NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation (“Cabot Microelectronics”, “the Company”, “us”, “we”, or “our”') is a leading global supplier of consumable materials to semiconductor manufacturers and customers in the pipeline and adjacent industries. On November 15, 2018 (“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 and adjacent industries, and industrial wood preservation industry (“Acquisition”). The Acquisition extended and strengthened our position as one of the leading suppliers of consumable materials to the semiconductor industry and expanded our portfolio with the addition of KMG’s businesses, which we believe enables us to be a leading global provider of performance products and services to pipeline and adjacent industry companies. The Consolidated Financial Statements included in this Annual Report on Form 10-K include the financial results of KMG from the Acquisition Date. Subsequent to the Acquisition, we have operated 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 KMG electronic chemicals business. The Performance Materials segment includes KMG’s heritage pipeline performance and wood treatment businesses, and our heritage QED business.
The audited consolidated financial statements have been prepared by us pursuant to the rules of the Securities and Exchange Commission (SEC) and accounting principles generally accepted in the United States of America (U.S. GAAP). We operate predominantly in two reportable segments - Electronic Materials and Performance Materials.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated in the consolidated financial statements as of September 30, 2019.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management's most challenging and subjective judgments include, but are not limited to, those estimates related to impairment of long-lived assets, business combinations, assets retirement obligations, goodwill and other intangible assets, income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates under different assumptions or conditions.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We consider investments in all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Short-term investments include securities generally having maturities of 90 days to one year. We did not own any securities that were considered short-term investments as of September 30, 2019 or 2018. See Note 5 of this Annual Report on Form 10-K for a more detailed discussion of other financial instruments.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. Our allowance for doubtful accounts is based on historical collection experience, adjusted for any specific known conditions or circumstances such as customer bankruptcies and increased risk due to economic conditions. Uncollectible account balances are charged against the allowance when we believe that it is probable that the receivable will not be recovered. Amounts charged to bad debt expense are recorded in general and administrative expenses. A portion of our receivables and the related allowance for doubtful accounts is denominated in foreign currencies, so they are subject to foreign exchange fluctuations which are included in the table below under deductions and adjustments.
Our allowance for doubtful accounts changed during the fiscal year ended September 30, 2019 as follows:
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Balance as of September 30, 2018
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$
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1,900
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Amounts charged to expense
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432
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Deductions and adjustments
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45
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Balance as of September 30, 2019
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$
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2,377
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CONCENTRATION OF CREDIT RISK
Financial instruments that subject us to concentrations of credit risk consist principally of accounts receivable. We perform ongoing credit evaluations of our customers' financial conditions and generally do not require collateral to secure accounts receivable. Our exposure to credit risk associated with nonpayment is affected principally by conditions or occurrences within the semiconductor industry and the global economy. We have not experienced significant losses relating to accounts receivable from individual customers or groups of customers.
Customers who represented more than 10% of revenue are as follows:
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Year Ended September 30, 2019
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2019
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2018
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2017
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Intel
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14
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%
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*
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*
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Samsung Group (Samsung)
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11
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%
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18
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%
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16
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%
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Taiwan Semiconductor Manufacturing Co. (TSMC)
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*
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12
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%
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13
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%
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SK Hynix Inc.
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*
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10
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%
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*
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Micron Technology Inc.
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*
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*
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10
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%
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* Not a customer with more than 10% revenue.
Intel accounted for 8.1% and 3.9% of net accounts receivable at September 30, 2019 and 2018, respectively. Samsung accounted for 5.5% and 11.4% of net accounts receivable at September 30, 2019 and 2018, respectively. TSMC accounted for 8.2% and 7.9% of net accounts receivable at September 30, 2019 and 2018, respectively. SK Hynix accounted for 1.6% and 3.4% of net accounts receivable at September 30, 2019 and 2018, respectively. Micron accounted for 6.8% and 13.1% of net accounts receivable at September 30, 2019 and 2018, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, and accounts payable approximate their fair values due to their short-term, highly liquid characteristics. See Note 5 of this Annual Report on Form 10-K for a more detailed discussion of the fair value of financial instruments.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or net realizable value. Finished goods and work in process inventories include material, labor and manufacturing overhead costs. We regularly review and write down the value of inventory as required for estimated obsolescence or lack of marketability. An inventory reserve is maintained based upon a historical percentage of actual inventories written off and applied against inventory value at the end of the period, adjusted for known conditions and circumstances.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is based on the following estimated useful lives of the assets using the straight-line method:
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Land Improvements
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10-20 years
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Buildings
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15-30 years
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Machinery and equipment
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3-20 years
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Furniture and fixtures
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5-10 years
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Vehicles
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5-8 years
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Information systems
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3-5 years
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Assets under capital leases
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Term of lease or estimated useful life
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Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized and depreciated over the remaining useful lives. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. We capitalize the costs related to the design and development of software used for internal purposes.
ASSET RETIREMENT OBLIGATIONS
Asset Retirement Obligations (AROs) are the obligation associated with the retirement of tangible long-lived assets. The Company recognizes AROs for the removal or storage of hazardous materials, decontamination or demolition of above ground storage tanks (ASTs), and certain restoration and decommissioning obligations related to certain of our owned and leased properties. The Company recognizes an ARO liability in the period in which it is incurred, including upon Acquisition, if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the ARO is incurred, the liability shall be recognized when a reasonable estimate of fair value can be made. The Company has multiple production facilities with an indeterminate useful life and there is insufficient information available to estimate a range of potential settlement dates for the obligation. Therefore, the Company cannot reasonably estimate the fair value of the liability.
When a reasonable estimate of fair value can be made, an ARO amount is calculated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal / decommissioning activities. Cost estimates for AROs are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, discount rates, and the potential methods for complying with legal and environmental regulations. Material changes to current ARO estimates could result as more information becomes available surrounding these assumption factors.
In subsequent periods, the Company recognizes accretion expense in Cost of sales increasing the ARO balances, such that the balance will ultimately equal the expected cash flows at the time of settlement. See Note 8 of this Annual Report on Form 10-K for the ARO and accretion expense recorded in fiscal 2019.
IMPAIRMENT OF LONG-LIVED ASSETS
We assess the recoverability of the carrying value of long-lived assets to be held and used, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We must exercise judgment in assessing whether an event of impairment has occurred. For purposes of recognition and measurement of an impairment loss, long-lived assets are either individually identified or grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in this grouping. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the use and eventual disposition of the asset or asset group are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. The fair value methodology used is an estimate of fair market value, which is made based on prices of similar assets or other valuation methodologies, including present value techniques. Long-lived assets to be disposed of by means other than sale are classified as held for use until their disposal. Long-lived assets to be disposed of by sale are classified as held for sale and are reported at the lower of carrying amount or fair market value, less the estimated cost to sell. Depreciation is discontinued for any long-lived assets classified as held for sale.
In the fourth quarter of fiscal 2019, we recorded an impairment of $67,372 of long-lived assets, of which $4,063 related to Property, plant and equipment in the wood treatment asset group. See Note 10 of this Annual Report on Form 10-K for a more detailed discussion of the impairment. We did not record any impairment expense in fiscal 2018. We recorded impairment expense on long-lived assets of $860 in fiscal 2017 related to surplus research and development equipment, which was subsequently sold for a gain.
GOODWILL AND OTHER INTANGIBLE ASSETS
Purchased intangible assets with finite lives are amortized over their estimated useful lives and are evaluated for impairment using a process similar to that used to evaluate other long-lived assets. Goodwill and indefinite lived intangible assets are not amortized and are tested annually in our fourth fiscal quarter or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. A component is a reporting unit when the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of the component. Components may be combined into one reporting unit when they have similar economic characteristics. We have six reporting units, all of which had goodwill as of September 30, 2019, the date of our annual impairment test.
The Company’s Electronic Materials segment is comprised of the three following reporting units: CMP slurries, electronic chemicals, and CMP pads. The Company’s Performance Materials segment is comprised of three additional reporting units: pipeline performance, wood treatment, and precision optics.
Accounting guidance provides an entity the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). We used a step zero qualitative analysis for the CMP slurries reporting unit in fiscal 2018 and 2019, and for precision optics in fiscal 2019. Aside from those previously noted, all other reporting units were assessed for goodwill impairment using a step one approach. The Flowchem trade name, an indefinite-lived intangible asset, was assessed for impairment using a relief from royalty approach.
Factors requiring significant judgment include the selection of valuation approach and assumptions related to future revenue, discount factors, terminal growth rates, and royalty rates, among others. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these assumptions may result in future impairment charges.
In the fourth quarter of fiscal 2019, the Company performed its annual goodwill impairment assessment, comparing estimated fair values of the reporting units to their carrying amounts. In estimating the fair values, the Company used the average of an income approach, discounting estimated future cash flows, and a market approach based upon relevant market multiples. As a result of a long-lived asset impairment recorded in the fourth quarter of fiscal 2019, the carrying value of the wood treatment reporting unit is equal to its fair value. In this circumstance with no excess of fair value over carrying value, any unfavorable variances from the estimated inputs used in the impairment assessment may result in further impairment of long-lived assets or goodwill. The Company’s Electronic Chemicals reporting unit has goodwill resulting from a recent acquisition, with a greater sensitivity to impairment, due to the extent by which its estimated fair value exceeds its carrying value. Changes to the assumptions requiring significant judgment, noted above, could result in a different outcome for the impairment assessment. Accordingly, the Company performed sensitivity analysis for selected key assumptions.
As a result of the review performed in the fourth quarter of fiscal 2019, and the related sensitivity analysis, we determined that there was no impairment of our goodwill as of September 30, 2019. There was no goodwill impairment recorded in fiscal 2018 or 2017.
While no goodwill impairments were recognized in fiscal 2019, the Company recognized asset impairment charges of $67,372, of which $63,309 related to Other intangible assets, net for the wood treatment asset group due to triggering events that occurred in the fourth quarter of fiscal 2019. See Note 10 of this Annual Report on Form 10-K. The Company will continue to monitor the wood treatment asset group for indicators of long-lived asset or goodwill impairment. Absent a sale of the business, as the Company approaches the announced closure date of the 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, 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.
WARRANTY RESERVE
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements. The warranty reserve is based upon a historical product return rate, adjusted for any specific known conditions or circumstances. Adjustments to the warranty reserve are recorded in Cost of sales.
FOREIGN CURRENCY TRANSLATION
Certain operating activities in Asia and Europe are denominated in local currency, considered to be the functional currency. Assets and liabilities of these operations are translated using exchange rates in effect at the end of the year, and revenue and costs are translated using average exchange rates for the year. The related translation adjustments are reported in comprehensive income in stockholders' equity.
FOREIGN EXCHANGE MANAGEMENT
We transact business in various foreign currencies, primarily the Korean won, Japanese yen, the New Taiwan dollar, Euro, British pound, and Singapore dollar. Our exposure to foreign currency exchange risks has not been significant because a large portion of our business is denominated in United States dollars. However, we also incur expenses in foreign countries that are transacted in currencies other than dollars, which provides natural hedge and mitigates the exposure on our Consolidated Statements of Income. We periodically, enter into certain 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. 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. See Note 13 of this Annual Report on Form 10-K for a discussion of derivative financial instruments.
PURCHASE COMMITMENTS
We have entered into unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. On an ongoing basis, we review our agreements and assess the likelihood of a shortfall in purchases and determine if it is necessary to record a liability. See Note 20 of this Annual Report on Form 10-K for additional discussion of purchase commitments. To date, we have not recorded such a liability.
REVENUE RECOGNITION
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 of 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 Annual Report on Form 10-K.
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 customers in the pipeline and adjacent 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.
RESEARCH, DEVELOPMENT AND TECHNICAL
Research, development and technical costs are expensed as incurred and consist primarily of staffing costs, materials and supplies, depreciation, utilities and other facilities costs.
INCOME TAXES
Current income taxes are determined based on estimated taxes payable or refundable on tax returns for the current year. Deferred income taxes are determined using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. Provisions are made for both U.S. and any foreign deferred income tax liability or benefit. We assess whether or not our deferred tax assets will ultimately be realized and record an estimated valuation allowance on those deferred tax assets that may not be realized. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position. In fiscal 2017, we maintained an assertion to permanently reinvest the earnings of all of our foreign subsidiaries. In light of the Tax Act and the associated transition to a modified territorial tax system, we no longer consider our foreign earnings to be indefinitely reinvested. See Note 19 of this Annual Report on Form 10-K for additional information on income taxes.
INTEREST RATE SWAPS
During the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap agreement to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. The fair value of our interest rate swaps is estimated using standard valuation models using market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value. We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of Interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into Net income. Hedge effectiveness is tested quarterly to determine if hedge treatment is appropriate.
SHARE-BASED COMPENSATION
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 re-approved the material terms of performance-based awards under the OIP for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended. For additional information regarding these programs, refer to Note 16 of this Annual Report on Form 10-K.
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 metrics expected due to the Acquisition.
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”), with vesting in three 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.
For additional information regarding our share-based compensation plans, refer to Note 16 of this Annual Report on Form 10-K.
EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing Net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC Topic 260, Earnings Per Share (ASC 260). Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method. We adopted ASU 2016-09 in fiscal 2018. Pursuant to the adoption, the proceeds from excess tax benefits are no longer included in the dilutive impact on the weighted average shares outstanding for dilutive EPS. The excess tax benefits were treated as a reduction to tax provision, rather than an increase to equity.
COMPREHENSIVE INCOME
Comprehensive income primarily differs from Net income due to interest rate swap contracts and foreign currency translation adjustments.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The provisions of ASU 2016-02 require a dual approach for lessee accounting under which a lessee would recognize a right-of-use asset and a corresponding lease liability. Leases will be classified as either finance or operating leases. For finance leases, a lessee will recognize Interest expense and amortization of the right-of-use asset, and for operating leases, the lessee will recognize a straight-line total lease expense. The guidance also requires specific qualitative and quantitative disclosures to supplement the amounts recorded in the financial statements, to afford better understanding of an entity's leasing activities, including any significant judgments and estimates. The guidance was amended through various ASU's subsequent to ASU 2016-02, all of which will be effective for us beginning October 1, 2019. Additional disclosures for our leases will be required beginning in the first quarter of fiscal 2020.
The Company will elect to use the practical expedients in the standard to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and therefore, does not expect the adoption of Topic 842 to have a significant impact on the Consolidated Statements of Income. We will not elect the hindsight practical expedient. We will also adopt the new standard in our first quarter of fiscal 2020 using the modified retrospective transition method; however, we will be applying the optional transition adjustment that permits us to continue applying Topic 840 within the comparative periods disclosed. By electing this optional transition method, we will recognize a cumulative-effect adjustment to the opening retained earnings balance as of October 1, 2019 rather than the earliest period presented. We also plan to make policy elections not to apply the balance sheet recognition requirements for qualifying short-term leases for non-real estate assets and not to separate non-lease components from lease components, as applicable.
We are finalizing the review of our population of lease contracts, implementing a new third-party lease software system, and establishing internal controls over financial reporting. Our lease portfolio primarily consists of operating leases, and the existing lease contracts include leases related to buildings, land, office equipment, and vehicles. The Company is in the process of determining the impact of adoption of ASU 2016-02 and anticipate the standard to have a material impact to our Consolidated Balance Sheets, but do not anticipate a material impact to our consolidated net earnings or cash flows. The most significant impact will be the recognition of right of use assets and lease liabilities for operating leases to our Consolidated Balance Sheets as of October 1, 2019. The Company will complete its adoption of this standard in the first quarter of fiscal 2020.
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (Topic 326). The provisions of this standard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would be established to present the net carrying value at the amount expected to be collected. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The guidance was amended through various ASU's subsequent to ASU 2016-13, all of which will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2019. We are currently evaluating the impact of implementation of this standard on our financial statements.
In 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 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.
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 Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU provides specific guidance on various disclosure requirements in Topic 820, including removal, modification and addition to current disclosure requirements. ASU 2018-13 will be effective for us beginning October 1, 2020, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our disclosures.
In August 2018, the FASB issued ASU No. 2018-15 "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)." The ASU Requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 will be effective for us beginning October 1, 2020, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregated Revenue
The Company disaggregates revenue by product area and segment as it best depicts the nature and amount of the Company’s revenue. See Note 23 of this Annual Report on Form 10-K for more information.
Contract Balances
The following table provides information about contract liability balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
October 1, 2018
|
|
Contract liabilities (current)
|
$
|
5,008
|
|
|
$
|
5,310
|
|
|
Contract liabilities (noncurrent)
|
1,130
|
|
|
1,239
|
|
The contract liability balances as of October 1, 2018 in the table above include the amounts recorded upon the adoption of ASC 606. At September 30, 2019, the current portion of contract liabilities of $5,008 is included in accrued liabilities, taxes payable and other current liabilities, and the noncurrent portion of $1,130 is included in other long-term liabilities in the Consolidated Balance Sheets. The amount of revenue recognized during the year ended September 30, 2019 that was included in the opening current contract liability balances in our Performance Materials segment was $4,989. The amount of revenue recognized during the year ended September 30, 2019 that was included in our opening contract liability balances in our Electronic Materials segment was not material.
Transaction Price Allocated to Remaining Performance Obligations
The table below discloses (1) the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period for contracts with an original duration of greater than one year and (2) when the Company expects to recognize this revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
Total
|
|
Revenue expected to be recognized on contract liability amounts as of September 30, 2019
|
$
|
1,344
|
|
|
$
|
671
|
|
|
$
|
460
|
|
|
$
|
2,475
|
|
4. BUSINESS COMBINATION
On the Acquisition Date, the Company completed its acquisition of 100% of the outstanding stock of KMG, which was a publicly 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 and adjacent industries, and industrial wood preservation 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 services to the pipeline industry. 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 shareholders and equity award holders, stock consideration to KMG common shareholders 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, $1,065,000 term loan facility (the “Term Loan Facility”), which we drew 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. 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 debt
|
304,648
|
|
|
Total cash consideration paid
|
1,205,404
|
|
|
Fair value of Cabot Microelectronics common stock issued for KMG outstanding common stock and equity awards
|
331,048
|
|
|
Total consideration transferred
|
$
|
1,536,452
|
|
The following table summarizes the allocation of fair values of assets acquired and liabilities assumed as of the Acquisition Date.
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
$
|
23,217
|
|
|
Accounts receivable
|
63,950
|
|
|
Inventories
|
68,087
|
|
|
Prepaid expenses and other current assets
|
14,694
|
|
|
Property, plant and equipment
|
147,170
|
|
|
Intangible assets
|
844,800
|
|
|
Other long-term assets
|
5,805
|
|
|
Accounts payable
|
(28,835)
|
|
|
Accrued expenses and other current liabilities
|
(44,216)
|
|
|
Deferred income taxes liabilities
|
(154,449)
|
|
|
Other long-term liabilities*
|
(15,900)
|
|
|
Total identifiable net assets acquired
|
924,323
|
|
|
Goodwill
|
612,129
|
|
|
Total consideration transferred
|
$
|
1,536,452
|
|
*In our fourth fiscal quarter of 2019, as a measurement period adjustment, $12,145 of asset retirement obligations was included in Other long-term liabilities. See Note 8 of this Annual Report on Form 10-K for additional information.
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 based on the information currently available, and the expectations and assumptions that have been deemed reasonable by the Company’s management.
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 revenues, operating expenses, discount rates, terminal growth rates, and customer 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 – Flowchem
|
$
|
315,000
|
|
|
20
|
|
Customer relationships -Electronic chemicals
|
280,000
|
|
|
19
|
|
Customer relationships - all other
|
109,000
|
|
|
15-16
|
|
Technology and know-how
|
85,500
|
|
|
9-11
|
|
Trade name – Flowchem
|
46,000
|
|
|
Indefinite
|
|
Trade name - all other
|
7,000
|
|
|
1-15
|
|
EPA product registration rights
|
2,300
|
|
|
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. The intangible assets subject to amortization have a weighted average useful life of 17.9 years.
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 allocation of goodwill to each of the Electronic Materials and Performance Materials segments as a result of the Acquisition was $259,859 and $352,270, respectively.
For the year ended September 30, 2019, we recorded $34,709 in Acquisition and integration-related expenses, including transaction costs, stock compensation expense, severance and retention costs. These items are included within Selling, general and administrative in the Consolidated Statements of Income. In the same year ended September 30, 2019, we also recorded a charge of $14,869 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 Consolidated Statements of Income and Consolidated Statements of Comprehensive Income (Loss) from the Acquisition Date. Net sales of the acquired KMG businesses since the Acquisition Date through September 30, 2019 were $450,945. KMG’s Net loss since the Acquisition Date was $38,500, which includes $22,720 of Acquisition-related costs, $67,372 of impairment expense and a $14,869 charge for fair value write-up of inventory sold. Further, additional amortization and depreciation expense associated with recording KMG’s net assets at fair value decreased KMG’s Net 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Revenues
|
$
|
1,099,674
|
|
|
$
|
1,063,563
|
|
|
Net income
|
69,673
|
|
|
50,055
|
|
Earnings per share - basic
|
$
|
2.40
|
|
|
$
|
1.74
|
|
|
Earnings per share - diluted
|
$
|
2.36
|
|
|
$
|
1.70
|
|
The following costs are included in the year ended September 30, 2018:
•Non-recurring transaction costs of $33,208.
•Non-recurring transaction-related employee costs, such as accelerated stock compensation expense, retention and severance expense of $38,132.
•Non-recurring charge for fair value write-up of inventory sold of $14,869.
The historical financial information has been adjusted by applying the Company’s accounting policies and giving effect to the pro forma adjustments, which consist of (i) amortization expense associated with identified intangible assets; (ii) depreciation of fixed asset step-up (for pre-Acquisition periods only); (iii) accretion of inventory step-up value; (iv) the elimination of Interest expense on pre-Acquisition KMG debt and replacement of Interest expense related to the Acquisition-related financing; (v) transaction-related costs; (vi) accelerated share-based compensation expense (pre-Acquisition periods only); (vii) retention and severance expense incurred as a direct result of the Acquisition; and (viii) an adjustment to tax-effect the aforementioned unaudited pro forma adjustments using an estimated weighted-average effective income tax rate of each entity and the jurisdictions to which the above adjustments relate. The pro forma consolidated results are not necessarily indicative of what the consolidated results actually would have been had the Acquisition been completed on October 1, 2017. The pro forma consolidated results do not purport to project future results of combined operations, nor do they reflect the expected realization of any revenue or cost synergies associated with the Acquisition.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB established a three-level hierarchy for disclosure based on the extent and level of judgment used to estimate fair value. Level 1 inputs consist of valuations based on quoted market prices in active markets for identical assets or liabilities. Level 2 inputs consist of valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in an inactive market, or other observable inputs. Level 3 inputs consist of valuations based on unobservable inputs that are supported by little or no market activity.
The following table presents financial instruments, other than long-term debt, that we measured at fair value on a recurring basis at September 30, 2019 and 2018. See Note 13 of this Annual Report on Form 10-K 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
188,495
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
188,495
|
|
|
Other long-term investments
|
980
|
|
|
—
|
|
|
—
|
|
|
980
|
|
|
Total assets
|
$
|
189,475
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
189,475
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
—
|
|
|
24,244
|
|
|
—
|
|
|
24,244
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
24,244
|
|
|
$
|
—
|
|
|
$
|
24,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active markets. We invest only in AAA-rated, prime institutional money market funds, comprised of high quality, short-term fixed income securities. Our other long-term investments represent the fair value of investments under the Cabot Microelectronics Supplemental Employee Retirement Plan (SERP), which is a nonqualified supplemental savings plan. The fair value of the investments is determined through quoted market prices within actively traded markets. Although the investments are allocated to individual participants and investment decisions are made solely by those participants, the SERP is a nonqualified plan. Consequently, the Company owns the assets and the related offsetting liability for disbursement until such time as a participant makes a qualifying withdrawal. The long-term asset was adjusted to $980 in the fourth quarter of fiscal 2019 to reflect its fair value as of September 30, 2019.
Our derivative financial instruments include foreign exchange contracts and an interest rate swap. During the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap agreement 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 12 of this Annual Report on Form 10-K for more information on our use of derivative financial instruments.
6. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Raw materials
|
$
|
60,157
|
|
|
$
|
35,150
|
|
|
Work in process
|
12,940
|
|
|
8,117
|
|
|
Finished goods
|
72,181
|
|
|
28,659
|
|
|
Total
|
$
|
145,278
|
|
|
$
|
71,926
|
|
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Land
|
$
|
36,276
|
|
|
$
|
17,525
|
|
|
Buildings
|
142,585
|
|
|
103,601
|
|
|
Machinery and equipment
|
257,706
|
|
|
195,434
|
|
|
Vehicles
|
13,497
|
|
|
—
|
|
|
Furniture and fixtures
|
9,615
|
|
|
7,575
|
|
|
Information systems
|
46,516
|
|
|
34,271
|
|
|
Capital lease
|
1,200
|
|
|
1,200
|
|
|
Construction in progress
|
63,636
|
|
|
17,001
|
|
|
Total property, plant and equipment
|
571,031
|
|
|
376,607
|
|
|
Less: accumulated depreciation
|
(294,213)
|
|
|
(265,204)
|
|
|
Net property, plant and equipment
|
$
|
276,818
|
|
|
$
|
111,403
|
|
Depreciation expense was $37,584, $17,255 and $17,195 for the years ended September 30, 2019, 2018 and 2017, respectively.
In fiscal 2019, we recorded an impairment of $4,063 of property, plant and equipment related to the wood treatment asset group, and adjusted the remaining useful lives such that they do not extend beyond the announced plant closures around the end of the calendar 2021. See Note 10 of this Annual Report on Form 10-K for further information. In fiscal 2017, we recorded $860 in impairment expense related to a surplus research and development asset and we recorded a $1,820 gain on sale of surplus research and development equipment. We did not record any impairment expense on property, plant and equipment in fiscal 2018.
8. ASSET RETIREMENT OBLIGATIONS
The company has asset retirement obligations (AROs) related to storage or removal of hazardous materials, decontamination or demolition of above ground storage tanks (ASTs) and certain restoration and decommissioning obligations related to certain of its owned and leased properties. We measure AROs based upon the applicable accounting guidance, using certain assumptions including estimates provided in decommissioning and demolition cost studies based on multiple alternative scenarios. These cost studies contain significant estimates and assumptions, and are reviewed by Company Management. If operational or regulatory requirements vary from our estimates, we could incur significant additional charges to income and increase in cash expenditures related to those costs.
The Company has multiple production facilities with an indeterminate useful life and there is insufficient information available to estimate a range of potential settlement dates for the obligation. Therefore, the Company cannot reasonably estimate the fair value of the liability. When a reasonable estimate can be made, an asset retirement obligation will be recorded, and such amounts may be material to the consolidated financial statements in the period in which they are recorded.
The following table provides a rollforward of the AROs reflected in the Company’s Consolidated Balance Sheets from October 1, 2018 to September 30, 2019:
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Beginning Balance at October 1, 2018
|
$
|
—
|
|
|
Addition: Purchase Accounting in connection with the Acquisition
|
12,145
|
|
|
Reduction: Liabilities Settled
|
—
|
|
|
Addition: Accretion of discount
|
530
|
|
|
Ending Balance at September 30, 2019
|
$
|
12,675
|
|
Our AROs are recorded in Other long-term liabilities in the Consolidated Balance Sheets. Accretion is recorded in Cost of sales on the Consolidated Statements of Income. See Note 2 of this Annual Report on Form 10-K for additional information on the Company’s accounting policy for AROs.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill activity for each of the Company’s reportable segments which carry goodwill, Electronic Materials and Performance Materials, for the years ended September 30, 2019 and 2018 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Materials
|
|
Performance Materials
|
|
Total
|
|
Balance at September 30, 2017
|
$
|
96,237
|
|
|
|
$
|
5,695
|
|
|
|
$
|
101,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation impact
|
(154)
|
|
|
|
—
|
|
|
|
(154)
|
|
|
Sale of certain assets
|
—
|
|
|
|
(695)
|
|
|
|
(695)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
$
|
96,083
|
|
|
|
$
|
5,000
|
|
|
|
$
|
101,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation impact
|
(3,145)
|
|
|
|
4
|
|
|
|
(3,141)
|
|
|
Goodwill arising from the Acquisition
|
259,859
|
|
|
|
352,270
|
|
|
|
612,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
$
|
352,797
|
|
|
|
$
|
357,274
|
|
|
|
$
|
710,071
|
|
The components of other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product technology, trade secrets and know-how
|
$
|
123,948
|
|
|
$
|
37,993
|
|
|
$
|
85,955
|
|
|
$
|
48,825
|
|
|
$
|
25,305
|
|
|
$
|
23,520
|
|
|
Acquired patents and licenses
|
9,023
|
|
|
8,397
|
|
|
626
|
|
|
8,270
|
|
|
8,252
|
|
|
18
|
|
|
Customer relationships, distribution rights and other
|
684,764
|
|
|
64,471
|
|
|
620,293
|
|
|
28,068
|
|
|
17,574
|
|
|
10,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets subject to amortization
|
817,735
|
|
|
110,861
|
|
|
706,874
|
|
|
85,163
|
|
|
51,131
|
|
|
34,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other indefinite-lived intangibles*
|
47,170
|
|
|
—
|
|
|
47,170
|
|
|
1,170
|
|
|
—
|
|
|
1,170
|
|
|
Total other intangible assets not subject to amortization
|
47,170
|
|
|
—
|
|
|
47,170
|
|
|
1,170
|
|
|
—
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
$
|
864,905
|
|
|
$
|
110,861
|
|
|
$
|
754,044
|
|
|
$
|
86,333
|
|
|
$
|
51,131
|
|
|
$
|
35,202
|
|
*Other indefinite-lived intangibles not subject to amortization primarily consist of trade names.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
|
Additions due to the Acquisition
|
|
Impairment
|
|
FX and Other
|
Balance at September 30, 2019
|
Accumulated Amortization
|
Net at September 30, 2019
|
|
Other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Customer relationships, trade names, and distribution rights
|
$
|
28,068
|
|
711,000
|
|
(51,969)
|
|
$
|
(2,335)
|
|
$
|
684,764
|
|
$
|
64,471
|
|
$
|
620,293
|
|
|
Product technology, trade secrets and know-how
|
48,825
|
|
85,500
|
|
(9,651)
|
|
(726)
|
|
123,948
|
|
37,993
|
|
85,955
|
|
|
Acquired patents and licenses
|
8,270
|
|
2,300
|
|
(1,689)
|
|
142
|
|
9,023
|
|
8,397
|
|
626
|
|
|
Total other intangible assets subject to amortization
|
85,163
|
|
798,800
|
|
(63,309)
|
|
(2,919)
|
|
817,735
|
|
110,861
|
|
706,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other indefinite-lived intangibles*
|
1,170
|
|
46,000
|
|
—
|
|
—
|
|
47,170
|
|
—
|
|
47,170
|
|
|
Total other intangible assets not subject to amortization
|
1,170
|
|
46,000
|
|
—
|
|
—
|
|
47,170
|
|
—
|
|
47,170
|
|
|
Total other intangible assets
|
$
|
86,333
|
|
$
|
844,800
|
|
$
|
(63,309)
|
|
$
|
(2,919)
|
|
$
|
864,905
|
|
$
|
110,861
|
|
$
|
754,044
|
|
As discussed in Note 4 of this Annual Report on Form 10-K, 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 of this Annual Report on Form 10-K
Amortization expense was $59,931, $7,495 and $7,795 for fiscal 2019, 2018 and 2017, respectively. Estimated future amortization expense of intangible assets as of September 30, 2019 for the five succeeding fiscal years is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Estimated
Amortization
Expense
|
|
|
|
|
|
2020
|
|
$90,811
|
|
|
2021
|
|
89,801
|
|
|
2022
|
|
82,175
|
|
|
2023
|
|
69,538
|
|
|
2024
|
|
61,627
|
|
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of our fiscal year or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. An entity has the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). Similarly, an entity has the option to use a step zero or a step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2018 and 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 units, for which we chose to use a step zero analysis for fiscal 2019. See Note 2 of this Annual Report on Form 10-K for information regarding our accounting policy.
As discussed further in Note 10 of this Annual Report on Form 10-K, in the fourth quarter of fiscal 2019, asset impairment charges of $63,309 were recorded related to technology and know-how, customer relationships and EPA product registration rights related to our wood treatment reporting unit. For these intangible assets, the remaining useful lives were limited to the end of the calendar 2021. No impairment charges to goodwill were recognized in any periods presented and no impairment charges for other intangible assets were recorded in fiscal 2018 and 2017.
10. LONG-LIVED ASSET IMPAIRMENT -WOOD TREATMENT
The wood treatment asset group produces pentachlorophenol ("penta"), a chemical pesticide supplied to industrial customers to pressure treat certain wood products, primarily utility poles and crossarms, to extend the useful life of such wood products by protecting against insect damage and related decay. It includes operations in Matamoros, Mexico and Tuscaloosa, Alabama, which form a single asset group as their operations are highly interrelated.
In September 2019, as the Company assessed its capital expenditure priorities for fiscal year 2020 and beyond, the Company made a decision to further focus its future capital investments on high-growth businesses complementary to its core, and to cease future investment in the wood treatment business and to not construct a new production facility to replace operations in Matamoros and Tuscaloosa.
The Company is considering various options regarding this business, which may include continued operations of the business until the previously announced closure of the existing facilities by around the end of calendar 2021, or exploration of a possible sale of the business; however, management has not committed to a plan of sale.
Management believes events subsequent to the Acquisition Date, including management's decision to cease capital investment in the wood treatment business, and shifting market perceptions of environmental risks and costs, with the Tuscaloosa warehouse facility fire incident as illustrative, resulted in a triggering event to assess the asset group for impairment. The asset group did not pass the recoverability test and the Company proceeded to measure an impairment.
In the fourth quarter of fiscal 2019, the Company recognized pre-tax asset impairment charges of $67,372, which were recorded within Asset impairment charges and a tax benefit of $17,072 in Provision for income taxes in the Consolidated Statements of Income. The impairment is recognized in the Performance Materials segment and relates to long-lived assets in the wood treatment reporting unit.
The long-lived asset impairment was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
Balance Prior to Impairment
|
|
Impairment
|
|
Balance after Impairment
|
|
Property, plant, and equipment, net
|
$
|
4,902
|
|
|
|
$
|
4,063
|
|
|
|
$
|
839
|
|
|
Other intangible assets – Product technology
|
11,646
|
|
|
|
9,651
|
|
|
|
1,995
|
|
|
Other intangible assets – Acquired patents and licenses
|
2,038
|
|
|
|
1,689
|
|
|
|
349
|
|
|
Other intangible assets – Customer relationships, distribution rights, and other
|
62,708
|
|
|
|
51,969
|
|
|
|
10,739
|
|
|
Total
|
$
|
81,294
|
|
|
|
$
|
67,372
|
|
|
|
$
|
13,922
|
|
To determine the measurement of the impairment loss, the Company estimated the fair value of the asset group, which is also a reporting unit and therefore included goodwill, and recognized an impairment to the extent that the carrying value exceeded the fair value. In estimating the fair value of the wood treatment asset group, the Company used an income approach based upon an estimate of discounted future cash flows, using a probability-weighted approach, including scenarios for continued operations and the potential for a sale of the business. The scenarios for estimating cash flows resulting from continued operations reflected management’s best estimates of sales volumes, which may include customer attrition driven by the Company’s announcement to cease investment in the wood treatment business, potentially prompting them to switch to alternative products. The sale case is based upon estimated proceeds from a potential sale of the wood treatment business; however, there is no assurance the Company will pursue or consummate a sale. The fair-value estimate for the wood treatment asset group included significant judgments and assumptions relating to projected revenues through the expected closure of the existing facilities.
The fair value of the wood treatment asset group was sufficient that the recognized impairment was limited to long-lived assets and the reporting unit goodwill was not impaired. The Company will continue to monitor the wood treatment asset group for indicators of long-lived asset or goodwill impairment. Absent a sale of the business, as the Company approaches the announced closure date of the 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, 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. Following the impairment, the wood treatment reporting unit has goodwill of $35,844 and long-lived assets of $13,922.
11. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Long-term contract asset
|
$
|
1,164
|
|
|
$
|
1,548
|
|
|
Long-term SERP Investment
|
980
|
|
|
1,137
|
|
|
Prepaid unamortized debt issuance cost - revolver
|
709
|
|
|
—
|
|
|
Other long-term assets
|
2,858
|
|
|
1,979
|
|
|
Total
|
$
|
5,711
|
|
|
$
|
4,664
|
|
12. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Accrued compensation
|
$
|
33,809
|
|
|
$
|
35,367
|
|
|
Income taxes payable
|
15,725
|
|
|
18,045
|
|
|
Dividends payable
|
12,953
|
|
|
10,822
|
|
|
KMG - Bernuth warehouse fire related (See Note 20)
|
7,998
|
|
|
—
|
|
|
Taxes, other than income taxes
|
6,281
|
|
|
1,976
|
|
|
Interest rate swap liability
|
5,351
|
|
|
—
|
|
|
Deferred revenue and customer advances
|
5,008
|
|
|
4,894
|
|
|
Accrued Interest
|
3,739
|
|
|
—
|
|
|
Goods and services received, not yet invoiced
|
3,075
|
|
|
1,954
|
|
|
Other
|
9,679
|
|
|
9,925
|
|
|
Total
|
$
|
103,618
|
|
|
$
|
82,983
|
|
13. DEBT
On the Acquisition Date, we entered into 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 Facility in an aggregate principal amount of$1,065.0 million and the 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 Term Loan Facility and the Revolving Credit Facility are referred to as the “Credit Facilities.”
Proceeds of the loans borrowed under the Term Loan Facility on the Acquisition Date were used to fund, in part, the Acquisition and certain of KMG’s existing indebtedness, and to pay related fees and expenses. The Revolving Credit Facility remains undrawn.
The Credit Facilities are guaranteed by each of the Company’s wholly-owned domestic subsidiaries, including KMG 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.
Borrowings under the 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 Term Loan Facility, 2.25% for LIBOR loans and 1.25% 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 total prepayment of $100.0 million during the fiscal year ended September 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 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 September 30, 2019, the fair value of the Term Loan Facility, using level 2 inputs, approximated its carrying value of $959,676 as the loan bears a floating market rate of interest. As of September 30, 2019, $13,313 of the debt outstanding was classified as short-term, and $17,900 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 agreement to hedge the variability in our LIBOR-based interest payments on approximately 70% of our Term Loan Facility balance. See Note 14 of this Annual Report on Form 10-K 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 September 30, 2019, scheduled principal repayments of the Term Loan were:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Principal Repayments
|
|
2020
|
|
$
|
13,313
|
|
|
2021
|
|
10,650
|
|
|
2022
|
|
10,650
|
|
|
2023
|
|
10,650
|
|
|
2024
|
|
10,650
|
|
|
Thereafter
|
|
903,763
|
|
|
|
|
$
|
959,676
|
|
14. 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 Agreement
During the second quarter, we entered into a floating-to-fixed interest rate swap agreement to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. As of September 30, 2019, the notional value of the swap was $699,000 and this value is scheduled to decrease bi-annually, and to expire on January 31, 2024.
We have designated this swap agreement 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.
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 September 30, 2019 and 2018, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign currencies were $6,239 and $7,652, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $24,270 and $24,860, 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 level 2 inputs, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
|
Derivative Liabilities
|
|
|
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
|
Consolidated Balance Sheets Location
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Accrued expenses, income taxes payable and other current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,351
|
|
|
$
|
—
|
|
|
|
Other long-term liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,841
|
|
|
$
|
—
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Accrued expenses, income taxes payable and other current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52
|
|
|
$
|
339
|
|
The following table summarizes the effect of our derivative instrument on our Consolidated Statements of Income for the fiscal years ended September 30, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Consolidated Statements of Income
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
Consolidated Statements of Income Location
|
2019
|
|
2018
|
|
2017
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other income (expense), net
|
$
|
28
|
|
|
$
|
(1,569)
|
|
|
$
|
(1,462)
|
|
The interest rate swap agreement has been deemed to be effective, and realized gains and losses were immaterial to our Consolidated Statements of Income. We recorded an unrealized loss of $18,780, net of tax, in Accumulated comprehensive income during the twelve months ended September 30, 2019 for this interest rate swap. As of September 30, 2019, during the next 12 months, we expect approximately $5,351 to be reclassified from Accumulated other comprehensive (loss) income into Interest expense related to our interest rate swap based on projected rates of the LIBOR forward curve as of September 30, 2019.
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below summarizes the components of Accumulated other comprehensive income (loss) (AOCI), net of Provision for income taxes/(benefit), for the years ended September 30, 2019, 2018, and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
|
|
Cash
Flow
Hedges
|
|
Pension and Other
Postretirement
Liabilities
|
|
Total
|
|
Balance at September 30, 2016
|
$
|
11,985
|
|
|
$
|
(817)
|
|
|
$
|
(1,612)
|
|
|
$
|
9,556
|
|
|
Foreign currency translation adjustment, net of tax of $(2,321)
|
(6,746)
|
|
|
—
|
|
|
—
|
|
|
(6,746)
|
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(660)
|
—
|
|
|
1,161
|
|
|
—
|
|
|
1,161
|
|
|
Reclassification adjustment into earnings, net of tax of $170
|
—
|
|
|
(298)
|
|
|
—
|
|
|
(298)
|
|
|
Change in pension and other postretirement, net of tax of $79
|
—
|
|
|
—
|
|
|
276
|
|
|
276
|
|
|
Balance at September 30, 2017
|
5,239
|
|
|
46
|
|
|
(1,336)
|
|
|
3,949
|
|
|
Foreign currency translation adjustment, net of tax of $(2,409)
|
679
|
|
|
—
|
|
|
—
|
|
|
679
|
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $111
|
—
|
|
|
319
|
|
|
—
|
|
|
319
|
|
|
Reclassification adjustment into earnings, net of tax of $(133)
|
—
|
|
|
(382)
|
|
|
—
|
|
|
(382)
|
|
|
Change in pension and other postretirement, net of tax of $1
|
—
|
|
|
—
|
|
|
(26)
|
|
|
(26)
|
|
|
Balance at September 30, 2018
|
5,918
|
|
|
(17)
|
|
|
(1,362)
|
|
|
4,539
|
|
|
Foreign currency translation adjustment, net of tax of $591
|
(8,548)
|
|
|
—
|
|
|
—
|
|
|
(8,548)
|
|
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(5,297)
|
—
|
|
|
(18,370)
|
|
|
—
|
|
|
(18,370)
|
|
|
Reclassification adjustment into earnings, net of tax of $(114)
|
—
|
|
|
(410)
|
|
|
—
|
|
|
(410)
|
|
|
Change in pension and other postretirement, net of tax of $(30)
|
—
|
|
|
—
|
|
|
(449)
|
|
|
(449)
|
|
|
Balance at September 30, 2019
|
$
|
(2,630)
|
|
|
$
|
(18,797)
|
|
|
$
|
(1,811)
|
|
|
$
|
(23,238)
|
|
The before tax amount reclassified from OCI to Net income in fiscal 2019, related to our cash flow hedges, was recorded as Interest expense on our Consolidated Statements of Income. Amounts reclassified from OCI to Net income, related to pension liabilities, were not material in fiscal years 2019, 2018 and 2017.
16. SHARE-BASED COMPENSATION PLANS
EQUITY INCENTIVE PLAN AND OMNIBUS INCENTIVE PLAN
In March 2004, our stockholders approved our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (the "EIP"), as amended and restated September 23, 2008. In March 2012, our stockholders approved the Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan (the "OIP"), which is the successor plan to the EIP, and which was amended as of March 2017. All share-based awards have been made from the OIP as of its approval date, and since then the EIP no longer has been available for any awards. The OIP is administered by the Compensation Committee of the Board of Directors and is intended to provide management with the flexibility to attract, retain and reward our employees, directors, consultants and advisors. The OIP allows for the granting of six types of equity incentive awards: stock options, restricted stock, restricted stock units, stock appreciation rights (SARs), performance-based awards and substitute awards. The OIP also provides for cash incentive awards to be made. Substitute awards under the OIP are those awards that, in connection with an acquisition, may be granted to employees, directors, consultants or advisors of the acquired company, in substitution for equity incentives held by them in the seller or the acquired company. For example, in fiscal 2019 in connection with the Acquisition, we awarded a total of 43,443 restricted stock unit awards to certain KMG employees in substitution for certain unvested restricted stock unit awards that KMG had awarded subsequent to the entry into the definitive agreement for the Acquisition, but prior to the Acquisition Date (“Replacement Awards”). Also, in fiscal 2016, related to our acquisition of NexPlanar, we granted incentive stock options (ISOs), as allowed under the OIP, to certain NexPlanar employees in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. As of September 30, 2019, no SARs have been granted to date under either plan. No awards of any type have been granted to date to consultants or advisors under either plan. The OIP authorizes up to 4,977,887 shares of stock to be granted thereunder, including up to 2,074,395 shares of stock in the aggregate of awards other than options or SARs, and up to 2,538,690 incentive stock options. The 4,977,887 shares of stock represents 2,944,803 shares of newly authorized shares and 2,033,084 shares previously available under the EIP. In addition, shares that become available from awards under the EIP and the OIP because of events such as forfeitures, cancellations or expirations will also be available for issuance under the OIP. Shares issued under our share-based compensation plans are issued from new shares rather than from treasury shares.
Non-qualified stock options issued under the OIP, as they were under the EIP, are generally time-based and provide for a ten-year term, with options generally vesting equally over a four-year period, with first vesting on the first anniversary of the award date. Non-qualified stock options granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date. Under the OIP, as under the EIP, employees may also be granted ISOs to purchase common stock at not less than the fair value on the date of the grant. Prior to fiscal 2016, no ISOs had been granted under either plan. Compensation expense related to our stock option awards was $4,267, $6,392 and $5,500 in fiscal 2019, 2018 and 2017, respectively. For additional information on our accounting for share-based compensation, see Note 2 of this Annual Report on Form 10-K.
Under the OIP, employees and non-employees may be awarded shares of restricted stock or restricted stock units, which generally vest over a four-year period, with first vesting on the anniversary of the grant date. In general, shares of restricted stock and restricted stock units may not be sold, assigned, transferred, pledged, disposed of or otherwise encumbered. Holders of restricted stock, and restricted stock units, if specified in the award agreements, have all the rights of stockholders, including voting and dividend rights, subject to the above restrictions. Holders of restricted stock units awarded as of fiscal 2016 have dividend equivalent rights pursuant to the terms of the OIP and respective award agreements. Restricted shares under the OIP, as under the EIP, also may be purchased and placed "on deposit" by executive officers pursuant to the 2001 Deposit Share Program. Shares purchased under this Deposit Share Program receive a 50% match in restricted shares ("Award Shares"). These Award Shares vest at the end of a three-year period, and are subject to forfeiture upon early withdrawal of the deposit shares. Compensation expense related to our restricted stock and restricted stock unit awards and restricted shares matched at 50% pursuant to the Deposit Share Program for fiscal 2019, 2018 and 2017 was $11,400, $9,186 and $6,730, respectively.
In December 2017, we granted performance share unit ("PSU") awards to certain employees. These PSUs fully vest on the third anniversary of the grant date. Stock-based compensation for the awards is recognized over the requisite service period (three years) beginning on the date of award through the end of the performance period based on the number of PSUs expected to vest under the awards at the end of the performance period. The expected amount of vesting is determined using certain performance measures and is re-evaluated at the end of each fiscal year through the end of the performance period. In addition, the PSUs awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We used a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions, including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility. We have recorded $1,279 and $2,056 compensation expense related to our PSU awards in fiscal 2019 and 2018, respectively.
With respect to the Replacement Awards, which were made in fiscal 2019, they vest in three 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.
EMPLOYEE STOCK PURCHASE PLAN
In March 2008, our stockholders approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the "ESPP"), which amended the ESPP for the primary purpose of increasing the authorized shares of common stock to be purchased under the ESPP from 475,000 designated shares to 975,000 shares. As of September 30, 2019, a total of 336,684 shares are available for purchase under the ESPP. The ESPP allows all full-time, and certain part-time, employees of our Company and its designated subsidiaries to purchase shares of our common stock through payroll deductions. Employees can elect to have up to 10% of their annual earnings withheld to purchase our stock, subject to a maximum number of shares that a participant may purchase and a maximum dollar expenditure in any six-month offering period, and certain other criteria. The provisions of the ESPP allow shares to be purchased at a price no less than the lower of 85% of the closing price at the beginning or end of each semi-annual stock purchase period. A total of 48,820, 49,896, and 69,751 shares were issued under the ESPP during fiscal 2019, 2018 and 2017, respectively. Compensation expense related to the ESPP was $1,281, $885 and $774 in fiscal 2019, 2018 and 2017, respectively.
ACCOUNTING FOR SHARE-BASED COMPENSATION
The fair value of our share-based awards, as shown below, was estimated using the Black-Scholes model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Stock Options
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
$
|
27.34
|
|
|
$
|
26.59
|
|
|
$
|
16.50
|
|
|
Expected term (in years)
|
6.86
|
|
6.68
|
|
6.57
|
|
Expected volatility
|
26
|
%
|
|
26
|
%
|
|
27
|
%
|
|
Risk-free rate of return
|
2.8
|
%
|
|
2.4
|
%
|
|
2.1
|
%
|
|
Dividend yield
|
1.6
|
%
|
|
1.0
|
%
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
ESPP
|
|
|
|
|
|
|
Weighted-average grant date fair value
|
$
|
25.16
|
|
|
$
|
20.94
|
|
|
$
|
12.49
|
|
|
Expected term (in years)
|
0.5
|
|
0.5
|
|
0.5
|
|
Expected volatility
|
34
|
%
|
|
26
|
%
|
|
24
|
%
|
|
Risk-free rate of return
|
2.3
|
%
|
|
1.5
|
%
|
|
0.6
|
%
|
|
Dividend yield
|
1.6
|
%
|
|
1.1
|
%
|
|
1.3
|
%
|
The Black-Scholes model is primarily used in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. Because employee stock options and ESPP purchases have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, our use of the Black-Scholes model for estimating the fair value of stock options and ESPP purchases may not provide an accurate measure. Although the value of our stock options and ESPP purchases are determined in accordance with applicable accounting standards using an option-pricing model, those values may not be indicative of the fair values observed in a willing buyer/willing seller market transaction.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award. Share-based compensation expense related to restricted stock and restricted stock unit awards is recorded net of expected forfeitures.
SHARE-BASED COMPENSATION EXPENSE
Total share-based compensation expense for the years ended September 30, 2019, 2018 and 2017, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Consolidated Statements of Income classifications:
|
|
|
|
|
|
|
Cost of sales
|
$
|
2,727
|
|
|
$
|
2,450
|
|
|
$
|
2,229
|
|
|
Research, development and technical
|
2,150
|
|
|
1,940
|
|
|
1,792
|
|
|
Selling, general and administrative
|
13,350
|
|
|
14,128
|
|
|
8,983
|
|
|
Tax benefit
|
(3,767)
|
|
|
(4,306)
|
|
|
(4,339)
|
|
|
Total share-based compensation expense, net of tax
|
$
|
14,460
|
|
|
$
|
14,212
|
|
|
$
|
8,665
|
|
Beginning in December 2017, equity grants included the provisions of stock option grants and restricted stock unit awards such that except in certain circumstances including termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, for those employees who have met the retirement eligibility at the grant date, we now record the total share-based compensation expense upon award; for those employees who will meet the retirement eligibility during the four-year vesting period, we now record the share-based compensation expense over the period from the grant date through the date of retirement eligibility, rather than over the four-year vesting period stated in the award agreement. Restricted stock units granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date.
In fiscal 2019, we recorded $3,253 in share-based compensation expense related to the Replacement Awards, including accelerated vesting, issued in conjunction with the Acquisition. In fiscal 2018, we recorded $2,602 of shared-based compensation expense associated with our executive officer transitions, which is included in the table above as general and administrative expense.
STOCK OPTION ACTIVITY
A summary of stock option activity under the EIP and OIP as of September 30, 2019, and changes during fiscal 2019 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at September 30, 2018
|
1,131,481
|
|
|
$
|
52.68
|
|
|
|
|
|
|
Granted
|
148,027
|
|
|
103.23
|
|
|
|
|
|
|
Exercised
|
(313,246)
|
|
|
42.12
|
|
|
|
|
|
|
Forfeited or canceled
|
(87,238)
|
|
|
67.89
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
879,024
|
|
|
$
|
63.44
|
|
|
6.6
|
|
$
|
68,363
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
492,218
|
|
|
$
|
50.70
|
|
|
5.5
|
|
$
|
44,549
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at September 30, 2019
|
386,806
|
|
|
$
|
79.72
|
|
|
8.0
|
|
$
|
23,783
|
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., for all in-the-money stock options, the difference between our closing stock price per share on the last trading day of fiscal 2019 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on the last trading day of fiscal 2019. The total intrinsic value of options exercised was $20,711, $30,345 and $25,213 for fiscal 2019, 2018 and 2017, respectively.
The total cash received from options exercised was $13,193, $19,247 and $27,666 for fiscal 2019, 2018 and 2017, respectively. The actual tax benefit realized for the tax deductions from options exercised was $4,449, $7,503 and $8,743 for fiscal 2019, 2018 and 2017, respectively. The total fair value of stock options vested during fiscal years 2019, 2018 and 2017 was $4,506, $5,008 and $5,300, respectively. As of September 30, 2019, there was $7,442 of total unrecognized share-based compensation expense related to unvested stock options granted under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.1 years.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
A summary of the status of the restricted stock awards and restricted stock unit awards, including PSUs outstanding that were awarded under the OIP as of September 30, 2019, and changes during fiscal 2019, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Awards and Units
|
|
Weighted Average
Grant Date Fair
Value
|
|
Nonvested at September 30, 2018
|
328,147
|
|
|
$
|
70.42
|
|
|
Granted *
|
152,499
|
|
|
99.41
|
|
|
Vested
|
(156,900)
|
|
|
69.17
|
|
|
Forfeited
|
(48,513)
|
|
|
69.42
|
|
|
Nonvested at September 30, 2019
|
275,233
|
|
|
$
|
87.36
|
|
*Includes PSUs awarded, which may be subject to downward or upward adjustment depending on the performance measures during the particular performance period pursuant to the PSU award agreement.
The total fair value of restricted stock awards and restricted stock units vested during fiscal years 2019, 2018 and 2017 was $11,060, $6,669 and $6,898, respectively. As of September 30, 2019, there was $18,824 of total unrecognized share-based compensation expense related to unvested restricted stock awards and restricted stock units, including PSUs, under the OIP. That cost is expected to be recognized over a weighted-average period of 2.2 years.
17. SAVINGS PLAN
Effective in May 2000, we adopted the Cabot Microelectronics Corporation 401(k) Plan (the "401(k) Plan"), which is a qualified defined contribution plan, covering all eligible heritage Cabot Microelectronics U.S. employees meeting certain minimum age and eligibility requirements, as defined by the 401(k) Plan. Participants may make elective contributions of up to 60% of their eligible compensation. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The 401(k) Plan provides for matching and fixed non-elective contributions by the Company. Under the 401(k) Plan, the Company will match 100% of the first four percent of the participant's eligible compensation and 50% of the next two percent of the participant's eligible compensation that is contributed, subject to limitations required by government regulations. Under the 401(k) Plan, all U.S. employees, even those who do not contribute to the 401(k) Plan, receive a contribution by the Company in an amount equal to four percent of eligible compensation, and thus are participants in the 401(k) Plan. Participants are 100% vested in all Company contributions at all times. The Company's expense for the 401(k) Plan totaled $6,028, $5,562 and $5,256 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
KMG has a defined contribution 401(k) plan in which all regular heritage KMG U.S. employees are eligible to participate. KMG makes matching contributions under this plan of up to four percent of a participant’s compensation up to the annual regulated maximum amounts. The first 3% of the employee contribution is matched at 100%. The next 2% of the employee contribution is matched at 50%. The KMG expense for the 401(k) Plan totaled $670 for the fiscal year ended September 30, 2019. KMG's United Kingdom and Singapore subsidiaries make contributions to retirement plans that function as defined contribution retirement plans, and the contributions to those plans were approximately $1,356 for the fiscal year ended September 30, 2019.
18. STOCKHOLDERS' EQUITY
The following is a summary of our capital stock activity over the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
Common
Stock
|
|
Treasury
Stock
|
|
September 30, 2016
|
34,261,304
|
|
|
9,744,642
|
|
|
Exercise of stock options
|
818,640
|
|
|
|
|
Restricted stock under EIP and OIP, net of forfeitures
|
81,047
|
|
|
|
|
Common stock under ESPP
|
69,751
|
|
|
|
|
Repurchases of common stock under share repurchase plans
|
|
|
167,809
|
|
|
Repurchases of common stock – other
|
|
|
35,739
|
|
|
|
|
|
|
|
September 30, 2017
|
35,230,742
|
|
|
9,948,190
|
|
|
Exercise of stock options
|
487,915
|
|
|
|
|
Restricted stock under OIP, net of forfeitures
|
93,817
|
|
|
|
|
Common stock under ESPP
|
49,991
|
|
|
|
|
Repurchases of common stock under share repurchase plans
|
|
|
369,791
|
|
|
Repurchases of common stock – other
|
|
|
38,166
|
|
|
|
|
|
|
|
September 30, 2018
|
35,862,465
|
|
|
10,356,147
|
|
|
Shares issued in connection with the Acquisition
|
3,236,865
|
|
|
|
|
Exercise of stock options
|
313,246
|
|
|
|
|
Restricted stock under OIP, net of forfeitures
|
131,072
|
|
|
|
|
Common stock under ESPP
|
48,820
|
|
|
|
|
Repurchases of common stock under share repurchase plans
|
|
|
88,403
|
|
|
Repurchases of common stock – other
|
|
|
46,702
|
|
|
|
|
|
|
|
September 30, 2019
|
39,592,468
|
|
|
10,491,252
|
|
COMMON STOCK
Each share of common stock, including those awarded as restricted stock, but not restricted stock units, entitles the holder to one vote on all matters submitted to a vote of Cabot Microelectronics' stockholders. Common stockholders are entitled to receive ratably the dividends, if any, as may be declared by the Board of Directors. Holders of restricted stock units awarded as of fiscal 2016 are entitled to dividend equivalents, which are paid to the holder upon the vesting of the restricted stock units. The number of authorized shares of common stock is 200,000,000 shares.
SHARE REPURCHASES
In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from $75,000 to $150,000. Under this program, we repurchased 88,403 shares for $10,002 during fiscal 2019, 369,791 shares for $40,726 during fiscal 2018, and 167,809 shares for $12,035 during fiscal 2017. As of September 30, 2019, $71,268 remains available under our share repurchase program. To date, we have funded share repurchases under our share repurchase program from our existing cash balance, and anticipate we will continue to do so. The program, which became effective on the authorization date, may be suspended or terminated at any time, at the Company's discretion. For additional information on share repurchases, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" and the section titled "Liquidity and Capital Resources" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report of Form 10-K.
Separate from this share repurchase program, a total of 46,702, 38,166 and 35,739 shares were purchased during fiscal 2019, 2018 and 2017, respectively, pursuant to the terms of our OIP as shares withheld from award recipients to cover payroll taxes on the vesting of shares of restricted stock granted under the OIP.
19. INCOME TAXES
Income before income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2019
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Domestic
|
$
|
(45,364)
|
|
|
$
|
46,254
|
|
|
$
|
33,272
|
|
|
Foreign
|
108,470
|
|
|
115,457
|
|
|
76,100
|
|
|
Total
|
$
|
63,106
|
|
|
$
|
161,711
|
|
|
$
|
109,372
|
|
Taxes on income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2019
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
U.S. federal and state:
|
|
|
|
|
|
|
Current
|
$
|
23,461
|
|
|
$
|
14,698
|
|
|
$
|
8,606
|
|
|
Deferred
|
(23,182)
|
|
|
10,347
|
|
|
1,550
|
|
|
Total
|
$
|
279
|
|
|
$
|
25,045
|
|
|
$
|
10,156
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
Current
|
$
|
27,580
|
|
|
$
|
26,135
|
|
|
$
|
13,422
|
|
|
Deferred
|
(3,968)
|
|
|
488
|
|
|
(1,158)
|
|
|
Total
|
23,612
|
|
|
26,623
|
|
|
12,264
|
|
|
Total U.S. and foreign
|
$
|
23,891
|
|
|
$
|
51,668
|
|
|
$
|
22,420
|
|
The Provision for income taxes at our effective tax rate differed from the statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2019
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Federal statutory rate
|
21.0
|
%
|
|
24.5
|
%
|
|
35.0
|
%
|
|
U.S. benefits from research and experimentation activities
|
(2.4)
|
|
|
(0.8)
|
|
|
(1.0)
|
|
|
State taxes, net of federal effect
|
(4.7)
|
|
|
0.1
|
|
|
0.4
|
|
|
Foreign income at other than U.S. rates
|
10.3
|
|
|
1.2
|
|
|
(14.7)
|
|
|
Excess compensation
|
6.4
|
|
|
0.4
|
|
|
0.3
|
|
|
Share-based compensation
|
(7.2)
|
|
|
(4.3)
|
|
|
0.1
|
|
|
U.S. tax reform
|
14.1
|
|
|
11.2
|
|
|
0.0
|
|
|
Global Intangible Low Taxed Income
|
3.1
|
|
|
—
|
|
|
—
|
|
|
Foreign Derived Intangible Income
|
(3.9)
|
|
|
—
|
|
|
—
|
|
|
Other, net
|
1.2
|
|
|
(0.3)
|
|
|
0.4
|
|
|
Provision for income taxes
|
37.9
|
%
|
|
32.0
|
%
|
|
20.5
|
%
|
The Tax Act created new rules that allow the Company to make an accounting policy election to treat taxes due on GILTI inclusions in taxable income as either a current period expense or reflect such inclusions related to temporary basis differences in the Company’s measurement of deferred taxes. The GILTI provision of the Tax Act became effective for Cabot for the year ended September 30, 2019 and the Company has elected to treat the GILTI inclusion as a current period expense. Additionally, the Tax Act allows a domestic corporation an immediate deduction in U.S. taxable income for a portion of its Foreign Derived Intangible Income (FDII).
The increase in the effective tax rate during fiscal 2019 was primarily due to increased tax expense related to newly issued final regulations related to the Tax Act, which impacted our reserves for uncertain tax positions, and also the unfavorable tax treatment of certain Acquisition-related costs, including compensation deduction limitations, and non-deductibility of certain professional fees. 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.
The significant increase in our effective tax rate for fiscal 2018 was primarily driven by the changes introduced by the Tax Act in December 2017, which includes the deemed repatriation tax (transition tax). The Company made the decision to take the dividends received deduction (DRD) on its fiscal 2018 tax return and accordingly reflected a section 245A DRD with respect to the section 78 gross-up in its transition tax calculation. Other factors that impacted the Company’s effective tax rate for fiscal 2018 were primarily related to benefits in excess of compensation cost from share-based compensation recorded in the Consolidated Statements of Income (as opposed to equity prior to October 2017) and the absence of benefits of a tax holiday in South Korea that expired as of October 2017.
The accounting guidance regarding uncertainty in income taxes prescribes a threshold for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. Under these standards, we may recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position.
The following table presents the changes in the balance of gross unrecognized tax benefits during the last three fiscal years:
|
|
|
|
|
|
|
|
Balance September 30, 2016
|
$
|
2,089
|
|
|
Additions for tax positions relating to the current fiscal year
|
381
|
|
|
Additions for tax positions relating to prior fiscal years
|
44
|
|
|
Lapse of statute of limitations
|
(244)
|
|
|
Balance September 30, 2017
|
2,270
|
|
|
Additions for tax positions relating to the current fiscal year
|
263
|
|
|
Additions for tax positions relating to prior fiscal years
|
116
|
|
|
Lapse of statute of limitations
|
(1,215)
|
|
|
Balance September 30, 2018
|
1,434
|
|
|
Additions for tax positions relating to the current fiscal year
|
271
|
|
|
Additions for tax positions relating to prior fiscal years
|
9,839
|
|
|
Balance September 30, 2019
|
$
|
11,544
|
|
The entire balance of unrecognized tax benefits shown above as of September 30, 2019 and 2018, would affect our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions as income tax expense in our financial statements. Additions for tax positions relating to prior fiscal years of $9,839 in fiscal 2019 are mainly due to newly issued regulations to the Tax Act, which impacted the Company's reserves for uncertain tax positions. Interest accrued on our Consolidated Balance Sheets was $281 and $69 at September 30, 2019 and 2018, respectively, and any interest and penalties charged to expense in fiscal years 2019, 2018 and 2017 was immaterial.
At September 30, 2019, the tax periods open to examination by the U.S. federal, state and local governments include fiscal years 2015 through 2019, and the tax periods open to examination by foreign jurisdictions include fiscal years 2014 through 2019. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Significant components of net deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
Employee benefits
|
$
|
5,719
|
|
|
$
|
3,995
|
|
|
Inventory
|
3,811
|
|
|
3,026
|
|
|
Accrued expenses
|
4,202
|
|
|
839
|
|
|
Share-based compensation expense
|
5,215
|
|
|
5,379
|
|
|
Credit and other carryforwards
|
9,743
|
|
|
6,419
|
|
|
Interest rate swap
|
5,412
|
|
|
—
|
|
|
Other
|
1,088
|
|
|
358
|
|
|
Valuation allowance
|
(2,574)
|
|
|
(133)
|
|
|
Total deferred tax assets
|
$
|
32,616
|
|
|
$
|
19,883
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation and amortization
|
$
|
140,092
|
|
|
$
|
8,007
|
|
|
Withholding on foreign income
|
6,026
|
|
|
5,209
|
|
|
Other
|
1,926
|
|
|
908
|
|
|
Total deferred tax liabilities
|
$
|
148,044
|
|
|
$
|
14,124
|
|
As of September 30, 2019, the Company had foreign and domestic net operating loss carryforwards (“NOLs”) of $13,465, which will expire over the period between fiscal year 2020 and fiscal year 2039. We have recorded a tax-effected valuation allowance of $2,565 against the deferred tax assets related to certain foreign and U.S. federal and state NOLs, as well as on certain federal tax credit carryforwards. As of September 30, 2019, the Company had a U.S. federal and state tax credit carryforward of $2,396, which will expire beginning in fiscal years 2021 through 2039.
Prior to enactment of the Tax Act, the Company did not record income tax expense for the undistributed earnings of its international subsidiaries. As a result of the Tax Act, the Company no longer intends to maintain the indefinite reinvestment assertion.
20. 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 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 criteria and recorded an undiscounted amount of $9,494 loss contingency regarding disposal costs that can be reasonably estimated at this time. These disposal costs were charged to Cost of sales. 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. The fire waste cleanup and disposal costs have been and may continue to be significant due to the nature of federally-regulated penta-related waste cleanup and disposal requirements. We will continue to update the estimated losses as new information becomes available.
In addition, we are working with our insurance carriers on possible recovery of losses and costs, but at this point we cannot reasonably estimate whether we will receive, or if so, the amount of, any potential insurance recoveries. As such, no insurance recoveries have been recognized as of September 30, 2019.
Separately, in 2014, prior to the Acquisition, the United States Environmental Protection Agency (“EPA”) had notified KMG-Bernuth, that the EPA considered it to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“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 seven other parties entered into an agreement with the EPA in September 2016 to complete a remedial design phase of the remediation of the site. The remediation work will be performed under a separate future agreement. Although KMG-Bernuth has not conceded liability, a reserve in connection with the remedial design was established, and as of September 30, 2019, the reserve remaining was $728.
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. and in other countries. These regulatory requirements relate to the use, generation, storage, handling, emission, transportation and discharge of certain hazardous materials, substances and waste into the environment. The Company, including its KMG entities, manage Environmental, Health and Safety (“EHS”) matters related to protection of the environment and human health, the cleanup of contaminated sites, the treatment, storage and disposal of wastes, and the emission of substances into the air or waterways, among other EHS concerns. Governmental authorities can enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company devotes significant financial resources to compliance, including costs for ongoing compliance.
Certain licenses, permits and product registrations are required for the Company’s products and operations in the U.S., Mexico and other countries in which it does business. The licenses, permits and product registrations are subject to revocation, modification and renewal by governmental authorities. In the United States in particular, producers and distributors of penta, which is a product manufactured and sold by KMG-Bernuth as part of the wood treatment business, are subject to registration and notification requirements under the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) and comparable state law in order to sell this product in the United States. Compliance with these requirements may have a significant effect on our business, financial condition and results of operations.
We are subject to contingencies, including litigation relating to EHS laws and regulations, commercial disputes and other matters. Certain of these contingencies are discussed above and below. The ultimate resolution of these contingencies is subject to significant uncertainty, and should we fail to prevail in any of them or should several of them be resolved against us in the same reporting period, these matters could, individually or in the aggregate, be material to the consolidated financial statements. The ultimate outcome of these matters cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in our consolidated financial statements. The Company records legal costs associated with loss contingencies as expenses in the period in which they are incurred.
INDEMNIFICATION
In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Generally, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the other party harmless against losses arising from items such as a breach of certain representations and covenants including title to assets sold, certain intellectual property rights and certain environmental matters. These terms are common in the industries in which we conduct business. In each of these circumstances, payment by us is subject to certain monetary and other limitations and is conditioned on the other party making an adverse claim pursuant to the procedures specified in the particular agreement, which typically allow us to challenge the other party's claims.
We evaluate estimated losses for such indemnifications under the accounting standards related to contingencies and guarantees. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not experienced material costs as a result of such obligations and, as of September 30, 2019, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of such obligations is probable.
LEASE COMMITMENTS
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable leases, most of which expire in five years and may be renewed by us. Rent expense under such arrangements during fiscal 2019, 2018 and 2017 totaled $7,975, $4,307 and $3,120, respectively.
Future minimum rental commitments under noncancelable leases as of September 30, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
2020
|
|
$
|
6,984
|
|
|
2021
|
|
4,941
|
|
|
2022
|
|
4,291
|
|
|
2023
|
|
4,122
|
|
|
2024
|
|
3,710
|
|
|
Thereafter
|
|
12,010
|
|
|
|
|
$
|
36,058
|
|
PURCHASE OBLIGATIONS
Purchase obligations include take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services. We have been operating under an abrasive particle supply agreement with Cabot Corporation, our former parent company which is not a related party, the current term of which runs through December 2019. As of September 30, 2019, purchase obligations include $5,897 of contractual commitments related to this agreement. In addition, we have purchase commitment of $9.7 million to purchase non-water-based carrier fluid, and have another purchase contract to purchase $4.1 million of abrasive particles.
POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS
We have defined benefit plans covering employees in certain foreign jurisdictions as required by local law. 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.
Our unfunded plans in Japan, which represent the majority of our pension liability for such plans, had projected benefit obligations of $7,175 and $6,621 as of September 30, 2019 and 2018, respectively, and an accumulated benefit obligation of $5,704 and $5,234 as of September 30, 2019 and 2018, respectively. Key assumptions used in the actuarial measurement of the Japan pension liability include a weighted average discount rate of 0.25% and 0.50% at September 30, 2019 and 2018, respectively, and an expected rate of compensation increase of 2.50% at September 30, 2019 and 2018, respectively. Total future Japan pension costs included in Accumulated other comprehensive (loss) income are $(1,894) and $(1,735) at September 30, 2019 and 2018, respectively.
Our unfunded plans in South Korea had projected benefit obligations of $2,182 and $1,731 as of September 30, 2019 and 2018 and an accumulated benefit obligation of $1,264 and $1,064 as of September 30, 2019 and 2018, respectively. Key assumptions used in the actuarial measurement of the Korea pension liability include weighted average discount rates of 2.50% and 3.75% at September 30, 2019 and 2018, respectively, and an expected rate of compensation increase of 4.50% at September 30, 2019 and 2018. Total future Korea pension costs included in Accumulated other comprehensive (loss) income are $(457) and $(133) at September 30, 2019 and 2018, respectively.
Our benefit plan for KMG employees in France had a projected benefit obligation of $1,764 as of September 30, 2019 and an accumulated benefit obligation of $1,346 as of September 30, 2019. Key assumptions used in the actuarial measurement of the France pension liability include a weighted average discount rate of 0.50% at September 30, 2019 and an expected rate of compensation increase of 2.50%, and an expected rate of return on plan assets of 2.15% at September 30, 2019. Total future France pension costs included in Accumulated other comprehensive (loss) income is not material at September 30, 2019.
Benefit costs for the combined plans were $1,345, $1,236 and $1,176 in fiscal years 2019, 2018 and 2017, respectively, consisting primarily of service costs, and were recorded as fringe benefit expense under Cost of sales and Operating expenses in our Consolidated Statements of Income. Estimated future benefit payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
2020
|
|
$
|
662
|
|
|
2021
|
|
481
|
|
|
2022
|
|
498
|
|
|
2023
|
|
621
|
|
|
2024
|
|
663
|
|
|
2025 to 2029
|
|
4,947
|
|
21. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing Net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC 260 “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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
Net income
|
$
|
39,215
|
|
|
$
|
110,043
|
|
|
$
|
86,952
|
|
|
Less: income attributable to participating securities
|
—
|
|
|
(123)
|
|
|
(256)
|
|
|
Net income available to common stockholders
|
$
|
39,215
|
|
|
$
|
109,920
|
|
|
$
|
86,696
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average common shares
|
28,571,052
|
|
|
25,517,825
|
|
|
25,015,458
|
|
|
(Denominator for basic calculation)
|
|
|
|
|
|
|
Weighted-average effect of dilutive securities:
|
|
|
|
|
|
|
Share-based compensation
|
522,975
|
|
|
725,339
|
|
|
497,029
|
|
|
Diluted weighted-average common shares
|
29,094,027
|
|
|
26,243,164
|
|
|
25,512,487
|
|
|
(Denominator for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
$
|
1.37
|
|
|
$
|
4.31
|
|
|
$
|
3.47
|
|
|
Diluted
|
$
|
1.35
|
|
|
$
|
4.19
|
|
|
$
|
3.40
|
|
For the year ended September 30, 2019, 2018, and 2017, approximately 0.2 million, 0.1 million and 0.4 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of Diluted earnings per share.
22. 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 one 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 two reportable segments:
Electronic Materials
Electronic Materials includes products and solutions for the semiconductor industry. We manufacture and sell CMP consumables, including CMP slurries and polishing pads, and high-purity process chemicals used to etch and clean silicon wafers in the production of semiconductors, photovoltaics (solar cells) and flat panel displays.
Performance Materials
Performance Materials includes pipeline performance products and services, wood treatment products, and products and equipment used in the precision optics industry.
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, integration-related expenses and impact of fair value adjustments to inventory acquired from KMG, and certain costs related to the KMG-Bernuth warehouse 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 2019 Short-Term Incentive Program (STIP). In addition, our chief operating decision maker does not use assets by segment to evaluate performance or allocate resources. Therefore, we do not disclose assets by segment.
Revenue from external customers by segment and are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Segment Revenue
|
|
|
|
|
|
|
Electronic Materials
|
$
|
833,051
|
|
|
$
|
559,944
|
|
|
$
|
485,034
|
|
|
Performance Materials
|
204,645
|
|
|
30,179
|
|
|
22,145
|
|
|
Total
|
$
|
1,037,696
|
|
|
$
|
590,123
|
|
|
$
|
507,179
|
|
Capital expenditures by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Capital Expenditures
|
|
|
|
|
|
|
Electronic Materials
|
$
|
40,166
|
|
|
$
|
18,668
|
|
|
$
|
19,325
|
|
|
Performance Materials
|
16,367
|
|
|
409
|
|
|
414
|
|
|
Corporate
|
5,663
|
|
|
3,918
|
|
|
|
1,917
|
|
|
Total
|
$
|
62,196
|
|
|
$
|
22,995
|
|
|
$
|
21,656
|
|
Adjusted EBITDA by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Segment adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
Electronic Materials
|
|
|
|
|
$
|
294,902
|
|
|
$
|
222,019
|
|
|
$
|
169,044
|
|
|
Performance Materials
|
|
|
|
|
91,372
|
|
|
7,191
|
|
|
2,516
|
|
|
Unallocated corporate expenses
|
|
|
|
|
(52,856)
|
|
|
(39,266)
|
|
|
(34,050)
|
|
|
Interest expense
|
|
|
|
|
(45,681)
|
|
|
(2,905)
|
|
|
(4,529)
|
|
|
Interest income
|
|
|
|
|
2,346
|
|
|
4,409
|
|
|
2,351
|
|
|
Depreciation and amortization
|
|
|
|
|
(98,592)
|
|
|
(25,876)
|
|
|
(25,960)
|
|
|
Acquisition and integration related expenses
|
|
|
|
|
(34,709)
|
|
|
(3,861)
|
|
|
—
|
|
|
Charge for fair value write-up of acquired inventory sold
|
|
|
|
|
(14,869)
|
|
|
—
|
|
|
—
|
|
|
Costs related to KMG-Bernuth warehouse fire (See Note 20)
|
|
|
|
|
(9,905)
|
|
|
—
|
|
|
—
|
|
|
Costs related to restructuring of wood treatment
|
|
|
|
|
(1,530)
|
|
|
—
|
|
|
—
|
|
|
Charges related to asset impairment of wood treatment
|
|
|
|
|
(67,372)
|
|
|
—
|
|
|
—
|
|
|
Income before income taxes
|
|
|
|
|
$
|
63,106
|
|
|
$
|
161,711
|
|
|
$
|
109,372
|
|
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 year ended September 30, 2018 and 2017 include Cabot Microelectronics’ heritage QED business. The adjustments to segment EBITDA for the year ended September 30, 2019 represent addbacks of the Acquisition and integration related expenses, and a charge for the write-up of inventory acquired from KMG to fair value for inventory sold in the period, costs related to KMG-Bernuth warehouse fire, and restructuring and asset impairment charges related to wood treatment business. The adjustments to segment EBITDA for the year ended September 30, 2018 represent addbacks of Acquisition and integration related expenses. There were no adjustments to segment EBITDA for the year ended September 30, 2017. The unallocated portions of corporate functions including finance, legal, human resources, information technology, and corporate development not directly attributable to a reportable segment.
23. FINANCIAL INFORMATION BY INDUSTRY SEGMENT, GEOGRAPHIC AREA AND PRODUCT LINE
We operate predominantly in two reportable segments - the Performance Materials and Electronic Materials. Revenues are attributed to the United States and foreign regions based upon the customer location and not the geographic location from which our products were shipped. Financial information by geographic area was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
North America
|
$
|
372,247
|
|
|
$
|
79,019
|
|
|
$
|
72,670
|
|
|
Asia
|
515,833
|
|
|
471,215
|
|
|
394,874
|
|
|
Europe, Middle East, and Africa
|
149,305
|
|
|
39,889
|
|
|
39,635
|
|
|
South America
|
311
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
1,037,696
|
|
|
$
|
590,123
|
|
|
$
|
507,179
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
North America
|
$
|
133,682
|
|
|
$
|
60,818
|
|
|
$
|
52,155
|
|
|
Asia
|
68,823
|
|
|
50,573
|
|
|
54,201
|
|
|
Europe
|
74,313
|
|
|
12
|
|
|
5
|
|
|
Total
|
$
|
276,818
|
|
|
$
|
111,403
|
|
|
$
|
106,361
|
|
The following table shows revenue from sales to customers in foreign countries that accounted for more than ten percent of our total revenue in fiscal 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
South Korea
|
$
|
135,844
|
|
|
$
|
136,403
|
|
|
$
|
95,414
|
|
|
Taiwan
|
125,895
|
|
|
130,500
|
|
|
130,849
|
|
|
China
|
*
|
|
|
97,254
|
|
|
74,781
|
|
* Not a country with more than 10% revenue.
The following table shows revenue generated by product group in fiscal 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
Electronic Materials
|
|
|
|
|
|
|
Slurries
|
$
|
460,053
|
|
|
$
|
476,828
|
|
|
$
|
416,361
|
|
|
Electronic Chemicals
|
278,413
|
|
|
|
—
|
|
|
|
—
|
|
|
CMP Pads
|
94,585
|
|
|
|
83,117
|
|
|
|
68,673
|
|
|
Total Electronic Materials
|
833,051
|
|
|
|
559,945
|
|
|
|
485,034
|
|
|
|
|
|
|
|
|
|
Performance Materials
|
|
|
|
|
|
|
Pipeline
|
140,553
|
|
|
—
|
|
|
—
|
|
|
Wood Treatment
|
31,898
|
|
|
—
|
|
|
—
|
|
|
Precision Optics and other
|
32,194
|
|
|
30,178
|
|
|
22,145
|
|
|
Total Performance Materials
|
$
|
204,645
|
|
|
|
$
|
30,178
|
|
|
|
$
|
22,145
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
$
|
1,037,696
|
|
|
$
|
590,123
|
|
|
$
|
507,179
|
|
SELECTED QUARTERLY OPERATING RESULTS
The following table presents our unaudited financial information for the eight quarterly periods ended September 30, 2019. This unaudited financial information has been prepared in accordance with accounting principles generally accepted in the United States of America, applied on a basis consistent with the annual audited financial statements and in the opinion of management, include all necessary adjustments, which consist only of normal recurring adjustments necessary to present fairly the financial results for the periods. The results for any quarter are not necessarily indicative of results for any future period.
CABOT MICROELECTRONICS CORPORATION
SELECTED QUARTERLY OPERATING RESULTS
(Unaudited and in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30,
2019
|
|
June 30,
2019
|
|
March 31,
2019
|
|
Dec. 31,
2018
|
|
Sept. 30,
2018
|
|
June 30,
2018
|
|
March 31,
2018
|
|
Dec. 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
278,645
|
|
|
$
|
271,882
|
|
|
$
|
265,391
|
|
|
$
|
221,778
|
|
|
$
|
156,729
|
|
|
$
|
150,437
|
|
|
$
|
142,978
|
|
|
$
|
139,979
|
|
|
Cost of sales
|
165,535
|
|
|
156,492
|
|
|
150,571
|
|
|
122,445
|
|
|
72,383
|
|
|
69,737
|
|
|
67,933
|
|
|
65,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
113,110
|
|
|
115,390
|
|
|
114,820
|
|
|
99,333
|
|
|
84,346
|
|
|
80,700
|
|
|
75,045
|
|
|
74,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and technical
|
12,698
|
|
|
12,191
|
|
|
12,778
|
|
|
14,040
|
|
|
13,372
|
|
|
13,059
|
|
|
13,368
|
|
|
12,151
|
|
|
Selling, general and administrative
|
50,663
|
|
|
50,959
|
|
|
50,328
|
|
|
61,128
|
|
|
26,986
|
|
|
25,711
|
|
|
24,589
|
|
|
24,751
|
|
|
Asset Impairment Expenses
|
67,372
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total operating expenses
|
130,733
|
|
|
63,150
|
|
|
63,106
|
|
|
75,168
|
|
|
40,358
|
|
|
38,770
|
|
|
37,957
|
|
|
36,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
(17,623)
|
|
|
52,240
|
|
|
51,714
|
|
|
24,165
|
|
|
43,988
|
|
|
41,930
|
|
|
37,088
|
|
|
37,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
12,703
|
|
|
12,757
|
|
|
13,331
|
|
|
6,890
|
|
|
102
|
|
|
513
|
|
|
1,158
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
342
|
|
|
417
|
|
|
568
|
|
|
1,019
|
|
|
1,161
|
|
|
1,141
|
|
|
1,156
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
(1,158)
|
|
|
(472)
|
|
|
(1,014)
|
|
|
(1,411)
|
|
|
(24)
|
|
|
486
|
|
|
(94)
|
|
|
(279)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
(31,142)
|
|
|
39,428
|
|
|
37,937
|
|
|
16,883
|
|
|
45,023
|
|
|
43,044
|
|
|
36,992
|
|
|
36,652
|
|
|
Provision for income taxes
|
(10,899)
|
|
|
20,550
|
|
|
10,800
|
|
|
3,440
|
|
|
(3,195)
|
|
|
7,873
|
|
|
7,255
|
|
|
39,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(20,243)
|
|
|
$
|
18,878
|
|
|
$
|
27,137
|
|
|
$
|
13,443
|
|
|
$
|
48,218
|
|
|
$
|
35,171
|
|
|
$
|
29,737
|
|
|
$
|
(3,083)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
(0.70)
|
|
|
$
|
0.65
|
|
|
$
|
0.94
|
|
|
$
|
0.50
|
|
|
$
|
1.89
|
|
|
$
|
1.37
|
|
|
$
|
1.16
|
|
|
$
|
(0.12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
29,084
|
|
|
29,064
|
|
|
28,998
|
|
|
27,157
|
|
|
25,520
|
|
|
25,612
|
|
|
25,593
|
|
|
25,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
$
|
(0.70)
|
|
|
$
|
0.64
|
|
|
$
|
0.92
|
|
|
$
|
0.48
|
|
|
$
|
1.84
|
|
|
$
|
1.34
|
|
|
$
|
1.14
|
|
|
$
|
(0.12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
29,084
|
|
|
29,568
|
|
|
29,479
|
|
|
27,762
|
|
|
26,213
|
|
|
26,319
|
|
|
26,161
|
|
|
25,326
|
|