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.
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 and the Korean won.dollar. Approximately 15%22% of our revenue is transacted in currencies other than the U.S. dollar. However, we also incur expenses in foreign countries that are transacted in currencies other than the U.S. dollar, which mitigates the exposure on the Consolidated Statement of Income. We periodically enter into forward contracts in an effort to manage foreign currency exchange exposure.exposure on our Consolidated Balance Sheet. However, we are unlikely to be able to hedge these exposures completely. We do not currently enter into forward exchange contracts or other derivative instruments for speculative or trading purposes.
We have performed a sensitivity analysis assuming a hypothetical 10% additional adverse movement in foreign exchange rates. As of September 30, 2014,2017, 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.
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.
40
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Cabot Microelectronics Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Cabot Microelectronics Corporation and its subsidiaries atas of September 30, 20142017 and 2013,September 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 20142017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014,2017, based on criteria established in Internal Control – Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Overover Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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.
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, ILIllinois
November 19, 201415, 2017
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
| | Year Ended September 30, | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Revenue | | $ | 424,666 | | | $ | 433,131 | | | $ | 427,657 | | $ | 507,179 | | | $ | 430,449 | | | $ | 414,097 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Cost of goods sold | | | 221,573 | | | | 221,015 | | | | 223,630 | | | 253,050 | | | | 220,247 | | | | 201,866 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 203,093 | | | | 212,116 | | | | 204,027 | | | 254,129 | | | | 210,202 | | | | 212,231 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | |
Research, development and technical | | | 59,354 | | | | 61,373 | | | | 58,642 | | | 55,658 | | | | 58,532 | | | | 59,778 | |
Selling and marketing | | | 26,513 | | | | 27,985 | | | | 29,516 | | | 30,846 | | | | 27,717 | | | | 24,983 | |
General and administrative | | | 45,418 | | | | 46,287 | | | | 49,345 | | | 55,637 | | | | 49,445 | | | | 52,430 | |
Total operating expenses | | | 131,285 | | | | 135,645 | | | | 137,503 | | | 142,141 | | | | 135,694 | | | | 137,191 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 71,808 | | | | 76,471 | | | | 66,524 | | | 111,988 | | | | 74,508 | | | | 75,040 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 3,354 | | | | 3,643 | | | | 2,309 | | | 4,529 | | | | 4,723 | | | | 4,524 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net | | | 140 | | | | 1,392 | | | | (1,011 | ) | |
Other income, net | | | 1,913 | | | | 653 | | | | 681 | |
Income before income taxes | | | 68,594 | | | | 74,220 | | | | 63,204 | | | 109,372 | | | | 70,438 | | | | 71,197 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | | 17,843 | | | | 21,642 | | | | 23,110 | | | 22,420 | | | | 10,589 | | | | 15,051 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 50,751 | | | $ | 52,578 | | | $ | 40,094 | | $ | 86,952 | | | $ | 59,849 | | | $ | 56,146 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 2.12 | | | $ | 2.27 | | | $ | 1.76 | | $ | 3.47 | | | $ | 2.47 | | | $ | 2.32 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average basic shares outstanding | | | 23,704 | | | | 22,924 | | | | 22,506 | | | 25,015 | | | | 24,077 | | | | 24,040 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 2.04 | | | $ | 2.19 | | | $ | 1.71 | | $ | 3.40 | | | $ | 2.43 | | | $ | 2.26 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average diluted shares outstanding | | | 24,611 | | | | 23,760 | | | | 23,244 | | | 25,512 | | | | 24,477 | | | | 24,632 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Dividends per share | | $ | - | | | $ | - | | | $ | 15.00 | | $ | 0.78 | | | $ | 0.54 | | | $ | - | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
| | Year Ended September 30, | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net income | | $ | 50,751 | | | $ | 52,578 | | | $ | 40,094 | | $ | 86,952 | | | $ | 59,849 | | | $ | 56,146 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
Foreign currency translation adjustments | | | (8,136 | ) | | | (13,037 | ) | | | 3,421 | | | (6,746 | ) | | | 15,996 | | | | (14,126 | ) |
Minimum pension liability adjustment | | | (196 | ) | | | 7 | | | | (537 | ) | | 276 | | | | (434 | ) | | | (318 | ) |
Unrealized gain on investments | | | 151 | | | | - | | | | - | | |
Net unrealized gain (loss) on cash flow hedges | | | 863 | | | | 84 | | | | (901 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | (8,181 | ) | | | (13,030 | ) | | | 2,884 | | | (5,607 | ) | | | 15,646 | | | | (15,345 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | $ | 42,570 | | | $ | 39,548 | | | $ | 42,978 | | $ | 81,345 | | | $ | 75,495 | | | $ | 40,801 | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| | September 30, | |
| | 2014 | | | 2013 | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 284,155 | | | $ | 226,029 | |
Accounts receivable, less allowance for doubtful accounts of $1,392 at September 30, 2014, and $1,532 at September 30, 2013 | | | 60,693 | | | | 54,640 | |
Inventories | | | 64,979 | | | | 63,786 | |
Prepaid expenses and other current assets | | | 10,645 | | | | 10,684 | |
Deferred income taxes | | | 7,521 | | | | 7,659 | |
Total current assets | | | 427,993 | | | | 362,798 | |
| | | | | | | | |
Property, plant and equipment, net | | | 100,821 | | | | 111,985 | |
Goodwill | | | 43,245 | | | | 44,306 | |
Other intangible assets, net | | | 7,163 | | | | 9,785 | |
Deferred income taxes | | | 11,353 | | | | 10,291 | |
Other long-term assets | | | 10,592 | | | | 12,427 | |
Total assets | | $ | 601,167 | | | $ | 551,592 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 15,304 | | | $ | 16,663 | |
Current portion of long-term debt | | | 8,750 | | | | 10,938 | |
Accrued expenses, income taxes payable and other current liabilities | | | 31,394 | | | | 40,620 | |
Total current liabilities | | | 55,448 | | | | 68,221 | |
| | | | | | | | |
Long-term debt, net of current portion | | | 164,063 | | | | 150,937 | |
Deferred income taxes | | | 510 | | | | 1,559 | |
Other long-term liabilities | | | 9,144 | | | | 7,433 | |
Total liabilities | | | 229,165 | | | | 228,150 | |
| | | | | | | | |
Commitments and contingencies (Note 16) | | | | | | | | |
| | | | | | | | |
Stockholders' equity: | | | | | | | | |
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 31,927,601 shares at September 30, 2014, and 30,213,577 shares at September 30, 2013 | | | 32 | | | | 30 | |
Capital in excess of par value of common stock | | | 437,266 | | | | 376,206 | |
Retained earnings | | | 227,942 | | | | 177,191 | |
Accumulated other comprehensive income | | | 9,255 | | | | 17,436 | |
Treasury stock at cost, 8,142,687 shares at September 30, 2014, and 6,866,675 shares at September 30, 2013 | | | (302,493 | ) | | | (247,421 | ) |
Total stockholders' equity | | | 372,002 | | | | 323,442 | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 601,167 | | | $ | 551,592 | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
| | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | |
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 50,751 | | | $ | 52,578 | | | $ | 40,094 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | | | 19,941 | | | | 20,457 | | | | 23,545 | |
Provision for doubtful accounts | | | (170 | ) | | | 173 | | | | 3,771 | |
Share-based compensation expense | | | 14,042 | | | | 13,350 | | | | 13,306 | |
Deferred income tax benefit | | | (700 | ) | | | (4,722 | ) | | | (2,733 | ) |
Non-cash foreign exchange loss | | | 943 | | | | 3,832 | | | | 748 | |
(Gain)/loss on disposal of property, plant and equipment | | | (51 | ) | | | 551 | | | | 247 | |
Impairment of long-lived assets | | | 2,320 | | | | 160 | | | | 968 | |
Other | | | (724 | ) | | | (1,400 | ) | | | (2,033 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (8,181 | ) | | | (5,936 | ) | | | (4,622 | ) |
Inventories | | | (3,794 | ) | | | (1,683 | ) | | | (10,228 | ) |
Prepaid expenses and other assets | | | 576 | | | | (3,471 | ) | | | 4,328 | |
Accounts payable | | | (850 | ) | | | (1,359 | ) | | | 2,026 | |
Accrued expenses, income taxes payable and other liabilities | | | (6,625 | ) | | | 12,953 | | | | (352 | ) |
Net cash provided by operating activities | | | 67,478 | | | | 85,483 | | | | 69,065 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Additions to property, plant and equipment | | | (12,551 | ) | | | (14,633 | ) | | | (19,586 | ) |
Proceeds from the sale of property, plant and equipment | | | 202 | | | | 20 | | | | 8 | |
Purchase of intangible assets | | | - | | | | - | | | | (155 | ) |
Proceeds from the sale of investments | | | 2,305 | | | | 25 | | | | 50 | |
Other investing activities | | | 1,062 | | | | - | | | | - | |
Net cash used in investing activities | | | (8,982 | ) | | | (14,588 | ) | | | (19,683 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Dividends paid | | | - | | | | - | | | | (347,140 | ) |
Issuance of long-term debt | | | 17,500 | | | | - | | | | 175,000 | |
Repayment of long-term debt | | | (6,562 | ) | | | (10,937 | ) | | | (2,188 | ) |
Repurchases of common stock | | | (55,072 | ) | | | (41,294 | ) | | | (34,537 | ) |
Net proceeds from issuance of stock | | | 43,070 | | | | 30,905 | | | | 36,497 | |
Debt issuance costs | | | (550 | ) | | | - | | | | (2,658 | ) |
Tax benefits associated with share-based compensation expense | | | 2,806 | | | | 1,148 | | | | 636 | |
Principal payments under capital lease obligations | | | - | | | | (21 | ) | | | (11 | ) |
Net cash provided by (used in) financing activities | | | 1,192 | | | | (20,199 | ) | | | (174,401 | ) |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | (1,562 | ) | | | (3,126 | ) | | | 932 | |
Increase (decrease) in cash | | | 58,126 | | | | 47,570 | | | | (124,087 | ) |
Cash and cash equivalents at beginning of year | | | 226,029 | | | | 178,459 | | | | 302,546 | |
Cash and cash equivalents at end of year | | $ | 284,155 | | | $ | 226,029 | | | $ | 178,459 | |
Supplemental disclosure of cash flow information: | | | | | | | | | |
Cash paid for income taxes | | $ | 18,041 | | | $ | 17,661 | | | $ | 22,701 | |
Cash paid for interest | | $ | 3,355 | | | $ | 3,643 | | | $ | 2,336 | |
| |
Supplemental disclosure of non-cash investing and financing activities: | |
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of period | | $ | 1,267 | | | $ | 1,232 | | | $ | 1,894 | |
Issuance of restricted stock | | $ | 7,785 | | | $ | 5,926 | | | $ | 6,374 | |
Assets acquired under capital lease | | $ | - | | | $ | - | | | $ | 20 | |
| September 30, | |
| 2017 | | | 2016 | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 397,890 | | | $ | 287,479 | |
Accounts receivable, less allowance for doubtful accounts of $1,747 at September 30, 2017, and $1,828 at September 30, 2016 | | 64,793 | | | | 62,830 | |
Inventories | | 71,873 | | | | 72,123 | |
Prepaid expenses and other current assets | | 16,426 | | | | 14,398 | |
Total current assets | | 550,982 | | | | 436,830 | |
| | | | | | | |
Property, plant and equipment, net | | 106,361 | | | | 106,496 | |
Goodwill | | 101,932 | | | | 100,639 | |
Other intangible assets, net | | 42,710 | | | | 50,476 | |
Deferred income taxes | | 21,598 | | | | 20,747 | |
Other long-term assets | | 10,517 | | | | 12,042 | |
Total assets | $ | 834,100 | | | $ | 727,230 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 17,624 | | | $ | 16,834 | |
Current portion of long-term debt | | 10,938 | | | | 7,656 | |
Accrued expenses, income taxes payable and other current liabilities | | 62,651 | | | | 41,395 | |
Total current liabilities | | 91,213 | | | | 65,885 | |
| | | | | | | |
Long-term debt, net of current portion, less prepaid debt issuance cost of $441 at September 30, 2017 and $696 at September 30, 2016 | | 132,997 | | | | 146,961 | |
Deferred income taxes | | 63 | | | | 75 | |
Other long-term liabilities | | 14,790 | | | | 16,661 | |
Total liabilities | | 239,063 | | | | 229,582 | |
| | | | | | | |
Commitments and contingencies (Note 18) | | | | | | | |
| | | | | | | |
Stockholders' equity: | | | �� | | | | |
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 35,230,742 shares at September 30, 2017, and 34,261,304 shares at September 30, 2016 | | 35 | | | | 34 | |
Capital in excess of par value of common stock | | 580,938 | | | | 530,840 | |
Retained earnings | | 397,881 | | | | 330,776 | |
Accumulated other comprehensive income | | 3,949 | | | | 9,556 | |
Treasury stock at cost, 9,948,190 shares at September 30, 2017, and 9,744,642 shares at September 30, 2016 | | (387,766 | ) | | | (373,558 | ) |
Total stockholders' equity | | 595,037 | | | | 497,648 | |
| | | | | | | |
Total liabilities and stockholders' equity | $ | 834,100 | | | $ | 727,230 | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
| Year Ended September 30, | |
| 2017 | | | 2016 | | | 2015 | |
Cash flows from operating activities: | | | | | | | | |
Net income | $ | 86,952 | | | $ | 59,849 | | | $ | 56,146 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | |
Depreciation and amortization | | 25,930 | | | | 26,031 | | | | 18,719 | |
Provision for doubtful accounts | | 26 | | | | 588 | | | | (84 | ) |
Share-based compensation expense | | 13,004 | | | | 13,787 | | | | 16,445 | |
Deferred income tax expense (benefit) | | 392 | | | | (1,757 | ) | | | 869 | |
Non-cash foreign exchange (gain)/loss | | 435 | | | | (1,144 | ) | | | 1,391 | |
(Gain)/Loss on disposal of property, plant and equipment | | (1,820 | ) | | | 103 | | | | (28 | ) |
Impairment of assets | | 860 | | | | 1,079 | | | | - | |
Other | | 188 | | | | 815 | | | | (524 | ) |
Changes in operating assets and liabilities, excluding amounts related to acquisition: | | | | | | | | | | | |
Accounts receivable | | (3,986 | ) | | | (8,017 | ) | | | 9,013 | |
Inventories | | (1,220 | ) | | | 3,351 | | | | (8,290 | ) |
Prepaid expenses and other assets | | (1,576 | ) | | | 3,935 | | | | (3,662 | ) |
Accounts payable | | 892 | | | | (478 | ) | | | 801 | |
Accrued expenses, income taxes payable and other liabilities | | 21,292 | | | | (2,931 | ) | | | 7,390 | |
Net cash provided by operating activities | | 141,369 | | | | 95,211 | | | | 98,186 | |
| | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | |
Additions to property, plant and equipment | | (21,174 | ) | | | (17,670 | ) | | | (13,812 | ) |
Proceeds from the sale of property, plant and equipment | | 1,216 | | | | 17 | | | | 201 | |
Acquisition of business, net of cash acquired | | - | | | | (126,976 | ) | | | - | |
Proceeds from the sale of investments | | 175 | | | | 200 | | | | 202 | |
Net cash used in investing activities | | (19,783 | ) | | | (144,429 | ) | | | (13,409 | ) |
| | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | |
Repayment of long-term debt | | (10,938 | ) | | | (8,750 | ) | | | (8,750 | ) |
Dividends paid | | (19,041 | ) | | | (8,658 | ) | | | - | |
Repurchases of common stock | | (14,208 | ) | | | (28,818 | ) | | | (42,247 | ) |
Net proceeds from issuance of stock | | 30,615 | | | | 19,512 | | | | 35,782 | |
Tax benefits associated with share-based compensation expense | | 6,557 | | | | 2,305 | | | | 6,207 | |
Net cash used in financing activities | | (7,015 | ) | | | (24,409 | ) | | | (9,008 | ) |
| | | | | | | | | | | |
Effect of exchange rate changes on cash | | (4,160 | ) | | | 6,916 | | | | (5,734 | ) |
Increase (decrease) in cash | | 110,411 | | | | (66,711 | ) | | | 70,035 | |
Cash and cash equivalents at beginning of year | | 287,479 | | | | 354,190 | | | | 284,155 | |
Cash and cash equivalents at end of year | $ | 397,890 | | | $ | 287,479 | | | $ | 354,190 | |
| | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | |
Cash paid for income taxes | $ | 13,321 | | | $ | 7,246 | | | $ | 8,543 | |
Cash paid for interest | $ | 4,128 | | | $ | 4,307 | | | $ | 4,107 | |
| | | | | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | |
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of period | $ | 1,488 | | | $ | 1,005 | | | $ | 1,503 | |
| | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
| | | | | | | | | | | Accumulated | | | | | | | | | Common Stock | | | Capital In Excess Of Par | | | Retained Earnings | | | Accumulated Other Comprehensive Income | | | Treasury Stock | | | Total | |
| | | | | Capital | | | | | | Other | | | | | | | | |
| | Common | | | In Excess | | | Retained | | | Comprehensive | | | Treasury | | | | | |
| | Stock | | | Of Par | | | Earnings | | | Income | | | Stock | | | Total | | |
Balance at September 30, 2011 | | $ | 28 | | | $ | 278,360 | | | $ | 431,333 | | | $ | 27,582 | | | $ | (171,590 | ) | | $ | 565,713 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense, net of compensation related to dividends on unvested restricted stock | | | | | | | 12,980 | | | | | | | | | | | | | | | | 12,980 | | |
Repurchases of common stock under share repurchase plans, at cost | | | | | | | | | | | | | | | | | | | (33,026 | ) | | | (33,026 | ) | |
Repurchases of common stock - other, at cost | | | | | | | | | | | | | | | | | | | (1,511 | ) | | | (1,511 | ) | |
Exercise of stock options | | | 1 | | | | 34,106 | | | | | | | | | | | | | | | | 34,107 | | |
Issuance of Cabot Microelectronics restricted stock under deposit share plan | | | | | | | 155 | | | | | | | | | | | | | | | | 155 | | |
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | | | | | | | 2,228 | | | | | | | | | | | | | | | | 2,228 | | |
Dividends paid, net of expected forfeitures of unvested restricted stock | | | | | | | | | | | (346,814 | ) | | | | | | | | | | | (346,814 | ) | |
Tax benefits from share-based compensation plans | | | | | | | 1,273 | | | | | | | | | | | | | | | | 1,273 | | |
Tax deduction for the dividend paid on unvested restricted stock, net of expected forfeitures | | | | | | | 1,455 | | | | | | | | | | | | | | | | 1,455 | | |
Net income | | | | | | | | | | | 40,094 | | | | | | | | | | | | 40,094 | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | 3,421 | | | | | | | | 3,421 | | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | (537 | ) | | | | | | | (537 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2012 | | $ | 29 | | | $ | 330,557 | | | $ | 124,613 | | | $ | 30,466 | | | $ | (206,127 | ) | | $ | 279,538 | | |
Balance at September 30, 2014 | | | $ | 32 | | | $ | 437,266 | | | $ | 227,942 | | | $ | 9,255 | | | $ | (302,493 | ) | | $ | 372,002 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | | | | | 13,350 | | | | | | | | | | | | | | | | 13,350 | | | | | | | | 16,445 | | | | | | | | | | | | | | | | 16,445 | |
Repurchases of common stock under share repurchase plans, at cost | | | | | | | | | | | | | | | | | | | (40,000 | ) | | | (40,000 | ) | | | | | | | | | | | | | | | | | | | (40,026 | ) | | | (40,026 | ) |
Repurchases of common stock - other, at cost | | | | | | | | | | | | | | | | | | | (1,294 | ) | | | (1,294 | ) | | | | | | | | | | | | | | | | | | | (2,221 | ) | | | (2,221 | ) |
Exercise of stock options | | | 1 | | | | 28,525 | | | | | | | | | | | | | | | | 28,526 | | | | 1 | | | | 33,175 | | | | | | | | | | | | | | | | 33,176 | |
Issuance of Cabot Microelectronics restricted stock under deposit share plan | | | | | | | 154 | | | | | | | | | | | | | | | | 154 | | |
Issuance of Cabot Microelectronics restricted stock under Deposit Share Plan | | | | | | | | 23 | | | | | | | | | | | | | | | | 23 | |
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | | | | | | | 2,226 | | | | | | | | | | | | | | | | 2,226 | | | | | | | | 2,583 | | | | | | | | | | | | | | | | 2,583 | |
Tax benefits from share-based compensation plans | | | | | | | 1,394 | | | | | | | | | | | | | | | | 1,394 | | | | | | | | 6,181 | | | | | | | | | | | | | | | | 6,181 | |
Net income | | | | | | | | | | | 52,578 | | | | | | | | | | | | 52,578 | | | | | | | | | | | | 56,146 | | | | | | | | | | | | 56,146 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | (13,037 | ) | | | | | | | (13,037 | ) | | | | | | | | | | | | | | | (14,126 | ) | | | | | | | (14,126 | ) |
Interest rate swaps | | | | | | | | | | | | | | | | (901 | ) | | | | | | | (901 | ) |
Minimum pension liability adjustment | | | | | | | | | | | | | | | 7 | | | | | | | | 7 | | | | | | | | | | | | | | | | (318 | ) | | | | | | | (318 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2013 | | $ | 30 | | | $ | 376,206 | | | $ | 177,191 | | | $ | 17,436 | | | $ | (247,421 | ) | | $ | 323,442 | | |
Balance at September 30, 2015 | | | $ | 33 | | | $ | 495,673 | | | $ | 284,088 | | | $ | (6,090 | ) | | $ | (344,740 | ) | | $ | 428,964 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | | | | | 14,042 | | | | | | | | | | | | | | | | 14,042 | | | | | | | | 13,787 | | | | | | | | | | | | | | | | 13,787 | |
Repurchases of common stock under share repurchase plans, at cost | | | | | | | | | | | | | | | | | | | (53,000 | ) | | | (53,000 | ) | | | | | | | | | | | | | | | | | | | (25,980 | ) | | | (25,980 | ) |
Repurchases of common stock - other, at cost | | | | | | | | | | | | | | | | | | | (2,072 | ) | | | (2,072 | ) | | | | | | | | | | | | | | | | | | | (2,838 | ) | | | (2,838 | ) |
Exercise of stock options | | | 2 | | | | 40,246 | | | | | | | | | | | | | | | | 40,248 | | | | 1 | | | | 16,623 | | | | | | | | | | | | | | | | 16,624 | |
Issuance of Cabot Microelectronics restricted stock under deposit share plan | | | | | | | 210 | | | | | | | | | | | | | | | | 210 | | |
Issuance of Cabot Microelectronics restricted stock under Deposit Share Plan | | | | | | | | 52 | | | | | | | | | | | | | | | | 52 | |
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | | | | | | | 2,612 | | | | | | | | | | | | | | | | 2,612 | | | | | | | | 2,837 | | | | | | | | | | | | | | | | 2,837 | |
Tax benefits from share-based compensation plans | | | | | | | 3,950 | | | | | | | | | | | | | | | | 3,950 | | | | | | | | 1,868 | | | | | | | | | | | | | | | | 1,868 | |
Net income | | | | | | | | | | | 50,751 | | | | | | | | | | | | 50,751 | | | | | | | | | | | | 59,849 | | | | | | | | | | | | 59,849 | |
Net unrealized gain on marketable securities | | | | | | | | | | | | | | | 151 | | | | | | | | 151 | | |
Dividends | | | | | | | | | | | | (13,161 | ) | | | | | | | | | | | (13,161 | ) |
Foreign currency translation adjustment | | | | | | | | | | | | | | | (8,136 | ) | | | | | | | (8,136 | ) | | | | | | | | | | | | | | | 15,996 | | | | | | | | 15,996 | |
Interest rate swaps | | | | | | | | | | | | | | | | 84 | | | | | | | | 84 | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | (196 | ) | | | | | | | (196 | ) | | | | | | | | | | | | | | | (434 | ) | | | | | | | (434 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2014 | | $ | 32 | | | $ | 437,266 | | | $ | 227,942 | | | $ | 9,255 | | | $ | (302,493 | ) | | $ | 372,002 | | |
Balance at September 30, 2016 | | | $ | 34 | | | $ | 530,840 | | | $ | 330,776 | | | $ | 9,556 | | | $ | (373,558 | ) | | $ | 497,648 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | | | | | | 13,004 | | | | | | | | | | | | | | | | 13,004 | |
Repurchases of common stock under share repurchase plans, at cost | | | | | | | | | | | | | | | | | | | | (12,035 | ) | | | (12,035 | ) |
Repurchases of common stock - other, at cost | | | | | | | | | | | | | | | | | | | | (2,173 | ) | | | (2,173 | ) |
Exercise of stock options | | | | 1 | | | | 27,665 | | | | | | | | | | | | | | | | 27,666 | |
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | | | | | | | | 2,986 | | | | | | | | | | | | | | | | 2,986 | |
Tax benefits from share-based compensation plans | | | | | | | | 6,443 | | | | | | | | | | | | | | | | 6,443 | |
Net income | | | | | | | | | | | | 86,952 | | | | | | | | | | | | 86,952 | |
Dividends | | | | | | | | | | | | (19,847 | ) | | | | | | | | | | | (19,847 | ) |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | (6,746 | ) | | | | | | | (6,746 | ) |
Interest rate swaps | | | | | | | | | | | | | | | | 863 | | | | | | | | 863 | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | | 276 | | | | | | | | 276 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2017 | | | $ | 35 | | | $ | 580,938 | | | $ | 397,881 | | | $ | 3,949 | | | $ | (387,766 | ) | | $ | 595,037 | |
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our'') supplies high-performance polishing slurries and pads used in the manufacture of advanced integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP). CMP polishes surfaces at an atomic level, thereby enablinghelping 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, and also for polishing the disk substrates and magnetic heads used in hard disk drives.devices. We also develop, manufacture and sell CMP polishing pads, which are used in conjunction with slurries in the CMP process. In addition, we pursue otherWe also develop and provide products for demanding surface modification applications in other industries through our Engineered Surface Finishes (ESF) business where we believe we can leverage our expertise in CMP consumables for the semiconductor industry to develop products for demanding polishing applications in other industries.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.America (U.S. GAAP). We operate predominantly in one industryreportable segment - the development, manufacture, and sale of CMP consumables.
Revision of Prior Period Amounts
As disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, in the third quarter of fiscal 2014, the Company recorded adjustments to prior periods to correct certain items of income tax accounting, which related to fiscal years 2011 through 2013. The adjustments related to the accounting for intercompany profit in inventory at our foreign branch locations and the accounting for annual incentive program costs and related fringe benefits, and are reflected in the Consolidated Balance Sheet table below as of September 30, 2013. In evaluating the cumulative materiality of the corrections, we considered guidance in Accounting Standard Codification (ASC) Topic 250, "Accounting Changes and Error Corrections", and its subtopics, ASC 250-10-S99-1, "Assessing Materiality" and ASC 250-10-S99-2, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements". We concluded that the cumulative effect of correcting these prior period amounts was not material individually or in the aggregate to any of the prior reporting periods. We also evaluated the effect that these adjustments would have had on our consolidated financial statements for the fiscal year ended September 30, 2014, had we chosen to address them at once in the third quarter, and concluded these adjustments would have had a material impact. As such, we concluded that revision of prior periods for the cumulative effect of these adjustments was appropriate. Since the cumulative impact of the adjustments is not material to prior periods, we have not amended previously filed reports.
As part of this revision, we also corrected previously disclosed out-of-period adjustments, which were immaterial to their respective prior periods. These out-of-period adjustments included the correction of certain historical income tax accounting and the remeasurement of certain foreign cash balances into their functional currency amounts in fiscal 2012, and the correction of certain historical income tax accounting in fiscal 2013. See Note 1 of the Notes to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended September 30, 2013 for additional information regarding the out-of-period adjustments recorded in fiscal years 2012 and 2013. The cumulative effect of the adjustments recorded in fiscal 2014, and the correction of out-of-period adjustments recorded in fiscal 2012 and 2013 are reflected in the financial information herein and will be reflected in future filings containing such financial information. The cumulative effect of these adjustments and corrections on retained earnings was a reduction of $3,635 as of September 30, 2013. In addition, we have corrected the presentation of debt issuance costs of $2,658 in the Consolidated Statement of Cash Flows for the fiscal year ended September 30, 2012. The debt issuance costs were originally reported as an operating cash outflow, but now are presented as a financing cash outflow in the revision tables below.
The following tables summarize the effects of the revisions to the financial statements for the comparative periods of fiscal 2012 and 2013 (in thousands, except per share data):
CONSOLIDATED STATEMENTS OF INCOME | |
| | Year Ended September 30, 2012 | |
| | As Originally Reported | | | Adjustment | | | As Revised | |
Other income (expense), net | | $ | (1,344 | ) | | $ | 333 | | | $ | (1,011 | ) |
Income before income taxes | | | 62,871 | | | | 333 | | | | 63,204 | |
Provision for income taxes | | | 22,045 | | | | 1,065 | | | | 23,110 | |
Net income | | | 40,826 | | | | (732 | ) | | | 40,094 | |
Basic earnings per share | | $ | 1.81 | | | $ | (0.05 | ) | | $ | 1.76 | |
Weighted average diluted shares outstanding | | | 23,280 | | | | (36 | ) | | | 23,244 | |
Diluted earnings per share | | $ | 1.75 | | | $ | (0.04 | ) | | $ | 1.71 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended September 30, 2013 | |
| | As Originally Reported | | | Adjustment | | | As Revised | |
Income before income taxes | | $ | 74,220 | | | $ | - | | | $ | 74,220 | |
Provision for income taxes | | | 22,835 | | | | (1,193 | ) | | | 21,642 | |
Net income | | | 51,385 | | | | 1,193 | | | | 52,578 | |
Basic earnings per share | | $ | 2.22 | | | $ | 0.05 | | | $ | 2.27 | |
Diluted earnings per share | | $ | 2.14 | | | $ | 0.05 | | | $ | 2.19 | |
| | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
| | Year Ended September 30, 2012 | |
| | As Originally Reported | | | Adjustment | | | As Revised | |
Net income | | $ | 40,826 | | | $ | (732 | ) | | $ | 40,094 | |
Foreign currency translation adjustments | | | 6,876 | | | | (3,455 | ) | | | 3,421 | |
Other comprehensive income (loss), net of tax | | | 6,339 | | | | (3,455 | ) | | | 2,884 | |
Comprehensive income | | $ | 47,165 | | | $ | (4,187 | ) | | $ | 42,978 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended September 30, 2013 | |
| | As Originally Reported | | | Adjustment | | | As Revised | |
Net income | | $ | 51,385 | | | $ | 1,193 | | | $ | 52,578 | |
Other comprehensive income (loss), net of tax | | | (13,030 | ) | | | - | | | | (13,030 | ) |
Comprehensive income | | $ | 38,355 | | | $ | 1,193 | | | $ | 39,548 | |
| | | | | | | | | | | | |
CONSOLIDATED BALANCE SHEET | |
| | September 30, 2013 | |
| | As Originally Reported | | | Adjustment | | | As Revised | |
Prepaid expenses and other current assets | | $ | 13,598 | | | $ | (2,914 | ) | | $ | 10,684 | |
Total current assets | | | 365,712 | | | | (2,914 | ) | | | 362,798 | |
Total assets | | | 554,506 | | | | (2,914 | ) | | | 551,592 | |
Accrued expenses, income taxes payable and other current liabilities | | | 39,899 | | | | 721 | | | | 40,620 | |
Total current liabilities | | | 67,500 | | | | 721 | | | | 68,221 | |
Total liabilities | | | 227,429 | | | | 721 | | | | 228,150 | |
Retained earnings | | | 180,826 | | | | (3,635 | ) | | | 177,191 | |
Total stockholders' equity | | | 327,077 | | | | (3,635 | ) | | | 323,442 | |
Total liabilities and stockholders' equity | | $ | 554,506 | | | $ | (2,914 | ) | | $ | 551,592 | |
| | | | | | | | | | | | |
CONSOLIDATED STATEMENT OF CASH FLOWS | |
| | Year Ended September 30, 2012 | |
| | As Originally Reported | | | Adjustment | | | As Revised | |
Net income | | $ | 40,826 | | | $ | (732 | ) | | $ | 40,094 | |
Deferred income tax expense (benefit) | | | (3,523 | ) | | | 790 | | | | (2,733 | ) |
Other | | | (925 | ) | | | (1,108 | ) | | | (2,033 | ) |
Change in prepaid expenses and other assets | | | 432 | | | | 3,896 | | | | 4,328 | |
Change in accrued expenses, income taxes payable and other current liabilities | | | (164 | ) | | | (188 | ) | | | (352 | ) |
Net cash provided by operating activities | | | 66,407 | | | | 2,658 | | | | 69,065 | |
Debt issuance costs | | | - | | | | (2,658 | ) | | | (2,658 | ) |
Net cash provided by (used in) financing activities | | $ | (171,743 | ) | | | (2,658 | ) | | $ | (174,401 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended September 30, 2013 | |
| | As Originally Reported | | | Adjustment | | | As Revised | |
Net income | | $ | 51,385 | | | $ | 1,193 | | | $ | 52,578 | |
Deferred income tax expense (benefit) | | | (3,118 | ) | | | (1,604 | ) | | | (4,722 | ) |
Other | | | (2,175 | ) | | | 775 | | | | (1,400 | ) |
Change in prepaid expenses and other assets | | | (2,087 | ) | | | (1,384 | ) | | | (3,471 | ) |
Change in accrued expenses, income taxes payable and other current liabilities | | | 11,933 | | | | 1,020 | | | | 12,953 | |
Net cash provided by operating activities | | $ | 85,483 | | | | - | | | $ | 85,483 | |
| | | | | | | | | | | | |
Results of Operations
As disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, the results of operations for the year ended September 30, 2014 include an asset impairment charge of $2,111 ($1,475 net of tax) related to certain manufacturing assets recorded in the quarter ended March 31, 2014. This asset impairment charge included in cost of goods sold reduced our gross profit percentage by 210 basis points during the second quarter of fiscal 2014 and by 50 basis points on a full year basis. The impairment charge reduced diluted earnings per share by approximately $0.06 on a full year basis.
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, 2014.2017.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of AmericaU.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 difficultchallenging and subjective judgments include, but are not limited to, those estimates related to bad debt expense, warranty obligations, inventory valuation, valuation and classification of auction rate securities, impairment of long-lived assets and investments, business combinations, goodwill, other intangible assets, interest rate swaps, net investment hedge, share-based compensation, income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates under different assumptions or conditions.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We consider investments in all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Short-term investments include securities generally having maturities of 90 days to one year. We did not own any securities that were considered short-term as of September 30, 20142017 or 2013.2016. See Note 34 for a more detailed discussion of other financial instruments.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. Our allowance for doubtful accounts is based on historical collection experience, adjusted for any specific known conditions or circumstances such as customer bankruptcies and increased risk due to economic conditions. Uncollectible account balances are charged against the allowance when we believe that it is probable that the receivable will not be recovered.
Accounts receivable, net of allowances for doubtful accounts, were $60,693 as of September 30, 2014 and $54,640 as of September 30, 2013. The increase in accounts receivable was primarily due to the timing of collection in certain foreign locations, partially offset by the negative impact of foreign currency fluctuations, primarily due to the continued weakening of the Japanese yen. In fiscal 2012, we recorded $3,727 in bad debt expense for Elpida Memory, Inc. (Elpida) a customer in Japan that filed for bankruptcy protection in February 2012. Elpida was acquired by Micron Technology, Inc. in fiscal 2014 and is paying the Company a portion of the balance owed over a period of seven years pursuant to its approved bankruptcy plan. 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 the deductions and adjustments.
Our allowance for doubtful accounts changed during the fiscal year ended September 30, 20142017 as follows:
Balance as of September 30, 2013 | | $ | 1,532 | | |
Balance as of September 30, 2016 | | | $ | 1,828 | |
Amounts charged to expense | | | (170 | ) | | | 26 | |
Deductions and adjustments | | | 30 | | | | (107 | ) |
Balance as of September 30, 2014 | | $ | 1,392 | | |
Balance as of September 30, 2017 | | | $ | 1,747 | |
CONCENTRATION OF CREDIT RISK
Financial instruments that subject us to concentrations of credit risk consist principally of accounts receivable. We perform ongoing credit evaluations of our customers' financial conditions and generally do not require collateral to secure accounts receivable. Our exposure to credit risk associated with nonpayment is affected principally by conditions or occurrences within the semiconductor industry and global economy. Prior toWith the Elpidaexception of one customer bankruptcy in fiscal 2012 and a customer placed into receivership in fiscal 2016, we hadhave not experienced significant losses relating to accounts receivable from individual customers or groups of customers in a number of years.customers.
Customers who represented more than 10% of revenue are as follows:
| | Year Ended September 30, | | Year Ended September 30, |
| | 2014 | | | 2013 | | | 2012 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | | | |
Samsung Group (Samsung) | | 16% | | 15% | | 15% |
Taiwan Semiconductor Manufacturing Co. (TSMC) | | | 22 | % | | | 21 | % | | | 18 | % | 13% | | 15% | | 18% |
Samsung Group (Samsung) | | | 14 | % | | | 13 | % | | | 13 | % | |
Micron Technology Inc. | | 10% | | * | | * |
* Not a customer with more than 10% revenue in fiscal 2016 and 2015.
TSMC accounted for 19.4%12.2% and 16.7%12.9% of net accounts receivable at September 30, 20142017 and 2013,2016, respectively. Samsung accounted for 10.2%11.9% and 11.8%8.3% of net accounts receivable at September 30, 20142017 and 2013,2016, respectively. Micron accounted for 10.7% and 7.2% of net accounts receivable at September 30, 2017 and 2016, respectively.
Due to recent financial challenges experienced by Toshiba, we continue to monitor their financial condition and ability to make the required payments due on our receivables. At September 30, 2017 our accounts receivable balance with Toshiba represented a U.S. dollar equivalent of $2,323, which equates to 3.6% of our total accounts receivable balance of $64,793, net of allowance for doubtful accounts, and of which no amounts are past due. At present, we do not believe it is probable that the receivables from Toshiba are impaired, and accordingly, we have not recorded a related allowance for doubtful accounts.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, and accounts payable approximate their fair values due to their short-term, highly liquid characteristics. See Note 34 for a more detailed discussion of the fair value of financial instruments.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or market. Finished goods and work in process inventories include material, labor and manufacturing overhead costs. We regularly review and write down the value of inventory as required for estimated obsolescence or lack of marketability. An inventory reserve is maintained based upon a historical percentage of actual inventories written off and applied against inventory value at the end of the period, adjusted for known conditions and circumstances.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is based on the following estimated useful lives of the assets using the straight-line method:
Buildings | 15-25 years |
Machinery and equipment | 3-10 years |
Furniture and fixtures | 5-10 years |
Information systems | 3-5 years |
Assets under capital leases | Lesser of term of lease or estimated useful life |
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized and depreciated over the remaining useful lives. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. We capitalize the costs related to the design and development of software used for internal purposes; however, these costs are not material.
IMPAIRMENT OF LONG-LIVED ASSETS
Reviews are regularly performed to determine whether facts and circumstances exist that indicate the carrying amount of assets may not be recoverable or the useful life is shorter than originally estimated. Asset recoverability assessment begins by comparing the projected undiscounted cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If assets are determined to be recoverable, but their useful lives are shorter than originally estimated, the net book value of the asset is depreciated over the newly determined remaining useful life. We recorded impairment expense on a certain long-lived asset of $860 in fiscal year 2017, which was subsequently sold for a gain. We did not record any impairment expense on property, plant and equipment in fiscal 2016 and 2015. See Note 56 for more information regarding impairment expenseimpairment.
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 fiscal years 2014, 2013 and 2012.cost of goods sold.
GOODWILL AND INTANGIBLE ASSETS
We amortize intangible assets with finite lives over their estimated useful lives, which range from one to ten and one-halfeleven years. Intangible assets with finite lives are reviewed for impairment using a process similar to that used to evaluate other long-lived assets. Goodwill and indefinite-lived intangible assets are not amortized and are tested annually in the fourth fiscal quarter, or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment, referred to as a component. A component is a reporting unit when the component constitutes a business for which discreetdiscrete financial information is available and segment management regularly reviews the operating results of the component. Components may be combined into one reporting unit when they have similar economic characteristics. We have four reporting units, threeall of which have goodwill and intangible assets as of September 30, 2014.2017. Goodwill impairment testing requires a comparison of the fair value of each reporting unit to the carrying value. If the carrying value exceeds fair value, goodwillthen the fair value of the assets and liabilities for the reporting unit is considered impaired.used to determine the "implied" fair value of goodwill. The amount of the impairment is the difference between the carrying value and the "implied"implied fair value of goodwill. TheAccounting guidance provides an entity the option to assess the fair value of thea reporting unit may be determinedeither using a discounted cash flowqualitative analysis of our projected future results. An("step zero") or a quantitative analysis ("step one"). In fiscal 2015, 2016 and 2017, we chose to use a step one analysis for goodwill impairment. Similarly, an entity has the option to assess qualitative factorsuse a step zero or step one approach to determine if the two-step impairment test must be performed. We elected to perform a discounted cash flow analysis in fiscal 2014 when we performed our annual impairment review of goodwill. An entity also has the option to assess qualitative factors in its impairment reviewrecoverability of indefinite-lived intangible assets. However,In fiscal 2015, 2016 and 2017, we electedused a step one analysis to usedetermine the royalty savings method in fiscal 2014 when we performed our impairment reviewrecoverability of our indefinite-lived intangible assets. As discussed in more detail in Note 3, we recorded $1,000 in impairment expense on an in-process technology asset during the fourth quarter of fiscal 2016. We determined that goodwill and the other intangible assets were not impaired as of September 30, 2014, and none of our reporting units were at risk for impairment.
WARRANTY RESERVE
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements. The warranty reserve is based upon a historical product return rate, adjusted for any specific known conditions or circumstances. Adjustments to the warranty reserve are recorded in cost of goods sold.2017.
FOREIGN CURRENCY TRANSLATION
Certain operating activities in Asia and Europe are denominated in local currency, considered to be the functional currency. Assets and liabilities of these operations are translated using exchange rates in effect at the end of the year, and revenue and costs are translated using average exchange rates for the year. The related translation adjustments are reported in comprehensive income in stockholders' equity.
FOREIGN EXCHANGE MANAGEMENT
We transact business in various foreign currencies, primarily the Japanese yen, New Taiwan dollar and Korean won. Our exposure to foreign currency exchange risks has not been significant because a large portion of our business is denominated in U.S. dollars. However, there was a weakening of the Japanese yen against the U.S. dollar during fiscal years 20132015, 2016 and 2014,part of 2017, which had some net positive impact on our results of operations.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. OurThese foreign exchange contracts do not qualify for hedge accounting underaccounting; therefore, the accounting rules for derivative instruments.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 1011 for a discussion of derivative financial instruments.
INTEREST RATE SWAPS
In fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. The fair value of our interest rate swaps is estimated using standard valuation models using market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value. We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income. Hedge effectiveness is tested quarterly to determine if hedge treatment is appropriate.
NET INVESTMENT HEDGE
In the fourth quarter of fiscal 2017, we entered into forward foreign exchange contracts in an effort to protect our net investment in a foreign operation against potential adverse changes resulting from foreign currency fluctuation. This transaction is designated as a net investment hedge and accounted for under hedge accounting. The fair value of our forward foreign exchange contracts is estimated using a standard valuation model and market-based observable inputs over the contractual term, including forward rates and/or the Overnight Index Swap (OIS) curve as of the valuation date. Unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Hedge effectiveness is assessed using the Forward Method, consistent with guidance in ASC 815. Consistent with this guidance, the entire change in fair value of the forward contracts is recorded in the same manner as the related currency translation adjustments, within other comprehensive income, as the hedging instruments are expected to be fully effective unless the amount hedged exceeds the net investment in the foreign operation, or the foreign operation is liquidated. As these contracts will settle on September 26, 2022 and there are no periodic settlements, we recorded the liability in other long-term liabilities on our Consolidated Balance Sheets as of September 30, 2017. See Note 11 for a discussion of derivative financial instruments.
INTERCOMPANY LOAN ACCOUNTING
We maintain an intercompany loan agreement with our wholly-owned subsidiary, Nihon Cabot Microelectronics K.K. ("Nihon"), under which we provided funds to Nihon to finance the purchase of certain assets from our former Japanese branch at the time of the establishment of this subsidiary, for the purchase of land adjacent to our facility in Geino, Japan, facility, 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 partassets of Nihon, as well as for general business purposes. Since settlement of the note is expected in the foreseeable future, and our subsidiary has been consistently makingmade timely payments on the loan, the loan is considered a foreign-currency transaction. Therefore, the associated foreign exchange gains and losses are recognized as other income or expense rather than being deferred in the cumulative translation account in other comprehensive income.
We also maintain an intercompany loan between two of our wholly-owned foreign subsidiaries, from Cabot Microelectronics Singapore Pte. Ltd. to Hanguk Cabot Microelectronics, LLC in South Korea. This loan provided funds for the construction and operation of our research, development and manufacturing facility in South Korea. This loan is also considered a foreign currency transaction and is accounted for in the same manner as our intercompany loan to Nihon.
These intercompany loans are eliminated from our Consolidated Balance Sheet in consolidation.
PURCHASE COMMITMENTS
We have entered into unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. On an ongoing basis, we review our agreements and assess the likelihood of a shortfall in purchases and determine if it is necessary to record a liability. See Note 18 for additional discussion of purchase commitments. To date, we have not recorded such a liability.
REVENUE RECOGNITION
Revenue from CMP consumables products is recognized when title is transferred to the customer, assuming all revenue recognition criteria are met. Title transfer generally occurs upon shipment to the customer or when inventory held on consignment is consumed by the customer, subject to the terms and conditions of the particular customer arrangement. We have consignment agreements with a number of our customers that require, at a minimum, monthly consumption reports that enable us to record revenue and inventory usage in the appropriate period.
WeAlthough the majority of our products are sold directly, we market some of our products through distributors in certain areas of the world. We recognize revenue upon shipment and when title is transferred to the distributor. We do not have any arrangements with distributors that include payment terms, rights of return, or rights of exchange outside the ordinary course of business, or any other significant matters that we believe would impact the timing of revenue recognition.
Within our Engineered Surface Finishes (ESF) business, sales of equipment are recorded as revenue upon delivery and customer acceptance. Amounts allocated to installation and training are deferred until those services are provided and are not material.
Revenues are reported net of any value-added tax or other such tax assessed by a governmental authority on our revenue-producing activities.
SHIPPING AND HANDLING
Costs related to shipping and handling are included in cost of goods sold.
RESEARCH, DEVELOPMENT AND TECHNICAL
Research, development and technical costs are expensed as incurred and consist primarily of staffing costs, materials and supplies, depreciation, utilities and other facilities costs.
INCOME TAXES
Current income taxes are determined based on estimated taxes payable or refundable on tax returns for the current year. Deferred income taxes are determined using enacted tax rates for the effect of temporarybased on differences between the book and tax bases of recorded assets and liabilities.liabilities, using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Provisions are made for both U.S. and any foreign deferred income tax liability or benefit. We assess whether our deferred tax assets will ultimately be realized and record an estimated valuation allowance on those deferred tax assets that may not be realized. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position. In fiscal 2012, we elected to permanently reinvest the earnings of certain of our foreign subsidiaries outside the U.S. rather than repatriate the earnings to the U.S. In fiscal 2013years 2015, 2016 and 2014,2017 we elected to permanently reinvest the earnings of all of our foreign subsidiaries.subsidiaries rather than repatriate the earnings to the U.S. See Note 1517 for additional information on income taxes.
SHARE-BASED COMPENSATION
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield, and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement eligible pursuant to their grants during the contractual term of the grant. The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award.
For additional information regarding our share-based compensation plans, refer to Note 11.13.
EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two class method under ASC Topic 260, Earnings Per Share (ASC 260). Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.
COMPREHENSIVE INCOME
Comprehensive income primarily differs from net income due to foreign currency translation adjustments.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, "Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11). The provisions of ASU 2013-11 require an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when the related deferred tax asset is available to be utilized. ASU 2013-11 is effective for us beginning October 1, 2014. We do not expect the adoption of ASU 2013-11 will have a material impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), an updated standard on revenue recognition. ASU 2014-09 provides enhancements to how revenue is reported and improves comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new standard is for companies to recognize revenue for goods or services in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard is intended to enhance disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, such as service revenue and contract modifications, and improve guidance for multiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, "Deferral of Effective Date" (Topic 606). This standard defers the effective date of ASU 2014-09 by one year. ASU 2014-09 will be effective for us beginning October 1, 2017,2018, and may be applied on a full retrospective or modified retrospective approach. In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" (Topic 606). ASU 2016-08 provides clarification for the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, ASU No. 2016-11, and ASU 2016-12, and ASU 2017-13 issued in September 2017, all of which provide additional clarification of the original revenue standard. We are working to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts, and identify and implement changes to business processes, systems and controls to support recognition and disclosure under the new standard. We anticipate any changes to revenue recognition for our Company are likely to be related to certain pricing and incentive arrangements with our customers within our CMP consumables business, but we believe the recognition of revenue will remain substantially unchanged for the majority of our contracts with customers. We anticipate we will use the modified retrospective approach to adoption, which will require us to record the cumulative effect of adopting the standard as an adjustment to the beginning balance of retained earnings. We continue to evaluate the impact of the implementation of these standards on our financial statements.
In July 2015, the FASB issued ASU No, 2015-11, "Simplifying the Measurement of Inventory" (Topic 330). The provisions of ASU 2015-11 require an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 will be effective for us beginning October 1, 2017, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" (Subtopic 825-10). The provision of ASU 2016-01 requires equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation, to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 simplifies the impairment assessment of equity securities by permitting a qualitative assessment each reporting period, and makes changes to presentation and disclosure of certain classes of financial assets and liabilities. ASU 2016-01 will be effective for us beginning October 1, 2018, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In June 2014,February 2016, the FASB issued ASU No. 2014-12, "Accounting2016-02, "Leases" (Topic 842). The provisions of ASU 2016-02 require a dual approach for Share-Based Payments Whenlessee 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 Termsright-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 Award Provide that a Performance Target Could be Achieved after the Requisite Service Period" (Topic 718).entity's leasing activities, including any significant judgments and estimates. ASU 2014-14 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of an award, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The compensation cost should represent the amount attributable to the periods for which the requisite service has been rendered. ASU 2014-092016-02 will be effective for us beginning October 1, 2016 and may be applied on a prospective or retrospective basis.2019, but early adoption is permitted. We do not expectare currently evaluating the impact of implementation of this standard on our financial statements.
In March 2016, the FASB issued ASU No. 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" (Topic 815). The provisions of ASU 2016-05 provide clarification that a change in a counterparty of a derivative instrument that has been designated as a hedging instrument does not require dedesignation of that hedging relationship, provided that all other hedge accounting criteria is met. ASU 2016-05 will be effective for us beginning October 1, 2018, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements.
In March 2016, the FASB issued ASU No. 2016-07, "Simplifying the Transition to the Equity Method of Accounting" (Topic 323). The provisions of ASU 2016-07 require equity method investors to add the cost of acquiring additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method prospectively as of the date the investment qualifies for the equity method of accounting. ASU 2016-07 will be effective for us beginning October 1, 2018, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements as we currently have no equity method investments.
In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718). The provisions of this standard involve several aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will be effective for us beginning October 1, 2017, but early adoption is permitted. We currently expect that the adoption of this standard will introduce additional variability in our effective tax rate; however, the impact will not grantedbe known until the related share-based award activity occurs. The adoption will also impact the classification of excess tax benefits on the Consolidated Statements of Cash Flows.
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (Topic 326). The provisions of this standard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would be established to present the net carrying value at the amount expected to be collected. ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2019. We are currently evaluating the impact of implementation of this standard on our financial statements.
In August 2016, the FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments" (Topic 230). The provisions of this standard provide guidance on the classification within the statement of cash flows of certain types of cash receipts and cash payments in an effort to eliminate diversity in practice. ASU 2016-15 will be effective for us beginning October 1, 2018, but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements as we currently do not have any awards withof the cash receipts or payments discussed in this standard.
In October 2016, the FASB issued ASU No. 2016-16 "Intra-Entity Transfers of Assets Other Than Inventory" (Topic 740). The provisions of this standard provide guidance on recognition of taxes related to intra-entity transfer of assets other than inventory when the transfer occurs. ASU 2016-16 will be effective for us beginning October 1, 2018, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In October 2016, the FASB issued ASU No. 2016-17 "Interest Held through Related Parties That Are under Common Control" (Topic 810). The provisions of this standard provide further guidance related to ASU 2015-02, and also provide guidance on consolidation in relation to VIEs and related parties. ASU 2016-17 will be effective for us beginning October 1, 2017, but early adoption is permitted. We do not believe the adoption of this standard will have a performance condition.material effect on our financial statements as we currently have no interest in any entities that may be considered VIE.
In January 2017, the FASB issued ASU No. 2017-01 "Clarifying the Definition of a Business" (Topic 805). The provisions of this standard provide guidance to determine whether the acquisition or sale of a set of assets or activities constitutes a business. The standard requires that an integrated set of assets and activities include an input and a substantive process that together contribute to the ability to create output. ASU 2017-01 will be effective for us beginning October 1, 2017, and early adoption is permitted under specified conditions. We do not believe the adoption of this standard will have a material effect on our financial statements.
In January 2017, the FASB issued ASU No. 2017-04 "Simplifying the Test for Goodwill Impairment" (Topic 350). The provisions of this standard eliminate Step 2 from the goodwill impairment test, which required an entity to determine the fair value of its assets and liabilities at the impairment testing date of its goodwill and compare it to its carrying amount to determine a possible impairment loss. Goodwill impairment testing will now be done by comparing the fair value of a reporting unit and its carrying amount. ASU 2017-04 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2017. We are currently evaluating the impact of implementation of this standard on our financial statements.
In March 2017, the FASB issued ASU No. 2017-07 "Improving the Presentation of Net Period Pension Cost and Net Period Postretirement Benefit Cost" (Topic 715). The provisions of ASU 2017-07 provided specific guidance on the presentation of the components of net benefit cost. ASU 2017-07 will be effective for us beginning October 1, 2018. We are currently evaluating the impact of implementation of this standard on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09 "Scope of Modification Accounting" (Topic 718). The provisions of ASU 2017-09 provide specific guidance about which changes to the term or conditions of a share-based payment require an entity to apply modification accounting. ASU 2017-09 will be effective for us beginning October 1, 2018. We are currently evaluating the impact of implementation of this standard on our financial statements.
In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging" (Topic 815). The provisions of this standard amend the hedge accounting model in ASC 815 to expand an entity's ability to hedge nonfinancial and financial risk components, reduce complexity in fair value hedges of interest rate risk, eliminate the requirement to separately measure and report hedge ineffectiveness, and generally require the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU 2017-09 will be effective for us beginning October 1, 2019, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
On October 22, 2015, the Company completed the acquisition of 100% of the outstanding stock of NexPlanar Corporation (NexPlanar), which was a privately held, U.S. based company that specialized in the development, manufacture and sale of advanced CMP pad solutions for the semiconductor industry. We acquired NexPlanar to expand our polishing pad portfolio by adding a complementary pad technology for which we believe we can leverage our global infrastructure to better serve customers on a global basis, including offering performance-advantaged slurry and pad consumable sets. We paid a total of $126,976, including total purchase consideration of $142,237, less cash acquired of $15,261. The purchase consideration includes $142,167 paid at the date of acquisition and $70 for a post-closing adjustment. In addition, we paid $154 in compensation expense related to certain unvested NexPlanar stock options settled in cash at the acquisition date.
3.The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition:
Total purchase consideration | | $ | 142,237 | |
| | | | |
Cash | | $ | 15,261 | |
Accounts receivable | | | 3,052 | |
Inventories | | | 2,768 | |
Prepaid expenses and other current assets | | | 1,712 | |
Property, plant and equipment | | | 6,901 | |
Intangible assets | | | 55,000 | |
Deferred tax assets | | | 20,509 | |
Other long-term assets | | | 1,458 | |
Accounts payable | | | (1,057 | ) |
Accrued expenses and other current liabilities | | | (1,472 | ) |
Deferred tax liabilities | | | (20,313 | ) |
Total identifiable net assets | | | 83,819 | |
Goodwill | | | 58,418 | |
| | $ | 142,237 | |
The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. We finalized the purchase price allocation during the fourth quarter of fiscal 2016. We believe that the information we used provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed.
The fair values of identifiable assets and liabilities acquired were developed with the assistance of third party valuation firms. The fair value of acquired property, plant and equipment is valued at its "value-in-use" as there are no known plans to dispose of any assets. The fair value of acquired identifiable intangible assets was determined using the "income approach" on an individual asset basis. The key assumptions used in the calculation of the discounted cash flows include projected revenue, gross margin, operating expenses, and discount rate. The valuations and the underlying assumptions have been deemed reasonable by Company management. There are inherent uncertainties and management judgment required in these determinations.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:
| | Fair | | Useful |
| | Value | | Life |
Trade name | | $ | 8,000 | | 7 years |
Customer relationships | | | 8,000 | | 11 years |
Developed technology - product family A | | | 32,000 | | 7 years |
Developed technology - product family B | | | 2,000 | | 9 years |
In-process technology | | | 5,000 | | |
Total intangible assets | | $ | 55,000 | | |
The trade name represents the estimated fair value of the brand and name recognition associated with the marketing of NexPlanar's product offerings. Customer relationships represent the estimated fair value of the underlying relationships and agreements with NexPlanar customers. Developed technology represents the estimated fair value of NexPlanar's technology, processes and knowledge regarding its product offerings. In-process technology represents the fair value assigned to technology projects under development as of the acquisition date. The in-process technology assets are capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, we will make a determination of the appropriate useful life and the related amortization will be recorded as an expense over the estimated useful life based on the future expected cash flow stream. In the fourth quarter of fiscal 2016, we recorded impairment expense of $1,000 representing the entire fair value of one of the in-process technology assets as management determined that expected future cash flows were insufficient to support the value of the asset. The intangible assets subject to amortization have a weighted average useful life of 7.7 years and are being amortized on a straight-line basis.
The excess of purchase consideration over the fair value of net assets acquired was recorded as goodwill, and is not deductible for income tax purposes. The goodwill is primarily attributable to anticipated revenue growth from the combination of our and NexPlanar pad technologies, expected synergies from the combined operations, and the assembled workforce of NexPlanar. NexPlanar's results of operations have been included in our unaudited consolidated statements of income and comprehensive income from the date of acquisition.
The following supplemental pro forma information summarizes the combined results of operations for Cabot Microelectronics and NexPlanar as if the acquisition had occurred on October 1, 2014.
| | Year Ended September 30, | |
| | 2016 | | | 2015 | |
Revenues | | $ | 431,856 | | | $ | 437,326 | |
Net income | | | 60,620 | | | | 46,928 | |
Earnings per share - basic | | | 2.50 | | | | 1.93 | |
Earnings per share - diluted | | $ | 2.46 | | | $ | 1.89 | |
The historical financial information has been adjusted to give effect to the pro forma adjustments, which consist of amortization expense associated with intangible assets, and the elimination of interest expense on NexPlanar debt repaid prior to the acquisition. The pro forma amounts for the years ended September 30, 2016 and 2015 exclude the impact of compensation expense related to unvested NexPlanar stock options settled in cash, and the step-up of inventory as these items are assumed to have occurred during the quarter ended December 31, 2014 had the acquisition been completed on October 1, 2014. The pro forma consolidated results are not necessarily indicative of what the consolidated results actually would have been had the acquisition been completed on October 1, 2014. The pro forma consolidated results do not purport to project future results of combined operations, nor do they reflect the expected realization of any revenue or cost synergies associated with the acquisition.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB established a three-level hierarchy for disclosure based on the extent and level of judgment used to estimate fair value. Level 1 inputs consist of valuations based on quoted market prices in active markets for identical assets or liabilities. Level 2 inputs consist of valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in an inactive market, or other observable inputs. Level 3 inputs consist of valuations based on unobservable inputs that are supported by little or no market activity.
The following table presents financial instruments, other than long-term debt, that we measured at fair value on a recurring basis at September 30, 20142017 and 2013.2016. See Note 910 for a detailed discussion of our long-term debt. We have chosen to not measure any of our other financial instruments at fair value as we believe their carrying value approximates their fair value. 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, 2014 | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | |
September 30, 2017 | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | |
Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 284,155 | | | $ | - | | | $ | - | | | $ | 284,155 | | | $ | 397,890 | | | $ | - | | | $ | - | | | $ | 397,890 | |
Other long-term investments | | | 1,654 | | | | - | | | | - | | | | 1,654 | | | | 929 | | | | - | | | | - | | | | 929 | |
Total | | $ | 285,809 | | | $ | - | | | $ | - | | | $ | 285,809 | | |
Derivative financial instruments | | | | - | | | | 263 | | | | - | | | | 263 | |
Total assets | | | $ | 398,819 | | | $ | 263 | | | $ | - | | | $ | 399,082 | |
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Derivative financial instruments | | | | - | | | | 1,881 | | | | - | | | | 1,881 | |
Total liabilities | | | $ | - | | | $ | 1,881 | | | $ | - | | | $ | 1,881 | |
September 30, 2013 | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | |
September 30, 2016 | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | |
Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 226,029 | | | $ | - | | | $ | - | | | $ | 226,029 | | | $ | 287,479 | | | $ | - | | | $ | - | | | $ | 287,479 | |
Other long-term investments | | | 1,375 | | | | - | | | | - | | | | 1,375 | | | | 1,028 | | | | - | | | | - | | | | 1,028 | |
Total | | $ | 227,404 | | | $ | - | | | $ | - | | | $ | 227,404 | | |
Derivative financial instruments | | | | - | | | | 28 | | | | - | | | | 28 | |
Total assets | | | $ | 288,507 | | | $ | 28 | | | $ | - | | | $ | 288,535 | |
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Derivative financial instruments | | | | - | | | | 1,469 | | | | - | | | | 1,469 | |
Total liabilities | | | $ | - | | | $ | 1,469 | | | $ | - | | | $ | 1,469 | |
Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active markets. The other long-term investments are includedWe invest only in other long-term assets on our Consolidated Balance Sheet.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 $1,654$929 in the fourth quarter of fiscal 20142017 to reflect its fair value as of September 30, 2014.2017.
Our derivative financial instruments include forward foreign exchange contracts and interest rate swaps. In fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. In the fourth quarter of fiscal 2017, we entered into forward foreign exchange contracts in an effort to protect our net investment in a foreign operation against potential adverse changes resulting from foreign currency fluctuation. The fair value of our derivative instruments is estimated using standard valuation models and market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves for interest rate swaps, and forward rates and/or the Overnight Index Swap (OIS) curve for forward foreign exchange contracts, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments. See Note 11 for more information on our use of derivative financial instruments.
4.5. INVENTORIES
Inventories consisted of the following:
| | September 30, | | September 30, | |
| | 2014 | | | 2013 | | 2017 | | 2016 | |
| | | | | | | | | | |
Raw materials | | $ | 37,009 | | | $ | 38,004 | | | $ | 36,415 | | | $ | 45,109 | |
Work in process | | | 4,505 | | | | 5,001 | | | | 7,365 | | | | 4,668 | |
Finished goods | | | 23,465 | | | | 20,781 | | | | 28,093 | | | | 22,346 | |
Total | | $ | 64,979 | | | $ | 63,786 | | | $ | 71,873 | | | $ | 72,123 | |
The increase in finished goods inventory is primarily due to higher raw material costs used in production during fiscal 2014 and the amount of certain manufacturing variances, which are included in cost of goods sold in the period when the inventory is sold to customers.
5.6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| | September 30, | | | September 30, | |
| | 2014 | | | 2013 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Land | | $ | 17,834 | | | $ | 18,914 | | | $ | 17,823 | | | $ | 18,636 | |
Buildings | | | 97,513 | | | | 97,542 | | | | 104,057 | | | | 100,084 | |
Machinery and equipment | | | 171,461 | | | | 175,406 | | | | 187,649 | | | | 198,870 | |
Furniture and fixtures | | | 6,224 | | | | 6,234 | | | | 6,770 | | | | 6,642 | |
Information systems | | | 27,673 | | | | 26,208 | | | | 32,748 | | | | 29,573 | |
Capital leases | | | - | | | | - | | |
Construction in progress | | | 3,166 | | | | 5,072 | | | | 10,439 | | | | 6,358 | |
Total property, plant and equipment | | | 323,871 | | | | 329,376 | | | | 359,486 | | | | 360,163 | |
Less: accumulated depreciation and amortization of assets under capital leases | | | (223,050 | ) | | | (217,391 | ) | |
Less: accumulated depreciation | | | | (253,125 | ) | | | (253,667 | ) |
Net property, plant and equipment | | $ | 100,821 | | | $ | 111,985 | | | $ | 106,361 | | | $ | 106,496 | |
Depreciation expense including amortization of assets recorded under capital leases, was $17,467, $17,835$17,195, $16,915 and $20,863$16,060 for the years ended September 30, 2014, 20132017, 2016 and 2012,2015, respectively.
In fiscal 2014,2017, we recorded $2,320$860 in impairment expense primarily related to the decision to write-off certain manufacturing assets in foreign locations in accordance with the applicable accounting standards for the impairmenta surplus research and disposal of long-lived assets. Of this amount, $2,236development asset, and $84 was included in cost of goods sold and selling and marketing expense, respectively. In fiscal 2012, we recorded $968 ina $1,820 gain on the sale of surplus research and development equipment. We did not record any impairment expense primarily related to the write-off of certain operational assets at one of our foreign locations. Of this amount, $842on property, plant and $126 was includedequipment in cost of goods soldfiscal 2016 and selling and marketing expense, respectively. Impairment expense for fiscal 2013 was insignificant.2015.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $43,245$101,932 and $44,306$100,639 as of September 30, 20142017 and 2013,2016, respectively. The decreaseincrease in goodwill was due to $1,147 in foreign exchange fluctuations of the New Taiwan dollar.dollar and an adjustment of $146 to a deferred tax liability.
The components of other intangible assets are as follows:
| | September 30, 2014 | | | September 30, 2013 | | |
| | Gross Carrying | | | Accumulated | | | Gross Carrying | | | Accumulated | | | September 30, 2017 | | | September 30, 2016 | |
| | Amount | | | Amortization | | | Amount | | | Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
Other intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Product technology | | $ | 8,278 | | | $ | 6,750 | | | $ | 8,362 | | | $ | 5,853 | | | $ | 42,287 | | | $ | 17,604 | | | $ | 42,194 | | | $ | 12,718 | |
Acquired patents and licenses | | | 8,270 | | | | 7,534 | | | | 8,270 | | | | 7,196 | | | | 8,270 | | | | 8,241 | | | | 8,270 | | | | 8,155 | |
Trade secrets and know-how | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | | | | 2,550 | |
Customer relationships, distribution rights and other | | | 12,193 | | | | 8,484 | | | | 12,496 | | | | 7,484 | | | | 28,229 | | | | 15,421 | | | | 27,900 | | | | 12,205 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other intangible assets subject to amortization | | | 31,291 | | | | 25,318 | | | | 31,678 | | | | 23,083 | | | | 81,336 | | | | 43,816 | | | | 80,914 | | | | 35,628 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other intangible assets not subject to amortization* | | | 1,190 | | | | | | | | 1,190 | | | | | | |
Other intangible assets not subject to amortization: | | | | | | | | | | | | | | | | | |
In-process technology | | | | 4,000 | | | | | | | | 4,000 | | | | | |
Other indefinite-lived intangibles* | | | | 1,190 | | | | | | | | 1,190 | | | | | |
Total other intangible assets not subject to amortization | | | | 5,190 | | | | | | | | 5,190 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other intangible assets | | $ | 32,481 | | | $ | 25,318 | | | $ | 32,868 | | | $ | 23,083 | | | $ | 86,526 | | | $ | 43,816 | | | $ | 86,104 | | | $ | 35,628 | |
* Total other intangible assets | * | Other indefinite-lived intangibles not subject to amortization primarily consist of trade names. |
Amortization expense was $2,474, $2,622$7,795, $8,176 and $2,682$2,346 for fiscal 2014, 20132017, 2016 and 2012,2015, respectively. Estimated future amortization expense of intangible assets as of September 30, 2017 for the five succeeding fiscal years is as follows:
Fiscal Year | | Estimated Amortization Expense | |
| | | |
2015 | | $ | 2,384 | |
2016 | | | 1,973 | |
2017 | | | 1,146 | |
2018 | | | 453 | |
2019 | | | 11 | |
| Fiscal Year | | Estimated Amortization Expense | |
| | | | |
| 2018 | | $ | 7,118 | |
| 2019 | | | 6,675 | |
| 2020 | | | 6,670 | |
| 2021 | | | 6,664 | |
| 2022 | | | 6,664 | |
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of our fiscal year or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. An entity has the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a discounted cash flowquantitative 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 20132016 and 2014,2017, we chose to use a step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment.
We completed our annual impairment test during our fourth quarter of fiscal 20142017 and concluded that no impairment existed. During the fourth quarter of fiscal 2016, as discussed in Note 3, we recorded $1,000 of impairment expense on one of the in-process technology assets acquired in the NexPlanar acquisition based on management's revised expected future cash flows for this asset. The impairment charge was included in research, development and technical expenses on our Consolidated Statements of Income. We concluded that no other impairment of goodwill or intangible assets was necessary. No impairment existed as a result of our impairment test during the fourth quarter of fiscal 2015. There have been no cumulative impairment charges recorded on the goodwill for any of our reporting units.
7.8. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
| | September 30, | | September 30, | |
| | 2014 | | | 2013 | | 2017 | | 2016 | |
| | | | | | | | | | |
Auction rate securities (ARS) | | $ | 5,895 | | | $ | 7,966 | | | $ | 5,319 | | | $ | 5,494 | |
Long-term contract asset | | | | 2,115 | | | | 3,055 | |
Other long-term assets | | | 3,043 | | | | 3,086 | | | | 2,154 | | | | 2,465 | |
Other long-term investments | | | 1,654 | | | | 1,375 | | | | 929 | | | | 1,028 | |
Total | | $ | 10,592 | | | $ | 12,427 | | | $ | 10,517 | | | $ | 12,042 | |
| | | | | | | | | |
We classify our ARS investments as held-to-maturity and have recorded them at cost. Our ARS investments at September 30, 20142017 consisted of two tax exempt municipal debt securities with a total par value of $5,895,$5,319, both of which both mature in morehave maturities greater than ten years. The ARS market began to experience illiquidity in early 2008, and this illiquidity continues. Despite this lack of liquidity, there have been no defaults in payment of the underlying securities and interest income on these holdings continues to be received on scheduled interest payment dates. Our ARS, when purchased, were issued by A-rated municipalities. Although the credit ratings of both municipalities have been downgraded since our original investment, one of the ARS is credit enhanced with bond insurance, and the other has become an obligation of the bond insurer. Both ARS currently carry a credit rating of AA- by Standard & Poor's.
The fair value of our ARS, determined using level 2 fair value inputs, was $5,292$4,884 as of September 30, 2014.2017. We have classified our ARS as held-to-maturity based on our intention and ability to hold the securities until maturity. We believe the gross unrecognized loss of $603$435 is due to the illiquidity in the ARS market, rather than to credit loss. Although we believe these securities will ultimately be collected in full, we believe that it is not likely that we will be able to monetize the securities in our next business cycle (which for us is generally one year). We will continue to monitor our ARS for impairment indicators, which may require us to record an impairment charge that is deemed other-than-temporary.
In November 2011, the municipality that issued onethird quarter of our ARS filed for bankruptcy protection. Asfiscal 2015, we amended a resultsupply contract with an existing supplier. The amended agreement includes a fee of $4,500, which provides us the option to purchase certain raw materials beyond calendar 2016. This fee was recorded as a long-term asset at its present value and is being amortized into cost of goods sold on a straight-line basis through December 31, 2019, the expiration date of the approval of the municipality's reorganization plan, and our voting elections, we received 65% of the par value outstanding, or $2,113, during the quarter ended December 31, 2013, and we reversed the $234 temporary impairment that we previously recorded.agreement. See Note 18 for more information regarding this contract.
Other long-term assets are comprised of the long-term portion of prepaid unamortized debt costs, related to our Revolving Credit Facility, as well as miscellaneous deposits and prepayments on contracts extending beyond the next 12 months. As discussed in Note 3,10, we reclassified $435 of prepaid debt costs related to our Term Loan out of other long-term assets as of September 30, 2016, in accordance with the adoption of a new accounting pronouncement. As discussed in Note 4, we recorded a long-term asset and a corresponding long-term liability of $1,654$929 representing the fair value of our SERP investments as of September 30, 2014.2017.
9. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
| | September 30, | |
| | 2014 | | | 2013 | |
Accrued compensation | | $ | 16,980 | | | $ | 24,601 | |
Goods and services received, not yet invoiced | | | 3,167 | | | | 4,681 | |
Deferred revenue and customer advances | | | 1,223 | | | | 458 | |
Warranty accrual | | | 246 | | | | 324 | |
Income taxes payable | | | 5,448 | | | | 7,652 | |
Taxes, other than income taxes | | | 1,182 | | | | 951 | |
Other | | | 3,148 | | | | 1,953 | |
Total | | $ | 31,394 | | | $ | 40,620 | |
| | September 30, | |
| | 2017 | | | 2016 | |
Accrued compensation | | $ | 35,332 | | | $ | 17,856 | |
Dividends payable | | | 5,314 | | | | 4,502 | |
Goods and services received, not yet invoiced | | | 2,172 | | | | 2,648 | |
Deferred revenue and customer advances | | | 1,559 | | | | 782 | |
Warranty accrual | | | 247 | | | | 243 | |
Income taxes payable | | | 9,717 | | | | 7,878 | |
Taxes, other than income taxes | | | 1,688 | | | | 775 | |
Current portion of long-term contract liability | | | 1,500 | | | | 1,500 | |
Other | | | 5,122 | | | | 5,211 | |
Total | | $ | 62,651 | | | $ | 41,395 | |
9.10. DEBT
On February 13, 2012, we entered into a credit agreement (the "Credit Agreement") among the Company, as Borrower, Bank of America, N.A., as administrative agent, swing line lender and an L/C issuer, Bank of America Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, JPMorgan Chase Bank, N.A., as syndication agent, and Wells Fargo Bank, N.A. as documentation agent. The Credit Agreement provided us with a $175,000 term loan (the "Term Loan"), which we drew on February 27, 2012 to fund approximately half of the special cash dividend we paid to our stockholders on March 1, 2012, and a $100,000 revolving credit facility (the "Revolving Credit Facility"), which has never been drawn, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans. The Term Loan and the Revolving Credit Facility are referred to as the "Credit Facilities." On June 27, 2014, we entered into an amendment (the "Amendment") to the Credit Agreement, which (i) increased term loan commitments by $17,500, from $157,500 to $175,000, the same level as the original amount under the Credit Agreement at its inception in 2012; (ii) increased the uncommitted accordion feature on the Revolving Credit Facility from $75,000 to $100,000; (iii) extended the expiration date of the Credit Facilities from February 13, 2017 to June 27, 2019; (iv) relaxed the consolidated leverage ratio financial covenant; and (v) revised certain pricing terms and other terms within the Credit Agreement. On June 27, 2014, we drew the $17,500 of increased term loan commitments, bringing the total outstanding commitments under the Term Loan to $175,000.
Borrowings under the amended Credit Facilities (other than in respect of swing-line loans) bear interest at a rate per annum equal to the "Applicable Rate" (as defined below) plus, at our option, either (1) a LIBOR rate determined by reference to the cost of funds for deposits in the relevant currency for the interest period relevant to such borrowing or (2) the "Base Rate", which is the highest of (x) the prime rate of Bank of America, N.A., (y) the federal funds rate plus 1/2 of 1.00% and (z) the one-month LIBOR rate plus 1.00%. The current Applicable Rate for borrowings under the Credit Facilities is 1.50%, as amended, with respect to LIBOR borrowings and 0.25% with respect to Base Rate borrowings, with such Applicable Rate subject to adjustment based on our consolidated leverage ratio. Swing-line loans bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the Revolving Credit Facility. In addition to paying interest on outstanding principal under the Credit Agreement, we pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. As amended, the fee ranges from 0.20% to 0.30%, based on our consolidated leverage ratio. Interest expense and commitment fees are paid according to the relevant interest period and no less frequently than at the end of each calendar quarter. We paid $2,658 in arrangement fees, upfront fees and administration fees in February 2012 and we paid an additional $550 in upfront fees and arrangement fees in June 2014, of which $411 and $1,466 remains in prepaid expenses and other current assets and other long-term assets, respectively, on our Consolidated Balance Sheet as of September 30, 2014. We also pay letter of credit fees as necessary. The Term Loan has periodic scheduled repayments; however, we may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary "breakage" fees and reemployment costs in the case of LIBOR borrowings. All obligations under the Credit Agreement are guaranteed by certain of our existing and future direct and indirect domestic subsidiaries. The obligations under the Credit Agreement and guarantees of those obligations are secured, subject to certain exceptions, by first priority liens and security interests in the assets of the Company and certain of its domestic subsidiaries.
The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents. The Credit Agreement requires us to comply with certain financial ratio maintenance covenants. As amended, theseThese include a maximum consolidated leverage ratio of 3.002.75 to 1.00 through December 31, 2015 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. As amended,1.00 for the maximum consolidated leverage ratio will decrease to 2.75 to 1.00 fromperiod January 1, 2016 through the terminationexpiration of the Credit Agreement. As of September 30, 2014,2017, our consolidated leverage ratio was 1.600.91 to 1.00 and our consolidated fixed charge coverage ratio was 6.493.41 to 1.00. The Credit Agreement also contains customary affirmative covenants and events of default. We believe we are in compliance with these covenants.
At September 30, 2014,2017, the fair value of the Term Loan, using level 2 inputs, approximates its carrying value of $172,813$144,376 as the loan bears a floating market rate of interest. As of September 30, 2014, $8,7502017, $10,938 of the debt outstanding is classified as short-term.
Principal repayments of the Term Loan are generally made on the last calendar day of each quarter if that day is considered to be a business day. As of September 30, 2014,2017, scheduled principal repayments of the Term Loan were as follows:
Fiscal Year | | Principal Repayments | |
2015 | | $ | 8,750 | |
2016 | | | 8,750 | |
2017 | | | 7,656 | |
2018 | | | 14,219 | |
2019 | | | 133,438 | |
Total | | $ | 172,813 | |
| Fiscal Year | | Principal Repayments | |
| 2018 | | $ | 10,938 | |
| 2019 | | | 133,438 | |
| Total | | $ | 144,376 | |
11. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates. We enter into certain derivative transactions to mitigate the volatility associated with these exposures. We have policies in place that define acceptable instrument types we may enter into and we have established controls to limit our market risk exposure. We do not use derivative financial instruments for trading or speculative purposes. In addition, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value on a gross basis.
Cash Flow Hedges – Interest Rate Swap Agreements
In fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on $86,406 of our outstanding variable rate debt. The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal payment of debt. The notional value of the swaps was $72,188 as of September 30, 2017, and the swaps are scheduled to expire on June 27, 2019.
We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income. Hedge effectiveness is tested quarterly to determine if hedge treatment continues to be appropriate.
Foreign Currency Contracts Not Designated as Hedges
Periodically we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. OurThese 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. 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. AtAs of September 30, 2014,2017 and September 30, 2016, respectively, the notional amounts of the forward contracts we hadheld to purchase U.S. dollars in exchange for foreign currencies were $8,176 and $8,858, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $24,295 and $15,635, respectively.
Net Investment Hedge – Foreign Exchange Contracts
In September 2017, we entered into two forward foreign exchange contracts in an effort to eitherprotect 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 or sell Japanese yenU.S. dollars, and British pound forthese contracts will settle on September 26, 2022. We have designated these forward contracts as an effective net investment hedge. The total notional amount under the purposecontracts is 100 billion Korean won. As of hedgingSeptember 30, 2017, the risk associated with achange in the fair value of the forward contracts in the net transactional exposureinvestment hedge relationship was $1,442, which was recorded in those currencies.foreign currency translation adjustments within other comprehensive income.
The fair value of our derivative instrumentinstruments included in the Consolidated Balance Sheet, which was determined using Levellevel 2 inputs, was as follows:
| | | Asset Derivatives | | | Liability Derivatives | |
| | | September 30, | | | September 30, | |
Consolidated Balance Sheet Location | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Derivatives designated as hedging instruments | | | | | | | | | | | | | |
Interest rate swap contracts | Other long-term assets | | $ | 117 | | | $ | - | | | $ | - | | | $ | - | |
| Accrued expenses, income taxes payable and other current liabilities | | $ | - | | | $ | - | | | $ | 31 | | | $ | 612 | |
| Other long-term liabilities | | $ | - | | | $ | - | | | $ | - | | | $ | 655 | |
| | | | | | | | | | | | | | | | | |
Foreign exchange contracts designated as net investment hedge | Other long-term liabilities | | | - | | | | - | | | | 1,442 | | | | - | |
| | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | Prepaid expenses and other current assets | | $ | 146 | | | $ | 28 | | | $ | - | | | $ | - | |
| Accrued expenses, income taxes payable and other current liabilities | | $ | - | | | $ | - | | | $ | 408 | | | $ | 202 | |
| | | Asset Derivatives | | | Liability Derivatives | |
Derivatives not designated as hedging instruments | Balance Sheet Location | | Fair Value at September 30, 2014 | | | Fair Value at September 30, 2013 | | | Fair Value at September 30, 2014 | | | Fair Value at September 30, 2013 | |
Foreign exchange contracts | Prepaid expenses and other current assets | | $ | 100 | | | $ | 60 | | | $ | - | | | $ | - | |
| Accrued expenses and other current liabilities | | $ | - | | | $ | - | | | $ | 270 | | | $ | - | |
The following table summarizes the effect of our derivative instrument on our Consolidated StatementStatements of Income for the fiscal years ended September 30, 2014, 20132017, 2016 and 2012:2015:
| | | Gain (Loss) Recognized in Statement of Income | | | | Gain (Loss) Recognized in Consolidated Statements of Income | |
| | | Fiscal Year Ended | | | | Fiscal Year Ended September 30, | |
Derivatives not designated as hedging instruments | Statement of Income Location | | September 30, 2014 | | | September 30, 2013 | | | September 30, 2012 | | Consolidated Statements of Income Location | | 2017 | | 2016 | | 2015 | |
Foreign exchange contracts | Other income (expense), net | | $ | (1,289 | ) | | $ | 252 | | | $ | 154 | | Other income (expense), net | | $ | (1,462 | ) | | $ | 676 | | | $ | (1,674 | ) |
The interest rate swap agreements have been deemed to be effective since inception, so there has been no impact on our Consolidated Statement of Income. We recorded a $46 unrealized gain, net of tax, in accumulated comprehensive income during the year ended September 30, 2017 for these interest rate swaps. During the next 12 months, we expect approximately $31 to be reclassified from accumulated other comprehensive income into interest expense related to our interest rate swaps based on projected rates of the LIBOR forward curve as of September 30, 2017.
Amounts recognized in Other comprehensive income (loss) for our net investment hedge during the fiscal year ended September 30, were as follows:
| | 2017 | |
| | | |
| Loss on net investment hedge | | $ | 1,442 | |
| Tax benefit | | | (522 | ) |
| Loss on net investment hedge, net of tax | | $ | 920 | |
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below summarizes the components of accumulated other comprehensive income (loss) (AOCI), net of tax provision/(benefit), for the years ended September 30, 2017, 2016, and 2015.
| Foreign Currency Translation | | | Cash Flow Hedges | | | Pension and Other Postretirement Liabilities | | | Total | |
Balance at September 30, 2014 | $ | 10,115 | | | $ | - | | | $ | (860 | ) | | $ | 9,255 | |
Foreign currency translation adjustment, net of tax of $(1,731) | | (14,126 | ) | | | - | | | | - | | | | (14,126 | ) |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Change in fair value, net of tax of $(833) | | - | | | | (1,511 | ) | | | - | | | | (1,511 | ) |
Reclassification adjustment into earnings, net of tax of $336 | | - | | | | 610 | | | | - | | | | 610 | |
Change in pension and other postretirement, net of tax of $0 | | - | | | | - | | | | (318 | ) | | | (318 | ) |
Balance at September 30, 2015 | | (4,011 | ) | | | (901 | ) | | | (1,178 | ) | | | (6,090 | ) |
Foreign currency translation adjustment, net of tax of $1,854 | | 15,996 | | | | - | | | | - | | | | 15,996 | |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Change in fair value, net of tax of $(274) | | - | | | | (499 | ) | | | - | | | | (499 | ) |
Reclassification adjustment into earnings, net of tax of $321 | | - | | | | 583 | | | | - | | | | 583 | |
Change in pension and other postretirement, net of tax of $(584) | | - | | | | - | | | | (434 | ) | | | (434 | ) |
Balance at September 30, 2016 | | 11,985 | | | | (817 | ) | | | (1,612 | ) | | | 9,556 | |
Foreign currency translation adjustment, net of tax of $(2,321) | | (6,746 | ) | | | 0 | | | | - | | | | (6,746 | ) |
Unrealized gain (loss) on cash flow hedges: | | | | | | | | | | | | | | | |
Change in fair value, net of tax of $(660) | | - | | | | 1,161 | | | | - | | | | 1,161 | |
Reclassification adjustment into earnings, net of tax of $170 | | - | | | | (298 | ) | | | - | | | | (298 | ) |
Change in pension and other postretirement, net of tax of $79 | | - | | | | - | | | | 276 | | | | 276 | |
Balance at September 30, 2017 | $ | 5,239 | | | $ | 46 | | | $ | (1,336 | ) | | $ | 3,949 | |
The before tax amount reclassified from OCI to net income in fiscal 2017, related to our cash flow hedges, was recorded as interest expense on our Consolidated Statement of Income. Amounts reclassified from OCI to net income, related to pension liabilities, were not material in fiscal years 2017, 2016 and 2015.
11.13. SHARE-BASED COMPENSATION PLANS
EQUITY INCENTIVE PLAN AND OMNIBUS INCENTIVE PLAN
In March 2004, our stockholders approved our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (the "EIP"), as amended and restated September 23, 2008. OnIn March 6, 2012, our stockholders approved the Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan (the "OIP"), which is the successor plan to the EIP. AsEIP, and which was amended as of such time, allMarch 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. NoIn fiscal 2016, pursuant to the Merger Agreement for our acquisition of NexPlanar, we granted incentive stock options (ISOs), as allowed under the OIP, to certain NexPlanar employees in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. As of September 30, 2017, no SARs or performance awards or substitute awards havehad 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.
On March 2, 2012, we completed a leveraged recapitalization pursuant to which we paid a special cash dividend of $15 per share to our stockholders. In conjunction with this recapitalization, the EIP and the OIP required us to proportionally adjust the shares available for issuance under them. The number of shares available under the plans was increased by multiplying the number by a factor of 1.45068, representing the ratio of the official NASDAQ closing price of $51.92 per share on March 1, 2012, the dividend payment date, to the official NASDAQ opening price of $35.79 per share on March 2, 2012, the ex-dividend date. The number of authorized shares in the OIP noted above includes the effects of this proportional adjustment.
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. Compensation expense related to our stock option awards was $6,947, $6,878 and $6,802 in fiscal 2014, 2013 and 2012, respectively. For additional information on our accounting for share-based compensation, see Note 2. 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. NoPrior to fiscal 2016, no ISOs havehad been granted to date under either plan. In the first quarter of fiscal 2016, we substituted certain NexPlanar ISOs with Cabot Microelectronics Corporation ISOs, preserving the intrinsic value, including the original vesting periods, of the original awards. Compensation expense related to our stock option awards was $5,500, $6,767 and $7,173 in fiscal 2017, 2016 and 2015, respectively. For additional information on our accounting for share-based compensation, see Note 2.
Under the OIP, as under the EIP, employees and non-employees may be awarded shares of restricted stock or restricted stock units, which generally vest over a four-year period, with first vesting on the anniversary of the grant date. Restricted stock units granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date. In general, shares of restricted stock and restricted stock units may not be sold, assigned, transferred, pledged, disposed of or otherwise encumbered. Holders of restricted stock, and restricted stock units, if specified in the award agreements, have all the rights of stockholders, including voting and dividend rights, subject to the above restrictions, although the current holders of restricted stock units awarded prior to fiscal 2016 do not have such rights. Holders of restricted stock units awarded as of fiscal 2016 have dividend equivalent rights pursuant to the terms of the OIP and respective award agreements. Restricted shares under the OIP, as under the EIP, also may be purchased and placed "on deposit" by executive officers pursuant to the 2001 Deposit Share Program. Shares purchased under this Deposit Share Program receive a 50% match in restricted shares ("Award Shares"). These Award Shares vest at the end of a three-year period, and are subject to forfeiture upon early withdrawal of the deposit shares. Compensation expense related to our restricted stock and restricted stock unit awards and restricted shares matched at 50% pursuant to the Deposit Share Program was $6,320, $5,793$6,730, $6,369 and $5,674$8,491 for fiscal 2014, 20132017, 2016 and 2012,2015, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In March 2008, our stockholders approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the "ESPP"), which amended the ESPP for the primary purpose of increasing the authorized shares of common stock to be purchased under the ESPP from 475,000 designated shares to 975,000 shares. The ESPP required us to proportionally adjust the cumulative number of shares designated under the plan to reflect the effect of the leveraged recapitalization with a special cash dividend. The cumulative number of shares designated under the ESPP was increased by a factor of 1.45068 representing the ratio of the official NASDAQ closing price of $51.92 per share on the dividend payment date, to the official NASDAQ opening price of $35.79 per share on the ex-dividend date. As of September 30, 2014,2017, a total of 648,323435,400 shares are available for purchase under the ESPP. The ESPP allows all full-time, and certain part-time, employees of our Company and its subsidiaries to purchase shares of our common stock through payroll deductions. Employees can elect to have up to 10% of their annual earnings withheld to purchase our stock, subject to a maximum number of shares that a participant may purchase and a maximum dollar expenditure in any six-month offering period, and certain other criteria. The provisions of the ESPP allow shares to be purchased at a price no less than the lower of 85% of the closing price at the beginning or end of each semi-annual stock purchase period. A total of 81,700, 84,602,69,751, 77,437, and 70,64565,735 shares were issued under the ESPP during fiscal 2014, 20132017, 2016 and 2012,2015, respectively. Compensation expense related to the ESPP was $680, $584$774, $763 and $735$686 in fiscal 2014, 20132017, 2016 and 2012,2015, respectively.
DIRECTORS' DEFERRED COMPENSATION PLAN
The Directors' Deferred Compensation Plan (DDCP), as amended and restated September 23, 2008, became effective in March 2001 and applies only to our non-employee directors. The cumulative number of shares deferred under the plan was 76,6330 and 74,46916,641 as of September 30, 20142017 and 2013,2016, respectively. The DDCP required us to proportionally adjust the cumulative number of shares deferred under the plan to reflect the effect of the leveraged recapitalization with a special cash dividend. The cumulative number of shares deferred under the DDCP was increased by a factor of 1.45068 representing the ratio of the official NASDAQ closing price of $51.92 per share on the dividend payment date, to the official NASDAQ opening price of $35.79 per share on the ex-dividend date. Compensation expense related to the DDCP was $0, $42, and $95 for each of fiscal 2014, 20132017, 2016 and 2012.2015, respectively.
ACCOUNTING FOR SHARE-BASED COMPENSATION
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement eligibleretirement-eligible pursuant to their grants during the contractual term of the grant. The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The fair value of our share-based awards, as shown below, was estimated using the Black-Scholes model with the following weighted-average assumptions, excluding the effect of our leveraged recapitalization:
| | Year Ended September 30, | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | 2017 | | 2016 | | 2015 | |
Stock Options | | | | | | | | | | | | | | | |
Weighted-average grant date fair value | | $ | 15.78 | | | $ | 12.13 | | | $ | 15.66 | | | $ | 16.50 | | | $ | 14.47 | | | $ | 16.99 | |
Expected term (in years) | | | 6.40 | | | | 6.37 | | | | 6.38 | | | | 6.57 | | | | 6.56 | | | | 6.30 | |
Expected volatility | | | 32 | % | | | 36 | % | | | 38 | % | | | 27 | % | | | 26 | % | | | 33 | % |
Risk-free rate of return | | | 1.9 | % | | | 0.9 | % | | | 1.3 | % | | | 2.1 | % | | | 1.9 | % | | | 1.9 | % |
Dividend yield | | | - | | | | - | | | | - | | | | 1.2 | % | | | 0.3 | % | | | - | |
| | Year Ended September 30, | |
| | 2017 | | 2016 | | 2015 | |
ESPP | | | | | | | | | | | | | | | |
Weighted-average grant date fair value | | $ | 9.11 | | | $ | 7.41 | | | $ | 8.78 | | | $ | 12.49 | | | $ | 9.57 | | | $ | 10.17 | |
Expected term (in years) | | | 0.50 | | | | 0.50 | | | | 0.50 | | | | 0.50 | | | | 0.50 | | | | 0.50 | |
Expected volatility | | | 25 | % | | | 25 | % | | | 36 | % | | | 24 | % | | | 24 | % | | | 24 | % |
Risk-free rate of return | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.6 | % | | | 0.4 | % | | | 0.1 | % |
Dividend yield | | | - | | | | - | | | | - | | | | 1.3 | % | | | 0.5 | % | | | - | |
The Black-Scholes model is primarily used in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. Because employee stock options and ESPP purchases have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, our use of the Black-Scholes model for estimating the fair value of stock options and ESPP purchases may not provide an accurate measure. Although the value of our stock options and ESPP purchases are determined in accordance with applicable accounting standards using an option-pricing model, those values may not be indicative of the fair values observed in a willing buyer/willing seller market transaction.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award. Share-based compensation expense related to restricted stock and restricted stock unit awards is recorded net of expected forfeitures.
SHARE-BASED COMPENSATION EXPENSE
Total share-based compensation expense for the years ended September 30, 2014, 20132017, 2016 and 2012,2015, is as follows:
| | Year Ended September 30, | | | Year Ended September 30, | |
Income statement classifications: | | 2014 | | | 2013 | | | 2012 | | | 2017 | | | 2016 | | | 2015 | |
Cost of goods sold | | $ | 1,866 | | | $ | 1,707 | | | $ | 1,541 | | | $ | 2,229 | | | $ | 2,105 | | | $ | 1,912 | |
Research, development and technical | | | 1,475 | | | | 1,301 | | | | 1,105 | | | | 1,792 | | | | 1,633 | | | | 1,596 | |
Selling and marketing | | | 1,298 | | | | 1,367 | | | | 1,392 | | | | 1,380 | | | | 1,618 | | | | 1,075 | |
General and administrative | | | 9,403 | | | | 8,975 | | | | 9,268 | | | | 7,603 | | | | 8,585 | | | | 11,862 | |
Tax benefit | | | (4,722 | ) | | | (4,581 | ) | | | (4,118 | ) | | | (4,339 | ) | | | (4,341 | ) | | | (5,511 | ) |
Total share-based compensation expense, net of tax | | $ | 9,320 | | | $ | 8,769 | | | $ | 9,188 | | | $ | 8,665 | | | $ | 9,600 | | | $ | 10,934 | |
As discussed in Note 3, in fiscal 2016, we recorded $154 in share-based compensation expense related to certain unvested NexPlanar ISOs settled in cash at the acquisition date. The $154 represents the portion of the fair value of the original awards related to the post-acquisition period had these awards not been settled in cash at the acquisition date. U.S. GAAP prescribes that the portion of fair value of equity awards related to pre-acquisition service periods represents purchase consideration, including equity awards vesting immediately upon a change-in-control, and the portion of fair value related to post-acquisition service periods represents compensation expense. Since the post-acquisition service requirement was eliminated through the cash settlement, the $154 in compensation expense was recorded immediately following the acquisition date. We accelerated the vesting on the substitute ISO awards made to certain individuals based on the terms of their employment agreements and recorded $492 of share-based compensation expense related to this acceleration. The total $646 of acquisition-related compensation is included in the table above as general and administrative expense.
Our non-employee directors received annual equity awards in March 2014 at the time of our Annual Meeting of Stockholders,2017, pursuant to the OIP. The award agreements for non-employee directors 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. SevenTwo of the Company's eight non-employee directors had completed at least two full terms of service as of the date of the March 20142017 award. Consequently, the requisite service period for the award hadhas already been satisfied and we recorded the fair value of $1,325$377 of the awards to these seventwo directors to share-based compensation expense in the fiscal quarter ended March 31, 20142017 rather than recording that expense over the one-year vesting period stated in the award agreement, as is done for the other non-employee director.directors who received an annual equity award in March 2017.
As discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, in conjunction with an executive officer transition, all unvested stock options and restricted stock held by our former President and Chief Executive Officer, who remains the Chairman of our Board of Directors in a non-executive capacity, vested in full on December 31, 2015, in accordance with the terms of his employment letter with the Company dated December 12, 2014. We applied the accounting guidance under Accounting Standards Codification (ASC) Topic 718 "Stock Compensation" to determine the additional share-based compensation expense to be recorded as part of the modification of the outstanding equity. The original fair value of his unvested equity totaling $5,033 was recorded ratably between the date of modification and December 31, 2015, rather than recording the expense over the original vesting period.
STOCK OPTION ACTIVITY
In fiscal 2012, as required by the EIP, the exercise prices and the number of outstanding non-qualified stock options (NQSOs) were proportionally adjusted to reflect the leveraged recapitalization with a special cash dividend. The exercise prices of outstanding NQSOs were reduced by multiplying them by a factor of 0.68933, representing the ratio of the official opening price of our common stock on the NASDAQ stock market of $35.79 per share on the ex-dividend date, to the official closing price of our common stock on the NASDAQ stock market of $51.92 per share on the last trading day immediately prior to the ex-dividend date. The number of outstanding NQSOs was increased by multiplying the number by a factor of 1.45068, representing the ratio of the official NASDAQ closing price of $51.92 per share on the dividend payment date to the official NASDAQ opening price of $35.79 per share on the ex-dividend date. This adjustment did not result in additional share-based compensation expense in the period as the fair value of the outstanding NQSOs immediately following the payment of the special cash dividend was equal to the fair value immediately prior to such distribution.
A summary of stock option activity under the EIP and OIP as of September 30, 2014,2017, and changes during fiscal 20142017 are presented below:
| | | | | | | | Weighted | | | | |
| | | | | | | | Average | | | | |
| | | | | Weighted | | | Remaining | | | Aggregate | |
| | | | | Average | | | Contractual | | | Intrinsic | |
| | Stock | | | Exercise | | | Term | | | Value | |
| | Options | | | Price | | | (in years) | | | (in thousands) | |
Outstanding at September 30, 2013 | | | 4,273,887 | | | $ | 26.95 | | | | | | | |
Granted | | | 475,856 | | | | 44.18 | | | | | | | |
Exercised | | | (1,449,002 | ) | | | 27.78 | | | | | | | |
Forfeited or canceled | | | (27,843 | ) | | | 32.87 | | | | | | | |
Outstanding at September 30, 2014 | | | 3,272,898 | | | $ | 29.04 | | | | 6.1 | | | $ | 41,908 | |
| | | | | | | | | | | | | | | | |
Exercisable at September 30, 2014 | | | 2,034,461 | | | $ | 25.10 | | | | 4.8 | | | $ | 33,263 | |
| | | | | | | | | | | | | | | | |
Expected to vest after September 30, 2014 | | | 1,193,375 | | | $ | 35.50 | | | | 8.1 | | | $ | 8,311 | |
| Stock Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value (in thousands) | |
Outstanding at September 30, 2016 | | 2,052,552 | | | $ | 36.97 | | | | | | | |
Granted | | 369,230 | | | | 60.99 | | | | | | | |
Exercised | | (818,640 | ) | | | 33.79 | | | | | | | |
Forfeited or canceled | | (86,081 | ) | | | 43.38 | | | | | | | |
Outstanding at September 30, 2017 | | 1,517,061 | | | $ | 44.17 | | | | 7.0 | | | $ | 54,251 | |
| | | | | | | | | | | | | | | |
Exercisable at September 30, 2017 | | 726,897 | | | $ | 36.34 | | | | 5.5 | | | $ | 31,687 | |
| | | | | | | | | | | | | | | |
Expected to vest after September 30, 2017 | | 788,676 | | | $ | 51.36 | | | | 8.3 | | | $ | 22,535 | |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., for all in-the-money stock options, the difference between our closing stock price of $41.45$79.93 per share on the last trading day of fiscal 20142017 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 2014.2017. The total intrinsic value of options exercised was $21,647, $9,847$25,213, $12,317 and $6,87931,546 for fiscal 2014, 20132017, 2016 and 2012,2015, respectively.
The total cash received from options exercised was $40,248, $28,525$27,666, $16,623 and $34,107$33,177 for fiscal 2014, 20132017, 2016 and 2012,2015, respectively.The actual tax benefit realized for the tax deductions from options exercised was $7,611,$3,394$8,743, $4,076 and $2,239$10,569 for fiscal 2014, 20132017, 2016 and 2012,2015, respectively. The total fair value of stock options vested during fiscal years 2014, 20132017, 2016 and 20122015 was $6,645, $6,681$5,300, $7,880 and $6,796,$7,005, respectively. As of September 30, 2014,2017, there was $10,035$8,727 of total unrecognized share-based compensation expense related to unvested stock options granted under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.42.3 years.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
Similarly, in fiscal 2012, the EIP required that we proportionally adjust the number of outstanding restricted stock units (RSUs) as a result of the leveraged recapitalization with a special cash dividend. The number of outstanding RSUs was increased by multiplying the number by a factor of 1.45068, representing the ratio of the official NASDAQ closing price of $51.92 per share on the dividend payment date to the official NASDAQ opening price of $35.79 per share on the ex-dividend date. This adjustment did not result in additional share-based compensation expense in the period as the fair value of the outstanding RSUs immediately following the payment of the special cash dividend was equal to the fair value immediately prior to such distribution.
A summary of the status of the restricted stock awards and restricted stock unit awards outstanding that were granted under the EIP and OIP as of September 30, 2014,2017, and changes during fiscal 2014,2017, are presented below:
| | | | | | | Restricted Stock Awards and Units | | | Weighted Average Grant Date Fair Value | |
| | Restricted | | | Weighted | | | | | | |
| | Stock | | | Average | | |
| | Awards and | | | Grant Date | | |
| | Units | | | Fair Value | | |
| | | | | | | |
Nonvested at September 30, 2013 | | | 396,429 | | | $ | 34.84 | | |
Nonvested at September 30, 2016 | | | 340,460 | | | $ | 43.13 | |
Granted | | | 181,172 | | | | 44.13 | | | 193,761 | | | | 61.75 | |
Vested | | | (170,997 | ) | | | 34.60 | | | (154,526 | ) | | | 44.64 | |
Forfeited | | | (8,505 | ) | | | 37.70 | | | (33,182 | ) | | | 47.76 | |
Nonvested at September 30, 2014 | | | 398,099 | | | $ | 39.11 | | |
Nonvested at September 30, 2017 | | | 346,513 | | | $ | 52.43 | |
The total fair value of restricted stock awards and restricted stock units vested during fiscal years 2017, 2016 and 2015 was $6,898, $10,740 and $7,222, respectively. As of September 30, 2014,2017, there was $9,681$13,058 of total unrecognized share-based compensation expense related to unvested restricted stock awards and restricted stock units under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.52.6 years.The total fair value of restricted stock awards and restricted stock units vested during fiscal years 2014, 2013 and 2012 was $5,916, $5,457 and $5,784, respectively.
12.14. SAVINGS PLAN
Effective in May 2000, we adopted the Cabot Microelectronics Corporation 401(k) Plan (the "401(k) Plan"), which is a qualified defined contribution plan, covering all eligible U.S. employees meeting certain minimum age and eligibility requirements, as defined by the 401(k) Plan. Participants may make elective contributions of up to 60% of their eligible compensation. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The 401(k) Plan provides for matching and fixed non-elective contributions by the Company. Under the 401(k) Plan, the Company will match 100% of the first four percent of the participant's eligible compensation and 50% of the next two percent of the participant's eligible compensation that is contributed, subject to limitations required by government regulations. Under the 401(k) Plan, all U.S. employees, even those who do not contribute to the 401(k) Plan, receive a contribution by the Company in an amount equal to four percent of eligible compensation, and thus are participants in the 401(k) Plan. Participants are 100% vested in all Company contributions at all times. The Company's expense for the 401(k) Plan totaled $4,547, $4,057$5,256, $4,624 and $4,210$4,111 for the fiscal years ended September 30, 2014, 20132017, 2016 and 2012,2015, respectively.
13.15. OTHER INCOME, (EXPENSE), NET
Other income, (expense), net, consisted of the following:
| Year Ended September 30, | | Year Ended September 30, | |
| 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 | |
| | | | | | | | | | | | |
Interest income | | $ | 194 | | | $ | 145 | | | $ | 146 | | | $ | 2,351 | | | $ | 949 | | | $ | 365 | |
Other income (expense) | | | (54 | ) | | | 1,247 | | | | (1,157 | ) | | | (438 | ) | | | (296 | ) | | | 316 | |
Total other income (expense), net | | $ | 140 | | | $ | 1,392 | | | $ | (1,011 | ) | |
Total other income, net | | | $ | 1,913 | | | $ | 653 | | | $ | 681 | |
Other income (expense) primarily represents the gains and losses recorded on transactions denominated in foreign currencies. The decrease in other income from fiscal 2013 to fiscal 2014, as well as the increase in other income from fiscal 2012 to fiscal 2013, was primarily due to the impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency, net of the gains and losses on forward foreign exchange contracts discussed in Note 10.71
The following is a summary of our capital stock activity over the past three years:
| | Number of Shares | | Number of Shares |
| | Common Stock | | | Treasury Stock | | Common Stock | | Treasury Stock |
September 30, 2011 | | | 27,652,336 | | | | 4,715,577 | | |
September 30, 2014 | | | 31,927,601 | | | 8,142,687 |
Exercise of stock options | | | 976,645 | | | | | | | 1,324,646 | | | |
Restricted stock under EIP, net of forfeitures | | | 159,879 | | | | | | |
Restricted stock under Deposit Share Plan | | | 5,022 | | | | | | |
Restricted stock under EIP and OIP, net of forfeitures | | | 172,010 | | | |
Restricted stock under Deposit Share Program, net of forfeitures | | | (811) | | | |
Common stock under ESPP | | | 70,645 | | | | | | | 65,735 | | | |
Repurchases of common stock under share repurchase plans | | | | | | | 929,407 | | | | | | 851,245 |
Repurchases of common stock – other | | | | | | | 37,304 | | | | | | 47,746 |
| | | | | | | | | | | | | |
September 30, 2012 | | | 28,864,527 | | | | 5,682,288 | | |
September 30, 2015 | | | 33,489,181 | | | 9,041,678 |
Exercise of stock options | | | 1,071,750 | | | | | | | 606,562 | | | |
Restricted stock under EIP and OIP, net of forfeitures | | | 185,925 | | | | | | | 86,277 | | | |
Restricted stock under Deposit Share Plan | | | 6,773 | | | | | | |
Restricted stock under Deposit Share Program, net of forfeitures | | | 1,847 | | | |
Common stock under ESPP | | | 84,602 | | | | | | | 77,437 | | | |
Repurchases of common stock under share repurchase plans | | | | | | | 1,144,836 | | | | | | 636,839 |
Repurchases of common stock – other | | | | | | | 39,551 | | | | | | 66,125 |
| | | | | | | | | | | | | |
September 30, 2013 | | | 30,213,577 | | | | 6,866,675 | | |
September 30, 2016 | | | 34,261,304 | | | 9,744,642 |
Exercise of stock options | | | 1,449,002 | | | | | | | 818,640 | | | |
Restricted stock under EIP and OIP, net of forfeitures | | | 176,026 | | | | | | | 81,047 | | | |
Restricted stock under Deposit Share Plan | | | 7,296 | | | | | | |
Restricted stock under Deposit Share Program, net of forfeitures | | | - | | | |
Common stock under ESPP | | | 81,700 | | | | | | | 69,751 | | | |
Repurchases of common stock under share repurchase plans | | | | | | | 1,229,494 | | | | | | 167,809 |
Repurchases of common stock – other | | | | | | | 46,518 | | | | | | 35,739 |
| | | | | | | | | | | | | |
September 30, 2014 | | | 31,927,601 | | | | 8,142,687 | | |
| | | | | | | | | |
September 30, 2017 | | | 35,230,742 | | | 9,948,190 |
COMMON STOCK
Each share of common stock, including those awarded as restricted stock, but not restricted stock units, entitles the holder to one vote on all matters submitted to a vote of Cabot Microelectronics' stockholders. Common stockholders are entitled to receive ratably the dividends, if any, as may be declared by the Board of Directors. Holders of restricted stock units awarded in fiscal 2017 are entitled to dividend equivalents, which are paid to the holder upon the vesting of the restricted stock units. The number of authorized shares of common stock is 200,000,000 shares.
SHARE REPURCHASES
In April 2014,January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from $62,000$75,000 to $150,000. Under this program, we repurchased 1,229,494167,809 shares for $53,000$12,035 during fiscal 2014, 1,144,8362017, 636,839 shares for $40,000$25,980 during fiscal 2013,2016, and 929,407851,245 shares for $33,026$40,026 during fiscal 2012.2015. As of September 30, 2014, $125,0002017, $121,993 remains outstandingavailable 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 46,518, 39,55135,739, 66,125 and 37,30447,746 shares were purchased during fiscal 2014, 20132017, 2016 and 2012,2015, respectively, pursuant to the terms of our EIP and OIP as shares withheld from award recipients to cover payroll taxes on the vesting of shares of restricted stock granted under the EIP and OIP.
Income before income taxes was as follows:
| | Year Ended September 30, | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | 2017 | | 2016 | | 2015 | |
| | | | | | | | | | | | | | | |
Domestic | | $ | 14,358 | | | $ | 40,045 | | | $ | 55,555 | | | $ | 33,272 | | | $ | 7,130 | | | $ | 15,305 | |
Foreign | | | 54,236 | | | | 34,175 | | | | 7,649 | | | | 76,100 | | | | 63,308 | | | | 55,892 | |
Total | | $ | 68,594 | | | $ | 74,220 | | | $ | 63,204 | | | $ | 109,372 | | | $ | 70,438 | | | $ | 71,197 | |
Taxes on income consisted of the following:
| | Year Ended September 30, | | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | | 2017 | | | 2016 | | | 2015 | |
U.S. federal and state: | | | | | | | | | | | | | | | | | | |
Current | | $ | 8,978 | | | $ | 18,060 | | | $ | 20,247 | | | $ | 8,606 | | | $ | 609 | | | $ | 6,496 | |
Deferred | | | 488 | | | | (3,494 | ) | | | (608 | ) | | | 1,550 | | | | (1,465 | ) | | | 1,791 | |
Total | | $ | 9,466 | | | $ | 14,566 | | | $ | 19,639 | | | $ | 10,156 | | | $ | (856 | ) | | $ | 8,287 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign: | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 9,565 | | | $ | 8,304 | | | $ | 5,596 | | | $ | 13,422 | | | $ | 11,737 | | | $ | 7,686 | |
Deferred | | | (1,188 | ) | | | (1,228 | ) | | | (2,125 | ) | | | (1,158 | ) | | | (292 | ) | | | (922 | ) |
Total | | | 8,377 | | | | 7,076 | | | | 3,471 | | | | 12,264 | | | | 11,445 | | | | 6,764 | |
Total U.S. and foreign | | $ | 17,843 | | | $ | 21,642 | | | $ | 23,110 | | | $ | 22,420 | | | $ | 10,589 | | | $ | 15,051 | |
The provision for income taxes at our effective tax rate differed from the statutory rate as follows:
| | Year Ended September 30, | | | Year Ended September 30, |
| | 2014 | | | 2013 | | | 2012 | | | 2017 | | 2016 | | | 2015 |
| | | | | | | | | | | | | | | | |
Federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | 35.0% | | | 35.0% | | | 35.0% |
U.S. benefits from research and experimentation activities | | | (0.6 | ) | | | (2.0 | ) | | | (0.5 | ) | | (1.0) | | | (3.5) | | | (2.2) |
State taxes, net of federal effect | | | 0.8 | | | | 0.3 | | | | 0.2 | | | 0.4 | | | (0.1) | | | 0.6 |
Foreign income at other than U.S. rates | | | (9.4 | ) | | | (5.3 | ) | | | (0.7 | ) | | (14.7) | | | (16.9) | | | (21.4) |
Change in valuation allowance | | | (0.0 | ) | | | 1.4 | | | | (0.0 | ) | |
Executive compensation | | | 0.4 | | | | 0.2 | | | | 0.8 | | | 0.3 | | | 0.0 | | | 0.6 |
Share-based compensation | | | 0.1 | | | | 0.5 | | | | 0.2 | | | 0.1 | | | 0.7 | | | 0.1 |
Adjustment of prior amounts | | | 0.1 | | | | 0.1 | | | | 1.9 | | | 0.0 | | | 0.0 | | | 1.4 |
Taiwan Restructuring | | | 0.0 | | | 0.0 | | | 7.2 |
Domestic production deduction | | | (0.3 | ) | | | (0.2 | ) | | | (0.5 | ) | | 0.0 | | | (1.3) | | | (1.3) |
Other, net | | | (0.1 | ) | | | (0.8 | ) | | | 0.2 | | | 0.4 | | | 1.1 | | | 1.1 |
Provision for income taxes | | | 26.0 | % | | | 29.2 | % | | | 36.6 | % | | 20.5% | | | 15.0% | | | 21.1% |
In fiscal 2012,years 2015, 2016, and 2017, we elected to permanently reinvest the earnings of certain of our foreign subsidiaries outside the U.S. rather than repatriate the earnings to the U.S. In fiscal 2013 and 2014, we elected to permanently reinvest thehistorical earnings of all of our foreign subsidiaries. We have not provided for deferred taxes on approximately $67,955$254,800 of undistributed earnings of such subsidiaries. These earnings could become subject to additional income tax if they are remitted as dividends to the U.S. parent company, loaned to the U.S. parent company, or upon sale of subsidiary stock. Determination of the amount of unrecognizedShould we decide to repatriate these undistributed foreign earnings, we would need to record a deferred tax liability of approximately $49,000 related to these earnings is not practicable.earnings.
The increase in the effective tax rate during fiscal 2017 was primarily due to the absence of the retroactive reinstatement of the research and experimentation tax credit recorded in fiscal 2016, and changes in the jurisdictional mix of income.
The decrease in ourthe effective tax rate induring fiscal 20142016 was primarily due to lowerthe absence of income tax expense on foreign earningstaxes incurred in conjunction with our electionfiscal 2015 related to permanently reinvest the earningsrestructuring of our foreign subsidiaries. In particular, as discussedoperations in Taiwan, the reinstatement of the research and experimentation tax credit in December 2015, and the benefit of $928 related to domestic production deductions. This was partially offset by a change in the following paragraph,mix of earnings among various jurisdictions in which we operate, including a scheduled reduction in the Company was awarded abenefit available under our tax holiday in South Korea which contributedfrom 100% to 50% of the reduction in our full year effectivestatutory tax rate.
The results of operations for the fiscal year ended September 30, 2015 included tax adjustments to correct prior period amounts, which we determined to be immaterial to the prior periods to which they related. These adjustments, relating to the tax treatment of intercompany activities between certain of our foreign and U.S. operations, were recorded in fiscal 2015 and reduced full year net income by $868 and diluted earnings per share by approximately $0.04.
The Company was awardedhad operated under a tax holiday in South Korea in conjunction with our investment in research, development and manufacturing facilities there.there, which expired at the end of fiscal 2017. This arrangement allowsallowed for a tax at 50% of the statutory rate in effect in South Korea for fiscal years 2016 and 2017, following a 0% tax rate in fiscal years 2013, 2014, and 2015, and a tax at 50% of the local statutory rate in effect for fiscal years 2016 and 2017.2015. This tax holiday reduced our fiscal 20142017, 2016, and 20132015 income tax provision by approximately $3,770$5,018, $3,771 and $467,$5,446, respectively. This tax holiday increased our fiscal 2017, 2016, and 2015 diluted earnings per share by approximately $0.20, $0.15, and $0.22, respectively.
The accounting guidance regarding uncertainty in income taxes prescribes a threshold for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. Under these standards, we may recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position.
The following table presents the changes in the balance of gross unrecognized tax benefits during the last three fiscal years:
Balance September 30, 2011 | | $ | 603 | | |
Balance September 30, 2014 | | | $ | 701 | |
Additions for tax positions relating to the current fiscal year | | | 51 | | | | 194 | |
Additions for tax positions relating to prior fiscal years | | | 114 | | | | 1,400 | |
Settlements with taxing authorities | | | (353 | ) | | | (522 | ) |
Lapse of statute of limitations | | | (132 | ) | |
Balance September 30, 2012 | | | 283 | | |
Balance September 30, 2015 | | | | 1,773 | |
Additions for tax positions relating to the current fiscal year | | | 228 | | | | 364 | |
Additions for tax positions relating to prior fiscal years | | | 247 | | | | 200 | |
Settlements with taxing authorities | | | - | | | | (248 | ) |
Lapse of statute of limitations | | | - | | |
Balance September 30, 2013 | | | 758 | | |
Balance September 30, 2016 | | | | 2,089 | |
Additions for tax positions relating to the current fiscal year | | | 59 | | | | 381 | |
Additions for tax positions relating to prior fiscal years | | | 125 | | | | 44 | |
Settlements with taxing authorities | | | (207 | ) | |
Lapse of statute of limitations | | | (34 | ) | | | (244 | ) |
Balance September 30, 2014 | | $ | 701 | | |
Balance September 30, 2017 | | | $ | 2,270 | |
The entire balance of unrecognized tax benefits shown above as of September 30, 2017 and 2016, would affect our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions as income tax expense in our financial statements. Interest accrued on our Consolidated Balance Sheet was $42$100 and $60$65 at September 30, 20142017 and 2013,2016, respectively, and any interest and penalties charged to expense in fiscal years 2014, 20132017, 2016 and 20122015 was not material.
At September 30, 2014,2017, the tax periods open to examination by the U.S. federal government included fiscal years 20112014 through 2014.2017. We believe the tax periods open to examination by U.S. state and local governments include fiscal years 20102013 through 20142017 and the tax periods open to examination by foreign jurisdictions include fiscal years 20102012 through 2014.2017. We do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Significant components of net deferred tax assets and liabilities were as follows:
| | September 30, | | | September 30, | |
| | 2014 | | | 2013 | | | 2017 | | | 2016 | |
Deferred tax assets: | | | | | | | | | | | | |
Employee benefits | | $ | 3,889 | | | $ | 3,892 | | | $ | 5,307 | | | $ | 4,612 | |
Inventory | | | 3,385 | | | | 3,138 | | | | 2,863 | | | | 3,117 | |
Bad debt reserve | | | 515 | | | | 515 | | | | 585 | | | | 615 | |
Share-based compensation expense | | | 12,150 | | | | 13,907 | | | | 6,611 | | | | 8,262 | |
Net operating losses | | | 641 | | | | 759 | | |
Credit and other carryforwards | | | | 22,663 | | | | 25,596 | |
Other | | | 3,084 | | | | 2,723 | | | | 1,488 | | | | 1,487 | |
Valuation allowance | | | (2,912 | ) | | | (2,288 | ) | | | (2,271 | ) | | | (3,022 | ) |
Total deferred tax assets | | $ | 20,752 | | | $ | 22,646 | | | $ | 37,246 | | | $ | 40,667 | |
| | | | | | | | | | | | | | | | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | $ | 14,671 | | | $ | 17,374 | |
Translation adjustment | | $ | 1,615 | | | $ | 3,247 | | | | 300 | | | | 2,079 | |
Depreciation and amortization | | | (267 | ) | | | 2,046 | | |
Other | | | 1,040 | | | | 962 | | | | 739 | | | | 542 | |
Total deferred tax liabilities | | $ | 2,388 | | | $ | 6,255 | | | $ | 15,710 | | | $ | 19,995 | |
As of September 30, 2014,2017, the Company had foreign, federal and state net operating loss carryforwards (NOLs) of $1,625$5,642, $26,075 and $894,$35,999, respectively, which will expire beginning inover the period between fiscal year 2017 through2018 and fiscal year 2034,2037, for which we have recorded a $1,518$1,039 gross valuation allowance.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, 2014,2017, the Company had $2,479$1,577 in state tax credit carryforwards, for which we have recorded a $2,052$1,409 gross valuation allowance. As of September 30, 2014,2017, the Company had a capital loss carryforward of $2,849,$2,772, for which we have recorded a full valuation allowance. As of September 30, 2017, the Company had foreign and federal tax credit carryforwards of $4,811 and $3,765, respectively, which will expire beginning in fiscal years 2028 through 2038.
16.18. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we periodically become a party to legal proceedings in the ordinary course of business.
PRODUCT WARRANTIES
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements, and costs related to such replacement. The warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Our warranty reserve requirements changed during fiscal 20142017 as follows:
Balance as of September 30, 2013 | | $ | 324 | | |
Balance as of September 30, 2016 | | | $ | 243 | |
Reserve for product warranty during the reporting period | | | 760 | | | | 530 | |
Settlement of warranty | | | (838 | ) | | | (526 | ) |
Balance as of September 30, 2014 | | $ | 246 | | |
Balance as of September 30, 2017 | | | $ | 247 | |
INDEMNIFICATION
In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Generally, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the other party harmless against losses arising from items such as a breach of certain representations and covenants including title to assets sold, certain intellectual property rights and certain environmental matters. These terms are common in the industries in which we conduct business. In each of these circumstances, payment by us is subject to certain monetary and other limitations and is conditioned on the other party making an adverse claim pursuant to the procedures specified in the particular agreement, which typically allow us to challenge the other party's claims.
We evaluate estimated losses for such indemnifications under the accounting standards related to contingencies and guarantees. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not experienced material costs as a result of such obligations and, as of September 30, 2014,2017, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of such obligations is probable.
LEASE COMMITMENTS
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable leases, all of which expire within sixfive years from September 30, 2014,2017, and may be renewed by us. Rent expense under such arrangements during fiscal 2014, 20132017, 2016 and 20122015 totaled $2,425, $2,594$3,120, $2,765 and $3,199,$2,195, respectively.
Future minimum rental commitments under noncancelable leases as of September 30, 20142017 are as follows:
Fiscal Year | | Operating | |
| | | |
2015 | | $ | 2,020 | |
2016 | | | 1,540 | |
2017 | | | 1,236 | |
2018 | | | 700 | |
2019 | | | 689 | |
Thereafter | | | 4,186 | |
| | $ | 10,371 | |
| Fiscal Year | | Operating | |
| | | | |
| 2018 | | $ | 3,052 | |
| 2019 | | | 2,587 | |
| 2020 | | | 1,956 | |
| 2021 | | | 1,392 | |
| 2022 | | | 1,084 | |
| Thereafter | | | 4,148 | |
| | | $ | 14,219 | |
PURCHASE OBLIGATIONS
Purchase obligations include our take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services. 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. To date, weWe have not recorded such a liability.
Prior to January 1, 2013, we operatedbeen operating under a fumed silica supply agreement with Cabot Corporation, our former parent company which is not a related party, underthe current term of which we were generally obligatedruns through December 31, 2019. As of calendar year 2017, this agreement has provided us the option to purchase at least 90% of our six-month volume forecast for certain of our slurry products, tofumed silica, with minimum purchase certain minimum quantities every six months, and to payrequirements through 2018, for the shortfall if we purchased less than these amounts. This agreement expired on December 31, 2012. We did not pay any shortfall under this agreement. We entered into a new fumed silica supply agreement with Cabot Corporation that became effective as of January 1, 2013 with a term of four years. This new agreement has revised pricing and requires us to purchase certain minimum quantities of fumed silica each year of the agreement, and tofor which we will pay a shortfall if wefee of $1,500 in each of calendar years 2017, 2018 and 2019, of which the 2017 payment has already been made. The present value of this fee was $2,933 as of September 30, 2017. The $1,500 payment due for 2018 is included in accrued expenses and the remaining $1,433 is included in other long-term liabilities on our Consolidated Balance Sheet As of September 30, 2017, purchase less than the minimum. Purchase obligations include $76,662$9,749 of contractual commitments related to this agreement. Until April 2013, we also operated under a fumed alumina supply arrangement withour Cabot Corporation under which we were obligated to pay certain fixed, capital and variable costs, and had take-or-pay obligations. We did not pay any shortfall under this agreement.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 a projected benefit obligationobligations of $5,025$6,673 and $4,843$7,091 as of September 30, 20142017 and 2013,2016, respectively, and an accumulated benefit obligation of $3,782$5,253 and $3,631$5,827 as of September 30, 20142017 and 2013,2016, respectively. Key assumptions used in the actuarial measurement of the Japan pension liability include weighted average discount rates of 1.50%0.50% and 1.75%0.25% at September 30, 20142017 and 2013,2016, respectively, and an expected rate of compensation increase of 2.50% and2.00%at both September 30, 20142017 and 2013.2016, respectively. Total future Japan pension costs included in accumulated other comprehensive income are $860 $1,837 and $665$1,667 at September 30, 20142017 and 2013,2016, respectively.
Our plans in Korea had defined benefit obligations of $1,663 and $1,822 as of September 30, 2017 and 2016. Key assumptions used in the actuarial measurement of the Korea pension liability include weighted average discount rates of 4.00% and 3.00% at September 30, 2017 and 2016, respectively, and an expected rate of compensation increase of 4.50% and 5.00% at September 30, 2017 and 2016. Total future Korea pension costs included in accumulated other comprehensive income are $6 and $530 at September 30, 2017 and 2016, respectively.
Benefit costs for the combined plans were $1,176, $1,024 and $962 in fiscal years 2017, 2016 and 2015, respectively, consisting primarily of service costs, areand were recorded as fringe benefit expense under cost of goods sold and operating expenses in our Consolidated Statement of Income. BenefitEstimated future benefit payments under all such unfunded plans to be paid over the next 10 years are expected to be immaterial.as follows:
| Fiscal Year | | Amount | |
| 2018 | | $ | 304 | |
| 2019 | | | 336 | |
| 2020 | | | 565 | |
| 2021 | | | 412 | |
| 2022 | | | 717 | |
| 2023 to 2027 | | $ | 3,451 | |
17.19. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC 260. Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.
The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. Basic and diluted earnings per share were calculated as follows:
| | Year Ended September 30, | | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | | 2017 | | | 2016 | | | 2015 | |
Numerator: | | | | | | | | | | | | | | | | | | |
Net income | | $ | 50,751 | | | $ | 52,578 | | | $ | 40,094 | | | $ | 86,952 | | | $ | 59,849 | | | $ | 56,146 | |
Less: income attributable to participating securities | | | (442 | ) | | | (506 | ) | | | (391 | ) | | | (256 | ) | | | (361 | ) | | | (483 | ) |
Net income available to common shareholders | | $ | 50,309 | | | $ | 52,072 | | | $ | 39,703 | | | $ | 86,696 | | | $ | 59,488 | | | $ | 55,663 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average common shares | | | 23,704,024 | | | | 22,924,056 | | | | 22,506,408 | | | | 25,015,458 | | | | 24,076,549 | | | | 24,039,692 | |
(Denominator for basic calculation) | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | | 906,884 | | | | 836,010 | | | | 737,548 | | | | 497,029 | | | | 400,444 | | | | 592,123 | |
Diluted weighted-average common shares | | | 24,610,908 | | | | 23,760,066 | | | | 23,243,956 | | | | 25,512,487 | | | | 24,476,993 | | | | 24,631,815 | |
(Denominator for diluted calculation) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 2.12 | | | $ | 2.27 | | | $ | 1.76 | | | $ | 3.47 | | | $ | 2.47 | | | $ | 2.32 | |
Diluted | | $ | 2.04 | | | $ | 2.19 | | | $ | 1.71 | | | $ | 3.40 | | | $ | 2.43 | | | $ | 2.26 | |
For the twelve months ended September 30, 2014, 2013,2017, 2016, and 2012,2015, approximately 0.50.4 million, 1.51.1 million and 1.30.7 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the options was greater than the average market price of our common stock and, therefore, their inclusion would have been anti-dilutive.
share.
18.
20. FINANCIAL INFORMATION BY INDUSTRY SEGMENT, GEOGRAPHIC AREA AND PRODUCT LINE
We operate predominantly in one industry segment – the development, manufacture, and sale of CMP consumables. Revenues are attributed to the United States and foreign regions based upon the customer location and not the geographic location from which our products were shipped. Financial information by geographic area was as follows:
| | Year Ended September 30, | | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | | 2017 | | | 2016 | | | 2015 | |
Revenue: | | | | | | | | | | | | | | | | | | |
United States | | $ | 51,036 | | | $ | 53,955 | | | $ | 56,770 | | | $ | 72,670 | | | $ | 62,400 | | | $ | 55,989 | |
Asia | | | 347,669 | | | | 347,797 | | | | 342,958 | | | | 394,874 | | | | 336,312 | | | | 328,669 | |
Europe | | | 25,961 | | | | 31,379 | | | | 27,929 | | | | 39,635 | | | | 31,737 | | | | 29,439 | |
Total | | $ | 424,666 | | | $ | 433,131 | | | $ | 427,657 | | | $ | 507,179 | | | $ | 430,449 | | | $ | 414,097 | |
Property, plant and equipment, net: | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | $ | 44,585 | | | $ | 47,436 | | | $ | 49,325 | | | $ | 52,155 | | | $ | 50,595 | | | $ | 43,239 | |
Asia | | | 56,236 | | | | 64,546 | | | | 75,690 | | | | 54,201 | | | | 55,893 | | | | 50,504 | |
Europe | | | - | | | | 3 | | | | 5 | | | | 5 | | | | 8 | | | | - | |
Total | | $ | 100,821 | | | $ | 111,985 | | | $ | 125,020 | | | $ | 106,361 | | | $ | 106,496 | | | $ | 93,743 | |
The following table shows revenue from sales to customers in foreign countries that accounted for more than ten percent of our total revenue in fiscal 2014, 20132017, 2016 and 2012:2015:
| | Year Ended September 30, | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | 2017 | | 2016 | | 2015 | |
Revenue: | | | | | | | | | | | | | | | |
Taiwan | | $ | 138,049 | | | $ | 133,273 | | | $ | 124,732 | | | $ | 130,849 | | | $ | 122,671 | | | $ | 124,460 | |
South Korea | | | 71,420 | | | | 73,778 | | | | 68,573 | | | | 95,414 | | | | 76,082 | | | | 70,608 | |
China | | | 45,200 | | | | * | | | | * | | | | 74,781 | | | | 59,239 | | | | 49,350 | |
Japan | | | * | | | | * | | | | 56,488 | | |
* Denotes less than ten percent of total | | | | | | | | | | | | | |
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 2014, 20132017, 2016 and 2012:2015:
| | Year Ended September 30, | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | 2017 | | 2016 | | 2015 | |
Property, plant and equipment, net: | | | | | | | | | | | | | | | |
Japan | | $ | 27,110 | | | $ | 33,566 | | | $ | 43,411 | | | $ | 21,408 | | | $ | 26,268 | | | $ | 22,572 | |
South Korea | | | | 16,915 | | | | 11,135 | | | | 9,658 | |
Taiwan | | | 16,675 | | | | 17,212 | | | | 18,397 | | | | 15,119 | | | | 17,949 | | | | 17,419 | |
South Korea | | | 11,564 | | | | 12,591 | | | | 12,580 | | |
The following table shows revenue generated by product area in fiscal 2014, 20132017, 2016 and 2012:2015:
| | Year Ended September 30, | | | Year Ended September 30, | |
| | 2014 | | | 2013 | | | 2012 | | | 2017 | | | 2016 | | | 2015 | |
Revenue: | | | | | | | | | | | | | | | | | | |
Tungsten slurries | | $ | 162,148 | | | $ | 155,904 | | | $ | 161,756 | | | $ | 221,493 | | | $ | 185,365 | | | $ | 178,770 | |
Dielectric slurries | | | 118,079 | | | | 123,180 | | | | 119,320 | | | | 120,240 | | | | 99,141 | | | | 96,386 | |
Polishing Pads | | | | 68,673 | | | | 52,067 | | | | 32,048 | |
Other Metals slurries | | | 76,605 | | | | 76,367 | | | | 67,157 | | | | 62,829 | | | | 63,960 | | | | 71,640 | |
Polishing pads | | | 33,824 | | | | 32,996 | | | | 33,725 | | |
Engineered Surface Finishes | | | | 27,900 | | | | 22,369 | | | | 21,534 | |
Data storage slurries | | | 17,850 | | | | 20,685 | | | | 20,821 | | | | 6,044 | | | | 7,547 | | | | 13,719 | |
Engineered Surface Finishes | | | 16,160 | | | | 23,999 | | | | 24,878 | | |
Total | | $ | 424,666 | | | $ | 433,131 | | | $ | 427,657 | | | $ | 507,179 | | | $ | 430,449 | | | $ | 414,097 | |
SELECTED QUARTERLY OPERATING RESULTS
The following table presents our unaudited financial information for the eight quarterly periods ended September 30, 2014.2017. This unaudited financial information has been prepared in accordance with accounting principles generally accepted in the United States of America, applied on a basis consistent with the annual audited financial statements and in the opinion of management, include all necessary adjustments, which consist only of normal recurring adjustments necessary to present fairly the financial results for the periods. The results for any quarter are not necessarily indicative of results for any future period.
CABOT MICROELECTRONICS CORPORATION
SELECTED QUARTERLY OPERATING RESULTS
(Unaudited and in thousands, except per share amounts)
| | Sept. 30, | | | June 30, | | | March 31, | | | Dec. 31, | | | Sept. 30, | | | June 30, | | | March 31, | | | Dec. 31, | |
| | 2014 | | | 2014 | | | 2014 | | | 2013 | | | 2013 (1) | | | 2013 (1)(2) | | | 2013 (2) | | | 2013 (1)(2) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 116,337 | | | $ | 108,358 | | | $ | 99,456 | | | $ | 100,515 | | | $ | 116,266 | | | $ | 109,968 | | | $ | 100,364 | | | $ | 106,533 | |
Cost of goods sold | | | 59,209 | | | | 56,632 | | | | 52,931 | | | | 52,801 | | | | 57,143 | | | | 55,359 | | | | 52,019 | | | | 56,494 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 57,128 | | | | 51,726 | | | | 46,525 | | | | 47,714 | | | | 59,123 | | | | 54,609 | | | | 48,345 | | | | 50,039 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research, development and technical | | | 15,051 | | | | 15,368 | | | | 14,364 | | | | 14,571 | | | | 15,835 | | | | 15,149 | | | | 15,073 | | | | 15,316 | |
Selling and marketing | | | 6,846 | | | | 6,489 | | | | 6,471 | | | | 6,707 | | | | 7,360 | | | | 6,470 | | | | 7,046 | | | | 7,109 | |
General and administrative | | | 12,236 | | | | 11,380 | | | | 11,076 | | | | 10,726 | | | | 12,270 | | | | 10,776 | | | | 12,287 | | | | 10,954 | |
Total operating expenses | | | 34,133 | | | | 33,237 | | | | 31,911 | | | | 32,004 | | | | 35,465 | | | | 32,395 | | | | 34,406 | | | | 33,379 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 22,995 | | | | 18,489 | | | | 14,614 | | | | 15,710 | | | | 23,658 | | | | 22,214 | | | | 13,939 | | | | 16,660 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 807 | | | | 832 | | | | 843 | | | | 872 | | | | 911 | | | | 907 | | | | 872 | | | | 953 | |
Other income (expense), net | | | (448 | ) | | | (132 | ) | | | 103 | | | | 617 | | | | (173 | ) | | | 248 | | | | 463 | | | | 854 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 21,740 | | | | 17,525 | | | | 13,874 | | | | 15,455 | | | | 22,574 | | | | 21,555 | | | | 13,530 | | | | 16,561 | |
Provision for income taxes (1) | | | 5,694 | | | | 4,223 | | | | 3,779 | | | | 4,147 | | | | 7,099 | | | | 5,261 | | | | 4,110 | | | | 5,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (1) | | $ | 16,046 | | | $ | 13,302 | | | $ | 10,095 | | | $ | 11,308 | | | $ | 15,475 | | | $ | 16,294 | | | $ | 9,420 | | | $ | 11,389 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share (1) (2) | | $ | 0.67 | | | $ | 0.55 | | | $ | 0.42 | | | $ | 0.47 | | | $ | 0.66 | | | $ | 0.70 | | | $ | 0.40 | | | $ | 0.49 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average basic shares outstanding | | | 23,500 | | | | 23,753 | | | | 23,982 | | | | 23,590 | | | | 23,041 | | | | 22,951 | | | | 22,974 | | | | 22,845 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share (1) (2) | | $ | 0.65 | | | $ | 0.53 | | | $ | 0.40 | | | $ | 0.45 | | | $ | 0.64 | | | $ | 0.68 | | | $ | 0.39 | | | $ | 0.48 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average diluted shares outstanding (2) | | | 24,334 | | | | 24,613 | | | | 24,897 | | | | 24,623 | | | | 23,994 | | | | 23,739 | | | | 23,847 | | | | 23,618 | |
(1) As discussed in Note 1 of the Notes to the Consolidated Financial Statements, the Company revised prior period financial statements to reflect the correction of certain items of income tax accounting identified in fiscal 2014, and the correction of previously identified out-of-period adjustments identified in fiscal years 2012 and 2013. The quarterly financial results in the table above reflect a reduction in our provision for income taxes of $1,686 and $801 for the quarters ended December 31, 2012 and June 30, 2013, respectively, and additional income tax expense of $1,294 for the quarter ended September 30, 2013. These corrections are also reflected in net income and earnings per share for each of these quarters.
(2) In conjunction with the financial statement revision discussed in Note 1, we revised the weighted average diluted shares outstanding in the quarters ended December 31, 2012, March 31, 2013, and June 30, 2014, to reflect the two-class method of calculating earnings per share. We have unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method. Consequently, our basic and diluted earnings per share for these quarters has been corrected to exclude the effects of the participating securities.
| | Sept. 30, 2017 | | | June 30, 2017 | | | March 31, 2017 | | | Dec. 31, 2016 | | | Sept. 30, 2016 | | | June 30, 2016 | | | March 31, 2016 | | | Dec. 31, 2015 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 136,784 | | | $ | 127,957 | | | $ | 119,184 | | | $ | 123,254 | | | $ | 122,684 | | | $ | 108,152 | | | $ | 99,244 | | | $ | 100,369 | |
Cost of goods sold | | | 66,734 | | | | 65,414 | | | | 59,153 | | | | 61,749 | | | | 61,598 | | | | 56,127 | | | | 52,348 | | | | 50,174 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 70,050 | | | | 62,543 | | | | 60,031 | | | | 61,505 | | | | 61,086 | | | | 52,025 | | | | 46,896 | | | | 50,195 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research, development and technical | | | 13,839 | | | | 14,333 | | | | 14,090 | | | | 13,396 | | | | 15,842 | | | | 12,928 | | | | 14,934 | | | | 14,828 | |
Selling and marketing | | | 8,680 | | | | 7,346 | | | | 7,268 | | | | 7,552 | | | | 8,057 | | | | 6,243 | | | | 6,668 | | | | 6,749 | |
General and administrative | | | 14,489 | | | | 13,953 | | | | 14,699 | | | | 12,496 | | | | 11,454 | | | | 10,738 | | | | 12,990 | | | | 14,263 | |
Total operating expenses | | | 37,008 | | | | 35,632 | | | | 36,057 | | | | 33,444 | | | | 35,353 | | | | 29,909 | | | | 34,592 | | | | 35,840 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 33,042 | | | | 26,911 | | | | 23,974 | | | | 28,061 | | | | 25,733 | | | | 22,116 | | | | 12,304 | | | | 14,355 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 1,127 | | | | 1,117 | | | | 1,135 | | | | 1,150 | | | | 1,187 | | | | 1,178 | | | | 1,191 | | | | 1,167 | |
Other income (expense), net | | | 798 | | | | (115 | ) | | | 234 | | | | 996 | | | | 257 | | | | (246 | ) | | | 452 | | | | 190 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 32,713 | | | | 25,679 | | | | 23,073 | | | | 27,907 | | | | 24,803 | | | | 20,692 | | | | 11,565 | | | | 13,378 | |
Provision for income taxes | | | 6,211 | | | | 5,740 | | | | 4,793 | | | | 5,676 | | | | 4,096 | | | | 1,990 | | | | 2,434 | | | | 2,069 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 26,502 | | | $ | 19,939 | | | $ | 18,280 | | | $ | 22,231 | | | $ | 20,707 | | | $ | 18,702 | | | $ | 9,131 | | | $ | 11,309 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 1.05 | | | $ | 0.79 | | | $ | 0.73 | | | $ | 0.90 | | | $ | 0.85 | | | $ | 0.78 | | | $ | 0.38 | | | $ | 0.46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average basic shares outstanding | | | 25,236 | | | | 25,228 | | | | 25,031 | | | | 24,583 | | | | 24,234 | | | | 23,929 | | | | 24,061 | | | | 24,142 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 1.03 | | | $ | 0.77 | | | $ | 0.71 | | | $ | 0.88 | | | $ | 0.83 | | | $ | 0.76 | | | $ | 0.37 | | | $ | 0.46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average diluted shares outstanding | | | 25,710 | | | | 25,721 | | | | 25,526 | | | | 25,072 | | | | 24,678 | | | | 24,325 | | | | 24,408 | | | | 24,549 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends per share | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.18 | | | $ | 0.18 | | | $ | 0.18 | | | $ | 0.18 | | | $ | - | |
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As discussed in more detail in Note 2 of the Notes to the Consolidated Financial Statements, in fiscal 2013, in relation to the bankruptcy filing of Elpida Memory, Inc., and subsequent approved bankruptcy plan, we charged off an accounts receivable balance against its related allowance for doubtful accounts. The following table sets forth activities in our allowance for doubtful accounts:
Allowance For Doubtful Accounts | | Balance At Beginning of Year | | | Amounts Charged To Expenses | | | Deductions and Adjustments | | | Balance At End Of Year | |
| | | | | | | | | | | | |
Year ended: | | | | | | | | | | | | |
September 30, 2014 | | $ | 1,532 | | | $ | (170 | ) | | $ | 30 | | | $ | 1,392 | |
September 30, 2013 | | | 4,757 | | | | 173 | | | | (3,398 | ) | | | 1,532 | |
September 30, 2012 | | | 1,090 | | | | 3,771 | | | | (104 | ) | | | 4,757 | |
Allowance For Doubtful Accounts | Balance At Beginning of Year | | Amounts Charged To Expenses | | Deductions and Adjustments | | Balance At End Of Year | |
| | | | | | | | |
Year ended: | | | | | | | | |
September 30, 2017 | | $ | 1,828 | | | $ | 26 | | | $ | (107 | ) | | $ | 1,747 | |
September 30, 2016 | | | 1,224 | | | | 588 | | | | 16 | | | | 1,828 | |
September 30, 2015 | | | 1,392 | | | | (84 | ) | | | (84 | ) | | | 1,224 | |
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements, and costs related to such replacement. The warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Charges to expenses and deductions, shown below, represent the net change required to maintain an appropriate reserve.
Warranty Reserves | | Balance At Beginning of Year | | | Reserve For Product Warranty During the Reporting Period | | | Adjustments To Pre-existing Warranty Reserve | | | Settlement of Warranty | | | Balance At End Of Year | |
| | | | | | | | | | | | | | | |
Year ended: | | | | | | | | | | | | | | | |
September 30, 2014 | | $ | 324 | | | $ | 760 | | | $ | - | | | $ | (838 | ) | | $ | 246 | |
September 30, 2013 | | | 359 | | | | 874 | | | | - | | | | (909 | ) | | | 324 | |
September 30, 2012 | | | 384 | | | | 867 | | | | - | | | | (892 | ) | | | 359 | |
Warranty Reserves | Balance At Beginning of Year | | Reserve For Product Warranty During the Reporting Period | | AdjustmentsTo Pre-existing Warranty Reserve | | Settlement of Warranty | | Balance At End Of Year | |
| | | | | | | | | | |
Year ended: | | | | | | | | | | |
September 30, 2017 | | $ | 243 | | | $ | 530 | | | $ | - | | | $ | (526 | ) | | $ | 247 | |
September 30, 2016 | | | 209 | | | | 595 | | | | - | | | | (561 | ) | | | 243 | |
September 30, 2015 | | | 246 | | | | 608 | | | | - | | | | (645 | ) | | | 209 | |
We have provided a valuation allowance on certain deferred tax assets. The following table sets forth activities in our valuation allowance:
Valuation Allowance | | Balance At Beginning of Year | | | Amounts Charged To Expenses | | | Deductions and Adjustments | | | Balance At End Of Year | |
| | | | | | | | | | | | |
Year ended: | | | | | | | | | | | | |
September 30, 2014 | | $ | 2,288 | | | $ | 624 | | | $ | - | | | $ | 2,912 | |
September 30, 2013 | | | 1,378 | | | | 910 | | | | - | | | | 2,288 | |
September 30, 2012 | | | 1,378 | | | | - | | | | - | | | | 1,378 | |
Valuation Allowance | Balance At Beginning of Year | | Amounts Charged To Expenses | | Deductions and Adjustments | | Balance At End Of Year | |
| | | | | | | | |
Year ended: | | | | | | | | |
September 30, 2017 | | $ | 3,022 | | | $ | - | | | $ | (751 | ) | | $ | 2,271 | |
September 30, 2016 | | | 3,079 | | | | - | | | | (57 | ) | | | 3,022 | |
September 30, 2015 | | | 2,912 | | | | 167 | | | | - | | | | 3,079 | |
MANAGEMENT RESPONSIBILITY
The accompanying consolidated financial statements were prepared by the Company in conformity with accounting principles generally accepted in the United States of America. The Company's management is responsible for the integrity of these statements and of the underlying data, estimates and judgments.
The Company's management establishes and maintains a system of internal accounting controls designed to provide reasonable assurance that its assets are safeguarded from loss or unauthorized use, transactions are properly authorized and recorded, and that financial records can be relied upon for the preparation of the consolidated financial statements. This system includes written policies and procedures, a code of business conduct and an organizational structure that provides for appropriate division of responsibility and the training of personnel. This system is monitored and evaluated on an ongoing basis by management in conjunction with its internal audit function.
The Company's management assesses the effectiveness of its internal control over financial reporting on an annual basis. In making this assessment, management uses the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (1992)(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/ William P. NoglowsDavid H. Li
William P. NoglowsDavid H. Li
Chief Executive Officer
/s/ William S. Johnson
William S. Johnson
Chief Financial Officer
/s/ Thomas S. Roman
Thomas S. Roman
Principal Accounting Officer
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange Act")), as of September 30, 2014.2017. 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 (1992)(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, 2014.2017. The effectiveness of the Company's internal control over financial reporting as of September 30, 20142017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which appears under Item 8 of this Annual Report on Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because of inherent limitations, our disclosure controls or our internal control over financial reporting may not prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K with respect to identification of directors, the existence of a separately-designated standing audit committee, identification of members of such committee, and identification of an audit committee financial expert, is incorporated by reference from the information contained in the sections captioned "Election of Directors" and "Board Structure and Compensation" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 3, 20156, 2018 (the "Proxy Statement"). In addition, for information with respect to the executive officers of our Company, see "Executive Officers" in Part I of this Form 10-K and the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. Information required by Item 405 of Regulation S-K is incorporated by reference from the information contained in the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.
We have adopted a code of business conduct for all of our employees and directors, including our principal executive officer, other executive officers, principal financial officer and senior financial personnel. A copy of our code of business conduct is available free of charge on our Company website at www.cabotcmp.com. We intend to post on our website any material changes to, or waivers from, our code of business conduct, if any, within two days of any such event.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
Shown below is information as of September 30, 2014,2017, with respect to the shares of common stock that may be issued under Cabot Microelectronics' existing equity compensation plans.
| | (a) | | | (b) | | | (c) | | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | (b) Weighted-average exercise price of outstanding options, warrants and rights | | | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
Equity compensation plans approved by security holders (1) | | | 3,431,640 | (2) | | $ | 29.04 | (2) | | | 4,574,582 | (3) | | | 1,798,707 | (2) | | $ | 44.17(2 | ) | | | 2,827,741 | (3) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 3,431,640 | (2) | | $ | 29.04 | (2) | | | 4,574,582 | (3) | | | 1,798,707 | (2) | | $ | 44.17(2 | ) | | | 2,827,741(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 1113 of the Notes"Notes to the Consolidated Financial StatementsStatements" for more information regarding our equity compensation plans. |
(2) | Column (a) includes 76,633281,646 shares that employees and non-employee directors who defer their compensation under our Directors' Deferred Compensation Plan, have the right to acquire pursuant thereto, and 82,109 shares that non-employee directors and non-U.S. employees have the right to acquire upon the vesting of the equivalent restricted stock units that they have been awarded under our equity incentive plans. Column (b) excludes both of these from the weighted-average exercise price. |
(3) | Column (c) includes 648,323435,400 shares available for future issuance under the ESPP. |
The other information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the section captioned "Stock Ownership" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the section captioned "Certain Relationships and Related Transactions" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in the section captioned "Fees of Independent Auditors and Audit Committee Report" in the Proxy Statement.
PART IV
ITEM 15. | ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following Financial Statements and Financial Statement Schedule are included in Item 8 herein:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2014, 20132017, 2016 and 20122015
Consolidated Statements of Comprehensive Income for the years ended September 30, 2014, 20132017, 2016 and 20122015
Consolidated Balance Sheets at September 30, 20142017 and 20132016
Consolidated Statements of Cash Flows for the years ended September 30, 2014, 20132017, 2016 and 20122015
Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2014, 20132017, 2016 and 20122015
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
NumberDescription
| 3.2 (5) | | Filed as an exhibit to, and incorporated by reference from |
| Description | | Form | | File No. | | Filing Date |
2.1 | | | 8-K | | 000-30205 | | September 28, 2015 |
3.2 | | | 8-K | | 000-30205 | | March 6, 2017 |
3.3 | 3.3 (1) | | | S-1 | | 333-95093 | | March 27, 2000 |
4.1 | 4.1 (2) | | | S-1 | | 333-95093 | | April 3, 2000 |
10.1 | 10.1 (6) | | | 10-K | | 000-30205 | | November 25, 2008 |
10.2 | 10.2 (9) | | | 10-Q | | 000-30205 | | May 9, 2011 |
10.4 | 10.4 (8) | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.5 | 10.5 (8) | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.6 | 10.6 (9) | | | 10-Q | | 000-30205 | | May 9, 2011 |
10.15 | 10.15 (13) | | | 10-K | | 000-30205 | | November 20, 2013 |
10.22 | 10.22 (7) | | | 10-Q | | 000-30205 | | February 8, 2010 |
10.23 | 10.23 (6) | | | 10-K | | 000-30205 | | November 25, 2008 |
10.28 | 10.28 (6) | | | 10-K | | 000-30205 | | November 25, 2008 |
10.30 | 10.30 (12) | | | 10-Q | | 000-30205 | | February 8, 2013 |
10.33 | 10.33 (6) | | | 10-K | | 000-30205 | | November 25, 2008 |
10.34 | 10.34 (8) | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.36 | 10.36 (3) | | | 10-K | | 000-30205 | | December 10, 2003 |
10.38 | 10.38 (4) | | | 10-Q | | 000-30205 | | February 12, 2004 |
10.46 | 10.46 (8) | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.51 | 10.51 (6) | | | 10-K | | 000-30205 | | November 25, 2008 |
10.53 | 10.53 (6) | | | 10-K | | 000-30205 | | November 25, 2008 |
10.54 | 10.54 (8) | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.57 | 10.57 (7) | | | 10-Q | | 000-30205 | | February 8, 2010 |
10.58 | 10.58 (8) | | | 10-Q | | 000-30205 | | February 8, 2011 |
10.60 | 10.60 (14) | Conformed Credit Agreement dated February 13, 2012 among Cabot Microelectronics Corporation, as Borrower, Bank of America, N.A., as Administrative Agent, Bank of America Merrill Lynch and J.P. Morgan Securities LLC, as Joint Lead Arrangers and Joint Book Managers, JPMorgan Chase Bank, N.A., as Syndication Agent, and Wells Fargo Bank, National Association, as Documentation Agent. | | 10-Q | | 000-30205 | | August 8, 2014 |
10.61 | 10.61 (10) | | | 10-Q | | 000-30205 | | May 5, 2017 |
10.62 | 10.62 (12) | | | 10-Q | | 000-30205 | | February 8, 2013 |
10.63 | 10.63 (12) | | | 10-Q | | 000-30205 | | February 8, 2013 |
10.64 | 10.64 (11) | | | 10-Q | | 000-30205 | | August 8, 2012 |
10.65 | 10.65 (11) | | | 10-Q | | 000-30205 | | August 8, 2012 |
10.66 | 10.66 (14) | | | 10-Q | | 000-30205 | | August 8, 2014 |
10.67 | | | 10-Q | | 000-30205 | | February 6, 2015 |
10.68 | | | 10-Q | | 000-30205 | | February 6, 2015 |
10.69 | | | 10-Q | | 000-30205 | | February 8, 2016 |
10.70 | | | 10-Q | | 000-30205 | | February 8, 2016 |
21.1 | | | | | | | |
23.1 | | Consent of Independent Registered Public Accounting Firm. | | | | | | |
31.1 | | Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | |
31.2 | | Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | |
32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | |
(1) Filed as an exhibit to, and incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 333-95093) filed with the Commission on March 27, 2000.
(2) Filed as an exhibit to, and incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 333-95093) filed with the Commission on April 3, 2000.
(3) Filed as an exhibit to, and incorporated by reference from the Registrant's Annual Report on Form 10-K (No. 000-30205) filed with the Commission on December 10, 2003.
(4) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on February 12, 2004.
(5) Filed as an exhibit to, and incorporated by reference from the Registrant's Current Report on Form 8-K (No. 000-30205) filed with the Commission on September 24, 2008.
(6) Filed as an exhibit to, and incorporated by reference from the Registrant's Annual Report on Form 10-K (No. 000-30205) filed with the Commission on November 25, 2008.
(7) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on February 8, 2010.
(8) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on February 8, 2011.
(9) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on May 9, 2011.
(10) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on May 9, 2012.
(11) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on August 8, 2012.
(12) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on February 8, 2013.
(13) Filed as an exhibit to, and incorporated by reference from the Registrant's Annual Report on Form 10-K (No. 000-30205) filed with the Commission on November 20, 2013.
(14) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on August 8, 2014.
* Management contract, or compensatory plan or arrangement.
** Substantially similar change in control severance protection agreements have been entered into with William P. Noglows,David H. Li, H. Carol Bernstein, Yumiko Damashek, David H. Li,Richard Hui, William S. Johnson, Thomas F. Kelly, Ananth Naman, Daniel J. Pike, Lisa A. Polezoes, Thomas S. Roman, Stephen R. Smith, Adam F. Weisman and Daniel S. Wobby,D. Woodland, with differences only in the amount of payments and benefits to be received by such persons.
*** Substantially similar deposit share agreements have been entered into with David H. Li, H. Carol Bernstein, William S. Johnson, David H. Li, Daniel J. Pike, Lisa A. Polezoes, and Thomas S. Roman and Daniel S. Wobby with differences only in the amount of initial deposit made and deposit shares purchased by such persons.
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
CABOT MICROELECTRONICS CORPORATION
Date: November 19, 2014/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chairman of the Board, President and Chief Executive Officer
[Principal Executive Officer]
Date: November 19, 2014/s/ WILLIAM S. JOHNSON
William S. Johnson
Executive Vice President and Chief Financial Officer
[Principal Financial Officer]
Date: November 19, 2014/s/ THOMAS S. ROMAN
Thomas S. Roman
Corporate Controller
[Principal Accounting Officer]
| CABOT MICROELECTRONICS CORPORATION | |
| | |
Date: November 15, 2017 | /s/ DAVID H. LI | |
| David H. Li | |
| President and Chief Executive Officer | |
| [Principal Executive Officer] | |
| | |
Date: November 15, 2017 | /s/ WILLIAM S. JOHNSON | |
| William S. Johnson | |
| Executive Vice President and Chief Financial Officer | |
| [Principal Financial Officer] | |
| | |
Date: November 15, 2017 | /s/ THOMAS S. ROMAN | |
| Thomas S. Roman | |
| Corporate Controller | |
| [Principal Accounting Officer] | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Date: November 15, 2017 | /s/ WILLIAM P. NOGLOWS* | |
| William P. Noglows | |
| Chairman of the Board | |
| [Director] | |
| | |
Date: November 15, 2017 | /s/ DAVID H. LI | |
| David H. Li | |
| President and Chief Executive Officer | |
| [Director] | |
| | |
Date: November 15, 2017 | /s/ RICHARD S. HILL* | |
| Richard S. Hill | |
| [Director] | |
| | |
Date: November 15, 2017 | /s/ BARBARA A. KLEIN* | |
| Barbara A. Klein | |
| [Director] | |
| | |
Date: November 15, 2017 | /s/ PAUL J. REILLY* | |
| Paul J. Reilly | |
| [Director] | |
| | |
Date: November 15, 2017 | /s/ SUSAN M. WHITNEY* | |
| Susan M. Whitney | |
| [Director] | |
| | |
Date: November 15, 2017 | /s/ GEOFFREY WILD* | |
| Geoffrey Wild | |
| [Director] | |
| | |
Date: November 19, 2014* /s/ WILLIAM P. NOGLOWS
William P. Noglows
Chairman of the Board, President and Chief Executive Officer
[Director]
Date: November 19, 2014/s/ ROBERT J. BIRGENEAU*
Robert J. Birgeneau
[Director]
Date: November 19, 2014/s/ JOHN P. FRAZEE, JR.*
John P. Frazee, Jr.
[Director]
Date: November 19, 2014/s/ H. LAURANCE FULLER*
H. Laurance Fuller
[Director]
Date: November 19, 2014/s/ RICHARD S. HILL*
Richard S. Hill
[Director]
Date: November 19, 2014/s/ BARBARA A. KLEIN*
Barbara A. Klein
[Director]
Date: November 19, 2014/s/ EDWARD J. MOONEY*
Edward J. Mooney
[Director]
Date: November 19, 2014/s/ STEVEN V. WILKINSON*
Steven V. Wilkinson
[Director]
Date: November 19, 2014/s/ BAILING XIA*
Bailing Xia
[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 1934.1934, as amended.