| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated in the consolidated financial statements as of September 30, 2019. USE OF ESTIMATES The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management's most challenging and subjective judgments include, but are not limited to, those estimates related to impairment of long-lived assets, business combinations, assets retirement obligations, goodwill and other intangible assets, income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates under different assumptions or conditions. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS We consider investments in all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Short-term investments include securities generally having maturities of 90 days to one year. We did not own any securities that were considered short-term investments as of September 30, 2019 or 2018. See Note 5 of this Annual Report on Form 10-K for a more detailed discussion of other financial instruments. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. Our allowance for doubtful accounts is based on historical collection experience, adjusted for any specific known conditions or circumstances such as customer bankruptcies and increased risk due to economic conditions. Uncollectible account balances are charged against the allowance when we believe that it is probable that the receivable will not be recovered. Amounts charged to bad debt expense are recorded in general and administrative expenses. A portion of our receivables and the related allowance for doubtful accounts is denominated in foreign currencies, so they are subject to foreign exchange fluctuations which are included in the table below under deductions and adjustments. Our allowance for doubtful accounts changed during the fiscal year ended September 30, 2019 as follows: Balance as of September 30, 2018 $ 1,900 Amounts charged to expense 432 Deductions and adjustments 45 Balance as of September 30, 2019 $ 2,377 CONCENTRATION OF CREDIT RISK Financial instruments that subject us to concentrations of credit risk consist principally of accounts receivable. We perform ongoing credit evaluations of our customers' financial conditions and generally do not require collateral to secure accounts receivable. Our exposure to credit risk associated with nonpayment is affected principally by conditions or occurrences within the semiconductor industry and the global economy. We have not experienced significant losses relating to accounts receivable from individual customers or groups of customers. Customers who represented more than 10% of revenue are as follows: Year Ended September 30, 2019 2019 2018 2017 Intel 14 % * * Samsung Group (Samsung) 11 % 18 % 16 % Taiwan Semiconductor Manufacturing Co. (TSMC) * 12 % 13 % SK Hynix Inc. * 10 % * Micron Technology Inc. * * 10 % * Not a customer with more than 10% revenue. Intel accounted for 8.1% and 3.9% of net accounts receivable at September 30, 2019 and 2018, respectively. Samsung accounted for 5.5% and 11.4% of net accounts receivable at September 30, 2019 and 2018, respectively. TSMC accounted for 8.2% and 7.9% of net accounts receivable at September 30, 2019 and 2018, respectively. SK Hynix accounted for 1.6% and 3.4% of net accounts receivable at September 30, 2019 and 2018, respectively. Micron accounted for 6.8% and 13.1% of net accounts receivable at September 30, 2019 and 2018, respectively. FAIR VALUES OF FINANCIAL INSTRUMENTS The recorded amounts of cash, accounts receivable, and accounts payable approximate their fair values due to their short-term, highly liquid characteristics. See Note 5 of this Annual Report on Form 10-K for a more detailed discussion of the fair value of financial instruments. INVENTORIES Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or net realizable value. Finished goods and work in process inventories include material, labor and manufacturing overhead costs. We regularly review and write down the value of inventory as required for estimated obsolescence or lack of marketability. An inventory reserve is maintained based upon a historical percentage of actual inventories written off and applied against inventory value at the end of the period, adjusted for known conditions and circumstances. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is based on the following estimated useful lives of the assets using the straight-line method: Land Improvements 10-20 years Buildings 15-30 years Machinery and equipment 3-20 years Furniture and fixtures 5-10 years Vehicles 5-8 years Information systems 3-5 years Assets under capital leases Term of lease or estimated useful life Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized and depreciated over the remaining useful lives. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. We capitalize the costs related to the design and development of software used for internal purposes. ASSET RETIREMENT OBLIGATIONS Asset Retirement Obligations (AROs) are the obligation associated with the retirement of tangible long-lived assets. The Company recognizes AROs for the removal or storage of hazardous materials, decontamination or demolition of above ground storage tanks (ASTs), and certain restoration and decommissioning obligations related to certain of our owned and leased properties. The Company recognizes an ARO liability in the period in which it is incurred, including upon Acquisition, if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the ARO is incurred, the liability shall be recognized when a reasonable estimate of fair value can be made. The Company has multiple production facilities with an indeterminate useful life and there is insufficient information available to estimate a range of potential settlement dates for the obligation. Therefore, the Company cannot reasonably estimate the fair value of the liability. When a reasonable estimate of fair value can be made, an ARO amount is calculated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal / decommissioning activities. Cost estimates for AROs are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, discount rates, and the potential methods for complying with legal and environmental regulations. Material changes to current ARO estimates could result as more information becomes available surrounding these assumption factors. In subsequent periods, the Company recognizes accretion expense in Cost of sales increasing the ARO balances, such that the balance will ultimately equal the expected cash flows at the time of settlement. See Note 8 of this Annual Report on Form 10-K for the ARO and accretion expense recorded in fiscal 2019. IMPAIRMENT OF LONG-LIVED ASSETS We assess the recoverability of the carrying value of long-lived assets to be held and used, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We must exercise judgment in assessing whether an event of impairment has occurred. For purposes of recognition and measurement of an impairment loss, long-lived assets are either individually identified or grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in this grouping. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the use and eventual disposition of the asset or asset group are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. The fair value methodology used is an estimate of fair market value, which is made based on prices of similar assets or other valuation methodologies, including present value techniques. Long-lived assets to be disposed of by means other than sale are classified as held for use until their disposal. Long-lived assets to be disposed of by sale are classified as held for sale and are reported at the lower of carrying amount or fair market value, less the estimated cost to sell. Depreciation is discontinued for any long-lived assets classified as held for sale. In the fourth quarter of fiscal 2019, we recorded an impairment of $67,372 of long-lived assets, of which $4,063 related to Property, plant and equipment in the wood treatment asset group. See Note 10 of this Annual Report on Form 10-K for a more detailed discussion of the impairment. We did not record any impairment expense in fiscal 2018. We recorded impairment expense on long-lived assets of $860 in fiscal 2017 related to surplus research and development equipment, which was subsequently sold for a gain. GOODWILL AND OTHER INTANGIBLE ASSETS Purchased intangible assets with finite lives are amortized over their estimated useful lives and are evaluated for impairment using a process similar to that used to evaluate other long-lived assets. Goodwill and indefinite lived intangible assets are not amortized and are tested annually in our fourth fiscal quarter or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. A component is a reporting unit when the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of the component. Components may be combined into one reporting unit when they have similar economic characteristics. We have six reporting units, all of which had goodwill as of September 30, 2019, the date of our annual impairment test. The Company’s Electronic Materials segment is comprised of the three following reporting units: CMP slurries, electronic chemicals, and CMP pads. The Company’s Performance Materials segment is comprised of three additional reporting units: pipeline performance, wood treatment, and precision optics. Accounting guidance provides an entity the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). We used a step zero qualitative analysis for the CMP slurries reporting unit in fiscal 2018 and 2019, and for precision optics in fiscal 2019. Aside from those previously noted, all other reporting units were assessed for goodwill impairment using a step one approach. The Flowchem trade name, an indefinite-lived intangible asset, was assessed for impairment using a relief from royalty approach. Factors requiring significant judgment include the selection of valuation approach and assumptions related to future revenue, discount factors, terminal growth rates, and royalty rates, among others. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these assumptions may result in future impairment charges. In the fourth quarter of fiscal 2019, the Company performed its annual goodwill impairment assessment, comparing estimated fair values of the reporting units to their carrying amounts. In estimating the fair values, the Company used the average of an income approach, discounting estimated future cash flows, and a market approach based upon relevant market multiples. As a result of a long-lived asset impairment recorded in the fourth quarter of fiscal 2019, the carrying value of the wood treatment reporting unit is equal to its fair value. In this circumstance with no excess of fair value over carrying value, any unfavorable variances from the estimated inputs used in the impairment assessment may result in further impairment of long-lived assets or goodwill. The Company’s Electronic Chemicals reporting unit has goodwill resulting from a recent acquisition, with a greater sensitivity to impairment, due to the extent by which its estimated fair value exceeds its carrying value. Changes to the assumptions requiring significant judgment, noted above, could result in a different outcome for the impairment assessment. Accordingly, the Company performed sensitivity analysis for selected key assumptions. As a result of the review performed in the fourth quarter of fiscal 2019, and the related sensitivity analysis, we determined that there was no impairment of our goodwill as of September 30, 2019. There was no goodwill impairment recorded in fiscal 2018 or 2017. While no goodwill impairments were recognized in fiscal 2019, the Company recognized asset impairment charges of $67,372, of which $63,309 related to Other intangible assets, net for the wood treatment asset group due to triggering events that occurred in the fourth quarter of fiscal 2019. See Note 10 of this Annual Report on Form 10-K. The Company will continue to monitor the wood treatment asset group for indicators of long-lived asset or goodwill impairment. Absent a sale of the business, as the Company approaches the announced closure date of the facilities and there are fewer estimated future cash flows, there is ongoing potential for further impairments of long-lived assets and impairment of goodwill. While the timing and amounts of any further impairments are unknown, they could be material to the Company’s Consolidated Balance Sheets and to the Consolidated Statements of Income, but they will not affect the Company’s reported Net cash provided by operating activities. WARRANTY RESERVE We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements. The warranty reserve is based upon a historical product return rate, adjusted for any specific known conditions or circumstances. Adjustments to the warranty reserve are recorded in Cost of sales. FOREIGN CURRENCY TRANSLATION Certain operating activities in Asia and Europe are denominated in local currency, considered to be the functional currency. Assets and liabilities of these operations are translated using exchange rates in effect at the end of the year, and revenue and costs are translated using average exchange rates for the year. The related translation adjustments are reported in comprehensive income in stockholders' equity. FOREIGN EXCHANGE MANAGEMENT We transact business in various foreign currencies, primarily the Korean won, Japanese yen, the New Taiwan dollar, Euro, British pound, and Singapore dollar. Our exposure to foreign currency exchange risks has not been significant because a large portion of our business is denominated in United States dollars. However, we also incur expenses in foreign countries that are transacted in currencies other than dollars, which provides natural hedge and mitigates the exposure on our Consolidated Statements of Income. We periodically, enter into certain forward contracts in an effort to manage foreign currency exchange exposure on our Consolidated Balance Sheets. However, we are unlikely to be able to hedge these exposures completely. We do not enter into forward contracts or other derivative instruments for speculative or trading purposes. These foreign exchange contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on our forward foreign exchange contracts are recognized as Other income (expense), net in the accompanying Consolidated Statements of Income in the period in which the exchange rates change. See Note 13 of this Annual Report on Form 10-K for a discussion of derivative financial instruments. PURCHASE COMMITMENTS We have entered into unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. On an ongoing basis, we review our agreements and assess the likelihood of a shortfall in purchases and determine if it is necessary to record a liability. See Note 20 of this Annual Report on Form 10-K for additional discussion of purchase commitments. To date, we have not recorded such a liability. REVENUE RECOGNITION Performance Obligations and Material Rights At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each material promise to the customer. A performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer, and is the unit of accounting under ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A majority of the Company’s contracts have a single performance obligation which represents, in most cases, the products, equipment or services being sold to the customer. Some contracts include multiple performance obligations, including prospective tiered price discounts or delivery of free product that we have concluded represents a material right. Contracts with prospective tiered price discounts require judgment in determining if that discount represents a material right. Contracts vary in length, and payment terms vary by the type and location of the Company’s customers and the products or services offered. However, the period of time between invoicing and when payment is due is typically not significant and has no significant financing components. Customers pay in accordance with negotiated terms upon receipt of goods or completion of services. For these contracts, the transaction price is determined upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of goods or services purchased. In certain instances, we receive consideration from a customer prior to transferring goods or services to the customer under the terms of a sales contract. In such cases, we record deferred revenue until the performance obligation is satisfied, which represents a contract liability, and is included in the contract liabilities discussed in Note 3 of this Annual Report on Form 10-K. The Company recognizes revenue related to product sales at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment, or delivery depending on the terms of the underlying contracts. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset. Revenue is recognized on consignment sales when control transfers to the customer, generally at the point of customer usage of the product. The Company also records revenue for services provided to customers in the pipeline and adjacent industries. These services include preventive maintenance, repair and specialized isolation sealing on pipelines and training. Revenue is recorded at a point in time when the services are completed as this is when right to payment and customer acceptance occurs. For sales contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices or estimates of such prices. Standalone selling price, once established, is then used to allocate total consideration proportionally to the various performance obligations within a contract. Most contracts where we have determined there to be multiple performance obligations relate to where we have identified the existence of a material right such that we provide prospective tiered pricing discounts or free product. When we invoice for products shipped under these contracts, we defer the revenue associated with these rights on the balance sheet as a contract liability. Revenue is recognized when the customer exercises the option to purchase goods at a discount in the case of the prospective tiered pricing discounts or when we ship the free product. Variable Consideration The primary type of variable consideration present in the Company’s contracts are rebates and early payment discounts, both of which are immaterial. Early payment discounts are offered on a limited basis and are not significant. The Company also offers rebates based upon cumulative volume of purchases within a quarter and accrues for the rebate obligation within the quarter that the rebate is earned. ASC 606 did not change the accounting for rebates under ASC 605. Costs to Obtain and Fulfill a Contract For certain contracts within the Performance Materials segment, commissions are paid to sales agents based upon a percentage of end-customer invoice value. Agents are paid the commissions after funds are received by the Company from its customers. Under ASC 340, sales commissions are required to be capitalized and expensed over the associated contract period. However, as a practical expedient, the Company does not capitalize commissions as the associated contracts are generally one year or less in duration. For shipping and handling activities performed after a customer obtains control of the goods, the Company has elected to account for these costs as activities to fulfill the promise to transfer the goods and included in Cost of sales. RESEARCH, DEVELOPMENT AND TECHNICAL Research, development and technical costs are expensed as incurred and consist primarily of staffing costs, materials and supplies, depreciation, utilities and other facilities costs. INCOME TAXES Current income taxes are determined based on estimated taxes payable or refundable on tax returns for the current year. Deferred income taxes are determined using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. Provisions are made for both U.S. and any foreign deferred income tax liability or benefit. We assess whether or not our deferred tax assets will ultimately be realized and record an estimated valuation allowance on those deferred tax assets that may not be realized. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position. In fiscal 2017, we maintained an assertion to permanently reinvest the earnings of all of our foreign subsidiaries. In light of the Tax Act and the associated transition to a modified territorial tax system, we no longer consider our foreign earnings to be indefinitely reinvested. See Note 19 of this Annual Report on Form 10-K for additional information on income taxes. INTEREST RATE SWAPS During the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap agreement to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. The fair value of our interest rate swaps is estimated using standard valuation models using market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value. We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of Interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into Net income. Hedge effectiveness is tested quarterly to determine if hedge treatment is appropriate. SHARE-BASED COMPENSATION We issue share-based awards under the following programs: our Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 (OIP); our Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated January 1, 2010 (ESPP); and, pursuant to the OIP, our Directors' Deferred Compensation Plan, as amended September 23, 2008 (DDCP), and our 2001 Executive Officer Deposit Share Program (DSP). In March 2017, our stockholders re-approved the material terms of performance-based awards under the OIP for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended. For additional information regarding these programs, refer to Note 16 of this Annual Report on Form 10-K. We record share-based compensation expense for all share-based awards, including stock option grants, and restricted stock, restricted stock unit and performance share unit ("PSU") awards, and employee stock purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and for stock option grants made prior to December 2017, we have added a slight premium to this expected term for employees who meet the definition of retirement-eligible pursuant to their stock option grants during the contractual term of the grant. As of December 2017, the provisions of stock option grants and restricted stock unit awards stated that, except in certain circumstances including termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, we record the total share-based compensation expense upon award for those employees who have met the retirement eligibility at the grant date. The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The PSUs that have been awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of an established market index. We use a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions, including the stock price of the Company and index constituents, the risk-free interest rate and stock price volatility. Subsequent to the Acquisition, the performance metrics of the PSUs awarded in December 2017 were modified to reflect the performance metrics expected due to the Acquisition. KMG awards granted subsequent to the entry into the definitive agreement for the Acquisition, but prior to the Acquisition Date, were converted to our restricted stock units (“Replacement Award”), with vesting in three equal installments on the first three anniversaries of the original award date. If the recipient is terminated without cause or resigns with good reason during the 18 months following the Acquisition Date, the Replacement Award will vest as of such termination date in a number of shares equal to 150% of the Replacement Award. For additional information regarding our share-based compensation plans, refer to Note 16 of this Annual Report on Form 10-K. EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing Net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC Topic 260, Earnings Per Share (ASC 260). Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method. We adopted ASU 2016-09 in fiscal 2018. Pursuant to the adoption, the proceeds from excess tax benefits are no longer included in the dilutive impact on the weighted average shares outstanding for dilutive EPS. The excess tax benefits were treated as a reduction to tax provision, rather than an increase to equity. COMPREHENSIVE INCOME Comprehensive income primarily differs from Net income due to interest rate swap contracts and foreign currency translation adjustments. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The provisions of ASU 2016-02 require a dual approach for lessee accounting under which a lessee would recognize a right-of-use asset and a corresponding lease liability. Leases will be classified as either finance or operating leases. For finance leases, a lessee will recognize Interest expense and amortization of the right-of-use asset, and for operating leases, the lessee will recognize a straight-line total lease expense. The guidance also requires specific qualitative and quantitative disclosures to supplement the amounts |
