2020 represent addbacks of the Acquisition and integration-related expenses, as well as costs related to KMG-Bernuth warehouse fire, restructuring of the wood treatment business, and the Pandemic. The adjustments to segment EBITDA for the three and six months ended March 31, 2019 represent addbacks of KMG acquisitionAcquisition and integration relatedintegration-related expenses, and a charge for the write-up of inventory acquired from KMG to fair value for inventory sold in the period, and costs related to KMG-Bernuth warehouse fire.  There were no adjustments to segment EBITDA for the three and nine months ended June 30, 2018.  Unallocated corporate expenses include expenses associated with executive leadership and public company costs, and theperiod. The unallocated portions of corporate functions, including finance, legal, human resources, information technology, and corporate development, are not directly attributable to a reportable segment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), as well as disclosures included elsewhere in this Report on Form 10-Q, include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.1995 ("the Act").  This Act provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results.  All statements other than statements of historical fact we make in this Report on Form 10-Q are forward-looking whichand address a variety of subjects including, for example, future sales and operating results; growth or contraction, and trends in the industryindustries and markets in which the Company participates; the acquisition of, investment in, or collaboration with other entities, including the Company’s acquisition of KMG Chemicals, Inc. (“KMG”), and the expected benefits and synergies of such acquisition;acquisition, divestment or disposition, or cessation of investment in certain, of the Company’s businesses; new product introductions; development of new products, technologies and markets; product performance; the financial conditions of the Company's customers; the competitive landscape;landscape that relates to the Company's businesses; the Company's supply chain; natural disasters; various economic or political factors and international or national events, including related to global public health crises such as the COVID-19 pandemic ("Pandemic"), and the enactment of trade sanctions, tariffs, or other similar matters; the generation, protection and acquisition of intellectual property, and litigation related to such intellectual property or third party intellectual property; environmental, health and safety laws and regulations, and related compliance; the operation of facilities by Cabot Microelectronics; the Company's management; foreign exchange fluctuation; the Company's current or future tax rate, including the effects of the Tax Cuts and Jobs Act in the United States (“tax act”(the “Tax Act”); cybersecurity threats; financing facilities and related debt, pay off or payment of principal and interest, and compliance with covenants and other terms; and, uses and investment of the Company's cash balance, including dividends and share repurchases, which may be suspended, terminated or modified at any time for any reason by the Company, based on a variety of factors. Statements that are not historical facts, including statements about Cabot Microelectronics’ beliefs, plans and expectations, are forward-looking statements. Such statements are based on current expectations of Cabot Microelectronics’ management and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. For information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to Cabot Microelectronics’ filings with the Securities and Exchange Commission (“SEC”), including the risk factors contained in Cabot Microelectronics’our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and in this Report on Form 10-Q. Except as required by law, Cabot Microelectronics undertakes no obligation to update forward-looking statements made by it to reflect new information, subsequent events or circumstances. The section entitled "Risk Factors" describes some, but not all, of the factors that could cause these differences.
This section, "Management's Discussionfollowing discussion and Analysis of Financial Condition and Results of Operations” (MD&A),analysis, should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2018,2019, including the Consolidated Financial Statements and related notes thereto.

THIRD
SECOND QUARTER OF FISCAL 20192020 OVERVIEW
Cabot Microelectronics Corporation ("(“Cabot Microelectronics''Microelectronics”, "the Company''“the Company”, "us''“us”, "we''“we”, or "our''“our”) is a leading global supplier of consumable materials to semiconductor manufacturers and pipeline companies. The Company's products play a critical role in the production of advanced semiconductor devices, helping to enable the manufacture of smaller, faster and more complex devices by its customers. As previously reported,discussed above, on November 15, 2018 (“Acquisition(the “Acquisition Date”), we completed our acquisition of KMG Chemicals, Inc. (“KMG”), which produces and distributes specialty chemicals and performance materials for the semiconductor industry, pipeline operations and energy,adjacent industries, and industrial wood preservation industries (“Acquisition”industry (the “Acquisition”). The Acquisition has extended and strengthened our position as one of the leading suppliers of consumable materials to the semiconductor industry and has expanded our portfolio with the addition of KMG’s performance materials business,businesses, which we believe enables us to be a leading global provider of performance products and servicesmaterials to the pipeline operations industry.operators. The Consolidated Financial Statements included in this Report on Form 10-Q include the financial results of KMG from the Acquisition Date. Subsequent toSince the Acquisition, we now operate our business within two reportable segments: Electronic Materials and Performance Materials. The Electronic Materials segment consists of our heritage CMP slurries and polishing pads businesses, as well as the recently-acquired KMG electronic chemicals business.  The Performance Materials segment includes KMG’s heritage pipeline performance and wood treatment businesses, and our heritage QED business. For additional information, refer to Part 1, Item 1 “Business”, inof Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.




2019.
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InThe global spread of the Electronic Materials segment,Pandemic has created significant uncertainty and economic disruption worldwide and in the countries and locations in which we recorded lower CMP slurries revenue,and our customers and suppliers operate. Our primary focus has been and continues to be on the health and well-being of our employees and the ongoing operation of our facilities worldwide according to our business continuity plans, which was partially offset by higher revenue in CMP pads and electronic chemicals. Within the backdrop ofwe refine on an ongoing soft semiconductor industry environment,basis. While we believe these results are reflective ofhave continued to operate uninterrupted as an essential business at our manufacturing sites worldwide since the resilience ofPandemic began, and we have not experienced meaningful impact from the Pandemic on our ability to manufacture or deliver products to our customers, the extent to which the Pandemic may impact our business, as well as the breadthoperations, results of our product offerings, as the increased demand from advanced logic customers balanced weakness from memory customers. CMP slurries have a high participation to memory,operations and were adversely impacted by the decrease in DRAMfinancial condition going forward is uncertain and NAND production at our customers this year. In logic applications, the transition to advanced nodes by many of our top customers is driving increased demand for materials, particularly electronic chemicals. Despite continued semiconductor industry uncertainty in the near term, as channel inventories are reduced and demand from multiple end markets improves, we have seen signs of stabilization in demand from memory customers and expect recovery to continue over the next several quarters.
In our Performance Materials segment, we continue to record strong revenue this quarter, primarily driven by higher demand for our drag-reducing agents. These products enable pipeline operators to optimize the efficiency and throughput of oil transport in both U.S. and international oil production.
However, there are many factors that make it difficult for us to predict, future revenue trends for our Company, including those discussed in Part II, Item 1A entitled “Risk Factors” of this Reportand depends on Form 10-Q.numerous evolving and potentially unknown factors.
Revenue for our thirdsecond quarter of fiscal 20192020 was $271.9$284.2 million, which represented an increase of 80.7%7.1% from the same quarter of fiscal 2018,2019, primarily due to the Acquisition.stronger demand for CMP slurries and pipeline performance products, as well as increased revenue in wood treatment, offset by lower sales volume in CMP pads.
Net income was $18.9$32.9 million in the thirdsecond quarter of fiscal 2019,2020, which represented a decreasean increase of 46.3%21.2% from the same quarter of fiscal 2018. Results2019. Net income benefited from higher gross profit, lower Interest expense resulting from the prepayment of our term loan, and lower interest rate achieved from our first quarter fiscal 2020 refinancing of our credit facility, and lower Acquisition but were more thanand integration-related costs, partially offset by acquisition-related expenses, increased amortization and depreciation associated with re-valuing KMG assets to fair value, higher interest expenses resulting from the debt borrowing to finance the Acquisition, costs related to the KMG-Bernuth warehouse fire that occurred in May 2019, and increased tax expense related to newly issued final regulations related to US Tax Reform which impacted our reserves for uncertain tax positions. For the same reasons, diluted earnings per share decrease from $1.34value.
Adjusted EBITDA, a non-GAAP financial measure, was $85.9 million in the thirdsecond quarter of fiscal 2018 to $0.64 in the current quarter.  
Adjusted EBITDA was $85.8 million in the third quarter of fiscal 2019.2020.  This represents an increase of $36.90.5%, or $0.4 million, or a 75.6% increase from the same quarter of fiscal 2018.2019.  Adjusted EBITDA benefited from the addition of the KMG businesses,higher sales in pipeline performance and wood treatment products, as well as CMP slurries, partially offset by the softer industry conditions that resulted in lower demand for Cabot Microelectronics’ heritagesales of CMP products.pads compared to the same period of fiscal 2019. Refer to the “Use of certainCertain GAAP and Non-GAAP Financial Information” section below for the definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to netNet income, the most comparable GAAP financial measure. Adjusted EBITDA margin, which represents adjusted EBITDA as a percentage of revenue, was 31.5%30.2% for the thirdsecond quarter of fiscal 2019,2020, compared to 32.5%32.2% for the same quarter of fiscal 2018.2019.
In our Electronic Materials segment, demand for our products from our semiconductor industry customers remained generally stable this quarter, driven by demand for devices and bandwidth needed by many to transition into work-from-home environments, as well as the continued overall industry recovery coming off of a softer demand environment in calendar 2019. Demand for our solutions was driven by strength in foundry and logic, as well as a modest improvement in demand from memory customers.
In our Performance Materials segment, we are closely monitoring the oil and gas sector, which has seen an unprecedented drop in demand, especially in the United States, as transportation and travel have been heavily affected by the Pandemic, and the sector also has been adversely affected by geopolitical disputes between global players. We expect this drop in global oil demand to also affect our oil and gas materials and services business and are working closely with our customers in this dynamic environment.
In addition to the Pandemic, there are many factors that make it difficult for us to predict the future financial performance of our Company, including with respect to revenue trends, including those discussed in Part II, Item 1A entitled “Risk Factors” of this Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
We discuss our critical accounting estimates and effects of recent accounting pronouncements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.2019.   Except for the discussion on revenue recognition in Note 2 of the Notes"Notes to the Consolidated Financial StatementsStatements" of this Report on Form 10-Q, no material changes have been made to the Company’s significant accounting policies during the first ninesix months of fiscal 2019.2020. See Note 2 of the Notes"Notes to the Consolidated Financial StatementsStatements" of this Report on Form 10-Q for a discussion of new accounting pronouncements.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2019,MARCH 31, 2020, VERSUS THREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
REVENUE
Revenue was $271.9$284.2 million for the three months ended June 30, 2019,March 31, 2020, which represented an 80.7%increase of 7.1%, or $121.4$18.8 million, increase from the three months ended June 30, 2018,March 31, 2019, primarily due to increased sales in the Acquisition. Revenue from Cabot Microelectronics’ heritage businesses decreasedCompany's pipeline performance and wood treatment products, as well as CMP slurries, offset by $10.1 million, or 6.7%, primarily due to lower sales volume, partially offset by a higher value product mix.in CMP pads.
COST OF SALES
Total costCost of sales was $156.5$163.1 million for the three months ended June 30, 2019,March 31, 2020, which represented an increase of 124.4%8.3%, or $86.8$12.5 million, from the three months ended June 30, 2018,March 31, 2019, primarily due to the Acquisition. The cost of sales from Cabot Microelectronics’ heritage businesses decreased by $3.8 million, primarily driven by lowerhigher sales volume.
GROSS MARGIN
Our gross margin was 42.4%42.6% for the three months ended June 30, 2019,March 31, 2020, compared to 53.6%43.3% for the three months ended June 30, 2018.March 31, 2019. The decrease in gross margin was primarily due to the inclusion of the KMG businesses, which reduced gross margin by 10.7%, of which 1.5% was due to theunfavorable fixed manufacturing costs, related to the KMG-Bernuth warehouse fire. Within Cabot Microelectronics’ heritage businesses, gross margin decreased by 0.5%, which was primarily due to lower sales volume, partially offset by aselected price increases and higher value product mix.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $12.2$13.2 million for the three months ended June 30, 2019,March 31, 2020, which represented a decreasean increase of 6.6%3.5%, or $0.9$0.5 million, from the three months ended June 30, 2018.March 31, 2019.  The decreaseincrease was primarily due to lowerhigher staffing-related costs of $1.1$1.0 million, including incentive compensation costs, partially offset by higher supplies used in research and developmenta net gain of $0.4 million.
Our research, development and technical efforts are focusedmillion on the areassale of 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.assets.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $51.0$56.2 million for the three months ended June 30, 2019,March 31, 2020, which represented an increase of 98.2%11.7%, or $25.2$5.9 million, from the three months ended June 30, 2018.March 31, 2019.  The increase was primarily due to $13.0$5.2 million of higher amortization expense relatedassociated with re-valuing KMG assets to the Acquisition, $11.2 million in incremental KMG-related costs, and $2.9fair value, $2.0 million of acquisitionhigher staffing-related costs, including incentive compensation costs, primarily resulting from higher accrual of STIP, and integration related costs.$0.6 million of higher allocated overhead expenses. These itemsincreases were partially offset by $1.6$1.1 million of lower staffing-relatedprofessional fees, $0.7 million of lower travel costs, including incentive compensationand $0.6 million of lower Acquisition and integration-related costs.
INTEREST EXPENSE
Interest expense was $12.8$10.8 million for the three months ended June 30, 2019,March 31, 2020, which represented an increasea decrease of $12.2$2.6 million from the three months ended June 30, 2018.March 31, 2019.  The increase resulteddecrease was primarily due to the lower outstanding Term Loan balance and lower interest rate resulting from the debt borrowing to financerefinancing of our credit facility in the Acquisition.first quarter of fiscal 2020.
INTEREST INCOME
Interest income was $0.4$0.1 million for the three months ended June 30, 2019,March 31, 2020, which represented a decrease of 63.5%74.8%, or $0.7$0.4 million, from the three months ended June 30, 2018March 31, 2019 due to lower average cash balances during the period compared to the same period last year.
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OTHER INCOME (EXPENSE), NET
Other expense was $0.5$1.0 million for three months ended June 30, 2019, compared to other income of $0.5 million from the three months ended June 30, 2018. The change was primarilyMarch 31, 2020, compared to Other expense of $1.0 million for the three months ended March 31, 2019. Other expense remained relatively flat due to higher losslosses on foreign exchange incurrency transactions offset by higher non-operating income compared to the currentsame quarter and the absence of the gain on termination of interest rate swap agreements of $0.5 million that had occurred in the third quarter of fiscal 2018.last year.
PROVISION FOR INCOME TAXES
The Company’s effective income tax rate for the thirdsecond quarter of fiscal 20192020 was 52.1%17.8%, compared to 18.3%28.5% in the same quarter last year.  The increasedecrease is primarily driven by a discrete charge of $9,128favorable tax treatment from the higher benefit related to newly issued final regulations related to U.S. Tax Reform which impactedshare based compensation and favorable impact from the Company’s reserves for uncertain tax positions.absence of non-deductible Acquisition-related costs.
NET INCOME
Net income was $18.9$32.9 million for the three months ended June 30, 2019,March 31, 2020, which represented a decreasean increase of 46.3%21.2%, or $16.3$5.8 million, from the three months ended June 30, 2018.March 31, 2019. Net income benefited from higher gross profit, lower Interest expense resulting from the additionprepayment of our Term Loan and lower interest rate achieved from the KMG businesses,refinancing of our credit facility, and waslower Acquisition and integration-related costs, partially offset by acquisition and integration-related expenses, increased amortization and depreciation associated with re-valuing KMG assets to fair value, higher interest expenses resulting from the debt borrowing to finance the Acquisition, KMG-Bernuth warehouse fire related costs, and discrete charge of $9,128 related to newly issued final regulations related to U.S. Tax Reform which impacted the Company’s reserves for uncertain tax positions.value.
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NINESIX MONTHS ENDED JUNE 30, 2019,MARCH 31, 2020, VERSUS NINESIX MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
REVENUE
Revenue was $759.1$567.3 million for the ninesix months ended June 30, 2019,March 31, 2020, which represented a 75.1%an increase of 16.5%, or $325.7$80.2 million increase from the ninesix months ended June 30, 2018.March 31, 2019.  The increase in revenue was primarily due to the Acquisition. Revenue from Cabot Microelectronics’ heritageaddition of the KMG businesses increased slightly by $9.0 million, or 2.1%. This increase was primarily driven by a higher value product mix,for the full period in fiscal 2020, selected price increases, partiallyand increased sales of CMP slurries, offset by lower sales volume.in CMP pads.
COST OF SALES
Total cost of sales was $429.5$317.6 million for the ninesix months ended June 30, 2019,March 31, 2020, which represented an increase of 110.9%16.3%, or $225.9$44.5 million, from the ninesix months ended June 30, 2018.March 31, 2019.  The increase in costCost of sales was primarily due to the Acquisition. Cost ofhigher sales of Cabot Microelectronics’ heritage businesses was relatively flat compared to the same period last year, as the lower costs associated with lower sales volume was offset by higher per unit costs.volume.
GROSS MARGIN
Our gross margin was 43.4%44.0% for the ninesix months ended June 30, 2019,March 31, 2020, which was flat compared to 53.0%44.0% for the ninesix months ended June 30, 2018.The gross margin was adversely impacted by the inclusion of the KMG businesses, which reduced gross margin by 11.2%, of which 2.0% was due to the impact of the fair value write-up of acquired inventory sold. Excluding the KMG businesses, gross margin increased by 1.6%, which was primarily due to lower production cost and a higher value product mix, partially offset by lower sales volume.March 31, 2019.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $39.0$26.0 million for ninethe six months ended June 30, 2019,March 31, 2020, which represented a decrease of 2.9%, or $0.8 million, from the six months ended March 31, 2019. The decrease was relatively flat comparedprimarily due to a net gain of $0.4 million on the same period last year.sale of assets, $0.3 million of lower allocated overhead expenses, and $0.3 million in lower professional fees, partially offset by higher staffing-related costs of $0.5 million, including incentive compensation costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $162.4$110.6 million for the ninesix months ended June 30, 2019,March 31, 2020, which represented a decrease of 0.7%, or $0.8 million, from the six months ended March 31, 2019.  The decrease was primarily due to $25.1 million of lower Acquisition and integration-related costs and $1.0 million of lower travel expense, partially offset by $16.2 million of higher amortization expense associated with re-valuing KMG assets to fair value, $5.3 million of higher staffing-related costs, including incentive compensation costs, primarily resulting from higher accrual of STIP, $1.3 million of higher IT expenses, and $0.7 million of higher allocated overhead expenses.
INTEREST EXPENSE
Interest expense was $22.7 million for the six months ended March 31, 2020, which represented an increase of 116.4%, or $87.4$2.5 million from the ninesix months ended June 30, 2018.March 31, 2019.  The increase was primarily due to $33.1 millionthe longer period of acquisition and integration related costs, $32.5 million of amortization expense relatedtime covered within the six months ended March 31, 2020 compared to the Acquisition, and $27.1 million in incremental KMG-related costs associated with the post-Acquisition period during the nine months period.  These items were partially offset by the absence of executive officer transition costs of $4.2 million that occurred in the first quarter of fiscal 2018.
INTEREST EXPENSE
Interest expense was $33.0 million for the ninesix months ended June 30,March 31, 2019 which represented an increase of $30.2 million fromunder the nine months ended June 30, 2018.  The increase resulted from thenew debt borrowing to finance the Acquisition.Acquisition in November 2018.
INTEREST INCOME
Interest income was $2.0$0.5 million for the ninesix months ended June 30, 2019,March 31, 2020, which represented a decrease of 38.3%71.1%, or $1.2$1.1 million, forfrom the ninesix months ended June 30, 2018March 31, 2019 due to lower average cash balances.balances during the period compared to the same period last year.
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OTHER INCOME (EXPENSE), NET
Other expense was $2.9$1.4 million for the ninesix months ended June 30, 2019,March 31, 2020, compared to other incomeOther expense of $0.1$2.4 million fromfor the ninesix months ended June 30, 2018.March 31, 2019. The change was primarily due to highera lower loss on foreign exchange, and the absence of the gain on sale of assets of $1.0 million and gain on the termination of interest rate swap agreements that occurredcurrency transactions in the ninesix months ended June 30, 2018.
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March 31, 2020 compared to the same period last year.
PROVISION FOR INCOME TAXES
The Company’s effective income tax rate was 36.9%20.1% for the ninesix months ended June 30, 2019,March 31, 2020, compared to 47.0%26.0% for the ninesix months ended June 30, 2018.March 31, 2019.  The decrease in our effective income tax rate for the ninesix months ended June 30, 2019March 31, 2020 compared to the prior year is primarily attributable to the Tax Act enacted in December 2017 which reduced the corporate incomehigher tax rate to 21.0% effective January 1, 2018, resulting in a change in our blended tax rate of 24.5% in fiscal 2018 to 21.0% beginning with our fiscal 2019. This is partially offset by the increased tax expensebenefit related to newly issued final regulations related to US Tax Reform which impacted our reserves for uncertain tax positions, unfavorable tax treatmentshare-based compensation and the favorable impact from the absence of certain KMG acquisition-related costs, such as compensation deduction limitations, as well as non-deductibility of certain professional fees.  Additionally, we recorded incremental tax expense for the GILTI provision of the Tax Act, which was effective for the first time during our fiscal 2019.non-deductible Acquisition-related costs. See Note 1516 of the Notes"Notes to the Consolidated Financial StatementsStatements" of this Report on Form 10-Q for more information on our income taxes.
NET INCOME
Net income was $59.5$71.4 million for the ninesix months ended June 30, 2019,March 31, 2020, which represented a decreasean increase of 3.8%76.1%, or $2.4$30.9 million, from the ninesix months ended June 30, 2018.March 31, 2019.  Net income benefited from the addition of the KMG businesses and the absence of the adverse impact of the Tax Act in the first quarter of fiscal 2018. Net income waslower Acquisition and integration-related expenses, partially offset by acquisition and integration-related expenses, a charge for fair value write-up of acquired inventory sold, increased amortization and depreciation associated with re-valuing KMG assets to fair value and higher interest expensesInterest expense resulting from the debt borrowing to finance the Acquisition, and the increased tax expense related to newly issued final regulations related to US Tax Reform which impacted our reserves for uncertain tax positions.Acquisition.
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SEGMENT ANALYSIS
Segment data is presented for our two reportable segments for the three and ninesix months ended June 30, 2019March 31, 2020 and 2018.2019. The segment data should be read in conjunction with our consolidated financial statementsConsolidated Financial Statements and related notes included elsewhere in this Report on Form 10-Q.
Revenue adjusted EBITDAfrom external customers and adjusted EBITDA marginEBITDA/Margin by segment were (in thousands except for percentages):are as follows:
Dollars in thousandsThree Months Ended March 31,Six Months Ended March 31,
2020201920202019
Segment Revenue:
Electronic Materials$218,909  $212,846  $439,630  $403,462  
Performance Materials65,284  52,545  127,706  83,707  
Total$284,193  $265,391  $567,336  $487,169  

Dollars in thousandsThree Months Ended March 31,Six Months Ended March 31,
2020201920202019
Segment Adjusted EBITDA:
Electronic Materials $69,603  $74,910  $150,807  $149,735  
Performance Materials29,932  22,660  57,411  35,727  
Unallocated Corporate Expenses(13,604) (12,052) (26,453) (23,094) 
Total$85,931  $85,518  $181,765  $162,368  

Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Adjusted EBITDA margin:
Electronic Materials31.8 %35.2 %34.3 %37.1 %
Performance Materials45.8 %43.1 %45.0 %42.7 %

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 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2019 2018 2019 2018
Segment Revenue       
Electronic Materials$212,123
 $143,810
 $615,585
 $413,227
Performance Materials59,759
 6,627
 143,466
 20,167
Total$271,882
 $150,437
 $759,051
 $433,394
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 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2019 2018 2019 2018
Segment Adjusted EBITDA       
Electronic Materials$70,859
 $57,460
 $220,594
 $162,641
Performance Materials27,425
 1,081
 63,152
 3,600
Unallocated Corporate Expenses(12,527) (9,715) (35,621) (30,471)
Total$85,757
 $48,826
 $248,125
 $135,770
 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2019 2018 2019 2018
        
Adjusted EBITDA margin     
Electronic Materials33.4% 40.0% 35.8% 39.4%
Performance Materials45.9% 16.3% 44.0% 17.8%


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THREE MONTHS ENDED JUNE 30, 2019,MARCH 31, 2020, VERSUS THREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
ELECTRONIC MATERIALS
The $68.3$6.1 million increase in Electronic Materials revenue was driven by increased sales of CMP slurries, offset by lower CMP pads demand. The $5.3 million decrease in Electronic Materials adjusted EBITDA and 3.4% decrease in Electronic Materials adjusted EBITDA margin were primarily driven by unfavorable manufacturing costs and changes in the allocation of corporate expenses.
PERFORMANCE MATERIALS
The $12.7 million increase in Performance Materials revenue and $7.3 million increase in Performance Materials adjusted EBITDA margin were driven by increased sales for DRAs and higher selling prices for wood treatment products for all customers, offset by lower sales in our QED business due to timing of product deliveries. The 2.7% Performance Materials adjusted EBITDA margin increase was primarily driven by higher selling prices for wood treatment products.

SIX MONTHS ENDED MARCH 31, 2020, VERSUS SIX MONTHS ENDED MARCH 31, 2019
ELECTRONIC MATERIALS
The $36.2 million increase in Electronic Materials revenue was driven by the addition of KMG’s electronic chemicals business insince the quarter, partially offset by the decrease in the saleAcquisition and increased sales of Cabot Microelectronics’ heritage CMP slurries products primarily due to softer industry conditions that resulted in lower demand for the Company’s products. The decrease in sales volume was partially offset by higher value product mix and price changes.  The increase inslurries.  Electronic Materials adjusted EBITDA compared to prior year was driven byessentially flat despite the additionrevenue increase as a result of KMG’s electronic chemicals results.product mix.  The lower2.8% Electronic Materials adjusted EBITDA margin decrease was primarily due to change in mix of products as a result of the Acquisition.
PERFORMANCE MATERIALS
The $53.1$44.0 million increase in Performance Materials revenue was primarilyand $21.7 million increase in Performance Materials adjusted EBITDA were driven by the addition of KMG’s performance materials businessbusinesses post-Acquisition, as well as continued sales growth in the quarter.DRAs and higher selling prices for our wood treatment products across all customers.  The 2.3% Performance Materials’ adjusted EBITDA andMaterials adjusted EBITDA margin expanded from the prior year due to the addition of KMG’s heritage performance materials business.
NINE MONTHS ENDED JUNE 30, 2019, VERSUS NINE MONTHS ENDED JUNE 30, 2018
ELECTRONIC MATERIALS
The $202.4 million increase in Electronic Materials revenue was driven by the addition of KMG’s electronic chemicals business since the Acquisition.  The remaining increase was driven by higher value product mix, strong organic demand for the Company’s heritage CMP polishing pads product line, which increased 11.1%, primarily on higher sales volume, partially offset by the decrease in Company's heritage CMP slurries products due to the softer industry conditions. Electronic Materials adjusted EBITDA increased from the prior year driven by the addition of KMG’s electronic chemicals results, as well as stronger profitability, driven by the leverage achieved on higher sales volume of the Company’s heritage CMP polishing pads product line.  The lower adjusted EBITDA margin was primarily due to change in mix of products as a result of the Acquisition.
PERFORMANCE MATERIALS
The $123.3 million increase in Performance Materials revenue was primarily driven by the addition of KMG’s performance materials business post-Acquisition.  Performance Materials’ adjusted EBITDA and adjusted EBITDA margin expanded from the prior year due to the addition of KMG’s heritage performance materials business.higher selling prices for wood treatment products.
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USE OF CERTAIN GAAP AND NON-GAAP FINANCIAL INFORMATION
We provide certain non-GAAP financial information, such as adjusted EBITDA and adjusted EBITDA margin, to complement reported GAAP results because we believe that analysis of our financial performance is enhanced by an understanding of these non-GAAP financial measures.  We exclude certain items from earnings when presenting our adjusted EBITDA measure because we believe they will be incurred infrequently and/or are otherwise not indicative of a segment's regular, ongoing operating performance.  Accordingly, we believe that they aid in evaluating the underlying operational performance of our business, and facilitate comparisons between periods. In addition, adjusted EBITDA is used as a basisone of the performance metric forgoals of our fiscal 20192020 Short-Term Incentive Program (STIP).  A similar adjusted EBITDA calculation is also used by our lenders for a key debt compliance ratio.
Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of revenue. Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, adjusted for certain items that affect comparability from period to period.  These adjustments include items related to our acquisition of KMG,the Acquisition, such as expenses incurred to complete the acquisition, integrationAcquisition and integration-related expenses, costs of restructuring related expenses,to the wood treatment business, costs related to the KMG-Bernuth warehouse fire, costs related to the Pandemic, and impact of fair value adjustments to inventory acquired from KMG.
The non-GAAP financial information provided is a supplement to, and not a substitute for, the Company’s financial results presented in accordance with U.S. GAAP. Management strongly encourages investors to review the Company’s consolidated financial statements in their entirety and to not rely on any single financial measure. These non-GAAP financial measures are provided to enhance the investor's understanding about the Company's ongoing operations. Specifically, the Company believes the impact of KMG acquisition-relatedAcquisition-related expenses and acquisition-relatedAcquisition-related amortization expenses are not indicative of its core operating results, and thus presents these certain metrics excluding these effects. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for results prepared and presented in accordance with U.S. GAAP. A reconciliation table of GAAP to non-GAAP financial measures is contained below.
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Adjusted EBITDA for the Electronic Materials and Performance Materials segments is presented in conformity with Accounting Standards Codification Topic 280, Segment Reporting. This measure is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For these reasons, this measure is excluded from the definition of non-GAAP financial measures under the SEC Regulation G and Item 10(e) of Regulation S-K.

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RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
The table below presents the reconciliation of netNet income to adjusted EBITDA. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to netNet income. Adjusted EBITDA may have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Segment Adjusted EBITDA:
Electronic Materials$69,603  $74,910  $150,807  $149,735  
Performance Materials29,932  22,660  57,411  35,727  
Unallocated Corporate Expenses(13,604) (12,052) (26,453) (23,094) 
Total$85,931  $85,518  $181,765  $162,368  
 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2019 2018 2019 2018
Segment adjusted EBITDA       
Electronic Materials$70,859
 $57,460
 $220,594
 $162,641
Performance Materials27,425
 1,081
 63,152
 3,600
Unallocated Corporate Expenses(12,527) (9,715) (35,621) (30,471)
Total$85,757
 $48,826
 $248,125
 $135,770

Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Net income$32,899  $27,137  $71,448  $40,580  
Interest expense10,753  13,331  22,673  20,221  
Interest income(143) (568) (458) (1,587) 
Income taxes7,144  10,800  18,025  14,240  
Depreciation and amortization32,550  27,348  64,192  43,889  
EBITDA *83,203  78,048  175,880  117,343  
Acquisition and integration-related expenses2,285  2,904  5,050  30,198  
Charge for fair value write-up of acquired inventory sold—  4,566  —  14,827  
Costs related to KMG-Bernuth warehouse fire and restructuring of wood treatment business206  —  598  —  
Costs related to the Pandemic237  —  237  —  
Adjusted EBITDA **$85,931  $85,518  $181,765  $162,368  
 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2019 2018 2019 2018
Net income$18,878
 $35,171
 $59,458
 $61,825
Interest expense12,757
 513
 32,978
 2,803
Interest income(417) (1,141) (2,004) (3,248)
Income taxes20,550
 7,873
 34,790
 54,863
Depreciation and amortization26,587
 6,410
 70,476
 19,548
EBITDA78,355
 48,826
 195,698
 135,791
Acquisition and integration related expenses2,910
 —
 33,108
 —
Charge for fair value write-up of acquired inventory sold42
 —
 14,869
 —
Costs related to KMG-Bernuth warehouse fire4,450
 —
 4,450
 —
Adjusted EBITDA$85,757
 $48,826
 $248,125
 $135,791

* EBITDA represents earnings before interest, taxes, depreciation and amortization.
** Adjusted EBITDA is calculated by excluding items from EBITDA that are believed to be infrequent or not indicative of the company's continuing operating performance.

LIQUIDITY AND CAPITAL RESOURCES
We generated $117.0$112.3 million in cash flows from operating activities in the first ninesix months of fiscal 2019,2020, compared to $104.0$53.5 million in cash from operating activities in the first ninesix months of fiscal 2018.2019.  The increase in operating cash flows of $13.0$58.8 million was due to an increase of netNet income adjusted for non-cash reconciling items.
In the first ninesix months of fiscal 2019,2020, cash flows used in investing activities were $1.2 billion,$57.6 million, compared to $145.3$1,196.5 million in cash used in investing activities in the first ninesix months of fiscal 2018.2019.  The increasedecrease was driven by the use of $1,182$1,182.2 million for the Acquisition.The remainderAcquisition during the first quarter of the purchase price was satisfiedfiscal 2019, with the issuance of common stock.stock satisfying the remainder of the purchase price. Capital expenditures in the first ninesix months of fiscal 2020 were $32.7$59.2 million, compared to $15.2$19.5 million in the prior year.first six months of fiscal 2019. The increase was primarily driven by plant expansion in the United States related to our Performance Materials segment.
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In the first ninesix months of fiscal 2019,2020, cash flows provided by financing activities were $908.7$98.1 million, compared to $177.7$982.3 million used inprovided by financing activities in the first ninesix months of fiscal 2018.2019.  During the first quarter of fiscal 2019, wethe Company received $1,044$1,043.6 million in debt proceeds, net of $21.4$18.7 million in debt issuance costs and original issue discount fees, which was used for the Acquisition. During the first six months of fiscal 2020, the Company drew $150.0 million under its Revolving Credit Facility, which is discussed below. The Company made $18.0 million of repayments under the Term Loan Facility during the first six months of fiscal 2020, compared to $45.0 million of repayments made in the first six months of fiscal 2019. In addition, ourcash paid for repurchases of common stock increased from $4.7 million in the first six months of fiscal 2019 to $19.5 million in the first six months of fiscal 2020. Our dividend payments also increased by $13.6from $21.9 million versusin the prior year, driven byfirst six months of fiscal 2019 to $24.8 million in the doublingfirst six months of fiscal 2020.
In March 2020, the Company drew $150.0 million under the Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertain global economic conditions resulting from the Pandemic. Prior to this, the Company had not drawn any amounts under the Revolving Credit Facility. As of March 31, 2020, $150.0 million was outstanding under the Revolving Credit Facility, and our quarterly dividend,available credit under the Revolving Credit Facility was $50.0 million, including our letter of credit sub-facility. Borrowings under the Revolving Credit Facility are classified as announcedshort-term debt. Proceeds from the Revolving Credit Facility are included in Cash and cash equivalents in the Company's Consolidated Balance Sheet as of March 2018, and the new shares issued in connection with the Acquisition.
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31, 2020.
On the Acquisition Date, we entered into a credit agreement by and among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”), which provides for senior secured financing of up to $1,265.0 million, consisting of a term loan facility in an aggregate principal amount of $1,065.0 million (the “Term Loan Facility”) and a revolving credit facility in an aggregate principal amount of up to $200.0 million, including a letter of credit sub-facility of up to $50.0 million (the “Revolving Credit Facility”).  The Term Loan Facility and the Revolving Credit Facility are referred to as the “Credit Facilities.” The Company may generally prepay outstanding loans under the Credit Facilities at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans. We made a prepayment of $55 million and a total prepayment of $100.0 million during the three and nine months ended June 30, 2019, respectively. The Revolving Credit Facility requires that the Company maintain a maximum first lien secured net leverage ratio, as defined in the Credit Agreement, of 4.00 to 1.00 as of the last day of each fiscal quarter if any revolving loans areborrowing under the Revolving Credit Facility is outstanding, commencing with the first full fiscal quarter after the Acquisition Date. As of March 31, 2020, our maximum first lien secured net leverage ratio was 2.02 to 1.00. Additionally, the Credit Agreement contains certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, asset sales and acquisitions, pay dividends and make other restricted payments and enter into transactions with affiliates. The Credit Agreement also contains customary affirmative covenants and events of default. We believe we are in compliance with these covenants. In the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap agreementcontract to hedge the variability in our LIBOR-based interest payments on approximately 70% of our Team Loan balance. During the first quarter of fiscal 2020, the Company amended the Credit Agreement to reduce the interest rate on term loan borrowings. See Note 10 of the Notes"Notes to the Consolidated Financial StatementsStatements" of this Report on Form 10-Q for additional information regarding the Amended Credit Agreement.
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. During the second quarter of fiscal 2020, we repurchased 157,368 shares for $16.4 million under this program. We did not purchase any shares under this program during the first quarter of fiscal 2020. As of June 30, 2019, $76.3March 31, 2020, $54.9 million remained 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. 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.
Our Board of Directors authorized the initiation of our regular quarterly cash dividend program in January 2016, and since that time has increased the dividend, to its current quarterly level of $0.42$0.44 per share. The declaration and payment of future dividends is subject to the discretion and determination of the 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.
As of June 30, 2019,On March 31, 2020, we had $168.7$340.7 million of cash and cash equivalents, $118.4$114.9 million of which was held in foreign subsidiaries.  See Part II, Item 1A entitled “Risk Factors”of Part II of this Report on Form 10-Q for additional discussion of our foreign operations.
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We believe that our current balance of cash, cash generated by our operations, cash repatriation to the United States, and available borrowing capacity under our Credit Facilities will be sufficient to fund our operations, expected capital expenditures, dividend payments, and share repurchases for at least the next twelve months. However, the current macroeconomic dislocation caused by the Pandemic has created uncertainty in worldwide economic conditions and in those of the industries in which we participate, and whether with respect to the impact of the Pandemic or in pursuit of corporate development or other initiatives, we may need to raise additional funds in the future through equity or debt financing, 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 June 30, 2019March 31, 2020 and September 30, 2018,2019, 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.
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TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes ourThere have been no material changes to the Company's contractual obligations at June 30, 2019, andduring the effect such obligations are expected to have on our liquidity and cash flows in future periods.second quarter of fiscal 2020, except as discussed below.
CONTRACTUAL OBLIGATIONS  Less Than 1-3 3-5 After 5
(In millions)Total 1 Year Years Years Years
Purchase obligations$63.3
 $60.2
 $3.1
 $—
 $—
Operating leases33.9
 7.1
 8.2
 6.8
 11.8
Severance agreements3.1
 3.1
 —
 —
 —
Debt962.3
 13.3
 21.3
 21.3
 906.4
Interest expense and fees235.3
 49.0
 71.8
 66.7
 47.8
Other long-term liabilities *
26.8
 0.5
 0.8
 0.7
 24.8
Total contractual obligations$1,324.7
 $133.2
 $105.2
 $95.5
 $990.8
* We have excluded $145 million in deferred tax liabilities from the other long-term liability amounts presented, as the amount and timing of payments to be settled in cash are not known.   We have also excluded $15.8 million related to the fair value of our interest rate swap, and $1.0 million in deferred rent as the rent payments are included in the table above under the caption “Operating leases.”
We have been operating under a multi-year supply agreement with Cabot Corporation, which has not been a related party since 2002, for the purchase of fumed silica, the current term of which runs through December 2022. As of March 31, 2019.  Purchase2020, purchase obligations include an aggregate amount of $8.9$27.5 million of contractual commitments related to this agreement.
Interest payments on long-term debt reflect interest rates in effect at December 31, 2018. The interest payments reflect variable LIBOR-based rates currently in effect on $216.3 million of our outstanding debt, and fixed rates on $746 million of outstanding debt for which we have implemented an interest rate swap. 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 Report on Form 10-Q for additional information regarding our long-term debt.
Refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018,2019, for additional information regarding our contractual obligations.
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SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Financial Information is presented to illustrate the estimated effects of the company’s acquisition of KMG (the “Acquisition”), which was consummated on November 15, 2018 (the “Acquisition Date”), based on the historical results of operations of Cabot Microelectronics and KMG. See Note 1, Background and Basis of Presentation, and Note 4, Business Combination, to the consolidated financial statements for additional information on the Acquisition. The following Unaudited Pro Forma Condensed Combined Statements of Income for the three and nine months ended June 30, 2019 and 2018 are based on the historical financial statements of Cabot Microelectronics and KMG after giving effect to the Acquisition, and the assumptions and adjustments described in the accompanying notes to these Unaudited Pro Forma Condensed Combined Statements of Income.
The historical Cabot Microelectronics Consolidated Statements of Income for the three and nine months ended June 30, 2019 and 2018 were derived from the consolidated financial statements included elsewhere in this Form 10-Q. The historical KMG Consolidated Statements of Income for the nine months ended June 30, 2019, as well as the historical KMG Consolidated Statements of Income for the three and nine months ended June 30, 2018 includes information derived from KMG’s books and records. Prior to the Acquisition, KMG was on a July 31st fiscal year end reporting cycle. These pro forma financials include actual KMG’s pre-Acquisition results with the months aligned to Cabot Microelectronics’ fiscal periods, and therefore, they do not align with consolidated financial statements included in KMG’s Quarterly Reports on Form 10-Q.
The Unaudited Pro Forma Condensed Combined Statements of Income are presented as if the Acquisition had been consummated on October 1, 2017, the first business day of our 2018 fiscal year, and combine the historical results of Cabot Microelectronics and KMG, which is consistent with internal management reporting, after primarily giving effect to the following assumptions and adjustments:
• Application of the acquisition method of accounting;
• Elimination of transaction costs incurred in connection with the Acquisition;
• Adjustments to reflect the new financing arrangements entered into and legacy financing arrangements retired in connection with the Acquisition;
• The exchange of 0.2000 share(s) of Cabot Microelectronics common stock for each share of KMG common stock; and
• Conformance of accounting policies.
The Unaudited Pro Forma Condensed Combined Financial Information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized estimated fair values at the Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. This allocation was initially completed as of November 15, 2018.  The allocation may be adjusted for up to one-year post closing.
The Unaudited Pro Forma Condensed Combined financial information has been prepared on the basis of SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying Unaudited Pro Forma Condensed Combined Statements of Income do not reflect any additional anticipated synergies, operating efficiencies, cost savings, or any integration costs that may result from the Acquisition.
The historical consolidated financial information has been adjusted in the accompanying Unaudited Pro Forma Condensed Combined Statements of Income to give effect to unaudited pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of the combined company. As a result, under SEC Regulation S-X Article 11, certain non-recurring expenses such as deal costs and compensation expenses related to severance or accelerated stock compensation and certain non-cash costs related to the fair value step-up of inventory are eliminated from pro forma results in the periods presented. Certain recurring historical KMG expenses related to depreciation, amortization, financing costs and costs of sales have been adjusted as if the Acquisition had occurred on October 1, 2017.
In contrast, under the ASC 805 presentation in Note 4, Business Combination, to the consolidated financial statements, these expenses are required to be included in prior year pro forma results.
The Unaudited Pro Forma Condensed Combined Financial Information, including the related notes included herein, should be read in conjunction with Cabot Microelectronics’ Current Report on Form 8-K/A filed on January 30, 2019, as well as our consolidated financial statements included in this Form 10-Q and the historical consolidated financial statements and related notes of Cabot Microelectronics and KMG, which are available to the public at the SEC’s website at www.sec.gov.
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CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Three and Nine Months Ended June 30, 2019 and June 30, 2018
(in thousands, except per share data)
 Three Months Ended
June 30,		 Nine Months Ended
June 30,
 2019 2018 2019 2018
        
Revenue$271,882
 $272,589
 $821,029
 $784,694
Cost of sales156,450
 152,414
 457,372
 443,059
Gross profit115,432
 120,175
 363,657
 341,635
Operating expenses:       
Research, development and technical 12,191
 13,059
 39,009
 38,578
Selling, general and administrative expenses54,655
 53,024
 166,189
 155,695
Total operating expenses66,846
 66,083
 205,198
 194,273
Operating income48,586
 54,092
 158,459
 147,362
Interest expense12,759
 13,350
 38,372
 41,391
Interest income417
 1,150
 2,055
 3,260
Other income (expense), net(472) 396
 (3,155) (890)
Income before income taxes35,772
 42,288
 118,987
 108,341
Provision for income taxes19,695
 7,585
 30,049
 37,462
Net income$16,077
 $34,703
 $88,938
 $70,879
        
Basic earnings per share $0.55
 $1.20
 $3.07
 $2.47
        
Weighted average basic shares outstanding 29,064
 28,849
 28,944
 28,716
        
Diluted earnings per share $0.54
 $1.17
 $3.02
 $2.41
        
Weighted average diluted shares outstanding29,568
 29,556
 29,469
 29,459
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CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Three Months Ended June 30, 2019
(in thousands, except per share data)
 Cabot Microelectronics    
 Three Months Ended June 30, 2019 
Pro Forma
Adjustments (1)
 
Pro Forma
Combined
      
Revenue$271,882
 $—
 $271,882
Cost of sales156,492
 (42) 156,450
Gross profit115,390
 42
 115,432
Operating expenses:     
Research, development and technical 12,191
 —
 12,191
Selling, general and administrative expenses50,959
 3,696
 54,655
Total operating expenses63,150
 3,696
 66,846
Operating income52,240
 (3,654) 48,586
Interest expense12,757
 2
 12,759
Interest income417
 —
 417
Other income (expense), net(472) —
 (472)
Income before income taxes39,428
 (3,656) 35,772
Provision for income taxes20,550
 (855) 19,695
Net income$18,878
 $(2,801) $16,077
      
Basic earnings per share $0.65
   $0.55
      
Weighted average basic shares outstanding 29,064
   29,064
      
Diluted earnings per share $0.64
   $0.54
      
Weighted average diluted shares outstanding29,568
   29,568
1 Pro forma adjustments are related to non-recurring items directly attributable to the transaction as well as recurring differences related to amortization or financing costs that were included as if the companies were combined as of October 1, 2017.
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CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Nine Months Ended June 30, 2019
(in thousands, except per share data)
 Cabot Microelectronics (1) KMG Chemicals (2)  
 Nine Months Ended June 30, 2019 
October 1, 2018 to
November 14, 2018
 
Presentation Reclassification
(3)
 
Pro Forma
Adjustments (4)
 
Pro Forma
Combined
          
Revenue$759,051
 $61,978
 $—
 $—
 $821,029
Cost of sales429,508
 36,534
 4,741
 (13,411) 457,372
Gross profit329,543
 25,444
 (4,741) 13,411
 363,657
Operating expenses:         
Distribution expenses—
 4,741
 (4,741) —
 —
Research, development and technical 39,009
 —
 —
 —
 39,009
Selling, general and administrative expenses162,415
 40,504
 —
 (36,730) 166,189
Amortization of intangibles—
 1,943
 —
 (1,943) —
Total operating expenses201,424
 47,188
 (4,741) (38,673) 205,198
Operating income128,119
 (21,744) —
 52,084
 158,459
Interest expense32,978
 8,537
 —
 (3,143) 38,372
Interest income2,004
 51
 —
 —
 2,055
Derivative fair value gain—
 567
 —
 (567) —
Other income (expense), net(2,897) (258) —
 —
 (3,155)
Income before income taxes94,248
 (29,921) —
 54,660
 118,987
Provision for income taxes (benefit)34,790
 (6,847) —
 2,106
 30,049
Net income$59,458
 $(23,074) $—
 $52,554
 $88,938
          
Basic earnings per share $2.09
       $3.07
          
Weighted average basic shares outstanding 28,399
       28,944
          
Diluted earnings per share $2.06
       $3.02
          
Weighted average diluted shares outstanding28,924
       29,469
1 Includes heritage Cabot Microelectronics from October 1, 2018 to June 30, 2019 and heritage KMG from November 15, 2018 to June 30, 2019. On November 15, 2018, the Acquisition was completed and actual combined company results are included.
2 Heritage KMG results that occurred prior to the Acquisition on November 15, 2018.
3 Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot Microelectronics’ accounting policies.
4 Certain pro forma adjustments related to depreciation, amortization, financing costs and costs of sales have been made for the October 1, 2018 to June 30, 2019 period assuming that the Acquisition occurred on October 1, 2017. Additionally, nonrecurring pro forma adjustments have been made for deal costs, compensation expenses related to severance or accelerated stock compensation, and the fair value step-up of inventory directly attributable throughout the nine-month period.
INDEX

CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Three Months Ended June 30, 2018
(in thousands, except per share data)
 Cabot Microelectronics KMG Chemicals (1)  
 Three Months Ended June 30, 2018 Three Months Ended June 30, 2018 
Presentation Reclassification
(2)
 
Pro Forma
Adjustments (3)
 
Pro Forma
Combined
          
Revenue$150,437
 $122,152
 $—
 $—
 $272,589
Cost of sales69,737
 69,964
 9,308
 3,405
 152,414
Gross profit80,700
 52,188
 (9,308) (3,405) 120,175
Operating expenses:         
Distribution expenses—
 9,308
 (9,308) —
 —
Research, development and technical 13,059
 —
 —
 —
 13,059
Selling, general and administrative expenses25,711
 15,043
 —
 12,270
 53,024
Amortization of intangibles—
 3,863
 —
 (3,863) —
Total operating expenses38,770
 28,214
 (9,308) 8,407
 66,083
Operating income41,930
 23,974
 —
 (11,812) 54,092
Interest expense513
 4,196
 —
 8,641
 13,350
Interest income1,141
 9
 —
 —
 1,150
Loss on the extinguishment of debt—
 194
 —
 (194) —
Derivative fair value gain—
 1,450
 —
 (1,450) —
Other income (expense), net486
 (90) —
 —
 396
Income before income taxes43,044
 20,953
 —
 (21,709) 42,288
Provision for income taxes (benefit)7,873
 4,795
 —
 (5,083) 7,585
Net income$35,171
 $16,158
 $—
 $(16,626) $34,703
          
Basic earnings per share $1.37
 $1.04
     $1.20
          
Weighted average basic shares outstanding 25,612
 15,505
     28,849
          
Diluted earnings per share $1.34
 $1.02
     $1.17
          
Weighted average diluted shares outstanding26,319
 15,905
     29,556
1 Shares outstanding for KMG are from KMG's filed 10-Q for the three months ended April 30, 2018. They are intended for illustrative purposes only and do not impact pro forma EPS calculations at right. Three months ended June 30, 2018 KMG share calculations were not available.
2 Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot Microelectronics’ accounting policies.
3 Pro forma adjustments are related to items directly attributable to the transaction, such as recurring differences related to depreciation, amortization or financing costs that were included as if the companies were combined as of October 1, 2017.
INDEX

CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statements of Income
For the Nine Months Ended June 30, 2018
(in thousands, except per share data)
 Cabot Microelectronics KMG Chemicals (1)      
 Nine Months Ended June 30, 2018 Nine Months Ended June 30, 2018 
Presentation
Reclassification (2)
 
Pro Forma Adjustments
(3)
 
Pro Forma
 Combined
          
Revenue$433,394
 $351,300
 $—
 $—
 $784,694
Cost of sales203,635
 202,182
 26,983
 10,259
 443,059
Gross profit229,759
 149,118
 (26,983) (10,259) 341,635
Operating expenses:        

Distribution expenses—
 26,983
 (26,983) —
 —
Research, development and technical 38,578
 —
 —
 —
 38,578
Selling, general and administrative expenses75,051
 43,823
 —
 36,821
 155,695
Amortization of intangibles—
 10,835
 —
 (10,835) —
Total operating expenses113,629
 81,641
 (26,983) 25,986
 194,273
Operating income116,130
 67,477
 —
 (36,245) 147,362
Interest expense2,803
 14,733
 —
 23,855
 41,391
Interest income3,248
 12
 —
 —
 3,260
Loss on the extinguishment of debt—
 6,503
 —
 (6,503) —
Derivative fair value gain—
 5,332
 —
 (5,332) —
Other income (expense), net113
 (1,003) —
 —
 (890)
Income before income taxes116,688
 50,582
 —
 (58,929) 108,341
Provision for income taxes (benefit)54,863
 (3,604) —
 (13,797) 37,462
Net income$61,825
 $54,186
 $—
 $(45,132) $70,879
          
Basic earnings per share $2.42
 $3.75
     $2.47
          
Weighted average basic shares outstanding 25,479
 14,439
     28,716
          
Diluted earnings per share $2.35
 $3.66
     $2.41
          
Weighted average diluted shares outstanding26,222
 14,814
     29,459
1 Shares outstanding for KMG are from KMG's filed 10-Q for the nine months ended April 30, 2018. They are intended for illustrative purposes only and do not impact pro forma EPS calculations at right. Nine months ended June 30, 2018 KMG share calculations were not available.
2 Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot Microelectronics’ accounting policies.

3 Pro forma adjustments are related to items directly attributable to the transaction, such as recurring differences related to depreciation, amortization, compensation or financing costs that were included as if the companies were combined as of October 1, 2017.
INDEX

CABOT MICROELECTRONICS CORPORATION
Summary of Pro Forma Adjustments
(in thousands, except per share data)
 Three Months Ended June 30, 2019 Three Months Ended June 30, 2018 Nine Months Ended June 30, 2019 Nine Months Ended June 30, 2018
Impact to cost of sales:       
Depreciation and amortization, net(a) $—
 $3,405
 $1,459
 $10,259
Inventory step-up(b) (42) —
 (14,870) —
Impact to cost of sales$(42) $3,405
 $(13,411) $10,259
        
Impact to operating expense:       
Depreciation and amortization step up(a) 6,488
 12,204
 24,416
 36,624
Compensation expense(c) —
 66
 33
 197
Deal costs(d) (2,792) —
 (61,179) —
Historical KMG amortization in other operating expenses removal(a) —
 (3,863) (1,943) (10,835)
Impact to operating expense$3,696
 $8,407
 $(38,673) $25,986
        
Impact to other expense:       
Loss on the extinguishment of debt(e)—
 (194) —
 (6,503)
Derivative fair value gain(e)—
 1,450
 567
 5,332
Impact to other expense$—
 $1,256
 $567
 $(1,171)
        
Impact to interest, net:       
Interest expense(f)2
 8,641
 (3,143) 23,855
Impact to interest$2
 $8,641
 $(3,143) $23,855
Adjustments included in the accompanying Unaudited Pro Forma Condensed Combined Statements of Income are as follows:
(a)Depreciation and amortization expense are adjusted by removing depreciation and amortization associated with legacy KMG assets and assigning a pro forma expense based on the fair value of the assets on the date of the Acquisition. For periods after the date of the Acquisition, there is no pro forma adjustment for Depreciation and actual booked depreciation is reflected on a straight line basis. Depreciation costs are allocated to costs of sales and selling, general and administrative expenses based on historical KMG allocations. Amortization costs are allocated to costs of sales or selling, general and administrative expense based on the use of the asset, where applicable.
(b)Cost of sales is impacted by increased inventory balance caused by the non-cash impact of the step up to fair value of the inventory. The incremental costs of sales driven by the inventory step-up during the period have been removed.
(c)
Directly attributable and non-recurring compensation expense related to non-recurring retention expenses and stock award vesting directly attributable to the Acquisition are removed for pro forma purposes. For KMG stock awards that were replaced by Cabot stock awards in connection with the Acquisition, the vesting for on-going service expenses are added as a pro forma adjustment.
(d)The elimination of non-recurring deal costs incurred in connection with the Acquisition.
(e)As a result of the Acquisition, there were non-recurring costs incurred by KMG as a result of retiring old debt. The costs associated with retiring the old debt facility and other financial instruments are removed for pro forma purposes. These instruments were retired as a result of the Acquisition and are not included in the pro forma results, which are presented as if the Acquisition had occurred on October 1, 2017.
(f)Changes in interest expense as a result of financing associated with the Acquisition. The adjustments remove legacy KMG interest costs, including unused revolver fees and adds the costs associated with the new financing facilities as if the Acquisition occurred on October 1, 2017.
INDEX

We calculated the income tax effect of the pro forma adjustments using a 22.1% and 23.4% tax rate, which represent the weighted average statutory tax rate for nine-month period ended June 30, 2019 and year-ended September 30, 2018, respectively.

Additionally, for the 2018 periods presented, we calculated the unaudited pro forma weighted average number of basic shares outstanding by adding the Cabot Microelectronics weighted average number of basic shares outstanding from the share amounts disclosed in the historical Quarterly Report on Form 10-Q to the amount of shares issued in connection with the Acquisition, as if the shares were held for the entire period.

We calculated the unaudited pro forma weighted average number of diluted shares outstanding by adding the number of shares issued in the Acquisition to the amount disclosed in the historical Cabot Microelectronics Quarterly Report on Form 10-Q.

The basic and diluted EPS calculation takes pro forma net income divided by the applicable number of shares outstanding.
INDEX


Cabot Microelectronics Corporation
Reconciliation of Pro Forma and Non-GAAP Adjusted Pro Forma Information
The company reports its financial results in accordance with U.S. GAAP.  However, management believes that certain non-GAAP financial measures that reflect the way that management evaluates the business may provide investors with additional information regarding the company’s results, trends and ongoing performance on a comparable basis.  We refer to these measures “Adjusted Pro Forma”, which begin with Pro Forma results that are prepared in accordance with SEC Regulation S-X Article 11 and are included above.  These results are then adjusted for the following additional items:
Removal of amortization of acquisition related intangibles, since management believes that these costs are not indicative of the company’s core operating performance.
Removal of integration expenses, as they are non-recurring in nature.
Adjustment for U.S. Tax Reform, which represents a significant non-recurring item affecting comparability among periods.
Removal of certain costs related to a warehouse fire at KMG-Bernuth.
Reconciliations for these items are provided in the tables below.
INDEX

CABOT MICROELECTRONICS CORPORATION
Unaudited Reconciliation of Pro Forma Condensed Combined
Statement of Income to Non-GAAP Adjusted Pro Forma Condensed
Combined Statement of Income
For the Three Months Ended June 30, 2019
(in thousands, except per share data)
   Non-GAAP Adjustments  
 Pro Forma Amortization of Acquisition Related Intangibles Integration Expenses U.S Tax Reform Costs Related to KMG-Bernuth Warehouse Fire Adjusted Pro forma
            
Revenue$271,882
 $—
 $—
 $—
 $—
 $271,882
Cost of Sales156,450
 (3,470) —
 —
 (4,200) 148,780
Gross Profit115,432
 3,470
 —
   4,200
 123,102
Gross Profit, % of Revenue42.5% 1.3% —% —% 1.5%
45.3%
            
Operating Expenses           
Research, development and technical12,191
 —
 —
   —
 12,191
Selling, general and administrative54,655
 (19,942) (117)   (250) 34,346
Total Operating Expenses66,846
 (19,942) (117)   (250) 46,537
            
Operating Income48,586
 23,412
 117
   4,450
 76,565
            
Interest Expense12,759
 —
 —
   —
 12,759
Interest Income 417
 —
 —
   —
 417
Other Income (Expense), net(472) —
 —
   —
 (472)
Income before income taxes35,772
 23,412
 117
   4,450
 63,751
            
Provision for income taxes19,695
 5,273
 26
 (9,128) 1,002
 16,868
Net Income$16,077
 $18,139
 $91
 $9,128
 $3,448
 $46,883
            
Diluted Earnings per share $0.54
 $0.62
 $—
 $0.31
 $0.12
 $1.59
Weighted Average Diluted Shares Outstanding29,568
 29,568
 29,568
 29,568
 29,568
 29,568
            
Depreciation & amortization$33,076
 $(23,412) $—
 $—
 $—
 $9,664
EBITDA$81,190
 $—
 $117
   $4,450
 $85,757
EBITDA Margin29.9%   —%   1.6% 31.5%
INDEX

CABOT MICROELECTRONICS CORPORATION
Unaudited Reconciliation of Pro Forma Condensed Combined
Statement of Income to Non-GAAP Adjusted Pro Forma Condensed
Combined Statement of Income
For the Nine Months Ended June 30, 2019
(in thousands, except per share data)
  Non-GAAP Adjustments  
 Pro Forma Amortization of Acquisition Related Intangibles Integration Expenses U.S. Tax Reform Costs Related to KMG-Bernuth Warehouse Fire Adjusted Pro forma
            
Revenue$821,029
 $—
 $—
   $—
 $821,029
Cost of Sales457,372
 (10,410) —
   (4,200) 442,762
Gross Profit363,657
 10,410
 —
 —
 4,200
 378,267
Gross Profit, % of Revenue44.3% 1.3% —% —% 0.5% 46.1%
            
Operating Expenses           
Research, development and technical39,009
 —
 —
   —
 39,009
Selling, general and administrative166,189
 (59,826) (2,208)   (250) 103,905
Total Operating Expenses205,198
 (59,826) (2,208) —
 (250) 142,914
            
Operating Income158,459
 70,236
 2,208
 —
 4,450
 235,353
            
Interest Expense38,372
 —
 —
   —
 38,372
Interest Income 2,055
 —
 —
   —
 2,055
Other Income (Expense), net(3,155) —
 —
   —
 (3,155)
Income before income taxes118,987
 70,236
 2,208
 —
 4,450
 195,881
            
Provision for income taxes30,049
 15,818
 497
 (8,869) 1,002
 38,497
Net Income$88,938
 $54,418
 $1,711
 $8,869
 $3,448
 $157,384
            
Diluted Earnings per share $3.02
 $1.84
 $0.06
 $0.30
 $0.12
 $5.34
Weighted Average Diluted Shares Outstanding29,469
 29,469
 29,469
 29,469
 29,469
 29,469
            
Depreciation & amortization$100,100
 $(70,236) $—
   $—
 $29,864
EBITDA$255,404
 $—
 $2,208
 $—
 $4,450
 $262,062
EBITDA Margin31.1% —
 0.3%   0.5% 31.9%
INDEX

CABOT MICROELECTRONICS CORPORATION
Unaudited Reconciliation of Pro Forma Condensed Combined
Statement of Income to Non-GAAP Adjusted Pro Forma Condensed
Combined Statement of Income
For the Three Months Ended June 30, 2018
(in thousands, except per share data)
  Non-GAAP Adjustments  
 Pro Forma 
Amortization of Acquisition
Related Intangibles
 U.S. Tax Reform Adjusted Pro forma
        
Revenue$272,589
 $—
 $—
 $272,589
Cost of Sales152,414
 (3,470) —
 148,944
Gross Profit120,175
 3,470

—
 123,645
Gross Profit, % of Revenue44.1% 1.3% —% 45.4%
        
Operating Expenses       
Research, development and technical13,059
 —
 —
 13,059
Selling, general and administrative53,024
 (12,380) —
 40,644
Total Operating Expenses66,083
 (12,380) —
 53,703
        
Operating Income54,092
 15,850
 —
 69,942
        
Interest Expense13,350
 —
 —
 13,350
Interest Income 1,150
 —
 —
 1,150
Other Income (Expense), net396
 —
 —
 396
Income before income taxes42,288
 15,850
 —
 58,138
        
Provision for income taxes7,585
 3,569
 511
 11,665
Net Income$34,703
 $12,281
 $(511) $46,473
        
Diluted Earnings per share $1.17
 $0.42
 $(0.02) $1.57
Weighted Average Diluted Shares Outstanding29,556
 29,556
 29,556
 29,556
        
Depreciation & amortization$25,732
 $(15,850) $—
 $9,882
EBITDA$80,220
 $—
 $—
 $80,220
EBITDA Margin29.4% —% —% 29.4%
INDEX

CABOT MICROELECTRONICS CORPORATION
Unaudited Reconciliation of Pro Forma Condensed Combined
Statement of Income to Non-GAAP Adjusted Pro Forma Condensed
Combined Statement of Income
For the Nine Months Ended June 30, 2018
(in thousands, except per share data)
  Non-GAAP Adjustments  
 Pro Forma Amortization of Acquisition Related Intangibles U.S. Tax Reform Adjusted Pro forma
        
Revenue$784,694
 $—
 $—
 $784,694
Cost of Sales443,059
 (10,335) —
 432,724
Gross Profit341,635
 10,335
 —
 351,970
Gross Profit, % of Revenue43.5% 1.3% —% 44.9%
        
Operating Expenses       
Research, development and technical38,578
 —
 —
 38,578
Selling, general and administrative155,695
 (37,140) —
 118,555
Total Operating Expenses194,273
 (37,140) —
 157,133
        
Operating Income147,362
 47,475
 —
 194,837
        
Interest Expense41,391
 —
 —
 41,391
Interest Income 3,260
 —
 —
 3,260
Other Income (Expense), net(890) —
 —
 (890)
Income before income taxes108,341
 47,475
 —
 155,816
        
Provision for income taxes37,462
 10,692
 (20,255) 27,899
Net Income$70,879
 $36,783
 $20,255
 $127,917
        
Diluted Earnings per share $2.41
 $1.24
 $0.69
 $4.34
Weighted Average Diluted Shares Outstanding29,459
 29,459
 29,459
 29,459
        
Depreciation & amortization$77,511
 $(47,475) $—
 $30,036
EBITDA$223,983
 $—
 $—
 $223,983
EBITDA Margin28.5% —
 —
 28.5%
INDEX


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF FOREIGN 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, Euro, Singapore dollar and the New Taiwan dollar, Euro, British pound, and Singapore dollar.  Approximately 33%22% of our revenue for the quarter ended March 31, 2020 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 provides a natural hedge and mitigates the exposure on ourthe Consolidated Statements of Income.  We periodically enter into forward contracts in an effort to manage foreign currency exchange exposure on our Consolidated Balance Sheets.  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 in foreign currencies have not had a material impact on our Consolidated Statements of Income forDuring the ninethree and six months ended June 30, 2019 and 2018. During the nine months ended June 30, 2019,March 31, 2020, we recorded $4.1$19.7 million and $3.9 million, respectively, in foreign currency translation gains,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.
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 June 30, 2019,March 31, 2020, 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.
INDEX
40


INDEX
ITEM 4. 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 conducted an evaluation of 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)amended ("the Exchange Act")), as of June 30, 2019.March 31, 2020.  Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective suchto 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company is in the process of integrating KMG into the Company’sCompany's internal control over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. Excluding the Acquisition, there were no changes in the Company’sCompany's internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’sCompany's 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 take into accountreflect 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 possible faulty judgmentthe realities that judgments in decision-making can be faulty, and that breakdowns due tocan 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.  Overconditions; 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.
INDEX41

INDEX
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 12 “Commitments and Contingencies,”13 of "Notes to the consolidated financial statementsConsolidated Financial Statements" included in Item 1 of Part I of this Report on Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY THE CORONAVIRUS (COVID-19) PANDEMIC (“PANDEMIC”) AND RELATED ADVERSE IMPACT TO WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS
The global spread of the Pandemic has created significant volatility, uncertainty and economic disruption across the world and in the countries and locations in which we and our customers and suppliers operate. The extent to which the Pandemic impacts our business, operations, results of operations and financial condition are uncertain and difficult to predict, and depend on numerous evolving factors that we may not be able to accurately predict, and may include: A decrease in short-term and long-term demand and pricing for our products and services, and a global economic recession that could further reduce demand and/or pricing for our products and services resulting from actions taken by governments, businesses, or the general public in an effort to limit exposure to and spreading of such infectious diseases, such as travel restrictions, quarantines, and business shutdowns or slowdowns; Negative impacts to our operations, including reductions in production levels, R&D activities, and qualification activities with our customers, and increased costs resulting from our efforts to mitigate the impact of the Pandemic through social-distancing measures we have enacted at our locations around the world in an effort to protect our employees’ health and well-being (including working from home, limiting the number of employees attending meetings, reducing the number of employees or others in our sites at any one time and how such individuals perform work while at our sites, and suspending employee travel); Deterioration of worldwide credit and financial markets that could limit our ability to obtain external financing to fund our operations and capital expenditures, result in losses on our holdings of cash and investments due to failures of financial institutions and other parties, and result in losses on our accounts receivables due to credit defaults or our customers’ inability to pay; and, Disruptions to our supply chain in connection with the sourcing of materials, equipment and logistics or other services and support necessary to our business as a result of the Pandemic and efforts to contain the spread of the Pandemic. The resumption of normal business operations after such interruptions may be delayed or constrained by lingering effects of the Pandemic on our Company and our customers, suppliers, and third-party service providers. These effects, alone or taken together, could have a material adverse effect on our business, results of operations, legal exposure, or financial condition. A sustained or prolonged outbreak or return of the Pandemic could exacerbate the adverse impact of such measures on our Company.
DEMAND FOR OUR PRODUCTS FLUCTUATES AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS
Our business is affected by economic and industry conditions, such as those currently being adversely affected by the Pandemic, and the majority of our revenue derives from our Electronic Materials segment, which is primarily dependent upon semiconductor industry demand. With respect to our Electronic Materials segment, historically, semiconductor industry demand has fluctuated due to economic and industry cycles and seasonal shifts in demand, which can affect our business, causing demand for our electronic materials products to fluctuate. For example, we have experiencedprior to the Pandemic, the relatively soft demand conditions in the semiconductor industry duringthat had commenced in our second fiscal quarter of 2019 and thirdcontinued into our first fiscal quartersquarter of 2019. Previously,2020 had begun to ameliorate in the strengtheningbeginning of the second fiscal quarter of 2020. However, the Pandemic has created uncertainty as to demand conditions infor the semiconductor industry we experienced duringgoing forward through the second halfremainder of the fiscal 2016 continued through fiscal 2018, following relatively soft demand conditions during the first half of fiscal 2016.year and beyond. Furthermore, competitive dynamics within the semiconductor industry may impact our business. Our limited visibility to future customer orders makes it difficult for us to predict industry trends.trends, especially during unusual adverse circumstances, such as the Pandemic. If the global economy or the semiconductor industry weakens further, whether in general or as a result of the Pandemic or other specific factors, such as macroeconomic factors, or unpredictable events such as natural disasters, geopolitical conditions, or geopolitical events,additional global health crises, we could experience material adverse impacts on our results of operations and financial condition. Some additional factors that may affect demand for our electronic materials products include: demand trends for different types of electronic devices, such as logic versus memory IC devices, or digital versus analog IC devices; the various technology nodes at which those products are manufactured; customers' efficiencies in the use of CMP consumables and/or high-purity process chemicals (“electronic chemicals”); customers' device architectures and specific manufacturing processes; the short order to delivery time for our products; quarter-to-quarter changes in customer order patterns; market share and competitive gains and losses; and pricing changes by us and our competitors.
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As to our Performance Materials segment, which continues to be an area of potential continued growth for us, our business may be impacted by changes in the utilities and/or oil and gas industries.  Volatilityindustries, such as the recent and ongoing significant dislocation in these industries occasioned by geopolitical disputes such as those that commenced in March 2020 between the Organization of Petroleum Exporting Countries (OPEC) and Russia, and a confluence of an excess in oil capacity due to these factors and the Pandemic and efforts to contain the Pandemic. Relatedly, as described, volatility in oil and natural gas prices may impact our customers’ activity levels, including production, and spending onwhile we have not yet experienced a significant adverse effect, we then may experience a drop in demand for our performance materials products and services. Expectations about future prices and price volatility are important in determining future spending levels for customers of our pipeline performance products and services. Historically,The current volatility in worldwide oil and natural gas prices and markets have been volatile,are an extreme example of historical volatility in this sector, and maysuch volatility is likely to continue to be so in the future. PricesAs is currently the case, prices for oil and natural gas are subject to wide fluctuations in response to relatively minor or major changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include, but are not limited to, decreases or increases in supplies from U.S. shale production international politicalor other oil production, geopolitical conditions, including uprisings, and political unrest, and international trade tensions, sovereign debt crises, the domestic and foreignnon-United States supply of oil and natural gas, the level of consumer demand due to economic growth or contraction such as currently seen related to the Pandemic, and other factors in countries such as China, weather conditions, domestic and foreign governmental regulations and taxes, the price and availability of alternative fuels, the health of international economic and credit markets, the ability of the members of the Organization of Petroleum Exporting CountriesOPEC and other state-controlled oil companies to agree upon and maintain oil price and production controls, and general economic conditions.conditions, such as those currently seen related to the Pandemic.
Further, adverse global economic and industry conditions such as those related to the Pandemic could have other negative effects on our Company. For instance, we could experience negative impacts on cash flows due to the inability of our customers to pay their obligations to us, or our production processes could be harmed if our suppliers cannot fulfill their obligations to us. WeAs a result of these or other conditions, we also might have to reduce the carrying value of goodwill and other intangible assets, which could harm our financial position and results of operations.
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WE MAY PURSUE ACQUISITIONS OF, INVESTMENTS IN, AND MERGERS OR STRATEGIC ALLIANCES WITH OTHER ENTITIES, WHICH COULD DISRUPT OUR OPERATIONS AND HARM OUR OPERATING RESULTS IF THEY ARE UNSUCCESSFUL, OR WE MAY ENCOUNTER UNANTICIPATED ISSUES IN IMPLEMENTING THEM
We expect to continue to make investments in technologies, assets and companies, either through acquisitions, mergers, investments or alliances, in order to supplement our organic growth and development efforts. Acquisitions, mergers, and investments, including our acquisitions of KMG, which we completed in November 2018, and NexPlanar, which we completed in October 2015, involve numerous risks, including the following: difficulties and risks in integrating the operations, technologies, products and personnel of acquired companies; difficulties and risks from unanticipated issues arising subsequent to a transaction related to the other entity; potential disruption of relationships with third parties;parties such as customers or suppliers; diversion of management's attention from normal daily operations of the business; increased risk associated with foreign operations; potential difficulties and risks in entering markets or industries in which we have limited or no direct prior experience andand/or where competitors have stronger positions; potential difficulties and unexpected situations arising in operating new businesses with different business models; facilities and operations; potential difficulties with regulatory or contract compliance in areas in which we have limited or no experience; initial dependence on unfamiliar supply chains or relatively small supply partners; insufficient revenues to offset increased expenses associated with acquisitions; potential loss of key employees of the acquired companies; or inability to effectively cooperate and collaborate with our alliance partners.
Further, we may never realize the perceived or anticipated benefits of a business combination or merger with, or asset or other acquisition of, or investments in, other entities. Transactions such as our acquisitions of KMG and NexPlanar could and in some cases have had negative effects on our results of operations, in areas such as contingent liabilities, gross margins, amortization charges related to intangible assets and other effects of accounting for the purchases of other business entities. Investments in and acquisitions of technology-related companies or assets are inherently risky because these businesses or assets may never develop, and we may incur losses related to these investments.
In addition, we may be required to impair the carrying value of these acquisitions or investments to reflect other than temporary declines in their value. The carrying value which could harmof goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangible assets represents the fair value of customer relationships, tradenames and other acquired intangible assets as of the acquisition date. Goodwill and other acquired intangible assets expected to contribute indefinitely to our businesscash flows are not amortized, but must be evaluated for impairment by management at least annually. If the carrying value exceeds the implied fair value of goodwill, the goodwill is considered impaired and is reduced to fair value via a non-cash charge to earnings. If the carrying value of an indefinite-lived intangible asset is greater than its fair value, the intangible asset is considered impaired and is reduced to fair value via a non-cash charge to earnings. If the value of goodwill or other acquired intangible assets is impaired, our results of operations.operations and financial condition could be adversely affected. Examples of asset impairment charges we recently incurred include the charge we took in the fourth quarter of fiscal year 2019 related to the KMG wood treatment business. Absent a sale of the wood treatment business, as we approach the announced closure date of the Matamoros and Tuscaloosa facilities and there are fewer estimated future cash flows, there is ongoing potential for further impairments of long-lived assets and impairment of goodwill. While the timing and amounts of any further impairments are unknown, our results of operations and financial condition could be adversely affected. See Notes 9 and 10 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, for a more detailed discussion of this impairment.
TheFurthermore, the integration of the recently acquired KMG business into our operations is a complex and time-consuming process that may not be successful. Our Company has a limited history of integrating a significant acquisition into its business and the process of integration may produce unforeseen operating difficulties and expenditures. The primary areas of focus for successfully combining the business of KMG with our operations may include and has included, among others: retaining and integrating key employees; realizing synergies; aligning customer and supplier interface, and operations across the combined business; integrating enterprise resource planning and other information technology systems; and managing the growth of the combined company. Even if we successfully integrate the business of KMG into our operations, there can be no assurance that we will realize the anticipated benefits of the Acquisition.

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WE HAVE A CONCENTRATED PRODUCT RANGE WITHIN EACH OF OUR SEGMENTS AND OUR PRODUCTS MAY BECOME OBSOLETE, OR TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN THE CONSUMPTION OF OUR PRODUCTS
Although our product offerings have expanded with the acquisition of KMG,Acquisition, our business remains substantially dependent on products in our Electronic Materials segment, such as CMP slurries, pads and electronic chemicals, which account for the majority of our revenue. We have identified our Performance Materials segment as another area of potential continued growth and the product offerings in our Performance Materials segment are similarly concentrated. As such, our business would suffer if these products became obsolete or if consumption of these products decreased. Our success depends on our ability to keep pace with technological changes and advances in the industries in which we operate, particularly the semiconductor industry, and to adapt, improve and customize our products in response to evolving customer needs and industry trends. Since its inception, the semiconductor industry, which is the largest industry in which we operate, has experienced technological changes and advances in the design, manufacture, performance and application of IC devices. Our customers continually pursue lower cost of ownership and higher quality and performance of materials consumed in their manufacturing processes, including CMP slurries and pads and electronic chemicals, as a means to reduce costs, increase the yield in their manufacturing facilities, and achieve desired performance of the IC devices they produce. We expect these technological changes, and this drive toward lower costs, higher quality and performance and higher yields, will continue in the future. Potential technology developments in the semiconductor industry, as well as our customers' efforts to reduce consumption of CMP consumables, including through use of smaller quantities, could render our products less important to the IC device manufacturing process.
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A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE OF THESE CUSTOMERS OR BUSINESS FROM THEM
Our customer base is concentrated among a limited number of large customers in each of our segments. Currently, our principal business is to supply electronic materials primarily to the semiconductor industry. The semiconductor industry has been consolidating as the larger semiconductor manufacturers have generally grown faster than the smaller ones, through business gains, mergers and acquisitions, and strategic alliances. Industry analysts predict that this trend will continue, which means the semiconductor industry will continue to be comprised of fewer and larger participants in the future if their prediction is correct. In addition, our customer base in our pipeline-related businesses is also somewhat concentrated, with large entities predominant, and outside of the United States, these entities frequently are state-owned or sponsored, and limited in number per country, as described more above. One or more of these principal customers could stop buying products from us or could substantially reduce the quantity of products purchased from us. Our principal customers in both of our segments also hold considerable purchasing power, which can impact the pricing and terms of sale of our products. Any deferral or significant reduction in the quantity or price of products sold to these principal customers could seriously harm our business, financial condition and results of operations.
In fiscal 2018, our five largest customers accounted for approximately an aggregate 57% of our revenue, with Samsung, Taiwan Semiconductor Manufacturing Company and SK Hynix Inc. accounting for approximately 18%, 12%, and 10%, respectively, of our revenue.
ANY PROBLEM OR DISRUPTION IN OUR SUPPLY CHAIN, INCLUDING SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS, OR IN OUR ABILITY TO MANUFACTURE OR DELIVER OUR PRODUCTS TO OUR CUSTOMERS, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
We depend on our supply chain to enable us to meet the demands of our customers. Our supply chain includes the raw materials we use to manufacture our products, our production operations and the means by which we deliver our products to our customers. Our business could be adversely affected by any problem or interruption in the supply of the key raw materials we use in our products, including raw materials that do not meet the stringent quality and consistency requirements of our customers, any problem or interruption that may occur during production or delivery of our products, such as weather-related problems, natural disasters, orglobal public health crises such as the Pandemic, geopolitical, trade or labor-related issues, or any difficulty in producing sufficient quantities of our products to meet growing demand from our customers. In particular, severe weather conditions have the potential to adversely affect our operations, damage facilities and increase our costs, and those conditions may also have an indirect effect on our operations by disrupting services provided by service companies or suppliers with whom we have a business relationship. Additionally, some of our full-time employees are represented by labor unions, workersworks councils or comparable organizations, particularly in Mexico and Europe. As our current agreements expire, we cannot provide assurance that new agreements will be reached at the end of each period without union action, or that a new agreement will be reached on terms satisfactory to us. An extended work stoppage, slowdown or other action by our employees could significantly disrupt our business. Future labor contracts may be on terms that result in higher labor costs to us, which also could adversely affect our results of operations. Our supply chain may also be negatively impacted by unanticipated price increases due to supply restrictions beyond the control of our Company or our raw materials suppliers.suppliers, such as those related to the Pandemic.
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We believe it would be difficult to promptly secure alternative sources of key raw materials in the event one of our suppliers becomes unable to supply us with sufficient quantities of raw materials that meet the quality and technical specifications required by us and our customers. In addition, new contract terms, forced production or manufacturing changes, contractual amendments to existing agreements with, or non-performance by, our suppliers, including any significant financial distress our suppliers may suffer, could adversely affect us. Also, if we change the supplier or type of key raw materials we use to make our products, in particular our electronic materials products, or are required to purchase them from a different manufacturer or manufacturing facility or otherwise modify our products, in certain circumstances our customers might have to requalify our products for their manufacturing processes and products. The requalification process could take a significant amount of time and expense to complete and could occupy technical resources of our customers that might otherwise be used to evaluate our new products, thus delaying potential revenue growth, or motivate our customers to consider purchasing products from our competitors, possibly interrupting or reducing our sales of products to these customers, especially sales of our electronic materials products to our semiconductor industry customers, but also with respect to our pipeline performance products to our pipeline and adjacent industry customers.
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OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR COMPETITORS DEVELOP COMPETITIVE PRODUCTS, OFFER BETTER PRICING, SERVICE OR OTHER TERMS, OR OBTAIN OR ASSERT CERTAIN INTELLECTUAL PROPERTY RIGHTS
Competition from other electronic materials or performance materials manufacturers or any new entrants could seriously harm our business and results of operations, and this competition could continue to increase. Competition has and will likely continue to impact the prices we are able to charge for our products, as well as our overall business. In addition, our competitors could have, obtain or assert intellectual property rights that could affect or restrict our ability to market our existing products and/or to innovate and develop new products, thus increasing our costs of doing business, could attempt to introduce products similar to ours following the expiration of our patents, or could attempt to introduce products that do not fall within the scope of our intellectual property rights.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We currently have operations and a large customer base outside of the United States. Approximately 87%64% of our revenue was generated by sales to customers outside of the United States for the full fiscal year ended September 30, 2018. 2019. We may encounter risks in doing business in certain foreign countries, including, but not limited to, adverse changes in economic and political conditions, both in foreign locations and in the United States with respect to non-U.S. operations of U.S. businesses like ours, geopolitical and/or trade tensions, global health crises such as the Pandemic, fluctuation in exchange rates, changes in international trade requirements and sanctions and/or tariffs that affect our business and that of our customers and suppliers, compliance with a variety of foreign laws and regulations and related audits and investigations, as well as difficulty in enforcing business and customer contracts and agreements, including protection of intellectual property rights. We also may encounter risks that we may not be able to repatriate additional earnings from our foreign operations, derive anticipated tax benefits of our foreign operations or recover the investments made in our foreign operations, whether due to regulatory or policy changes in the U.S. or in the countries outside of the U.S. in which we do business, or other factors.
In particular, China continues to be a fast-developing market for the semiconductor industry, and an area of continued potential continued growth for us. As business volume between China and the rest of the world continues to grow, there is risk that geopolitical, regulatory, trade, political and political mattersglobal public health crises such as the Pandemic could adversely affect business for companies like ours based on the complex relationships among China, the United States, and other countries in the Asia Pacific region or elsewhere, which could have a material adverse impact on our business. In addition, there are risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business, and,or, provide incentives to government-backed local customers to buy from local suppliers rather than companies like ours, all of which could adversely impact our business, including our results of operations.
In addition, we have operations and customers located in the United Kingdom. In June 2016,Kingdom, which recently has exited the European Union. Although the United Kingdom held a referendum in which voters approved an exit fromand the European Union (“Brexit”).  In March 2017, the United Kingdom formally notified the European Union of its intentionhave agreed to withdraw, and withdrawal negotiations began in June 2017. The United Kingdom will cease to be a member state when a withdrawal agreement is entered into (such agreement will also require parliamentary approval) or, failing that, two years following the notification of an intention to leave the European Union, unless the European Union (together with the United Kingdom) unanimously decides to extend this period. In March 2018, the European Union announced an agreement in principle tooperate under transitional provisions under which most European Union law would remain in force in the United Kingdom until the end of December 2020, however, this transitional period remains subject to the successful conclusion of a final withdrawal agreement between the parties. In the absence of such an agreement, there would be no transitional provisions and a “hard” Brexit would occur. In April 2019, the United Kingdom and European Union agreed that the transitional provisions are extended until October 31, 2019. Although it is unknownat present unclear as to what trade agreement the terms ofparties will operate under following such an agreement, assuming it is reached, will be, it is possible that there will be greater restrictions on importstime, and exports between the United Kingdom and European Union countries, a fluctuation in currency exchange rates and increased regulatory complexities. These changes may adversely affect our operations and financial results. Whilewhat impacts such changes in laws, regulations and conditionsmight have not had a material adverse effect on our business or financial condition to date, we cannot provide assurances regarding the future effect of any such changes.business.
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WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL LAWS AND REGULATIONS AND MAY INCUR COSTS THAT HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION AS A RESULT OF VIOLATIONS OF OR LIABILITIES UNDER THEM
Like other companies involved in environmentally sensitive businesses, our operations and properties are subject to extensive and stringent federal, state, local and foreign environmental, health and safety (EHS) laws and regulations, including those concerning, among other things:
• the marketing, sale, use and registration of our chemical products, such as pentachlorophenol (“penta”), which is part of the wood treatment business in our Performance Materials segment;
• the treatment, storage and disposal of wastes;
• the investigation and remediation of contaminated media including but not limited to soil and groundwater;
• the discharge of effluents into waterways;
• the emission of substances into the air; and
• other matters relating to environmental protection and various health and safety matters.
The United States Environmental Protection Agency (“EPA”)EPA and other federal and state agencies in the United States, as well as comparable agencies in other countries where we have facilities or sell our products, have the authority to promulgate regulations that could have a material adverse impact on our operations. These EHS laws and regulations may require permits for certain types of operations, require the installation of expensive pollution control equipment, place restrictions upon operations or impose substantial liability for pollution and otherEHS concerns resulting from our operations. Compliance with EHS laws and regulations has resulted in ongoing costs for us and could restrict our ability to modify or expand our facilities, continue production, require us to install costly pollution control equipment, or incur significant other expenses, including remediation costs. We are currently involved in investigation and remediation activities at certain sites, such as at KMG-Bernuth's Tuscaloosa, Alabama facility as described in Note 10 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part 1, Note 12II of thisour Annual Report on Form 10-Q.10-K for the fiscal year ended September 30, 2019. We have incurred, and expect to continue to incur, significant costs to comply with EHS laws or to address liabilities for contamination resulting from past or present operations. Federal, state and foreign governmental authorities may seek fines and penalties, as well as injunctive relief, for violation of EHS laws and regulations, and could, among other things, impose liability on us to cleanup or mitigate environmental, natural resources or other damages resulting from a release of pesticides, hazardous materials or other chemicals into the environment. We maintain insurance coverage for sudden and accidental environmental damages. We do not believe that insurance coverage for environmental damage that occurs over time is available at a reasonable cost. Also, we do not believe that insurance coverage for the full potential liability that could be caused by sudden and accidental incidences is available at a reasonable cost. Accordingly, we may be subject to an uninsured or under-insured loss in such cases; although unknown at present, the KMG-Bernuth warehouse fire may be such an instance.
1.
The distribution, sale and use of our products is subject to prior governmental approvals and thereafter ongoing governmental regulation:
The distribution, sale and use of our products is subject to prior governmental approvals and thereafter ongoing governmental regulation: Our products are subject to laws administered by federal, state and foreign governments, including regulations requiring registration, approval and labeling. The labeling requirements restrict the use and type of application for our products. More stringent restrictions could make our products less desirable which would adversely affect our sales and profitability. All venues where our penta products are used also require registration prior to marketing or use.
Governmental regulatory authorities have required, and may require in the future, that certain scientific testing and data production be provided on our products. Under the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”), the EPA requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement significantly increases our operatingOperating expenses, and we expect those expenses will continue in the future.future while we operate the wood treatment business. Because scientific analyses are constantly improving, we cannot determine with certainty whether or not new or additional tests may be required by regulatory authorities. While good laboratory practice standards specify the minimum practices and procedures that must be followed in order to ensure the quality and integrity of data related to these tests submitted to the EPA, there can be no assurance that the EPA will not request certain tests or studies be repeated. In addition, more stringent legislation or requirements may be imposed in the future. Recent changes to the Toxic Substances Control Act (“TSCA”) could result in increased regulation and required testing of chemicals we manufacture and could increase the costs of compliance for our operations. We can provide no assurance that the cost of such compliance will not adversely affect our profitability. Our products could also be subject to other future regulatory action that may result in restricting or completely banning their use which could have an adverse effect on our performance and results of operations.
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2.
The Registration, Evaluation and Authorization of Chemicals (“REACH”) legislation may affect our ability to manufacture and sell certain products in the European Union:1. The Registration, Evaluation and Authorization of Chemicals (“REACH”) legislation may affect our ability to manufacture and sell certain products in the European Union: REACH requires chemical manufacturers and importers in the European Union to prove the safety of their products. We were required to pre-register certain products and file comprehensive reports, including testing data, on each chemical substance, and perform chemical safety assessments. Additionally, substances of high concern are subject to an authorization process. Authorization may result in restrictions on certain uses of products or even prohibitions on the manufacture or importation of products. The full registration requirements of REACH are phased in over several years. We will incur additional expense to cause the registration of our products under these regulations. REACH may also affect our ability to import, manufacture and sell certain products in the European Union. In addition, other countries and regions of the world already have or may adopt legislation similar to REACH that affect our business, affect our ability to import, manufacture or sell certain products in these jurisdictions, and have required or will require us to incur increased costs.
2. The classification of penta as a Persistent Organic Pollutant (“POP”) under the Stockholm Convention may adversely affect our ability to manufacture or sell our penta products: The Conference of the Parties (“COP”) accepted the recommendation of the United Nations Persistent Organic Pollutant Review Committee that the use of penta should be banned except that its use for the treatment of utility poles and crossarms could continue for an extended period of five to ten years. KMG-Bernuth supplies penta to industrial customers who use it primarily to treat utility poles and crossarms. The U.S. is not bound by the determination of the COP because it did not ratify the Stockholm Convention treaty. Canada and Mexico are governed by the treaty. KMG-Bernuth's sole penta manufacturing facility is located in Matamoros, Mexico, and its processing facility is located in Tuscaloosa, Alabama. As a result of the classification of penta as a POP, the Mexican government requires KMG-Bernuth to cease producing penta in Mexico by the end of 2021. In July 2019, KMG-Bernuth had communicated plans to close both the Matamoros and Tuscaloosa facilities by such date and to consolidate into and build a new facility. However, in November 2019, we communicated that we will not build a new facility, and that we intend to explore various options for the wood treatment business. We took a restructuring charge and asset impairment charges in our fourth fiscal quarter of 2019 related to the decision to close the Matamoros and Tuscaloosa facilities and to not build a new plant. No assurance can be given that we will not incur significant expenditures in connection with closing the facilities, or that the ultimate action of the COP and our related decisions will not adversely impact on our financial condition and results of operation.
3. If our products are not re-registered by the EPA or are re-registered subject to new restrictions, our ability to sell our products may be curtailed or significantly limited: KMG-Bernuth's penta product registrations are under continuous review by the EPA under FIFRA. KMG-Bernuth has submitted and will continue to submit a wide range of scientific data to support its U.S. registrations. To satisfy the registration review, KMG-Bernuth is required to demonstrate, among other things, that its products will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. In September 2008, the EPA announced that it had determined that penta was eligible for re-registration, but the EPA proposed new restrictions on the use of penta that have required KMG-Bernuth's customers to incur substantial additional costs and to revise certain operating procedures. In December 2014, the EPA issued a registration review work plan that required penta registrants to provide additional research and testing data respecting certain potential risks to human health or the environment as a further condition to continued registration. KMG-Bernuth conducted required testing in accordance with the EPA's proposed work plan. In January 2020, the EPA published a Registration Review Draft Risk Assessment for Pentachlorophenol, dated June 27, 2019, which included several key preliminary EPA conclusions related to the safety and environmental risks of penta as a wood treating product. We have provided the EPA with responsive comments. We cannot tell you when or if the EPA will issue a final decision concluding that the conditions of re-registration for its penta products and all additional testing requirements have been satisfied. We cannot assure you that KMG-Bernuth's products will not be subject to use or labeling restrictions that may have an adverse effect on our financial position and results of operations. The failure of KMG-Bernuth's products to be re-registered, to satisfy the registration review by the EPA, or the imposition of new use, labeling or other restrictions in connection with re-registration could have an adverse effect on our financial condition and results of operations.

4. Our use of hazardous materials exposes us to potential liabilities: Our manufacturing and distribution of chemical products, such as our electronic chemicals, involves the controlled use of hazardous materials. Our operations, therefore, are subject to various associated risks, including chemical spills, discharges or releases of toxic or hazardous substances or gases, fires, mechanical failure, storage facility leaks and similar events. Our suppliers are subject to similar risks that may adversely impact the availability of raw materials. While we adapt our manufacturing and distribution processes to the environmental control standards of regulatory authorities, we cannot completely eliminate the risk of accidental contamination or injury from hazardous or regulated materials, including injury of our employees, individuals who handle our products or goods treated with our products, or others who claim to have been exposed to our products, nor can we completely eliminate the unanticipated interruption or suspension of operations at our facilities due to such events. We may be held liable for significant damages or fines in the event of contamination or injury, and such assessed damages or fines could have an adverse effect on our financial performance and results of operations.

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3.
The classification of pentachlorophenol as a Persistent Organic Pollutant (“POP”) under the Stockholm Convention may adversely affect our ability to manufacture or sell our penta products: The Conference of the Parties (“COP”) accepted the recommendation of the United Nations Persistent Organic Pollutant Review Committee that the use of penta should be banned except that its use for the treatment of utility poles and crossarms could continue for an extended period of five to ten years. KMG-Bernuth supplies penta to industrial customers who use it primarily to treat utility poles and crossarms. The U.S. is not bound by the determination of the COP because it did not ratify the Stockholm Convention treaty. Canada and Mexico are governed by the treaty. KMG-Bernuth's sole penta manufacturing facility is located in Matamoros, Mexico, and its processing facility is located in Tuscaloosa, Alabama. As a result of the classification of penta as a POP, the Mexican government has requested that the Matamoros penta manufacturing facility be relocated, and in July 2019, KMG-Bernuth has communicated plans to close this facility by the end of 2021. KMG-Bernuth is in the process of identifying a potential site in the U.S. for such relocation, as well as to close the Tuscaloosa facility and consolidate into this new facility. No assurance can be given that we will not incur significant expenditures in connection with such relocation and related closures, that we will find an adequate location within the required timeframe, or that the ultimate action of the COP will not adversely impact on our financial condition and results of operation.
4.
If our products are not re-registered by the EPA or are re-registered subject to new restrictions, our ability to sell our products may be curtailed or significantly limited: KMG-Bernuth's penta product registrations are under continuous review by the EPA under FIFRA. KMG-Bernuth has submitted and will submit a wide range of scientific data to support its U.S. registrations. To satisfy the registration review, KMG-Bernuth is required to demonstrate, among other things, that its products will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. In September 2008, the EPA announced that it had determined that penta was eligible for re-registration, but the EPA proposed new restrictions on the use of penta that have required KMG-Bernuth's customers to incur substantial additional costs and to revise certain operating procedures. In December 2014, the EPA issued a registration review work plan that required penta registrants to provide additional research and testing data respecting certain potential risks to human health or the environment as a further condition to continued registration. KMG-Bernuth conducted required testing. but cannot tell you when or if the EPA will issue a final decision concluding that the conditions of re-registration for its penta products and all additional testing requirements have been satisfied. We cannot assure you that KMG-Bernuth's products will not be subject to use or labeling restrictions that may have an adverse effect on our financial position and results of operations. The failure of KMG-Bernuth's current or future-acquired products to be re-registered, to satisfy the registration review by the EPA, or the imposition of new use, labeling or other restrictions in connection with re-registration could have an adverse effect on our financial condition and results of operations.
5.
Our use of hazardous materials exposes us to potential liabilities: Our manufacturing and distribution of chemical products, such as our electronic chemicals, involves the controlled use of hazardous materials. Our operations, therefore, are subject to various associated risks, including chemical spills, discharges or releases of toxic or hazardous substances or gases, fires, mechanical failure, storage facility leaks and similar events. Our suppliers are subject to similar risks that may adversely impact the availability of raw materials. While we adapt our manufacturing and distribution processes to the environmental control standards of regulatory authorities, we cannot completely eliminate the risk of accidental contamination or injury from hazardous or regulated materials, including injury of our employees, individuals who handle our products or goods treated with our products, or others who claim to have been exposed to our products, nor can we completely eliminate the unanticipated interruption or suspension of operations at our facilities due to such events. We may be held liable for significant damages or fines in the event of contamination or injury, and such assessed damages or fines could have an adverse effect on our financial performance and results of operations.
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FUTURE CLIMATE CHANGE REGULATION COULD RESULT IN INCREASED OPERATING COSTS AND REDUCED DEMAND FOR OUR PRODUCTS
Although the U.S. has not ratified the Kyoto Protocol, a number of federal laws related to “greenhouse gas” or “GHG” emissions have been considered by Congress. Because of the lack of any comprehensive legislation program addressing GHGs, the EPA is using its existing regulatory authority to promulgate regulations requiring reduction in GHG emissions from various categories of sources, such as when a permit is required due to emissions of other pollutants. In addition, various state, local and regional regulations and initiatives have been enacted or are being considered related to GHGs.
Member States of the European Union each have an overall cap on emissions, which are approved by the European Commission, and implement the EU Emissions Trading Directive as a commitment to the Kyoto Protocol. Under this Directive, organizations apply to the Member State for an allowance of GHG emissions. These allowances are tradable so as to enable companies that manage to reduce their GHG emissions to sell their excess allowances to companies that are not reaching their emissions objectives. Failure to purchase sufficient allowances will require the purchase of allowances at a current market price.
Any laws or regulations that may be adopted to restrict or reduce emissions of GHGs could cause an increase to our raw material costs, require us to incur increased operating costs, and have an adverse effect on demand for our products and our financial performance and results for our business.

OUR PRODUCTS MAY BE RENDERED OBSOLETE OR LESS ATTRACTIVE BY CHANGES IN INDUSTRY REQUIREMENTS OR BY SUPPLY-CHAIN DRIVEN PRESSURES TO SHIFT TO ENVIRONMENTALLY PREFERABLE ALTERNATIVES

Changes in regulatory, legislative and industry requirements, or changes driven by supply-chain pressures, may shift current customers away from products using penta, products containing hazardous materials, or certain of our other products and toward alternative products that are believed to have fewer environmental effects. The EPA, foreign and state regulators, local governments, private environmental advocacy organizations and a number of large industrial companies have proposed or adopted policies designed to decrease the use of a variety of chemicals, including penta and others included in certain of our products.products, such as those containing hazardous materials. Our ability to anticipate changes in regulatory, legislative, and industryrequirements, or changes driven by supply-chain pressures, affects our ability to remain competitive. Further, we may not be able to comply with changed or new regulatory or industrial standards that may be necessary for us to remain competitive.

We cannot assure you that the EPA, foreign and state regulators or local governments will not restrict the uses of penta or certain of our other products or ban the use of one or more of these products.products or the raw materials in them. Similarly, companies who use our products may decide to reduce significantly or cease the use of our products voluntarily. As a result, our products may become obsolete or less attractive to our customers.

BECAUSE WE RELY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY OBTAIN OR PROTECT IT COULD SIGNIFICANTLY HARM OUR BUSINESS

Protection of intellectual property is particularly important in our industry because we develop complex technical formulas and processes for products that are proprietary in nature and differentiate our products from those of our competitors. Our intellectual property is important to our success and ability to compete. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as employee and third-party nondisclosure and assignment agreements. In addition, we protect our product differentiation through various other means, such as proprietary supply arrangements for certain raw materials, and use of certain manufacturing technologies. Due to our international operations, we pursue protection in different jurisdictions, which may provide varying degrees of protection, and we cannot provide assurance that we can obtain adequate protection in each such jurisdiction. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason, including through the patent prosecution process or in the event of litigation related to such intellectual property, could seriously harm our business. In addition, certain types of intellectual property, such as patents, expire after a certain period of time, and products protected by our patents then lose such protection, so we refresh our intellectual property portfolio on an ongoing basis through continued innovation, and failure to do so could adversely affect our business. Also, the costs of obtaining or protecting our intellectual property could negatively affect our operating results.


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OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER
We utilize and rely upon a global workforce. If we fail to attract and retain the necessary managerial, technical and customer support personnel, our business and our ability to maintain existing and obtain new customers, develop new products and provide acceptable levels of customer service could suffer. We compete worldwide with other industry participants for qualified personnel, particularly those with significant experience in the semiconductor industry. The loss of services of key employees, or our inability to obtain or maintain visas or other travel or residency documents on their behalf with respect to our business needs, could harm our business and results of operations. Periodically, we engage in succession planning for our key employees, and our Board of Directors reviews succession planning for our executive officers, including our chief executive officer, on an annual basis.

BECAUSE WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF ELECTRONIC MATERIALS AND PERFORMANCE MATERIALS, EXPANSION OF OUR BUSINESS INTO OTHER PRODUCTS AND APPLICATIONS MAY NOT BE SUCCESSFUL
An element of our strategy has been to leverage our customer relationships, technological expertise and other capabilities and competencies to expand our business. For example, we have made acquisitions to expand beyond CMP consumables into other electronic materials product areas. In addition,areas, as well as into performance materials product areas in our Engineered Surface Finishes business,which we have been pursuing other surface modification applications.limited experience. Expanding our business into new product areas could involve technologies, production processes and business models in which we have limited experience, and we may not be able to develop and produce products or provide services that satisfy customers' needs, or we may be unable to keep pace with technological or other developments. Or, we may decide that we no longer wish to pursue these new business initiatives. Also, our competitors may have or obtain intellectual property rights that could restrict our ability to market our existing products and/or to innovate and develop new products.
TAX INCREASES OR CHANGES IN TAX RULES MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS
As a company conducting business on a global basis, we are exposed, both directly and indirectly, to effects of changes in United States, state, local and foreign tax rules. In December 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act") was enacted in the United States. Known and certain estimated effects based upon current interpretation of the Tax Act have been incorporated into our financial results. As additional clarification and implementation guidance is issued on the Tax Act, it may be necessary to adjust our income tax estimates, as we experienced thisin our second fiscal quarter of fiscal 2019 with respect to our previously reported Transition Tax describedescribed in Note 19 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part I, Note 15II of thisour Annual Report on Form 10-Q.10-K for the fiscal year ended September 30, 2019. Adjustments to income tax amounts could be material to our results of operations and cash flows. In addition, there is a risk that state or foreign jurisdictions may amend their tax laws in response to the Tax Act, which could have a material impact on our future results of operations and cash flows.
CERTAIN CRITICAL INFORMATION SYSTEMS COULD BE SUSCEPTIBLE TO CYBERSECURITY AND OTHER THREATS

We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include, but are not limited to, telecommunications, the Internet, our corporate intranet, various computer hardware and software applications, network communications, and email. These information systems may be owned and maintained by us, our outsourced providers, or third parties such as vendors, contractors, and Cloud providers. All of these information systems are subject to disruption, breach or failure from various sources including, but not limited to, attacks, degradation, and failures resulting from potential sources, including viruses, malware, denial of service, destructive or inadequate code, power failures, and physical damage. Confidential and/or sensitive information stored on these information systems, or transmitted to or from Cloud storage, could be intentionally or unintentionally compromised, lost, and/or stolen. While we have implemented security procedures and virus protection software, intrusion prevention systems, access control, and emergency recovery processes to mitigate risks like these with respect to information systems that are under our control, they are not fail-safe and may be subject to breaches. Further, we cannot assure that third parties upon whom we rely for various IT services will maintain sufficient vigilance and controls over their systems. Our inability to use or access these information systems at critical points in time, or unauthorized releases of personal or confidential information, could unfavorably impact the timely and efficient operation of our business, including our results of operations, and our reputation, as well as our relationships with our employees or other individuals whose information may have been affected by such cybersecurity incidents.


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In addition, regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. New privacyPrivacy security laws and regulations, including the United Kingdom's Data Protection Act 2018 and the European Union General Data Protection Regulation 2016, that became effective May 2018,and similar laws in countries such as Korea and Taiwan, among others, pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulations could result in significant penalties.penalties that could adversely affect our business and results of operations.
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OUR ABILITY TO RAISE CAPITAL IN THE FUTURE MAY BE LIMITED, WHICH COULD PREVENT US FROM GROWING, AND OUR EXISTING CREDIT AGREEMENT COULD RESTRICT OUR BUSINESS ACTIVITIES

We may in the future be required to raise capital through public or private financing or other arrangements.Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed couldharm our business. Our Amended Credit Agreement contains financial and other covenants that may restrict our business activities or our ability to execute our strategic objectives, and our failure to comply with these covenants could result in a default under our Credit Agreement.it. Furthermore, additional equity financing may dilute the interests of our common stockholders, and debt financing, if available, may involve restrictive covenants that could further restrict our business activities or our ability to execute our strategic objectives and could reduce our profitability. If we raise or borrow funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

In addition, borrowings under our Amended Credit Facilities generally bear interest based on (a) a London Inter-bank Offered Rate (“LIBOR”), subject to a 0.00% floor, or (b) a base rate, in each case plus an applicable margin of, in the case of borrowings under the Amended Term Loan Facility, 2.25%2.00% for LIBOR loans and 1.25%1.00% for base rate loans and, in the case of borrowings under the Revolving Credit Facility, initially, 1.50% for LIBOR loans and 0.50% for base rate loans. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In the United States, the Alternative Reference Rates Committee (“ARRC”), the working group formed to recommend an alternative rate to LIBOR, has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR. When LIBOR ceases to exist after 2021, any calculation of interest based upon the Alternate Base Rate (or any comparable or replacement formulation), may result in higher interest rates. To the extent that these interest rates increase, our interestInterest expense will increase, which could adversely affect our financial condition, operating results and cash flows.

RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK

THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY

The market price of our common stock has fluctuated and could continue to fluctuate significantly as a result of factors such as: economic, geopolitical, global public health, political and stock market conditions generally and specifically as they may impact participants in the semiconductor and related industries; changes in financial estimates and recommendations by securities analysts who follow our stock; earnings and other announcements, and changes in market evaluations, by securities analysts, investors, market participants or others, of or related to, us or participants in the semiconductor and related industries; changes in business, trade or regulatory conditions affecting us or participants in the semiconductor and related industries; announcements or implementation by us, our competitors, or our customers of technological innovations, new products or different business strategies; changes in our capital deployment strategy, issuances of shares of our capital stock or entering into a business combination or other strategic transaction; and trading volume of our common stock. This has been evident since approximately March of 2020 in the wake of the significant adverse impact to global economic conditions of the Pandemic and also dislocation in the oil and gas sector.

ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID FOR OUR COMPANY

Our certificate of incorporation and bylaws, and various provisions of the Delaware General Corporation Law may make it more difficult or expensive to effect a change in control of our Company. For instance, our amended and restated certificate of incorporation provides for the division of our Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms.

We have adopted change in control arrangements covering our executive officers and other key employees. These arrangements provide for a cash severance payment, continued medical benefits and other ancillary payments and benefits upon termination of service of a covered employee's employment following a change in control, which may make it more expensive to acquire our Company.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period Total Number of Shares Purchased Average Price paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands)
Apr. 1 through Apr. 30, 2019 72
 $125.44
 —
 $81,271
May 1 through May 31, 2019 19,900
 $103.55
 19,900
 $79,210
June 1 through June 30, 2019 28,035
 $106.64
 27,570
 $76,269
Total 48,007
 $105.39
 47,470
 $76,269
In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program to $150.0 million. Under this program, we repurchased 48,007 shares for $5.0 million during the third quarter of fiscal 2019.  As of June 30, 2019, $76.3March 31, 2020, there was $54.9 million remained outstandingof authorized repurchases remaining under our share repurchasethe program. The manner in which the Company repurchases its shares is discussed in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Liquidity and Capital Resources”, of this Report on Form 10-Q.  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.

PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands)
Jan. 1 through Jan. 31, 2020—  $—  —  $71,268  
Feb. 1 through Feb. 29, 2020—  $—  —  $71,268  
Mar. 1 through Mar. 31, 2020157,368  $104.31  157,368  $54,854  
Total157,368  $104.31  157,368  $54,854  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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ITEM 6. EXHIBITS
The exhibit numbers in the following list correspond to the number assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
Exhibit

Number
 Description
31.110.72
Cabot Microelectronics Corporation 401(k) Plan, as amended.
10.73
Adoption Agreement, January 1, 2020, as amended, of Cabot Microelectronics Corporation 401(k) Plan.
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101. INSXBRL Instance Document - The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase
104.Cover Page Interactive Data File - The Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CABOT MICROELECTRONICS CORPORATION
[Registrant]
Date: May 8, 2020By:CABOT MICROELECTRONICS CORPORATION
[Registrant]
Date: August 9, 2019By:/s/ SCOTT D. BEAMER
Scott D. Beamer

Vice President and Chief Financial Officer

[Principal Financial Officer]
Date: August 9, 2019By:/s/ THOMAS S. ROMAN
Thomas S. Roman
Corporate Controller
[Officer and Interim Principal Accounting Officer]

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