2018
ANNUAL REPORT
Letter from the
President & CEO
Fiscal 2018 was another strong year for Cabot
Microelectronics. Our company achieved record annual
revenue, gross margin, earnings per share, and free
cash flow generation through successful execution of
our strategic initiatives and a strong industry demand
environment. We remained focused on providing high-
quality and innovative solutions to our global customers.
We doubled our quarterly dividend to $0.40 per share,
or $1.60 per share on an annualized basis, on the
company’s common stock. During the year, we returned
$71.5 million, or 60% of fiscal year 2017 free cash
flow, to shareholders through dividends and share
repurchases, still finishing the fiscal year with $352.9
million of cash on hand while carrying no debt.
FINANCIAL HIGHLIGHTS
in millions, except per share amounts
Revenue
Gross Profit
2018
2017
$590.1
$507.2
$314.1
$254.1
16%
24%
Gross Margin
53.2%
50.1%
310 bps
Adjusted Net Income
$137.0
$91.2
Adjusted EPS
$5.22
$3.56
Free Cash Flow
$147.6
$120.2
50%
47%
23%
Reconciliation of U.S. GAAP net income and earnings per share (EPS) to adjusted net income and adjusted
EPS, and the definition of free cash flow, can be found in our October 25, 2018 current report on Form 8-K.
Our three CMP focus areas of tungsten slurries, dielectric
slurries, and polishing pads all achieved record
revenues in 2018. This was driven by higher demand
for CMP consumables due to increasing storage and
processing power requirements, as well as the transition
to new technologies such as 3D NAND and FinFET. In
tungsten slurries, revenue increased 14%, primarily
driven by strong demand for our products in memory
and advanced logic applications. In dielectrics slurries,
revenue increased 16%, driven by increased demand for
advanced products, including high-performing colloidal
silica and ceria-based solutions. In polishing pads,
revenue increased 21%, supporting our long-term growth
objectives for this significant business.
REVENUE GROWTH
s
n
o
i
l
l
i
m
n
i
7
.
4
2
4
$
1
.
4
1
4
$
4
.
0
3
4
$
1
.
0
9
5
$
2
.
7
0
5
$
FY14
FY15
FY16
FY17
FY18
To complement our organic growth, we leveraged our
strong balance sheet and free cash flow generation
to acquire KMG Chemicals, Inc. in November 2018.
The acquisition of KMG opens the next chapter in our
compelling story.
The addition of KMG broadens our portfolio of specialty
materials and strengthens our position as a premier
materials supplier to the semiconductor industry. KMG’s
high-purity acids, solvents, and blends expand our
portfolio of electronic materials and customer solutions
beyond the CMP process, and into adjacent integrated
In addition, KMG’s
steps.
circuit manufacturing
performance materials business provides opportunities
to expand our addressable market by supplying critical
materials that enhance pipeline operations efficiency
and protect vital infrastructure.
We are excited and optimistic about the long-term industry
growth potential in our core semiconductor business and
the opportunity for increasing demand for performance
materials products. We remain focused on supporting
our global customers by supplying best-in-class solutions
and services.
I would like to thank our shareholders, customers and
employees for your continued support of our company.
Sincerely,
David H. Li
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
xxxx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2018
or
oooo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 00030205
CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of Incorporation)
364324765
(I.R.S. Employer Identification No.)
870 NORTH COMMONS DRIVE
AURORA, ILLINOIS
(Address of principal executive offices)
60504
(Zip Code)
Registrant's telephone number, including area code: (630) 3756631
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the registrant's Common Stock held beneficially or of record by stockholders who are not affiliates of the registrant, based upon the closing price of the
Common Stock on March 31, 2018, as reported by the NASDAQ Global Select Market, was approximately $2,715,311,977. For the purposes hereof, "affiliates" include all executive
officers and directors of the registrant.
As of October 31, 2018, the Company had 25,506,725 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 6, 2019, are incorporated by reference in Part III of this Form 10-K to
the extent stated herein.
This Form 10-K includes statements that constitute "forward-looking statements" within the meaning of federal securities regulations. For more detail regarding "forward-looking
statements" see Item 7 of Part II of this Form 10-K.
1
PART I.
PART II.
PART III.
PART IV.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
CABOT MICROELECTRONICS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2018
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Exhibit Index
Signatures
Page
3
13
17
18
19
19
20
22
24
25
38
39
80
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2 PART I
ITEM 1. BUSINESS
OUR COMPANY
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our''), which was incorporated in the state of Delaware in 1999, is the leading
supplier of high-performance polishing slurries and second largest supplier of polishing pads used in the manufacture of advanced integrated circuit (IC) devices within the
semiconductor industry, in a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the
multiple layers of material that are deposited upon silicon wafers in the production of advanced ICs. Our products play a critical role in the production of advanced semiconductor
devices, helping to enable our customers to produce smaller, faster and more complex IC devices with fewer defects. Our mission is to create value by delivering high-performing and
innovative solutions that solve our customer's challenges.
We currently operate predominantly in one industry segment – the development, manufacture and sale of CMP consumables products. We develop, produce and sell CMP slurries
for polishing many of the conducting, insulating and isolating materials used in IC devices, and for polishing the disk substrates and magnetic heads used in hard disk drives. We also
develop, manufacture and sell CMP polishing pads, which are used in conjunction with slurries in the CMP process. In addition, we pursue demanding surface modification
applications in other industries through our Engineered Surface Finishes (ESF) business.
PENDING ACQUISITION OF KMG CHEMICALS, INC.
On August 14, 2018, we entered into an Agreement and Plan of Merger ("Merger Agreement") with KMG Chemicals, Inc., a Texas corporation ("KMG"), and Cobalt Merger Sub
Corporation, a Texas corporation and wholly owned subsidiary of Cabot Microelectronics ("Merger Sub"), providing for the acquisition of KMG by Cabot Microelectronics. The
Merger Agreement provides that, upon the terms and subject to the satisfaction or valid waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and
into KMG (the "Acquisition"), with KMG continuing as the surviving corporation and a wholly owned subsidiary of Cabot Microelectronics. The Merger Agreement and the
Acquisition were unanimously approved by the board of directors of each of Cabot Microelectronics and KMG. At the effective time of the Acquisition, each outstanding share of
KMG common stock, par value $0.01 per share ("KMG Common Stock"), other than shares owned by KMG, Cabot Microelectronics and their subsidiaries, dissenting shares, or shares
subject to a KMG Equity Award (as defined below), will automatically be converted into the right to receive the following consideration (collectively, the "Merger Consideration"),
without interest: $55.65 in cash (the "Cash Consideration"); and, 0.2000 shares of common stock of Cabot Microelectronics, par value $0.001 per share ("CMC Common Stock"). Based
on the closing price of CMC Common Stock on November 9, 2018, the most recent practicable date prior to the date of this Report on Form 10-K, the Merger Consideration is
approximately $1.5 billion, which will fluctuate as the market price of CMC Common Stock fluctuates because a portion of the Merger Consideration is payable in a fixed number of
shares of CMC Common Stock. As a result, the value of the Merger Consideration upon completion of the Acquisition could be greater than, less than or the same as the value of the
Merger Consideration on the date of this report. Cabot Microelectronics and KMG have each made customary representations, warranties and covenants in the Merger Agreement.
The Merger Agreement contains certain customary termination rights by either Cabot Microelectronics or KMG, including if the Acquisition is not consummated by February 14, 2019.
If the Merger Agreement is terminated under certain circumstances, KMG will be obligated to pay to Cabot Microelectronics a termination fee equal to $38.8 million in cash.
Immediately prior to closing, each restricted stock unit award relating to shares of KMG Common Stock (each, a "KMG Equity Award") granted prior to August 14, 2018 will vest
(with any applicable performance targets deemed satisfied at the level specified in the applicable award agreement) and be cancelled in exchange for the Merger Consideration in respect
of each share of KMG Common Stock underlying the applicable KMG Equity Award. Each KMG Equity Award granted on or following August 14, 2018 will be converted into a
corresponding award relating to shares of CMC Common Stock and continue to vest post-closing in accordance with the terms of the applicable award agreement (which will include
vesting on a qualifying termination of employment).
The consummation of the Acquisition is subject to customary closing conditions, including the adoption of the Merger Agreement by KMG's shareholders, the meeting for which
is scheduled to occur on November 13, 2018. Assuming such conditions are satisfied or validly waived, we expect the Acquisition to close in approximately mid-November 2018.
3 On August 14, 2018, in connection with the execution of the Merger Agreement, we entered into a commitment letter, dated as of August 14, 2018 (the "Commitment Letter"), with
JPMorgan Chase Bank, N.A., Bank of America, N.A. and Goldman Sachs Bank USA (together with the additional commitment parties described below, the "Commitment Parties") and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which the Commitment Parties have committed to arrange and provide, subject to the terms and conditions of the
Commitment Letter, a senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million (the "New Revolving Facility") and a senior secured term loan
facility in an aggregate principal amount of up to $1,065.0 million (the "New Term Loan Facility", and together with the New Revolving Facility, the "New Credit Facilities"). On
September 4, 2018, we amended and restated the commitment letter to add BMO Harris Financing, Inc., U.S. Bank, National Association, HSBC Bank USA, N.A., and PNC Bank, National
Association as additional commitment parties. On November 1, 2018, we completed the syndication of the New Credit Facilities. See Note 20 of the Notes to the Consolidated Financial
Statements of this Report on Form 10-K for additional information regarding the anticipated terms of the New Credit Facilities.
CMP PROCESS WITHIN IC DEVICE MANUFACTURING
IC devices, or "chips", are components in a wide range of electronic systems for computing, communications, manufacturing and transportation. Consumers most frequently
encounter IC devices in mobile internet devices (MIDs) such as smart phones and tablets, microprocessors, application processors and memory chips in their desktop or laptop
computers, and in automotive applications, gaming devices, and digital televisions. The multi-step manufacturing process for IC devices typically begins with a circular wafer of pure
silicon, with the first manufacturing step referred to as a "wafer start". A large number of identical IC devices, or dies, are manufactured on each wafer at the same time. The initial steps
in the manufacturing process build transistors and other electronic components on the silicon wafer. These are isolated from each other using a layer of insulating material, most often
silicon dioxide, to prevent electrical signals from bridging from one transistor to another. These components are then wired together using conducting materials such as aluminum or
copper in a particular sequence to produce a functional IC device with specific characteristics. When the conducting wiring on one layer of the IC device is completed, another layer of
insulating material is added. The process of alternating insulating and conducting layers is repeated until the desired wiring within the IC device is achieved. At the end of the process,
the wafer is cut into the individual dies, which are then packaged to form individual chips.
Demand for CMP consumables products, including slurries and pads, used in the production of IC devices is primarily based on the number of wafer starts by semiconductor
manufacturers and the type and complexity of the IC devices they produce. To enhance the performance of IC devices, IC device manufacturers have progressively increased the
number and density of electronic components and wiring layers in each IC device. This is typically done in conjunction with shrinking the key dimensions on an IC device from one
technology generation, or "node," to another. As a result, the number of transistors, wires and the number of discrete wiring layers have increased, increasing the complexity of the IC
device and the related demand for CMP consumables products. As semiconductor technology has advanced and performance requirements of IC devices have increased, the
percentage of IC devices that utilize CMP in the manufacturing process has increased steadily over time. We believe that CMP is used in the majority of all IC devices made today, and
we expect that the use of CMP will continue to increase in the future.
In the CMP polishing process, CMP consumables are used to remove excess material that is deposited during the IC manufacturing process, and to level and smooth the surfaces
of the layers of IC devices, via a combination of chemical reactions and mechanical abrasion, leaving minimal residue and defects on the surface, with only the material necessary for
circuit integrity remaining. CMP slurries are liquid solutions generally composed of high-purity deionized water and a proprietary mix of chemical additives and engineered abrasives
that chemically and mechanically interact at an atomic level with the surface material on the wafer. CMP pads are engineered polymeric materials designed to distribute and transport the
slurry to the surface of the wafer and distribute it evenly across the wafer. Grooves are formed into the surface of the pad to facilitate distribution of the slurry. The CMP process is
performed on a CMP polishing tool. During the CMP process, the wafer is held on a rotating carrier, which is pressed down against a CMP pad. The CMP pad is attached to a rotating
polishing table that spins in a circular motion in the opposite direction from the rotating wafer carrier. A CMP slurry is continuously applied to the polishing pad to facilitate and
enhance the polishing process. Hard disk drive and silicon wafer manufacturers use similar processes to smooth the surface of substrate disks.
An effective CMP process is achieved through technical optimization of the CMP consumables in conjunction with an appropriately designed CMP process. Prior to introducing
new or different CMP slurries or pads into its manufacturing process, an IC device manufacturer generally requires the product to be qualified in its processes through an extensive
series of tests and evaluations. These qualifications are intended to confirm that the CMP consumable product will function properly within the customer's overall manufacturing
process. These tests and evaluations may require minor changes to the CMP process or the CMP slurry or pad. While this qualification process varies depending on numerous factors,
it is generally quite costly and may take six months or longer to complete. IC device manufacturers usually assess the cost, time required and impact on production when they consider
implementing or switching to a new CMP slurry or pad.
4 CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with a greater density of transistors and other electronic components. With smaller
IC devices, IC device manufacturers can increase the number of IC devices that fit on a wafer, which increases their throughput, or the number of IC devices that can be manufactured in
a given time period. CMP also helps reduce the number of defective or substandard IC devices produced, which increases the device yield. Producing more complex and higher
performing IC devices increases the value of the wafers processed. Improvements in throughput, yield and value per wafer improve the return on an IC device manufacturer's significant
investment in manufacturing capacity, which is a high priority. More broadly, sustained growth in the semiconductor industry traditionally has been fueled by enhanced performance
and lower unit costs, making IC devices more affordable in an expanding range of applications. We believe CMP remains a critical process in leading-edge semiconductor technology,
enabling IC device manufacturers to efficiently produce the complex chips, particularly where higher performance may now be accompanied by higher unit costs.
PRECISION POLISHING
Through our ESF business, we are applying our technical expertise in polishing techniques to demanding applications in other industries where shaping, enabling and enhancing
the performance of surfaces is critical to success, such as for precision optics and electronic substrates, including silicon and silicon-carbide wafers.
Many of the production processes currently used in precision machining and polishing have been based on traditional, labor-intensive techniques, which are being replaced by
computer-controlled, deterministic processes. Our wholly-owned subsidiary, QED Technologies International, Inc. (QED), is a leading provider of deterministic finishing technology for
the precision optics industry. We believe precision optics are pervasive, serving several large existing industries such as semiconductor equipment, aerospace, defense, biomedical,
research and digital imaging.
5 OUR PRODUCTS
CMP CONSUMABLES FOR IC DEVICES
We develop, produce and sell CMP slurries for polishing a wide range of materials that conduct electrical signals, including tungsten, copper, tantalum (commonly referred to as
"barrier"), which is used in copper wiring applications, and aluminum. Slurries for polishing tungsten are used in the production of advanced memory applications, including mobile and
server applications transitioning from traditional planar, or 2D NAND memory, to 3D NAND. Tungsten slurries are also used in advanced logic devices for a multitude of end use
applications including MIDs such as smart phones and tablets, gaming devices, and in high-performance computing and artificial intelligence, as well as in legacy logic applications
such as those used in automobiles and connected communication devices. Tungsten slurries are also used in some of the most advanced technologies, such as 3D memory and FinFET
for advanced logic IC devices. Slurries for polishing copper and barrier materials are used in the production of advanced IC logic devices such as microprocessors for computers, and
devices for graphic systems, gaming systems and communication devices, as well as in the production of advanced memory devices. These products include different slurries for
polishing the copper film and the thin barrier layer used to separate copper from the adjacent insulating material. Slurries for polishing aluminum are used in certain advanced transistor
gate structures. We offer multiple products for each technology node to enable different integration schemes depending on specific customer needs.
We also develop, manufacture and sell slurry products used to polish the dielectric insulating materials that separate conductive layers within logic and memory IC devices. Some
of our slurry products for these materials are used in mature, high volume polishing applications called Interlayer Dielectric, or ILD, in the production of both logic and memory devices.
Our more advanced dielectrics products are designed to deliver higher throughput, improved defectivity, and lower cost of ownership than required in traditional ILD applications, as
well as to meet the more stringent and complex performance requirements of lower-volume, more specialized dielectrics polishing applications at advanced technology nodes. Some of
the applications for advanced dielectrics slurries include shallow trench isolation (STI), "stop on poly" or "stop on nitride" isolation, bulk oxide polishing, and polishing of various
dielectrics in advanced transistor designs.
We develop, produce and sell CMP polishing pads, which are consumable materials that work in conjunction with CMP slurries in the CMP polishing process. We believe that
CMP polishing pads represent a natural adjacency to our CMP slurry business, since both technologies are required by our customers to deliver their intended result and utilize the
same technical and sales infrastructure. Our polishing pad product portfolio includes pads utilizing both thermoset and thermoplastic polyurethane pad material. We produce and sell
pads that can be used on a variety of polishing tools, over a range of applications, including tungsten, copper, and dielectrics, over a range of technology nodes, and on both 300mm
and 200mm wafers.
CMP CONSUMABLES FOR THE DATA STORAGE INDUSTRY
We develop, produce and sell CMP slurries for polishing certain materials that are used in the production of rigid disks and magnetic heads used in hard disk drives for computer
and other data storage applications, which represent an extension of our core CMP slurry technology and manufacturing capabilities established for the semiconductor industry. We
believe CMP significantly improves the surface finish of these rigid disk coatings, resulting in greater storage capacity of the hard disk drive systems, and improves the production
efficiency of manufacturers of hard disk drives.
PRECISION OPTICS PRODUCTS
Through our QED subsidiary, we design and produce precision polishing and metrology systems for advanced optics applications that allow customers to attain near-perfect shape
and surface finish on a range of optical components such as mirrors, lenses and prisms. Historically, advanced optics have been produced using labor-intensive artisanal processes,
and variability has been common. QED has automated the polishing process for advanced optics to enable rapid, deterministic and repeatable surface correction to the most demanding
levels of precision in dramatically less time than with traditional means. QED's polishing systems use Magneto-Rheological Finishing (MRF), a proprietary surface figuring and
finishing technology that employs magnetic fluids and sophisticated computer technology to polish a variety of shapes and materials. QED's metrology systems use proprietary
Subaperture Stitching Interferometry (SSI) technology, which captures precise metrology data for large and/or strongly curved optical parts. SSI technology includes proprietary
Aspheric Stitching Interferometry (ASI), which is designed to measure increasingly complex shapes, including non-spherical surfaces, or aspheres. QED's products also include MRF
polishing fluids and MRF polishing components, as well as optical polishing services and polishing support services.
6 STRATEGY
We collaborate closely with our customers to develop and manufacture products that offer innovative and reliable solutions to our customers' challenges, and we strive to
consistently and reliably deliver and support these products around the world through what we believe is a robust global infrastructure and supply chain. We continue to focus on the
execution of our primary strategies related to technology leadership, customer collaboration and supply chain excellence.
STRENGTHENING AND GROWING OUR CORE CMP CONSUMABLES BUSINESS
Delivering Innovative and High-Performing Solutions: We believe that technology and innovation are vital to success in our CMP consumables business, and we devote
significant resources to research and development. We focus our research and development activity to deliver innovative CMP consumables products for advanced applications for
our technology-leading customers. We have established facilities in Japan, Singapore, South Korea, Taiwan, and the United States to meet our customers' technology needs on a
global basis.
We believe an example of our ability to deliver innovative products for advanced applications is the growth we saw in revenue in fiscal 2018 from certain of our tungsten and
dielectrics slurry products used in 3D memory, and tungsten slurry products for FinFET in advanced logic, as well as growth in revenue from our pads products. We believe our
focused effort on advanced technologies with technology-leading customers will enable us to provide more compelling new products as technology continues to advance. In addition,
we believe our polishing pads product area represents a promising opportunity for continued growth. We believe that the combination of pad technology and products from our
NexPlanar acquisition with our organic pad technology and products enables us to better serve the needs of our customers on a global basis, including the ability to offer performance-
differentiated CMP slurry and pad consumable sets.
Close Collaboration with Our Customers: We believe that building close relationships with our customers is essential to achieving long-term success in our business. We
collaborate with our customers to identify and deliver new and improved CMP solutions, to integrate our products into their manufacturing processes, and to assist them with supply,
warehouse and inventory management. Our customers demand a highly reliable supply source, and we believe we have a competitive advantage because of our ability to timely deliver
high-quality products and service from the early stages of product development through the high-volume commercial use of our products. We have strategically located our research
and development and clean room facilities, manufacturing operations, and related technical and customer support teams to be responsive to our customers' needs, and believe they
provide us with a competitive advantage.
We believe the several supplier excellence awards we received from our customers in fiscal 2018 are evidence of our commitment to, and success in, delivering high-performing and
high-quality products to our customers through close collaboration with them. These awards recognized our product quality and reliability, our technology leadership, and our
customer support capabilities. Our global business teams are focused on a range of projects with our customers to address specific business opportunities for advanced technologies.
Robust Global Supply Chain: We believe that product and supply chain quality is critical to success in our business. Our customers demand continuous improvement in the
performance of our products, in terms of product quality and consistency. We strive to reduce variation in our products and processes in order to increase quality, productivity and
efficiency, and improve the uniformity and consistency of performance of our CMP consumables products. Variability reduction becomes more important to our customers as
technology advances. Our global manufacturing sites are managed to provide the people, training and systems needed to support stringent industry demands for product quality. To
support our quality initiative, we use Six Sigma, a systematic, data-driven approach and methodology for improving quality by reducing variability, across our Company. We believe our
use of Six Sigma has contributed to lower variability in our products and sustained improvement in productivity in our operations.
We also believe that continuous improvement and variation reduction in our global supply chain are critical to our success and the success of our customers. We believe our
capabilities in supply chain management and quality systems differentiate us from our competitors. We believe our worldwide CMP consumables manufacturing plants and global
network of suppliers also provide supply chain flexibility as needed.
7 ENGINEERED SURFACE FINISHES
Beyond our core CMP consumables business through our ESF business, we develop and provide products for demanding polishing applications in other industries, such as in
precision optics and electronic substrates. Our QED subsidiary continues to be the technology leader in deterministic finishing for the precision optics industry. QED's polishing and
metrology technology enables customers to replace manual processes with automated solutions that provide more precise and repeatable results. Another aspect of our ESF business
is the polishing of electronic substrates, including silicon and silicon-carbide wafers. CMP is utilized in the production of these wafers to ensure they meet the stringent specifications
required by IC manufacturers.
INDUSTRY TRENDS
SEMICONDUCTOR INDUSTRY
We believe the semiconductor industry continues to exhibit various trends. The demand within the semiconductor business is driven primarily by MIDs, secondarily by personal
computers (PCs), as well as a wide range of other electronic applications including high-performance computing and artificial intelligence. The semiconductor industry has shown
fluctuation in the overall industry demand, consolidation of our customer base, pressure to reduce costs, and slower pace of technology advancement.
We have discussed the significant shift in semiconductor industry demand over the past several years from IC devices for PCs to MIDs. Demand for MIDs is largely consumer-
based, versus more enterprise-based demand for PCs, and this shift introduced fluctuations in semiconductor industry demand. For example, the semiconductor industry experienced
relatively strong demand conditions during the second half of our fiscal 2016 through the end of our fiscal 2018 following soft demand conditions during the first half of our fiscal 2016.
Industry reports suggest demand during our fiscal 2018 was primarily driven by a robust memory market, generally due to the growing requirements for storage in a wide range of end-
use applications, as well as strengthening of demand for certain logic applications. There are several factors that could drive future industry growth: the ongoing transition from
traditional planar, or 2D, memory to advanced 3D memory for mobile, server, and PC applications; expected need for advanced semiconductor devices for high performance computing,
virtual and augmented reality, smart phone applications, and artificial intelligence; demand for greater connectivity with wearables, peripherals, and the internet of things; increased
semiconductor content in automobiles; and semiconductor industry development in China. We continue to believe that semiconductor industry demand will grow over the long term
based on increased usage of IC devices in existing applications, as well as future applications.
Over a number of years, we have seen our customer base within the semiconductor industry consolidate as larger semiconductor manufacturers have generally grown faster than
the smaller ones, through mergers and acquisitions as well as through alliances among and between different companies. Costs to achieve the required scale in manufacturing within
the semiconductor industry continue to rise, along with the related costs of research and development, and larger manufacturers generally have greater access to the resources
necessary to manage their businesses, than do smaller ones. This trend is particularly evident in capital spending within the industry, as the largest semiconductor companies account
for an increasingly large portion of total capital spending in the industry compared to the past.
As demand for more advanced and lower cost electronic devices grows, there is continued pressure on IC device manufacturers to reduce their costs. Many manufacturers reduce
costs by pursuing ever-increasing scale in their operations, while seeking to reduce their production costs by increasing their production yields, regardless of their scale. Thus, they
look for CMP consumables products with quality and performance attributes that can help them reduce their overall cost of ownership, pursue ways to use smaller amounts of CMP
materials, and aggressively pursue price reductions for these materials.
Manufacturers also have historically reduced cost, and simultaneously improved device performance, by migrating to smaller technology nodes. However, as the industry
continues to shrink dimensions, leading edge technology node transitions are becoming more challenging due to technical and physical obstacles, and the pace of technology change
has slowed. To achieve performance and cost improvements, semiconductor manufacturers are placing greater emphasis on new device architectures, including 3D memory and
FinFET. Industry commentary suggests that approximately 50% of the NAND market has been converted to 3D memory, and the industry transition is expected to continue over the
next several years, providing additional anticipated momentum to memory growth. The capacity of 3D NAND and DRAM continued to expand, primarily in Korea and China, as demand
remained robust and DRAM capacity continued to be tight. We believe semiconductor manufacturers will continue to depend upon highly engineered materials in these new
architectures, requiring innovative CMP solutions.
8 CMP CONSUMABLES INDUSTRY
Demand for CMP consumables is primarily driven by wafer starts, so the CMP consumables industry reflects semiconductor industry demand patterns in terms of growth,
cyclicality and seasonality and varying demand for specific device types. We saw stronger demand starting in the second half of fiscal 2016 through fiscal 2018, which was consistent
with other participants in the semiconductor industry. Our revenue generated in China and Korea during fiscal 2018 increased 30% and 43%, respectively, from fiscal 2017, which is
attributable to semiconductor growth in China and overall growth in the memory market. Over the long term, we anticipate worldwide demand for CMP consumables used by IC device
manufacturers will grow as a result of expected long-term growth in wafer starts, the trend to more advanced technologies and an associated increase in the number of CMP polishing
steps required to produce these advanced devices, and the introduction of new materials that are expected to require CMP.
We expect the anticipated long-term growth in demand will be partially mitigated by continued efficiency improvements in CMP consumables usage as customers seek to reduce
their costs. As discussed above, semiconductor manufacturers look for ways to lower the cost of CMP consumables in their production operations, including improvements in
technology, dilution of slurry, use of concentrated slurry products, or reduction of slurry flow rate, to reduce the total amount of slurry used, and to extend pad life. In addition, CMP
demand also depends upon the specific mix of IC device demand, since the intensity of CMP usage varies by IC device type.
We believe that CMP technical solutions are becoming more complex, with advanced technologies generally requiring greater customization of CMP slurry products by customer,
tool set and process integration approach. As a result, we generally see customers selecting suppliers earlier in their development processes and maintaining preferred supplier
relationships through production. Therefore, we believe that close collaboration with our customers early in the development cycle offers the best opportunity for optimal CMP
solutions. We also believe that research and development programs with customers and suppliers continue to be vital to our success as we develop and commercialize innovative,
high-performing and more cost-effective CMP solutions.
COMPETITION
We compete in the CMP consumables sector, which is characterized by advances in technology and demanding requirements for product quality and consistency. We face
competition from other CMP consumables suppliers. We also may face competition in the future from significant changes in technology or emerging technologies. However, we believe
we are well-positioned to continue our leadership in CMP slurries, and to continue to grow our business in CMP pads. We believe we have the experience, scale, capabilities and
infrastructure that are required for success, and we work closely with technology-leading customers in the semiconductor industry to meet their growing expectations as a trusted
business partner.
Our CMP slurry competitors range from small companies that compete with a single product or in a single geographic region, to divisions of global companies with multiple lines of
CMP products, and we believe we are the leader in CMP slurries. In our view, we are the only CMP slurry supplier today that serves a broad range of customers by offering and
supporting a full line of CMP slurry solutions for all major applications, with a proven track record of supplying these products globally in high volumes with the requisite high level of
technical support services.
With respect to CMP polishing pads, a division of DowDuPont has held the leading position in this area for many years. We believe we are the second largest supplier of CMP
polishing pads to the industry. A number of other companies also participate in this area of the CMP consumables business. We believe that the combination of our existing pad
technology and products with those from our acquisition of NexPlanar in 2015 enable us to meet our customers' needs for lower defectivity, greater pad consistency, and longer pad
life. In addition, we believe that our full array of polishing pads offerings enables us to better serve our customers on a global basis, including our performance-differentiated slurry and
pad consumable sets.
Our QED subsidiary operates in the precision optics industry. There are few direct competitors of QED and we believe its technology is unique and provides a competitive
advantage to customers in the precision optics industry, which still relies heavily on traditional artisanal methods of fabrication.
9 CUSTOMERS, SALES AND MARKETING
Within the semiconductor industry, our customers are generally producers of logic or memory IC devices, or providers of IC foundry services. Some logic customers, and so-called
"fabless" companies, outsource some or all of the production of their devices to foundries, which provide contract manufacturing services, in order to avoid the high cost of process
development, construction and operation of a fab, or to provide additional capacity when needed.
We believe the primary influences of our customers' CMP consumables buying decisions are: overall cost of ownership, which represents the cost to purchase, use and maintain a
product; product quality and consistency; product performance and its impact on a customer's overall yield; engineering support; and, supply assurance. We believe that greater
customer expertise within the CMP process, more challenging integration schemes, additional and unique polishing materials, and cost pressures will continue to increase demands on
CMP consumables suppliers like us.
We use a collaborative approach to build close relationships with our customers in a variety of areas, and we have customer-focused teams in each major geographic region. Our
sales process begins long before the actual sale of our products, and occurs on a number of levels. Due to the long lead times from research and development to product
commercialization and sales, we have research teams that collaborate with technology-leading customers on emerging applications years before the products are required by the market.
We also have development teams that interact closely with these customers, using our research and development facilities and capabilities to design CMP products tailored to their
needs. Next, our applications engineers work with customers to integrate our products into their manufacturing processes. Finally, as part of our sales process, our logistics and sales
personnel provide supply, warehouse and inventory management services for our customers.
We market our products primarily through direct sales to our customers, although we use distributors in certain areas. We believe this strategy of primarily direct sales provides us
an additional means to collaborate with our customers, and provides our customers with the most efficient means by which to procure our products.
Our QED subsidiary supports customers in the semiconductor equipment, aerospace, defense, research, biomedical and digital imaging industries. QED counts among its
worldwide customers leading precision optics manufacturers, major semiconductor original equipment manufacturers, research institutions, and contractors to the United States and
other governments.
In fiscal 2018, our five largest customers accounted for approximately an aggregate 57% of our revenue, with Samsung, Taiwan Semiconductor Manufacturing Company (TSMC)
and SK Hynix Inc. accounting for approximately 18%, 12%, and 10%, respectively, of our revenue. For additional information on our customers, refer to Note 2 of the "Notes to the
Consolidated Financial Statements" included in Item 8 of Part II of this Form 10-K.
RESEARCH, DEVELOPMENT AND TECHNICAL SUPPORT
We believe that technology is vital to success in our CMP and ESF businesses, and we plan to continue to devote significant resources to research, development and technical
support (R&D), and balance our efforts between shorter and longer-term market needs. We focus our R&D efforts on product innovation at leading-edge applications for our
technology-leading customers. We develop new and enhanced CMP solutions tailored to these customers' requirements using our expertise in chemical formulation, materials science,
product engineering and manufacturing technology. We work closely with these customers at their facilities to identify their specific technology and manufacturing challenges and to
translate these challenges into viable CMP process solutions.
Our technology efforts are focused on five main areas that span the early stage of product development involving new materials, processes and designs several years in advance of
commercialization, to continuous improvement of already commercialized products in daily use in our customers' manufacturing facilities:
Research related to fundamental CMP technology;
•
• Development of new and enhanced CMP consumables products, including collaboration on joint development projects with technology-leading customers and suppliers;
•
•
• Development of polishing and metrology applications outside of the semiconductor industry.
Process development to support rapid and effective commercialization of new products;
Technical support of our CMP products in our customers' research, development and manufacturing facilities; and,
10 Our research in CMP slurries and pads addresses a breadth of complex and interrelated performance criteria that relate to the functional performance of IC devices, our customers'
manufacturing yields, and their overall cost of ownership. We design slurries and pads that are capable of polishing one or more materials of differing hardness, sometimes at the same
time, that comprise the semiconductor circuitry. In addition, our products must achieve the desired surface conditions at high polishing rates, high processing yields and low
consumables costs in order to provide acceptable cost of ownership for our customers. As technology advances and materials and designs increase in complexity, these challenges
require significant investments in R&D.
We also commit R&D resources to our ESF business. Products under development in this area include products used to polish silicon wafers to improve the surface quality of
these wafers and reduce the customers' total cost of ownership.
We believe that our technology provides us with a competitive advantage, and that our investments in R&D provide us with polishing and metrology capabilities that support the
most advanced and challenging customer technology requirements. In fiscal years 2018, 2017 and 2016, we incurred approximately $52.0 million, $55.7 million and $58.5 million,
respectively, in R&D expenses. Investments in property, plant and equipment to support our R&D efforts are capitalized and depreciated over their useful lives.
Our global R&D team includes experts from the semiconductor industry and scientists from key disciplines required for the development of high-performance CMP consumable
products. We operate an R&D facility in Aurora, Illinois, that features a Class 1 clean room and advanced equipment for product development, including 300mm polishing and
metrology capabilities; a facility in Japan, which includes a Class 1 clean room with 300mm polishing, metrology and slurry development capabilities; a facility in Taiwan that includes a
clean room with 200mm polishing capability; a facility in South Korea that provides slurry formulation capability and 300mm polishing capability; an R&D laboratory in Singapore that
provides polishing, metrology and slurry development capabilities for the data storage industry; and, a research facility in Rochester, New York that supports our QED business. These
facilities underscore our commitment to continuing to invest in our technology infrastructure to maintain our technology leadership and to be responsive to the needs of our customers.
RAW MATERIALS SUPPLY
Engineered abrasive particles are significant raw materials we use in many of our CMP slurries. Our strategy is to secure various sources of different raw materials, as appropriate,
to enable the desired performance of our products, and monitor those sources as necessary to provide supply assurance. Also, we have entered into multi-year supply agreements with
a number of suppliers for the purchase of raw materials in the interest of supply assurance and to control costs. For additional information regarding these agreements, refer to "Tabular
Disclosure of Contractual Obligations", included in "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Item 7 of Part II of this Form 10-K.
INTELLECTUAL PROPERTY
We believe our intellectual property is important to our success and ability to compete, and we also differentiate our products and technology by their high quality and reliability,
and our quality systems, global supply chain and logistics. As of October 31, 2018, we had 1,319 active worldwide patents, of which 276 are U.S. patents, and 410 pending worldwide
patent applications, of which 45 are in the United States. Many of these patents are important to our continued development of new and innovative products for CMP and related
processes, as well as for new businesses. Our patents have a range of duration. We refresh our intellectual property on an ongoing basis through continued innovation. As an
example, we have had patent coverage that was important to some of our legacy business, and continue to have significant other patents that protect this technology and other legacy
and advanced technology with a range of duration. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws,
use of certain manufacturing technologies, exclusive contractual arrangements with suppliers, and with employee and third party-nondisclosure and assignment agreements. We
vigorously protect and defend our intellectual property, and have been successful in this regard.
Most of our intellectual property has been developed internally, but we also may acquire intellectual property from others to enhance our intellectual property portfolio. These
enhancements may be via licenses or assignments or we may acquire certain proprietary technology and intellectual property when we make acquisitions. We believe these technology
rights can enhance our competitive advantage by providing us with future product development opportunities and expanding our intellectual property portfolio.
11 ENVIRONMENTAL MATTERS
Our facilities are subject to various environmental, safety and health laws and regulations, including those relating to air emissions, wastewater discharges, the handling and
disposal of solid and hazardous wastes, and occupational safety and health. We believe that our facilities are in substantial compliance with applicable environmental laws and
regulations. Our major operations in the United States, Japan, Singapore, South Korea and Taiwan are certified under current ISO 14001 Environmental and OHSAS 18001 Safety and
Health standards, which requires that we implement and operate according to various procedures that demonstrate waste reduction, energy conservation, injury reduction and other
environmental, health and safety objectives. We have achieved certification under the revised ISO 14001 standards and are now actively pursuing certification under revised OHSAS
18001 standards that will transition to ISO 45001 standards over the next three years. We have incurred, and will continue to incur, capital and operating expenditures and other costs in
complying with environmental, safety and health laws and regulations in the United States and other countries in which we do business, but we do not expect these costs will be
material.
EMPLOYEES
We believe our employees are the foundation of our success. As of October 31, 2018, we employed 1,219 individuals, including 722 in operations, 248 in research and development
and technical, 84 in sales and marketing and 165 in administration. In general, our employees are not covered by collective bargaining agreements. We have not experienced any work
stoppages and consider our relations with our employees to be good.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We sell our products worldwide. We believe our geographic coverage allows us to utilize our business and technical expertise from a diverse, global workforce, strategically
located in close proximity to our customers. For more financial information about geographic areas, see Note 20 of the "Notes to the Consolidated Financial Statements" included in
Item 8 of Part II of this Form 10-K.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports,
as well as any other filings with the SEC, including our Form S-4 Registration Statement with respect to our pending acquisition of KMG, and amendments thereto, are made available
free of charge on our Company website, www.cabotcmp.com, as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission (SEC). Any
materials that the Company files with the SEC are also available to read and copy at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Statements regarding beneficial ownership of our securities by our executive officers
and directors are made available on our Company website following the filing of such with the SEC. In addition, the SEC's website (http://www.sec.gov) contains reports, proxy
statements, and other information that we file electronically with the SEC.
12 ITEM 1A. RISK FACTORS
RISKS RELATING TO OUR BUSINESS
WE MAY PURSUE ACQUISITIONS OF, INVESTMENTS IN, AND MERGERS OR STRATEGIC ALLIANCES WITH OTHER ENTITIES, WHICH COULD DISRUPT OUR
OPERATIONS AND HARM OUR OPERATING RESULTS IF THEY ARE UNSUCCESSFUL, OR WE MAY ENCOUNTER UNATICIPATED ISSUES IN IMPLEMENTING THEM
We expect to continue to make investments in technologies, assets and companies, either through acquisitions, mergers, investments or alliances, in order to supplement our
internal growth and development efforts. Acquisitions, mergers, and investments, including our acquisition of NexPlanar, which we completed in October 2015, and our pending
acquisition of KMG announced in August 2018 and expected to close in mid-November 2018, involve numerous risks, including the following: difficulties and risks in integrating the
operations, technologies, products and personnel of acquired companies; difficulties and risks from unanticipated issues arising subsequent to a transaction related to the other entity;
diversion of management's attention from normal daily operations of the business; increased risk associated with foreign operations; potential difficulties and risks in entering markets
in which we have limited or no direct prior experience and where competitors have stronger positions; potential difficulties in operating new businesses with different business models;
potential difficulties with regulatory or contract compliance in areas in which we have limited experience; initial dependence on unfamiliar supply chains or relatively small supply
partners; insufficient revenues to offset increased expenses associated with acquisitions; potential loss of key employees of the acquired companies; or inability to effectively
cooperate and collaborate with our alliance partners.
Further, we may never realize the perceived or anticipated benefits of a business combination or merger with, or asset or other acquisition of, or investments in, other entities.
Transactions such as these could have negative effects on our results of operations, in areas such as contingent liabilities, gross margins, amortization charges related to intangible
assets and other effects of accounting for the purchases of other business entities. Investments in and acquisitions of technology-related companies or assets are inherently risky
because these businesses or assets may never develop, and we may incur losses related to these investments. For example, in fiscal 2016, we recorded $1.0 million of impairment
expense related to certain in-process technology, related to the NexPlanar acquisition. In addition, we may be required to impair the carrying value of these acquisitions or investments
to reflect other than temporary declines in their value, which could harm our business and results of operations.
Our planned acquisition of KMG is still pending at the time of filing of this Report on Form 10-K. Some risks related to the Acquisition include: the uncertainty of the value of the
acquisition consideration we will pay because the value is partially based on the market price of our common stock, which has fluctuated and will continue to fluctuate through the close
of the Acquisition; the ability to satisfy the conditions of closing of the Acquisition on the expected timing or at all and other risks related to the completion of the Acquisition;
expected benefits, synergies and growth prospects of the proposed transaction may not be achieved in a timely manner or at all; we may not be able to successfully integrate KMG's
business with Cabot Microelectronics following the close; we may not be able to retain and hire key personnel; any disruption of our business relationships with customers, suppliers,
distributors or employees due to uncertainty associated with the Acquisition; the potential dilutive impact to our earnings per share due to the issuance of shares of our common stock
in the Acquisition; and, a potential decline in the market price of our common stock following the Acquisition. For additional information regarding risks relating to the acquisition of
KMG, refer to "Risk Factors—Risks Relating to the Merger" in our Form S-4 Registration Statement filed with the SEC on September 12, 2018 and Form S-4/A filed on October 5, 2018.
DEMAND FOR OUR PRODUCTS FLUCTUATES AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS
Our business is affected by economic and industry conditions and our revenue is primarily dependent upon semiconductor demand. Historically, semiconductor demand has
fluctuated due to economic and industry cycles and seasonal shifts in demand, which can affect our business, causing demand for our products to fluctuate. For example, the
strengthening of demand conditions in the semiconductor industry we experienced during the second half of fiscal 2016 continued through fiscal 2018, following relatively soft demand
conditions during the first half of fiscal 2016. Furthermore, competitive dynamics within the semiconductor industry may impact our business. Our limited visibility to future customer
orders makes it difficult for us to predict industry trends. If the global economy or the semiconductor industry weakens, whether in general or as a result of specific factors, such as
macroeconomic factors, or unpredictable events such as natural disasters or geopolitical events, we could experience material adverse impacts on our results of operations and financial
condition.
Adverse global economic and industry conditions could have other negative effects on our Company. For instance, we could experience negative impacts on cash flows due to the
inability of our customers to pay their obligations to us, or our production process could be harmed if our suppliers cannot fulfill their obligations to us. We also might have to reduce
the carrying value of goodwill and other intangible assets, which could harm our financial position and results of operations.
13 Some additional factors that affect demand for our products include: demand trends for different types of electronic devices, such as logic versus memory IC devices, or digital
versus analog IC devices; the various technology nodes at which those products are manufactured; customers' efficiencies in the use of CMP consumables; customers' device
architectures and specific manufacturing processes; the short order to delivery time for our products; quarter-to-quarter changes in customer order patterns; market share and
competitive gains and losses; and pricing changes by us and our competitors.
WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN
THE CONSUMPTION OF CMP SLURRIES AND PADS
Our business is substantially dependent on CMP slurries and pads, which account for the majority of our revenue. Our business would suffer if these products became obsolete or
if consumption of these products decreased. Our success depends on our ability to keep pace with technological changes and advances in the semiconductor industry and to adapt,
improve and customize our products for advanced IC applications in response to evolving customer needs and industry trends. Since its inception, the semiconductor industry has
experienced technological changes and advances in the design, manufacture, performance and application of IC devices. Our customers continually pursue lower cost of ownership
and higher quality and performance of materials consumed in their manufacturing processes, including CMP slurries and pads, as a means to reduce costs, increase the yield in their
manufacturing facilities, and achieve desired performance of the IC devices they produce. We expect these technological changes, and this drive toward lower costs, higher quality and
performance and higher yields, will continue in the future. Potential technology developments in the semiconductor industry, as well as our customers' efforts to reduce consumption of
CMP consumables, including through use of smaller quantities, could render our products less important to the IC device manufacturing process.
A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE
SIGNIFICANTLY IF WE LOST ONE OR MORE OF THESE CUSTOMERS OR BUSINESS FROM THEM
Our CMP consumables customer base is concentrated among a limited number of large customers. The semiconductor industry has been consolidating as the larger semiconductor
manufacturers have generally grown faster than the smaller ones, through business gains, mergers and acquisitions, and strategic alliances. Industry analysts predict that this trend will
continue, which means the semiconductor industry will be comprised of fewer and larger participants in the future if their prediction is correct. One or more of these principal customers
could stop buying CMP consumables from us or could substantially reduce the quantity of CMP consumables purchased from us. Our principal customers also hold considerable
purchasing power, which can impact the pricing and terms of sale of our products. Any deferral or significant reduction in the quantity or price of CMP consumables sold to these
principal customers could seriously harm our business, financial condition and results of operations.
In fiscal 2018, our five largest customers accounted for approximately an aggregate 57% of our revenue, with Samsung, TSMC and SK Hynix Inc. accounting for approximately 18%,
12%, and 10%, respectively, of our revenue. In fiscal year 2017, our five largest customers accounted for approximately 57% of our revenue, with Samsung, TSMC, and Micron
Technology, Inc. accounting for approximately 16%, 13%, and 10%, respectively, of our revenue.
OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR COMPETITORS DEVELOP COMPETITIVE CMP CONSUMABLES PRODUCTS, OFFER BETTER PRICING,
SERVICE OR OTHER TERMS, OR OBTAIN OR ASSERT CERTAIN INTELLECTUAL PROPERTY RIGHTS
Competition from other CMP consumables manufacturers or any new entrants could seriously harm our business and results of operations, and this competition could continue to
increase. Competition has and will likely continue to impact the prices we are able to charge for our CMP consumables products, as well as our overall business. In addition, our
competitors could have, obtain or assert intellectual property rights that could affect or restrict our ability to market our existing products and/or to innovate and develop new products,
thus increasing our costs of doing business, could attempt to introduce products similar to ours following the expiration of our patents, as referenced with respect to certain intellectual
property important to some of our legacy business, or could attempt to introduce products that do not fall within the scope of our intellectual property rights.
14 ANY PROBLEM OR DISRUPTION IN OUR SUPPLY CHAIN, INCLUDING SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS, OR IN OUR ABILITY TO MANUFACTURE
AND DELIVER OUR PRODUCTS TO OUR CUSTOMERS, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
We depend on our supply chain to enable us to meet the demands of our customers. Our supply chain includes the raw materials we use to manufacture our products, our
production operations and the means by which we deliver our products to our customers. Our business could be adversely affected by any problem or interruption in the supply of the
key raw materials we use in our CMP slurries and pads, including raw materials that do not meet the stringent quality and consistency requirements of our customers, any problem or
interruption that may occur during production or delivery of our products, such as weather-related problems, natural disasters, or geopolitical, trade or labor-related issues, or any
difficulty in producing sufficient quantities of our products to meet growing demand from our customers. Our supply chain may also be negatively impacted by unanticipated price
increases due to supply restrictions beyond the control of our Company or our raw materials suppliers.
We believe it would be difficult to promptly secure alternative sources of key raw materials in the event one of our suppliers becomes unable to supply us with sufficient quantities
of raw materials that meet the quality and technical specifications required by us and our customers. In addition, new contract terms, forced production or manufacturing changes,
contractual amendments to existing agreements with, or non-performance by, our suppliers, including any significant financial distress our suppliers may suffer, could adversely affect
us. Also, if we change the supplier or type of key raw materials we use to make our CMP slurries or pads, or are required to purchase them from a different manufacturer or
manufacturing facility or otherwise modify our products, in certain circumstances our customers might have to requalify our CMP slurries and pads for their manufacturing processes
and products. The requalification process could take a significant amount of time and expense to complete and could occupy technical resources of our customers that might otherwise
be used to evaluate our new products, thus delaying potential revenue growth, or motivate our customers to consider purchasing products from our competitors, possibly interrupting
or reducing our sales of CMP consumables to these customers.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We currently have operations and a large customer base outside of the United States. Approximately 87%, 86% and 86% of our revenue was generated by sales to customers
outside of the United States during fiscal years 2018, 2017 and 2016, respectively. We may encounter risks in doing business in certain foreign countries, including, but not limited to,
adverse changes in economic and political conditions, both in foreign locations and in the United States with respect to non-U.S. operations of U.S. businesses like ours, geopolitical
and/or trade tensions, fluctuation in exchange rates, changes in international trade requirements and sanctions and/or tariffs that affect our business and that of our customers and
suppliers, compliance with a variety of foreign laws and regulations and related audits and investigations, as well as difficulty in enforcing business and customer contracts and
agreements, including protection of intellectual property rights. We also may encounter risks that we may not be able to repatriate additional earnings from our foreign operations,
derive anticipated tax benefits of our foreign operations or recover the investments made in our foreign operations, whether due to regulatory or policy changes in the U.S. or in the
countries outside of the U.S. in which we do business, or other factors.
In particular, China is a fast-developing market for the semiconductor industry, and is an area of potential continued growth for us. As business volume between China and the rest
of the world continues to grow, there is risk that geopolitical, regulatory, trade and political matters could adversely affect business for companies like ours based on the complex
relationships among China, the United States, and other countries in the Asia Pacific region, which could have a material adverse impact on our business. In addition, there are risks
that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct
business, and, provide incentives to government-backed local customers to buy from local suppliers rather than companies like ours, all of which could adversely impact our business,
including our results of operations.
15 BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY OBTAIN OR PROTECT IT COULD SERIOUSLY HARM OUR
BUSINESS
Protection of intellectual property is particularly important in our industry because we develop complex technical formulas and processes for CMP products that are proprietary in
nature and differentiate our products from those of our competitors. Our intellectual property is important to our success and ability to compete. We attempt to protect our intellectual
property rights through a combination of patent, trademark, copyright and trade secret laws, as well as employee and third-party nondisclosure and assignment agreements. In addition,
we protect our product differentiation through various other means, such as proprietary supply arrangements for certain raw materials, and use of certain manufacturing technologies.
Due to our international operations, we pursue protection in different jurisdictions, which may provide varying degrees of protection, and we cannot provide assurance that we can
obtain adequate protection in each such jurisdiction. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason, including through the
patent prosecution process or in the event of litigation related to such intellectual property, could seriously harm our business. In addition, certain types of intellectual property, such
as patents, expire after a certain period of time, and products protected by our patents then lose such protection, so we refresh our intellectual property portfolio on an ongoing basis
through continued innovation, and failure to do so could adversely affect our business. Also, the costs of obtaining or protecting our intellectual property could negatively affect our
operating results.
BECAUSE WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF CMP CONSUMABLES, EXPANSION OF OUR BUSINESS INTO OTHER PRODUCTS AND
APPLICATIONS MAY NOT BE SUCCESSFUL
An element of our strategy has been to leverage our current customer relationships, technological expertise and other capabilities and competencies to expand our business
beyond CMP consumables into other areas, such as other electronic materials. In addition, in our Engineered Surface Finishes business, we have been pursuing other surface
modification applications. Expanding our business into new product areas could involve technologies, production processes and business models in which we have limited experience,
and we may not be able to develop and produce products or provide services that satisfy customers' needs, or we may be unable to keep pace with technological or other
developments. Or, we may decide that we no longer wish to pursue these new business initiatives. Also, our competitors may have or obtain intellectual property rights that could
restrict our ability to market our existing products and/or to innovate and develop new products.
TAX INCREASES OR CHANGES IN TAX RULES MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS
As a company conducting business on a global basis, we are exposed, both directly and indirectly, to effects of changes in United States, state, local and foreign tax rules. On
December 22, 2017, the President of the United States signed and enacted into law comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").
Known and certain estimated effects based upon current interpretation of the Tax Act have been incorporated into our financial results. As additional clarification and implementation
guidance is issued on the Tax Act, it may be necessary to adjust the provisional amounts. Adjustments to provisional amounts could be material to our results of operations and cash
flows. In addition, there is a risk that state or foreign jurisdictions may amend their tax laws in response to the Tax Act, which could have a material impact on our future results of
operations and cash flows.
CERTAIN CRITICAL INFORMATION SYSTEMS COULD BE SUSCEPTIBLE TO CYBERSECURITY AND OTHER THREATS
We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include, but are not limited to,
telecommunications, the Internet, our corporate intranet, various computer hardware and software applications, network communications, and email. These information systems may be
owned and maintained by us, our outsourced providers, or third parties such as vendors, contractors, and Cloud providers. All of these information systems are subject to disruption,
breach or failure from various sources including, but not limited to, attacks, degradation, and failures resulting from potential sources, including viruses, malware, denial of service,
destructive or inadequate code, power failures, and physical damage. Confidential and/or sensitive information stored on these information systems, or transmitted to or from Cloud
storage, could be intentionally or unintentionally compromised, lost, and/or stolen. While we have implemented security procedures and virus protection software, intrusion prevention
systems, access control, and emergency recovery processes to mitigate risks like these with respect to information systems that are under our control, they are not fail-safe and may be
subject to breaches. Further, we cannot assure that third parties upon whom we rely for various IT services will maintain sufficient vigilance and controls over their systems. Our
inability to use or access these information systems at critical points in time, or unauthorized releases of personal or confidential information, could unfavorably impact the timely and
efficient operation of our business, including our results of operations, and our reputation, as well as our relationships with our employees or other individuals whose information may
have been affected by such cybersecurity incidents.
16 In addition, regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. New privacy security laws and
regulations, including the United Kingdom's Data Protection Act 2018 and the European Union General Data Protection Regulation 2016 that became effective May 2018, among others,
pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulations could result in significant
penalties.
OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER
We utilize and rely upon a global workforce. If we fail to attract and retain the necessary managerial, technical and customer support personnel, our business and our ability to
maintain existing and obtain new customers, develop new products and provide acceptable levels of customer service could suffer. We compete worldwide with other industry
participants for qualified personnel, particularly those with significant experience in the semiconductor industry. The loss of services of key employees, or our inability to obtain or
maintain visas or other travel or residency documents on their behalf with respect to our business needs, could harm our business and results of operations. Periodically, we engage in
succession planning for our key employees, and our Board of Directors reviews succession planning for our executive officers, including our chief executive officer, on an annual basis.
RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK
THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
The market price of our common stock has fluctuated and could continue to fluctuate significantly as a result of factors such as: economic, geopolitical, political and stock market
conditions generally and specifically as they may impact participants in the semiconductor and related industries; changes in financial estimates and recommendations by securities
analysts who follow our stock; earnings and other announcements, and changes in market evaluations, by securities analysts, investors, market participants or others, of or related to,
us or participants in the semiconductor and related industries; changes in business, trade or regulatory conditions affecting us or participants in the semiconductor and related
industries; announcements or implementation by us, our competitors, or our customers of technological innovations, new products or different business strategies; changes in our
capital deployment strategy, issuances of shares of our capital stock or entering into a business combination or other strategic transaction, such as our pending acquisition of KMG;
and trading volume of our common stock.
ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED
BID FOR OUR COMPANY
Our certificate of incorporation and bylaws, and various provisions of the Delaware General Corporation Law may make it more difficult or expensive to effect a change in control of
our Company. For instance, our amended and restated certificate of incorporation provides for the division of our Board of Directors into three classes as nearly equal in size as
possible with staggered three-year terms.
We have adopted change in control arrangements covering our executive officers and other key employees. These arrangements provide for a cash severance payment, continued
medical benefits and other ancillary payments and benefits upon termination of service of a covered employee's employment following a change in control, which may make it more
expensive to acquire our Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17 ITEM 2. PROPERTIES
Our principal U.S. facilities that we own consist of:
•
•
•
a global headquarters and research and development facility in Aurora, Illinois, comprising approximately 200,000 square feet;
a commercial slurry manufacturing plant and distribution center in Aurora, Illinois, comprising approximately 175,000 square feet; and
a commercial polishing pad manufacturing plant and offices in Aurora, Illinois, comprising approximately 48,000 square feet.
Our principal U.S. facilities that we lease consist of:
•
•
two commercial pad manufacturing plants and offices in Hillsboro, Oregon, comprising approximately 140,000 square feet; and
a development and technical support facility and business office in Rochester, New York, comprising approximately 23,000 square feet.
Our principal foreign facilities that we own consist of:
•
•
•
a commercial slurry and pad manufacturing plant, automated warehouse, research and development facility and offices in Kaohsiung County, Taiwan, comprising
approximately 190,000 square feet;
a commercial slurry manufacturing plant and distribution center, and a development and technical support facility in Geino, Japan, comprising approximately 165,000 square
feet; and
a commercial slurry manufacturing plant, development facility and offices in Oseong, South Korea, comprising approximately 110,000 square feet.
Our principal foreign facilities that we lease consist of:
•
•
an office in Hsin-Chu, Taiwan, comprising approximately 30,000 square feet; and
a commercial slurry manufacturing plant, research and development facility and business office in Singapore, comprising approximately 24,000 square feet.
We believe that our facilities are suitable and adequate for their intended purpose and provide us with sufficient capacity and capacity expansion opportunities and technological
capability to meet our current and expected demand in the foreseeable future. For example, we expanded our facilities in Hillsboro, Oregon in fiscal 2018 to support future growth.
18 ITEM 3. LEGAL PROCEEDINGS
While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we
periodically become a party to legal proceedings in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
19 EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information concerning our executive officers and their ages as of October 31, 2018.
NAME
AGE
POSITION
David H. Li
Scott D. Beamer
H. Carol Bernstein
Thomas F. Kelly
Ananth Naman
Eleanor K. Thorp
Daniel D. Woodland
Thomas S. Roman
45
47
58
53
48
44
48
57
President and Chief Executive Officer
Vice President and Chief Financial Officer
Vice President, Secretary and General Counsel
Vice President and Chief Commercial Officer
Vice President, Asia Pacific, and Chief Technology Officer
Vice President, Human Resources
Vice President and Chief Marketing and Operations Officer
Principal Accounting Officer and Corporate Controller
DAVID H. LI has served as our President and Chief Executive Officer, and as a director of our Company, since January 2015. From June, 2008 through December 2014, Mr. Li served as
our Vice President of the Asia Pacific Region. Prior to that role, Mr. Li held various leadership roles, including our Managing Director of China and Korea, and our Global Business
Director for Tungsten and Advanced Dielectrics. Prior to that, he held a variety of leadership positions in operations, sourcing and investor relations since joining us in 1998. Mr. Li
received a B.S. in Chemical Engineering from Purdue University and an M.B.A. from Northwestern University.
SCOTT D. BEAMER has served as our Vice President and Chief Financial Officer since January, 2018. Prior to joining us, Mr. Beamer served as Vice President and Chief Financial
Officer of Stepan Company from August 2013. Before that, Mr. Beamer held various senior finance roles over a 16-year career at PPG Industries, Inc., including serving as its CFO –
Europe, and as its Assistant Corporate Controller. Mr. Beamer has a B.S. from Bloomsburg University, and an M.B.A. from the University of Pittsburgh, and began his career at Ernst &
Young.
H. CAROL BERNSTEIN has served as our Vice President, Secretary and General Counsel since August 2000. From 1998 until joining us, Ms. Bernstein served as the General Counsel
and Director of Industrial Technology Development of Argonne National Laboratory/the University of Chicago. From 1985 through 1997, she served in various positions with the IBM
Corporation, culminating in serving as an Associate General Counsel, and was the Vice President, Secretary and General Counsel of Advantis Corporation, an IBM joint venture. Ms.
Bernstein received her B.A. from Colgate University and her J.D. from Northwestern University; she is a member of the Bar of the States of Illinois and New York.
THOMAS F. KELLY has served as our Vice President and Chief Commercial Officer since October 2017, and prior to that had served as our Vice President of Corporate Development
since September 2016. From 2012 until joining us, Mr. Kelly served as the Director of Global Raw Materials Procurement for Celanese Corporation. Prior to that, he held various roles at
Chemtura Corporation, culminating in serving as Vice President of New Business Development and the Program Management Organization from 2010 to 2012, and was Vice President of
Product Management, Operations and Integration Planning from 2008 to 2010. Before that, Mr. Kelly held various senior business operations, product management, and supply chain
assurance positions with us from 1999 through 2008. Mr. Kelly received his B.S. and M.S. degrees in Chemical Engineering from Villanova University, and his M.B.A. from Drexel
University.
ANANTH NAMAN has served as our Vice President and Chief Technology Officer since January 2015, and as of October 2017, also assumed responsibility for our Asia Pacific region.
Previously, Dr. Naman was our Vice President of Research and Development since January 2011. Prior to that, Dr. Naman was our Director of Product Development starting in April
2009 and Director of Pads Technology from January 2006 through March 2009. Prior to joining us, Dr. Naman managed research and development efforts at Honeywell International
from July 2000 to December 2005, and from 1997 to 2000 he held positions in research and development at Seagate Technology. Dr. Naman earned B.S., M.S. and Ph.D. degrees in
Materials Science and Engineering from the University of Florida.
20 ELEANOR K. THORP has served as our Vice President, Human Resources since September 2018. Ms. Thorp rejoined our company after serving as the Head of Human Resources and
Recruiting at Sephora Digital SEA, from 2015 through 2018, based in Singapore. Prior to that, Ms. Thorp was Cabot Microelectronics' Human Resources Director of Asia Pacific from
2013 through 2015. Before this, she was Head of Human Resources and Recruiting at Frontier Strategy Group, and also spent time in executive search, working across a wide range of
industries, based first in London and then in New York. Ms. Thorp graduated from the University of Cambridge (England) with a B.A. in Social and Political Science.
DANIEL D. WOODLAND has served as our Vice President and Chief Marketing and Operations Officer since October 2017, and prior to that had served as our Vice President of
Marketing since January 2015. From June 2009 through December 2014, Dr. Woodland served as our Global Business Director for Dielectrics, after having served as our Marketing
Director since December 2006. Prior to that, Dr. Woodland served as Product Line Manager, and held various research and development positions after joining us in September 2003.
Before joining us, Dr. Woodland held management roles at OMNOVA Solutions. Dr. Woodland received a B.A. in Physics from the University of California – Berkeley, and a Ph.D. in
Physics from the University of Maine.
THOMAS S. ROMAN has served as our Corporate Controller and Principal Accounting Officer since February 2004 and previously served as our North American Controller. Prior to
joining us in April 2000, Mr. Roman was employed by FMC Corporation in various financial reporting, tax and audit positions. Before that, Mr. Roman worked for Gould Electronics and
Arthur Andersen LLP. Mr. Roman is a C.P.A. and earned a B.S. in Accounting from the University of Illinois and an M.B.A. from DePaul University.
21 PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has traded publicly under the symbol "CCMP" since our initial public offering in April 2000, currently on the NASDAQ Global Select Market, and formerly the
NASDAQ National Market. The following table sets forth the range of quarterly high and low sales prices for our common stock.
Fiscal 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2019 First Quarter (through October 31, 2018)
HIGH
64.45
77.01
81.85
81.39
102.92
115.94
119.32
123.76
104.07
LOW
50.66
62.41
69.88
68.00
79.36
92.38
97.42
101.17
89.19
As of October 31, 2018, there were approximately 598 holders of record of our common stock. In January 2016, we announced that our Board of Directors authorized the initiation of
a regular dividend program under which the Company intends to pay quarterly cash dividends on our common stock. Pursuant to this announcement, our Board of Directors declared
quarterly cash dividends of $0.18 per share, during the second, third, and fourth quarters of fiscal 2016, and during the first quarter of fiscal 2017. Starting in the second quarter of fiscal
2017, our Board of Directors declared quarterly cash dividends of $0.20 per share, which continued in each quarter through the first quarter of fiscal 2018. Starting in the second quarter
of fiscal 2018, our Board of Directors declared quarterly cash dividends of $0.40 per share, the latest of which we paid in October 2018. The declaration and payment of future dividends
is subject to the discretion and determination of the Company's Board of Directors and management, based on a variety of factors, and the program may be suspended, terminated or
modified at any time for any reason.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Jul. 1 through Jul. 31, 2018
Aug. 1 through Aug. 31, 2018
Sep. 1 through Sep. 30, 2018
Total
Total Number of
Shares
Purchased
Average Price
Paid Per Share
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs (in
thousands)
34,170
$
42,579
17,162
93,911
$
114.89
115.65
109.11
114.17
33,999
$
42,500
16,500
92,999
$
$
87,986
83,071
81,271
81,271
In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from the previously remaining $75.0 million to $150.0
million. Under this program, we repurchased 369,791 shares for $40.7 million in fiscal 2018. As of September 30, 2018, $81.3 million remains available under our share repurchase
program. The manner in which the Company repurchases its shares is discussed in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, under the heading "Liquidity and Capital Resources", of this Form 10-K. To date, we have funded share purchases under our share repurchase program from our available
cash balance, and currently anticipate we will continue to do so.
Separate from this share repurchase program, we purchased a total of 38,166 shares during fiscal 2018 pursuant to the terms of our Cabot Microelectronics Corporation 2012
Omnibus Incentive Plan, as amended (OIP), as shares withheld from award recipients to cover payroll taxes on the vesting of shares of restricted stock awarded under the OIP.
22 EQUITY COMPENSATION PLAN INFORMATION
See Part III, Item 12 of this Form 10-K for information regarding shares of common stock that may be issued under the Company's existing equity compensation plans.
STOCK PERFORMANCE GRAPH
The following graph illustrates the cumulative total stockholder return on our common stock during the period from September 30, 2013 through September 30, 2018 and compares it
with the cumulative total return on the NASDAQ Composite Index and the Philadelphia Semiconductor Index. The comparison assumes $100 was invested on September 30, 2013 in our
common stock and in each of the foregoing indices and assumes reinvestment of the quarterly cash dividends declared in fiscal 2016, 2017 and 2018. The performance shown is not
necessarily indicative of future performance. See "Risk Factors" in Part I, Item 1A above.
9/13
12/13
3/14
6/14
9/14
12/14
3/15
6/15
9/15
12/15
3/16
Cabot Microelectronics Corporation
NASDAQ Composite
PHLX Semiconductor
100.00
100.00
100.00
118.67
110.41
108.68
114.26
111.85
117.36
115.94
118.36
127.33
107.63
121.64
130.24
122.88
128.28
139.60
129.76
133.11
137.19
122.33
136.27
132.11
100.60
127.37
119.78
113.68
138.65
130.71
106.71
135.53
135.70
6/16
9/16
12/16
3/17
6/17
9/17
12/17
3/18
6/18
9/18
Cabot Microelectronics Corporation
NASDAQ Composite
PHLX Semiconductor
110.90
135.00
141.32
139.06
148.79
167.42
166.50
150.57
172.35
202.48
166.25
189.52
195.66
173.12
195.73
212.38
183.54
221.76
250.51
195.89
241.86
286.23
201.02
260.31
288.48
214.63
253.15
276.71
230.21
264.21
23 ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each year of the five-year period ended September 30, 2018 has been derived from the audited consolidated financial statements.
The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements and notes to those statements included in Items 7 and 8 of Part II of this Form 10-K, as well as
Risk Factors included in Item 1A of Part I of this Form 10-K.
CABOT MICROELECTRONICS CORPORATION
SELECTED FINANCIAL DATA - FIVE YEAR SUMMARY
(Amounts in thousands, except per share amounts)
Consolidated Statement of Income Data:
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research, development and technical
Selling and marketing
General and administrative
Total operating expenses
Operating income
Interest expense
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Weighted average basic shares outstanding
Diluted earnings per share
Weighted average diluted shares outstanding
Cash dividends per share
Consolidated Balance Sheet Data:
Cash and cash equivalents
Other current assets
Property, plant and equipment, net
Other assets
Total assets
Current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
2018
2017
Year Ended September 30,
2016
2015
2014
$
590,123
276,018
314,105
$
507,179
253,050
254,129
$
430,449
220,247
210,202
$
414,097
201,866
212,231
51,950
25,044
76,993
153,987
160,118
2,905
4,498
161,711
51,668
110,043
4.31
25,518
4.19
26,243
1.40
2018
352,921
169,860
111,403
146,789
780,973
101,154
-
13,127
114,281
666,692
780,973
$
$
$
$
$
$
$
$
55,658
30,846
55,637
142,141
111,988
4,529
1,913
109,372
22,420
86,952
3.47
25,015
3.40
25,512
0.78
$
$
$
$
58,532
27,717
49,445
135,694
74,508
4,723
653
70,438
10,589
59,849
2.47
24,077
2.43
24,477
0.54
2017
As of September 30,
2016
397,890
153,092
106,361
176,757
834,100
91,213
132,997
14,853
239,063
595,037
834,100
$
$
$
$
287,479
149,351
106,496
183,904
727,230
65,885
146,961
16,736
229,582
497,648
727,230
$
$
$
$
$
$
$
$
59,778
24,983
52,430
137,191
75,040
4,524
681
71,197
15,051
56,146
2.32
24,040
2.26
24,632
-
2015
354,190
140,318
93,743
72,223
660,474
60,644
155,313
15,553
231,510
428,964
660,474
$
$
$
$
$
$
$
$
424,666
221,573
203,093
59,354
26,513
45,418
131,285
71,808
3,354
140
68,594
17,843
50,751
2.12
23,704
2.04
24,611
-
2014
284,155
143,838
100,821
72,353
601,167
55,448
164,063
9,654
229,165
372,002
601,167
$
$
$
$
$
$
$
$
$
24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), as well as disclosures included elsewhere in this Report on
Form 10-K, include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a safe harbor for forward-looking
statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in
this Report on Form 10-K are forward-looking. In particular, forward-looking statements include statements herein regarding the expected timetable for closing of the pending
acquisition of KMG; the expected benefits and synergies of the pending acquisition of KMG and the capital structure of the combined company; our and KMG's beliefs, plans and
expectations; future sales and operating results; growth or contraction of, and trends in the industry and markets in which the Company participates; the Company's management;
various economic or political factors and international or national events, including related to the enactment of trade sanctions, tariffs, or other similar matters; regulatory or legislative
activity, including the enactment of the Tax Act in December 2017 in the United States; product performance; the generation, protection and acquisition of intellectual property, and
litigation related to such intellectual property or third party intellectual property; new product introductions; development of new products, technologies and markets; the Company's
supply chain; the financial conditions of the Company's customers; natural disasters; the acquisition of, investment in, or collaboration with other entities; uses and investment of the
Company's cash balance, including dividends and share repurchases, which may be suspended, terminated or modified at any time for any reason by the Company, based on a variety
of factors; financing facilities and related debt, payoff or payment of principal and interest, and compliance with covenants and other terms; the Company's capital structure; the
Company's current or future tax rate, including the effects of the Tax Act in the United States; and the operation of facilities by the Company; and statements preceded by, followed by
or that include the words "intends," "estimates," "plans," "believes," "expects," "anticipates," "should," "could" or similar expressions, are forward-looking statements. These forward-
looking statements involve a number of risks, uncertainties, and other factors, that could cause actual results to differ materially from those described by these forward-looking
statements. We assume no obligation to update this forward-looking information. The section entitled "Risk Factors" describes some, but not all, of the factors that could cause these
differences.
The following discussion and analysis should be read in conjunction with our historical financial statements and the notes to those financial statements which are included in Item
8 of Part II of this Form 10-K.
OVERVIEW
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our'') supplies high-performance polishing slurries and pads used in the manufacture
of advanced integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP). CMP polishes surfaces at an atomic level,
thereby helping to enable IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. We operate predominantly in one industry segment – the
development, manufacture and sale of CMP consumables. We develop, produce and sell CMP slurries for polishing many of the conducting and insulating materials used in IC devices,
and for polishing the disk substrates and magnetic heads used in hard disk drives. We also develop, manufacture and sell CMP polishing pads, which are used in conjunction with
slurries in the CMP process. We also pursue other demanding surface modification applications through our Engineered Surface Finishes (ESF) business, in which we develop and
provide products for demanding polishing applications in other industries.
In fiscal 2018, we experienced continued strong demand for our products, consistent with demand conditions in the overall semiconductor industry, particularly for memory
applications. This was driven in part by our memory customers' migration from 2D to 3D NAND, which requires more CMP processing steps. In addition, continued capacity
expansions in 3D NAND, primarily in Korea and China, should continue to provide future growth opportunities for us. In the advanced logic and foundry segments, we believe that new
applications in areas such as mobile, artificial intelligence (or AI), and blockchain will continue to drive demand for advanced logic semiconductors going forward. In addition, the
legacy logic and foundry area of the industry continues to benefit from growth in applications such as internet of things, autonomous driving, industrial automation, cloud and high-
performance computing, virtual reality, and 5G. We believe we remain well-positioned to benefit from these long-term demand trends. However, there are many factors that make it
difficult for us to predict future revenue trends for our business, including those discussed in Part I, Item 1A entitled "Risk Factors" in this Form 10-K.
25 Revenue for fiscal 2018 was $590.1 million, which represented an increase of 16.4% from $507.2 million reported for fiscal 2017, and was a record for the Company. The increase in
revenue from fiscal 2017 included record annual revenue in our tungsten slurries, dielectrics slurries, and polishing pads, which grew 14.3%, 16.1% and 21.0%, respectively, from last
year. In addition, results benefited from record revenue in ESF, which includes QED Technologies.
Gross margin, representing gross profit as a percentage of revenue, for fiscal 2018 was 53.2%, compared to 50.1% in fiscal 2017. The increase in gross margin from last year was
primarily due to higher sales volume and a higher value product mix, partially offset by higher fixed manufacturing costs, including higher staffing-related expense. We currently expect
our gross margin for full fiscal year 2019 to be between 53% and 54%, which includes approximately 80 basis points of NexPlanar amortization expense and does not take into account
expected expenses related to the pending acquisition of KMG. We may continue to experience fluctuations in our gross margin due to a number of factors, including changes in our
product mix and the extent to which we utilize our manufacturing capacity, which may cause our annual and quarterly gross margin to be above or below this annual guidance range.
Operating expenses, which include research, development and technical, selling and marketing, and general and administrative expenses, were $154.0 million in fiscal 2018 compared
to $142.1 million in fiscal 2017. The increase in operating expenses of 8.3%, or $11.8 million, from fiscal 2017 was primarily due to executive officer transition costs, costs related to the
proposed acquisition of KMG, as well as higher staffing-related expense. We currently expect total operating expenses for our full fiscal year 2019 to be between $154.0 million and
$158.0 million. This includes approximately $1.9 million of NexPlanar amortization expense, but does not include any expenses related to KMG acquisition.
Diluted earnings per share in fiscal 2018 were a record level of $4.19, and represented an increase of 23.2%, or $0.79, from $3.40 in fiscal 2017. The increase was primarily due to
higher revenue and a higher gross margin, partially offset by higher operating expenses and the unfavorable impact of the enactment of the Tax Act in December 2017.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This MD&A, as well as disclosures included elsewhere in this Report on Form 10-K, are based upon our audited consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. On an ongoing basis, we evaluate the estimates used, including those
related to bad debt expense, inventory valuation, impairment of long-lived assets and investments, business combinations, goodwill, other intangible assets, share-based compensation,
income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for
identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. Our allowance for doubtful
accounts is based on historical collection experience, adjusted for any specific known conditions or circumstances. While historical experience may provide a reasonable estimate of
uncollectible accounts, actual results may differ from what was recorded. We will continue to monitor the financial solvency of our customers and, if global economic, or individual
customer, conditions weaken, we may have to record additional increases to our allowance for doubtful accounts. As of September 30, 2018, our allowance for doubtful accounts
represented 2.4% of gross accounts receivable. If we had increased our estimate of bad debts by 100 basis points to 3.4% of gross accounts receivable, our general and administrative
expenses would have increased by $0.7 million.
26 INVENTORY VALUATION
We value inventory at the lower of cost or market and write down the value of inventory for estimated obsolescence or if inventory is deemed unmarketable. An inventory reserve
is maintained based upon a historical percentage of actual inventories written off applied against the inventory value at the end of the period, adjusted for known conditions and
circumstances. We exercise judgment in estimating the amount of inventory that is obsolete. Should actual product marketability be affected by conditions that are different from those
projected by management, revisions to the estimated inventory reserve may be required. If we had increased our reserve for obsolete inventory at September 30, 2018 by 10%, our cost
of goods sold would have increased by $0.3 million.
IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
We assess the recoverability of the carrying value of long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the
assets may be impaired. We perform a periodic review of our long-lived assets to determine if such impairment indicators exist. We must exercise judgment in assessing whether an
event of impairment has occurred. For purposes of recognition and measurement of an impairment loss, long-lived assets are either individually identified or grouped with other assets
and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in this grouping.
If the sum of the undiscounted future cash flows expected to result from the identified asset group is less than the carrying value of the asset group, an impairment provision may be
required. The amount of the impairment to be recognized is calculated by subtracting the fair value of the asset group from the net book value of the asset group. Determining future
cash flows and estimating fair values require significant judgment and are highly susceptible to change from period to period because they require management to make assumptions
about future sales and cost of sales generally over a long-term period. We did not record any impairment expense in fiscal 2018 and 2016. We recorded impairment expense on long-
lived assets of $0.9 million in fiscal 2017 related to surplus research and development equipment, which was subsequently sold for a gain.
We evaluate the estimated fair value of investments annually, or more frequently if indicators of potential impairment exist, to determine if an other-than-temporary impairment in the
value of the investment has taken place.
BUSINESS COMBINATIONS
We account for our acquisitions under the current standards of accounting for business combinations. These standards require assets and liabilities of an acquired business to be
recognized at their estimated fair value. We engage independent third-party appraisal firms to assist us in determining the fair values of assets and liabilities acquired. This valuation
requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets. Goodwill represents the residual value of the purchase
price over the fair value of net assets acquired, including identifiable intangible assets.
Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows related to acquired developed technologies and patents and
assumptions about the period of time the technologies will continue to be used in the Company's product portfolio; expected costs to develop the in-process technology into
commercially viable products and estimated cash flows from the products when completed; and discount rates. Management's estimates of value are based upon assumptions believed
to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which
may cause actual realized values to be different from management's estimates.
As described elsewhere in this Report on Form 10-K, in August 2018, we entered into a Merger Agreement pursuant to which we will acquire KMG, which we expect to close in
approximately mid-November 2018, subject to customary closing conditions, including the adoption of the Merger Agreement by KMG's shareholders. We intend to account for the
Merger using the business combination standard, and we will be treated as the acquirer for accounting purposes.
In fiscal 2016, we recorded $58.4 million of goodwill and $55.0 million of intangible assets related to our acquisition of NexPlanar. The intangible assets included $50.0 million with
finite lives and $5.0 million of in-process technology. In the fourth quarter of fiscal 2016, we determined that one of the products under development was unlikely to meet our original
cash flow projections based on information received subsequent to the date of acquisition. Consequently, we recorded a $1.0 million impairment of this intangible asset. The remaining
$4.0 million was subsequently reclassified to developed technology and we began amortizing this intangible asset in fiscal 2018.
27 GOODWILL AND 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 three
reporting units, all of which had goodwill as of September 30, 2018, the date of our annual impairment test. Two of the reporting units, CMP Slurries and CMP Pads, represent 95% of
the goodwill balance on our Consolidated Balance Sheet as of September 30, 2018. The goodwill related to CMP Pads resulted from our acquisition of NexPlanar.
Accounting guidance provides an entity the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step
one"). Similarly, an entity has the option to use a step zero or step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2016, 2017 and 2018, we
chose to use a step one analysis for both goodwill impairment and for the recoverability of indefinite-lived intangible assets, with the exception of our CMP Slurries reporting unit, for
which we chose to use a step zero analysis for fiscal 2018.
Factors requiring significant judgment include the selection of valuation approach and assumptions related to future revenue and gross margin growth rates, discount factors and
royalty rates, among others. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these
assumptions may result in future impairment charges. The CMP Pads reporting unit and QED reporting unit each had a calculated fair value that was in excess of the carrying value
greater than 50%. As a result of the review performed in the fourth quarter of fiscal 2018, and the related sensitivity analysis, we determined that there was no impairment of our
goodwill as of September 30, 2018. There was no goodwill impairment recorded in fiscal 2017. In fiscal 2016, as noted above, we recorded a $1.0 million impairment of certain NexPlanar
in-process technology.
SHARE-BASED COMPENSATION
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 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 new stock option grants and restricted stock unit awards state that except in certain circumstances, including
termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of
service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, for those employees who have met the retirement eligibility at the
grant date, we now record the total share-based compensation expense upon award; for those employees who will meet the retirement eligibility during the four-year vesting period, we
now record the share-based compensation expense over the period from the grant date through the date of retirement eligibility, rather than over the four-year vesting period stated in
the award agreement. Due to the change in retirement eligibility for awards in December 2017, $0.9 million was immediately recorded as expense in the first quarter of fiscal 2018.
The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free interest rate is derived from the U.S.
Treasury yield curve in effect at the time of grant.
The PSUs that have been awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular
performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We use a third-party service provider to estimate the fair value of the
PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions,
including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility.
28 In the first quarter of fiscal 2018, we adopted ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718) (ASU 2016-09) prospectively. The
provisions of this standard relate to aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or
liabilities, classification of excess tax benefits on the Consolidated Statements of Cash Flows and earnings per share calculations. As a result of the adoption, our excess tax benefits
were recorded as a reduction to the provision for income taxes, rather than an increase to equity. Therefore, we recorded a tax benefit of $7.3 million in our Consolidated Statements of
Income for fiscal 2018. The net income, including the impact of the tax benefits, was used to calculate our basic earnings per share under the new guidance. In addition, we have elected
to continue to estimate forfeitures under ASC 718 pursuant to the adoption of ASU 2016-09.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award.
In fiscal 2016, in conjunction with our acquisition of NexPlanar, we granted incentive stock options (ISOs), as allowed under our current Omnibus Incentive Plan, to certain
NexPlanar employees in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. We used the Black-Scholes option-pricing model to
estimate the grant date fair value of these ISOs to calculate share-based compensation expense in fiscal 2016 and for future periods.
ACCOUNTING FOR 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 2016 and
2017, we maintained an assertion to permanently reinvest the earnings of all of our foreign subsidiaries. In light of the enactment of the Tax Act in December 2017 and the associated
transition to a territorial tax system, we no longer considered our foreign earnings to be indefinitely reinvested and repatriated $197.9 million in fiscal 2018. In addition, the Tax Act
incudes complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate income tax rate to 21% effective January 1, 2018; and (2) requiring a
one-time transition tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years. As a result of the Tax Act, the SEC staff issued accounting guidance
that provides up to a one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act (SAB 118). To the extent that a company's
accounting for certain income tax effects of the Tax Act is incomplete but for which the company is able to determine a reasonable estimate, it must record a provisional estimate in its
financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the provisions of the tax laws that were
in effect immediately before the enactment of the Tax Act. New guidance regulators, changes in interpretations of the Tax Act, and refinement of our estimates from ongoing analysis of
data and tax positions may change the provisional amounts. See the section titled "Liquidity and Capital Resources" in this MD&A and Note 16 of the "Notes to the Consolidated
Financial Statements" of this Form 10-K for additional information on income taxes and permanent reinvestment.
COMMITMENTS AND CONTINGENCIES
We have entered into certain unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. We review
our agreements on a quarterly basis and make an assessment of the likelihood of a shortfall in purchases and determine if it is necessary to record a liability. In addition, we are subject
to the possibility of various loss contingencies arising in the ordinary course of business, such as a legal proceeding or claim. An estimated loss contingency is accrued when it is
probable that an asset has been impaired, or a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate information available to us to
determine whether such accruals should be adjusted and whether new accruals are required.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements of this Form 10-K for a description of recent accounting pronouncements including the expected dates of adoption and effects
on our results of operations, financial position and cash flows.
29 RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of revenue of certain line items included in our historical statements of income:
Revenue
Cost of goods sold
Gross profit
Research, development and technical
Selling and marketing
General and administrative
Operating income
Interest expense
Other income, net
Income before income taxes
Provision for income taxes
Year Ended September 30,
2017
2018
2016
100.0%
46.8
53.2
8.8
4.2
13.0
27.1
0.5
0.8
27.4
8.8
100.0 %
49.9
50.1
11.0
6.1
11.0
22.1
0.9
0.4
21.5
4.4
100.0%
51.2
48.8
13.6
6.4
11.5
17.3
1.1
0.2
16.4
2.5
Net income
18.6%
17.1 %
13.9%
30 YEAR ENDED SEPTEMBER 30, 2018, VERSUS YEAR ENDED SEPTEMBER 30, 2017
REVENUE
Revenue was $590.1 million in fiscal 2018, which represented an increase of 16.4%, or 82.9 million, from fiscal 2017. The increase in revenue was driven by a $52.9 million increase
due to higher sales volume, a $27.5 million increase due to a higher value product mix, and a $4.4 million increase due to foreign exchange fluctuations, partially offset by a $1.8 million
decrease due to price changes. The increase in sales volume was consistent with continued overall strong demand conditions in the global semiconductor industry. Revenue from
tungsten slurries, dielectrics slurries, polishing pads and ESF increased 14.3%, 16.1%, 21.0% and 36.4%, respectively, from fiscal 2017.
COST OF GOODS SOLD
Total cost of goods sold was $276.0 million in fiscal 2018, which represented an increase of 9.1%, or $23.0 million, from fiscal 2017. The increase in cost of goods sold was primarily
driven by a $12.4 million increase due to higher sales volume, a $6.6 million increase in fixed manufacturing costs, including higher staffing-related expenses, a $2.9 million increase due
to product mix, a $2.0 million increase due to foreign exchange fluctuations, partially offset by a $1.0 million decrease in other variable manufacturing costs, including material costs.
Fixed manufacturing costs included $5.2 million of NexPlanar amortization expense compared to $4.8 million in the same period of fiscal 2017.
GROSS MARGIN
Our gross margin was 53.2% in fiscal 2018 compared to 50.1% for fiscal 2017. The increase in gross margin from last year was primarily due to higher sales volume and a higher
value product mix, partially offset by higher fixed manufacturing costs, including higher staffing-related expenses.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $52.0 million in fiscal 2018, which represented a decrease of 6.7%, or $3.7 million, from fiscal 2017. The decrease was
primarily due to lower professional expenses of $1.3 million, lower staffing-related costs of $1.0 million, the absence of an impairment charge of $0.9 million that occurred in fiscal 2017,
and lower depreciation and amortization expense of $0.7 million, partially offset by the absence of a gain on equipment disposal of $1.8 million that occurred in fiscal 2017.
Our research, development and technical efforts are focused on the following main areas:
Research related to fundamental CMP technology;
•
• Development of new and enhanced CMP consumable products, including collaboration on joint development projects with technology-leading customers and suppliers;
•
•
• Development of polishing and metrology applications outside of the semiconductor industry.
Process development to support rapid and effective commercialization of new products;
Technical support of CMP products in our customers' research, development and manufacturing facilities; and,
SELLING AND MARKETING
Selling and marketing expenses were $25.0 million in fiscal 2018, which represented a decrease of 18.8%, or $5.8 million, from fiscal 2017. The decrease was primarily due to lower
staffing-related costs of $4.1 million, lower information technology expenses of $0.8 million, and the absence of amortization expense of $0.6 million resulting from intangible assets
becoming fully amortized during fiscal 2018.
31 GENERAL AND ADMINISTRATIVE
General and administrative expenses were $77.0 million in fiscal 2018, which represented an increase of 38.4%, or $21.4 million, from fiscal 2017. The increase was primarily due to
higher staffing-related costs of $5.7 million, $4.2 million in costs associated with executive officer transitions, $3.9 million in acquisition and integration related costs in connection with
the proposed KMG acquisition, higher long-term incentive compensation expenses of $2.6 million, higher professional expenses of $1.8 million, and higher information technology
expenses of $1.5 million.
INTEREST EXPENSE
Interest expense was $2.9 million in fiscal 2018, which represented a decrease of 35.9%, or $1.6 million, from fiscal 2017. The decrease resulted from the payoff of our Term Loan in
April 2018.
OTHER INCOME, NET
Other income was $4.5 million in fiscal 2018, an increase of $2.6 million from fiscal 2017. The increase was primarily due to higher interest income of $2.1 million resulting from higher
investment balances and higher average interest rates, and gain on the sale of certain ESF assets of $1.0 million in the second quarter of fiscal 2018.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 32.0% in fiscal 2018 compared to 20.5% in fiscal 2017. The increase in the effective tax rate during fiscal 2018 was primarily due to the unfavorable
initial impact of the Tax Act, which was enacted in the first quarter of fiscal 2018, and the absence of benefits of the tax holiday in South Korea, which expired as of October 2017. These
items were partially offset by the benefit from the adoption of ASU 2016-09 in fiscal 2018, which requires excess tax benefits of share based exercises to be recorded as a reduction to the
provision for income taxes, rather than an increase to equity. Note 16 of the "Notes to the Consolidated Financial Statements" for more information on our income tax provision.
NET INCOME
Net income was $110.0 million in fiscal 2018, which represented an increase of 26.6%, or $23.1 million, from fiscal 2017. The increase was primarily due to higher revenue and a
higher gross margin, partially offset by higher operating expenses and the $18.2 million unfavorable initial impact of the enactment of the Tax Act in December 2017.
32 YEAR ENDED SEPTEMBER 30, 2017, VERSUS YEAR ENDED SEPTEMBER 30, 2016
REVENUE
Revenue was $507.2 million in fiscal 2017, which represented an increase of 17.8%, or $76.7 million, from fiscal 2016. The increase in revenue was driven by a $58.0 million increase
due to higher sales volume, a $23.0 million increase due to product mix, and a $1.9 million increase due to exchange rate fluctuations, partially offset by a $6.1 million decrease due to
price changes. Revenue from polishing pads, ESF, dielectrics slurries, and tungsten slurries increased 31.9%, 24.7%, 21.3%, and 19.5%, respectively, from fiscal 2016.
COST OF GOODS SOLD
Total cost of goods sold was $253.0 million in fiscal 2017, which represented an increase of 14.9%, or $32.8 million, from fiscal 2016. The increase in cost of goods sold was primarily
due to a $17.2 million increase in fixed manufacturing costs, including costs related to our STIP, a $15.8 million increase due to higher sales volume, a $2.0 million increase due to foreign
exchange fluctuations, a $1.4 million increase due to higher logistics costs, and a $1.2 million increase due to product mix, partially offset by a $5.5 million decrease in other variable
manufacturing costs. Fixed manufacturing costs in fiscal 2017 included $4.8 million of NexPlanar amortization expense, compared to $4.5 million in fiscal 2016.
GROSS PROFIT
Our gross profit as a percentage of revenue was 50.1% in fiscal 2017 compared to 48.8% for fiscal 2016. The increase in gross profit as a percentage of revenue from fiscal 2016 was
primarily due to higher sales volume, a higher-value product mix, and lower raw material costs, partially offset by higher fixed manufacturing costs, including costs associated with our
STIP.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $55.7 million in fiscal 2017, which represented a decrease of 4.9%, or $2.9 million, from fiscal 2016. The decrease was
primarily due to $1.1 million in lower clean room material costs, a $1.0 million decrease due to the absence of an impairment charge recorded in fiscal 2016 for a NexPlanar intangible asset
related to a technology asset, a $0.9 million decrease for gains on sale of surplus research and development equipment, and $0.7 million in lower depreciation and amortization expense,
partially offset by $1.8 million in higher staffing-related costs, including STIP costs.
Our research, development and technical efforts are focused on the following main areas:
● Research related to fundamental CMP technology;
● Development of new and enhanced CMP consumable products, including collaboration on joint development projects with technology-leading customers and suppliers;
●
●
● Development of polishing and metrology applications outside of the semiconductor industry.
Process development to support rapid and effective commercialization of new products;
Technical support of CMP products in our customers' research, development and manufacturing facilities; and,
SELLING AND MARKETING
Selling and marketing expenses were $30.8 million in fiscal 2017, which represented an increase of 11.3%, or $3.1 million, from fiscal 2016. The increase was primarily due to $2.8
million in higher staffing-related costs, including STIP costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $55.6 million in fiscal 2017, which represented an increase of 12.5%, or $6.2 million, from fiscal 2016. The increase was primarily due to
$5.8 million in higher staffing-related costs, including STIP costs, and $0.4 million in higher travel-related costs, partially offset by $0.6 million in lower bad debt expense, primarily
related to the absence of $0.5 million for a customer placed into receivership in the fourth quarter of fiscal 2016.
33 INTEREST EXPENSE
Interest expense was $4.5 million in fiscal 2017, and was comparable to $4.7 million in fiscal 2016.
OTHER INCOME, NET
Other income was $1.9 million in fiscal 2017, and increased $1.3 million from fiscal 2016. The increase was primarily due to higher interest income earned on our cash and investment
balances.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 20.5% in fiscal 2017 compared to 15.0% in fiscal 2016. The increase in the effective tax rate during fiscal 2017 was primarily due to the absence of
the retroactive reinstatement of the research and experimentation tax credit recorded in fiscal 2016, and changes in the jurisdictional mix of income. See Note 16 of the "Notes to the
Consolidated Financial Statements" for more information on our income tax provision.
NET INCOME
Net income was $87.0 million in fiscal 2017, which represented an increase of 45.3%, or $27.1 million, from fiscal 2016. The increase was primarily due to higher revenue and a higher
gross profit margin, partially offset by a higher effective tax rate and higher operating expenses.
34 LIQUIDITY AND CAPITAL RESOURCES
We generated $168.9 million in cash flows from operating activities in fiscal 2018, $141.4 million in fiscal 2017 and $95.2 million in fiscal 2016. Our cash provided by operating
activities in fiscal 2018 reflected net income of $110.0 million, $66.8 million in non-cash items, including $11.3 million related to the deemed repatriation transition tax of the Tax Act,
partially offset by a $7.9 million decrease in cash flow due to a net increase in working capital. The increase in cash flows from operating activities in fiscal 2018 was primarily due to
higher revenue and gross margin, partially offset by an increase in working capital.
In fiscal 2018, cash flows used in investing activities were $22.8 million, representing property, plant and equipment additions of $21.3 million and payment for net investment hedge
termination of $9.9 million. These items were partially offset by cash inflows of $5.3 million from the liquidation of auction rate securities and $3.0 million of cash received for the sale of
certain ESF assets that occurred in the second quarter of fiscal 2018. Our priority for use of cash continues to be investing in the organic growth of our business. For example, we plan
to continue to invest in our pads operations to improve automation, throughput, and efficiency to support continued increasing customer demand. We currently estimate that our total
capital expenditures in fiscal 2019 will be in the range of $23.0 to $26.0 million not taking into account any expected expenditures related to the KMG Acquisition.
In fiscal 2018, cash flows used in financing activities were $197.6 million. We used $144.4 million to payoff our previously existing Term Loan in April 2018, $44.3 million to
repurchase shares of our common stock, and $30.7 million to pay dividends and dividend equivalents on our common stock. We received $23.0 million from the issuance of common
stock related to the exercise of stock options granted under our EIP and OIP, and for the sale of shares to employees under our ESPP. We have a borrowing capacity of $100.0 million
under Revolving Credit Facility, as well as a $100.0 million uncommitted accordion feature. The Revolving Credit Facility remains undrawn as of September 30, 2018.
Following the enactment of the Tax Act in December 2017, we repatriated nearly $200 million of overseas cash, enabling the payoff of our Term Loan, as noted above. In addition,
the move to a territorial tax system under the Tax Act is expected to increase our ability to repatriate cash in the future. In light of these factors and our belief in our ability to continue
to generate strong cash flows, in March 2018, we announced an update to our capital deployment strategy. This strategy included doubling our regular quarterly cash dividend, from
$0.20 to $0.40 per share, and prior to the pending KMG acquisition, our stated intention to distribute at least 50 percent of prior fiscal year free cash flow to stockholders through a
combination of cash dividends and share repurchases. In fiscal 2018, we returned approximately 60 percent of our fiscal 2017 cash flow to stockholders.
In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from the previously remaining $75.0 million to $150.0
million. As of September 30, 2018, $81.3 million remains available under our share repurchase program. Share repurchases are made from time to time, depending on market and other
conditions. The timing, manner, price and amounts of repurchases are determined at the Company's discretion, and the share repurchase program may be suspended, terminated or
modified at any time for any reason. The repurchase program does not obligate the Company to acquire any specific number of shares. To date, we have funded share purchases under
our share repurchase program from our available cash balance, and anticipate we will continue to do so. Periodically, we have entered into "10b5-1" stock purchase plan agreements
with independent brokers to repurchase shares of our common stock in accordance with guidelines pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. A plan
under Rule 10b5-1 allows a company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading
blackout periods. Repurchases are subject to SEC regulations as well as certain conditions specified in the plan.
Our Board of Directors authorized the initiation of our regular quarterly cash dividend program in January 2016, and since that time has increased the dividend twice, to its current
level of $0.40 per share. The declaration and payment of future dividends is subject to the discretion and determination of the Board of Directors and management, based on a variety of
factors, and the program may be suspended, terminated or modified at any time for any reason.
35 We expect the pending acquisition of KMG to have a significant impact on our liquidity. We intend to fund the Merger Consideration, as well as acquisition and integration-related
costs, through our cash on hand and the entry into a senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million and a senior secured term loan
facility in an aggregate principal amount of up to $1,065.0 million, as described elsewhere in this Report on Form 10-K. At the closing of the transaction, we expect to terminate our
existing Credit Facility and draw down on this senior secured term loan facility in the amount of $1,065.0 million. In addition, we expect to issue common stock to satisfy the equity
portion of the Merger Consideration. Also, in connection with the Acquisition, we incurred $3,861 in acquisition and integration related costs in fiscal 2018, and expect to incur more in
the future. See Note 9 of the Notes to the Consolidated Financial Statements of this Report on Form 10-K for additional information regarding the existing Credit Agreement and Note 20
regarding the anticipated terms of the New Credit Facilities.
As of September 30, 2018, we had $352.9 million of cash and cash equivalents, $130.3 million of which was held in foreign subsidiaries. See Part I, Item 1A entitled "Risk Factors" in
this Report on Form 10-K for additional discussion of our foreign operations.
We believe that our current balance of cash, cash generated by our operations, cash repatriation to the United States enabled by the Tax Act, and borrowing under expected debt
financing following the close of our pending acquisition of KMG will be sufficient to fund our operations, expected capital expenditures, dividend payments, merger and acquisition
activities, and share repurchases for at least the next twelve months. However, in pursuit of corporate development or other initiatives, we may need to raise additional funds in the
future through equity or debt financing, or other arrangements. Depending on future conditions in the capital and credit markets, we could encounter difficulty securing additional
financing in the type or amount necessary to pursue these objectives.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2018 and September 30, 2017, we did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or
special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements.
36 TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at September 30, 2018, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
CONTRACTUAL OBLIGATIONS
(In millions)
Total
Less Than
1 Year
1-3
Years
3-5
Years
After 5
Years
Purchase obligations
Operating leases
Severance agreements
Other long-term liabilities *
Total contractual obligations
41.1
19.6
1.9
12.3
$ 74.9 $
34.0
3.5
1.7
0.4
$ 39.6 $
6.6
4.5
0.2
1.0
$ 12.3 $
0.5
3.7
-
0.8
$ 5.0 $
-
7.9
-
10.1
$ 18.0
$
* We have excluded $0.1 million in deferred tax liabilities from the other long-term liability amounts presented, as the deferred taxes that will be settled in cash are not known and the
timing of any such payments is uncertain. We have also excluded $0.3 million in deferred rent as the rent payments are included in the table above under the caption "Operating
leases".
PURCHASE OBLIGATIONS
We have been operating under a multi-year supply agreement with Cabot Corporation, which is not a related party and has not been one since 2002, for the purchase of fumed
silica, the current term of which runs through December 31, 2019. This agreement provides us the option to purchase fumed silica with no minimum purchase requirements as of 2017, for
which we have paid a fee of $1.5 million in each of fiscal years 2017 and 2018, and for which we will pay the same in 2019. The purchase obligation in the table above reflect
management's expectation that we will meet our forecasted quantities in calendar 2018 and beyond. Purchase obligations include an aggregate amount of $11.2 million of contractual
commitments related to our Cabot Corporation supply agreement for fumed silica. The $1.5 million payment due in fiscal year 2019 is included in accrued liabilities on our Consolidated
Balance Sheet as of September 30, 2018.
OPERATING LEASES
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable operating leases, most of which expire within ten years
of their respective commencement dates and may be renewed by us.
SEVERANCE AGREEMENTS
Liabilities for severance agreements at September 30, 2018 represent payments to be made to former or to be former employees in accordance with individual agreements.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities at September 30, 2018 primarily consist of liabilities related to our foreign benefit plans in Japan and Korea, which represents approximately $8.1 million,
$2.5 million of liability for uncertain tax positions, and the $1.1 million liability for future payments to be made under our Cabot Microelectronics Supplemental Employee Retirement Plan.
PENDING ACQUISITION OF KMG
The table above excludes the purchase price and related transaction costs for the pending acquisition of KMG, which is expected to close in approximately mid-November 2018,
subject to customary closing conditions, including the adoption of the Merger Agreement by KMG's shareholders.
37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our foreign operations. Some of our foreign operations maintain their accounting records in their local
currencies. Consequently, period to period comparability of results of operations is affected by fluctuations in exchange rates. The primary currencies to which we have exposure are
the Korean won, Japanese yen, and the New Taiwan dollar. Approximately 25% of our revenue is transacted in currencies other than the U.S. dollar. However, outside of the United
States, we also incur expenses that are transacted in currencies other than the U.S. dollar, which mitigates the exposure on the Consolidated Statement of Income. We periodically enter
into forward contracts in an effort to manage foreign currency exchange exposure on our Consolidated Balance Sheet. However, we are unlikely to be able to hedge these exposures
completely. We do not enter into forward contracts or other derivative instruments for speculative or trading purposes.
Fluctuations of the won, yen, and New Taiwan dollar have not had a material impact on our Consolidated Income Statement during fiscal years 2018, 2017 and 2016. While
fluctuations of the yen and won have not had a significant impact on other comprehensive income on our Consolidated Balance Sheet in fiscal 2018, they did have a significant impact
in fiscal years 2017 and 2016. We recorded $6.7 million in currency translation losses and $16.0 million in currency translation gains, net of tax, during fiscal years 2017 and 2016,
respectively, which was included in other comprehensive income.
MARKET RISK AND SENSITIVITY ANALYSIS RELATED TO FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10% additional adverse movement in foreign exchange rates. As of September 30, 2018, the analysis
demonstrated that such market movements would not have a material adverse effect on our consolidated financial position, results of operations or cash flows over a one-year period.
Actual gains and losses in the future may differ materially from this analysis based on changes in the timing and amount of foreign currency rate movements and our actual exposures.
38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended September 30, 2018, 2017 and 2016
Consolidated Balance Sheets at September 30, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended September 30, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
Selected Quarterly Operating Results
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts
Management Responsibility
Page
40
41
42
43
44
45
46
77
78
79
All other schedules are omitted, because they are not required, are not applicable, or the information is included in the consolidated financial statements and notes thereto.
39 To the Board of Directors and Stockholders of Cabot Microelectronics Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Cabot Microelectronics Corporation and its subsidiaries (the "Company") as of September 30, 2018 and September
30, 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended
September 30, 2018, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the "consolidated financial statements").
We also have audited the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and
September 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is
to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all
material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
November 13, 2018
We have served as the Company's auditor since 1999.
40 CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
2018
Year Ended September 30,
2017
2016
$
590,123
$
507,179
$
430,449
276,018
314,105
51,950
25,044
76,993
153,987
160,118
2,905
4,498
161,711
51,668
110,043
4.31
25,518
$
$
253,050
254,129
55,658
30,846
55,637
142,141
111,988
4,529
1,913
109,372
22,420
86,952
3.47
25,015
$
$
220,247
210,202
58,532
27,717
49,445
135,694
74,508
4,723
653
70,438
10,589
59,849
2.47
24,077
4.19
$
3.40
$
2.43
26,243
25,512
24,477
1.40
$
0.78
$
0.54
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research, development and technical
Selling and marketing
General and administrative
Total operating expenses
Operating income
Interest expense
Other income, net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Weighted-average basic shares outstanding
Diluted earnings per share
Weighted-average diluted shares outstanding
Dividends per share
41 Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Minimum pension liability adjustment
Net unrealized gain (loss) on cash flow hedges
Other comprehensive income (loss), net of tax
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
2018
Year Ended September 30,
2017
2016
$
110,043
$
86,952
$
59,849
679
(26)
(63)
590
(6,746)
276
863
(5,607)
15,996
(434)
84
15,646
75,495
Comprehensive income
$
110,633
$
81,345
$
The accompanying notes are an integral part of these consolidated financial statements.
42 CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,900 at September 30, 2018, and $1,747 at September 30, 2017
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Deferred income taxes
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Current portion of long-term debt
Accrued expenses, income taxes payable and other current liabilities
Total current liabilities
Long-term debt, net of current portion, less prepaid debt issuance cost of $441 at September 30, 2017
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 17)
Stockholders' equity:
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 35,862,465 shares at September 30, 2018, and 35,230,742 shares
at September 30, 2017
Capital in excess of par value of common stock
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost, 10,356,147 shares at September 30, 2018, and 9,948,190 shares at September 30, 2017
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
$
$
$
September 30,
2018
2017
$
$
$
352,921
75,886
71,926
22,048
522,781
111,403
101,083
35,202
5,840
4,664
780,973
18,171
-
82,983
101,154
-
81
13,046
114,281
397,890
64,793
71,873
16,426
550,982
106,361
101,932
42,710
21,598
10,517
834,100
17,624
10,938
62,651
91,213
132,997
63
14,790
239,063
36
622,498
471,673
4,539
(432,054)
666,692
35
580,938
397,881
3,949
(387,766)
595,037
$
780,973
$
834,100
43 CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for doubtful accounts
Share-based compensation expense
Deemed repatriation transition tax
Deferred income tax expense (benefit)
Non-cash foreign exchange (gain)/loss
Loss/(Gain) on disposal of property, plant and equipment
Impairment of assets
Realized loss on the sale of available-for-sale securities
(Gain) on sale of assets
Other
Changes in operating assets and liabilities, excluding amounts related to acquisition:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses, income taxes payable and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property, plant and equipment
Proceeds from the sale of property, plant and equipment
Acquisition of business, net of cash acquired
Proceeds from the sales of assets
Purchases of available-for-sale securities
Proceeds from the sale and maturities of investment securities
Settlement of net investment hedge
Net cash used in investing activities
Cash flows from financing activities:
Repayment of long-term debt
Dividends paid
Repurchases of common stock
Net proceeds from issuance of stock
Principal payments under capital lease obligations
Tax benefits associated with share-based compensation expense
Net cash used in financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplemental disclosure of non-cash investing and financing activities:
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of period
2018
Year Ended September 30,
2017
2016
$
110,043
$
86,952
$
59,849
25,876
185
18,517
11,340
10,835
(873)
91
-
96
(956)
1,666
(12,068)
(442)
(5,818)
128
10,245
168,865
(21,308)
-
-
3,027
(209,048)
214,460
(9,882)
(22,751)
(144,375)
(30,730)
(44,288)
23,031
(1,200)
-
(197,562)
6,479
(44,969)
397,890
352,921
20,345
2,464
$
$
$
25,930
26
13,004
-
392
435
(1,820)
860
-
-
188
(3,986)
(1,220)
(1,576)
892
21,292
141,369
(21,174)
1,216
-
-
-
175
-
(19,783)
(10,938)
(19,041)
(14,208)
30,615
-
6,557
(7,015)
(4,160)
110,411
287,479
397,890
13,321
4,128
$
$
$
26,031
588
13,787
-
(1,757)
(1,144)
103
1,079
-
-
815
(8,017)
3,351
3,935
(478)
(2,931)
95,211
(17,670)
17
(126,976)
-
-
200
-
(144,429)
(8,750)
(8,658)
(28,818)
19,512
-
2,305
(24,409)
6,916
(66,711)
354,190
287,479
7,246
4,307
1,975
$
1,488
$
1,005
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
44 CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Common
Stock
Capital
In Excess
Of Par
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Total
Balance at September 30, 2015
$
33
$
495,673
$
284,088
$
(6,090) $
(344,740) $
428,964
Share-based compensation expense
Repurchases of common stock under share
repurchase plans, at cost
Repurchases of common stock - other, at cost
Exercise of stock options
Issuance of Cabot Microelectronics restricted
stock under Deposit Share Program
Issuance of Cabot Microelectronics stock under
Employee Stock Purchase Plan
Tax benefits from share-based compensation plans
Net income
Dividends
Foreign currency translation adjustment
Interest rate swaps
Minimum pension liability adjustment
1
13,787
16,623
52
2,837
1,868
(25,980)
(2,838)
13,787
(25,980)
(2,838)
16,624
52
2,837
1,868
59,849
(13,161)
15,996
84
(434)
59,849
(13,161)
15,996
84
(434)
Balance at September 30, 2016
$
34
$
530,840
$
330,776
$
9,556
$
(373,558) $
497,648
Share-based compensation expense
Repurchases of common stock under share
repurchase plans, at cost
Repurchases of common stock - other, at cost
Exercise of stock options
Issuance of Cabot Microelectronics stock under
Employee Stock Purchase Plan
Tax benefits from share-based compensation plans
Net income
Dividends
Foreign currency translation adjustment
Interest rate swaps
Minimum pension liability adjustment
1
13,004
27,665
2,986
6,443
(12,035)
(2,173)
13,004
(12,035)
(2,173)
27,666
2,986
6,443
86,952
(19,847)
(6,746)
863
276
86,952
(19,847)
(6,746)
863
276
Balance at September 30, 2017
$
35
$
580,938
$
397,881
$
3,949
$
(387,766) $
595,037
Share-based compensation expense
Repurchases of common stock under share
repurchase plans, at cost
Repurchases of common stock - other, at cost
Exercise of stock options
Issuance of Cabot Microelectronics restricted
stock under Deposit Share Program
Issuance of Cabot Microelectronics stock under
Employee Stock Purchase Plan
Net income
Dividends
Foreign currency translation adjustment
Interest rate swaps
Minimum pension liability adjustment
1
18,518
19,278
300
3,464
(40,726)
(3,562)
18,518
(40,726)
(3,562)
19,279
300
3,464
110,043
(36,251)
679
(63)
(26)
110,043
(36,251)
679
(63)
(26)
Balance at September 30, 2018
$
36
$
622,498
$
471,673
$
4,539
$
(432,054) $
666,692
The accompanying notes are an integral part of these consolidated financial statements.
45 CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our'') supplies high-performance polishing slurries and pads used in the manufacture
of advanced integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP). CMP polishes surfaces at an atomic level,
thereby helping to enable IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. We develop, produce and sell CMP slurries for polishing
many of the conducting and insulating materials used in IC devices. We develop, manufacture and sell CMP polishing pads, which are used in conjunction with slurries in the CMP
process. We also develop and provide products for demanding surface modification applications in other industries through our Engineered Surface Finishes (ESF) business.
The audited consolidated financial statements have been prepared by us pursuant to the rules of the Securities and Exchange Commission (SEC) and accounting principles generally
accepted in the United States of America (U.S. GAAP). We operate predominantly in one reportable segment - the development, manufacture, and sale of CMP consumables.
The results of operations for the quarter ended December 31, 2017 and year ended September 30, 2018 include a correction to prior period amounts, which we determined to be
immaterial to the prior periods to which they relate and to our fiscal 2018 results. The adjustments, relating primarily to accumulated earnings taxes of a foreign operation, increased the
income tax expense for the first quarter of fiscal 2018 by $2,071. Separately, in Note 16 of this Report on Form 10-K, we discuss the effects of the Tax Cuts and Jobs Act ("Tax Act") on
our financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies
have been eliminated in the consolidated financial statements as of September 30, 2018.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management's most challenging and subjective judgments
include, but are not limited to, those estimates related to bad debt expense, inventory valuation, impairment of long-lived assets and investments, business combinations, goodwill,
other intangible assets, share-based compensation, income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other
assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual
results may differ from these estimates under different assumptions or conditions.
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, 2018 or 2017. See Note 3 for a more
detailed discussion of other financial instruments.
46 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, 2018 as follows:
Balance as of September 30, 2017
Amounts charged to expense
Deductions and adjustments
Balance as of September 30, 2018
CONCENTRATION OF CREDIT RISK
$
$
1,747
185
(32)
1,900
Financial instruments that subject us to concentrations of credit risk consist principally of accounts receivable. We perform ongoing credit evaluations of our customers' financial
conditions and generally do not require collateral to secure accounts receivable. Our exposure to credit risk associated with nonpayment is affected principally by conditions or
occurrences within the semiconductor industry and global economy. With the exception of a customer placed into receivership in fiscal 2016, we have not experienced significant
losses relating to accounts receivable from individual customers or groups of customers.
Customers who represented more than 10% of revenue are as follows:
Samsung Group (Samsung)
Taiwan Semiconductor Manufacturing Co. (TSMC)
SK Hynix Inc.
Micron Technology Inc.
* Not a customer with more than 10% revenue.
2018
Year Ended September 30,
2017
2016
18%
12%
10%
*
16%
13%
*
10%
15%
15%
*
*
TSMC accounted for 7.9% and 12.2% of net accounts receivable at September 30, 2018 and 2017, respectively. Samsung accounted for 11.4% and 11.9% of net accounts receivable
at September 30, 2018 and 2017, respectively. SK Hynix accounted for 3.4% and 4.9% of net accounts receivable at September 30, 2018 and 2017, respectively. Micron accounted for
13.1% and 10.7% of net accounts receivable at September 30, 2018 and 2017, respectively.
47 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 3 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:
Buildings
Machinery and equipment
Furniture and fixtures
Information systems
Assets under capital leases
15-25 years
3-10 years
5-10 years
3-5 years
Term of lease or estimated useful life
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized and depreciated over the remaining
useful lives. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of
operations. We capitalize the costs related to the design and development of software used for internal purposes; however, these costs are not material.
IMPAIRMENT OF LONG-LIVED ASSETS
We assess the recoverability of the carrying value of long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the
assets may be impaired. We perform a periodic review of our long-lived assets to determine if such impairment indicators exist. We must exercise judgment in assessing whether an
event of impairment has occurred. For purposes of recognition and measurement of an impairment loss, long-lived assets are either individually identified or grouped with other assets
and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in this grouping.
If the sum of the undiscounted future cash flows expected to result from the identified asset group is less than the carrying value of the asset group, an impairment provision may be
required. The amount of the impairment to be recognized is calculated by subtracting the fair value of the asset group from the net book value of the asset group. Determining future
cash flows and estimating fair values require significant judgment and are highly susceptible to change from period to period because they require management to make assumptions
about future sales and cost of sales generally over a long-term period. We did not record any impairment expense in fiscal 2018 and 2016. We recorded impairment expense on long-
lived assets of $860 in fiscal 2017 related to surplus research and development equipment, which was subsequently sold for a gain. See Note 5 for more information regarding
impairment.
We evaluate the estimated fair value of investments annually, or more frequently if indicators of potential impairment exist, to determine if an other-than-temporary impairment in the
value of the investment has taken place.
WARRANTY RESERVE
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance
requirements. The warranty reserve is based upon a historical product return rate, adjusted for any specific known conditions or circumstances. Adjustments to the warranty reserve
are recorded in cost of goods sold.
48 GOODWILL AND 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 three
reporting units, all of which had goodwill as of September 30, 2018, the date of our annual impairment test. Two of the reporting units, CMP Slurries and CMP Pads, represent 95% of
the goodwill balance on our Consolidated Balance Sheet as of September 30, 2018. The goodwill related to CMP Pads resulted from our acquisition of NexPlanar.
Accounting guidance provides an entity the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step
one"). Similarly, an entity has the option to use a step zero or step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2016, 2017 and 2018, we
chose to use a step one analysis for both goodwill impairment and for the recoverability of indefinite-lived intangible assets, with the exception of our CMP Slurries reporting unit, for
which we chose to use a step zero analysis for fiscal 2018.
Factors requiring significant judgment include the selection of valuation approach and assumptions related to future revenue and gross margin growth rates, discount factors and
royalty rates, among others. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these
assumptions may result in future impairment charges. The CMP Pads reporting unit and QED reporting unit each had a calculated fair value that was in excess of the carrying value by
greater than 50%. As a result of the review performed in the fourth quarter of fiscal 2018, and the related sensitivity analysis, we determined that there was no impairment of our
goodwill as of September 30, 2018. There was no goodwill impairment recorded in fiscal 2017. In fiscal 2016, we recorded a $1,000 impairment of certain NexPlanar in-process technology.
FOREIGN CURRENCY TRANSLATION
Certain operating activities in Asia and Europe are denominated in local currency, considered to be the functional currency. Assets and liabilities of these operations are translated
using exchange rates in effect at the end of the year, and revenue and costs are translated using average exchange rates for the year. The related translation adjustments are reported in
comprehensive income in stockholders' equity.
FOREIGN EXCHANGE MANAGEMENT
We transact business in various foreign currencies, primarily the Japanese yen, New Taiwan dollar and Korean won. Our exposure to foreign currency exchange risks has not been
significant because a large portion of our business is denominated in U.S. dollars. However, there was a weakening of the Japanese yen against the U.S. dollar during the past few fiscal
years, which had some net positive impact on our gross margin percentage and our net income. Periodically, we enter into certain forward foreign exchange contracts in an effort to
mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. These foreign exchange contracts do not qualify for hedge accounting;
therefore, the gains and losses resulting from the impact of currency exchange rate movements on our forward foreign exchange contracts are recognized as other income or expense in
the accompanying consolidated income statements in the period in which the exchange rates change. See Note 10 for a discussion of derivative financial instruments.
49 INTERCOMPANY LOAN ACCOUNTING
We maintain an intercompany loan agreement with our wholly-owned subsidiary, Nihon Cabot Microelectronics K.K. ("Nihon"), under which we provided funds to Nihon to
finance the purchase of certain assets from our former Japanese branch at the time of the establishment of this subsidiary, for the purchase of land adjacent to our facility in Geino,
Japan, for the construction of our Asia Pacific technology center, and for the purchase of a 300 millimeter polishing tool and related metrology equipment, all of which are assets of
Nihon, as well as for general business purposes. Since settlement of the note is expected in the foreseeable future, and our subsidiary has made timely payments on the loan, the loan is
considered a foreign-currency transaction. Therefore, the associated foreign exchange gains and losses are recognized as other income or expense rather than being deferred in the
cumulative translation account in other comprehensive income.
We also maintain an intercompany loan between two of our wholly-owned foreign subsidiaries, from Cabot Microelectronics Singapore Pte. Ltd. to Hanguk Cabot Microelectronics,
LLC in South Korea. This loan provided funds for the construction and operation of our research, development and manufacturing facility in South Korea. This loan is also considered
a foreign currency transaction and is accounted for in the same manner as our intercompany loan to Nihon.
These intercompany loans are eliminated from our Consolidated Balance Sheet in consolidation.
PURCHASE COMMITMENTS
We have entered into unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. On an ongoing basis,
we review our agreements and assess the likelihood of a shortfall in purchases and determine if it is necessary to record a liability. See Note 17 for additional discussion of purchase
commitments. To date, we have not recorded such a liability.
REVENUE RECOGNITION
Revenue from CMP consumables products is recognized when title is transferred to the customer, assuming all revenue recognition criteria are met. Title transfer generally occurs
upon shipment to the customer or when inventory held on consignment is consumed by the customer, subject to the terms and conditions of the particular customer arrangement. We
have consignment agreements with a number of our customers that require, at a minimum, monthly consumption reports that enable us to record revenue and inventory usage in the
appropriate period.
Although the majority of our products are sold directly, we market some of our products through distributors in certain areas of the world. We recognize revenue upon shipment
and when title is transferred to the distributor. We do not have any arrangements with distributors that include payment terms, rights of return, or rights of exchange outside the
ordinary course of business, or any other significant matters that we believe would impact the timing of revenue recognition.
Within our ESF business, sales of equipment are recorded as revenue upon delivery and customer acceptance. Amounts allocated to installation and training are deferred until
those services are provided and are not material.
Revenues are reported net of any value-added tax or other such tax assessed by a governmental authority on our revenue-producing activities.
SHIPPING AND HANDLING
Costs related to shipping and handling are included in cost of goods sold.
RESEARCH, DEVELOPMENT AND TECHNICAL
Research, development and technical costs are expensed as incurred and consist primarily of staffing costs, materials and supplies, depreciation, utilities and other facilities costs.
50 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 2016 and
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 considered our foreign earnings to be indefinitely reinvested and repatriated $197,932 in fiscal 2018, and plan to repatriate foreign earnings on an ongoing basis.
Consequently, we recorded deferred tax liabilities associated with withholding taxes on actual and future distribution of such earnings. In addition, the Tax Act incudes complex
changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate income tax rate to 21% effective January 1, 2018; and (2) requiring a one-time transition
tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years. As a result of the Tax Act, the SEC staff issued accounting guidance that provides up to a
one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act (SAB 118). To the extent that a company's accounting for certain
income tax effects of the Tax Act is incomplete but for which the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a
company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately
before the enactment of the Tax Act. The final impact of the Tax Act may differ from the provisional estimates due to changes in interpretations of the Tax Act, any legislative action to
address questions that arise because of the Tax Act, by changes in accounting standard for income taxes and related interpretations in response to the Tax Act, and any updates or
changes to estimates used in the provisional amounts. See Note 16 for additional information on income taxes and permanent reinvestment.
SHARE-BASED COMPENSATION
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 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 new stock option grants and restricted stock unit awards state that except in certain circumstances, including
termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of
service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, for those employees who have met the retirement eligibility at the
grant date, we now record the total share-based compensation expense upon award; for those employees who will meet the retirement eligibility during the four-year vesting period, we
now record the share-based compensation expense over the period from the grant date through the date of retirement eligibility, rather than over the four-year vesting period stated in
the award agreement.
The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free interest rate is derived from the U.S.
Treasury yield curve in effect at the time of grant.
The PSUs that have been awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular
performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We use a third-party service provider to estimate the fair value of the
PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions,
including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility.
51 In the first quarter of fiscal 2018, we adopted ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718) (ASU 2016-09) prospectively. The
provisions of this standard relate to aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or
liabilities, classification of excess tax benefits on the Consolidated Statements of Cash Flows and earnings per share calculations. During fiscal 2018, we have recorded a tax benefit of
$7,294 in our Consolidated Statements of Income. The net income, including the impact of the tax benefits, was used to calculate our basic earnings per share under the new guidance.
In addition, we have elected to continue to estimate forfeitures under ASC 718 pursuant to the adoption of ASU 2016-09.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award.
In fiscal 2016, related to our acquisition of NexPlanar, we granted incentive stock options (ISOs), as allowed under our current Omnibus Incentive Plan, to certain NexPlanar
employees in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. We used the Black-Scholes option-pricing model to estimate the
grant date fair value of these ISOs to calculate share-based compensation expense in fiscal 2016 and for future periods.
For additional information regarding our share-based compensation plans, refer to Note 12.
EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the
period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-
class method under ASC Topic 260, Earnings Per Share (ASC 260). Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding
during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.
We adopted ASU 2016-09 in fiscal 2018. Pursuant to the adoption, the proceeds from excess tax benefits are no longer included in the dilutive impact on the weighted average shares
outstanding for dilutive EPS. The excess tax benefits were treated as a reduction to tax provision, rather than an increase to equity.
COMPREHENSIVE INCOME
Comprehensive income primarily differs from net income due to foreign currency translation adjustments.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), an updated standard on revenue recognition. ASU 2014-09 provides
enhancements to how revenue is reported and improves comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new
standard is for companies to recognize revenue for goods or services in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods
or services. The new standard is intended to enhance disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, such as
service revenue and contract modifications, and improve guidance for multiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, "Deferral of Effective
Date" (Topic 606). This standard defers the effective date of ASU 2014-09 by one year. ASU 2014-09 was effective for us beginning October 1, 2018, and may be applied on a full
retrospective or modified retrospective approach. In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus
Net)" (Topic 606). ASU 2016-08 provides clarification for the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, ASU
No. 2016-11, and ASU 2016-12, and ASU 2017-13 issued in September 2017, all of which provide additional clarification of the original revenue standard. We have substantially
completed the process to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts, and have identified and
implemented changes to our business processes, systems and controls to support recognition and disclosure under the new standard. We believe the recognition of revenue will
remain substantially unchanged for the majority of our contracts with customers. However, for our contracts containing certain pricing and incentive arrangements with our customers
within our CMP consumables business, the new guidance will change the manner and timing in which we recognize the revenue. Based on our current assessment of the existing
contracts at the time of the adoption containing nonstandard pricing and incentive arrangements, we do not expect the adoption of the new standard to have a material impact on our
financial position and results of operations. We will adopt the new revenue standard in the first quarter of fiscal 2019 using the modified retrospective approach to adoption, which will
require us to record an immaterial adjustment to the beginning balance of retained earnings for the cumulative effect of adopting the standard.
52 In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The provisions of ASU 2016-02 require a dual approach for lessee accounting under which a lessee
would recognize a right-of-use asset and a corresponding lease liability. Leases will be classified as either finance or operating leases. For finance leases, a lessee will recognize interest
expense and amortization of the right-of-use asset, and for operating leases, the lessee will recognize a straight-line total lease expense. The guidance also requires qualitative and
specific quantitative disclosures to supplement the amounts recorded in the financial statements, to afford better understanding of an entity's leasing activities, including any
significant judgments and estimates. ASU 2016-02 will be effective for us beginning October 1, 2019, but early adoption is permitted. We are currently evaluating the impact of
implementation of this standard on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718). The provisions of this standard involve several
aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the
statement of cash flows. We have adopted this standard in the first quarter of fiscal 2018 prospectively. As a result of the adoption, excess tax benefits were recorded as a reduction to
the provision for income taxes, rather than an increase to equity. Therefore, we recorded a tax benefit of $7,294 in our Consolidated Statements of Income in fiscal 2018. Additionally, the
proceeds from excess tax benefits are no longer included in the dilutive impact on the weighted average shares outstanding for dilutive EPS under the new guidance. Also, we have
elected to continue to estimate forfeitures under ASC 718 pursuant to the adoption of ASU 2016-09.
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (Topic 326). The provisions of this standard require financial assets
measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would be established to present the net carrying value at the amount
expected to be collected. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-
13 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2019. We are currently evaluating the impact of implementation of this standard on
our financial statements.
In January 2017, the FASB issued ASU No. 2017-04 "Simplifying the Test for Goodwill Impairment" (Topic 350). The provisions of this standard eliminate Step 2 from the goodwill
impairment test, which required an entity to determine the fair value of its assets and liabilities at the impairment testing date of its goodwill and compare it to its carrying amount to
determine a possible impairment loss. Goodwill impairment quantification will now be done by comparing the fair value of a reporting unit and its carrying amount. We adopted ASU
2017-04 effective October 1, 2017 and applied the new guidance in our annual test for goodwill impairment in the fourth quarter of fiscal 2018.
In March 2017, the FASB issued ASU No. 2017-07 "Improving the Presentation of Net Period Pension Cost and Net Period Postretirement Benefit Cost" (Topic 715). The provisions
of ASU 2017-07 provided specific guidance on the presentation of the components of net benefit cost. ASU 2017-07 was effective for us beginning October 1, 2018. We currently do not
expect this standard to have a material impact on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09 "Scope of Modification Accounting" (Topic 718). The provisions of ASU 2017-09 provide specific guidance about which changes
to the term or conditions of a share-based payment require an entity to apply modification accounting. ASU 2017-09 was effective for us beginning October 1, 2018. We will apply this
new standard to the awards, to the extent modified.
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 the impact of implementation of this standard on our financial statements.
In June 2018, the FASB issued ASU No. 2018-07 " Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting". The ASU
simplified the accounting for share-based payments granted to nonemployees for goods and services, therefore guidance on such payments to nonemployees would be mostly aligned
with the requirements for share-based payments granted to employees. ASU 2018-07 will be effective for us beginning October 1, 2019, but early adoption is permitted (but no earlier
than the adoption date of Topic 606). We are currently evaluating the impact of implementation of this standard on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13 " Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement". The ASU provides specific guidance on various disclosure requirements in Topic 820, including removal, modification and addition to current disclosure requirements.
ASU 2018-13 will be effective for us beginning October 1, 2020, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our
disclosures.
53 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. 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, 2018 and 2017. See Note 9 for a
detailed discussion of our long-term debt. We have classified the following assets in accordance with the fair value hierarchy set forth in the applicable standards. In instances where
the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest level input that is significant to the
determination of the fair value.
September 30, 2018
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
Other long-term investments
Derivative financial instruments
Total assets
Liabilities:
Derivative financial instruments
Total liabilities
Assets:
Cash and cash equivalents
Other long-term investments
Derivative financial instruments
Total assets
Liabilities:
Derivative financial instruments
Total liabilities
September 30, 2017
$
$
$
$
$
$
352,921
1,137
-
354,058
-
-
Level 1
397,890
929
-
398,819
-
-
$
$
$
$
$
$
-
-
-
-
339
339
-
-
263
263
Level 2
1,881
1,881
$
$
$
$
$
$
Level 3
Total
Fair Value
352,921
1,137
-
354,058
339
339
Total
Fair Value
397,890
929
263
399,082
1,881
1,881
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
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 $1,137 in the fourth quarter of fiscal 2018 to reflect its fair value as of September 30, 2018.
54 The fair value of our derivative instruments is estimated using standard valuation models and market-based observable inputs over the contractual term, including one-month
LIBOR-based yield curves for interest rate swaps, and forward rates and/or the Overnight Index Swap (OIS) curve for forward foreign exchange contracts, among others. We consider
the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments. Our derivative financial instruments include forward
foreign exchange contracts and interest rate swaps. In fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest
payments on a portion of our outstanding variable rate debt. We terminated our interest rate swap agreements during the fiscal year, in connection with the extinguishment of debt. In
the fourth quarter of fiscal 2017, we entered into forward foreign exchange contracts in an effort to protect our net investment in a foreign operation against potential adverse changes
resulting from foreign currency fluctuation. This net investment hedge was terminated during the year driven by a significant repatriation of funds from this foreign operation. See
Note 10 for more information on our use of derivative financial instruments.
4. INVENTORIES
Inventories consisted of the following:
Raw materials
Work in process
Finished goods
Total
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
Land
Buildings
Machinery and equipment
Furniture and fixtures
Information systems
Capital lease
Construction in progress
Total property, plant and equipment
Less: accumulated depreciation
Net property, plant and equipment
September 30,
2018
2017
$
$
35,150 $
8,117
28,659
71,926 $
36,415
7,365
28,093
71,873
September 30,
2018
17,525 $
103,601
195,434
7,575
34,271
1,200
17,001
376,607
(265,204)
111,403 $
2017
17,823
104,057
187,649
6,770
32,748
-
10,439
359,486
(253,125)
106,361
$
$
Depreciation expense was $17,255, $17,195 and $16,915 for the years ended September 30, 2018, 2017 and 2016, respectively.
In fiscal 2017 we recorded $860 in impairment expense related to a surplus research and development asset, and we recorded a $1,820 gain on sale of surplus research and
development equipment. We did not record any impairment expense on property, plant and equipment in fiscal 2018 and 2016.
55 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $101,083 and $101,932 as of September 30, 2018 and 2017, respectively. The decrease in goodwill was due to $154 in foreign exchange fluctuations of the New Taiwan
dollar and a $695 decrease related to the sale of certain ESF assets. As a result of this sale of assets in March 2018, we received net proceeds of $3,277, of which $250 is held in escrow,
and recorded a gain of $956 in other income in the Consolidated Statements of Income.
The components of other intangible assets are as follows:
Other intangible assets subject to amortization:
Product technology
Acquired patents and licenses
Trade secrets and know-how
Customer relationships, distribution rights and other
Total other intangible assets subject to amortization
Other intangible assets not subject to amortization:
In-process technology
Other indefinite-lived intangibles*
Total other intangible assets not subject to amortization
September 30, 2018
September 30, 2017
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
$
46,275
8,270
2,550
28,068
85,163
-
1,170
1,170
$
22,755
8,252
2,550
17,574
51,131
17,604
8,241
2,550
15,421
43,816
$
42,287
8,270
2,550
28,229
81,336
4,000
1,190
5,190
Total other intangible assets
$
86,333
$
51,131
$
86,526
$
43,816
* Other indefinite-lived intangibles not subject to amortization primarily consist of trade names.
During the first quarter of fiscal 2018, development of our in-process technology was completed, and we reclassified $4,000 to product technology under other intangible assets subject
to amortization.
Amortization expense was $7,495, $7,795 and $8,176 for fiscal 2018, 2017 and 2016, respectively. Estimated future amortization expense of intangible assets as of September 30, 2018
for the five succeeding fiscal years is as follows:
Fiscal
Year
Estimated
Amortization
Expense
$
2019
2020
2021
2022
2023
7,119
7,115
7,108
7,108
1,717
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of our fiscal year or more frequently if indicators of potential impairment exist,
using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an
operating segment. An entity has the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). Similarly,
an entity has the option to use a step zero or a step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2017 and 2018, 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 reporting unit, for which we chose to use a step
zero analysis for fiscal 2018.
56 We completed our annual impairment test during our fourth quarter of fiscal 2018 and concluded that no impairment existed. No impairment existed as a result of our impairment test
during the fourth quarter of fiscal 2017. During the fourth quarter of fiscal 2016, we recorded $1,000 of impairment expense on one of the in-process technology assets acquired in the
NexPlanar acquisition based on management's revised expected future cash flows for this asset. The impairment charge was included in research, development and technical expenses
on our Consolidated Statements of Income. We concluded that no other impairment of goodwill or intangible assets was necessary. There have been no cumulative impairment charges
recorded on the goodwill for any of our reporting units.
7. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
Auction rate securities (ARS)
Long-term contract asset
Other long-term assets
Other long-term investments
Total
September 30,
2018
2017
$
$
- $
1,548
1,979
1,137
4,664 $
5,319
2,115
2,154
929
10,517
During the fiscal year we redeemed our ARS investments which consisted of two tax exempt municipal debt securities, both of which had maturities of greater than ten years.
Other long-term assets are primarily comprised of long-term miscellaneous deposits and prepayments on contracts extending beyond the next 12 months. As discussed in Note 3,
we recorded a long-term asset and a corresponding long-term liability of $1,137 representing the fair value of our SERP investments as of September 30, 2018.
8. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
Accrued compensation
Income taxes payable
Dividends payable
Acquisition and integration related
Goods and services received, not yet invoiced
Deferred revenue and customer advances
Taxes, other than income taxes
Current portion of long-term contract liability
Other
Total
September 30,
2018
2017
$
$
35,367 $
18,045
10,822
2,701
1,954
4,894
1,976
1,487
5,737
82,983 $
35,332
9,717
5,314
-
2,172
1,559
1,688
1,500
5,369
62,651
57 9. DEBT
On February 13, 2012, we entered into a credit agreement (the "Credit Agreement") among the Company, as Borrower, Bank of America, N.A., as administrative agent, swing line
lender and an L/C issuer, Bank of America Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, JPMorgan Chase Bank, N.A., as syndication
agent, and Wells Fargo Bank, N.A. as documentation agent. The Credit Agreement provided us with a $175,000 term loan (the "Term Loan"), which we drew on February 27, 2012 to
fund approximately half of the special cash dividend we paid to our stockholders on March 1, 2012, and a $100,000 revolving credit facility (the "Revolving Credit Facility"), which has
never been drawn, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans. The Term Loan and the Revolving Credit Facility are referred to as the "Credit
Facilities." On June 27, 2014, we entered into an amendment (the "Amendment") to the Credit Agreement, which (i) increased term loan commitments by $17,500, from $157,500 to
$175,000, the same level as the original amount under the Credit Agreement at its inception in 2012; (ii) increased the uncommitted accordion feature on the Revolving Credit Facility
from $75,000 to $100,000; (iii) extended the expiration date of the Credit Facilities from February 13, 2017 to June 27, 2019; (iv) relaxed the consolidated leverage ratio financial covenant;
and (v) revised certain pricing terms and other terms within the Credit Agreement. On June 27, 2014, we drew the $17,500 of increased term loan commitments, bringing the total
outstanding commitments under the Term Loan to $175,000.
The enactment of the Tax Act in the United States in December 2017 facilitated the repatriation of a substantial amount of the Company's non-U.S. cash. In April 2018, the
Company utilized these repatriated funds to pay off its remaining outstanding Term Loan pursuant to the Credit Agreement. There was no penalty upon the Company's prepayment of
the Term Loan. As a result of this early extinguishment of the Term Loan, we expensed the remaining $315 of unamortized debt issuance cost in the third quarter of fiscal 2018, and we
terminated the related interest rate swaps and recognized a gain of $532 in the Consolidated Statements of Income.
Borrowings under the amended Credit Facilities (other than in respect of swing-line loans) bear interest at a rate per annum equal to the "Applicable Rate" (as defined below) plus,
at our option, either (1) a LIBOR rate determined by reference to the cost of funds for deposits in the relevant currency for the interest period relevant to such borrowing or (2) the "Base
Rate", which is the highest of (x) the prime rate of Bank of America, N.A., (y) the federal funds rate plus 1/2 of 1.00% and (z) the one-month LIBOR rate plus 1.00%. The current
Applicable Rate for borrowings under the Credit Facilities is 1.50%, as amended, with respect to LIBOR borrowings and 0.25% with respect to Base Rate borrowings, with such
Applicable Rate subject to adjustment based on our consolidated leverage ratio. Swing-line loans bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the
Revolving Credit Facility. In addition to paying interest on outstanding principal under the Credit Agreement, we pay a commitment fee to the lenders under the Revolving Credit
Facility in respect of the unutilized commitments thereunder. As amended, the fee ranges from 0.20% to 0.30%, based on our consolidated leverage ratio. Interest expense and
commitment fees are paid according to the relevant interest period and no less frequently than at the end of each calendar quarter. We also pay letter of credit fees as necessary. The
Term Loan has periodic scheduled repayments; however, we may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary "breakage" fees and
reemployment costs in the case of LIBOR borrowings. All obligations under the Credit Agreement are guaranteed by certain of our existing and future direct and indirect domestic
subsidiaries. The obligations under the Credit Agreement and guarantees of those obligations are secured, subject to certain exceptions, by first priority liens and security interests in
the assets of the Company and certain of its domestic subsidiaries.
As of September 30, 2017, unamortized debt issuance costs related to our Term Loan that were presented as a reduction of long-term debt were $441, and these cost were
subsequently recorded in interest expense upon payoff of the Term Loan. Unamortized debt issuance costs related to our Revolving Credit Facility were not material.
The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain
significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents. The
Credit Agreement requires us to comply with certain financial ratio maintenance covenants. These include a maximum consolidated leverage ratio of 2.75 to 1.00 and a minimum
consolidated fixed charge coverage ratio of 1.25 to 1.00 for the period January 1, 2016 through the expiration of the Credit Agreement. As of September 30, 2018, our consolidated
leverage ratio was 0.00 to 1.00 and our consolidated fixed charge coverage ratio was 3.93 to 1.00. The Credit Agreement also contains customary affirmative covenants and events of
default. We believe we are in compliance with these covenants.
In connection with our pending acquisition of KMG, we expect to terminate our existing Credit Agreement and enter into a new credit agreement which will provide us with a
New Term Loan in the amount of $1,065 million and a New Revolving Facility in the amount of $200 million. See Note 20 of this Report on Form 10-K for more information about the
anticipated terms of the New Credit Facilities.
58 10. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates. We enter into certain derivative transactions to mitigate
the volatility associated with these exposures. We have policies in place that define acceptable instrument types we may enter into and we have established controls to limit our market
risk exposure. We do not use derivative financial instruments for trading or speculative purposes. In addition, all derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value on a gross basis.
Cash Flow Hedges – Interest Rate Swap Agreements
In fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on $86,406 of our outstanding variable rate
debt. The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal payment of debt. The interest rate swap agreements
were terminated during fiscal year 2018 in conjunction with the payoff of the Term Loan. We recorded a $532 gain in other income (expense) on our Consolidated Statement of Income
as part of termination of interest rate swap agreements.
We designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains were recognized as assets
and unrealized losses were recognized as liabilities. Unrealized gains and losses were 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 was recorded as a component of accumulated other comprehensive
income or loss, while the ineffective portion was recorded as a component of interest expense. Changes in the method by which we paid interest from one-month LIBOR to another rate
of interest could create ineffectiveness in the swaps, and result in amounts which were reclassified from other comprehensive income into net income. Hedge effectiveness was tested
quarterly to determine if hedge treatment continues to be appropriate.
Foreign Currency Contracts Not Designated as Hedges
Periodically we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet
exposures. These foreign exchange contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on
our forward foreign exchange contracts are recognized as other income or expense in the accompanying consolidated income statements in the period in which the exchange rates
change. As of September 30, 2018 and September 30, 2017, respectively, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign
currencies were $7,652 and $8,176, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $24,860 and $24,295,
respectively.
Net Investment Hedge – Foreign Exchange Contracts
In September 2017, we entered into two forward foreign exchange contracts in an effort to protect the net investment of our Korean subsidiary against potential adverse changes
resulting from currency fluctuations in the Korean won. We entered into forward contracts to sell Korean won and buy U.S. dollars, and had designated these forward contracts as an
effective net investment hedge. As a result of cash repatriation facilitated by the Tax Act, the Company terminated these foreign exchange contracts during fiscal year 2018.
Amounts recognized in Consolidated Statements of Comprehensive Income for our net investment hedge during the fiscal year ended September 30, were as follows:
2018
Balance at September 30, 2017
Loss on net investment hedge
Tax benefit
Balance at September 30, 2018
$
$
920
8,440
(2,169)
7,191
59 The fair value of our derivative instruments included in the Consolidated Balance Sheet, which was determined using level 2 inputs, was as follows:
Consolidated Balance Sheet Location
2018
2017
2018
2017
Asset Derivatives
September 30,
Liability Derivatives
September 30,
Derivatives designated as hedging instruments
Interest rate swap contracts
Other long-term assets
Accrued expenses, income taxes payable and
other current liabilities
Other long-term liabilities
Foreign exchange contracts designated as net
investment hedge
Other long-term liabilities
Derivatives not designated as hedging
instruments
Foreign exchange contracts
Prepaid expenses and other current assets
Accrued expenses, income taxes payable and
other current liabilities
$
$
$
$
$
$
-
-
-
-
-
-
$
$
$
$
$
$
117
$
-
-
-
146
-
$
$
$
$
$
-
-
-
$
$
$
-
31
-
-
$
1,442
-
339
$
$
-
408
The following table summarizes the effect of our derivative instrument on our Consolidated Statements of Income for the fiscal years ended September 30, 2018, 2017 and 2016:
Derivatives not designated as hedging instruments
Foreign exchange contracts
Other income (expense), net
$
(1,569) $
(1,462) $
676
Consolidated Statements of Income Location
Gain (Loss) Recognized in Consolidated Statements of Income
Fiscal Year Ended September 30,
2017
2016
2018
60 11. ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below summarizes the components of accumulated other comprehensive income (loss) (AOCI), net of tax provision/(benefit), for the years ended September 30, 2018,
2017, and 2016.
Balance at September 30, 2015
Foreign currency translation adjustment, net of tax of $1,854
Unrealized gain (loss) on cash flow hedges:
Change in fair value, net of tax of $(274)
Reclassification adjustment into earnings, net of tax of $321
Change in pension and other postretirement, net of tax of $(584)
Balance at September 30, 2016
Foreign currency translation adjustment, net of tax of $(2,321)
Unrealized gain (loss) on cash flow hedges:
Change in fair value, net of tax of $(660)
Reclassification adjustment into earnings, net of tax of $170
Change in pension and other postretirement, net of tax of $79
Balance at September 30, 2017
Foreign currency translation adjustment, net of tax of $(2,409)
Unrealized gain (loss) on cash flow hedges:
Change in fair value, net of tax of $111
Reclassification adjustment into earnings, net of tax of $(133)
Change in pension and other postretirement, net of tax of $1
Balance at September 30, 2018
Foreign
Currency
Translation
Cash
Flow
Hedges
Pension and
Other
Postretirement
Liabilities
Total
$
(4,011) $
15,996
$
(901)
-
(1,178) $
-
-
-
-
11,985
(6,746)
-
-
-
5,239
679
-
-
-
5,918
$
(499)
583
-
(817)
-
1,161
(298)
-
46
-
319
(382)
-
(17)
$
-
-
(434)
(1,612)
-
-
-
276
(1,336)
-
-
-
(26)
(1,362) $
$
(6,090)
15,996
(499)
583
(434)
9,556
(6,746)
1,161
(298)
276
3,949
679
319
(382)
(26)
4,539
The before tax amount reclassified from OCI to net income in fiscal 2018, related to our cash flow hedges, was recorded as interest expense on our Consolidated Statement of
Income. Amounts reclassified from OCI to net income, related to pension liabilities, were not material in fiscal years 2018, 2017 and 2016.
61 12. SHARE-BASED COMPENSATION PLANS
EQUITY INCENTIVE PLAN AND OMNIBUS INCENTIVE PLAN
In March 2004, our stockholders approved our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (the "EIP"), as amended and restated
September 23, 2008. In March 2012, our stockholders approved the Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan (the "OIP"), which is the successor plan to the
EIP, and which was amended as of March 2017. All share-based awards have been made from the OIP as of its approval date, and the EIP is no longer available for any awards. The OIP
is administered by the Compensation Committee of the Board of Directors and is intended to provide management with the flexibility to attract, retain and reward our employees,
directors, consultants and advisors. The OIP allows for the granting of six types of equity incentive awards: stock options, restricted stock, restricted stock units, stock appreciation
rights (SARs), performance-based awards and substitute awards. The OIP also provides for cash incentive awards to be made. Substitute awards under the OIP are those awards that,
in connection with an acquisition, may be granted to employees, directors, consultants or advisors of the acquired company, in substitution for equity incentives held by them in the
seller or the acquired company. In fiscal 2016, 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, 2018, 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 4,934,444 shares of stock to be granted
thereunder, including up to 2,030,952 shares of stock in the aggregate of awards other than options or SARs, and up to 2,538,690 incentive stock options. The 4,934,444 shares of stock
represents 2,901,360 shares of newly authorized shares and 2,033,084 shares previously available under the EIP. In addition, shares that become available from awards under the EIP and
the OIP because of events such as forfeitures, cancellations or expirations, or because shares subject to an award are withheld to satisfy tax withholding obligations, will also be
available for issuance under the OIP. Shares issued under our share-based compensation plans are issued from new shares rather than from treasury shares.
Non-qualified stock options issued under the OIP, as they were under the EIP, are generally time-based and provide for a ten-year term, with options generally vesting equally over
a four-year period, with first vesting on the first anniversary of the award date. Non-qualified stock options granted to non-employee directors on an annual basis vest 100% on the first
anniversary of the award date. Under the OIP, as under the EIP, employees may also be granted ISOs to purchase common stock at not less than the fair value on the date of the grant.
Prior to fiscal 2016, no ISOs had been granted under either plan. In the first quarter of fiscal 2016, we substituted certain NexPlanar ISOs with Cabot Microelectronics Corporation ISOs,
preserving the intrinsic value, including the original vesting periods, of the original awards. Compensation expense related to our stock option awards was $6,392, $5,500 and $6,767 in
fiscal 2018, 2017 and 2016, respectively. For additional information on our accounting for share-based compensation, see Note 2.
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, although the holders of restricted stock units awarded prior to fiscal 2016 do not have such rights. Holders of restricted stock units awarded as of
fiscal 2016 have dividend equivalent rights pursuant to the terms of the OIP and respective award agreements. Restricted shares under the OIP, as under the EIP, also may be purchased
and placed "on deposit" by executive officers pursuant to the 2001 Deposit Share Program. Shares purchased under this Deposit Share Program receive a 50% match in restricted
shares ("Award Shares"). These Award Shares vest at the end of a three-year period, and are subject to forfeiture upon early withdrawal of the deposit shares. Compensation expense
related to our restricted stock and restricted stock unit awards and restricted shares matched at 50% pursuant to the Deposit Share Program was $9,186, $6,730 and $6,369 for fiscal 2018,
2017 and 2016, respectively.
62 In December 2017, we granted performance share unit ("PSU") awards to certain employees. These PSUs fully vest on the third anniversary of the grant date. Stock-based
compensation for the awards is recognized over the requisite service period (three years) beginning on the date of grant through the end of the performance period based on the number
of PSUs expected to vest under the awards at the end of the performance period. The expected amount of vesting is determined using certain performance measures and is re-evaluated
at the end of each fiscal year through the end of the performance period. In addition, the PSUs awarded may be subject to downward or upward adjustment depending on the total
shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We
used a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the
Company and Index constituents using certain assumptions, including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility. We
have recorded $2,056 compensation expense related to our PSU awards in fiscal 2018.
In connection with our pending acquisition of KMG, immediately prior to the closing, each KMG Equity Award granted on or following August 14, 2018 will be converted into a
corresponding award relating to shares of CMC Common Stock and continue to vest post-closing in accordance with the terms of the OIP (which will include vesting on a qualifying
termination of employment).
EMPLOYEE STOCK PURCHASE PLAN
In March 2008, our stockholders approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the "ESPP"), which amended the ESPP for the primary purpose of
increasing the authorized shares of common stock to be purchased under the ESPP from 475,000 designated shares to 975,000 shares. As of September 30, 2018, a total of 385,504 shares
are available for purchase under the ESPP. The ESPP allows all full-time, and certain part-time, employees of our Company and its subsidiaries to purchase shares of our common stock
through payroll deductions. Employees can elect to have up to 10% of their annual earnings withheld to purchase our stock, subject to a maximum number of shares that a participant
may purchase and a maximum dollar expenditure in any six-month offering period, and certain other criteria. The provisions of the ESPP allow shares to be purchased at a price no less
than the lower of 85% of the closing price at the beginning or end of each semi-annual stock purchase period. A total of 49,896, 69,751, and 77,437 shares were issued under the ESPP
during fiscal 2018, 2017 and 2016, respectively. Compensation expense related to the ESPP was $885, $774 and $763 in fiscal 2018, 2017 and 2016, 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,
2017
2018
2016
Stock Options
Weighted-average grant date fair value
Expected term (in years)
Expected volatility
Risk-free rate of return
Dividend yield
ESPP
Weighted-average grant date fair value
Expected term (in years)
Expected volatility
Risk-free rate of return
Dividend yield
$
$
26.59
6.68
$
16.50
6.57
14.47
6.56
26%
2.4%
1.0%
27%
2.1%
1.2%
26%
1.9%
0.3%
Year Ended September 30,
2017
2018
2016
$
$
20.94
0.50
$
12.49
0.50
26%
1.5%
1.1%
24%
0.6%
1.3%
9.57
0.50
24%
0.4%
0.5%
63 The Black-Scholes model is primarily used in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. Because
employee stock options and ESPP purchases have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can
materially affect the estimated value, our use of the Black-Scholes model for estimating the fair value of stock options and ESPP purchases may not provide an accurate measure.
Although the value of our stock options and ESPP purchases are determined in accordance with applicable accounting standards using an option-pricing model, those values may not
be indicative of the fair values observed in a willing buyer/willing seller market transaction.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award. Share-based compensation expense
related to restricted stock and restricted stock unit awards is recorded net of expected forfeitures.
SHARE-BASED COMPENSATION EXPENSE
Total share-based compensation expense for the years ended September 30, 2018, 2017 and 2016, is as follows:
Year Ended September 30,
2017
2016
2018
Income statement classifications:
Cost of goods sold
Research, development and technical
Selling and marketing
General and administrative
Tax benefit
Total share-based compensation expense, net of tax
$
$
2,450 $
1,940
1,277
12,851
(4,306)
14,212 $
2,229 $
1,792
1,380
7,603
(4,339)
8,665 $
2,105
1,633
1,618
8,585
(4,341)
9,600
The grant of December 2017 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 2018, we recorded $2,602 of shared-based compensation expense associated with our executive officer transitions, which is included in the table above as general and
administrative expense. In fiscal 2016, we recorded $154 in share-based compensation expense related to certain unvested NexPlanar ISOs settled in cash at the acquisition date. The
$154 represents the portion of the fair value of the original awards related to the post-acquisition period had these awards not been settled in cash at the acquisition date. U.S. GAAP
prescribes that the portion of fair value of equity awards related to pre-acquisition service periods represents purchase consideration, including equity awards vesting immediately upon
a change-in-control, and the portion of fair value related to post-acquisition service periods represents compensation expense. Since the post-acquisition service requirement was
eliminated through the cash settlement, the $154 in compensation expense was recorded immediately following the acquisition date. We accelerated the vesting on the substitute ISO
awards made to certain individuals based on the terms of their employment agreements and recorded $492 of share-based compensation expense related to this acceleration. The total
$646 of acquisition-related compensation is included in the table above as general and administrative expense.
64 Our non-employee directors receive annual equity awards in March, pursuant to the OIP. The award agreements provide for immediate vesting of the award at the time of
termination of service for any reason other than by reason of Cause, Death, Disability or a Change in Control, as defined in the OIP, if at such time the non-employee director has
completed an equivalent of at least two full terms as a director of the Company, as defined in the Company's bylaws. Three of the Company's non-employee directors had completed at
least two full terms of service as of the date of the March 2018 award. Consequently, the requisite service period for the award has already been satisfied and we recorded the fair value
of $586 of the awards to these directors to share-based compensation expense in the fiscal quarter ended March 31, 2018 rather than recording that expense over the one-year vesting
period stated in the award agreement.
STOCK OPTION ACTIVITY
A summary of stock option activity under the EIP and OIP as of September 30, 2018, and changes during fiscal 2018 are presented below:
Outstanding at September 30, 2017
Granted
Exercised
Forfeited or canceled
Outstanding at September 30, 2018
Exercisable at September 30, 2018
Expected to vest after September 30, 2018
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
44.17
95.19
39.45
53.09
52.68
41.57
63.16
6.8
5.5
8.0
$
$
$
57,212
34,063
23,120
Stock
Options
1,517,061
152,282
(488,029)
(49,833)
1,131,481
552,969
575,758
$
$
$
$
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 2018 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 2018. The total intrinsic value of options exercised was $30,345, $25,213 and $12,317 for fiscal 2018, 2017 and 2016, respectively.
The total cash received from options exercised was $19,247, $27,666 and $16,623 for fiscal 2018, 2017 and 2016, respectively. The actual tax benefit realized for the tax deductions
from options exercised was $7,503, $8,743 and $4,076 for fiscal 2018, 2017 and 2016, respectively. The total fair value of stock options vested during fiscal years 2018, 2017 and 2016 was
$5,008, $5,300 and $7,880, respectively. As of September 30, 2018, there was $6,723 of total unrecognized share-based compensation expense related to unvested stock options granted
under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.3 years.
65 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, 2018, and
changes during fiscal 2018, are presented below:
Nonvested at September 30, 2017
Granted *
Vested
Forfeited
Nonvested at September 30, 2018
Restricted
Stock
Awards and
Units
Weighted
Average
Grant Date
Fair Value
346,513 $
140,084
(134,165)
(24,285)
328,147 $
52.43
93.16
49.73
58.64
70.42
* Includes the initial amount of PSUs granted, which may be subject to downward or upward adjustment depending on the performance measures during the particular performance
period pursuant to the PSU award agreement.
The total fair value of restricted stock awards and restricted stock units vested during fiscal years 2018, 2017 and 2016 was $6,669, $6,898 and $10,740, respectively. As of
September 30, 2018, there was $20,955 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 2.3 years.
13. SAVINGS PLAN
Effective in May 2000, we adopted the Cabot Microelectronics Corporation 401(k) Plan (the "401(k) Plan"), which is a qualified defined contribution plan, covering all eligible U.S.
employees meeting certain minimum age and eligibility requirements, as defined by the 401(k) Plan. Participants may make elective contributions of up to 60% of their eligible
compensation. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The 401(k) Plan provides for matching and fixed non-elective
contributions by the Company. Under the 401(k) Plan, the Company will match 100% of the first four percent of the participant's eligible compensation and 50% of the next two percent
of the participant's eligible compensation that is contributed, subject to limitations required by government regulations. Under the 401(k) Plan, all U.S. employees, even those who do
not contribute to the 401(k) Plan, receive a contribution by the Company in an amount equal to four percent of eligible compensation, and thus are participants in the 401(k) Plan.
Participants are 100% vested in all Company contributions at all times. The Company's expense for the 401(k) Plan totaled $5,562, $5,256 and $4,624 for the fiscal years ended September
30, 2018, 2017 and 2016, respectively.
14. OTHER INCOME, NET
Other income, net, consisted of the following:
Interest income
Other income (expense)
Total other income, net
$
$
4,409 $
89
4,498 $
2,351 $
(438)
1,913 $
949
(296)
653
Year Ended September 30,
2017
2016
2018
66 15. STOCKHOLDERS' EQUITY
The following is a summary of our capital stock activity over the past three years:
September 30, 2015
Exercise of stock options
Restricted stock under EIP and OIP, net of forfeitures
Restricted stock under Deposit Share Program, net of forfeitures
Common stock under ESPP
Repurchases of common stock under share repurchase plans
Repurchases of common stock – other
September 30, 2016
Exercise of stock options
Restricted stock under OIP, net of forfeitures
Common stock under ESPP
Repurchases of common stock under share repurchase plans
Repurchases of common stock – other
September 30, 2017
Exercise of stock options
Restricted stock under OIP, net of forfeitures
Common stock under ESPP
Repurchases of common stock under share repurchase plans
Repurchases of common stock – other
September 30, 2018
COMMON STOCK
Number of Shares
Common
Stock
33,489,181
606,562
86,277
1,847
77,437
34,261,304
818,640
81,047
69,751
35,230,742
487,915
93,817
49,991
Treasury
Stock
9,041,678
636,839
66,125
9,744,642
167,809
35,739
9,948,190
369,791
38,166
35,862,465
10,356,147
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 369,791 shares for $40,726 during fiscal 2018, 167,809 shares for $12,035 during fiscal 2017, and 636,839 shares for $25,980 during fiscal 2016. As of September 30, 2018,
$81,271 remains available under our share repurchase program. To date, we have funded share repurchases under our share repurchase program from our existing cash balance, and
anticipate we will continue to do so. The program, which became effective on the authorization date, may be suspended or terminated at any time, at the Company's discretion. For
additional information on share repurchases, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" and
the section titled "Liquidity and Capital Resources" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Separate from this share repurchase program, a total of 38,166, 35,739 and 66,125 shares were purchased during fiscal 2018, 2017 and 2016, 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.
67
16. INCOME TAXES
Income before income taxes was as follows:
Domestic
Foreign
Total
Taxes on income consisted of the following:
U.S. federal and state:
Current
Deferred
Total
Foreign:
Current
Deferred
Total
Total U.S. and foreign
Year Ended September 30,
2018
2017
2016
$
$
46,254 $
115,457
161,711 $
33,272 $
76,100
109,372 $
7,130
63,308
70,438
Year Ended September 30,
2017
2016
2018
$
$
$
$
14,698 $
10,347
25,045 $
8,606 $
1,550
10,156 $
609
(1,465)
(856)
26,135 $
488
26,623
51,668 $
13,422 $
(1,158)
12,264
22,420 $
11,737
(292)
11,445
10,589
The provision for income taxes at our effective tax rate differed from the statutory rate as follows:
Year Ended September 30,
2017
2018
2016
Federal statutory rate
U.S. benefits from research and experimentation activities
State taxes, net of federal effect
Foreign income at other than U.S. rates
Executive compensation
Share-based compensation
U.S. tax reform
Domestic production deduction
Other, net
Provision for income taxes
24.5%
(0.8)
0.1
1.2
0.4
(4.3)
11.2
(0.2)
(0.1)
32.0%
35.0%
(1.0)
0.4
(14.7)
0.3
0.1
0.0
0.0
0.4
20.5%
35.0%
(3.5)
(0.1)
(16.9)
0.0
0.7
0.0
(1.3)
1.1
15.0%
68 The significant increase in our effective tax rate for fiscal 2018 was primarily driven by the changes introduced by the Tax Cuts and Jobs Act in the United States ("the Tax Act") in
December 2017, 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. This benefit may be reduced or eliminated in future legislation. If
such legislation is enacted, we will record the impact of the legislation in the quarter of enactment. 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 income statement (as opposed to equity prior to October 2017) and the
absence of benefits of a tax holiday in South Korea that expired as of October 2017.
The increase in the effective tax rate during fiscal 2017 was primarily due to the absence of the retroactive reinstatement of the research and experimentation tax credit recorded in
fiscal 2016, and changes in the jurisdictional mix of income.
The Tax Act includes broad and complex changes to the U.S. tax code, including but not limited to: (1) reducing the U.S. federal corporate income tax rate to 21.0% effective January
1, 2018; and (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years. For fiscal 2018, we recorded our income tax
provision using a blended U.S. statutory tax rate of 24.5%, which is based on a proration of the applicable tax rates before and after the Tax Act. The U.S. statutory tax rate of 21.0% will
apply for fiscal 2019 and beyond.
As a result of the Tax Act, the SEC staff issued accounting guidance that provides up to a one-year measurement period during which a company may complete its accounting for
the impacts of the Tax Act (SAB 118). To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but for which the company is able to
determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial
statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The final impact of the Tax Act may differ
from the provisional estimates due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, by changes in accounting
standard for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts.
In connection with our analysis of the impact of the Tax Act, we recorded total tax expense of $18,178 for the year ended September 30, 2018. This amount is comprised of $11,340
of the U.S. transition tax on accumulated earnings of foreign subsidiaries, $5,555 of foreign withholding tax, and $1,283 of tax expense for re-measurement of deferred taxes. We have
determined that these amounts were each provisional amounts and reasonable estimates for fiscal 2018. Estimates used in the provisional amounts include earnings, cash positions,
foreign income taxes and withholding taxes attributable to foreign subsidiaries. The amounts recorded are reasonable estimates and are discussed more fully below.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profits (E&P)
of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant
subsidiaries, as well as the amount of non-U.S. taxes on such earnings. We were able to make a reasonable estimate, and recorded $11,340 of Transition Tax, which included U.S. federal
and state tax implications, for the year ended September 30, 2018. In addition, we also recorded a provisional estimate of $5,555 for non-U.S. withholding taxes to be incurred on actual
and future distributions of foreign earnings. We are monitoring U.S. federal and state legislative developments for further interpretative guidance and may further refine provisional
estimates during the measurement period provided under SAB 118. Previously, the Company maintained an assertion to permanently reinvest the earnings of its non-U.S. subsidiaries
outside of the U.S., with certain insignificant exceptions, and therefore, did not record U.S. deferred income taxes or foreign withholding taxes for these earnings. In light of the Tax Act
and the associated transition to a modified territorial tax system, the Company no longer considered its foreign earnings to be indefinitely reinvested and repatriated $197,932 in fiscal
2018, and plan to repatriate foreign earnings on an ongoing basis. Consequently, the Company recorded deferred tax liabilities associated with withholding taxes on actual and future
distribution of such earnings.
Reduction of U.S. Federal Corporate Tax Rate: The Company re-measured its U.S. deferred tax assets and liabilities and recorded tax expense of $1,283 based on the rates at which
the deferred tax assets and liabilities are expected to reverse in the future. We are still analyzing certain aspects of the Tax Act and the actual impact of the reduction in the U.S. federal
corporate tax rate may be affected by the timing of the reversal of such balances.
69 The Company is also analyzing other provisions of the Tax Act to determine their impact on the Company's effective tax rate in fiscal year 2019 or in the future, including the
following:
Global Intangible Low Taxed Income (GILTI): Tax Act includes a provision designed to tax GILTI, which we are continuing to evaluate. Under U.S. GAAP, we are allowed to
make an accounting policy choice of either: (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period
cost method"); or, (2) factoring such amounts into a company's measurement of its deferred taxes (the "deferred method"). We have not yet made the accounting policy election, and
we are not yet able to reasonably estimate the effect of the GILTI provision and have not made any adjustments related to potential GILTI tax in our financial statements. If applicable,
GILTI tax would first apply to our fiscal year 2019 and would be accounted for as incurred under the period cost method.
Base Erosion and Anti-Abuse Tax (BEAT): The Tax Act creates a new minimum BEAT liability for corporations that make base erosion payments if the corporation has sufficient
gross receipts and derives a sufficient level of "base erosion tax benefits". We are further assessing the provisions of the BEAT and will evaluate the effects on the Company's
financial statements as further information becomes available. If applicable, any BEAT would first apply to the Company in fiscal year 2019 and would be accounted for as incurred
under the period cost method.
Foreign Derived Intangible Income (FDII): The Tax Act allows a domestic corporation an immediate deduction in U.S. taxable income for a portion of its FDII. The amount of the
deduction will depend in part on the Company's U.S. taxable income. We are still assessing the benefits of the FDII deduction. If applicable, the FDII deduction would first be available
to the Company in fiscal year 2019 and would be accounted for under the period cost method.
The Company previously operated under a tax holiday in South Korea in fiscal years 2013 through 2017 in conjunction with our investment in research, development and
manufacturing facilities there, which expired at the end of fiscal year 2017. This arrangement allowed for a tax at 50% of the local statutory rate in effect for fiscal years 2016 and 2017,
following a 0% tax rate in fiscal years 2013, 2014 and 2015. This tax holiday reduced our fiscal 2017 and 2016 income tax provision by approximately $5,018 and $3,771, respectively. This
holiday increased our fiscal 2017 and 2016 diluted earnings per share by approximately $0.20 and $0.15, respectively.
70 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, 2015
Additions for tax positions relating to the current fiscal year
Additions for tax positions relating to prior fiscal years
Settlements with taxing authorities
Balance September 30, 2016
Additions for tax positions relating to the current fiscal year
Additions for tax positions relating to prior fiscal years
Lapse of statute of limitations
Balance September 30, 2017
Additions for tax positions relating to the current fiscal year
Additions for tax positions relating to prior fiscal years
Lapse of statute of limitations
Balance September 30, 2018
$
$
1,773
364
200
(248)
2,089
381
44
(244)
2,270
263
116
(1,215)
1,434
The entire balance of unrecognized tax benefits shown above as of September 30, 2018 and 2017, would affect our effective tax rate if recognized. We recognize interest and
penalties related to uncertain tax positions as income tax expense in our financial statements. Interest accrued on our Consolidated Balance Sheet was $69 and $100 at September 30,
2018 and 2017, respectively, and any interest and penalties charged to expense in fiscal years 2018, 2017 and 2016 was not material.
At September 30, 2018, the tax periods open to examination by the U.S. federal government included fiscal years 2015 through 2018. We believe the tax periods open to examination
by U.S. state and local governments include fiscal years 2014 through 2018 and the tax periods open to examination by foreign jurisdictions include fiscal years 2013 through 2018. We
do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Significant components of net deferred tax assets and liabilities were as follows:
Deferred tax assets:
Employee benefits
Inventory
Bad debt reserve
Share-based compensation expense
Credit and other carryforwards
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Withholding on transition taxes
Translation adjustment
Other
Total deferred tax liabilities
September 30,
2018
2017
3,995 $
2,526
361
5,379
6,419
1,336
(133)
19,883 $
5,307
2,863
585
6,611
22,663
1,488
(2,271)
37,246
8,007 $
5,209
-
908
14,124 $
14,671
-
300
739
15,710
$
$
$
$
71 As of September 30, 2018, the Company had foreign and federal net operating loss carryforwards (NOLs) of $2,163 and $14,765, respectively, which will expire over the period
between fiscal year 2019 and fiscal year 2038, for which we have recorded a $423 gross valuation allowance, all of which was attributable to foreign NOLs. The majority of the federal
and state NOLs are attributable to the NexPlanar acquisition. As of September 30, 2018, the Company had a state tax credit carryforward of $74 and no capital loss carryforwards. As of
September 30, 2018, the Company had a federal tax credit carryforward of $737, which will expire beginning in fiscal years 2028 through 2038.
17. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we
periodically become a party to legal proceedings in the ordinary course of business.
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, 2018, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of such
obligations is probable.
LEASE COMMITMENTS
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable leases, all of which expire within five years from
September 30, 2018, and may be renewed by us. Rent expense under such arrangements during fiscal 2018, 2017 and 2016 totaled $4,307, $3,120 and $2,765, respectively.
Future minimum rental commitments under noncancelable leases as of September 30, 2018 are as follows:
Fiscal Year
2019
2020
2021
2022
2023
Thereafter
$
$
Operating
3,456
2,466
2,099
1,853
1,890
7,890
19,654
72
PURCHASE OBLIGATIONS
Purchase obligations include our take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the
purchase of goods and services. We have been operating under a fumed silica supply agreement with Cabot Corporation, our former parent company which is not a related party, the
current term of which runs through December 2019. This agreement provides us the option to purchase fumed silica, with no purchase requirements as of 2017, for which we have paid a
fee of $1,500 in each of the fiscal years 2017, 2018 and will pay in 2019. The $1,500 payment due for 2019 is included in accrued expenses on our Consolidated Balance Sheet As of
September 30, 2018, purchase obligations include $11,208 of contractual commitments related to our Cabot Corporation supply agreement for fumed silica.
POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS
We have unfunded defined benefit plans covering employees in certain foreign jurisdictions as required by local law. Our plans in Japan, which represent the majority of our
pension liability for such plans, had projected benefit obligations of $6,621 and $6,673 as of September 30, 2018 and 2017, respectively, and an accumulated benefit obligation of $5,234
and $5,253 as of September 30, 2018 and 2017, respectively. Key assumptions used in the actuarial measurement of the Japan pension liability include a weighted average discount rate
of 0.50% at September 30, 2018 and 2017, respectively, and an expected rate of compensation increase of 2.50% at September 30, 2018 and 2017, respectively. Total future Japan pension
costs included in accumulated other comprehensive income are $1,735 and $1,837 at September 30, 2018 and 2017, respectively.
Our plans in Korea had defined benefit obligations of $1,731 and $1,663 as of September 30, 2018 and 2017. Key assumptions used in the actuarial measurement of the Korea
pension liability include weighted average discount rates of 3.75% and 4.00% at September 30, 2018 and 2017, respectively, and an expected rate of compensation increase of 4.50% at
September 30, 2018 and 2017. Total future Korea pension costs included in accumulated other comprehensive income are $133 and $6 at September 30, 2018 and 2017, respectively.
Benefit costs for the combined plans were $1,236, $1,176 and $1,024 in fiscal years 2018, 2017 and 2016, respectively, consisting primarily of service costs, and were recorded as
fringe benefit expense under cost of goods sold and operating expenses in our Consolidated Statement of Income. Estimated future benefit payments are as follows:
Fiscal Year
2019
2020
2021
2022
2023
2024 to 2028
$
$
Amount
372
611
461
642
554
4,237
73 18. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the
period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-
class method under ASC 260. Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include
the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.
Pursuant to the adoption of ASU 2016-09 in the first quarter of fiscal 2018, the tax benefits associated with share-based compensation plans were recorded as a tax benefit in our
Consolidated Statements of Income. The number of shares that would be repurchased with the proceeds from the tax benefits was excluded from the diluted weighted average shares
outstanding using treasury stock method under the new guidance.
The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share
computations. Basic and diluted earnings per share were calculated as follows:
Year Ended September 30,
2017
2016
2018
Numerator:
Net income
Less: income attributable to participating securities
Net income available to common stockholders
$
$
110,043 $
(123)
109,920 $
86,952 $
(256)
86,696 $
59,849
(361)
59,488
Denominator:
Weighted-average common shares
(Denominator for basic calculation)
Weighted-average effect of dilutive securities:
Share-based compensation
Diluted weighted-average common shares
(Denominator for diluted calculation)
Earnings per share:
Basic
Diluted
25,517,825
25,015,458
24,076,549
725,339
26,243,164
497,029
25,512,487
400,444
24,476,993
$
$
4.31 $
4.19 $
3.47 $
3.40 $
2.47
2.43
For the twelve months ended September 30, 2018, 2017, and 2016, approximately 0.1 million, 0.4 million and 1.1 million shares, respectively, attributable to outstanding stock options
were excluded from the calculation of diluted earnings per share.
74 19. FINANCIAL INFORMATION BY INDUSTRY SEGMENT, GEOGRAPHIC AREA AND PRODUCT LINE
We operate predominantly in one industry segment – the development, manufacture, and sale of CMP consumables. Revenues are attributed to the United States and foreign
regions based upon the customer location and not the geographic location from which our products were shipped. Financial information by geographic area was as follows:
Year Ended September 30,
2017
2016
2018
Revenue:
United States
Asia
Europe
Total
Property, plant and equipment, net:
United States
Asia
Europe
Total
$
$
$
$
79,019 $
471,215
39,889
590,123 $
72,670 $
394,874
39,635
507,179 $
62,400
336,312
31,737
430,449
60,818 $
50,573
12
111,403 $
52,155 $
54,201
5
106,361 $
50,595
55,893
8
106,496
The following table shows revenue from sales to customers in foreign countries that accounted for more than ten percent of our total revenue in fiscal 2018, 2017 and 2016:
Year Ended September 30,
2017
2018
2016
Revenue:
South Korea
Taiwan
China
$
136,403 $
130,500
97,254
95,414 $
130,849
74,781
76,082
122,671
59,239
The following table shows net property, plant and equipment in foreign countries that accounted for more than ten percent of our total net property, plant and equipment in fiscal
2018, 2017 and 2016:
Property, plant and equipment, net:
Japan
South Korea
Taiwan
Year Ended September 30,
2017
2018
2016
$
19,610 $
16,857
13,592
21,408 $
16,915
15,119
26,268
11,135
17,949
The following table shows revenue generated by product area in fiscal 2018, 2017 and 2016:
Year Ended September 30,
2017
2016
2018
Revenue:
Tungsten slurries
Dielectric slurries
Polishing Pads
Other Metals slurries
ESF and other
Total
$
$
253,069 $
139,577
83,117
69,317
45,043
590,123 $
221,493 $
120,240
68,673
62,829
33,944
507,179 $
185,365
99,141
52,067
63,960
29,916
430,449
75 20. SUBSEQUENT EVENTS
On August 14, 2018, we entered into a Merger Agreement with KMG and the Merger Sub, providing for the acquisition of KMG by Cabot Microelectronics. The Merger Agreement
provides that, upon the terms and subject to the satisfaction or valid waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into KMG, with KMG
continuing as the surviving corporation and a wholly owned subsidiary of Cabot Microelectronics. The Merger Agreement and the Acquisition were unanimously approved by the
board of directors of each of Cabot Microelectronics and KMG. At the effective time of the Acquisition, each outstanding share of KMG common stock, par value $0.01 per share
("KMG Common Stock"), other than shares owned by KMG, Cabot Microelectronics and their subsidiaries, dissenting shares, or shares subject to a KMG Equity Award (as defined
below), will automatically be converted into the right to receive the following Merger Consideration, without interest: $55.65 in cash (the "Cash Consideration"); and, 0.2000 shares of
common stock of Cabot Microelectronics, par value $0.001 per share ("CMC Common Stock"). Based on the closing price of CMC Common Stock on November 9, 2018, the most recent
practicable date prior to the date of this Report on Form 10-K, the Merger Consideration is approximately $1.5 billion, which will fluctuate as the market price of CMC Common Stock
fluctuates because a portion of the Merger Consideration is payable in a fixed number of shares of CMC Common Stock. As a result, the value of the Merger Consideration upon
completion of the Acquisition could be greater than, less than or the same as the value of the Merger Consideration on the date of this report. Cabot Microelectronics and KMG have
each made customary representations, warranties and covenants in the Merger Agreement. The Merger Agreement contains certain customary termination rights by either Cabot
Microelectronics or KMG, including if the Acquisition is not consummated by February 14, 2019. If the Merger Agreement is terminated under certain circumstances, KMG will be
obligated to pay to Cabot Microelectronics a termination fee equal to $38.8 million in cash.
Immediately prior to closing, each restricted stock unit award relating to shares of KMG Common Stock (each, a "KMG Equity Award") granted prior to August 14, 2018 will vest
(with any applicable performance targets deemed satisfied at the level specified in the applicable award agreement) and be cancelled in exchange for the Merger Consideration in respect
of each share of KMG Common Stock underlying the applicable KMG Equity Award. Each KMG Equity Award granted on or following August 14, 2018 will be converted into a
corresponding award relating to shares of CMC Common Stock and continue to vest post-closing in accordance with the terms of the applicable award agreement (which will include
vesting on a qualifying termination of employment).
The consummation of the Acquisition is subject to customary closing conditions, including the adoption of the Merger Agreement by KMG's shareholders, the meeting for which
is scheduled to occur on November 13, 2018. Assuming such conditions are satisfied or validly waived, we expect the Acquisition to close in approximately mid-November 2018.
On August 14, 2018, in connection with the execution of the Merger Agreement, we entered into a commitment letter, dated as of August 14, 2018 (the "Commitment Letter"), with
JPMorgan Chase Bank, N.A., Bank of America, N.A. and Goldman Sachs Bank USA (together with the additional commitment parties described below, the "Commitment Parties") and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which the Commitment Parties have committed to arrange and provide, subject to the terms and conditions of the
Commitment Letter, a senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million (the "New Revolving Facility") and a senior secured term loan
facility in an aggregate principal amount of up to $1,065.0 million (the "New Term Loan Facility", and together with the New Revolving Facility, the "New Credit Facilities"). On
September 4, 2018, we amended and restated the commitment letter to add BMO Harris Financing, Inc., U.S. Bank, National Association, HSBC Bank USA, N.A., and PNC Bank, National
Association as additional commitment parties.
On November 1, 2018, we completed the syndication of the New Credit Facilities. We expect the New Credit Facilities to be made available pursuant to a credit agreement to be
entered into on the closing date of the Acquisition. We expect the New Revolving Facility to mature five years after the closing date of the Acquisition and the New Term Loan Facility
to mature seven years after the closing date of the Acquisition and to amortize in equally quarterly installments of 0.25% of the initial principal amount. We expect that the New Credit
Facilities will be guaranteed by KMG and all of CMC's and KMG's wholly-owned domestic subsidiaries and will be secured by first priority liens and security interests in substantially
all assets of CMC and each guarantor, in each case subject to certain exceptions. We expect borrowings under the New Term Loan Facility to bear interest at LIBOR plus 2.25% per
annum and borrowings under the New Revolving Facility to bear interests at a rate per annum equal to LIBOR plus an applicable margin of 1.00% to 1.75% depending on our
consolidated leverage ratio. We also expect to be required to pay certain fees and expenses in connection with the New Credit Facility, including an undrawn commitment fee of 0.175%
to 0.30% per annum based on our consolidated leverage ratio. We expect that the New Credit Facilities will require us to comply with customary affirmative and negative covenants and
events of default, and that the New Revolving Facility will require us to maintain a first lien secured net leverage ratio no greater than 4.00 to 1.00. Although the syndication of the New
Credit Facilities is complete, we have not yet entered into definitive documentation with respect to the New Credit Facilities. Accordingly, the terms of the New Credit Facilities may
vary from those described herein.
76 SELECTED QUARTERLY OPERATING RESULTS
The following table presents our unaudited financial information for the eight quarterly periods ended September 30, 2018. This unaudited financial information has been prepared
in accordance with accounting principles generally accepted in the United States of America, applied on a basis consistent with the annual audited financial statements and in the
opinion of management, include all necessary adjustments, which consist only of normal recurring adjustments necessary to present fairly the financial results for the periods. The
results for any quarter are not necessarily indicative of results for any future period.
CABOT MICROELECTRONICS CORPORATION
SELECTED QUARTERLY OPERATING RESULTS
(Unaudited and in thousands, except per share amounts)
Sept. 30,
2018
June 30,
2018
March 31,
2018
Dec. 31,
2017
Sept. 30,
2017
June 30,
2017
March 31,
2017
Dec. 31,
2016
Revenue
Cost of goods sold
$
156,729
72,383
$
150,437
69,737
$
142,978
67,933
$
139,979
65,965
$
136,784
66,734
$
127,957
65,414
$
119,184
59,153
$
123,254
61,749
Gross profit
84,346
80,700
75,045
74,014
70,050
62,543
60,031
61,505
Operating expenses:
Research, development and
technical
Selling and marketing
General and administrative
Total operating expenses
Operating income
Interest expense
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income (loss)
Basic earnings (loss) per share
Weighted average basic shares
outstanding
13,372
6,211
20,775
40,358
43,988
102
1,137
45,023
(3,195)
48,218
1.89
$
$
13,059
6,207
19,504
38,770
41,930
513
1,627
43,044
7,873
35,171
1.37
$
$
13,368
6,790
17,799
37,957
37,088
1,158
1,062
36,992
7,255
29,737
1.16
$
$
12,151
5,836
18,915
36,902
37,112
1,132
672
36,652
39,735
13,839
8,680
14,489
37,008
33,042
1,127
798
32,713
6,211
$
$
(3,083) $
26,502
(0.12) $
1.05
$
$
14,333
7,346
13,953
35,632
26,911
1,117
(115)
25,679
5,740
19,939
0.79
$
$
14,090
7,268
14,699
36,057
23,974
1,135
234
23,073
4,793
18,280
0.73
$
$
13,396
7,552
12,496
33,444
28,061
1,150
996
27,907
5,676
22,231
0.90
25,520
25,612
25,593
25,326
25,236
25,228
25,031
24,583
Diluted earnings (loss) per share
$
1.84
$
1.34
$
1.14
$
(0.12) $
1.03
$
0.77
$
0.71
$
0.88
Weighted average diluted shares
outstanding
26,213
26,319
26,161
25,326
25,710
25,721
25,526
25,072
Dividends per share
$
0.40
$
0.40
$
0.40
$
0.20
$
0.20
$
0.20
$
0.20
$
0.18
77 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activities in our allowance for doubtful accounts:
Allowance For Doubtful Accounts
Year ended:
September 30, 2018
September 30, 2017
September 30, 2016
Balance At
Beginning
of
Year
Amounts
Charged
To
Expenses
Deductions
and
Adjustments
Balance At
End Of
Year
$
1,747 $
1,828
1,224
185 $
26
588
(32) $
(107)
16
1,900
1,747
1,828
We have provided a valuation allowance on certain deferred tax assets. The following table sets forth activities in our valuation allowance:
Valuation Allowance
Balance At
Beginning
of Year
Amounts
Charged To
Expenses
Deductions
and
Adjustments
Balance At
End
Of Year
Year ended:
September 30, 2018
September 30, 2017
September 30, 2016
$
2,271 $
3,022
3,079
- $
-
-
(2,138) $
(751)
(57)
133
2,271
3,022
78 MANAGEMENT RESPONSIBILITY
The accompanying consolidated financial statements were prepared by the Company in conformity with accounting principles generally accepted in the United States of America.
The Company's management is responsible for the integrity of these statements and of the underlying data, estimates and judgments.
The Company's management establishes and maintains a system of internal accounting controls designed to provide reasonable assurance that its assets are safeguarded from loss
or unauthorized use, transactions are properly authorized and recorded, and that financial records can be relied upon for the preparation of the consolidated financial statements. This
system includes written policies and procedures, a code of business conduct and an organizational structure that provides for appropriate division of responsibility and the training of
personnel. This system is monitored and evaluated on an ongoing basis by management in conjunction with its internal audit function.
The Company's management assesses the effectiveness of its internal control over financial reporting on an annual basis. In making this assessment, management uses the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Management acknowledges, however, that
all internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance with respect to financial statement preparation and
presentation. In addition, the Company's independent registered public accounting firm evaluates the Company's internal control over financial reporting and performs such tests and
other procedures as it deems necessary to reach and express an opinion on the fairness of the financial statements.
In addition, the Audit Committee of the Board of Directors provides general oversight responsibility for the financial statements. Composed entirely of Directors who are
independent and not employees of the Company, the Committee meets periodically with the Company's management, internal auditors and the independent registered public accounting
firm to review the quality of financial reporting and internal controls, as well as results of auditing efforts. The internal auditors and independent registered public accounting firm have
full and direct access to the Audit Committee, with and without management present.
/s/ David H. Li
David H. Li
Chief Executive Officer
/s/ Scott D. Beamer
Scott D. Beamer
Chief Financial Officer
/s/ Thomas S. Roman
Thomas S. Roman
Principal Accounting Officer
79 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange Act")), as of September 30, 2018. Based on that
evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and
communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
While we believe the present design of our disclosure controls and procedures is effective enough to make known to our senior management in a timely fashion all material
information concerning our business, we intend to continue to improve the design and effectiveness of our disclosure controls and procedures to the extent necessary in the future to
provide our senior management with timely access to such material information, and to correct any deficiencies that we may discover in the future, as appropriate.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is
defined in Rule 13a-15(f) or Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company's CEO and CFO to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America. Internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect our transactions and dispositions of the Company's assets; provide reasonable assurance that transactions are recorded as necessary for
preparation of our financial statements in accordance with generally accepted accounting principles; provide reasonable assurance that receipts and expenditures of Company assets
are made in accordance with management authorization; and provide reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a
material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that the Company's internal control over
financial reporting was effective as of September 30, 2018. The effectiveness of the Company's internal control over financial reporting as of September 30, 2018 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which appears under Item 8 of Report on Form 10-K.
80 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because of inherent limitations, our disclosure controls or our internal control over financial reporting may not prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls
may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-
effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
81 PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K with respect to identification of directors, the existence of a separately-designated standing audit committee, identification of
members of such committee, and identification of an audit committee financial expert, is incorporated by reference from the information contained in the sections captioned "Election of
Directors" and "Board Structure and Compensation" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 6, 2019 (the "Proxy Statement"). In
addition, for information with respect to the executive officers of our Company, see "Executive Officers" in Part I of this Form 10-K and the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement. Information required by Item 405 of Regulation S-K is incorporated by reference from the information contained in the
section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.
We have adopted a code of business conduct for all of our employees and directors, including our principal executive officer, other executive officers, principal financial officer and
senior financial personnel. A copy of our code of business conduct is available free of charge on our Company website at www.cabotcmp.com. We intend to post on our website any
material changes to, or waivers from, our code of business conduct, if any, within two days of any such event.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned "Executive Compensation" in the Proxy
Statement.
82 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
Shown below is information as of September 30, 2018, with respect to the shares of common stock that may be issued under Cabot Microelectronics' existing equity compensation
plans.
Plan category
(a) Number of
securities to be issued
upon exercise of
outstanding options,
warrants
and rights
(b) Weighted-average
exercise
price of outstanding
options, warrants and
rights
(c) Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans approved by security holders (1)
1,435,064(2) $
52.68(2)
2,434,912(3)
Equity compensation plans not approved by security holders
Total
1,435,064(2) $
52.68(2)
2,434,912(3)
(1) Equity Compensation plans consist of our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (EIP), as amended and restated
September 23, 2008, our Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 (OIP), and our Cabot Microelectronics
Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated September 23, 2013 (ESPP). As of March 6, 2012, all securities available for future issuance under
the EIP were transferred to the OIP and the EIP is no longer available for any future awards. All share amounts in the above table reflect the effect of the leveraged
recapitalization with a special cash dividend. See Note 12 of the "Notes to the Consolidated Financial Statements" for more information regarding our equity compensation
plans.
(2) Column (a) includes 266,965 shares that employees and non-employee directors have the right to acquire upon the vesting of the equivalent restricted stock units that they
have been awarded under our equity incentive plans, and 36,618 initial granted shares that certain employees have the right to acquire upon the vesting of the performance-
based restricted stock units that they have been awarded under our equity incentive plans, which may be subject to downward or upward adjustment depending on the
performance measures during the particular performance period pursuant to the PSU award agreement. Column (b) excludes all of these from the weighted-average exercise
price.
(3) Column (c) includes 385,504 shares available for future issuance under the ESPP.
The other information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the section captioned "Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in the section captioned "Fees of Independent Auditors and Audit
Committee Report" in the Proxy Statement.
83 PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following Financial Statements and Financial Statement Schedule are included in Item 8 herein:
1.
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended September 30, 2018, 2017 and 2016
Consolidated Balance Sheets at September 30, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended September 30, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
2.
Financial Statement Schedule: Schedule II – Valuation and Qualifying Accounts
3. Exhibits - The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K:
Exhibit No.
2.1
2.2
3.2
3.3
4.1
10.1
10.2
10.4
10.15
10.22
10.23
10.28
10.30
Description
Agreement and Plan of Merger, dated as of September 27, 2015, by and among NexPlanar Corporation,
Cabot Microelectronics Corporation, Matrix Merger Co., and Shareholder Representative Services LLC
solely in its capacity as representative.
Agreement and Plan of Merger, dated as of August 14, 2018, by and among KMG Chemicals, Inc.,
Cabot Microelectronics Corporation, and Cobalt Merger Sub Corporation.
(Third) Amended and Restated By-Laws of Cabot Microelectronics Corporation.
Form of Amended and Restated Certificate of Incorporation of Cabot Microelectronics Corporation.
Form of Cabot Microelectronics Corporation Common Stock Certificate.
Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan, as
amended and restated September 23, 2008.*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan Non-Qualified Stock Option Grant Agreement (non-employee directors).*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan Non-Qualified Stock Option Grant Agreement (employees (including executive officers)).*
Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated
September 23, 2013.*
Cabot Microelectronics Corporation 401(k) Plan, as amended.*
Form of Amended and Restated Change in Control Severance Protection Agreement.**
Directors' Deferred Compensation Plan, as amended September 23, 2008.*
Form of Deposit Share Agreement.***
Filed as an exhibit to, and incorporated by reference from
Form
8-K
File No.
000-30205
Filing Date
September 28, 2015
8-K
8-K
S-1
S-1
10-K
10-Q
10-Q
10-K
10-Q
10-K
10-K
10-Q
000-30205
August 17, 2018
000-30205
333-95093
333-95093
000-30205
March 6, 2017
March 27, 2000
April 3, 2000
November 25, 2008
000-30205
May 9, 2011
000-30205
February 8, 2011
000-30205
November 20, 2013
000-30205
000-30205
000-30205
000-30205
February 8, 2010
November 25, 2008
November 25, 2008
February 8, 2013
84 10.33
Adoption Agreement, as amended September 23, 2008, of Cabot Microelectronics Corporation
Supplemental Employee Retirement Plan.*
Code of Business Conduct.
10.34
10.36 Directors' Cash Compensation Umbrella Program.*
10.53
10.57 Adoption Agreement, as amended January 1, 2010, of Cabot Microelectronics Corporation 401(k) Plan.*
10.58
Cabot Microelectronics Corporation Supplemental Employee Retirement Plan, as amended.*
Employee Stock Purchase Plan Prospectus as of November 24, 2010.*
Conformed Credit Agreement dated February 13, 2012 among Cabot Microelectronics Corporation, as
Borrower, Bank of America, N.A., as Administrative Agent, Bank of America Merrill Lynch and J.P.
Morgan Securities LLC, as Joint Lead Arrangers and Joint Book Managers, JPMorgan Chase Bank,
N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Documentation Agent.
Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017.
*
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Non-Qualified Stock Option
Grant Agreement (employees (including executive officers)).*
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Restricted Stock Award
Agreement (employees (including executive officers)).*
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Non-Qualified Stock Option
Grant Agreement (non-employee directors).*
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Restricted Stock Units
Award Agreement (non-employee directors).*
Amendment No. 1 to Credit Agreement dated as of June 27, 2014 among Cabot Microelectronics
Corporation, as Borrower, each lender party, Bank of America, N.A., as Administrative Agent, and each
of the Guarantors.
Employment Offer Letter dated December 12, 2014 (David H. Li).
Cabot Microelectronics Corporation Short Term Incentive Program
Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Fiscal Year 20[__] Restricted Unit
Award Agreement for United States Employees
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.68
10.69
10.70
10-K
10-Q
10-K
10-K
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
000-30205
November 25, 2008
000-30205
000-30205
000-30205
000-30205
000-30205
000-30205
February 8, 2011
December 10, 2003
November 25, 2008
February 8, 2010
February 8, 2011
August 8, 2014
000-30205
May 5, 2017
000-30205
February 8, 2013
000-30205
February 8, 2013
000-30205
August 8, 2012
000-30205
August 8, 2012
000-30205
August 8, 2014
000-30205
000-30205
000-30205
February 6, 2015
February 8, 2016
February 8, 2016
85 10.71
10.72
Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Fiscal Year 20[ ] Non-Qualified
Stock Option Award Agreement for United States Employees
Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Fiscal Year 20[ ] Restricted Stock
Unit Award Agreement for United States Employees
10.73
Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Fiscal Year 20[ ] Performance Share
Unit Award Agreement for United States Employees
21.1
23.1
24.1
31.1
31.2
32.1
Subsidiaries of Cabot Microelectronics Corporation.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney.
Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
10-Q
10-Q
10-Q
000-30205
February 7, 2018
000-30205
February 7, 2018
000-30205
February 7, 2018
* Management contract, or compensatory plan or arrangement.
** Substantially similar change in control severance protection agreements have been entered into with David H. Li, Scott D. Beamer, H. Carol Bernstein,
Thomas F. Kelly, Ananth Naman, Eleanor K. Thorp, Thomas S. Roman, and Daniel D. Woodland, with differences only in the amount of payments and benefits
to be received by such persons.
*** Substantially similar deposit share agreements have been entered into with David H. Li and Ananth Naman, with differences only in the amount of initial
deposit made and deposit shares purchased by such persons.
86 Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the
SIGNATURES
undersigned thereunto duly authorized:
Date: November 13, 2018
CABOT MICROELECTRONICS CORPORATION
/s/ DAVID H. LI
David H. Li
President and Chief Executive Officer
[Principal Executive Officer]
Date: November 13, 2018
/s/ SCOTT D BEAMER
Date: November 13, 2018
Scott D. Beamer
Vice President and Chief Financial Officer
[Principal Financial Officer]
/s/ THOMAS S. ROMAN
Thomas S. Roman
Corporate Controller
[Principal Accounting Officer]
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Date: November 13, 2018
Date: November 13, 2018
Date: November 13, 2018
Date: November 13, 2018
Date: November 13, 2018
Date: November 13, 2018
Date: November 13, 2018
/s/ WILLIAM P. NOGLOWS*
William P. Noglows
Chairman of the Board
[Director]
/s/ DAVID H. LI
David H. Li
President and Chief Executive Officer
[Director]
/s/ RICHARD S. HILL*
Richard S. Hill
[Director]
/s/ BARBARA A. KLEIN*
Barbara A. Klein
[Director]
/s/ PAUL J. REILLY*
Paul J. Reilly
[Director]
/s/ SUSAN M. WHITNEY*
Susan M. Whitney
[Director]
/s/ GEOFFREY WILD*
Geoffrey Wild
[Director]
*
by H. Carol Bernstein as Attorney-in-fact pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended.
87 EXHIBIT 21.1
SUBSIDIARIES OF CABOT MICROELECTRONICS CORPORATION
Cabot Microelectronics Global Corporation (Delaware, U.S.)
Cabot Microelectronics Polishing Corporation (Delaware, U.S.)
Cobalt Merger Sub Corporation (Texas, U.S)
NexPlanar Corporation (Delaware, U.S.)
QED Technologies International, Inc. (Delaware, U.S.)
Cabot Microelectronics Japan KK (Japan)
Nihon Cabot Microelectronics KK (Japan)
Cabot Microelectronics B.V. (Netherlands)
Cabot Microelectronics Singapore Pte. Ltd. (Singapore)
Hanguk Cabot Microelectronics, LLC (South Korea)
Epoch Material Co., Ltd. (Taiwan)
Shanghai Cabot Microelectronics Co. Ltd. (China)
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-34272, 333-34270, 333-82680, 333-123692, 333-170810, and 333-179955) and on
Form S-4 (No. 333-227301) of Cabot Microelectronics Corporation of our report dated November 13, 2018 relating to the financial statements, financial statement schedule and the
effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
November 13, 2018
EXHIBIT 24.1
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints H. Carol Bernstein, their Attorney-in-fact, with the power of
substitution, for him or her in any and all capacities, to sign the annual report on Form 10-K for the fiscal year ended September 30, 2018 and any amendments to this Report on Form 10-
K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said
Attorney-in-fact, or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE
TITLE
Date
/s/ William P. Noglows
William P. Noglows
/s/ David H. Li
David H. Li
/s/ Richard S. Hill
Richard S. Hill
/s/ Barbara A. Klein
Barbara A. Klein
/s/ Paul J. Reilly
Paul J. Reilly
/s/ Susan M. Whitney
Susan M. Whitney
/s/ Geoffrey Wild
Geoffrey Wild
Chairman of the Board
November 13, 2018
President and Chief,
Executive Officer
Director
Director
Director
Director
Director
November 13, 2018
November 13, 2018
November 13, 2018
November 13, 2018
November 13, 2018
November 13, 2018
Exhibit 31.1
I, David H. Li, certify that:
CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of Cabot Microelectronics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the
audit committee of registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 13, 2018
/s/ DAVID H. LI
David H. Li
Chief Executive Officer
Exhibit 31.2
I, Scott D. Beamer, certify that:
CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of Cabot Microelectronics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the
audit committee of registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 13, 2018
/s/ SCOTT D. BEAMER
Scott D. Beamer
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cabot Microelectronics Corporation (the "Company") on Form 10-K for the fiscal year ended September 30, 2018, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 13, 2018
Date: November 13, 2018
/s/ DAVID H. LI
David H. Li
Chief Executive Officer
/s/ SCOTT D. BEAMER
Scott D. Beamer
Chief Financial Officer
BR12709P-0119-10K