Company Quick10K Filing
Quick10K
Cabot Microelectronics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$114.82 29 $3,320
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-06-18 Earnings, Regulation FD
8-K 2019-06-12 Other Events, Exhibits
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-03-07 Shareholder Vote
8-K 2019-03-06 Regulation FD, Other Events, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2019-01-24 Officers
8-K 2019-01-24 Officers
8-K 2018-12-07 Other Events, Exhibits
8-K 2018-11-15 Enter Agreement, Leave Agreement, M&A, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-09-26 Other Events, Exhibits
8-K 2018-08-15 Other Events, Exhibits
8-K 2018-08-14 Enter Agreement, Other Events, Exhibits, Enter Agreement
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-12 Other Events, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-04-09 Other Events
8-K 2018-03-07 Shareholder Vote
8-K 2018-03-05 Regulation FD, Other Events, Exhibits
8-K 2018-01-25 Earnings, Exhibits
HMC Honda Motor 45,800
VMC Vulcan 16,960
ODFL Old Dominion Freight Line 11,830
FN Fabrinet 2,160
HESM Hess Midstream Partners 1,120
FENG Phoenix New Media 582
CIA Citizens 344
DAKT Daktronics 334
CAAS China Automotive Systems 82
JCTG Jiucaitong Group 0
CCMP 2019-03-31
Part I. Financial Information
Item 1.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 6. Exhibits
EX-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-32.1 ex32_1.htm

Cabot Microelectronics Earnings 2019-03-31

CCMP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q.htm  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

March 31, 2019
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 000-30205

CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)


DELAWARE
36-4324765
(State of Incorporation)
(I.R.S. Employer Identification No.)

870 NORTH COMMONS DRIVE
60504
AURORA, ILLINOIS
(Zip Code)
(Address of principal executive offices)
 

Registrant's telephone number, including area code: (630) 375-6631

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES
X
NO
   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
YES
X
NO
   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act         

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 
YES
 
NO
X
 

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

As of April 30, 2019, the Company had 29,061,830 shares of Common Stock, par value $0.001 per share, outstanding.


CABOT MICROELECTRONICS CORPORATION

INDEX

Part I. Financial Information
Page
     
Item 1.
Unaudited Financial Statements
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
9
     
Item 2.
30
     
Item 3.
55
     
Item 4.
56
     
Part II. Other Information
 
     
Item 1.
57
     
Item 1A.
57
     
Item 2.
66
     
Item 3.
66
     
Item 4.
66
     
Item 6.
67
 
68

2

PART I. FINANCIAL INFORMATION
ITEM 1.


CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2019
   
2018
   
2019
   
2018
 
Revenue
 
$
265,391
   
$
142,978
   
$
487,169
   
$
282,957
 
                                 
Cost of sales
   
150,571
     
67,933
     
273,016
     
133,898
 
                                 
Gross profit
   
114,820
     
75,045
     
214,153
     
149,059
 
                                 
Operating expenses:
                               
Research, development and technical
   
12,778
     
13,368
     
26,818
     
25,519
 
Selling, general and administrative
   
50,328
     
24,589
     
111,456
     
49,340
 
Total operating expenses
   
63,106
     
37,957
     
138,274
     
74,859
 
                                 
Operating income
   
51,714
     
37,088
     
75,879
     
74,200
 
                                 
Interest expense
   
13,331
     
1,158
     
20,221
     
2,290
 
Interest income
   
568
     
1,156
     
1,587
     
2,107
 
Other income (expense), net
   
(1,014
)
   
(94
)
   
(2,425
)
   
(373
)
Income before income taxes
   
37,937
     
36,992
     
54,820
     
73,644
 
                                 
Provision for income taxes
   
10,800
     
7,255
     
14,240
     
46,990
 
                                 
Net income
 
$
27,137
   
$
29,737
   
$
40,580
   
$
26,654
 
                                 
Basic earnings per share (in dollars per share)
 
$
0.94
   
$
1.16
   
$
1.45
   
$
1.05
 
                                 
Weighted average basic shares outstanding
   
28,998
     
25,593
     
28,066
     
25,474
 
                                 
Diluted earnings per share (in dollars per share)
 
$
0.92
   
$
1.14
   
$
1.42
   
$
1.02
 
                                 
Weighted average diluted shares outstanding
   
29,479
     
26,161
     
28,607
     
26,076
 

The accompanying notes are an integral part of these Consolidated Financial Statements.

3

CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands)

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Net income
 
$
27,137
   
$
29,737
   
$
40,580
   
$
26,654
 
                                 
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation adjustments
   
(992
)
   
3,961
     
1,433
     
11,105
 
Net unrealized gain on available-for-sale securities
   
-
     
46
     
-
     
-
 
Minimum pension liability adjustment
   
251
     
-
     
-
     
-
 
Net unrealized gain (loss) on cash flow hedges
   
(6,474
)
   
(52
)
   
(6,474
)
   
147
 
                                 
Other comprehensive income (loss), net of tax
   
(7,215
)
   
3,955
     
(5,041
)
   
11,252
 
                                 
Comprehensive income
 
$
19,922
   
$
33,692
   
$
35,539
   
$
37,906
 

The accompanying notes are an integral part of these Consolidated Financial Statements.

4

CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share amounts)

   
March 31, 2019
   
September 30, 2018
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
192,260
   
$
352,921
 
Accounts receivable, less allowance for doubtful accounts of $1,704 at March 31, 2019, and $1,900 at September 30, 2018
   
131,880
     
75,886
 
Inventories
   
147,324
     
71,926
 
Prepaid expenses and other current assets
   
30,551
     
22,048
 
Total current assets
   
502,015
     
522,781
 
                 
Property, plant and equipment, net
   
263,556
     
111,403
 
Goodwill
   
705,426
     
101,083
 
Other intangible assets, net
   
854,378
     
35,202
 
Deferred income taxes
   
5,498
     
5,840
 
Other long-term assets
   
6,215
     
4,664
 
Total assets
 
$
2,337,088
   
$
780,973
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
47,330
   
$
18,171
 
Current portion of long-term debt
   
13,313
     
-
 
Accrued expenses, income taxes payable and other current liabilities
   
86,913
     
82,983
 
Total current liabilities
   
147,556
     
101,154
 
                 
Long-term debt, net of current portion, less prepaid debt issuance cost of $19,411 at March 31, 2019
   
987,276
     
-
 
Deferred income taxes
   
150,575
     
81
 
Other long-term liabilities
   
25,814
     
13,046
 
Total liabilities
   
1,311,221
     
114,281
 
                 
Commitments and contingencies (Note 12)
               
Stockholders’ equity:
               
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 39,446,709 shares at March 31, 2019, and 35,862,465 shares at September 30, 2018
   
39
     
36
 
Capital in excess of par value of common stock
   
975,612
     
622,498
 
Retained earnings
   
487,467
     
471,673
 
Accumulated other comprehensive income
   
(502
)
   
4,539
 
Treasury stock at cost, 10,401,574 shares at March 31, 2019, and 10,356,147 shares at September 30, 2018
   
(436,749
)
   
(432,054
)
Total stockholders’ equity
   
1,025,867
     
666,692
 
                 
Total liabilities and stockholders’ equity
 
$
2,337,088
   
$
780,973
 

The accompanying notes are an integral part of these Consolidated Financial Statements.

5

CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and amounts in thousands)
   
Six Months Ended March 31,
 
   
2019
   
2018
 
Cash flows from operating activities:
           
Net income
 
$
40,580
   
$
26,654
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
43,889
     
13,138
 
Provision for doubtful accounts
   
(314
)
   
5
 
Share-based compensation expense
   
11,708
     
10,082
 
Deemed repatriation transition tax
   
-
     
24,641
 
Deferred income tax (expense) benefit
   
(13,811
)
   
15,291
 
Non-cash foreign exchange (gain) loss
   
354
     
(11
)
Loss (Gain) on disposal of property, plant and equipment
   
(58
)
   
18
 
Realized loss on the sale of available-for-sale securities
   
-
     
118
 
Non-cash charge on inventory step up of acquired inventory sold
   
14,827
     
-
 
Amortization of debt issuance costs
   
1,286
     
63
 
(Gain) on sale of assets
   
-
     
(956
)
Other
   
2,337
     
2,125
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
9,445
     
(4,370
)
Inventories
   
(21,100
)
   
(3,771
)
Prepaid expenses and other assets
   
5,415
     
(5,503
)
Accounts payable
   
(429
)
   
(407
)
Accrued expenses, income taxes payable and other liabilities
   
(40,601
)
   
(9,983
)
Net cash provided by operating activities
   
53,528
     
67,134
 
                 
Cash flows from investing activities:
               
Additions to property, plant and equipment
   
(19,472
)
   
(8,804
)
Acquisition of a business, net of cash acquired
   
(1,182,186
)
   
-
 
Cash settlement of life insurance policy
   
3,959
     
-
 
Proceeds from the sale of assets
   
1,210
     
2,999
 
Purchases of available-for-sale securities
   
-
     
(50,673
)
Proceeds from the sale and maturities of available-for-sale securities
   
-
     
50,548
 
Net cash used in investing activities
   
(1,196,489
)
   
(5,930
)
                 
Cash flows from financing activities:
               
Repayment of long-term debt
   
(45,000
)
   
(6,563
)
Repurchases of common stock
   
(4,695
)
   
(9,937
)
Proceeds from issuance of long-term debt
   
1,062,337
     
-
 
Debt issuance costs
   
(18,745
)
   
-
 
Proceeds from issuance of stock
   
10,361
     
18,089
 
Dividends paid
   
(21,934
)
   
(10,228
)
Net cash provided by (used in) financing activities
   
982,324
     
(8,639
)
                 
Effect of exchange rate changes on cash
   
(24
)
   
10,979
 
Decrease in cash and cash equivalents
   
(160,661
)
   
63,544
 
Cash and cash equivalents at beginning of period
   
352,921
     
397,890
 
Cash and cash equivalents at end of period
 
$
192,260
   
$
461,434
 
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of the period
 
$
2,425
   
$
2,068
 
Equity consideration related to the acquisition of KMG Chemicals, Inc
   
331,048
     
-
 


The accompanying notes are an integral part of these Consolidated Financial Statements.

6


CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited and amounts in thousands)

 
 
Common
Stock
   
Capital
In Excess
Of Par
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Treasury
Stock
   
Total
 
Balance at September 30, 2018
 
$
36
   
$
622,498
   
$
471,673
   
$
4,539
   
$
(432,054
)
 
$
666,692
 
                                                 
Share-based compensation expense
           
8,170
                             
8,170
 
Repurchases of common stock - other, at cost
                                   
(4,001
)
   
(4,001
)
Exercise of stock options
           
3,097
                             
3,097
 
Issuance of common stock in connection with acquisition of KMG Chemicals, Inc.
   
3
     
331,045
                             
331,048
 
Issuance of Cabot Microelectronics restricted stock under Deposit Share Program
           
75
                             
75
 
Net income
                   
13,443
                     
13,443
 
Dividends ($0.40 per share in dollars)
                   
(11,598
)
                   
(11,598
)
Effect of the adoption of the revenue recognition accounting standards
                   
(933
)
                   
(933
)
Foreign currency translation adjustment
                           
2,425
             
2,425
 
Minimum pension liability adjustment
                           
(251
)
           
(251
)
                                                 
Balance at December 31, 2018
   
39
     
964,885
     
472,585
     
6,713
     
(436,055
)
   
1,008,167
 
 
                                               
Share-based compensation expense
           
3,538
                             
3,538
 
Repurchases of common stock - other, at cost
                                   
(694
)
   
(694
)
Exercise of stock options
           
5,080
                             
5,080
 
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan
           
2,109
                             
2,109
 
Net income
                   
27,137
                     
27,137
 
Dividends ($0.42 per share in dollars)
                   
(12,255
)
                   
(12,255
)
Foreign currency translation adjustment
                           
(992
)
           
(992
)
Interest rate swap
                           
(6,474
)
           
(6,474
)
Minimum pension liability adjustment
                           
251
             
251
 
 
                                               
Balance at March 31, 2019
 
$
39
   
$
975,612
   
$
487,467
   
$
(502
)
 
$
(436,749
)
 
$
1,025,867
 

The accompanying notes are an integral part of these Consolidated Financial Statements.
7

CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited and amounts in thousands)

 
 
Common
Stock
   
Capital
In Excess
Of Par
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Treasury
Stock
   
Total
 
Balance at September 30, 2017
 
$
35
   
$
580,938
   
$
397,881
   
$
3,949
   
$
(387,766
)
 
$
595,037
 
 
                                               
Share-based compensation expense
           
5,881
                             
5,881
 
Repurchases of common stock under share repurchase plans, at cost
                                   
(1,591
)
   
(1,591
)
Repurchases of common stock - other, at cost
                                   
(3,160
)
   
(3,160
)
Exercise of stock options
           
6,139
                             
6,139
 
Issuance of Cabot Microelectronics restricted stock under Deposit Share Program
           
300
                             
300
 
Net loss
                   
(3,083
)
                   
(3,083
)
Dividends ($0.20 per share in dollars)
                   
(5,153
)
                   
(5,153
)
Foreign currency translation adjustment
                           
7,144
             
7,144
 
Interest rate swaps
                           
199
             
199
 
Unrealized loss in short term available-for-sale securities
                           
(46
)
           
(46
)
                                                 
Balance at December 31, 2017
   
35
     
593,258
     
389,645
     
11,246
     
(392,517
)
   
601,667
 
                                                 
Share-based compensation expense
           
4,223
                             
4,223
 
Repurchases of common stock under share repurchase plans, at cost
                                   
(5,005
)
   
(5,005
)
Repurchases of common stock - other, at cost
                                   
(300
)
   
(300
)
Exercise of stock options
   
1
     
9,611
                             
9,612
 
Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan
           
2,012
                             
2,012
 
Net income
                   
29,737
                     
29,737
 
Dividends ($0.40 per share in dollars)
                   
(10,390
)
                   
(10,390
)
Foreign currency translation adjustment
                           
3,961
             
3,961
 
Interest rate swaps
                           
(52
)
           
(52
)
Sale of short term available-for-sale securities
                           
46
             
46
 
 
                                               
Balance at March 31, 2018
 
$
36
   
$
609,104
   
$
408,992
   
$
15,201
   
$
(397,822
)
 
$
635,511
 
 
                                               

The accompanying notes are an integral part of these Consolidated Financial Statements.


8

CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share and per share amounts)


1. BACKGROUND AND BASIS OF PRESENTATION

Cabot Microelectronics Corporation (“Cabot Microelectronics”, “the Company”, “us”, “we”, or “our”') is a leading global supplier of consumable materials to semiconductor manufacturers and pipeline operators.  On November 15, 2018 (“Acquisition Date”), we completed our acquisition of KMG Chemicals, Inc. (“KMG”), which produces and distributes specialty chemicals and performance materials for the semiconductor, industrial wood preservation, pipeline and energy industries (“Acquisition”).  The Acquisition has extended and strengthened our position as one of the leading suppliers of consumable materials to the semiconductor industry and expands our portfolio with the addition of KMG’s businesses, which we believe will enable us to be a leading global provider of performance products and services to the pipeline operations and energy industries. The Consolidated Financial Statements included in this Report on Form 10-Q include the financial results of KMG from the Acquisition Date. Subsequent to the Acquisition, we have operated our business within two reportable segments: Electronic Materials and Performance Materials. The Electronic Materials segment consists of our heritage CMP slurries and polishing pads businesses, as well as the KMG electronic chemicals business.  The Performance Materials segment includes KMG’s heritage pipeline performance and wood treatment businesses, and Cabot Microelectronics’ heritage QED business. For additional information, refer to Part 1, Item 1, “Business”, in our and KMG’s Annual Reports on Form 10-K for the fiscal year ended September 30, 2018 and July 31, 2018, respectively.

The unaudited Consolidated Financial Statements have been prepared by Cabot Microelectronics pursuant to the rules of the Securities and Exchange Commission (SEC) and accounting principles generally accepted in the United States of America (U.S. GAAP).  In the opinion of management, these unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of Cabot Microelectronics’ financial position as of March 31, 2019, cash flows for the six months ended March 31, 2019 and March 31, 2018, and results of operations for the three and six months ended March 31, 2019 and March 31, 2018.  The Consolidated Balance Sheets as of September 30, 2018 were derived from audited financial statements. The results of operations for the three and six months ended March 31, 2019 may not be indicative of results to be expected for future periods, including the fiscal year ending September 30, 2019.  Certain prior period amounts have been reclassified to conform to the current period presentation.  This Report on Form 10-Q does not contain all of the footnote disclosures from the annual financial statements and should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in Cabot Microelectronics’ Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

The Consolidated Financial Statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated as of March 31, 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 difficult and subjective judgments include, but are not limited to, those estimates related to bad debt expense, inventory valuation, impairment of long-lived assets and investments, business combinations, goodwill, other intangible assets, share-based compensation, income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates under different assumptions or conditions.


9


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Significant Accounting Policies and Estimates

Except for the discussion on revenue recognition below, no material changes have been made to the Company’s significant accounting policies disclosed in Note 2 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

REVENUE RECOGNITION

As of October 1, 2018, the Company began applying the provisions of Accounting Standards Codification 606-10, “Revenue from Contracts with Customers” (“ASC 606”), and all related appropriate guidance using the modified retrospective method applied to those contracts which were not completed as of October 1, 2018.  The Company recognizes revenue under the core principle of depicting the transfer of control to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when a performance obligation is satisfied.

Upon adoption of ASC 606 we recognized a $933 decrease to the opening balance of retained earnings, net of tax, due to the cumulative impact of adopting the new revenue standards. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.  The Company changed its accounting policy for revenue recognition for customer incentives that provide free products and tiered pricing.  For free products, the new revenue standards require that a portion of the transaction price be allocated to the free product and deferred until the product has been delivered.  We previously accrued for undelivered free product as a charge to cost of sales.  In prior fiscal years, in accordance with ASC 605, we did not consider prospective tiered pricing to represent a material right.


The cumulative effect of the changes made to our Consolidated Balance Sheet as of October 1, 2018 for the adoption of the new revenue standards was as follows:

   
Balance at
September 30, 2018
   
Adjustments Due to ASC 606
   
Balance at October 1, 2018
 
Deferred income tax assets
 
$
5,840
   
$
261
   
$
6,101
 
Accrued expenses, income taxes payable and other current liabilities
   
82,983
     
(47
)
   
82,936
 
Other long-term liabilities
   
13,046
     
1,241
     
14,287
 
Retained earnings
 
$
471,673
   
$
(933
)
 
$
470,740
 

We have determined that the effect of applying the new revenue standards during the three and six months ended March 31, 2019 was immaterial to our financial statements compared to revenue guidance in effect before the adoption of the new revenue standards.  As a result, for the three and six months ended March 31, 2019, we are not disclosing the quantitative amount by which each financial statement line item is affected by the application of the new revenue standards.

As part of the adoption of ASU 606, the Company elected to use certain allowed practical expedients. For the Company’s contracts that have an original duration of one year or less as of the adoption date, the Company uses the practical expedient applicable to such contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the future performance obligations as of the end of each reporting period for contracts having an expected duration of one year or less.  See Note 3 of this Report on Form 10-Q for disaggregated revenue, the reconciliation of contract balances and transaction price allocation to remaining performance obligations for contracts expected to remain effective beyond one year.

10


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 Form 10-Q.

The Company recognizes revenue related to product sales at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment, or delivery depending on the terms of the underlying contracts. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.  Revenue is recognized on consignment sales when control transfers to the customer, generally at the point of customer usage of the product. The Company also records revenue for services provided to the pipeline and oilfield energy industries.  These services include preventive maintenance, repair and specialized isolation sealing on pipelines and training. Revenue is recorded at a point in time when the services are completed as this is when right to payment and customer acceptance occurs.

For sales contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices or estimates of such prices.  Standalone selling price, once established, is then used to allocate total consideration proportionally to the various performance obligations within a contract. Most contracts where we have determined there to be multiple performance obligations relate to where we have identified a material right to exist 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.

11


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 qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements, to afford better understanding of an entity's leasing activities, including any significant judgments and estimates.   The guidance was amended through various ASU's subsequent to ASU 2016-02, all of which will be effective for us beginning October 1, 2019, but early adoption is permitted.  We are currently evaluating the impact of implementation of this standard on our financial statements.

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 March 2017, the FASB issued ASU No. 2017-07 "Improving the Presentation of Net Period Pension Cost and Net Period Postretirement Benefit Cost" (Topic 715). The provisions of ASU 2017-07 provided specific guidance on the presentation of the components of net benefit cost.  We adopted this standard ASU 2017-07 effective October 1, 2018 and applied it retrospectively. Pursuant to the adoption, net service costs are recorded as fringe benefit expense under cost of sales and operating expenses, and all other costs are recorded in the Other income (expense), net in our Consolidated Statements of Income. The impact of the retrospective adoption in fiscal 2018 is not material.

In May 2017, the FASB issued ASU No. 2017-09 "Scope of Modification Accounting" (Topic 718). The provisions of ASU 2017-09 provide specific guidance about which changes to the term or conditions of a share-based payment require an entity to apply modification accounting.  We adopted ASU 2017-09 effective October 1, 2018 and will apply this new standard to the share-based compensation awards, to the extent modified.

In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging" (Topic 815). The provisions of this standard amend the hedge accounting model in ASC 815 to expand an entity's ability to hedge nonfinancial and financial risk components, reduce complexity in fair value hedges of interest rate risk, eliminate the requirement to separately measure and report hedge ineffectiveness, and generally require the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness.  We early adopted this guidance effective January 1, 2019, and we did not have any hedges that existed as of the initial application date.  We applied the new guidance to the interest rate swap that we entered into during our second quarter of fiscal 2019. Pursuant to the guidance, we performed initial quantitative hedge effectiveness testing upon the hedge inception, and determined the hedge to be highly effective.  Therefore, unrealized changes in fair value are recorded in other comprehensive income.  In addition, we reclassify the realized gains and losses out of other comprehensive income, and into interest expense in our Consolidated Statements of Income, which is the same financial statement line as the hedged item.  We will perform subsequent assessments of hedge effectiveness qualitatively on a quarterly basis.

In February 2018, the FASB issued ASU No. 2018-02 "Income Statement – Reporting Comprehensive Income (Topic 220)".  The amendments in this standard allow a company to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act") from accumulated other comprehensive income to retained earnings. ASU 2018-02 will be effective for us beginning October 1, 2019, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.

In June 2018, the FASB issued ASU No. 2018-07 " Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting".  The ASU simplified the accounting for share-based payments granted to nonemployees for goods and services, therefore guidance on such payments to nonemployees would be mostly aligned with the requirements for share-based payments granted to employees. ASU 2018-07 will be effective for us beginning October 1, 2019, but early adoption is permitted (but no earlier than the adoption date of Topic 606). We are currently evaluating the impact of implementation of this standard on our financial statements.

12

In August 2018, the FASB issued ASU No. 2018-13 " Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement".  The ASU provides specific guidance on various disclosure requirements in Topic 820, including removal, modification and addition to current disclosure requirements. ASU 2018-13 will be effective for us beginning October 1, 2020, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our disclosures.

In August 2018, the FASB issued ASU No. 2018-15 " Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)".  The ASU Requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. ASU 2018-15 will be effective for us beginning October 1, 2020, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.

3.  REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

The Company disaggregates revenue by product area and segment as it best depicts the nature and amount of the Company’s revenue.


The following table shows revenue generated by product area during the three and six months ended March 31, 2019 and 2018:

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
 
 
2019
   
2018
   
2019
   
2018
 
Revenue:
                       
Electronic Materials:
                       
CMP Slurries
 
$
110,299
   
$
115,086
   
$
236,627
   
$
229,522
 
Electronic Chemicals
   
78,549
     
-
     
118,371
     
-
 
CMP Pads
   
23,998
     
21,017
     
48,464
     
39,895
 
Total Electronic Materials
   
212,846
     
136,103
     
403,462
     
269,417
 
                                 
Performance Materials
   
52,545
     
6,875
     
83,707
     
13,540
 
                                 
Total revenue
 
$
265,391
   
$
142,978
   
$
487,169
   
$
282,957
 

Reconciliation of Contract Liability Balances

The following table provides information about contract liability balances:

   
March 31, 2019
   
October 1, 2018
 
Contract liabilities (current)
 
$
3,611
   
$
5,310
 
Contract liabilities (noncurrent)
   
1,414
     
1,239
 

The contract liability balances as of October 1, 2018 in the table above include the amounts recorded upon the adoption of ASC 606.  At March 31, 2019, the current portion of contract liabilities of $3,611 is included in accrued liabilities, taxes payable and other current liabilities and the noncurrent portion of $1,414 is included in other long-term liabilities in the Consolidated Balance Sheets.  The amount of revenue recognized during the three and six months ended March 31, 2019 that was included in the opening current contract liability balances in our Performance Materials segment were  $2,317 and $4,160, respectively.  The amount of revenue recognized during the three and six months ended March 31, 2019 that was included in our opening contract liability balances in our Electronic Materials segment was not material.


13


Transaction Price Allocated to Remaining Performance Obligations

The table below discloses (1) the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period for contracts with an original duration of greater than one year and (2) when the Company expects to recognize this revenue.

 
Less Than 1 Year
 
1-3 Years
 
3-5 Years
 
Total
 
Revenue expected to be recognized on contract liability amounts as of March 31, 2019
 
$
87
   
$
1,085
   
$
329
   
$
1,501
 


4. BUSINESS COMBINATION

On the Acquisition Date, the Company completed its acquisition of 100% of the outstanding stock of KMG, which was a publicly held company headquartered in Fort Worth, Texas. KMG specializes in producing and distributing electronic chemicals for the semiconductor industry and performance materials for the pipeline, energy, and industrial wood preservation industries. We acquired KMG to extend and strengthen our position as one of the leading suppliers of consumable materials to the semiconductor industry and to expand our portfolio with the addition of KMG’s performance materials business, which we believe will enable us to be a leading global provider of performance products and services to the pipeline operations and energy industries. The purchase consideration was $1,513,235, including consideration transferred of $1,536,452, less cash acquired of $23,217. The consideration was comprised of cash consideration to KMG common shareholders and equity award holders, stock consideration to KMG common shareholders and equity award holders, and cash consideration in the form of the retirement of KMG’s preexisting debt obligations.  Under the terms of the definitive agreement to acquire KMG, each share of KMG common stock was converted into the right to receive $55.65 in cash and 0.2000 of a share of Cabot Microelectronics common stock. As a result, we issued 3,237,005 shares of our common stock to KMG’s common stockholders, with a stock price of $102.27 on the Acquisition Date. In connection with the Acquisition, we entered into a credit agreement (the “Credit Agreement”), which provided us with a seven-year, $1,065,000 term loan facility (the “Term Loan Facility”), which we drew on the Acquisition Date to fund the Acquisition along with cash on hand, and a five-year, $200,000 revolving credit facility (the “Revolving Credit Facility”), which has not been drawn. In connection with the borrowing, we incurred $21,408 in debt issuance costs and original issue discount fees, $859 of which relates to the Revolving Credit Facility and is recorded as a prepaid asset, and the remaining $20,549 in debt issuance costs relates to the Term Loan Facility and is presented as a reduction of long-term debt. These debt issuance costs are amortized and recorded in Interest expense in the Consolidated Statements of Income over the life of the Revolving Credit Facility and Term Loan Facility, respectively. See below for a summary of the different components that comprise the total consideration.

   
Amount
 
Total cash consideration paid for KMG outstanding common stock and equity awards
 
$
900,756
 
Cash provided to payoff KMG debt
   
304,648
 
Total cash consideration paid
   
1,205,404
 
Fair value of Cabot Microelectronics common stock issued for KMG outstanding common stock and equity awards
   
331,048
 
Total consideration transferred
 
$
1,536,452
 

14



The following table summarizes the preliminary allocation of fair values of assets acquired and liabilities assumed as of Acquisition Date:

Cash
 
$
23,217
 
Accounts receivable
   
64,711
 
Inventories
   
68,963
 
Prepaid expenses and other current assets
   
14,798
 
Property, plant and equipment
   
149,504
 
Intangible assets
   
844,800
 
Other long-term assets
   
6,208
 
Accounts payable
   
(28,894
)
Accrued expenses and other current liabilities
   
(43,451
)
Deferred income taxes liabilities
   
(164,469
)
Other long-term liabilities
   
(3,754
)
Total identifiable net assets acquired
   
931,633
 
Goodwill
   
604,819
 
Total consideration transferred
 
$
1,536,452
 

The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the Acquisition Date. These valuations are preliminary based on the information currently available, and the expectations and assumptions that have been deemed reasonable by the Company’s management.  The Company has not finalized the fair value determinations of the assets acquired and liabilities assumed and expects to finalize as soon as practicable, but not later than one-year from the Acquisition Date.  As a result, certain adjustments have been made and will continue to be made to the Company’s Consolidated Balance Sheet and Statements of Income.

The fair values of identifiable assets and liabilities acquired were developed with the assistance of a third-party valuation firm. The fair value of acquired property, plant and equipment is primarily valued at its “value-in-use.” The fair value of acquired identifiable intangible assets was determined using the “income approach” on an individual asset basis. The key assumptions used in the calculation of the discounted cash flows include projected revenue, gross margin, operating expenses, discount rate and customer attrition.  The valuations and the underlying assumptions have been deemed reasonable by the Company’s management. There are inherent uncertainties and management judgment required in these determinations.


The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the Acquisition Date:
 
   
Fair Value
   
Estimated Useful Life (years)
 
Customer relationships
 
$
704,000
     
15-20
 
Technology and know-how
   
85,500
     
9-11
 
Trade name - Flowchem
   
46,000
   
Indefinite
 
Trade name - all other
   
7,000
     
1-15
 
EPA product registration rights
   
2,300
     
15
 
Total intangible assets
 
$
844,800
         


Customer relationships represent the estimated fair value of the underlying relationships and agreements with KMG’s customers and are being amortized on an accelerated basis in order for the expense to most accurately match the periods of highest cash flows attributable to the identified relationships. Technology and know-how represent the estimated fair value of KMG’s technology, processes and knowledge regarding its product offerings, and are being amortized on a straight-line basis. Trade names represents the estimated fair value of the brand and name recognition associated with the marketing of KMG’s product offerings and are being amortized on a straight-line basis, except for the Flowchem trade name, which we believe has an indefinite life. These intangible assets are capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing. The intangible assets subject to amortization have a weighted average useful life of 17.9 years.

15


The excess of consideration transferred over the fair value of net assets acquired was recorded as goodwill, and is not deductible for income tax purposes. The goodwill is primarily attributable to anticipated revenue growth from the combined company product portfolio, expected synergies of the combined company, and the assembled workforce of KMG. The preliminary allocation of goodwill to each of the Electronic Materials and Performance Materials segments as a result of this Acquisition was $262,746 and $342,073, respectively.

For the three and six month ended March 31, 2019, we recorded $2,904 and $30,198 in acquisition and integration-related expenses, including transaction costs, stock compensation expense, severance and retention costs. These items are included within Selling, general and administrative in the Consolidated Statements of Income. In the same three and six month ended March 31, 2019, we also recorded a charge of $4,566 and $14,827 related to the fair value write-up of acquired inventory sold, respectively, which is included in Cost of sales in the Consolidated Statements of Income.

KMG’s results of operations have been included in our unaudited Consolidated Statements of Income and Consolidated Statements of Comprehensive Income from the Acquisition Date. Net sales of the acquired KMG business since the Acquisition Date through March 31, 2019 were $185,127. KMG’s net loss since the Acquisition Date was $5,561, which includes $19,996 of acquisition related costs and a $14,827 charge for fair value write-up of inventory sold. Further, additional amortization and depreciation expense associated with recording KMG’s net assets at fair value decreased KMG’s net income post-Acquisition.


The following unaudited supplemental pro forma information summarizes the combined results of operations for Cabot Microelectronics and KMG as if the Acquisition had occurred on October 1, 2017.

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2019
   
2018
   
2019
   
2018
 
Revenues
 
$
265,391
   
$
259,372
   
$
549,147
   
$
512,105
 
Net income (loss)
   
28,056
     
24,902
     
66,873
     
(38,262
)
Earnings per share - basic
 
$
0.97
   
$
0.86
   
$
2.32
   
$
(1.33
)
Earnings per share - diluted
 
$
0.95
   
$
0.85
   
$
2.27
   
$
(1.33
)

The following costs are included in the three and six months ended March 31, 2018:

Non-recurring transaction costs of $580 and $30,610, respectively.
Non-recurring transaction-related employee costs, such as accelerated stock compensation expense, retention and severance    expense of $460 and $35,601, respectively.
Non-recurring charge for fair value write-up of inventory sold of $1,045 and $14,859, respectively.

The historical financial information has been adjusted by applying the Company’s accounting policies and giving effect to the pro forma adjustments, which consist of (i) amortization expense associated with identified intangible assets; (ii) depreciation of fixed asset step-up; (iii) accretion of inventory step-up value; (iv) the elimination of interest expense on pre-acquisition KMG debt and replacement of interest expense related to the acquisition-related financing; (v) transaction-related costs; (vi) accelerated share-based compensation expense; (vii) retention and severance expense incurred as a direct result of the acquisition; and (viii) an adjustment to tax-effect the aforementioned unaudited pro forma adjustments using an estimated weighted-average effective income tax rate of each entity and the jurisdictions to which the above adjustments relate. The pro forma consolidated results are not necessarily indicative of what the consolidated results actually would have been had the Acquisition been completed on October 1, 2017. The pro forma consolidated results do not purport to project future results of combined operations, nor do they reflect the expected realization of any revenue or cost synergies associated with the Acquisition.


16



5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The Financial Accounting Standards Board (“FASB”) 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 March 31, 2019 and September 30, 2018.  See Note 10 for a detailed discussion of our long-term debt.  We have classified the following assets and liabilities in accordance with the fair value hierarchy set forth in the applicable standards.  In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest-level input that is significant to the determination of the fair value. 

March 31, 2019
 
Level 1
   
Level 2
   
Level 3
   
Total
Fair Value
 
Assets:
                       
Cash and cash equivalents
 
$
192,260
   
$
-
   
$
-
   
$
192,260
 
Other long-term investments
   
1,371
     
-
     
-
     
1,371
 
Total assets
 
$
193,631
   
$
-
   
$
-
   
$
193,631
 
                                 
Liabilities:
                               
Derivative financial instruments
   
-
     
8,401
     
-
     
8,401
 
Total liabilities
 
$
-
   
$
8,401
   
$
-
   
$
8,401
 

September 30, 2018
 
Level 1
   
Level 2
   
Level 3
   
Total
Fair Value
 
Assets:
                       
Cash and cash equivalents
 
$
352,921
   
$
-
   
$
-
   
$
352,921
 
Other long-term investments
   
1,137
     
-
     
-
     
1,137
 
Total assets
 
$
354,058
   
$
-
   
$
-
   
$
354,058
 
                                 
Liabilities:
                               
Derivative financial instruments
   
-
     
339
     
-
     
339
 
Total liabilities
 
$
-
   
$
339
   
$
-
   
$
339
 

Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active markets.  We invest only in AAA-rated, prime institutional money market funds, comprised of high quality, short-term fixed income securities. Our other long-term investments represent the fair value of investments under the Cabot Microelectronics Supplemental Employee Retirement Plan (SERP), which is a nonqualified supplemental savings plan.  The fair value of the investments is determined through quoted market prices within actively traded markets. Although the investments are allocated to individual participants and investment decisions are made solely by those participants, the SERP is a nonqualified plan.   Consequently, the Company owns the assets and the related offsetting liability for disbursement until a participant makes a qualifying withdrawal.  The long-term investment was adjusted to $1,371 in the second quarter of fiscal 2019 to reflect its fair value as of March 31, 2019.

Our derivative financial instruments include foreign exchange contracts and interest rate swap.  During the quarter, we entered into a floating-to-fixed interest rate swap agreement to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt.  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 swap, and forward rates and/or the Overnight Index Swap (OIS) curve for forward foreign exchange contracts, among others.  We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments.  See Note 11 of this Report on Form 10-Q for more information on our use of derivative financial instruments.

17



6. INVENTORIES

Inventories consisted of the following:

   
March 31,
2019
   
September 30, 2018
 
             
Raw materials
 
$
58,496
   
$
35,150
 
Work in process
   
12,569
     
8,117
 
Finished goods
   
76,259
     
28,659
 
Total
 
$
147,324
   
$
71,926
 

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $705,426 as of March 31, 2019, and $101,083 as of September 30, 2018.  The increase in goodwill was due to $604,510 in goodwill related to the acquisition of KMG offset by $167 in foreign exchange fluctuations.  The amount of goodwill assigned to each of the Electronic Materials and Performance Materials segments was $358,141 and $347,285, respectively.

The components of other intangible assets are as follows:

   
March 31, 2019
   
September 30, 2018
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
Other intangible assets subject to amortization:
                       
Product technology, trade secrets and know-how
 
$
134,340
   
$
31,131
   
$
48,825
   
$
25,305
 
Acquired patents and licenses
   
10,570
     
8,315
     
8,270
     
8,252
 
Customer relationships, trade names, and distribution rights
   
739,560
     
37,816
     
28,068
     
17,574
 
                                 
Total other intangible assets subject to amortization
   
884,470
     
77,262
     
85,163
     
51,131
 
                                 
Other intangible assets not subject to amortization:
                               
Other indefinite-lived intangibles*
   
47,170
             
1,170
         
Total other intangible assets not subject to amortization
   
47,170
             
1,170
         
                                 
Total other intangible assets
 
$
931,640
   
$
77,262
   
$
86,333
   
$
51,131
 

*Other indefinite-lived intangible assets not subject to amortization consist primarily of trade names.

As discussed in Note 4, we recorded $844,800 of intangible assets related to our acquisition of KMG.  The allocation of the amount into the various categories of intangible assets, as well as useful lives we have established, are discussed in Note 4.

Amortization expense on our intangible assets was $16,960 and $26,318 for the three and six months ended March 31, 2019, respectively, and was $1,963 and $3,936 for the three and six months ended March 31, 2018, respectively. Estimated future amortization expense for the five succeeding fiscal years is as follows:

 
Fiscal Year
 
Estimated
Amortization
Expense
 
 
Remainder of 2019
 
$
33,881
 
 
2020
   
87,936
 
 
2021
   
87,233
 
 
2022
   
79,822
 
 
2023
   
67,663
 

18


Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of our fiscal year or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. An entity has the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a quantitative analysis ("step one"). Similarly, an entity has the option to use a step zero or a step one approach to determine the recoverability of indefinite-lived intangible assets. In 2018, we chose to use a step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment, with the exception of our CMP slurries reporting unit, for which we chose to use a step zero analysis for fiscal 2018.

We completed our annual impairment test during our fourth quarter of fiscal 2018 and concluded that no impairment existed.  There were no indicators of potential impairment during the quarter ended March 31, 2019, so it was not necessary to perform an impairment review for goodwill and indefinite-lived intangible assets during the quarter.  There have been no impairment charges recorded on the goodwill for any of our reporting units.


8. OTHER LONG-TERM ASSETS

Other long-term assets consisted of the following:

   
March 31,
2019
   
September 30,
2018
 
             
Long-term contract assets
   
1,024
     
1,548
 
Long-term SERP Investment
   
1,371
     
1,137
 
Prepaid unamortized debt issuance cost
   
795
     
-
 
Other long-term assets
   
3,025
     
1,979
 
Total
 
$
6,215
   
$
4,664
 


9. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES

Accrued expenses, income taxes payable and other current liabilities consisted of the following:

   
March 31,
2019
   
September 30,
2018
 
             
Accrued compensation
 
$
26,148
   
$
35,367
 
Income taxes payable
   
18,889
     
18,045
 
Dividends payable
   
12,742
     
10,822
 
Taxes, other than income taxes
   
6,530
     
1,976
 
Accrued interest
   
4,197
     
-
 
Contract liabilities
   
3,611
     
4,894
 
Goods and services received, not yet invoiced
   
4,260
     
1,954
 
Other accrued expenses
   
10,536
     
9,925
 
Total
 
$
86,913
   
$
82,983
 



19


10. DEBT

On the Acquisition Date, we entered into the Credit Agreement by and among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, which provides for senior secured financing of up to $1,265.0 million, consisting of the Term Loan Facility in an aggregate principal amount of $1,065.0 million and the Revolving Credit Facility in an aggregate principal amount of up to $200.0 million, including a letter of credit sub-facility of up to $50.0 million.  The Term Loan Facility and the Revolving Credit Facility are referred to as the “Credit Facilities.”

Proceeds of the loans borrowed under the Term Loan Facility on the Acquisition Date were used to fund, in part, the Acquisition and certain of KMG’s existing indebtedness, and to pay related fees and expenses. The Revolving Credit Facility remains undrawn.

The Credit Facilities are guaranteed by each of the Company’s wholly owned domestic subsidiaries, including KMG and its subsidiaries, and are secured by substantially all assets of the Company and of each subsidiary guarantor, in each case subject to certain exceptions.

Borrowings under the Credit Facilities bear interest at a rate per annum equal to, at the Company’s option, either (a) a LIBOR, subject to a 0.00% floor, or (b) a base rate, in each case plus an applicable margin of, in the case of borrowings under the Term Loan Facility, 2.25% for LIBOR loans and 1.25% for base rate loans and, in the case of borrowings under the Revolving Credit Facility, initially, 1.50% for LIBOR loans and 0.50% for base rate loans. The applicable margin for borrowings under the Revolving Credit Facility varies depending on the Company’s first lien secured net leverage ratio. The Company is also required to pay a commitment fee currently equal to 0.25% per annum to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The commitment fee under the Revolving Credit Facility varies depending on the Company’s first lien secured net leverage ratio.

The Term Loan Facility matures on November 15, 2025, the seven-year anniversary of the Acquisition Date, and amortizes in equal quarterly installments of 0.25% of the initial principal amount, starting with the first full fiscal quarter after the Acquisition Date. The Revolving Facility matures on November 15, 2023, the five-year anniversary of the Acquisition Date. In addition, the Company is required to prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with up to 50% of the Company’s annual excess cash flow, as defined under the Credit Agreement, and 100% of the net cash proceeds of certain recovery events and non-ordinary course asset sales.

The Company may generally prepay outstanding loans under the Credit Facilities at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans. Prepayments of the Term Loan Facility in connection with certain “repricing events” resulting in a lower yield occurring at any time during the first six months after the Acquisition Date must be accompanied by a 1.00% prepayment premium.  During this quarter we made a prepayment of $45.0 million.  Subsequent to the end of the quarter ended March 31, 2019, we made an additional prepayment of $55.0 million.

The Revolving Credit Facility requires that the Company maintain a maximum first lien secured net leverage ratio, as defined in the Credit Agreement, of 4.00 to 1.00 as of the last day of each fiscal quarter if any revolving loans are outstanding, commencing with the first full fiscal quarter after the Acquisition Date.

The Credit Agreement contains certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, asset sales and acquisitions, pay dividends and make other restricted payments and enter into transactions with affiliates. We believe we are in compliance with these covenants.

The Credit Agreement contains certain events of default, including relating to a change of control. If an event of default occurs, the lenders under the Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the Credit Facilities.

At March 31, 2019, the fair value of the Term Loan Facility, using level 2 inputs, approximated its carrying value of $1,020,000 as the loan bears a floating market rate of interest. As of March 31, 2019, $13,313 of the debt outstanding was classified as short-term, and $19,411 of debt issuance costs related to our Term Loan were presented as a reduction of long-term debt.

In the second quarter of fiscal 2019, we entered into a floating-to-fixed interest rate swap agreement to hedge the variability in our LIBOR-based interest payments on approximately 70% of our Term Loan Facility balance.  See Note 11 on the Report on Form 10-Q for additional information.


20


Principal repayments of the Term Loan Facility are generally made on the last calendar day of each quarter if that day is considered to be a business day.  As of March 31, 2019, scheduled principal repayments of the Term Loan were as follows:

 
Fiscal Year
 
Principal
Repayments
 
 
Remainder of 2019
 
$
7,988
 
 
2020
   
10,650
 
 
2021
   
10,650
 
 
2022
   
10,650
 
 
2023
   
10,650
 
 
Greater than 5 years
   
969,412
 
 
Total
 
$
1,020,000
 


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 Consolidated Balance Sheets at fair value on a gross basis.

Cash Flow Hedges - Interest Rate Swap Agreements

During the quarter, we entered into a floating-to-fixed interest rate swap agreement to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt.  As of March 31, 2019, the notional value of the swap was $746,000 and this value is scheduled to decrease bi-annually, and expire on January 31, 2024.

We have designated this swap agreement as a cash flow hedge pursuant to ASC 815, "Derivatives and Hedging".  Based on certain quantitative and qualitative assessments, we have determined that the hedge is highly effective and qualifies for hedge accounting.  Accordingly, unrealized gains and losses on the hedge are recorded in other comprehensive income.  Realized gains and losses are recorded on the same financial statement line as the hedged item, which is interest expense.

Foreign Currency Contracts Not Designated as Hedges

On a regular basis, we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures.  These foreign exchange contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on our forward foreign exchange contracts are recognized as other income or expense in the accompanying consolidated income statements in the period in which the exchange rates change.  As of March 31, 2019 and September 30, 2018, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for foreign currencies were $4,102 and $7,652, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for foreign currencies were $23,815 and $24,860, respectively.

Net Investment Hedge - Foreign Exchange Contracts

In September 2017, we entered into forward contracts to sell 100 billion Korean won and buy U.S. dollars, which we subsequently terminated in the third quarter of fiscal 2018. We had designated these forward contracts as effective net investment hedges. During the second quarter of fiscal 2018, the change in the fair value of these forward contracts in the net investment hedge relationship was $2,966, which was recorded in foreign currency translation adjustments within other comprehensive income.

21


The fair value of our derivative instruments included in the Consolidated Balance Sheets, which was determined using Level 2 inputs, was as follows:

      
Asset Derivatives
   
Liability Derivatives
 

Consolidated Balance Sheet Locatio
 
March 31, 2019
   
September 30, 2018
   
March 31, 2019
   
September 30, 2018
 
Derivatives designated as hedging instruments
                         
Interest rate swap contract
Accrued expenses, income taxes payable and other current liabilities
  $
-
    $
-
   
$
781
   
$
-
 

Other long-term liabilities
   
-
     
-
   
$
7,572
   
$
-
 
                                   
Derivatives not designated as hedging instruments
                                 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$
-
   
$
-
   
$
-
   
$
-
 

Accrued expenses, income taxes payable and other current liabilities
 
$
-
   
$
-
   
$
48
   
$
339
 


The following table summarizes the effect of our derivative instruments on our Consolidated Statements of Income for the three and six months ended March 31, 2019 and 2018:

    
Gain (Loss) Recognized in Statement of Income
 
 
   
Three Months Ended
 
Six Months Ended
 

Statement of Income Location
March 31, 2019
 
March 31, 2018
 
March 31, 2019
 
March 31, 2018
 
Derivatives not designated as hedging instruments
                 
Foreign exchange contracts
Other income (expense), net
 
$
(348
)
 
$
887
   
$
(38
)
 
$
78
 

The interest rate swap agreement has been deemed to be effective, and realized gains and losses were immaterial to our Consolidated Statement of Income.  We recorded an unrealized loss of $6,473, net of tax, in accumulated comprehensive income during the three and six months ended March 31, 2019 for this interest rate swap.  As of March 31, 2019, during the next 12 months, we expect approximately $781 to be reclassed from accumulated other comprehensive income into interest expense related to our interest rate swap based on projected rates of the LIBOR forward curve as of March 31, 2019.


22


12. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

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

The United States Environmental Protection Agency (“EPA”) has notified KMG’s subsidiary, KMG-Bernuth, that the EPA considered it to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”) by virtue of its relationship with certain alleged predecessor companies, including Idacon, Inc. (f/k/a Sonford Chemical Company in connection with the Star Lake Canal Superfund Site near Beaumont, Texas. The EPA has estimated that the remediation will cost approximately $22.0 million. KMG and approximately seven other parties entered into an agreement with the EPA in September 2016 to complete a remedial design phase of the remediation of the site. The remediation work will be performed under a separate future agreement. Although KMG has not conceded liability, KMG established a reserve in connection with the remedial design, and as of March 31, 2019, the reserve remaining was $1,008.  We also may face other governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with this or other past and present operations. We accrue for environmental liabilities when a determination can be made that they are probable and reasonably estimable.

Other than as described above, we are not involved in any legal proceedings that we believe could have a material impact on our consolidated financial position, results of operations or cash flows.

In addition, our Company is subject to extensive federal, state and local laws, regulations and ordinances in the U.S. and in other countries. These regulatory requirements relate to the use, generation, storage, handling, emission, transportation and discharge of certain hazardous materials, substances and waste into the environment.  The Company, including its KMG entities, manage Environmental, Health and Safety (“EHS”) matters related to protection of the environment and human health, the cleanup of contaminated sites, the treatment, storage and disposal of wastes, and the emission of substances into the air or waterways, among other EHS concerns.  Governmental authorities have the power to enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company devotes significant financial resources to compliance, including costs for ongoing compliance.

Certain licenses, permits and product registrations are required for the Company’s products and operations in the U.S., Mexico and other countries in which it does business. The licenses, permits and product registrations are subject to revocation, modification and renewal by governmental authorities.  In the U.S.  in particular, producers and distributors of pentachlorophenol (“penta”), which is a product manufactured and sold by a KMG subsidiary as part of the wood treatment business, are subject to registration and notification requirements under the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) and comparable state law in order to sell this product in the U.S. Compliance with these requirements may have a significant effect on our business, financial condition and results of operations.

We are subject to contingencies, including litigation relating to EHS laws and regulations, commercial disputes and other matters. Certain of these contingencies are discussed below. The ultimate resolution of these contingencies is subject to significant uncertainty, and should we fail to prevail in any of them or should several of them be resolved against us in the same reporting period, these matters could, individually or in the aggregate, be material to the consolidated financial statements. The ultimate outcome of these matters, however, cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in our consolidated financial statements.  The Company records legal costs associated with loss contingencies as expenses in the period in which they are incurred.
    
Refer to Note 17 of “Notes to the Consolidated Financial Statements” in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, for additional information regarding commitments and contingencies.
23




POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS

We have defined benefit plans covering employees in certain foreign jurisdictions as required by local law, which are unfunded. We adopted ASU 2017-07 during the first quarter of the fiscal year and pursuant to the adoption, net service costs are recorded as fringe benefit expense under cost of sales and operating expenses, and all other costs are recorded in the Other income (expense), net in our Consolidated Statements of Income.  The projected benefit obligations and accumulated benefit obligations under all such unfunded plans are updated annually during the fourth quarter of the fiscal year. Benefit payments under all such unfunded plans to be paid over the next ten years are expected to be approximately $7,906.  For more information regarding these plans, refer to Note 17 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

PURCHASE OBLIGATIONS

Purchase obligations include take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services.  We have been operating under a fumed silica supply agreement with Cabot Corporation, our former parent company which is not a related party, the current term of which runs through December 2019.  As of March 31, 2019, purchase obligations include $11,073 of contractual commitments related to our Cabot Corporation supply agreement for fumed silica.


13. ACCUMULATED OTHER COMPREHENSIVE INCOME

The table below summarizes the components of accumulated other comprehensive income (AOCI), net of tax provision/(benefit), as of March 31, 2019 and 2018: 

   
Foreign
Currency
Translation
   
Cash Flow
Hedges
   
Pension and
Other
Postretirement