2011 Annual Report
500
400
300
200
100
0
2.5
2.0
1.5
OUR COMPANY
1.0
Revenue (in millions)
$500
$400
Revenue (in millions)
FY07
FY08
FY09
FY10 FY11
Diluted Earnings Per Share (in dollars)
$500
$400
$300
$200
$100
0
$2.50
$2.00
$1.50
$1.00
0.5
$300
Cabot Microelectronics is the world’s leading supplier of chemical mechanical planarization (CMP) slurries and
a growing CMP pad supplier to the semiconductor industry. Our CMP consumables products are used to level,
smooth and remove excess material from the multiple layers of material that are deposited upon silicon wafers in the
production of most semiconductor devices. This enables our customers to manufacture smaller, faster and more
complex devices. We also produce slurries for the data storage industry that are used to polish certain hard disk
drive components, and we are pursuing a number of other demanding surface modification applications through our
Engineered Surface Finishes business.
FY10 FY11
FY10 FY11
$0.50
$200
$100
FY07
FY08
FY09
FY07
FY08
FY09
0.0
0
0
FINANCIAL HIGHLIGHTS
Revenue (in millions)
Diluted Earnings Per Share (in dollars)
Cash From Operations (in millions)
$500
$400
$300
$200
$100
0
100
80
60
40
20
FY07
FY08
FY09
0
FY10 FY11
$2.50
$2.00
$1.50
$1.00
$0.50
0
FY07
FY08
FY09
FY10 FY11
$100
$80
$60
$40
$20
0
FY07
FY08
FY09
FY10 FY11
In millions, except per share and percentage amounts
FY11
FY10
Change
$445.4
$408.2
48.1%
49.9%
9.1%
(3.6)
51.7
2.20
628.2
566.4
302.5
93.6
49.5
2.13
571.8
514.3
254.2
88.4
18.8%
18.8%
4.5
3.3
9.9
10.1
19.0
5.9
—
Cash From Operations (in millions)
$100
$80
$60
$40
$20
0
FY07
FY08
FY09
FY10 FY11
Revenue
Gross profit margin
Diluted Earnings Per Share (in dollars)
Net income
$2.50
Diluted earnings per share
$2.00
Total assets
Stockholders’ equity
$1.50
Cash and short-term investments
$1.00
Cash from operations
After tax return on invested capital
$0.50
0
FY07
FY08
FY09
FY10 FY11
Cash From Operations (in millions)
$100
$80
$60
$40
$20
0
FY07
FY08
FY09
FY10 FY11
500
400
300
200
100
0
2.5
2.0
1.5
1.0
0.5
0.0
100
80
60
40
20
0
500
400
300
200
100
0
2.5
2.0
1.5
1.0
0.5
0.0
100
80
60
40
20
0
(Left)
William P. Noglows,
Chairman, President & CEO
(Right)
William S. Johnson,
Vice President & CFO
T O O U R S T O C K H O L D E R S , C U S T O M E R S , S U P P L I E R S A N D E M P L O Y E E S
We are very pleased to have achieved strong financial
Less than a year after breaking ground, we celebrated
performance in 2011 with record revenue of $445 million, net
the grand opening of our new facility in South Korea in
income of $51.7 million and earnings per share of $2.20.
August 2011. We believe this investment will enhance our
These results were on top of the record levels we achieved in
manufacturing and technical capabilities there and help
fiscal 2010. We also achieved record annual revenue in each of
enable more real time collaboration with our key memory
our CMP slurry business areas, Tungsten, Dielectrics, Copper
customers, similar to investments we made in additional
and Data Storage, as well as in our CMP polishing Pads
capabilities in Taiwan a number of years ago that enabled us
business and our Engineered Surface Finishes business.
to better serve and grow with our foundry customers. We
Our vision is to be the trusted industry partner to our
customers, providing high quality solutions with speed and
delivering superior cost of ownership. In order to execute
look forward to leveraging this new facility in South Korea to
further strengthen our ability to serve the second largest
CMP consumables market in the world.
on our primary strategy to strengthen and grow our core
We expanded our manufacturing capacity in Japan to
CMP consumables business, we must demonstrate our
meet increased demand for our CMP slurry products. Our
commitment to this vision each and every day. I believe our
manufacturing facility in Japan is our largest plant, supplying
financial performance in 2011 and the strategic investments
customers in Japan as well as throughout the Asia Pacific
we made during the year reflect our commitment to achieving
region. In addition, during the year we invested in expanding
our vision, and to further strengthening our global position.
our slurry manufacturing facility in Singapore to meet higher
EXPANDED GLOBAL FOOTPRINT
demand from our Data Storage customers. Our Data Storage
business had an outstanding year in fiscal 2011 and this facility
Cabot Microelectronics’ global infrastructure includes sales,
expansion prepares us well for future potential growth in this
manufacturing and technical capabilities across the United
business, which is closely adjacent to our core CMP
States, Europe and the Asia Pacific region to serve our
consumables business for semiconductor applications.
customers around the world. During 2011, we implemented
an aggressive capital investment program to significantly
INNOVATED AND COMMERCIALIZED NEW PRODUCTS
expand our existing footprint in the Asia Pacific region to
As the semiconductor industry continues to evolve and
better meet the needs of our customers. Our investments
advance to smaller technology nodes, customers require
this year included a new research, development and
greater customization of CMP solutions, and our ability
manufacturing facility in South Korea, as well as expansions
to collaborate with our customers with speed becomes
of our manufacturing capacity in our existing facilities in
increasingly critical. As the industry leader in CMP slurries
Japan and Singapore.
and the second largest supplier of CMP pads, one of our
highest priorities is to develop reliable and innovative
that these investments will serve us well as we continue to
solutions, while partnering with our customers. In fiscal
collaborate with our customers around the world to provide
2011 we invested $58 million in research and development
high value solutions to meet their evolving business needs.
activities. We are proud that we developed and commercialized
new, high quality products in all of our business areas during
fiscal 2011 to address traditional CMP applications as well as
new and emerging areas. We believe our product portfolio is
rich and robust, serving virtually all applications and
technology nodes.
Over the years, our strong financial model has demonstrated
solid revenue growth, a consistent level of profitability, and
strong, consistent free cash flow. In turn, this has enabled us
to invest in the organic growth of our business, complete
several acquisitions, and purchase a significant amount of
our stock. Even as we have pursued these growth and
During the year, we launched a number of leading edge
investment strategies, we have accumulated a sizeable cash
products that are designed to provide our customers with
balance over time to slightly over $300 million at the end of
high quality solutions while delivering superior cost of
fiscal 2011.
ownership. We introduced products to enable our customers’
advanced process integration schemes and provide higher
throughput and enhanced defectivity performance, while
optimizing removal rates. We also collaborated with
customers on several joint development projects for future
slurry applications for 22 nanometer technology and beyond.
In light of this, and with confidence in the future success of
our company, we announced a new capital management
initiative in December 2011. This initiative includes a planned
leveraged recapitalization of the company with a proposed
special cash dividend of $15 per share, or approximately
$345 million in total, as well as an increase in our existing
In response to the needs of our pad customers, we introduced
share repurchase program to $150 million.
new pad products from our existing Epic® D100 product
platform to improve pad life and defectivity performance, and
we developed a next generation Epic D200 pad platform,
which is tunable to meet a variety of specific customers’
needs. We have approximately 50 specific pad business
opportunities around the world in various stages of evaluation
and qualification across our Epic D100 and D200 offerings.
While this new capital management initiative represents a
significant change in our capital allocation strategy compared
to our historical practices, our growth and investment strategies
remain unchanged. We will continue to invest in our business
and pursue organic growth opportunities, as well as consider
attractive acquisition opportunities that can profitably grow
our company. In addition, we will balance these investments
We also have leveraged investments in technology
in our business with consideration of future opportunities to
and infrastructure related to our core CMP consumables
provide value to shareholders on an ongoing basis.
businesses to expand into adjacent markets. During the year,
we made progress in commercializing new slurries for
polishing silicon wafers and continued to develop optics
polishing and metrology systems in our Engineered Surface
Finishes (ESF) business.
PATH FORWARD
I would like to thank our stockholders, customers, suppliers
and employees for your continued support and confidence in
our company. We believe our strategic investments coupled
with our efforts toward achieving our vision and our new
capital management initiative, will translate into long-term
profitable growth and value for our company.
I am pleased with the strategic investments we made during
the year to expand our global footprint and develop innovative
Sincerely,
products for our customers. I look forward to the years ahead,
in which we intend to capitalize on these strategic investments
and further strengthen our global position. I am confident
WILLIAM P. NOGLOWS
Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2011
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
(State of Incorporation)
36-4324765
(I.R.S. Employer Identification No.)
870 NORTH COMMONS DRIVE
AURORA, ILLINOIS
(Address of principal executive offices)
60504
(Zip Code)
Registrant’s telephone number, including area code: (630) 375-6631
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.001 par value
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No X
The aggregate market value of the registrant’s Common Stock held beneficially or of record by stockholders who are
not affiliates of the registrant, based upon the closing price of the Common Stock on March 31, 2011, as reported by
the NASDAQ Global Select Market, was approximately $1,203,000. For the purposes hereof, “affiliates” include all
executive officers and directors of the registrant.
As of October 31, 2011, the Company had 22,937,476 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 6,
2012, are incorporated by reference in Part III of this Form 10-K to the extent stated herein.
This Form 10-K includes statements that constitute “forward-looking statements” within the meaning of federal
securities regulations. For more detail regarding “forward-looking statements” see Item 7 of Part II of this Form 10-K.
CABOT MICROELECTRONICS CORPORATION
FORM 10-K
For the Fiscal Year Ended September 30, 2011
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Executive Officers of the Registrant
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV.
Item 15.
Exhibits and Financial Statement Schedules
Exhibit Index
Signatures
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2
PART I
Item 1. Business
Our Company
Cabot Microelectronics Corporation (“Cabot Microelec-
tronics”, “the Company”, “us”, “we”, or “our”), which was
incorporated in the state of Delaware in 1999, is the
lead ing supplier of high-performance polishing slurries
and a growing CMP pad supplier used in the manufac-
ture of advanced integrated circuit (IC) devices within
the semiconductor industry, in a process called chemi-
cal mechanical planarization (CMP). CMP is a polishing
process used by IC device manufacturers to planarize or
flatten many of the multiple layers of material that are
deposited upon silicon wafers in the production of
advanced ICs. Our products play a critical role in the
production of advanced IC devices, thereby enabling
our customers to produce smaller, faster and more com-
plex IC devices with fewer defects.
We currently operate predominantly in one industry seg-
ment— the development, manufacture and sale of CMP
consumable products. We develop, produce and sell
CMP slurries for polishing many of the conducting and
insulating materials used in IC devices, and also for
polishing the disk substrates and magnetic heads used
in hard disk drives. We also develop, manufacture and
sell CMP polishing pads, which are used in conjunction
with slurries in the CMP process. We also pursue other
demanding surface modification applications through
our Engineered Surface Finishes (ESF) business where
we believe we can leverage our expertise in CMP con-
sumables for the semiconductor industry to develop
products for demanding surface applications in other
industries.
CMP Process Within IC Device Manufacturing
IC devices, or “chips”, are components in a wide range
of electronic systems for computing, communications,
manufacturing and transportation. Individual consumers
most frequently encounter IC devices as microproces-
sors in their desktop or laptop computers and as memory
chips in computers, tablets, smart phones, cell phones
and digital cameras. The multi-step manufacturing proc-
ess for IC devices typically begins with a circular wafer of
pure silicon, with the first manufacturing step referred to
as a “wafer start”. A large number of identical IC devices,
or dies, are manufactured on each wafer at the same
time. The initial steps in the manufacturing process build
transistors and other electronic components on the
silicon wafer. These are isolated from each other using
a layer of insulating material, most often silicon dioxide,
to prevent electrical signals from bridging from one
transistor to another. These components are then wired
together using conducting materials such as aluminum
or copper in a particular sequence to produce a func-
tional IC device with specific characteristics. When the
conducting wiring on one layer of the IC device is com-
pleted, another layer of insulating material is added. The
process of alternating insulating and conducting layers
is repeated until the desired wiring within the IC device
is achieved. At the end of the process, the wafer is cut
into the individual dies, which are then packaged to
form individual chips.
Demand for CMP consumable products, including slur-
ries and pads, for IC devices is primarily based on the
number of wafer starts by semiconductor manufacturers
and the type and complexity of the IC devices they pro-
duce. To enhance the performance of IC devices, IC
device manufacturers have progressively increased the
number and density of electronic components and
wiring layers in each IC device. This is typically done in
conjunction with shrinking the key dimensions on an IC
device from one technology generation, or “node”, to
another. As a result, the number of transistors, wires and
the number of discrete wiring layers have increased,
increasing the complexity of the IC device and the
related demand for CMP consumable products to polish
those devices. As semiconductor technology has
advanced and performance requirements of IC devices
have increased, the percentage of IC devices that utilize
CMP in the manufacturing process has increased steadily
over time. We believe that CMP is used in the majority
of all IC devices made today, and we expect that the use
of CMP will continue to increase in the future.
In the CMP polishing process, CMP consumables are
used to remove excess material that is deposited during
the IC manufacturing process, and to level and smooth
the surfaces of the layers of IC devices, via a combination
of chemical reactions and mechanical abrasion, leaving
minimal residue and defects on the surface, and leaving
only the material necessary for circuit integrity. CMP
slurries are liquid solutions generally composed of high-
purity deionized water and a proprietary mix of chemical
additives and engineered abrasives that chemically and
mechanically interact at an atomic level with the surface
material of the IC device. CMP pads are engineered
polymeric materials designed to distribute and transport
the slurry to the surface of the wafer and distribute it
evenly across the wafer. Grooves are cut into the surface
of the pad to facilitate distribution of the slurry. The
CMP process is performed on a CMP polishing tool.
During the CMP process, the wafer is held on a rotating
carrier, which is pressed down against a CMP pad. The
CMP pad is attached to a rotating polishing table that
spins in a circular motion. A CMP slurry is continuously
applied to the polishing pad to facilitate and enhance
the polishing process. Hard disk drive and silicon wafer
manufacturers use similar processes to smooth the
surface of substrate disks before depositing magnetic
media onto the disk.
3
An effective CMP process is achieved through technical
optimization of the CMP consumables in conjunction
with an appropriately designed CMP process. Prior to
introducing new or different CMP slurries or pads into
its manufacturing process, an IC device manufacturer
generally requires the product to be qualified in its
proc esses through an extensive series of tests and eval-
uations. These qualifications are intended to ensure that
the CMP consumable product will function properly
within the customers’ overall manufacturing process.
These tests and evaluations may require minor changes
to the CMP process or the CMP slurry or pad. While this
qualification process varies depending on numerous
factors, it is generally quite costly and may take six
months or longer to complete. IC device manufacturers
usually take into account the cost, time required and
impact on production when they consider implement-
ing or switching to a new CMP slurry or pad.
CMP enables IC device manufacturers to produce smaller,
faster and more complex IC devices with a greater den-
sity of transistors and other electronic components than
is possible without CMP. By enabling IC device manufac-
turers to make smaller IC devices, CMP also allows them
to increase the number of IC devices that fit on a wafer.
This increase in the number of IC devices per wafer in
turn increases the throughput, or the number of IC devices
that can be manufactured in a given time period, and
thereby reduces the cost per device. CMP also helps
reduce the number of defective or substandard IC devices
produced, which increases the device yield. Improve-
ments in throughput and yield reduce an IC device man-
ufacturer’s unit production costs, and reducing costs is
one of the highest priorities of a semiconductor manu-
facturer as the return on its significant investment in
manufacturing capacity can be enhanced by lower unit
costs. More broadly, sustained growth in the semicon-
ductor industry traditionally has been fueled by enhanced
performance and lower unit costs, making IC devices
more affordable in an expanding range of applications.
Precision Polishing
Through our ESF business, we are applying our technical
expertise in CMP consumables and polishing techniques
developed for the semiconductor industry to demanding
applications in other industries where shaping, enabling
and enhancing the performance of surfaces is critical to
success, such as for precision optics and electronic sub-
strates, including silicon and silicon-carbide wafers.
Many of the production processes currently used in
precision machining and polishing have been based on
traditional, labor-intensive techniques, which are being
replaced by computer-controlled, deterministic proc-
esses. Our wholly-owned subsidiary, QED Technologies
International, Inc. (QED), is a leading provider of deter-
ministic finishing technology for the precision optics
industry. We believe precision optics are pervasive,
serving several existing large markets such as semicon-
ductor equipment, aerospace, defense, security, biomed-
ical and consumer imaging.
Our Products
CMP Consumables for IC Devices
We develop, produce and sell CMP slurries for polishing
a wide range of materials that conduct electrical signals,
including tungsten, copper, tantalum (commonly referred
to as “barrier” which is used in copper wiring applica-
tions) and aluminum. Slurries for polishing tungsten are
used heavily in the production of advanced memory
devices for a multitude of end applications such as com-
puters, tablets, MP3 players, cellphones, gaming devices,
digital photography and digital video recorders, as well
as in mature logic applications such as those used in
automobiles. Our most advanced slurries for tungsten
polishing are designed to be customized to provide cus-
tomers greater flexibility, improved performance and a
reduced cost of ownership. Our slurries for polishing
copper and barrier materials are used in the production
of advanced IC logic devices such as microprocessors
for computers, and devices for graphic systems, gaming
systems and communication devices, as well as in the
production of advanced memory devices. These products
include different slurries for polishing the copper film
and the thin barrier layer used to separate copper from
the adjacent insulating material. Slurries for polishing
aluminum are relatively new in the CMP consumables
market and are used in the most advanced transistor
designs currently in production. We offer multiple prod-
ucts for each technology node to enable different inte-
gration schemes depending on specific customer needs.
We also develop, manufacture and sell slurry products
used to polish the dielectric insulating materials that
separate conductive layers within logic and memory IC
devices. Our core slurry products for these materials are
primarily used for high volume applications called
Interlayer Dielectric or ILD. Our advanced dielectrics
products are designed to meet the more stringent and
complex performance requirements of lower-volume,
more specialized dielectric polishing applications, such
as pre-metal dielectric (PMD) and shallow trench isola-
tion (STI), at advanced technology nodes.
We develop, produce and sell CMP polishing pads,
which are consumable materials that work in conjunction
with CMP slurries in the CMP polishing process. We
believe that CMP polishing pads represent a natural
adjacency to our CMP slurry business, since the technol-
ogies are closely related and utilize the same technical,
sales and support infrastructure. We believe our unique
pad material and our continuous pad manufacturing
process enable us to produce a pad with a longer pad
life, greater consistency from pad to pad, and enhanced
4
performance, resulting in lower cost of ownership for
our customers. We are producing and selling pads that
can be used on a variety of polishing tools, over a range
of applications including tungsten, copper and dielec-
trics, over a range of technology nodes, and on both
200mm and 300mm wafers. Our pad product offerings
include our EPIC D100 series of pads and our next gen-
eration D200 series.
CMP Consumables for the Data Storage Industry
We develop and produce CMP slurries for polishing cer-
tain materials that are used in the production of rigid
disks and magnetic heads used in hard disk drives for
computer and other data storage applications, which
represent an extension of our core CMP slurry technol-
ogy and manufacturing capabilities established for the
semiconductor industry. We believe CMP significantly
improves the surface finish of these rigid disk coatings,
resulting in greater storage capacity of the hard disk
drive systems, and also improves the production effi-
ciency of manufacturers of hard disk drives by helping
increase their throughput and yield. We expanded our
manufacturing capacity for data storage applications in
fiscal 2011 to accommodate the growth we have experi-
enced in this area of our business.
Precision Optics Products
Through our QED subsidiary, we design and produce
precision polishing and metrology systems for advanced
optic applications that allow customers to attain near-
perfect shape and surface finish on a range of optical
components such as mirrors, lenses and prisms. His tor i-
cally, advanced optics have been produced using labor-
intensive artisanal processes, and variability has been
common. QED has automated the polishing process for
advanced optics to enable rapid, deterministic and
repeatable surface correction to the most demanding
levels of precision in dramatically less time than with tra-
ditional means. QED’s polishing systems use Magneto-
Rheological Finishing (MRF), a proprietary surface figuring
and finishing technology, which employs magnetic fluids
and sophisticated computer technology to polish a vari-
ety of shapes and materials. QED’s metrology systems
use Subaperture Stitching Interferometry (SSI) technol-
ogy that captures precise metrology data for large and/
or strongly curved optical parts and Aspheric Stitching
Interferometry (ASI) technology, which is designed to
measure increasingly complex shapes, including non-
spherical surfaces, or aspheres.
Strategy
We collaborate closely with our customers to develop
and manufacture products that offer innovative and reli-
able solutions to our customers’ challenges and we strive
to consistently and reliably deliver and support these
products around the world through what we believe is
a robust global infrastructure and supply chain. We
continue to focus on the execution of our primary strategy
of strengthening and growing our core CMP consum-
ables business within the semiconductor and hard disk
drive industries. We are also leveraging our expertise in
CMP process and slurry formulation to expand our ESF
business in the optics and electronic substrates markets.
Strengthening and Growing Our Core CMP
Consumables Business
We intend to grow our core CMP consumables business
by leveraging the capabilities and global infrastructure
we have developed as the leader in the CMP slurry
industry. We dedicate significant time and resources to
new product innovation, and we work closely with our
customers to deliver reliable solutions on a global scale
that are designed to provide superior quality and lower
overall cost of ownership. We believe our strong finan-
cial position allows us to fund growth opportunities in
our core CMP consumables business through internally
developed technologies as well as through potential
acquisitions of technologies and businesses such as our
acquisition of Epoch Material Co., Ltd. (Epoch), a Taiwan-
based CMP consumable provider, in fiscal 2009.
Developing Innovative Solutions: We believe that tech-
nology and innovation are vital to success in our CMP
consumables business and we devote significant
resources to research and development. We need to
stay ahead of the rapid technological advances in the
electronics industry in order to deliver a broad line of
CMP consumables products that meet or exceed our
customers’ evolving needs. We have established research
and development facilities in the United States, Japan,
Taiwan, Singapore, and most recently in South Korea, in
order to meet our customers’ technology needs on a
global basis.
In fiscal 2011, we launched a number of new products
within our existing slurry and polishing pad businesses
that cross multiple applications over a range of technol-
ogy nodes and we have also expanded our offerings
within new and emerging technology areas. Several of
our newest product offerings are discussed below:
• We have expanded our solutions within our tungsten
slurry business due to the increasing importance of a
“buff” step to address more stringent customer per-
formance and selectivity requirements. A buff step is
a short polishing step for minimal material removal
that complements our existing tungsten slurries for
bulk removal applications.
• We have introduced new products for Through Silicon
Via (TSV) polishing. TSV is a new advancement in chip
design where multiple layers of stacked IC devices are
connected into three dimensional chips. This enables
semiconductor manufacturers to add speed and per-
formance to IC devices without having to reduce the
critical dimensions of the chip.
5
• We have commercialized CMP solutions for emerging
applications such as for High K Metal Gates, which uti-
lize aluminum CMP.
• We have developed post CMP cleaning solutions,
referred to as the Epoch Clean series, which are
designed to deliver optimal post CMP wafer surface
properties for more advanced applications.
Close Collaboration With Our Customers: We believe that
building close relationships with our customers is key to
achieving long-term success in our business. We collab-
orate with our customers on joint projects to identify
and develop new and better CMP solutions, to integrate
our products into their manufacturing processes, and to
assist them with supply, warehousing and inventory
management. Our customers demand a highly reliable
supply source, and we believe we have a competitive
advantage because of our ability to timely deliver high-
quality products and service from the early stages of
product development through the high-volume com-
mercial use of our products. We strategically locate our
research facilities and clean rooms, manufacturing oper-
ations and the related technical and customer support
teams to be responsive to our customers’ needs. We
believe our extensive research and development facilities,
in close proximity to our customers, provide a competi-
tive advantage.
In fiscal 2011, we expanded our facilities at several loca-
tions in the Asia Pacific region to further enhance our
custo mer relationships. We completed construction of a
new 56,000 square foot research, development and man-
ufacturing facility in Oseong, South Korea. We believe
this facility will enhance our ability to support our cus-
tomers as South Korea is home to some of the largest
manufacturers of memory devices in the world. We have
also expanded manufacturing capacity in Japan and
Singapore to support continued growth in customer
demand and to respond more quickly to our customers’
needs in the Asia Pacific region.
Robust Global Supply Chain: We believe that product
and supply chain quality is critical to success in our busi-
ness. Our customers demand continuous improvement
in the performance of our products in terms of product
quality and consistency. We strive to drive out variation in
our products and processes in order to increase quality,
productivity and efficiency, and improve the uniformity
and consistency of performance of our CMP consumable
products. Our global manufacturing sites are managed
to ensure we have the people, training and systems
needed to support the unique industry demands for
product quality. To support our quality initiative, we
practice the concepts of Six Sigma across our Company.
Six Sigma is a systematic, data-driven approach and meth-
odology for improving quality by reducing variability.
We believe our Six Sigma initiatives have contributed to
significant, sustained improvement in productivity in
our operations. We also believe the key supplier award
we received in fiscal 2011 from Intel is evidence of our
commitment to providing our customers with high qual-
ity solutions.
We also believe that the depth and breadth of our global
supply chain are critical to our success and the success
of our customers. We believe our global supply chain
differentiates us from our competitors. We now have
five slurry manufacturing plants worldwide and a global
network of suppliers, which we believe positions us well
to mitigate supply interruptions when unexpected events
occur. The major earthquake and resulting tsunami in
Japan in March 2011 was a prime example of such unex-
pected events, in which our global supply chain capa-
bilities enabled us to proactively address the needs of
our customers and suppliers to assist them through that
difficult time. We believe that our ability to address our
customers’ concerns with openness and speed reflects
the strength of our customer relationships and their trust
in us as a global supplier and business partner.
Leveraging Our Expertise into New Markets—
Engineered Surface Finishes Business
In addition to strengthening and growing our core CMP
business, we continue to pursue development of our
ESF business. We believe we can leverage our expertise
in CMP consumables for the semiconductor industry to
develop products for demanding polishing applications
in other industries that are synergistic to our CMP con-
sumables business. Our primary focus, in this regard,
is on opportunities in precision optics and electronic
substrates.
Our QED subsidiary continues to be the technology
leader in deterministic finishing for the precision optics
industry. QED’s polishing and metrology technology
enables customers to replace manual processes with
automated solutions that provide more precise and
repeatable results. Another focus of our ESF business is
the polishing of electronic substrates, including silicon
and silicon-carbide wafers. A key step in the production
of these wafers is CMP, which is utilized to ensure the
wafers meet the stringent specifications required by IC
manufacturers.
Industry Trends
Semiconductor Industry
We believe the semiconductor industry continues to
demonstrate several clear trends: the semiconductor
business is defined by cyclical growth; there is constant
pressure to reduce costs while advancing technology;
and, the customer base continued to consolidate.
The cyclical nature of the semiconductor industry is
closely tied to the global economy as well as to supply
and demand within the industry. The semiconductor
6
industry growth that we saw during fiscal 2010 contin-
ued through fiscal 2011, although at a slower pace. We
began to see some softening of demand within the
industry during the second half of fiscal 2011 that we
attribute to general uncertainty in the global economy
and a modest correction of IC device inventory. Overall
industry growth in fiscal 2011 positively affected demand
for our products as evidenced by the 7.4% growth in our
fiscal 2011 revenue from CMP consumables products
compared to fiscal 2010. We believe that semiconductor
industry demand will grow over the long term based on
increased usage of IC devices in existing applications,
as well as an expanding range of new uses of these
devices. This trend of increased usage of IC devices is
most evident in the area of mobile connectivity, including
devices such as smart-phones and tablets. However, at
present, there is uncertainty regarding macro-economic
factors and the outlook for the global economy. There-
fore, we believe the near-term outlook for the semi-
conductor industry is also uncertain. We believe that our
Company is well positioned to operate successfully over
a range of demand environments as we have successfully
navigated our business through industry and macroeco-
nomic cycles in the past.
As the demand for more advanced and lower cost elec-
tronic devices grows, there is continued pressure on IC
device manufacturers to reduce their costs. Many manu-
facturers reduce costs by pursuing ever-increasing scale
in their operations. In addition, manufacturers seek ways
to increase their production yield while reducing their
production costs regardless of the number of units they
produce. They look for CMP consumables products with
quality and performance attributes that can reduce their
overall cost of ownership, pursue ways to use less CMP
materials, and also aggressively pursue price reductions
on the materials they buy. The pressure on manufacturers
to reduce costs has led a number of integrated device
manufacturers to increase their use of foundries where
they can outsource some or all of their manufacturing to
reduce their fixed costs. This approach also leads to
increasing scale and lower costs for these foundries.
The number of companies that manufacture semicon-
ductor devices continues to decline both through merg-
ers and acquisitions as well as through alliances among
different companies. Smaller manufacturers may not
have the technology or resources necessary to compete
with the larger manufacturers on a global basis as
needed in the market today. In fiscal 2011, we saw evi-
dence of this in the memory segment of the industry.
For example, prices of DRAM chips declined signifi-
cantly during the second half of 2011 causing some of the
smaller manufacturers to reduce their production since
they do not appear to be able to operate profitably at
prevailing market prices. Some larger manufacturers
have increased their production, and their market share,
as they are able to produce at lower costs, yet still oper-
ate profitably. Additionally, several of our customers
have formed consortia and research and development
alliances to better manage the high cost of their devel-
opment activities, thus reducing the number of design
centers we serve.
CMP Consumables Industry
Demand for CMP consumables is primarily driven by
wafer starts, so the CMP consumables industry reflects
the cyclicality of the semiconductor industry as well as
changes in global economic conditions. Our revenue and
net income for fiscal years 2010 and 2011 clearly demon-
strated these effects, improving dramatically from fiscal
2009 as wafer starts grew following the severe downturn
associated with the global economic recession of 2009.
Growth in wafer starts in fiscal 2011 was more modest
than in fiscal 2010, and macroeconomic uncertainty
clouds the near-term outlook for the semiconductor
industry. Over the long term, we anticipate the world-
wide market for CMP consumables used by IC device
manufacturers will grow as a result of expected long-
term growth in wafer starts, growth in the percentage of
IC devices produced that require CMP, an increase in
the number of CMP polishing steps required to produce
these devices and the introduction of new materials in
the manufacture of semiconductor devices that will
require CMP.
We expect the anticipated long-term growth in demand
will be somewhat mitigated by continued increase in
efficiency in CMP consumable usage as customers seek
to reduce their costs. Semiconductor manufacturers
look for ways to lower the cost of CMP consumables in
their production operations, including improvements in
technology, diluting slurry or reducing the slurry flow
rate during production to reduce the total amount of
slurry used, and extending the polishing time before
replacing pads.
As semiconductor technology continues to advance, we
believe that CMP technical solutions are becoming more
complex, and leading-edge technologies generally
require greater customization by customer, tool set and
process integration approach. Leading-edge device
designs are introducing more materials and processes
into next generation chips, and these new materials and
processes must be considered in developing CMP solu-
tions. As a result, we generally see customers selecting
suppliers earlier in their development processes and
maintaining preferred supplier relationships through
production. Therefore, we believe that close collabora-
tion with our customers offers the best opportunity for
optimal CMP solutions. We also believe that research
and development programs continue to be vital to our
success as we develop and commercialize innovative,
high-performing and more cost-effective CMP solutions.
7
Competition
We compete in the CMP consumables industry, which
is characterized by rapid advances in technology and
demanding product quality and consistency require-
ments. We face competition from other CMP consum-
ables suppliers, and we also may face competition in the
future from significant changes in technology or emerg-
ing technologies. However, we believe we are well posi-
tioned to continue our leadership in CMP slurries, and
to continue to grow our CMP pad business. We believe
we have the experience, scale, capabilities and infra-
structure that are required for success, and we work
closely with the largest customers in the semiconductor
industry to meet their growing expectations as a trusted
business partner.
Our CMP slurry competitors range from small companies
that compete with a single product and/or in a single
geographic region to divisions of global companies with
multiple lines of CMP products for IC manufacturers.
However, we believe we have more CMP slurry business
than any other provider. In our view, we are the only CMP
slurry supplier today that serves a broad range of custom-
ers by offering and supporting a full line of CMP slurry
solutions for all major applications over a range of tech-
nologies, and that has a proven track record of supplying
these products globally in high volumes with the atten-
dant required high level of technical support services.
With respect to CMP polishing pads, a division of Dow
Chemical has held the dominant market position for a
number of years. We believe we are the second largest
supplier of polishing pads in the world. A number of
other companies are attempting to enter this market,
providing potentially viable product alternatives. We
believe our pad materials and our continuous pad man-
ufacturing process have enabled us to produce a pad
with a longer pad life, lower defectivity and greater con-
sistency for our customers than traditional offerings,
thus reducing their total pad cost. We believe this has
fueled significant growth in sales of our pad products in
recent years.
Our QED subsidiary operates in the precision optics
industry. There are few direct competitors of QED
because its technology is relatively new and unique. We
believe QED’s technology provides a competitive
advantage to customers in the precision optics industry,
which still relies heavily on traditional artisanal methods
of fabrication.
Customers, Sales and Marketing
Within the semiconductor industry, our customers are
primarily producers of logic IC devices, producers of
memory IC devices and IC foundries. Logic customers
often outsource some or all of the production of their
devices to foundries, which provide contract manufactur-
ing services, in order to avoid the high cost of process
development, constructing and operating a fab, or to
provide additional capacity when needed.
Based upon our own observations and customer survey
results, we believe the following factors are the primary
influences of our customers’ CMP buying decisions:
overall cost of ownership, which represents the cost to
purchase, use and maintain a product; product quality
and consistency; product performance and its impact
on a customer’s overall yield; engineering support; and
delivery/supply assurance. We believe that greater cus-
tomer sophistication in the CMP process, more demand-
ing integration schemes, additional and unique polishing
materials and cost pressures will add further demands
on CMP consumable suppliers like us. When these fac-
tors are combined with our customers’ desires to gain
purchasing leverage and lower their cost of ownership,
we believe that only the most reliable, innovative, cost
effective, service-driven CMP consumables suppliers
will thrive.
We use a highly collaborative approach to build close
relationships with our customers in a variety of areas,
and we have customer-focused teams located in each
major geographic region of sales. Our sales process
begins long before the actual sale of our products and
occurs on a number of levels. Due to the long lead times
from research and development to product commercial-
ization and sales, we have research teams that collaborate
with customers on emerging applications years before
the products are required by the market. We also have
development teams that interact closely with our custom-
ers, using our research and development facilities and
capabilities to design CMP products tailored to their
precise needs. Next, our applications engineers work with
customers to integrate our products into their manufac-
turing processes. Finally, as part of our sales process,
our logistics and sales personnel provide supply, ware-
housing and inventory management for our customers.
We market our products primarily through direct sales
to our customers, although we use distributors in select
areas. We believe this strategy provides us an additional
means to collaborate with our customers.
Our QED subsidiary supports customers in the semicon-
ductor equipment, aerospace, defense, security, research,
biomedical and consumer imaging markets. QED counts
among its worldwide customers leading precision optics
manufacturers, major semiconductor original equip-
ment manufacturers, research institutions, and the
United States government and its contractors.
In fiscal 2011, our five largest customers accounted for
approximately 47% of our revenue, with TSMC and
Samsung accounting for approximately 17% and 10% of
our revenue, respectively. For additional information on
concentration of customers, refer to Note 2 of “Notes to
8
the Consolidated Financial Statements” included in
Item 8 of Part II of this Form 10-K.
Research, Development and Technical Support
We believe that technology is vital to success in our
CMP and ESF businesses, and we plan to continue to
devote significant resources to research, development
and technical support (R&D), and balance our efforts
between the shorter-term market needs and the longer-
term investments required of us as a technology leader.
We develop and formulate new and enhanced CMP
solutions tailored to our customers’ requirements. We
work closely with our customers at their facilities to
identify their specific technology and manufacturing
challenges and to translate these challenges into viable
CMP process solutions.
Our technology efforts are currently focused on five
main areas that span the early conceptual stage of prod-
uct development involving new materials, processes
and designs several years in advance of commercializa-
tion, through to continuous improvement of already
commercialized products in daily use in our customers’
manufacturing facilities. These five areas are:
• Research related to fundamental CMP technology;
• Development and formulation of new and enhanced
CMP consumables products, including collaborating
on joint development projects with our customers;
• Process development to support rapid and effective
commercialization of new products;
• Technical support of our CMP products in our custom-
ers’ manufacturing facilities, including the application
of Six Sigma as a tool to reduce variation and drive
process improvements; and
• Evaluation and development of new polishing and
metrology applications outside of the semiconductor
industry.
Our research in CMP slurries and pads addresses a
breadth of complex and interrelated performance criteria
that relate to the functional performance of the chip, our
customers’ manufacturing yields, and their overall cost
of ownership. We design slurries and pads that are
capable of polishing one or more materials of differing
hardness, sometimes at the same time, that make up the
semiconductor circuitry. Additionally, our products must
achieve the desired surface conditions at high polishing
rates, high processing yields and low consumables costs
in order to provide acceptable system economics for
our customers. As dimensions become smaller and as
materials and designs increase in complexity, these
challenges require significant investments in R&D.
We also commit internal R&D resources to our ESF busi-
ness. We believe that application areas we are currently
developing, such as precision optics and electronic
substrates, represent natural adjacencies to our core CMP
business and technology. Products under development
include products used to polish silicon and silicon-carbide
wafers to improve the surface quality of these wafers
and reduce the customers’ total cost of ownership.
We believe that a competitive advantage can be gained
through technology, and that our investments in R&D
provide us with polishing and metrology capabilities that
support the most advanced and challenging customer
technology requirements on a global basis. In fiscal 2011,
2010 and 2009, we incurred approximately $58.0 million,
$51.8 million and $48.2 million, respectively, in R&D
expenses. We believe our Six Sigma initiatives in our R&D
efforts allow us to conduct more research at a lower
cost. Investments in property, plant and equipment to
support our R&D efforts are capitalized and depreci-
ated over their useful lives.
Our global R&D team includes experts from the semi-
conductor industry and scientists from key disciplines
required for the development of high-performance CMP
consumable products. We operate an R&D facility in
Aurora, Illinois, that features a Class 1 clean room and
advanced equipment for product development, includ-
ing 300mm polishing and metrology capabilities; a tech-
nology center in Japan, which includes a Class 1 clean
room with 300mm polishing, metrology and slurry devel-
opment capability; an R&D facility in Taiwan within our
Epoch subsidiary that includes a clean room with 200mm
polishing capability; a new R&D facility in South Korea
that was opened in August 2011; an R&D laboratory in
Singapore that provides slurry formulation capability for
the data storage industry; and a research facility in
Rochester, New York to support our QED business. All
of these facilities underscore our commitment both to
continuing to invest in our technology infrastructure to
maintain our technology leadership, and to becoming
even more responsive to the needs of our customers.
Raw Materials Supply
Metal oxides, such as silica and alumina, are significant
raw materials we use in many of our CMP slurries. In the
interest of supply assurance, our strategy is to secure
multiple sources of raw materials and qualify and moni-
tor those sources as necessary to ensure our supply of
raw materials remains uninterrupted. Also, we have
entered into multi-year supply agreements with a num-
ber of suppliers for the purchase of raw materials in the
interest of supply assurance and to control costs. For
additional information regarding these agreements,
refer to “Tabular Disclosure of Contractual Obligations”,
included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, in Item 7
of Part II of this Form 10-K.
9
Intellectual Property
Our intellectual property is important to our success and
ability to compete. As of October 31, 2011, we had 210
active U.S. patents and 78 pending U.S. patent applica-
tions. In most cases we file counterpart foreign patent
applications. Many of these patents are important to our
continued development of new and innovative products
for CMP and related processes, as well as for new busi-
nesses. Our patents have a range of duration and we do
not expect to lose any material patent through expiration
in the next four years. We attempt to protect our intel-
lectual property rights through a combination of patent,
trademark, copyright and trade secret laws, as well as
employee and third-party nondisclosure and assignment
agreements. We vigorously and proactively pursue
parties that attempt to compromise our investments in
research and development by infringing our intellectual
property. For example, from 2007 to 2011, we were
involved in a legal action against DuPont Air Products
NanoMaterials LLC (DA Nano), a competitor of ours,
regarding whether certain specific formulations of slurry
products used for tungsten CMP infringe certain CMP
slurry patents that we own, and the validity of those and
other of our patents. All of our patents at issue in the
case were found valid, but the specific products at issue
were found to not infringe the asserted claims of these
patents. With respect to the same patents, we have
been successful before the United States International
Trade Commission in prohibiting the importation and
sale within the United States of infringing products by
another competitor.
Most of our intellectual property has been developed
internally, but we also may acquire intellectual property
from others to enhance our intellectual property portfo-
lio. These enhancements may be via licenses or assign-
ments or we may acquire certain proprietary technology
and intellectual property when we make acquisitions,
such as through our acquisitions of Epoch, QED and
Surface Finishes Co. We believe these technology rights
continue to enhance our competitive advantage by
providing us with future product development opportu-
nities and expanding our already substantial intellectual
property portfolio.
Environmental Matters
Our facilities are subject to various environmental laws
and regulations, including those relating to air emissions,
wastewater discharges, the handling and disposal of
solid and hazardous wastes, and occupational safety and
health. We believe that our facilities are in substantial
compliance with applicable environmental laws and
regulations. By utilizing Six Sigma in our environmental
management system process, we believe we have
improved operating efficiencies while protecting the
environment. Our operations in the United States, Japan,
Singapore, Europe and Taiwan are ISO 14001 certified,
10
which requires that we implement and operate according
to various procedures that demonstrate our dedication
to waste reduction, energy conservation and other envi-
ronmental concerns. We are committed to maintaining
these certifications and are actively pursuing ISO 18001
Safety and Health certification for our existing operations
over the next two years. We will also obtain additional
certifications, as applicable, in the areas in which we do
business. We have incurred, and will continue to incur,
capital and operating expenditures and other costs in
complying with these laws and regulations in both the
United States and abroad. However, we currently do not
anticipate that the future costs of environmental compli-
ance will have a material adverse effect on our business,
financial condition or results of operations.
Employees
We believe we have a world-class team of employees
who make our Company successful. As of October 31,
2011, we employed 1,025 individuals, including 558 in
operations, 242 in research and development and tech-
nical, 101 in sales and marketing and 124 in administra-
tion. None of our employees are covered by collective
bargaining agreements. We have not experienced any
work stoppages and in general consider our relations
with our employees to be good.
Financial Information About Geographic Areas
We sell our products worldwide. Our geographic coverage
allows us to utilize our business and technical expertise
from a worldwide workforce, provides stability to our
operations and revenue streams to offset geography-
specific economic trends, and offers us an opportunity
to take advantage of new markets for products.
For more financial information about geographic areas,
see Note 19 of “Notes to the Consolidated Financial
Statements” included in Item 8 of Part II of this Form 10-K.
Available Information
Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, definitive proxy statements on Form 14A,
current reports on Form 8-K, and any amendments to
those reports are made available free of charge on our
Company website, www.cabotcmp.com, as soon as rea-
sonably practicable after such reports are filed with the
Securities and Exchange Commission (SEC). Statements
of changes in beneficial ownership of our securities on
Form 4 by our executive officers and directors are made
available on our Company website by the end of the busi-
ness day following the submission to the SEC of such fil-
ings. In addition, the SEC’s website (http://www.sec.gov)
contains reports, proxy statements, and other informa-
tion that we file electronically with the SEC.
Item 1A. Risk Factors
We do not believe there have been any material changes
in our risk factors since the filing of our Annual Report
on Form 10-K for the fiscal year ended September 30,
2010. However, we may update our risk factors in our
SEC filings from time to time for clarification purposes
or to include additional information, at management’s
discretion, even when there have been no material
changes.
Risks Relating to Our Business
Demand for Our Products Fluctuates and Our
Business May Be Adversely Affected by Worldwide
Economic and Industry Conditions
Our business is affected by economic and industry con-
ditions and our revenue is primarily dependent upon
semiconductor demand. Semiconductor demand, in
turn, is impacted by semiconductor industry cycles, and
these cycles can dramatically affect our business. These
cycles may be characterized by rapid increases or
decreases in product demand, excess or low customer
inventories, and rapid changes in prices of IC devices.
For example, the semiconductor industry grew signifi-
cantly during the past two years following a severe eco-
nomic downturn, and generally, overall demand for our
products has followed this same cycle. However, we
began to see some softening of demand in the second
half of fiscal 2011. Some industry analysts predict this
softening may continue through the first half of fiscal
2012. In addition, our business has experienced histori-
cal seasonal trends as evidenced by a decrease in our
revenue in the second quarter of fiscal 2011 from the
revenue recorded in the first quarter of 2011, and an
increase in revenue in the third quarter of fiscal 2011.
Our limited visibility to future customer orders makes it
difficult for us to predict industry trends. If the global
economy weakens further and/or the semiconductor
industry weakens, whether in general or as a result of
specific factors, such as the current European sovereign
debt crisis, the March 2011 natural disasters in Japan, or
the November 2011 flooding in Thailand, that have had
effects on the semiconductor, data storage and infor-
mation technology industries, we could experience
material adverse impacts on our results of operations
and financial condition.
Adverse global economic conditions may have other
negative effects on our Company. For instance, we may
experience negative impacts on cash flows due to the
inability of our customers to pay their obligations to us
or our production process may be harmed if our suppli-
ers cannot fulfill their obligations to us. We may also
have to reduce the carrying value of goodwill and other
intangible assets, which could harm our financial posi-
tion and results of operations.
Some additional factors that affect demand for our
products include: the types of products that our cus-
tomers may produce, such as logic devices versus
memory devices; the various technology nodes at which
those products are manufactured; customers’ specific
manufacturing process integration schemes; the short
order to delivery time for our products; quarter-to-
quarter changes in customer order patterns; market
share gains and losses; and pricing changes by us and
our competitors.
We Have a Narrow Product Range and Our
Products May Become Obsolete, or Technological
Changes May Reduce or Limit Increases in the
Consumption of CMP Slurries and Pads
Our business is substantially dependent on a single
class of products, CMP slurries, which account for the
majority of our revenue. Our business in CMP pads is
also developing and growing. Our business would suffer
if these products became obsolete or if consumption of
these products decreased. Our success depends on our
ability to keep pace with technological changes and
advances in the semiconductor industry and to adapt,
improve and customize our products for advanced IC
applications in response to evolving customer needs
and industry trends. Since its inception, the semicon-
ductor industry has experienced rapid technological
changes and advances in the design, manufacture,
performance and application of IC devices, and our
customers continually pursue lower cost of ownership
and higher performance of materials consumed in their
manufacturing processes, including CMP slurries and
pads, as a means to reduce the costs and increase the
yield in their manufacturing facilities. We expect these
technological changes and advances, and this drive
toward lower costs and higher yields, will continue in
the future. Potential technology developments in the
semiconductor industry, as well as our customers’ efforts
to reduce consumption of CMP consumables and to
possibly reuse or recycle these products, could render
our products less important to the IC device manufac-
turing process.
A Significant Amount of Our Business Comes from
a Limited Number of Large Customers and Our
Revenue and Profits Could Decrease Significantly
if We Lost One or More of These Customers
Our CMP consumables customer base is concentrated
among a limited number of large customers. The num-
ber of semiconductor manufacturers has declined both
through mergers and acquisitions as well as through
strategic alliances. Industry analysts predict that this
trend will continue, which means the semiconductor
industry will be comprised of fewer and larger partici-
pants if their prediction is correct. One or more of these
principal customers could stop buying CMP consum-
ables from us or could substantially reduce the quantity
11
of CMP consumables purchased from us. Our principal
customers also hold considerable purchasing power,
which can impact the pricing and terms of sale of our
products. Any deferral or significant reduction in CMP
consumables sold to these principal customers, or a
significant number of smaller customers, could seriously
harm our business, financial condition and results of
operations.
In fiscal 2011, our five largest customers accounted for
approximately 47% of our revenue, with Taiwan Semi-
conductor Manufacturing Company (TSMC) and Samsung
accounting for approximately 17% and 10%, respec-
tively, of our revenue. In fiscal year 2010, our five largest
customers accounted for approximately 48% of our rev-
enue, with TSMC and United Microelectronics Corporation
accounting for approximately 18% and 11%, respectively.
Samsung accounted for less than 10% of our revenue in
fiscal 2010.
Our Business Could Be Seriously Harmed if Our
Competitors Develop Superior Slurry Products,
Offer Better Pricing Terms or Service, or Obtain
Certain Intellectual Property Rights
Competition from other CMP slurry manufacturers could
seriously harm our business and results of operations.
Competition from other providers of CMP slurries could
continue to increase, and opportunities exist for other
companies to emerge as potential competitors by
developing their own CMP slurry products. Increased
competition has and may continue to impact the prices
we are able to charge for our slurry products as well as
our overall business. In addition, our competitors could
have or obtain intellectual property rights which could
restrict our ability to market our existing products and/
or to innovate and develop new products.
Any Problem or Disruption in Our Supply Chain,
Including Supply of Our Most Important Raw
Materials, or in Our Ability to Manufacture and
Deliver Our Products to Our Customers, Could
Adversely Affect Our Results of Operations
We depend on our supply chain to enable us to meet the
demands of our customers. Our supply chain includes
the raw materials we use to manufacture our products,
our production operations, and the means by which we
deliver our products to our customers. Our business
could be adversely affected by any problem or interrup-
tion in our supply of the key raw materials we use in our
CMP slurries and pads, including fumed silica, which we
use for certain of our slurries, or any problem or inter-
ruption that may occur during production or delivery of
our products, such as weather-related problems or natu-
ral disasters, such as the March 2011 earthquakes and
tsunami in Japan. Consistent with our initial assessment
in our second fiscal quarter of 2011, these natural disasters
have not had a significant impact on the semiconductor
12
industry, or on our business or supply chain, although
Japan was the only geographic region in which our busi-
ness did not grow in fiscal 2011. Yet, it still is unclear
what long-term effects these disasters may have on
Japan’s economy and on the global economic environ-
ment as Japan represents the world’s third largest econ-
omy. Our supply chain may also be negatively impacted
by unanticipated price increases due to supply restric-
tions beyond the control of our Company or our raw
material suppliers.
For instance, Cabot Corporation continues to be our
primary supplier of particular amounts and types of
fumed silica. We believe it would be difficult to promptly
secure alternative sources of key raw materials, includ-
ing fumed silica, in the event one of our suppliers
becomes unable to supply us with sufficient quantities
of raw materials that meet the quality and technical
specifications required by us and our customers. In addi-
tion, contractual amendments to the existing agreements
with, or non-performance by, our suppliers, including
any significant financial distress our suppliers may suffer,
could adversely affect us. Also, if we change the sup-
plier or type of key raw materials we use to make our
CMP slurries or pads, or are required to purchase them
from a different manufacturer or manufacturing facility
or otherwise modify our products, in certain circum-
stances our customers might have to requalify our CMP
slurries and pads for their manufacturing processes and
products. The requalification process could take a sig-
nificant amount of time and expense to complete and
could motivate our customers to consider purchasing
products from our competitors, possibly interrupting
or reducing our sales of CMP consumables to these
customers.
We Are Subject to Risks Associated With Our
Foreign Operations
We currently have operations and a large customer base
outside of the United States. Approximately 86%, 86%
and 84% of our revenue was generated by sales to cus-
tomers outside of the United States for the fiscal 2011,
2010 and 2009, respectively. We encounter risks in doing
business in certain foreign countries, including, but not
limited to, adverse changes in economic and political
conditions, fluctuation in exchange rates, compliance
with a variety of foreign laws and regulations, as well as
difficulty in enforcing business and customer contracts
and agreements, including protection of intellectual
property rights. We also encounter the risks that we may
not be able to repatriate the earnings from certain of
our foreign operations, derive the anticipated tax bene-
fits of our foreign operations or recover the investments
made in our foreign operations.
We May Pursue Acquisitions of, Investments in, and
Strategic Alliances with Other Entities, Which Could
Disrupt Our Operations and Harm Our Operating
Results if They Are Unsuccessful
We expect to continue to make investments in technol-
ogies, assets and companies, either through acquisitions,
investments or alliances, in order to supplement our
internal growth and development efforts. Acquisitions
and investments, such as our fiscal 2009 acquisition of
Epoch Material Co., Ltd., a Taiwan-based company,
involve numerous risks, including the following: difficul-
ties and risks in integrating the operations, technolo-
gies, products and personnel of acquired companies;
diversion of management’s attention from normal daily
operations of the business; increased risk associated
with foreign operations; potential difficulties and risks in
entering markets in which we have limited or no direct
prior experience and where competitors in such markets
have stronger market positions; potential difficulties in
operating new businesses with different business mod-
els; potential difficulties with regulatory or contract
compliance in areas in which we have limited experi-
ence; initial dependence on unfamiliar supply chains or
relatively small supply partners; insufficient revenues to
offset increased expenses associated with acquisitions;
potential loss of key employees of the acquired compa-
nies; or inability to effectively cooperate and collaborate
with our alliance partners.
Further, we may never realize the perceived or antici-
pated benefits of a business combination, asset acquisi-
tion or investments in other entities. Acquisitions by us
could have negative effects on our results of operations,
in areas such as contingent liabilities, gross profit mar-
gins, amortization charges related to intangible assets
and other effects of accounting for the purchases of
other business entities. Investments in and acquisitions
of technology-related companies or assets are inher-
ently risky because these businesses or assets may
never develop, and we may incur losses related to these
investments. In addition, we may be required to write
down the carrying value of these acquisitions or invest-
ments to reflect other than temporary declines in their
value, which could harm our business and results of
operations.
Because We Have Limited Experience in Business
Areas Outside of CMP Slurries, Expansion of Our
Business into New Products and Applications May
Not Be Successful
An element of our strategy has been to leverage our
current customer relationships and technological exper-
tise to expand our CMP business from CMP slurries into
other areas, such as CMP polishing pads. Additionally,
pursuant to our Engineered Surface Finishes business,
we are pursuing other surface modification applications.
Expanding our business into new product areas could
involve technologies, production processes and busi-
ness models in which we have limited experience, and
we may not be able to develop and produce products
or provide services that satisfy customers’ needs or we
may be unable to keep pace with technological or other
developments. Also, our competitors may have or
obtain intellectual property rights that could restrict our
ability to market our existing products and/or to inno-
vate and develop new products.
Because We Rely Heavily on Our Intellectual
Property, Our Failure to Adequately Obtain or
Protect It Could Seriously Harm Our Business
Protection of intellectual property is particularly impor-
tant in our industry because we develop complex tech-
nical formulas for CMP products that are proprietary in
nature and differentiate our products from those of our
competitors. Our intellectual property is important to
our success and ability to compete. We attempt to pro-
tect our intellectual property rights through a combina-
tion of patent, trademark, copyright and trade secret
laws, as well as employee and third-party nondisclosure
and assignment agreements. Due to our international
operations, we pursue protection in different jurisdic-
tions, which may provide varying degrees of protection,
and we cannot provide assurance that we can obtain
adequate protection in each such jurisdiction. Our failure
to obtain or maintain adequate protection of our intel-
lectual property rights for any reason, including through
the patent prosecution process or in the event of litiga-
tion related to such intellectual property, such as the
current litigation between us and DuPont Air Products
NanoMaterials (DA Nano), in which the validity of all of
our patents at issue in the matter was upheld as further
described above in Part I, Item 1 under the heading
“Intellectual Property” and in Part I, Item 3 under the
heading “Legal Proceedings,” could seriously harm our
business. In addition, the costs of obtaining or protect-
ing our intellectual property could negatively affect our
operating results. For example, in fiscal 2010, costs
associated with enforcing our intellectual property
caused our operating expenses to increase.
We May Not Be Able to Monetize Our Investments
in Auction Rate Securities in the Short Term and We
Could Experience a Decline in Their Market Value,
Which Could Adversely Affect Our Financial Results
We owned auction rate securities (ARS) with an esti-
mated fair value of $8.1 million ($8.3 million par value) at
September 30, 2011, which were classified as other long-
term assets on our Consolidated Balance Sheet. If cur-
rent illiquidity in the ARS market does not lessen, if
issuers of our ARS are unable to refinance the underly-
ing securities, or are unable to pay debt obligations and
related bond insurance fails, or if credit ratings decline
or other adverse developments occur in the credit
markets, then we may not be able to monetize these
13
securities in the foreseeable future. We may also be
required to further adjust the carrying value of these
instruments through an impairment charge that may be
deemed other-than-temporary which would adversely
affect our financial results.
Our Inability to Attract and Retain Key Personnel
Could Cause Our Business to Suffer
If we fail to attract and retain the necessary managerial,
technical and customer support personnel, our business
and our ability to maintain existing and obtain new cus-
tomers, develop new products and provide acceptable
levels of customer service could suffer. We compete
with other industry participants for qualified personnel,
particularly those with significant experience in the
semiconductor industry. The loss of services of key
employees could harm our business and results of
operations.
Risks Relating to the Market for Our
Common Stock
The Market Price May Fluctuate Significantly
and Rapidly
The market price of our common stock has fluctuated and
could continue to fluctuate significantly as a result of
factors such as: economic and stock market conditions
generally and specifically as they may impact participants
in the semiconductor and related industries; changes in
financial estimates and recommendations by securities
analysts who follow our stock; earnings and other
announcements by, and changes in market evaluations
of, us or participants in the semiconductor and related
industries; changes in business or regulatory conditions
affecting us or participants in the semiconductor and
related industries; announcements or implementation
by us, our competitors, or our customers of technologi-
cal innovations, new products or different business
strategies; and trading volume of our common stock.
Anti-Takeover Provisions Under Our Certificate
of Incorporation and Bylaws May Discourage
Third Parties from Making an Unsolicited Bid
for Our Company
Our certificate of incorporation, our bylaws, and various
provisions of the Delaware General Corporation Law
may make it more difficult or expensive to effect a
change in control of our Company. For instance, our
amended and restated certificate of incorporation pro-
vides for the division of our Board of Directors into three
classes as nearly equal in size as possible with staggered
three-year terms. Until April 2010, we had a rights plan
which expired according to the terms of the plan.
We have adopted change in control arrangements cov-
ering our executive officers and other key employees.
These arrangements provide for a cash severance pay-
ment, continued medical benefits and other ancillary
payments and benefits upon termination of service of a
covered employee’s employment following a change in
control, which may make it more expensive to acquire
our Company.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal U.S. facilities that we own consist of:
• a global headquarters and research and development
facility in Aurora, Illinois, comprising approximately
200,000 square feet;
• a commercial slurry manufacturing plant and distribu-
tion center in Aurora, Illinois, comprising approximately
175,000 square feet;
• a commercial polishing pad manufacturing plant and
offices in Aurora, Illinois, comprising approximately
48,000 square feet;
• an additional 13.2 acres of vacant land in Aurora,
Illinois; and
• a facility in Addison, Illinois, comprising approximately
15,000 square feet.
In addition, we lease a facility in Rochester, New York,
comprising approximately 23,000 square feet.
Our principal foreign facilities that we or our subsidiaries
own consist of:
• a commercial slurry manufacturing plant, automated
warehouse, research and development facility and
offices in Kaohsiung County, Taiwan, comprising
approximately 170,000 square feet;
• a commercial slurry manufacturing plant and distribu-
tion center in Geino, Japan, comprising approximately
124,000 square feet;
• a development and technical support facility in Geino,
Japan, comprising approximately 20,000 square feet.
• a commercial slurry manufacturing plant, research
and development facility and business office in the
Oseong, South Korea, comprising approximately
56,000 square feet.
Our principal foreign facilities that we lease consist of:
• an office, research and development laboratory and
polishing pad manufac turing plant in Hsin-Chu,
Taiwan, comprising approximately 31,000 square feet;
14
• a commercial slurry manufacturing plant, research and
development facility and business office in Singapore,
comprising approximately 24,000 square feet.
We believe that our facilities are suitable and adequate
for their intended purpose and provide us with sufficient
capacity and capacity expansion opportunities and
technological capability to meet our current and
expected demand in the foreseeable future. In fiscal
2011, we increased our manufacturing capacity and
added new capabilities in the Asia Pacific region includ-
ing the construction of a new research, development
and manufacturing facility in South Korea, and expanded
manufacturing capacity in our Geino, Japan and
Singapore facilities.
Item 3. Legal Proceedings
While we are not involved in any legal proceedings that
we believe will have a material impact on our consoli-
dated financial position, results of operations or cash
flows, we periodically become a party to legal proceed-
ings in the ordinary course of business. For example,
from 2007 to 2011, we were involved in a legal action in
the United States against DuPont Air Products
NanoMaterials LLC (DA Nano), a CMP slurry competitor,
regarding whether certain specific formulations of slurry
products used for tungsten CMP infringe certain CMP
slurry patents that we own, and the validity of those and
other of our patents. All of the Cabot Microelectronics
Corporation patents at issue in the case were found
valid, but the specific products at issue were found to
not infringe the asserted claims of these patents.
Executive Officers of the Registrant
Set forth below is information concerning our executive officers and their ages as of October 31, 2011.
Name
Age
Position
William P. Noglows
H. Carol Bernstein
Yumiko Damashek
William S. Johnson
David H. Li
Ananth Naman
Daniel J. Pike
Stephen R. Smith
Adam F. Weisman
Daniel S. Wobby
Thomas S. Roman
53
51
55
54
38
41
48
52
49
48
50
Chairman of the Board, President and Chief Executive Officer
Vice President, Secretary and General Counsel
Vice President, Japan and Operations in Asia
Vice President and Chief Financial Officer
Vice President, Asia Pacific Region
Vice President, Research and Development
Vice President, Corporate Development
Vice President, Marketing
Vice President, Business Operations
Vice President, Global Sales
Principal Accounting Officer and Corporate Controller
WILLIAM P. NOGLOWS has served as our Chairman,
President and Chief Executive Officer since November
2003. Mr. Noglows had previously served as a director
of our Company from January 2000 until April 2002.
Prior to joining us, Mr. Noglows served as an Executive
Vice President of Cabot Corporation from 1998 to June
2003. Prior to that, Mr. Noglows held various manage-
ment positions at Cabot Corporation including General
Manager of Cabot Corporation’s Cab-O-Sil Division,
where he was one of the primary founders of our
Company when our business was a division of Cabot
Corporation, and was responsible for identifying and
encouraging the development of the CMP application.
Mr. Noglows received his B.S. in Chemical Engineering
from the Georgia Institute of Technology. Mr. Noglows is
also a director of Littelfuse, Inc. and Aspen Aerogels, Inc.
H. CAROL BERNSTEIN has served as our Vice President,
Secretary and General Counsel since August 2000. From
January 1998 until joining us, Ms. Bernstein served as the
General Counsel and Director of Industrial Technology
Development of Argonne National Laboratory, which is
operated by the University of Chicago for the United
States Department of Energy. From May 1985 until
December 1997, she served in various positions with the
IBM Corporation, culminating in serving as an Associate
General Counsel, and was the Vice President, Secretary
and General Counsel of Advantis Corporation, an IBM
joint venture. Ms. Bernstein received her B.A. from
Colgate University and her J.D. from Northwestern
University; she is a member of the Bar of the States of
Illinois and New York.
YUMIKO DAMASHEK has served as our Vice President,
Japan and Operations in Asia since June 2008. Previously,
Ms. Damashek served as Managing Director of Japan
since November 2005. Prior to joining us, Ms. Damashek
served as President for Celerity Japan, Inc. Prior to
that, she held various leadership positions at Global
Partnership Creation, Inc. and Millipore Corporation.
Ms. Damashek received her B.A. from the University of
Arizona and her M.B.A. from San Diego State University.
15
WILLIAM S. JOHNSON has served as our Vice President
and Chief Financial Officer since April 2003. Prior to join-
ing us, Mr. Johnson served as Executive Vice President
and Chief Financial Officer for Budget Group, Inc. from
August 2000 to March 2003. Before that, Mr. Johnson
spent 16 years at BP Amoco in various senior finance
and management positions, the most recent of which
was President of Amoco Fabrics and Fibers Company.
Mr. Johnson received his B.S. in Mechanical Engineering
from the University of Oklahoma and his M.B.A. from
the Harvard Business School.
DAVID H. LI has served as our Vice President, Asia Pacific
Region since June 2008. Prior to that, Mr. Li served as
Managing Director of South Korea and China since
February 2007. Previously, Mr. Li served as our Global
Business Director for Tungsten and Advanced Dielectrics
from 2005 to February 2007. Mr. Li held a variety of lead-
ership positions for us in operations, sourcing and inves-
tor relations between 1998 and 2005. Prior to joining us,
Mr. Li worked for UOP in marketing and process engi-
neering. Mr. Li received a B.S. in Chemical Engineering
from Purdue University and an M.B.A. from Northwestern
University—Kellogg School of Management.
ANANTH NAMAN has served as our Vice President of
Research and Development since January 2011. Previously,
Dr. Naman was our Director of Product Development
starting in April 2009 and Director of Pads Technology
from January 2006 through March 2009. Prior to joining
us, Dr. Naman managed research and development
efforts at Honeywell International from July 2000
to December 2005, and from 1997 to 2000 he held
positions in research and development at Seagate
Technology. Dr. Naman earned B.S., M.S. and Ph.D.
degrees in Materials Science and Engineering from the
University of Florida.
DANIEL J. PIKE has served as our Vice President of
Corporate Development since January 2004 and prior
to that was our Vice President of Operations from
December 1999. Mr. Pike served as Director of Global
Operations for a division of Cabot Corporation from
1996 to 1999. Prior to that, Mr. Pike worked for FMC
Corporation in various marketing and finance positions.
Mr. Pike received his B.S. in Chemical Engineering
from the University of Buffalo and his M.B.A. from
the Wharton School of Business of the University of
Pennsylvania.
STEPHEN R. SMITH has served as our Vice President of
Marketing since September 2006, and previously was our
Vice President of Marketing and Business Management
since April 2005 and our Vice President of Sales and
Marketing from October 2001. Prior to joining us, Mr.
Smith served as Vice President, Sales & Business
Development for Buildpoint Corporation from 2000 to
April 2001. Prior to that, Mr. Smith spent 17 years at Tyco
Electronics Group, formerly known as AMP Incorporated,
in various management positions. Mr. Smith earned a
B.S. in Industrial Engineering from Grove City College
and an M.B.A. from Wake Forest University.
ADAM F. WEISMAN has served as our Vice President of
Business Operations since September 2006, and prior
to that was our Vice President of Operations. Before
joining us, Mr. Weisman held various engineering and
senior operations management positions with the
General Electric Company from 1988 through 2004,
including having served as the General Manager of
Manufacturing for GE Plastics—Superabrasives, and
culminating in serving as the Executive Vice President of
Operations for GE Railcar Services. Prior to joining GE,
he worked as an engineering team leader and pilot plant
manager for E.I. Du Pont de Nemours & Company. Mr.
Weisman holds a B.S. in Ceramic Engineering from
Alfred University.
DANIEL S. WOBBY has served as our Vice President of
Global Sales since June 2008. Prior to that, Mr. Wobby
served as Vice President, Asia Pacific Region since
September 2005. Previously, Mr. Wobby served as Vice
President, Greater China and Southeast Asia starting in
February 2004 and as Corporate Controller and Principal
Accounting Officer from 2000 to 2004. From 1989 to
2000, Mr. Wobby held various accounting and opera-
tions positions with Cabot Corporation culminating in
serving as Director of Finance. Mr. Wobby earned a B.S.
in Accounting from St. Michael’s College and an M.B.A.
from the University of Chicago.
THOMAS S. ROMAN has served as our Corporate
Controller and Principal Accounting Officer since
February 2004 and previously served as our North
American Controller. Prior to joining us in April 2000,
Mr. Roman was employed by FMC Corporation in vari-
ous financial reporting, tax and audit positions. Before
that, Mr. Roman worked for Gould Electronics and
Arthur Andersen LLP. Mr. Roman is a C.P.A. and earned
a B.S. in Accounting from the University of Illinois and an
M.B.A. from DePaul University’s Kellstadt Graduate
School of Business.
16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock has traded publicly under the symbol “CCMP” since our initial public offering in April 2000,
currently on the NASDAQ Global Select Market, and formerly the NASDAQ National Market. The following table sets
forth the range of quarterly high and low closing sales prices for our common stock.
Fiscal 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2012
First Quarter (through October 31, 2011)
High
Low
$35.47
37.83
42.69
36.65
$42.80
52.25
51.88
48.21
$30.59
31.99
34.18
29.81
$32.22
40.80
43.18
34.39
$39.46
$33.09
As of October 31, 2011, there were approximately 954 holders of record of our common stock. No dividends were
declared or paid in either fiscal 2011 or fiscal 2010 and we have no current plans to pay cash dividends in the future.
Issuer Purchases of Equity Securities
Period
Jul. 1 through Jul. 31, 2011
Aug. 1 through Aug. 31, 2011
Sep. 1 through Sep. 30, 2011
Total
Total
Number
of Shares
Purchased
—
367,000
150
367,150
Average
Price Paid
Per Share
$ —
$38.44
$38.32
$38.44
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plans
or Programs (in thousands)
—
367,000
—
367,000
$110,001
$ 95,894
$ 95,894
$ 95,894
In January 2008, our Board of Directors authorized a
share repurchase program for up to $75.0 million of our
outstanding common stock. We repurchased 564,568
shares for $25.0 million in fiscal 2011 under this program,
which was completed during the fiscal quarter ended
March 31, 2011. In November 2010, our Board of Directors
authorized a new share repurchase program for up to
$125.0 million of our outstanding common stock, which
became effective on the authorization date. We repur-
chased 671,100 shares for $29.1 million during fiscal 2011
under this new program. Share repurchases are made
from time to time, depending on market conditions, in
open market transactions, at management’s discretion.
We fund share purchases under these programs from
our available cash balance.
Separate from this share repurchase program, a total of
33,840 shares were purchased during fiscal 2011 pursu-
ant to the terms of our Second Amended and Restated
Cabot Microelectronics Corporation 2000 Equity
Incentive Plan (EIP) as shares withheld from award recipi-
ents to cover payroll taxes on the vesting of shares of
restricted stock granted under the EIP.
Equity Compensation Plan Information
See Part II, Item 12 of this Form 10-K for information
regarding shares of common stock that may be issued
under the Company’s existing equity compensation plans.
17
200
180
160
140
120
100
80
60
40
20
0
Stock Performance Graph
The following graph illustrates the cumulative total stockholder return on our common stock during the period from
September 30, 2006 through September 30, 2011 and compares it with the cumulative total return on the NASDAQ
Composite Index and the Philadelphia Semiconductor Index. The comparison assumes $100 was invested on
September 30, 2006 in our common stock and in each of the foregoing indices and assumes reinvestment of
dividends, if any. The performance shown is not necessarily indicative of future performance. See “Risk Factors” in
Part I, Item 1A above.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cabot Microelectronics Corporation, the NASDAQ Composite Index
and the PHLX Semiconductor Index
$200
180
160
140
120
100
80
60
40
20
0
9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10 3/11 6/11 9/11
Cabot Microelectronics Corporation
NASDAQ Composite
PHLX Semiconductor
*$100 invested on 9/30/06 in stock or index, including reinvestment of dividends.
Fiscal year ending September 30.
Cabot Microelectronics Corporation
NASDAQ Composite
Philadelphia Semiconductor
100.00 117.77 116.27 123.14 148.33 124.60 111.55 115.02 111.31 90.46
100.00 107.91 108.17 116.86 121.84 119.24 102.32 103.18 92.48 71.03
100.00 100.41 98.60 113.01 115.85 109.37 93.10 95.95 79.21 60.01
83.38
68.89
64.99
9/06
12/06
3/07
6/07
9/07
12/07
3/08
6/08
9/08
12/08
3/09
Cabot Microelectronics Corporation
NASDAQ Composite
Philadelphia Semiconductor
98.16 120.96 114.37 131.26 120.02 111.66 143.82 181.30 161.24 119.33
82.80 96.08 103.21 109.08 96.30 108.39 121.45 127.65 127.41 110.99
73.49 89.57 97.71 100.07 90.23 93.99 110.84 114.20 112.37 98.62
6/09
9/09
12/09
3/10
6/10
9/10
12/10
3/11
6/11
9/11
18
Item 6. Selected Financial Data
The following selected financial data for each year of the five-year period ended September 30, 2011, has been
derived from the audited consolidated financial statements.
The information set forth below is not necessarily indicative of results of future operations and should be read in
conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes to those statements included in Items 7 and 8 of Part II of this Form 10-K,
as well as Risk Factors included in Item 1A of Part I of this Form 10-K.
CABOT MICROELECTRONICS CORPORATION
SELECTED FINANCIAL DATA—FIVE YEAR SUMMARY
(Amounts in thousands, except per share amounts)
Consolidated Statement of Income Data:
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Year Ended September 30,
2011
2010
2009
2008
2007
$ 445,442
231,336
$ 408,201
204,704
$ 291,372
162,918
$ 375,069
200,596
$ 338,205
178,224
214,106
203,497
128,454
174,473
159,981
Research, development and technical
Selling and marketing
General and administrative
Purchased in-process research and development
58,035
29,758
45,928
—
51,818
26,885
50,783
—
48,150
22,239
40,632
1,410
49,155
28,281
47,595
—
49,970
24,310
39,933
—
Total operating expenses
133,721
129,486
112,431
125,031
114,213
Operating income
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
80,385
(1,473)
78,912
27,250
74,011
(734)
73,277
23,819
16,023
599
16,622
5,435
49,442
5,448
54,890
16,552
45,768
3,606
49,374
15,538
$ 51,662
$ 49,458
$ 11,187
$ 38,338
$ 33,836
$
2.26
$
2.14
$
0.48
$
1.64
$
1.42
Weighted-average basic shares outstanding
22,896
23,084
23,079
23,315
23,748
Diluted earnings per share
$
2.20
$
2.13
$
0.48
$
1.64
$
1.42
Weighted-average diluted shares outstanding
23,435
23,273
23,096
23,348
23,754
Cash dividends per share
$
— $
— $
— $
— $
—
Consolidated Balance Sheet Data:
Current assets
Property, plant and equipment, net
Other assets
Total assets
Current liabilities
Other long-term liabilities
Total liabilities
Stockholders’ equity
As of September 30,
2011
2010
2009
2008
2007
$ 430,405
130,791
67,033
$ 381,029
115,811
74,916
$ 316,852
122,782
75,510
$ 330,592
115,843
31,002
$ 310,754
118,454
25,921
$ 628,229
$ 571,756
$ 515,144
$ 477,437
$ 455,129
$ 55,550
6,325
$ 53,330
4,083
$ 39,536
4,879
$ 37,801
5,403
$ 36,563
5,362
61,875
566,354
57,413
514,343
44,415
470,729
43,204
434,233
41,925
413,204
Total liabilities and stockholders’ equity
$ 628,229
$ 571,756
$ 515,144
$ 477,437
$ 455,129
19
Item 7. Management’s Discussion and
Analysis of Financial Condition and
Results of Operations
The following “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”
(MD&A), as well as disclosures included elsewhere in
this Form 10-K, include “forward-looking statements”
within the meaning of the Private Securities Litigation
Reform Act of 1995. This Act provides a safe harbor for
forward-looking statements to encourage companies to
provide prospective information about themselves so
long as they identify these statements as forward-looking
and provide meaningful cautionary statements identify-
ing important factors that could cause actual results to
differ from the projected results. All statements other
than statements of historical fact we make in this Form
10-K are forward-looking. In particular, the statements
herein regarding future sales and operating results;
Company and industry growth, contraction or trends;
growth or contraction of the markets in which the
Company participates; international events, regulatory
or legislative activity, or various economic factors; prod-
uct performance; the generation, protection and acqui-
sition of intellectual property, and litigation related to
such intellectual property; new product introductions;
development of new products, technologies and mar-
kets; the acquisition of or investment in other entities;
uses and investment of the Company’s cash balance;
the construction and operation of facilities by the
Company; and statements preceded by, followed by or
that include the words “intends”, “estimates”, “plans”,
“believes”, “expects”, “anticipates”, “should”, “could”
or similar expressions, are forward-looking statements.
Forward-looking statements reflect our current expec-
tations and are inherently uncertain. Our actual results
may differ significantly from our expectations. We
assume no obligation to update this forward-looking
information. The section entitled “Risk Factors” describes
some, but not all, of the factors that could cause these
differences.
The following discussion and analysis should be read in
conjunction with our historical financial statements and
the notes to those financial statements which are
included in Item 8 of Part II of this Form 10-K.
Overview
Cabot Microelectronics Corporation (“Cabot Microelec-
tronics”, “the Company”, “us”, “we”, or “our”) supplies
high-performance polishing slurries and pads used in
the manufacture of advanced integrated circuit (IC)
devices within the semiconductor industry, in a process
called chemical mechanical planarization (CMP). CMP
polishes surfaces at an atomic level, thereby enabling IC
device manufacturers to produce smaller, faster and
more complex IC devices with fewer defects. We
operate predominantly in one industry segment—the
development, manufacture and sale of CMP consum-
ables. We develop, produce and sell CMP slurries for
polishing many of the conducting and insulating materi-
als used in IC devices, and also for polishing the disk
substrates and magnetic heads used in hard disk drives.
We also develop, manufacture and sell CMP polishing
pads, which are used in conjunction with slurries in the
CMP process. We also pursue other demanding surface
modification applications through our Engineered
Surface Finishes (ESF) business where we believe we
can leverage our expertise in CMP consumables for the
semiconductor industry to develop products for
demanding polishing applications in other industries.
The economic and industry growth that we saw during
fiscal 2010 in the overall semiconductor industry and for
our Company continued into fiscal 2011. Unit growth in
the semiconductor industry has been driven in particu-
lar by increased demand for mobile internet products
such as smart phones and tablets. However, we began
to see a softening of demand within the semiconductor
industry in the second half of fiscal 2011 based on cer-
tain factors including general uncertainty in the global
economy and a modest correction of IC inventory. Some
industry analysts project that this softening of demand
may continue through the first half of our fiscal 2012.
Consequently, we remain cautious regarding demand
trends in fiscal 2012. There are many factors that make it
difficult for us to predict future revenue trends for our
business, including those discussed in Part I, Item 1A
entitled “Risk Factors” in this Form 10-K.
Our fiscal 2011 performance was highlighted by a number
of strategic investments we made to further strengthen
our global position for the future. We completed con-
struction of a new research, development and manufac-
turing facility in South Korea, which we believe will
strengthen our ability to serve the second largest CMP
market in the world. We expanded our manufacturing
facility in Japan to meet increased demand for our CMP
slurry products and we expanded our manufacturing
facility in Singapore to meet higher demand for our data
storage products. We also developed and commercial-
ized innovative new products in all of our business areas
to address traditional CMP applications as well as new
and emerging technologies.
Revenue for fiscal 2011 was $445.4 million, which repre-
sented an increase of 9.1% from the $408.2 million
reported for fiscal 2010, and was a record level for our
Company. The increase in revenue from fiscal 2010
reflects increased sales volume primarily due to contin-
ued growth of the semiconductor industry. We experi-
enced revenue growth across all of our product lines,
including each of our slurry areas, our polishing pads
business and our ESF business. We also experienced
revenue growth in each geographic area in which we
20
operate, except in Japan, including a 32% increase in
revenue in South Korea.
Gross profit expressed as a percentage of revenue for
fiscal 2011 was 48.1%, which represents a decrease from
the 49.9% reported for fiscal 2010, but was within our full
year guidance range of 48% to 50% of revenue. The
decrease in gross profit percentage from fiscal 2010 was
primarily due to higher fixed manufacturing costs, the
negative effects of foreign exchange rate changes, par-
ticularly with respect to the U.S. dollar against the
Japanese yen, which accounted for approximately a 1.5
percentage point decrease in gross margin percentage,
and selective price decreases, partially offset by a
higher-valued product mix. We expect our gross profit
percentage for full fiscal year 2012 to be in the range of
46% to 48%. Our fiscal 2012 guidance reflects antici-
pated continued adverse impacts of foreign exchange
rate changes, fixed costs associated with our new facility
in South Korea and uncertainty within the semiconduc-
tor industry and the global economy. However, we may
experience fluctuations in our gross profit due to a num-
ber of factors, including the extent to which we utilize
our manufacturing capacity and changes in our product
mix, which may cause our quarterly gross profit to be
above or below this range.
Operating expenses of $133.7 million, which include
research, development and technical, selling and market-
ing, and general and administrative expenses, increased
3.3%, or $4.2 million, from the $129.5 million reported for
fiscal 2010. The increase was primarily due to higher
staffing-related costs and higher expenses for clean
room materials, partially offset by lower professional fees.
In fiscal 2012, we expect our full year operating expenses
to be in the range of $135 million to $140 million.
Diluted earnings per share of $2.20 in fiscal 2011
increased 3.3%, or $0.07, from $2.13 reported in fiscal
2010, and represented a record level for our Company.
The increase was primarily due to increased sales
volume, partially offset by a lower gross margin percent-
age, higher operating expenses and a higher effective
tax rate.
The results of operations for the fiscal year ended
September 30, 2011 include certain adjustments to
correct prior period amounts, which we have deter-
mined to be immaterial to the current period and the
prior periods to which they relate. Adjustments in fiscal
2011 listed below, the first four of which were made in
the first two quarters, are related to: (1) $1.5 million ($1.0
million, net of tax) in employer-paid fringe benefits for
required contributions to our 401(k) Plan, Supplemental
Employee Retirement Plan, and non-United States statu-
tory pension plans as a result of our annual payment
pursuant to our fiscal 2010 annual incentive cash bonus
program (AIP); (2) income tax expense of $0.7 million
recorded for certain compensation in fiscal 2008 through
2010 for which a previous tax benefit should not have
been recorded; (3) the reversal of a $0.5 million deferred
tax asset regarding certain share-based compensation
expense which is not subject to such tax treatment;
(4) our under accrual of $0.3 million ($0.2 million, net of
tax) for payments made pursuant to the AIP as a result
of the calculation of results against goals under the AIP;
and (5) other immaterial corrections to deferred tax
assets and liabilities that reduced our income tax
expense by $0.1 million. Collectively, prior period adjust-
ments reduced net income in fiscal 2011 by $2.3 million
and diluted earnings per share by approximately $0.10.
Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” (MD&A), as well
as disclosures included elsewhere in this Form 10-K, are
based upon our audited consolidated financial state-
ments, which have been prepared in accordance with
accounting principles generally accepted in the United
States. The preparation of these financial statements
requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingencies. On
an ongoing basis, we evaluate the estimates used,
including those related to bad debt expense, warranty
obligations, inventory valuation, valuation and classifica-
tion of auction rate securities, impairment of long-lived
assets and investments, business combinations, good-
will, other intangible assets, share-based compensation,
income taxes and contingencies. We base our estimates
on historical experience, current conditions and on vari-
ous other assumptions that we believe to be reasonable
under the circumstances, the results of which form the
basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from
other sources, as well as for identifying and assessing
our accounting treatment with respect to commitments
and contingencies. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies
involve significant judgments and estimates used in the
preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for esti-
mated losses resulting from the potential inability of our
customers to make required payments. Our allowance
for doubtful accounts is based on historical collection
experience, adjusted for any specific known conditions
or circumstances. While historical experience may
provide a reasonable estimate of uncollectible accounts,
actual results may differ from what was recorded. In
fiscal 2009, the global economic recession adversely
affected our ability to collect accounts receivable from
21
some of our customers. The recession also caused a
small number of our customers to file for bankruptcy or
insolvency. We recorded a $0.9 million increase in our
allowance for doubtful accounts during fiscal 2009 to
account for these bankruptcies and the increased risk
regarding customer collections due to the continued
uncertainty in the global economy. We will continue to
monitor the financial solvency of our customers and, if
global economic conditions worsen, we may have to
record additional increases to our allowances for doubt-
ful accounts. As of September 30, 2011, our allowance
for doubtful accounts represented 2.0% of gross
accounts receivable. If we had increased our estimate of
bad debts to 3.0% of gross accounts receivable, our
general and administrative expenses would have
increased by $0.5 million.
Warranty Reserve
We maintain a warranty reserve that reflects manage-
ment’s best estimate of the cost to replace product that
does not meet customers’ specifications and perfor-
mance requirements, and costs related to such replace-
ment. The warranty reserve is based upon a historical
product replacement rate, adjusted for any specific
known conditions or circumstances. Should actual
warranty costs differ substantially from our estimates,
revisions to the estimated warranty liability may be
required. As of September 30, 2011, our warranty reserve
represented 0.3% of the current quarter revenue. If we
had increased our warranty reserve estimate to 1.3% of
the current quarter revenue, our cost of goods sold
would have increased by $1.0 million.
Inventory Valuation
We value inventory at the lower of cost or market and
write down the value of inventory for estimated obsoles-
cence or if inventory is deemed unmarketable. An inven-
tory reserve is maintained based upon a historical
percentage of actual inventories written off applied
against the inventory value at the end of the period,
adjusted for known conditions and circumstances. We
exercise judgment in estimating the amount of inven-
tory that is obsolete. Should actual product marketabil-
ity and fitness for use be affected by conditions that are
different from those projected by management, revisions
to the estimated inventory reserve may be required. If
we had increased our reserve for obsolete inventory at
September 30, 2011 by 10%, our cost of goods sold
would have increased by $0.2 million.
Valuation and Classification of
Auction Rate Securities
As of September 30, 2011, we owned two auction rate
securities (ARS) with an estimated fair value of $8.1 million
($8.3 million par value) which are classified as other long-
term assets on our Consolidated Balance Sheet. In
general, ARS investments are securities with long-term
nominal maturities for which interest rates are reset
through a Dutch auction every seven to 35 days.
Historically, these periodic auctions provided a liquid
market for these securities. General uncertainties in the
global credit markets reduced liquidity in the ARS mar-
ket, and this illiquidity continues.
As discussed in Notes 4 and 8 of the Notes to the
Consolidated Financial Statements, we have recorded a
temporary impairment of $0.2 million, net of tax, in the
value of one of our ARS in other comprehensive income.
The calculation of fair value and the balance sheet
classification for our ARS requires critical judgments and
estimates by management including an appropriate
discount rate and the probabilities that a security may
be monetized through a future successful auction, of a
refinancing of the underlying debt, of a default in pay-
ment by the issuer, and of payments not being made by
the bond insurance carrier in the event of default by the
issuer. An other-than-temporary impairment must be
recorded when a credit loss exists; that is when the
present value of the expected cash flows from a debt
security is less than the amortized cost basis of the secu-
rity. We performed two discounted cash flow analyses,
one using a discount rate based on a market index com-
prised of tax exempt variable rate demand obligations
and one using a discount rate based on the LIBOR swap
curve, and we applied a risk factor to reflect current
liquidity issues in the ARS market. Key inputs to our dis-
counted cash flow model include projected cash flows
from interest and principal payments and the weighted
probabilities of improved liquidity or debt refinancing
by the issuer. We also incorporate certain Level 2 market
indices into the discounted cash flow analysis, including
published rates such as the LIBOR rate, the LIBOR swap
curve and a municipal swap index published by the
Securities Industry and Financial Markets Association.
We also considered the probability of default in pay-
ment by the issuer of the securities, the strength of the
insurance backing and the probability of failure by the
insurance carrier in the case of default by the issuer of
the securities. In November 2011, the municipality that
issued our impaired ARS filed for bankruptcy protection.
We considered these developments, in light of the con-
tinued insurance backing, and have concluded the
impairment we have maintained remains adequate and
temporary. We do not intend to sell the securities at a
loss and we believe we will not be required to sell the
securities at a loss in the future. If auctions involving our
remaining ARS continue to fail, if issuers of our ARS are
unable to refinance the underlying securities, if the
issuing municipalities are unable to pay their debt obli-
gations and the bond insurance fails, or if credit ratings
decline or other adverse developments occur in the
credit markets, we may not be able to monetize our
remaining securities in the near term and may be
required to further adjust the carrying value of these
22
instruments through an impairment charge that may be
deemed other-than-temporary.
Impairment of Long-Lived Assets and Investments
We assess the recoverability of the carrying value of
long-lived assets, including finite lived intangible assets,
whenever events or changes in circumstances indicate
that the assets may be impaired. We must exercise judg-
ment in assessing whether an event of impairment has
occurred. For purposes of recognition and measurement
of an impairment loss, long-lived assets are grouped
with other assets and liabilities at the lowest level for
which identifiable cash flows are largely independent of
the cash flows of other assets and liabilities. We must
exercise judgment in this grouping. If the sum of the
undiscounted future cash flows expected to result from
the identified asset group is less than the carrying value
of the asset group, an impairment provision may be
required. The amount of the impairment to be recog-
nized is calculated by subtracting the fair value of the
asset group from the net book value of the asset group.
Determining future cash flows and estimating fair values
require significant judgment and are highly susceptible
to change from period to period because they require
management to make assumptions about future sales
and cost of sales generally over a long-term period. As a
result of assessments performed during fiscal 2011, we
recorded $0.2 million in impairment expense. In fiscal
2010 and 2009, we recorded $0.2 million and $1.2 million
in impairment expense, respectively.
We evaluate the estimated fair value of investments
annually or more frequently if indicators of poten -
tial impairment exist, to determine if an other-than-
temporary impairment in the value of the investment
has taken place.
Business Combinations
We have accounted for all business combinations under
the purchase method of accounting. As discussed in
more detail in Note 3 of the Notes to the Consolidated
Financial Statements, we were required to adopt new
accounting standards for business combinations com-
mencing after October 1, 2009. However, we have not
made any acquisitions to which we were required to
apply these new standards. We have allocated the
purchase price of acquired entities to the tangible and
intangible assets acquired, liabilities assumed, and in-
process research and development (IPR&D) based on
their estimated fair values. We engage independent
third-party appraisal firms to assist us in determining
the fair values of assets and liabilities acquired. This
valuation requires management to make significant esti-
mates and assumptions, especially with respect to long-
lived and intangible assets. Contingent consideration
was recorded as a liability when the outcome of the con-
tingency became determinable. Goodwill represents
the excess of the purchase price over the fair value of
net assets and amounts assigned to identifiable intan-
gible assets. Purchased IPR&D, for which technological
feasibility has not yet been established and no future
alternative uses exist, has been expensed immediately.
Critical estimates in valuing certain of the intangible
assets include but are not limited to: future expected
cash flows related to acquired developed technologies
and patents and assumptions about the period of time
the technologies will continue to be used in the
Company’s product portfolio; expected costs to
develop the IPR&D into commercially viable products
and estimated cash flows from the products when com-
pleted; and discount rates. Management’s estimates of
value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and
unpredictable. Assumptions may be incomplete or inac-
curate, and unanticipated events and circumstances
may occur which may cause actual realized values to be
different from management’s estimates.
Goodwill and Intangible Assets
Purchased intangible assets with finite lives are amor-
tized 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 the fourth fiscal quarter or more frequently if
indicators of potential impairment exist, using a fair-
value-based approach.
The recoverability of goodwill is measured at the report-
ing 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 discreet financial infor-
mation 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
had three reporting units to which we allocated good-
will and intangible assets as of September 30, 2011, the
date of our annual impairment test. Initially, our Company
had only one reporting unit as we were created from a
division of our former parent company, Cabot Corporation,
and we identified associated goodwill and intangible
assets under one reporting unit at that time. Other
amounts of goodwill and intangible assets have been
attributed to acquired businesses at the time of acquisi-
tion through the use of independent appraisal firms.
We have historically determined the fair value of our
reporting units using a discounted cash flow analysis
(“step one” analysis) of our projected future results. The
step one analysis we performed in the fourth quarter of
fiscal 2010 indicated the fair value of our reporting units was
significantly higher than the carrying value. As discussed
23
in Notes 2 and 7 of the Notes to the Consolidated
Financial Statements, effective September 30, 2011, we
adopted new accounting pronouncements related to our
goodwill impairment analysis. The new accounting guid-
ance allows an entity to first assess qualitative factors to
determine if it is more likely than not that the fair value
of a reporting unit is less than its carrying amount (“step
zero” analysis). In fiscal 2011, we used this new guidance
in our annual impairment analysis for goodwill because
our cash flows for all of our reporting units exceeded
the expectations we had as of September 30, 2010.
The recoverability of indefinite lived intangible assets is
measured using the royalty savings method. Factors
requiring significant judgment include assumptions
related to future growth rates, discount factors, royalty
rates and tax 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.
As a result of the review performed in the fourth quarter
of fiscal 2011, we determined that there was no impair-
ment of our goodwill and intangible assets as of
September 30, 2011.
Share-Based Compensation
We record share-based compensation expense for all
share-based awards, including stock option grants,
restricted stock and restricted stock unit awards and
employee stock purchase plan purchases. We calculate
share-based compensation expense using the straight-
line approach based on awards expected to ultimately
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 peri-
ods 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 and the risk-free interest rate.
A small change in the underlying assumptions can have
a relatively large effect on the estimated valuation. We
estimate the expected volatility of our stock 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 the simplified method, due to our limited
amount of historical option exercise data, and we add a
slight premium to this expected term for employees
who meet the definition of retirement eligible pursuant
to terms of their award agreements during the contrac-
tual term. The simplified method uses an average of the
vesting term and the contractual term of the option to
calculate the expected term. The risk-free rate is derived
from the U.S. Treasury yield curve in effect at the time
of grant.
The fair value of our restricted stock and restricted stock
unit awards represents the closing price of our common
stock on the date of award.
Accounting for Income Taxes
Current income taxes are determined based on estimated
taxes payable or refundable on tax returns for the cur-
rent 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 a change in tax rates is recognized in income in the
period that includes the enactment date. Provisions are
made for both U.S. and any foreign deferred income tax
liability or benefit. We 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 posi-
tion. In fiscal 2011 and 2010, we elected to permanently
reinvest the earnings of certain of our foreign subsidiar-
ies outside the U.S. rather than repatriating the earnings
to the U.S. See the section titled “Liquidity and Capital
Resources” in this MD&A and Note 16 of the Notes to the
Consolidated Financial Statements for additional infor-
mation on income taxes and permanent reinvestment.
Commitments and Contingencies
We have entered into certain unconditional purchase
obligations, which include noncancelable purchase
commitments and take-or-pay arrangements with sup-
pliers. We review our agreements on a quarterly basis
and make an assessment of the likelihood of a shortfall
in purchases and determine if it is necessary to record a
liability. In addition, we are subject to the possibility of
various loss contingencies arising in the ordinary course
of business such as a legal proceeding or claim. An esti-
mated loss contingency is accrued when it is probable
that an asset has been impaired or a liability has been
incurred and the amount of the loss can be reasonably
estimated. We regularly evaluate current information
available to us to determine whether such accruals
should be adjusted and whether new accruals are
required.
Effects of Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for
a description of recent accounting pronouncements
including the expected dates of adoption and effects
on our results of operations, financial position and
cash flows.
24
Results of Operations
The following table sets forth, for the periods indicated,
the percentage of revenue of certain line items included
in our historical statements of income:
Year Ended September 30,
2011
2010
2009
Revenue
Cost of goods sold
Gross profit
Research, development
and technical
Selling and marketing
General and administrative
Purchased in-process research
and development
Operating income
Other income (expense), net
Income before income taxes
Provision for income taxes
100.0% 100.0% 100.0%
50.1
55.9
51.9
48.1
13.1
6.7
10.3
—
18.0
(0.3)
17.7
6.1
49.9
44.1
12.7
6.6
12.5
—
18.1
(0.2)
17.9
5.8
16.5
7.6
14.0
0.5
5.5
0.2
5.7
1.9
Net income
11.6%
12.1%
3.8%
Year Ended September 30, 2011, Versus Year
Ended September 30, 2010
Revenue
Revenue was $445.4 million in fiscal 2011, which repre-
sented an increase of 9.1%, or $37.2 million, from fiscal
2010. The increase in revenue was driven by a $35.6 mil-
lion increase in sales volume, a $5.5 million increase due
to the effect of foreign exchange rate changes, and a
$4.7 million increase due to a higher-priced product mix.
These increases were partially offset by an $8.9 million
decrease in revenue due to a lower weighted-average
selling price for our CMP consumables. The economic
and industry growth that we saw during fiscal 2010 con-
tinued into fiscal 2011. However, we saw some softening
of demand in the semiconductor industry in the second
half of fiscal 2011 based on certain factors, including
general uncertainty in the global economy and a modest
correction of integrated circuit (IC) device inventory.
Some industry analysts currently project this softening
of demand to persist through the first half of our fiscal
2012, so we are cautious regarding future demand trends
within the semiconductor industry.
Cost of Goods Sold
Total cost of goods sold was $231.3 million in fiscal 2011,
which represented an increase of 13.0%, or $26.6 million,
from fiscal 2010. The increase in cost of goods sold was
primarily due to $17.8 million from increased sales vol-
ume due to the increased demand for our products, a
$9.5 million increase due to the effect of foreign exchange
rate changes, a $6.9 million increase due to higher fixed
manufacturing costs, a $1.8 million increase due to higher
freight and packaging costs, a $1.3 million increase due
to certain production variances and a $0.7 million increase
due to higher sample costs. These increases were par-
tially offset by an $11.5 million decrease in cost of goods
sold due to a lower-cost product mix.
Metal oxides, such as silica and alumina, are significant
raw materials that we use in many of our CMP slurries. In
an effort to mitigate our risk to rising raw material costs
and to increase supply assurance and quality perfor-
mance requirements, we have entered into multi-year
supply agreements with a number of suppliers. For
more financial information about our supply contracts,
see “Tabular Disclosure of Contractual Obligations”
included in Item 7 of Part II of this Form 10-K.
Our need for additional quantities or different kinds of
key raw materials in the future has required, and will
continue to require, that we enter into new supply
arrangements with third parties. Future arrangements
may result in costs which are different from those in the
existing agreements. In addition, a number of factors
could impact the future cost of raw materials, packag-
ing, freight and labor. We also expect to continue to
invest in our operations excellence initiative to improve
product quality, reduce variability and improve product
yields in our manufacturing process.
Gross Profit
Our gross profit as a percentage of revenue was 48.1%
in fiscal 2011 as compared to 49.9% for fiscal 2010. The
decrease in gross profit as a percentage of revenue was
primarily due to higher fixed manufacturing costs, the
negative effects of foreign exchange rate changes, selec-
tive price decreases and the absence of a raw material
supplier credit we recognized in the first quarter of fiscal
2010 related to our achieving a certain volume threshold
in calendar 2009, partially offset by a higher-valued
product mix. We expect our gross profit percentage for
full fiscal year 2012 to be in the range of 46% to 48%.
However, we may experience fluctuations in our gross
profit due to a number of factors, including the extent to
which we utilize our manufacturing capacity and changes
in our product mix, which may cause our quarterly gross
profit to be above or below this range.
25
Research, Development and Technical
Total research, development and technical expenses were
$58.0 million in fiscal 2011, which represented an increase
of 12.0%, or $6.2 million, from fiscal 2010. The increase
was primarily due to $3.6 million in higher staffing-related
costs, related to higher staffing levels and separation
costs related to the transition of one of our executive
officers, and $2.2 million in higher expenses for clean
room materials.
Our research, development and technical efforts are
focused on the following main areas:
• Research related to fundamental CMP technology;
• Development and formulation of new and enhanced
CMP consumable products, including collaborating
on joint development projects with our customers;
• Process development to support rapid and effective
commercialization of new products;
• Technical support of CMP products in our customers’
manufacturing facilities; and
• Evaluation and development of new polishing and
metrology applications outside of the semiconductor
industry.
incurred on forward foreign exchange contracts dis-
cussed in Note 10 of the Notes to the Consolidated
Financial Statements.
Provision for Income Taxes
Our effective income tax rate was 34.5% in fiscal 2011
compared to 32.5% in fiscal 2010. The increase in the
effective tax rate was primarily due to a number of factors
related to share-based compensation expense, including
tax impacts of stock option exercises and the vesting of
restricted stock for certain employees, and taxable
executive compensation in excess of limits defined in
section 162(m) of the Internal Revenue Code, partially
offset by the reinstatement of the U.S. research and
experimentation tax credit in December 2010, which
was retroactively effective as of January 1, 2010. As
discussed in the “Overview” section of this MD&A, our
income tax provision in fiscal 2011 included adjustments
to correct prior period amounts, including $0.7 million in
tax expense related to executive compensation in fiscal
2008 through 2010 for which a previous tax benefit
should not have been recorded, and the reversal of a
$0.5 million deferred tax asset related to certain share-
based compensation expense.
Selling and Marketing
Selling and marketing expenses were $29.8 million in
fiscal 2011, which represented an increase of 10.7%, or
$2.9 million, from fiscal 2010. The increase was primarily
due to $1.3 million in higher staffing-related costs, $0.6
million in higher travel-related costs and $0.4 million in
higher miscellaneous selling expenses.
Net Income
Net income was $51.7 million in fiscal 2011, which repre-
sented an increase of 4.5%, or $2.2 million, from fiscal
2010. The increase was primarily due to increased sales
volume, partially offset by a lower gross margin percent-
age, increased operating expenses and a higher effec-
tive tax rate.
General and Administrative
General and administrative expenses were $45.9 million
in fiscal 2011, which represented a decrease of 9.6%, or
$4.9 million, from fiscal 2010. The decrease was primarily
due to $6.8 million in lower professional fees, including
costs to enforce our intellectual property, partially offset
by $1.1 million in higher staffing-related costs and $0.6
million in higher depreciation expense. See Part I, Item 3
entitled “Legal Proceedings” and Note 17 of the Notes
to the Consolidated Financial Statements for more infor-
mation on the enforcement of our intellectual property.
Other Income (Expense), Net
Other expense was $1.5 million in fiscal 2011, compared
to $0.7 million during fiscal 2010. The increase in other
expense was primarily due to $1.1 million in foreign
exchange effects, primarily related to changes in the
exchange rate of the Japanese yen and the New Taiwan
dollar to the U.S. dollar, net of the gains and losses
Year Ended September 30, 2010, Versus Year
Ended September 30, 2009
Revenue
Revenue was $408.2 million in fiscal 2010, which repre-
sented an increase of 40.1%, or $116.8 million, from fiscal
2009. The increase in revenue was driven by a $118.3 mil-
lion increase in sales volume, a $4.8 million increase due
to the effect of foreign exchange rate changes, and $2.6
million due to a slightly higher-priced product mix, par-
tially offset by a decrease in revenue of $8.9 million due
to a lower weighted-average selling price for our CMP
consumable products. We began to see improvement in
economic and industry conditions during the second
half of our fiscal 2009. These improvements, particularly
in the semiconductor industry, continued through our
fiscal 2010 and positively impacted the demand for our
products.
26
Cost of Goods Sold
Total cost of goods sold was $204.7 million in fiscal 2010,
which represented an increase of 25.6%, or $41.8 million,
from fiscal 2009. The increase in cost of goods sold was
primarily due to $59.4 million from increased sales vol-
ume due to the increased demand for our products
associated with the economic and industry recovery,
and an $8.4 million increase due to higher fixed costs.
These costs were partially offset by a $16.2 million
decrease due to higher utilization of our manufacturing
capacity on the increased sales volume, and a $10.7 mil-
lion benefit of a lower-cost product mix.
Gross Profit
Our gross profit as a percentage of revenue was 49.9%
in fiscal 2010 as compared to 44.1% for fiscal 2009. The
increase in gross profit as a percentage of revenue was
primarily due to the significant increase in sales volume
and the related increased utilization of our manufactur-
ing capacity, as well as a higher-valued product mix,
partially offset by a decrease in the weighted-average
selling price of our CMP slurries and increased fixed
manufacturing costs.
Research, Development and Technical
Total research, development and technical expenses
were $51.8 million in fiscal 2010, which represented an
increase of 7.6%, or $3.7 million, from fiscal 2009. The
increase was mainly due to $3.6 million in higher staffing-
related costs, primarily related to our AIP, $0.6 million in
higher travel-related costs, and $0.2 million in higher
office equipment expenses, partially offset by the
absence of $1.1 million in pre-tax impairment charges
recorded on certain research and development equip-
ment during fiscal 2009.
Selling and Marketing
Selling and marketing expenses were $26.9 million in
fiscal 2010, which represented an increase of 20.9%, or
$4.6 million, from fiscal 2009. The increase was primarily
due to $2.6 million in higher staffing related costs, includ-
ing costs associated with our AIP, $1.0 million in higher
travel-related costs, $0.4 million in higher depreciation
expense, and $0.3 million in higher professional fees.
General and Administrative
General and administrative expenses were $50.8 million
in fiscal 2010, which represented an increase of 25.0%,
or $10.2 million, from fiscal 2009. The increase was mainly
due to $6.0 million in higher staffing-related costs, pri-
marily related to our AIP, $4.2 million in higher professional
fees, including costs to enforce our intellectual prop-
erty, and $0.5 million in higher travel-related expenses,
partially offset by $0.9 million due to lower bad debt
expense. See Part I, Item 3 entitled “Legal Proceedings”
and Note 17 of the Notes to the Consolidated Financial
Statements for more information on the enforcement of
our intellectual property.
Purchased In-Process Research
and Development
Purchased in-process research and development (IPR&D)
expense was $1.4 million in fiscal 2009, related to the
acquisition of Epoch in the second quarter of fiscal 2009.
We did not make any acquisitions in fiscal 2010.
Other Income (Expense), Net
Other expense was $0.7 million in fiscal 2010, compared
to other income of $0.6 million during fiscal 2009. The
decrease in other income was primarily due to $0.8 mil-
lion in lower interest income resulting from lower inter-
est rates on our cash balances and investments, and
$0.7 million due to net unfavorable foreign exchange
effects, primarily related to changes in the exchange
rate of the Japanese yen to the U.S. dollar, net of the
gains and losses incurred on forward foreign exchange
contracts discussed in Note 10 of the Notes to the
Consolidated Financial Statements.
Provision for Income Taxes
Our effective income tax rate was 32.5% in fiscal 2010
compared to 32.7% in fiscal 2009. The decreases in the
effective tax rate in fiscal 2010 was primarily due to our
election to permanently reinvest earnings from certain
of our foreign subsidiaries outside of the U.S., as well as
decreased tax expense related to share-based compen-
sation. Increases in the effective tax rate in fiscal 2010
that partially offset these decreases included decreases
in tax-exempt interest income and the expiration of the
research and experimentation tax credit effective
December 31, 2009, which was not retroactively reinstated
for our fiscal 2010 until the first quarter of our fiscal 2011.
Net Income
Net income was $49.5 million in fiscal 2010, which repre-
sented an increase of 342.1%, or $38.3 million, from fiscal
2009 as a result of the factors discussed above. The
election to permanently reinvest the earnings of certain
of our foreign subsidiaries outside the U.S. increased
net income by $2.0 million in fiscal 2010.
27
Liquidity and Capital Resources
We had cash flows from operating activities of $93.6 mil-
lion in fiscal 2011, $88.4 million in fiscal 2010 and $44.7
million in fiscal 2009. Our cash provided by operating
activities in fiscal 2011 originated from $51.7 million in
net income, $41.0 million in non-cash items, and a $0.9
million increase in cash flow due to a net decrease in
working capital. The increase in cash from operations in
fiscal 2011 from fiscal 2010 was primarily due to increased
net income and deferred tax expense, as well as
decreased accounts receivable in fiscal 2011, partially
offset by an increase in working capital associated with
higher inventories and lower accrued expenses and
accounts payable. The decrease in accounts receivable
was primarily due to improved cash collections in fiscal
2011. The increase in inventories was primarily due to a
general inventory build to meet the increased customer
demand we experienced in fiscal 2011. The decrease in
accrued expenses was primarily due to the payment
made in the first quarter of fiscal 2011 of our fiscal 2010
annual incentive cash bonus, partially offset by the
accrual of our fiscal 2011 annual incentive cash bonus,
which we expect will be paid in the first quarter of
fiscal 2012.
We used $28.2 million in investing activities in fiscal 2011
representing $28.1 million in purchases of property,
plant and equipment and $0.1 million in other investing
cash outflows. Capital expenditures in fiscal 2011 included
the construction of our new facility in South Korea and
capacity expansions of our Japan and Singapore facili-
ties, net of the amounts that remain in accounts payable
and accrued expenses at year end. We used $11.9 mil-
lion in investing activities in fiscal 2010 representing
$11.7 million in purchases of property, plant and equip-
ment and $0.2 million in other investing cash outflows.
We used $69.0 million in investing activities in fiscal
2009, representing $60.5 million used for our acquisition
of Epoch, net of $6.2 million in cash acquired, and $8.5
million in purchases of property, plant and equipment.
See Note 3 and Note 7 of the Notes to the Consolidated
Financial Statements for more information on business
combinations and intangible assets. We estimate that
our total capital expenditures in fiscal 2012 will be
between $25 million and $30 million.
In fiscal 2011, cash flows used in financing activities were
$17.9 million. We used $54.1 million to repurchase com-
mon stock under our share repurchase program, $1.4
million to repurchase common stock pursuant to the
terms of our Second Amended and Restated Cabot
Microelectronics Corporation 2000 Equity Incentive
Plan (EIP) for shares withheld from employees to cover
payroll taxes on the vesting of restricted stock awarded
under the EIP, and we made $1.3 million in principal pay-
ments under capital lease obligations. These cash out-
flows were partially offset by $38.1 million received from
the issuance of common stock related to the exercise of
stock options granted under our EIP and our 2007
Employee Stock Purchase Plan, as amended and restated
January 1, 2010 (ESPP). In addition, we received $0.8 mil-
lion in tax benefits related to stock options exercised
and vesting of restricted stock awarded under our EIP. In
fiscal 2010, cash flows used in financing activities were
$23.5 million. We used $25.0 million to repurchase com-
mon stock under our share repurchase plan, $0.8 million
to repurchase common stock pursuant to the terms of
our EIP for shares withheld from employees and pur-
chased by the Company to cover payroll taxes on the
vesting of restricted stock awarded under the EIP, and
we made $1.2 million in principal payments under capi-
tal lease obligations. These cash outflows were partially
offset by $3.4 million received from the issuance of com-
mon stock related to the exercise of stock options
granted under our EIP and our ESPP. In fiscal 2009, cash
flows provided by financing activities were $0.7 million.
We received $2.2 million from the issuance of common
stock related to the exercise of stock options granted
under our EIP and our ESPP. These cash inflows were
partially offset by $1.1 million in principal payments on
capital leases and $0.3 million in repurchases of com-
mon stock pursuant to the terms of our EIP for shares
withheld to cover payroll taxes on the vesting of
restricted stock awarded under the EIP.
In January 2008, our Board of Directors authorized a
share repurchase program for up to $75.0 million of our
outstanding common stock. We repurchased 564,568
shares for $25.0 million in fiscal 2011 under this program,
which was completed during the fiscal quarter ended
March 31, 2011. We also repurchased 723,184 shares for
$25.0 million during fiscal 2010 under this program. In
November 2010, our Board of Directors authorized a
new share repurchase program for up to $125.0 million
of our outstanding common stock, which became effec-
tive on the authorization date. We repurchased 671,100
shares for $29.1 million during fiscal 2011 under this new
program. Share repurchases are made from time to
time, depending on market conditions, in open market
transactions, at management’s discretion. We fund
share purchases under these programs from our avail-
able cash balance.
28
We have an unsecured revolving credit facility of $50.0
million with an option to increase the facility to $80.0
million. Pursuant to an amendment we entered into in
October 2008, the agreement extends through October
2011, with an option to renew for two additional one-
year terms. In November 2010, the scheduled termina-
tion date was extended by one year through October
2012 and in August 2011, the scheduled termination
date was extended another year through October 2013.
Under this agreement, interest accrues on any outstand-
ing balance at either the lending institution’s base rate
or the Eurodollar rate plus an applicable margin. We also
pay a non-use fee. Loans under this facility are intended
primarily for general corporate purposes, including
financing working capital, capital expenditures and
acquisitions. The credit agreement also contains various
covenants. No amounts are currently outstanding under
this credit facility and we believe we are currently in
compliance with the covenants.
As of September 30, 2011, we had $302.5 million of cash
and cash equivalents, $29.1 million of which was held at
foreign subsidiaries in Singapore and Taiwan where we
have made a current election to permanently reinvest
the earnings rather than repatriate the earnings to the
U.S. If we choose to repatriate these earnings in the
future through dividends or loans to the U.S. parent
company, the earnings could become subject to addi-
tional income tax expense.
We believe that our current balance of cash and long-
term investments, cash generated by our operations
and available borrowings under our revolving credit
facility will be sufficient to fund our operations, expected
capital expenditures, general merger and acquisition
activities, and share repurchases for the foreseeable
future. However, we plan to further expand our busi-
ness; therefore, we may need to raise additional funds in
the future through equity or debt financing, strategic
relationships or other arrangements. Depending upon
conditions in the capital and credit markets, we could
encounter difficulty securing additional financing in the
type or amount necessary to pursue these objectives.
Off-Balance Sheet Arrangements
At September 30, 2011 and 2010, we did not have any
unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or
special purpose entities, which might have been estab-
lished for the purpose of facilitating off-balance sheet
arrangements.
Tabular Disclosure of Contractual Obligations
The following summarizes our contractual obligations at
September 30, 2011, and the effect such obligations
are expected to have on our liquidity and cash flow in
future periods.
Contractual
Obligations
(In millions)
Operating leases
Purchase obligations
Other long-term
Less
Than
1 Year
$ 3.6
31.4
Total
$ 10.2
33.4
1–3
Years
3–5
Years
After
5 Years
$3.6
1.1
$1.7
0.3
$1.3
0.6
liabilities
6.3
—
—
—
6.3
Total contractual
obligations
$ 49.9
$35.0
$4.7
$2.0
$8.2
Operating Leases
We lease certain vehicles, warehouse facilities, office
space, machinery and equipment under cancelable and
noncancelable operating leases, most of which expire
within ten years of their respective commencement
dates and may be renewed by us. Operating lease obli-
gations also include certain costs associated with our
pad finishing operation located at Taiwan Semiconductor
Manufacturing Company, which are accounted for as
operating lease payments.
Purchase Obligations
We have entered into multi-year supply agreements
with Cabot Corporation, our former parent company
which is not a related party, for the purchase of certain
fumed metal oxides. We purchase fumed silica primarily
under a fumed silica supply agreement with Cabot
Corporation that became effective in January 2004, and
was amended in September 2006 and in April 2008, the
latter of which extended the termination date of the
agreement from December 2009 to December 2012 and
also changed the pricing and some other non-material
terms of the agreement to the benefit of both parties.
We are generally obligated to purchase fumed silica for
at least 90% of our six-month volume forecast for certain
of our slurry products, to purchase certain minimum
quantities every six months, and to pay for the shortfall
if we purchase less than these amounts. We currently
anticipate meeting all minimum forecasted purchase
volume requirements. Since December 2001, we have
purchased fumed alumina primarily under a fumed alu-
mina supply agreement with Cabot Corporation that
has an original term ending in December 2006 and was
renewed for another five-year term ending in December
2011. Prices charged for fumed alumina from Cabot
Corporation are pursuant to the terms of the supply
29
agreement and may fluctuate based upon the actual
costs incurred by Cabot Corporation in the manufacture
of fumed alumina. Under these agreements, Cabot
Corporation continues to be the exclusive supplier of
certain quantities and types of fumed silica and fumed
alumina for certain products we produced as of the
effective dates of these agreements. Subject to certain
terms, Cabot Corporation is prohibited from selling cer-
tain types of fumed alumina to third parties for use in
CMP applications, as well as engaging itself in CMP
applications. If Cabot Corporation fails to supply us with
our requirements for any reason, including if we require
product specification changes that Cabot Corporation
cannot meet, we have the right to purchase products
meeting those specifications from other suppliers. We
also may purchase fumed alumina and fumed silica from
other suppliers for certain products, including those
commercialized after certain dates related to these
agreements and their amendments. Purchase obligations
include an aggregate amount of $7.8 million of contrac-
tual commitments related to our Cabot Corporation
agreements for fumed silica and fumed alumina.
Other Long-Term Liabilities
Other long-term liabilities at September 30, 2011 consist
of liabilities related to our Japan retirement allowance,
which represents approximately $4.9 million, our liability
for future payments to be made under our Cabot Micro-
elec tronics Supplemental Employee Retirement Plan
and our liability for uncertain tax positions.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
Effect of Currency Exchange Rates and
Exchange Rate Risk Management
We conduct business operations outside of the United
States through our foreign operations. Some of our
foreign operations maintain their accounting records in
their local currencies. Consequently, period to period
comparability of results of operations is affected by fluc-
tuations in exchange rates. The primary currencies to
which we have exposure are the Japanese yen and the
New Taiwan dollar. As noted in the Overview section of
Management’s Discussion and Analysis of Financial
Condition and Results of Operations, the negative effects
of foreign exchange rate changes, primarily related to
the Japanese yen, accounted for an approximate 1.5
percentage point decline in our gross profit margin in
fiscal 2011 compared to fiscal 2010. From time to time
we enter into forward contracts in an effort to manage
foreign currency exchange exposure on our balance
sheet. However, we may be unable to hedge these
exposures completely. During fiscal 2011, we recorded
$5.5 million in foreign currency translation gains that
are included in other comprehensive income on our
Consolidated Balance Sheet. These gains primarily
relate to the revaluation of assets and liabilities denomi-
nated in the Japanese yen and the New Taiwan dollar at
period end exchange rates. Approximately 13% of our
revenue is transacted in currencies other than the U.S.
dollar. However, we also incur expenses in foreign coun-
tries that are transacted in currencies other than the
U.S. dollar, which reduces the net exposure on the
Consolidated Statement of Income. We do not currently
enter into forward exchange contracts or other deriva-
tive instruments for speculative or trading purposes.
Market Risk and Sensitivity Analysis Related to
Foreign Exchange Rate Risk
Over the past 24 months, there has been a significant
weakening of the U.S. dollar against the Japanese yen,
which has had some negative impact on our results of
operations. We have performed a sensitivity analysis
assuming a hypothetical additional 10% adverse move-
ment in foreign exchange rates. As of September 30,
2011, the analysis demonstrated that such market move-
ments would not have a material adverse effect on our
consolidated financial position, results of operations or
cash flows over a one-year period. Actual gains and
losses in the future may differ materially from this analysis
based on changes in the timing and amount of foreign
currency rate movements and our actual exposures.
Market Risk Related to Investments in Auction
Rate Securities
At September 30, 2011, we owned two auction rate
securities (ARS) with a total estimated fair value of $8.1
million ($8.3 million par value) which were classified as
other long-term assets on our Consolidated Balance
Sheet. Beginning in 2008, general uncertainties in the
global credit markets significantly reduced liquidity in
the ARS market, and this illiquidity continues. For more
information on our ARS, see “Risk Factors” set forth in
Part I, Item 1A, “Critical Accounting Policies and Estimates”
in Management’s Discussion and Analysis of Financial
Condition and Results of Operations in Part II, Item 7,
and Notes 4 and 8 of the Notes to the Consolidated
Financial Statements in Part II, Item 8 of this Annual
Report on Form 10-K.
30
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statement Schedule
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2011, 2010 and 2009
Consolidated Balance Sheets at September 30, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2011,
2010 and 2009
Notes to the Consolidated Financial Statements
Selected Quarterly Operating Results
Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts
Page
32
33
34
35
36
37
56
57
All other schedules are omitted, because they are not required, are not applicable, or the information is included in
the consolidated financial statements and notes thereto.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Cabot Microelectronics Corporation:
In our opinion, the consolidated financial statements
listed in the accompanying index present fairly, in all
material respects, the financial position of Cabot
Microelectronics Corporation and its subsidiaries at
September 30, 2011 and 2010, and the results of their
operations and their cash flows for each of the three
years in the period ended September 30, 2011 in confor-
mity with accounting principles generally accepted in
the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompa-
nying index presents fairly, in all material respects, the
information set forth therein when read in conjunction
with the related consolidated financial statements. Also
in our opinion, the Company maintained, in all material
respects, effective internal control over financial report-
ing as of September 30, 2011, based on criteria estab-
lished in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s man-
agement is responsible for these financial statements
and financial statement schedule, for maintaining effec-
tive internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Management’s Report
on Internal Control Over Financial Reporting appearing
under Item 9A. Our responsibility is to express opinions
on these financial statements, on the financial statement
schedule, and on the Company’s internal control over
financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance
about whether the financial statements are free of mate-
rial misstatement and whether effective internal control
over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the
overall financial statement presentation. Our audit of
internal control over financial reporting included obtain-
ing an understanding of internal control over financial
reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and oper-
ating effectiveness of internal control based on the
assessed risk. Our audits also included performing such
other procedures as we considered necessary in the
circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external pur-
poses in accordance with generally accepted account-
ing principles. A company’s internal control over financial
reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reason-
able detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) pro-
vide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted
accounting principles, and that receipts and expendi-
tures of the company are being made only in accor-
dance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthor-
ized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effective-
ness to future periods are subject to the risk that controls
may become inadequate because of changes in condi-
tions, or that the degree of compliance with the policies
or procedures may deteriorate.
Chicago, IL
November 22, 2011
32
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research, development and technical
Selling and marketing
General and administrative
Purchased in-process research and development
Total operating expenses
Operating income
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Weighted-average basic shares outstanding
Diluted earnings per share
Weighted-average diluted shares outstanding
The accompanying notes are an integral part of these consolidated financial statements.
Year Ended September 30,
2011
2010
2009
$ 445,442
231,336
$ 408,201
204,704
$ 291,372
162,918
214,106
203,497
128,454
58,035
29,758
45,928
—
51,818
26,885
50,783
—
48,150
22,239
40,632
1,410
133,721
129,486
112,431
80,385
(1,473)
78,912
27,250
74,011
(734)
73,277
23,819
16,023
599
16,622
5,435
$ 51,662
$ 49,458
$ 11,187
$
2.26
$
2.14
$
0.48
22,896
23,084
23,079
$
2.20
$
2.13
$
0.48
23,435
23,273
23,096
33
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,090 at
September 30, 2011, and $1,121 at September 30, 2010
Inventories
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Deferred income taxes
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Capital lease obligations
Accrued expenses and other current liabilities
Total current liabilities
Capital lease obligations, net of current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common stock: Authorized: 200,000,000 shares, $0.001 par value; Issued:
27,652,336 shares at September 30, 2011, and 26,384,715 shares at September 30, 2010
Capital in excess of par value of common stock
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost, 4,715,577 shares at September 30, 2011, and 3,446,069 shares
at September 30, 2010
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
September 30,
2011
2010
$ 302,546
$ 254,164
52,747
56,128
14,735
4,249
57,456
51,896
13,973
3,540
430,405
381,029
130,791
41,148
14,651
862
10,372
115,811
40,436
17,089
8,044
9,347
$ 628,229
$ 571,756
$ 22,436
10
33,104
$ 17,521
1,296
34,513
55,550
2
6,323
61,875
53,330
12
4,071
57,413
28
278,360
435,429
24,127
26
228,103
383,767
18,538
(171,590)
(116,091)
566,354
514,343
$ 628,229
$ 571,756
34
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Purchased in-process research and development
Provision for doubtful accounts
Share-based compensation expense
Deferred income tax expense (benefit)
Non-cash foreign exchange gain
Loss on disposal of property, plant and equipment
Impairment of property, plant and equipment
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses, income taxes payable and other liabilities
Year Ended September 30,
2011
2010
2009
$ 51,662
$ 49,458
$ 11,187
23,992
—
(18)
12,646
4,934
(212)
140
198
(723)
6,623
(2,816)
(658)
(1,021)
(1,181)
24,994
—
(113)
11,643
(2,150)
(498)
107
158
92
(1,985)
(5,715)
(6,021)
1,555
16,860
24,832
1,410
856
12,802
(2,064)
(2,731)
235
1,245
938
(8,519)
8,084
4,889
(464)
(8,003)
Net cash provided by operating activities
93,566
88,385
44,697
Cash flows from investing activities:
Additions to property, plant and equipment
Proceeds from the sale of property, plant and equipment
Acquisition of business, net of cash acquired
Purchase of intangible assets
Proceeds from the sale of investments
Net cash used in investing activities
Cash flows from financing activities:
Repurchases of common stock
Net proceeds from issuance of stock
Tax benefits associated with the share-based compensation expense
Principal payments under capital lease obligations
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplemental disclosure of non-cash investing and financing activities:
Purchases of property, plant and equipment in accrued liabilities and
accounts payable at the end of period
Issuance of restricted stock
The accompanying notes are an integral part of these consolidated financial statements.
(28,052)
41
—
(200)
25
(11,657)
2
—
(315)
50
(8,493)
1
(60,520)
—
50
(28,186)
(11,920)
(68,962)
(55,499)
38,051
830
(1,296)
(25,764)
3,429
—
(1,210)
(17,914)
(23,545)
916
1,292
(336)
2,206
—
(1,129)
741
2,009
48,382
254,164
54,212
199,952
(21,515)
221,467
$ 302,546
$ 254,164
$ 199,952
$ 19,788
158
$
$ 29,174
257
$
$ 4,283
338
$
$ 6,322
$ 6,774
974
$
$ 4,985
429
$
$ 4,209
35
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Balance at September 30, 2008
Share-based compensation expense
Repurchases of common stock—other,
at cost
Exercise of stock options
Issuance of Cabot Microelectronics
restricted stock under deposit share plan
Issuance of Cabot Microelectronics stock
under Employee Stock Purchase Plan
Net income
Foreign currency translation adjustment
Minimum pension liability adjustment
Total comprehensive income
Common
Stock
Capital in
Excess of
Par
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Comprehensive
Income
(Net of tax)
$26
$ 198,022 $ 323,122
$ 3,054
12,802
680
170
1,357
11,187
10,275
361
$11,187
10,275
361
$21,823
Treasury
Stock
Total
$
(89,991) $ 434,233
12,802
(336)
(336)
680
170
1,357
21,823
Balance at September 30, 2009
$26
$ 213,031 $ 334,309
$ 13,690
$
(90,327) $ 470,729
Share-based compensation expense
Repurchases of common stock under
share repurchase plans, at cost
Repurchases of common stock—other,
at cost
Exercise of stock options
Issuance of Cabot Microelectronics
restricted stock under deposit share plan
Issuance of Cabot Microelectronics stock
under Employee Stock Purchase Plan
Net income
Foreign currency translation adjustment
Minimum pension liability adjustment
Total comprehensive income
11,643
2,283
45
1,101
49,458
4,580
268
$49,458
4,580
268
$54,306
11,643
(24,998)
(24,998)
(766)
(766)
2,283
45
1,101
54,306
Balance at September 30, 2010
$26
$ 228,103 $ 383,767
$ 18,538
$ (116,091) $ 514,343
Share-based compensation expense
Repurchases of common stock under
share repurchase plans, at cost
Repurchases of common stock—other,
at cost
Exercise of stock options
Issuance of Cabot Microelectronics
restricted stock under deposit share plan
Issuance of Cabot Microelectronics stock
under Employee Stock Purchase Plan
Deferred tax effect of long-term incentives
Tax deduction for the exercise of stock
options granted prior to the adoption
of ASC 718
Net income
Foreign currency translation adjustment
Minimum pension liability adjustment
Total comprehensive income
12,646
2
35,953
145
1,951
(700)
262
51,662
5,490
99
$51,662
5,490
99
$57,251
12,646
(54,106)
(54,106)
(1,393)
(1,393)
35,955
145
1,951
(700)
262
57,251
Balance at September 30, 2011
$28
$ 278,360 $ 435,429
$24,127
$(171,590) $566,354
The accompanying notes are an integral part of these consolidated financial statements.
36
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Background and Basis of Presentation
Cabot Microelectronics Corporation (“Cabot Micro elec-
tronics”, “the Company”, “us”, “we” or “our”) supplies
high-performance polishing slurries and pads used in
the manufacture of advanced integrated circuit (IC)
devices within the semiconductor industry, in a process
called chemical mechanical planarization (CMP). CMP
polishes surfaces at an atomic level, thereby enabling IC
device manufacturers to produce smaller, faster and
more complex IC devices with fewer defects. We
develop, produce and sell CMP slurries for polishing
many of the conducting and insulating materials used in
IC devices, and also for polishing the disk substrates
and magnetic heads used in hard disk drives. We also
develop, manufacture and sell CMP polishing pads,
which are used in conjunction with slurries in the CMP
process. We also pursue other demanding surface mod-
ification applications through our Engineered Surface
Finishes (ESF) business where we believe we can lever-
age our expertise in CMP consumables for the semicon-
ductor industry to develop products for demanding
polishing applications in other industries.
The audited consolidated financial statements have been
prepared by us pursuant to the rules of the Securities
and Exchange Commission (SEC) and accounting
principles generally accepted in the United States of
America. We operate predominantly in one industry
segment—the development, manufacture, and sale of
CMP consumables.
Results of Operations
The results of operations for the fiscal year ended
September 30, 2011 include certain adjustments to
correct prior period amounts, which we have deter-
mined to be immaterial to the current period and the
prior periods to which they relate. Adjustments in fiscal
2011 listed below, the first four of which were made in
the first two quarters of the fiscal year, related to:
(1) $1,474 ($1,014, net of tax) in employer-paid fringe ben-
efits for required contributions to our 401(k) Plan,
Supplemental Employee Retirement Plan, and non-
United States statutory pension plans as a result of our
annual payment pursuant to our fiscal 2010 annual
incentive cash bonus program (AIP); (2) income tax
expense of $671 recorded for certain compensation in
fiscal 2008 through 2010 for which a previous tax benefit
should not have been recorded; (3) the reversal of a $497
deferred tax asset regarding certain share-based com-
pensation expense which is not subject to such tax
treatment; (4) our under-accrual of $290 ($199, net of tax)
for payments made pursuant to the AIP as a result of the
calculation of results against goals under the AIP; and
(5) other immaterial corrections to deferred tax assets
and liabilities that reduced our income tax expense by
$101. Collectively, these adjustments reduced net
income for fiscal 2011 by $2,280 and diluted earnings
per share by approximately $0.10.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts
of Cabot Microelectronics and its subsidiaries. All inter-
company transactions and balances between the com-
panies have been eliminated as of September 30, 2011.
Use of Estimates
The preparation of financial statements and related
disclosures in conformity with accounting principles
generally accepted in the United States of America
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 manage-
ment’s most difficult and subjective judgments include,
but are not limited to, those estimates related to bad
debt expense, warranty obligations, inventory valuation,
valuation and classification of auction rate securities,
impairment of long-lived assets and investments, busi-
ness combinations, goodwill, other intangible assets,
share-based compensation, income taxes and contin-
gencies. 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 esti-
mates and judgments routinely require adjustment.
Actual results may differ from these estimates under
different assumptions or conditions.
Cash, Cash Equivalents and Short-Term Investments
We consider investments in all highly liquid financial
instruments with original maturities of three months or
less to be cash equivalents. Short-term investments
include securities generally having maturities of 90 days
to one year. We did not own any securities that were
considered short-term as of September 30, 2011 or 2010.
See Note 4 for a more detailed discussion of other finan-
cial 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 allow-
ance for doubtful accounts for estimated losses resulting
from the potential inability of our customers to make
37
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 eco-
nomic conditions. Uncollectible account balances are
charged against the allowance when we believe that it is
probable that the receivable will not be recovered. See
Schedule II under Part IV, Item 15 of this Form 10-K for
more information on our allowance for doubtful accounts.
Concentration of Credit Risk
Financial instruments that subject us to concentrations
of credit risk consist principally of accounts receivable.
We perform ongoing credit evaluations of our customers’
financial conditions and generally do not require collateral
to secure accounts receivable. Our exposure to credit
risk associated with nonpayment is affected principally
by conditions or occurrences within the semiconductor
industry and global economy. We historically have not
experienced material losses relating to accounts receiv-
able from individual customers or groups of customers.
Customers who represented more than 10% of revenue
are as follows:
Taiwan Semiconductor
Manufacturing Co. (TSMC)
Samsung
United Microelectronics
Corporation (UMC)
*Denotes less than ten percent of total
Year Ended
September 30,
2011
2010
2009
17% 18%
10%
*
17%
*
*
11%
*
TSMC accounted for 12.9% and 13.6% of net accounts
receivable at September 30, 2011 and 2010, respectively.
Samsung accounted for 11.4% of net accounts receiv-
able at September 30, 2011. UMC accounted for 7.1%
and 9.2% of net accounts receivable at September 30,
2011 and 2010, 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. The fair
value of our long-term auction rate securities (ARS) is
determined through discounted cash flow analyses. See
Note 4 for a more detailed discussion of the fair value of
financial instruments.
Inventories
Inventories are stated at the lower of cost, determined
on the first-in, first-out (FIFO) basis, or market. Finished
goods and work in process inventories include material,
labor and manufacturing overhead costs. We regularly
review and write down the value of inventory as required
for estimated obsolescence or unmarketability. An
inventory reserve is maintained based upon a historical
percentage of actual inventories written off applied
against inventory value at the end of the period, adjusted
for known conditions and circumstances.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost.
Depreciation is based on the following estimated useful
lives of the assets using the straight-line method:
Buildings
Machinery and equipment
Furniture and fixtures
Information systems
Assets under capital leases
15–25 years
3–10 years
5–10 years
3–5 years
Term of lease or
estimated useful life
Expenditures for repairs and maintenance are charged
to expense as incurred. Expenditures for major renewals
and betterments are capitalized and depreciated over
the remaining useful lives. As assets are retired or sold,
the related cost and accumulated depreciation are
removed from the accounts and any resulting gain or
loss is included in the results of operations. We capital-
ize the costs related to the design and development of
software used for internal purposes.
Impairment of Long-Lived Assets
Reviews are regularly performed to determine whether
facts and circumstances exist that indicate the carrying
amount of assets may not be recoverable or the useful
life is shorter than originally estimated. Asset recover-
ability assessment begins by comparing the projected
undiscounted cash flows associated with the related
asset or group of assets over their remaining lives against
their respective carrying amounts. Impairment, if any, is
based on the excess of the carrying amount over the fair
value of those assets. If assets are determined to be
recoverable, but their useful lives are shorter than origi-
nally estimated, the net book value of the asset is depre-
ciated over the newly determined remaining useful life.
Goodwill and Intangible Assets
We amortize intangible assets with finite lives over their
estimated useful lives, which range from two to ten and
one-half years. Intangible assets with finite lives are
reviewed for impairment using a process similar to that
used to evaluate other long-lived assets. Goodwill and
indefinite-lived intangible assets are not amortized and
are tested annually in the fourth fiscal quarter or more
frequently if indicators of potential impairment exist,
using a fair-value-based approach. The recoverability of
goodwill is measured at the reporting unit level, which is
defined as either an operating segment or one level
below an operating segment, referred to as a compo-
nent. A component is a reporting unit when the compo-
nent constitutes a business for which discreet financial
information is available and segment management reg-
ularly reviews the operating results of the component.
Components may be combined into one reporting unit
38
when they have similar economic characteristics. We
had three reporting units to which we allocated good-
will and intangible assets as of September 30, 2011.
Goodwill impairment testing requires a comparison of
the fair value of each reporting unit to the carrying
value. If the carrying value exceeds fair value, goodwill is
considered impaired. The amount of the impairment is
the difference between the carrying value of goodwill
and the “implied” fair value. The fair value of the report-
ing unit may be determined using a discounted cash
flow analysis of our projected future results. As discussed
later in this Note 2 under the heading “Effects of Recent
Accounting Pronouncements”, an entity now has the
option to assess qualitative factors to determine if the
two-step impairment test must be performed. We elected
this option in fiscal 2011 when we performed our annual
impairment review of goodwill. The recoverability of
indefinite-lived intangible assets is measured using the
royalty savings method, which requires a comparison
between the fair value of the discounted royalty savings
and the carrying value of the assets. We determined
that goodwill and other intangible assets were not
impaired as of September 30, 2011.
Warranty Reserve
We maintain a warranty reserve that reflects manage-
ment’s best estimate of the cost to replace product that
does not meet customers’ specifications and performance
requirements. The warranty reserve is based upon a his-
torical product return rate, adjusted for any specific
known conditions or circumstances. Adjustments to the
warranty reserve are recorded in cost of goods sold.
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 oper-
ations are translated using exchange rates in effect at
the end of the year, and revenue and costs are trans-
lated using weighted-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, pri-
marily the Japanese yen and New Taiwan dollar. Our
exposure to foreign currency exchange risks has not
been significant because a large portion of our business
is denominated in U.S. dollars. However, there has been
a significant weakening of the U.S. dollar against the
Japanese yen over the past 24 months, which has had
some negative impact on our results of operations. As
noted in the Overview section of Management’s
Discussion and Analysis of Financial Condition and
Results of Operations, the negative effects of foreign
exchange rate changes, primarily related to the Japanese
yen, accounted for an approximate 1.5 percentage point
decline in our gross profit margin in fiscal 2011 com-
pared to fiscal 2010. Periodically we enter into forward
foreign exchange contracts in an effort to mitigate the
risks associated with currency fluctuations on certain
foreign currency balance sheet exposures. Our foreign
exchange contracts do not qualify for hedge accounting
under the accounting rules for derivative instruments.
See Note 10 for a more detailed discussion of derivative
financial instruments.
Intercompany Loan Accounting
We maintain intercompany loan agreements with our
wholly-owned subsidiary, Nihon Cabot Microelectronics
K.K. (“the K.K.”), under which we provided funds to the
K.K. to finance the purchase of certain assets from our
former Japanese branch at the time of the establishment
of this subsidiary, for the purchase of land adjacent to
our Geino, Japan, facility, for the construction of our Asia
Pacific technology center, and for the purchase of a 300
millimeter polishing tool and related metrology equip-
ment, all of which are part of the K.K., as well as for gen-
eral business purposes. Since settlement of the notes is
expected in the foreseeable future, and our subsidiary
has been consistently making timely payments on the
loans, the loans are considered foreign-currency trans-
actions. Therefore the associated foreign exchange gains
and losses are recognized as other income or expense
rather than being deferred in the cumulative translation
account in other comprehensive income.
We also maintain intercompany loan agreements
between some of our wholly-owned foreign subsidiaries,
including Cabot Microelectronics Singapore Pte. Ltd.,
Epoch Material Co., Ltd. in Taiwan and Hanguk Cabot
Microelectronics, LLC in South Korea. These loans pro-
vided funds for the construction of our new research,
development and manufacturing facility in South Korea.
These loans are also considered foreign currency trans-
actions and are accounted for in the same manner as
our intercompany loans to the K.K.
Purchase Commitments
We have entered into unconditional purchase obligations,
which include noncancelable purchase commitments
and take-or-pay arrangements with suppliers. We review
our agreements and make an assessment of the likeli-
hood of a shortfall in purchases and determine if it is
necessary to record a liability.
Revenue Recognition
Revenue from CMP consumable products is recognized
when title is transferred to the customer, provided
acceptance and collectibility are reasonably assured.
Title transfer generally occurs upon shipment to the
customer or when inventory held on consignment is
consumed by the customer, subject to the terms and
conditions of the particular customer arrangement. We
have consignment agreements with a number of our
39
customers that require, at a minimum, monthly con-
sumption reports that enable us to record revenue and
inventory usage in the appropriate period.
We market our products through distributors in a few
areas of the world. We recognize revenue upon ship-
ment and when title is transferred to the distributor. We
do not have any arrangements with distributors that
include payment terms, rights of return, or rights of
exchange outside the normal course of business, or any
other significant matters that would impact the timing of
revenue recognition.
Within our Engineered Surface Finishes (ESF) business,
sales of equipment are recorded as revenue upon deliv-
ery and customer acceptance. Amounts allocated to
installation and training are deferred until those services
are provided and are not material.
Revenues are reported net of any value-added tax or
other such tax assessed by a governmental authority on
our revenue-producing activities.
Shipping and Handling
Costs related to shipping and handling are included in
cost of goods sold.
Research, Development and Technical
Research, development and technical costs are expensed
as incurred and consist primarily of staffing costs, mate-
rials and supplies, depreciation, utilities and other facili-
ties costs.
Income Taxes
Current income taxes are determined based on estimated
taxes payable or refundable on tax returns for the cur-
rent 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 liabili-
ties of a change in tax rates is recognized in income in
the period that includes the enactment date. Provisions
are made for both U.S. and any foreign deferred income
tax liability or benefit. We 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 posi-
tion. In fiscal 2011 and 2010, we elected to permanently
reinvest the earnings of certain of our foreign subsidiar-
ies outside the U.S. rather than repatriating the earnings
to the U.S. See Note 16 for additional information on
income taxes.
Share-Based Compensation
We record share-based compensation expense for all
share-based awards, including stock option grants,
restricted stock and restricted stock unit awards and
employee stock purchase plan purchases. We calculate
share-based compensation expense using the straight-line
approach based on awards ultimately expected to vest,
which requires the use of an estimated forfeiture rate.
Our estimated forfeiture rate is primarily based on his-
torical 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 option’s
expected term, the price volatility of the underlying stock,
the risk-free interest rate and the expected dividend
rate, if any. A small change in the underlying assump-
tions can have a relatively large effect on the estimated
valuation. We estimate the expected volatility of our
stock 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 the simplified method, due to
our limited amount of historical option exercise data,
and we add a slight premium to this expected term for
employees who would meet the definition of retirement
eligible pursuant to the terms of their grant agreements
during the contractual term of the grant. The simplified
method uses an average of the vesting term and the
contractual term of the option to calculate the expected
term. The risk-free rate is derived from the U.S. Treasury
yield curve in effect at the time of grant.
The fair value of our restricted stock and restricted stock
unit awards represents the closing price of our common
stock on the date of award.
For additional information regarding our share-based
compensation plans, refer to Note 12.
Earnings Per Share
Basic earnings per share (EPS) is calculated by dividing
net income available to common stockholders by the
weighted-average number of common shares outstand-
ing during the period. Diluted EPS is calculated by using
the weighted-average number of common shares out-
standing during the period increased to include the
weighted-average dilutive effect of “in-the-money”
stock options and unvested restricted stock shares using
the treasury stock method.
Comprehensive Income
Comprehensive income primarily differs from net income
due to foreign currency translation adjustments.
Effects of Recent Accounting Pronouncements
In October 2010, we adopted new accounting standards
regarding the recognition of a controlling financial inter-
est in a variable interest entity (VIE). The primary benefi-
ciary of a VIE is defined as the enterprise that has both:
1) the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance;
and 2) the obligation to absorb losses of the entity that
40
could potentially be significant to the VIE or the right to
receive benefits from the entity that could potentially be
significant to the VIE. The new standards also require
ongoing reassessments of whether an enterprise is the
primary beneficiary of a VIE. The adoption of these new
standards did not have any impact on our results of
operations, financial position or cash flows as we do not
currently have any interest or arrangements that are
considered variable interest entities.
In October 2010, we adopted new accounting standards
regarding the recognition of revenue for multiple deliv-
erable revenue arrangements. The new standards modify
the fair value requirements regarding the recognition of
revenue under multiple deliverable arrangements by
allowing the use of the best estimate of selling price in
addition to vendor-specific objective evidence (VSOE)
and third-party evidence (TPE) for determining the sell-
ing price of a deliverable. A vendor is now required to
use its best estimate of the selling price when VSOE or
TPE of the selling price cannot be determined. In addi-
tion, the residual method of allocating arrangement
consideration is no longer permitted. The adoption of
these new standards did not have a material effect on
our results of operations, financial position or cash flows.
In October 2010, we adopted new accounting standards
regarding revenue arrangements that include software
elements. The guidance in these new standards modifies
the existing accounting rules regarding the recognition
of revenue from the sale of software to exclude: (a) non-
software components of tangible products; and (b) soft-
ware components of tangible products that are sold,
licensed or leased with tangible products when the soft-
ware components and non-software components of the
tangible product function together to deliver the tangi-
ble product’s essential functionality. The adoption of
these new standards did not have a material effect on
our results of operations, financial position or cash flows.
In January 2010, the FASB issued ASU No. 2010-06, “Fair
Value Measurements and Disclosures (Topic 820)—
Improving Disclosures about Fair Value Measurements”
(ASU 2010-06). ASU 2010-06 provides amendments to
the rules regarding the disclosure of fair value measure-
ments and clarifies the language in certain existing
disclosures. New disclosures include a discussion of the
transfers in and out of Level 1 and 2 measurements as well
as a reconciliation of gross activity for Level 3 measure-
ments. ASU 2010-06 clarifies the disclosures an entity
must make regarding inputs and valuation techniques
used in fair value measurements. The ASU also clarifies
that an entity should provide fair value disclosures for each
class of assets and liabilities. ASU 2010-06 is effective
for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about the
reconciliation of Level 3 measurements which are effec-
tive for fiscal years beginning after December 15, 2010.
The adoption of the provisions relating to Level 1 and
Level 2 measurements did not have a material impact on
our results of operations, financial position or cash flows.
Based on our current Level 3 fair value measurements,
we believe that the adoption of the provisions related to
Level 3 measurements will not have a material impact on
the disclosures in our financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value
Measurement (Topic 820)—Amendments to Achieve
Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs” (ASU 2011-04).
The amendments in ASU 2011-04 change some of the
wording used to describe certain U.S. GAAP require-
ments for measuring fair value and disclosing informa-
tion about fair value measurements. Some of the
amendments clarify the FASB’s intent about the applica-
tion of existing fair value measurement requirements
and other amendments change a particular principle or
requirement for measuring fair value or for disclosing
information about fair value measurements. ASU 2011-04
is effective for interim and annual periods beginning
after December 15, 2011. We believe that the adoption
of ASU 2011-04 will not have a material impact on the
fair value measurements and their related disclosures in
our financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
“Com pre hensive Income (Topic 220)—Presentation of
Comprehensive Income” (ASU 2011-05). The provisions
of ASU 2011-05 require an entity to present the total of
comprehensive income, the components of net income,
and the components of other comprehensive income
either in a single continuous statement of comprehensive
income or in two separate but consecutive statements.
If two separate statements are presented, the statement
of other comprehensive income should immediately fol-
low the statement of net income. ASU 2011-05 is effective
for fiscal years, and interim periods within those years,
beginning after December 15, 2011. Early adoption of
these provisions is permitted and will be applied retro-
spectively. The adoption of ASU 2011-05 will change the
way we present comprehensive income as current U.S.
GAAP permits an annual presentation of comprehen-
sive income within the statement of equity and quarterly
presentation of comprehensive income within the foot-
notes to the financial statements. We expect to present
comprehensive income in a separate statement immedi-
ately following the statement of net income beginning
in our fiscal quarter ending March 31, 2012.
September 2011, the FASB issued ASU No. 2011-08,
“Intangibles-Goodwill and Other (Topic 350)—Testing
Goodwill for Impairment” (ASU 2011-08). The provisions
of ASU 2011-08 provide an entity with the option to assess
qualitative factors to determine whether the existence
of events or circumstances leads to the determination
that it is more-likely-than-not that the fair value of a
41
reporting unit is less than its carrying amount. This qual-
itative assessment is referred to as a “step zero”
approach. If, based on the review of the qualitative fac-
tors, an entity determines it is not more-likely-than-not
that the fair value of a reporting unit is less than its car-
rying value, the entity may skip the two-step impairment
test required by prior accounting guidance. If an entity
determines otherwise, the first step (“step one”) of the
two-step impairment test is required. This new account-
ing guidance also gives the entity the option to bypass
“step zero” and proceed directly to “step one”; an entity
may resume performing “step zero” in any subsequent
period. ASU 2011-08 is effective for fiscal years begin-
ning after December 15, 2011, with early adoption per-
mitted if the financial statements for the most recent
annual or interim period have not yet been issued. We
have chosen to early adopt these new accounting provi-
sions effective with our goodwill impairment review dur-
ing the fourth quarter of fiscal 2011. We determined,
based upon our qualitative assessment, that “step one”
was not required as there were no indications that the
fair value of our reporting units was less than the carry-
ing value. See Note 7 for a more detailed discussion of
our goodwill and intangible assets.
3. Business Combinations
All business combinations have been accounted for
under the purchase method of accounting. Accordingly,
the assets and liabilities of the acquired entities are
recorded at their estimated fair values at the date of
acquisition. Goodwill represents the excess of the pur-
chase price over the fair value of net assets and amounts
assigned to identifiable intangible assets. Purchased
in-process research and development (IPR&D), for which
technological feasibility has not yet been established
and no future alternative uses exist, has been expensed
immediately. In December 2007, the FASB issued new
standards for the accounting for business combinations.
The new standards retain the purchase method of
accounting for acquisitions, but require a number of
changes, including changes in the way assets and liabili-
ties are recognized in purchase accounting. They also
change the recognition of assets acquired and liabilities
assumed arising from contingencies, require the capital-
ization of IPR&D at fair value, and require acquisition-
related costs to be charged to expense as incurred. The
new standards were effective for us October 1, 2009 and
will apply prospectively to business combinations com-
pleted on or after that date.
On February 27, 2009, we completed the acquisition of
Epoch Material Co., Ltd. (Epoch), which previously was a
consolidated subsidiary of Eternal Chemical Co., Ltd.
(Eternal). Epoch is a Taiwan-based company specializing
primarily in the development, manufacture and sale of
copper CMP consumables. We paid $59,391 to obtain
90% of Epoch’s stock, plus $728 of transaction costs,
from our available cash balance. We paid an additional
$6,600 from an escrow account which was held in Taiwan
to Eternal in August 2010 to acquire the remaining 10%
of Epoch’s stock. During this interim period, Eternal
held the remaining 10% ownership interest in Epoch.
However, Eternal waived rights to any interest in the
earnings of Epoch during the interim period, including
any associated dividends. Consequently, we have
recorded 100% of Epoch’s results of operations from
February 27, 2009 through the end of our fiscal 2011 in
our Consolidated Statement of Income, rather than
recording any noncontrolling interest in Epoch.
The purchase price for Epoch was allocated to tangible
assets, liabilities assumed, identified intangible assets
acquired, as well as IPR&D, based on our estimation of
their fair values. The excess of the purchase price over
the aggregate fair values was recorded as goodwill and
is generally fully deductible for tax purposes. The follow-
ing table summarizes the final purchase price allocation.
Current assets
Long-term assets
In-process research and development
Identified intangible assets
Goodwill
Total assets acquired
Total liabilities assumed
Net assets acquired
$11,453
13,965
1,410
11,510
29,877
68,215
1,496
$66,719
The following unaudited pro forma consolidated results
of operations have been prepared as if the acquisition
of Epoch had occurred on October 1, 2008:
Revenues
Net income
Net income per share:
Basic
Diluted
Fiscal Year Ended
September 30,
2009
$296,120
$ 10,205
$ 0.44
$ 0.44
The unaudited pro forma consolidated results of opera-
tions do not purport to be indicative of the results that
would have been achieved if the acquisition had actually
occurred as of the dates indicated, or of those results
that may be achieved in the future. The unaudited pro
forma consolidated results of operations include adjust-
ments to net income to give effect to: expensing of
IPR&D on October 1, 2008; amortization of intangible
assets acquired; depreciation of property, plant and
equipment acquired; and, income taxes.
42
4. Fair Value of Financial Instruments
On October 1, 2009, we adopted the accounting provi-
sions that relate to the fair value of non-financial assets
and non-financial liabilities. We did not elect the fair value
options for any non-financial assets or non-financial lia-
bilities that were not previously required to be measured
at fair value under other generally accepted accounting
principles. The adoption of these provisions did not
have a material impact on our results of operations,
financial position or cash flows.
Fair value is defined as the price that would be received
from the sale of an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between
market participants on the measurement date. The
FASB established a three-level hierarchy for disclosure
based on the extent and level of judgment used to esti-
mate 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 inac-
tive 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 tables present financial assets that we meas-
ured at fair value on a recurring basis at September 30,
2011 and 2010. As permitted under the relevant stan-
dards, we have chosen to not measure any of our liabili-
ties at fair value as we believe our liabilities approximate
their fair value due to their short-term, highly liquid
characteristics. We have classified the following assets
in accordance with the fair value hierarchy set forth in
the applicable standards. In instances where the inputs
used to measure the fair value of an asset fall into more
than one level of the hierarchy, we have classified them
based on the lowest level input that is significant to the
determination of the fair value.
September 30, 2011
Level 1
Level 2
Level 3
Total Fair
Value
Cash and cash
equivalents
Auction rate
securities (ARS)
Other long-term
investments
$ 302,546
$— $ — $302,546
—
827
—
—
8,041
8,041
—
827
Total
$ 303,373
$— $ 8,041 $311,414
September 30, 2010
Level 1
Level 2
Level 3
Total Fair
Value
Cash and cash
equivalents
Auction rate
$ 254,164
$— $ — $ 254,164
securities (ARS)
—
—
8,066
8,066
Total
$ 254,164
$— $ 8,066
$ 262,230
Our cash and cash equivalents consist of various bank
accounts used to support our operations and invest-
ments in institutional money-market funds which are
traded in active markets. The ARS and other long-term
investments are included in other long-term assets on
our Consolidated Balance Sheet. The fair value of our
long-term ARS is determined through two discounted
cash flow analyses, one using a discount rate based on a
market index comprised of tax exempt variable rate
demand obligations and one using a discount rate based
on the LIBOR swap curve, adding a risk factor to reflect
current liquidity issues in the ARS market. Our other
long-term investments represent the fair value of invest-
ments under the Cabot Microelectronics Supplemental
Employee Retirement Plan (SERP), which is a nonquali-
fied 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 partici-
pants, the SERP has been deemed a nonqualified plan.
Consequently, the Company owns the assets and the
related liability for disbursement until such time a par-
ticipant makes a qualifying withdrawal, and should have
recorded the assets and liability in our Consolidated
Balance Sheet in prior periods. As a result, during the
quarter ended March 31, 2011, we established a long-
term asset of $952 representing the fair value of SERP
investments held at March 31 and a corresponding
liability of $952 in other long-term liabilities on our
Consolidated Balance Sheet. The long-term asset and
long-term liability were adjusted to $827 in the fourth
quarter of fiscal 2011 to reflect their fair value as of
September 30, 2011.
We applied accounting standards regarding the classifi-
cation and valuation of financial instruments to the valu-
ation of our investment in ARS at September 30, 2011
and 2010. Our ARS investments at September 30, 2011
consisted of two tax exempt municipal debt securities
with a total par value of $8,275. The ARS market began
to experience illiquidity in early 2008, and this illiquidity
continues. Despite this lack of liquidity, there have been
no defaults of the underlying securities and interest
income on these holdings continues to be received on
scheduled interest payment dates. Our ARS, when pur-
chased, were generally issued by A-rated municipalities.
Although the credit ratings of both municipalities have
been downgraded since our original investment, the ARS
are credit enhanced with bond insurance and currently
carry a credit rating of AA+ by Standard and Poors.
Since an active market for ARS does not currently exist,
we determine the fair value of these investments using a
Level 3 discounted cash flow analysis and also consider
other factors such as the reduced liquidity in the ARS
market and nature of the insurance backing. Key inputs
to our discounted cash flow model include projected
43
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
Land
Buildings
Machinery and equipment
Furniture and fixtures
Information systems
Capital leases
Construction in progress
Total property, plant and
equipment
September 30,
2011
2010
$ 21,597
100,779
171,595
6,247
23,318
9,820
5,166
$ 20,381
86,965
156,653
5,969
19,290
9,820
3,624
338,522
302,702
Less: accumulated depreciation
and amortization of assets under
capital leases
(207,731)
(186,891)
Net property, plant and equipment
$ 130,791
$ 115,811
Depreciation expense, including amortization of assets
recorded under capital leases, was $21,271, $22,568 and
$22,310 for the years ended September 30, 2011, 2010
and 2009, respectively.
In fiscal 2009, we recorded $1,245 in impairment expense
primarily related to the decision to write-off certain
research and development equipment in accordance
with the applicable accounting standards for the impair-
ment and disposal of long-lived assets. Of this amount,
$22 and $1,223 was included in cost of goods sold and
research, development and technical expense, respec-
tively. Impairment expense for fiscal 2011 and 2010 was
not material.
7. Goodwill and Other Intangible Assets
Goodwill was $41,148 and $40,436 as of September 30,
2011 and 2010, respectively. The increase in goodwill
was due to foreign exchange fluctuations of the New
Taiwan dollar.
cash flows from interest and principal payments and the
weighted probabilities of improved liquidity or debt
refinancing by the issuer. We also incorporate certain
Level 2 market indices into the discounted cash flow
analysis, including published rates such as the LIBOR
rate, the LIBOR swap curve and a municipal swap index
published by the Securities Industry and Financial
Markets Association. The following table presents a
reconciliation of the activity in fiscal 2011 for fair value
measurements using level 3 inputs:
Balance as of September 30, 2010
Net sales of ARS
Balance as of September 30, 2011
$ 8,066
(25)
$ 8,041
Based on our fair value assessment, we determined that
one ARS continues to be impaired as of September 30,
2011. This security has a fair value of $3,091 (par value
$3,325). We assessed the impairment in accordance with
the applicable standards and determined that the
impairment was due to the lack of liquidity in the ARS
market rather than to credit risk. We have maintained
the $234 temporary impairment that we previously
recorded. We believe that this ARS is not permanently
impaired because in the event of default by the issuer,
we expect the insurance provider would pay interest
and principal following the original repayment schedule,
we successfully monetized at par value $25 of this secu-
rity during our fiscal quarter ended March 31, 2011 and
we do not intend to sell the security nor do we believe
we will be required to sell the security before the value
recovers, which may be at maturity. We determined that
the fair value of the other ARS was not impaired as of
September 30, 2011. In November 2011, the municipality
that issued our impaired ARS filed for bankruptcy pro-
tection. We considered these developments, in light of
the continued insurance backing, and have concluded
the impairment we have maintained remains adequate
and temporary. See Note 8 for more information on
these investments.
5. Inventories
Inventories consisted of the following:
Raw materials
Work in process
Finished goods
Total
September 30,
2011
2010
$26,217
4,964
24,947
$23,542
3,189
25,165
$56,128
$51,896
44
The components of other intangible assets are as follows:
September 30, 2011
September 30, 2010
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
Other intangible assets subject to amortization:
Product technology
Acquired patents and licenses
Trade secrets and know-how
Customer relationships, distribution rights and other
Total other intangible assets subject to amortization
Total other intangible assets not subject to amortization*
Total other intangible assets
$ 8,266
8,115
2,550
12,154
31,085
1,190
$32,275
$ 3,890
6,446
2,550
4,738
17,624
$17,624
$ 8,206
8,115
2,550
11,939
30,810
1,190
$32,000
$ 2,926
6,135
2,550
3,300
14,911
$14,911
*Total other intangible assets not subject to amortization primarily consist of trade names.
In fiscal 2011, other intangible assets increased by $275
due to foreign exchange fluctuations of the New Taiwan
dollar. In fiscal 2010, we acquired $515 in other intangible
assets and other intangible assets increased by $323 due
to foreign exchange fluctuations of the New Taiwan dollar.
Goodwill and indefinite lived intangible assets are tested
for impairment annually in the fourth fiscal quarter or
more frequently if indicators of potential impairment
exist, using a fair-value-based approach. The recover-
ability of goodwill is measured at the reporting unit
level, which is defined as either an operating segment
or one level below an operating segment. We have con-
sistently determined the fair value of our reporting units
using a discounted cash flow analysis (“step one”) of our
projected future results. As discussed in Note 2 under
the heading “Effects of Recent Accounting Pronounce-
ments”, effective September 30, 2011, we adopted new
accounting pronouncements related to our goodwill
impairment analysis, which allows an entity to perform a
“step zero” assessment of the fair value of their report-
ing units. In the fourth quarter of fiscal 2011, we used
this new guidance in our annual impairment analysis for
goodwill. The recoverability of indefinite lived intangible
assets is measured using the royalty savings method.
The use of discounted projected future results is based
on assumptions that are consistent with our estimates of
future growth within the strategic plan used to manage
the underlying business. Factors requiring significant
judgment include assumptions related to future growth
rates, discount factors, royalty rates and tax rates,
among others. Changes in economic and operating
conditions that occur after the annual impairment analy-
sis or an interim impairment analysis that impact these
assumptions may result in future impairment charges.
As a result of the review performed in the fourth quarter
of fiscal 2011, we determined that there was no impair-
ment of our goodwill and intangible assets as of
September 30, 2011.
Amortization expense was $2,720, $2,426 and $2,522 for
fiscal 2011, 2010 and 2009, respectively. Estimated future
amortization expense for the five succeeding fiscal years
is as follows:
Fiscal Year
2012
2013
2014
2015
2016
Estimated
Amortization
Expense
$2,627
2,460
2,417
2,378
1,968
8. Other Long-Term Assets
Other long-term assets consisted of the following:
Auction rate securities
Other long-term assets
Other long-term investments
Total
September 30,
2011
2010
$ 8,041
1,504
827
$ 8,066
1,281
—
$ 10,372
$ 9,347
As discussed in Note 4 of this Form 10-K, the two ARS
that we owned as of September 30, 2011 are classified
as long-term investments. The securities are credit
enhanced with bond insurance to an AA+ credit rating
and all interest payments continue to be received on a
timely basis. Although we believe these securities will
ultimately be collected in full, we believe that it is not
likely that we will be able to monetize the securities in
our next business cycle (which for us is generally one
year). We maintain a $234 pretax reduction ($151 net of
tax) in fair value on one of the ARS that we had first
recognized in fiscal 2008. We continue to believe this
decline in fair value is temporary based on: (1) the nature
of the underlying debt; (2) the presence of bond insur-
ance; (3) the fact that all interest payments have been
received; (4) our successful monetization of $25 of this
45
ARS during the quarter ended March 31, 2011; and
(5) our intention not to sell the security nor be required
to sell the security until the value recovers, which may be
at maturity, given our current cash position, our expected
future cash flow, and our unused debt capacity.
As discussed in Note 4 of this Form 10-K, we recorded a
long-term asset and a corresponding long-term liability
of $827 representing the fair value of our SERP invest-
ments as of September 30, 2011.
9. Accrued Expenses and Other
Current Liabilities
Accrued expenses and other current liabilities consisted
of the following:
Accrued compensation
Goods and services received,
not yet invoiced
Deferred revenue and
customer advances
Warranty accrual
Taxes, other than income taxes
Acquisition related
Other
Total
September 30,
2011
2010
$ 23,922
$ 25,752
3,457
4,359
2,420
384
808
—
2,113
303
375
1,162
—
2,562
$ 33,104
$ 34,513
The decrease in accrued compensation was primarily
due to the payment of our AIP earned in fiscal 2010,
partially offset by the accrual of our AIP related to fiscal
2011. The increase in deferred revenue and customer
advances was due to the timing of customer advances
and revenue not yet earned in our Engineered Surface
Finishes business.
10. Derivative Financial Instruments
Periodically we enter into forward foreign exchange
contracts in an effort to mitigate the risks associated
with currency fluctuations on certain foreign currency
balance sheet exposures. Our foreign exchange con-
tracts do not qualify for hedge accounting; therefore,
the gains and losses resulting from the impact of cur-
rency exchange rate movements on our forward foreign
exchange contracts are recognized as other income or
expense in the accompanying consolidated income
statements in the period in which the exchange rates
change. We do not use derivative financial instruments
for trading or speculative purposes. In addition, all deriv-
atives, whether designated in hedging relationships or
not, are required to be recorded on the balance sheet at
fair value. At September 30, 2011, we had one forward
foreign exchange contract selling Japanese Yen related
to intercompany notes with one of our subsidiaries in
Japan and for the purpose of hedging the risk associ-
ated with a net transactional exposure in Japanese Yen.
The fair value of our derivative instrument included in the Consolidated Balance Sheet, which was determined using
Level 1 inputs, was as follows:
Derivatives Not
Designated as
Hedging Instruments
Foreign exchange
contracts
Balance Sheet Location
Prepaid expenses and
other current assets
Accrued expenses and
other current liabilities
Asset Derivatives
Liability Derivatives
Fair Value at
September 30,
2011
Fair Value at
September 30,
2010
Fair Value at
September 30,
2011
Fair Value at
September 30,
2010
$48
$ —
$ 5
$—
$—
$—
$—
$—
The following table summarizes the effect of our derivative instrument on our Consolidated Statement of Income
for the fiscal years ended September 30, 2011, 2010 and 2009:
Derivatives Not Designated
as Hedging Instruments
Statement of Income Location
Gain (Loss) Recognized in Statement of Income
Fiscal Year Ended
September 30,
2011
September 30,
2010
September 30,
2009
Foreign exchange contracts
Other income (expense), net
$(806)
$(555)
$(2,573)
46
11. Revolving Credit Facility
We have an unsecured revolving credit facility of $50,000
with an option to increase the facility up to $80,000.
Pursuant to an amendment in October 2008, the agree-
ment extends through October 2011, with an option to
renew for two additional one-year terms. In November
2010, the scheduled termination date was extended by
one year through October 2012, and in August 2011, the
scheduled termination date was extended another year
through October 2013. Under this agreement, interest
accrues on any outstanding balance at either the lend-
ing institution’s base rate or the Eurodollar rate plus an
applicable margin. We also pay a non-use fee. Loans
under this facility are intended primarily for general cor-
porate purposes, including financing working capital,
capital expenditures and acquisitions. The credit agree-
ment also contains various covenants. No amounts are
currently outstanding under this credit facility and we
believe we are currently in compliance with its covenants.
12. Share-Based Compensation Plans
Equity Incentive Plan
In March 2004, our stockholders approved our Second
Amended and Restated Cabot Microelectronics Corpo-
ra tion 2000 Equity Incentive Plan (the “EIP”), as amended
and restated September 23, 2008, which is administered
by the Compensation Committee of the Board of
Directors and is intended to provide management with
the flexibility to attract, retain and reward our employ-
ees, directors, consultants and advisors. The EIP allows
for the granting of four types of equity incentive awards:
stock options, restricted stock, restricted stock units
and substitute awards. Substitute awards are those
awards that, in connection with an acquisition, may be
granted to employees, directors, consultants or advisors
of the acquired company, in substitution for equity
incentives held by them in the seller or the acquired
company. No substitute awards have been granted to
date. The EIP authorizes up to 9,500,000 shares of stock
to be granted thereunder, including up to 1,900,000
shares in the aggregate of restricted stock or restricted
stock units and up to 1,750,000 incentive stock options
(ISO). Shares issued under our share-based compensa-
tion plans are issued from new shares rather than from
treasury shares.
Non-qualified stock options issued under the EIP are
generally time-based and provide for a ten-year term,
with options generally vesting equally over a four-year
period, with first vesting on the first anniversary of the
award date. Beginning in March 2011, non-qualified
stock options granted to non-employee directors on an
annual basis vest 100% on the first anniversary of the
award date. Compensation expense related to our stock
option awards was $6,871, $7,081 and $9,507 in fiscal 2011,
2010 and 2009, respectively. For additional information
on our accounting for share-based compensation, see
Note 2 to the consolidated financial statements. Under
the EIP, employees and non-employees may also be
granted ISOs to purchase common stock at not less
than the fair value on the date of the grant. No ISOs
have been granted to date.
Under the EIP, employees and non-employees may be
awarded shares of restricted stock or restricted stock
units, which generally vest over a four-year period, with
first vesting on the anniversary of the grant date.
Beginning in March 2011, restricted stock units granted
to non-employee directors on an annual basis vest 100%
on the first anniversary of the award date. In general,
shares of restricted stock and restricted stock units may
not be sold, assigned, transferred, pledged, disposed of
or otherwise encumbered. Holders of restricted stock,
and restricted stock units, if specified in the award
agreements, have all the rights of stockholders, includ-
ing voting and dividend rights, subject to the above
restrictions, although the current holders of restricted
stock units do not have such rights. Restricted shares
under the EIP also may be purchased and placed “on
deposit” by executive officers pursuant to the 2001
Deposit Share Plan. Shares purchased under this
Deposit Share Plan receive a 50% match in restricted
shares (“Award Shares”). These Award Shares vest at the
end of a three-year period, and are subject to forfeiture
upon early withdrawal of the deposit shares.
Compensation expense related to our restricted stock
and restricted stock unit awards and restricted shares
matched at 50% pursuant to the Deposit Share Plan was
$5,184, $4,134 and $2,893 for fiscal 2011, 2010 and 2009,
respectively.
Employee Stock Purchase Plan
In March 2008, our stockholders approved our 2007
Cabot Microelectronics Employee Stock Purchase Plan
(the “ESPP”), which amended the ESPP for the primary
purpose of increasing the authorized shares of common
stock to be purchased under the ESPP from 475,000
designated shares to 975,000 shares. The ESPP allows all
full and certain part-time employees of Cabot Micro-
electronics and its subsidiaries to purchase shares of our
common stock through payroll deductions. Employees
can elect to have up to 10% of their annual earnings
withheld to purchase our stock, subject to a maximum
number of shares that a participant may purchase and a
maximum dollar expenditure in any six-month offering
period, and certain other criteria. The provisions of the
ESPP allow shares to be purchased at a price no less
than the lower of 85% of the closing price at the begin-
ning or end of each semi-annual stock purchase period.
Prior to January 1, 2009, the shares were purchased at
the maximum 15% discount. In conjunction with certain
cost reduction initiatives we implemented in the second
quarter of fiscal 2009, the ESPP was amended as of
47
The fair value of our share-based awards was estimated
using the Black-Scholes model with the following
weighted-average assumptions:
Stock Options
Weighted-average grant
date fair value
Expected term (in years)
Expected volatility
Risk-free rate of return
Dividend yield
ESPP
Weighted-average grant
date fair value
Expected term (in years)
Expected volatility
Risk-free rate of return
Dividend yield
Year Ended September 30,
2011
2010
2009
$16.49
6.28
$13.42
6.35
$11.63
6.50
36%
2.1%
—
39%
2.6%
—
50%
2.1%
—
$ 9.05
0.50
$ 7.45
0.50
$ 6.38
0.50
28%
0.2%
—
33%
0.3%
—
48%
1.2%
—
The Black-Scholes model is primarily used in estimating
the fair value of short-lived exchange traded options that
have no vesting restrictions and are fully transferable.
Because employee stock options and employee stock
purchases have certain characteristics that are signif i-
cantly different from traded options, and because changes
in the subjective assumptions can materially affect the
estimated value, our use of the Black-Scholes model for
estimating the fair value of stock options and employee
stock purchases may not provide an accurate measure.
Although the value of our stock options and employee
stock purchases are determined in accordance with appli-
cable accounting standards using an option-pricing model,
those values may not be indicative of the fair values
observed in a willing buyer/willing seller market transaction.
The fair value of our restricted stock and restricted stock
unit awards represents the closing price of our common
stock on the date of grant. Share-based compensation
expense related to restricted stock and restricted stock
unit awards is recorded net of expected forfeitures.
January 19, 2009 to suspend the 15% discount. Pursuant
to the amended ESPP, effective with the six-month
period beginning January 1, 2009, the ESPP shares were
purchased at a price equal to the lower of the closing
price at the beginning or end of each semi-annual offer-
ing period. In light of improved economic and industry
conditions, the ESPP was amended again as of January
1, 2010 to reinstate the 15% discount effective January 1,
2010. A total of 61,364, 38,050, and 57,815 shares were
issued under the ESPP during fiscal 2011, 2010 and 2009,
respectively. Compensation expense related to the
ESPP was $508, $360 and $324 in fiscal 2011, 2010 and
2009, respectively.
Directors’ Deferred Compensation Plan
The Directors’ Deferred Compensation Plan, as amended
and restated September 23, 2008, became effective in
March 2001 and applies only to our non-employee
directors. The cumulative number of shares deferred
under the plan was 47,530 and 45,572 as of September
30, 2011 and 2010, respectively. Compensation expense
related to our Directors’ Deferred Compensation Plan
was $83, $68 and $78 for fiscal 2011, 2010 and 2009,
respectively.
Accounting for Share-Based Compensation
We record share-based compensation expense for all
share-based awards, including stock option grants,
restricted stock and restricted stock unit awards and
employee stock purchase plan purchases. We calculate
share-based compensation expense using the straight-
line approach based on awards ultimately expected to
vest, which requires the use of an estimated forfeiture
rate. Our estimated forfeiture rate is primarily based on
historical experience, but may be revised in future peri-
ods if actual forfeitures differ from the estimate. We use
the Black-Scholes 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 and the risk-free interest rate. We estimate the
expected volatility of our stock options based on a com-
bination 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 the simplified method, due to our limited
amount of historical option exercise data, and we add a
slight premium to this expected term for employees
who meet the definition of retirement eligible pursuant
to their grants during the contractual term of the grant.
The simplified method uses an average of the vesting
term and the contractual term of the option to calculate
the expected term. The risk-free rate is derived from the
U.S. Treasury yield curve in effect at the time of grant.
48
Share-Based Compensation Expense
Total share-based compensation expense for the year
ended September 30, 2011, 2010 and 2009, is as follows:
Income statement classifications:
Cost of goods sold
Research, development
and technical
Selling and marketing
General and administrative
Tax benefit
Total share-based com-
pensation expense,
net of tax
Year Ended
September 30,
2011
2010
2009
$ 1,221 $ 986
$ 982
1,060
1,124
9,241
(4,060)
908
1,025
8,724
(4,145)
1,079
1,207
9,534
(4,574)
$ 8,586 $ 7,498
$ 8,228
The costs presented in the preceding table for share-
based compensation expense may not be representa-
tive of the total effects on reported income for future
years. Factors that may impact future years include, but
are not limited to, changes to our historical approaches
to long-term incentives such as described above, the
timing and number of future grants of share-based
awards, the vesting period and contractual term of
share-based awards and types of equity awards granted.
Further, share-based compensation may be impacted
by changes in the fair value of future awards through
variables such as fluctuations in and volatility of our
stock price, as well as changes in employee exercise
behavior and forfeiture rates.
Our non-employee directors received their annual equity
award in March 2011. The award agreements provide for
immediate vesting of the award at the time of termina-
tion of service for any reason other than by reason of
Cause, Death, Disability or a Change in Control, as
defined in the Cabot Microelectronics Corporation 2000
Equity Incentive Plan, if at such time the non-employee
director has completed an equivalent of at least two full
terms as a director of the Company, as defined in the
Company’s bylaws. Five of the Company’s non-employee
directors had completed at least two full terms of service
as of the date of the March 2011 award. Consequently,
the requisite service period for the award has already
been satisfied and we recorded the fair value of $1,010
of the awards to these five directors to share-based
com pensation expense in the fiscal quarter ended
March 31, 2011 rather than recording that expense
over the one-year vesting period stated in the award
agreement.
Stock Option Activity
A summary of stock option activity under the EIP as of September 30, 2011, and changes during the fiscal 2011 are
presented below:
Stock
Options
Weighted-Average
Exercise Price
Weighted-Average
Remaining Contractual
Term (in years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at September 30, 2010
Granted
Exercised
Forfeited or canceled
Outstanding at September 30, 2011
Exercisable at September 30, 2011
Expected to vest at September 30, 2011
4,732,591
466,362
(1,085,965)
(162,451)
3,950,537
2,856,861
968,710
$ 37.94
42.18
33.11
43.77
$39.52
$41.51
$34.81
4.7
3.3
8.3
$7,497
$3,707
$3,130
The aggregate intrinsic value in the table above repre-
sents the total pretax intrinsic value (i.e., for all in-the-
money stock options, the difference between our closing
stock price of $34.39 on the last trading day of fiscal
2011 and the exercise price, multiplied by the number of
shares) that would have been received by the option
holders had all option holders exercised their options
on the last trading day of fiscal 2011. The total intrinsic
value of options exercised was $13,135, $492 and $68 for
fiscal 2011, 2010 and 2009, respectively.
49
The total cash received from options exercised was
$35,955, $2,283 and $680 for fiscal 2011, 2010 and 2009,
respectively. The actual tax benefit realized for the tax
deductions from options exercised was $4,401, $175 and
$24 for fiscal 2011, 2010 and 2009, respectively. The total
fair value of stock options vested during fiscal years
2011, 2010 and 2009 was $6,321, $8,494 and $12,560,
respectively. As of September 30, 2011, there was $9,169
of total unrecognized share-based compensation
expense related to unvested stock options under the
EIP. That cost is expected to be recognized over a
weighted-average period of 2.5 years.
Restricted Stock
A summary of the status of the restricted stock awards
and restricted stock unit awards outstanding under the
EIP as of September 30, 2011, and changes during fiscal
2011, are presented below:
to 60% of their eligible compensation. All amounts con-
tributed by participants and earnings on these contribu-
tions are fully vested at all times. The 401(k) Plan provides
for matching and fixed non-elective contributions by the
Company. Under the 401(k) Plan, the Company will
match 100% of the first four percent of the participant’s
eligible compensation and 50% of the next two percent
of the participant’s eligible compensation that is con-
tributed, subject to limitations required by government
regulations. Under the 401(k) Plan, all U.S. employees,
even those who do not contribute to the 401(k) Plan,
receive a contribution by the Company in an amount
equal to four percent of eligible compensation, and thus
are participants in the 401(k) Plan. Participants are 100%
vested in all Company contributions at all times. The
Company’s expense for the 401(k) Plan totaled $4,201,
$2,981 and $2,813 for the fiscal years ended September
30, 2011, 2010 and 2009, respectively.
Nonvested at
September 30, 2010
Granted
Vested
Forfeited
Nonvested at
September 30, 2011
Restricted
Stock Awards
and Units
Weighted-
Average Grant
Date Fair Value
377,460
160,677
(146,470)
(21,986)
$29.34
42.16
30.40
32.83
369,681
$34.29
14. Other Income (Expense), Net
Other income (expense), net, consisted of the following:
Interest income
Interest expense
Other expense
Year Ended
September 30,
2011
2010
2009
$ 238
(155)
(1,556)
$ 228
(233)
(729)
$ 1,057
(365)
(93)
As of September 30, 2011, there was $7,197 of total unrec-
ognized share-based compensation expense related to
nonvested restricted stock awards and restricted stock
units under the EIP. That cost is expected to be recog-
nized over a weighted-average period of 2.6 years. The
total fair values of restricted stock awards and restricted
stock units vested during fiscal years 2011, 2010 and
2009 were $4,452, $3,209 and $2,471, respectively.
13. Savings Plan
Effective in May 2000, we adopted the Cabot Micro-
elec tronics Corporation 401(k) Plan (the “401(k) Plan”),
which is a qualified defined contribution plan, covering
all eligible U.S. employees meeting certain minimum
age and eligibility requirements, as defined by the 401(k)
Plan. Participants may make elective contributions of up
Total other income (expense), net
$ (1,473)
$ (734)
$ 599
The decrease in other income (expense) in fiscal 2011
from fiscal 2010 was primarily due to foreign exchange
effects, primarily related to changes in the exchange
rate of the Japanese yen and the New Taiwan dollar to
the U.S. dollar, net of the gains and losses incurred on
forward foreign exchange contracts discussed in Note
10 of this Form 10-K. The decrease in other income
(expense) in fiscal 2010 from fiscal 2009 was primarily
due to lower interest income resulting from lower inter-
est rates earned on our cash balances and investments
compared to fiscal 2009, and the foreign exchange
effects, primarily related to changes in the exchange
rate of the Japanese yen to the U.S. dollar, net of the
gains and losses incurred on forward foreign exchange
contracts discussed in Note 10 of this Form 10-K.
50
15. Stockholders’ Equity
The following is a summary of our capital stock activity
over the past three years:
Number of Shares
September 30, 2008
Exercise of stock options
Restricted stock under EIP,
net of forfeitures
Restricted stock under
Deposit Share Plan
Common stock under ESPP
Repurchases of common stock
under share repurchase plans
September 30, 2009
Exercise of stock options
Restricted stock under EIP,
net of forfeitures
Restricted stock under Deposit
Share Plan, net of forfeitures
Common stock under ESPP
Repurchases of common stock
under share repurchase plans
Repurchases of common
stock—other
September 30, 2010
Exercise of stock options
Restricted stock under EIP,
net of forfeitures
Restricted stock under Deposit
Share Plan, net of forfeitures
Common stock under ESPP
Repurchases of common stock
under share repurchase plans
Repurchases of common
stock—other
Common
Stock
25,906,990
21,617
146,881
9,813
57,815
26,143,116
74,019
127,390
2,140
38,050
26,384,715
1,085,965
115,069
5,223
61,364
Treasury
Stock
2,683,809
14,425
2,698,234
723,184
24,651
3,446,069
1,235,668
33,840
September 30, 2011
27,652,336
4,715,577
Common Stock
Each share of common stock entitles the holder to one
vote on all matters submitted to a vote of Cabot Micro-
electronics’ stockholders. Common stockholders are
entitled to receive ratably the dividends, if any, as may
be declared by the Board of Directors. The number of
authorized shares of common stock is 200,000,000 shares.
Stockholder Rights Plan
In March 2000 the Board of Directors of Cabot Micro-
electronics approved a stock rights agreement and
declared a dividend distribution of one right to pur-
chase one one-thousandth of a share of Series A Junior
Participating Preferred Stock for each outstanding share
of common stock to stockholders of record on April 7,
2000. This rights agreement expired in April 2010
according to its terms.
Share Repurchases
In January 2008, our Board of Directors authorized a
share repurchase program for up to $75,000 of our out-
standing common stock. We repurchased 564,568
shares for $25,000 in fiscal 2011 under this program,
which was completed during the fiscal quarter ended
March 31, 2011. During fiscal 2010, we repurchased
723,184 shares of common stock under this program at
a cost of $24,998. We did not repurchase any shares
under the share repurchase program in fiscal 2009. In
November 2010, our Board of Directors authorized a
new share repurchase program for up to $125,000 of our
outstanding common stock, which became effective on
the authorization date. We repurchased 671,100 shares
for $29,105 during fiscal 2011 under this new program.
Shares are repurchased from time to time, depending
on market conditions, in open market transactions, at
management’s discretion. We fund share repurchases
from our existing cash balance. The program, which
became effective on the authorization date, may be
suspended or terminated at any time, at the Company’s
discretion. For additional information on share repur-
chases, see Part II, Item 5. “Market for Registrant’s
Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities”.
Separate from this share repurchase program, a total of
33,840, 24,651 and 14,425 shares were purchased during
fiscal 2011, 2010 and 2009, respectively, pursuant to the
terms of our EIP as shares withheld from award recipi-
ents to cover payroll taxes on the vesting of shares of
restricted stock granted under the EIP.
16. Income Taxes
Income before income taxes was as follows:
Domestic
Foreign
Total
Year Ended September 30,
2011
2010
2009
$ 54,886
24,026
$ 39,835
33,442
$ 2,909
13,713
$ 78,912
$ 73,277
$ 16,622
Taxes on income consisted of the following:
U.S. federal and state:
Current
Deferred
Total
Foreign:
Current
Deferred
Total
Year Ended September 30,
2011
2010
2009
$ 15,700
6,194
$ 15,372
(2,643)
$ 2,688
(2,163)
$ 21,894
$ 12,729
$
525
$ 6,616
(1,260)
$ 10,597
493
$ 4,811
99
5,356
11,090
4,910
Total U.S. and foreign
$ 27,250
$ 23,819
$ 5,435
51
The provision for income taxes at our effective tax rate
differed from the statutory rate as follows:
Federal statutory rate
U.S. benefits from research and
experimentation activities
State taxes, net of federal effect
Foreign income at other than
U.S. rates
Executive compensation
Share-based compensation
Domestic production deduction
Tax-exempt interest income
Other, net
Year Ended
September 30,
2011
2010
2009
35.0% 35.0% 35.0%
(2.0)
0.6
(2.8)
1.4
3.3
(0.8)
(0.1)
(0.1)
(0.6)
0.5
(2.7)
—
0.3
(0.1)
(0.1)
0.2
(5.0)
0.6
—
—
2.9
(0.2)
(1.9)
1.3
Provision for income taxes
34.5% 32.5% 32.7%
In fiscal 2011 and 2010, we elected to permanently rein-
vest the earnings of certain of our foreign subsidiaries
outside the U.S. rather than repatriating the earnings to
the U.S. We have not provided deferred taxes on approx-
imately $25.5 million of undistributed earnings of such
subsidiaries. These earnings could become subject to
additional income tax if they are remitted as dividends
to the U.S. parent company, loaned to the U.S. parent
company, or upon sale of subsidiary stock. This election
reduced our effective income tax rate by 3.0 and 2.7
percentage points in fiscal 2011 and 2010, respectively.
The increase in our effective tax rate in fiscal 2011 was
primarily due to a number of factors related to share-
based compensation expense, including tax impacts of
stock option exercises and the vesting of restricted
stock for certain employees, and taxable executive com-
pensation in excess of limits defined in section 162(m) of
the Internal Revenue Code. As discussed in footnote 1
of this 10-K under the heading “Results of Operations”,
income tax expense in fiscal 2011 included $671 related
to executive compensation in fiscal 2008 through 2010
and a $497 reversal of a deferred tax asset for certain
share-based compensation expense. These increases in
our effective tax rate were partially offset by the rein-
statement of the U.S. research and experimentation tax
credit in December 2010, which was retroactively effec-
tive as of January 1, 2010.
The accounting guidance regarding the uncertainty in
income taxes prescribes a threshold for the financial state-
ment recognition and measurement of tax positions taken
or expected to be taken on a tax return. Under these
standards, we may recognize the tax benefit of an uncer-
tain tax position only if it is more likely than not that the
tax position will be sustained by the taxing authorities,
based on the technical merits of the position.
The following table presents the changes in the balance
of gross unrecognized tax benefits during the last three
fiscal years:
Balance September 30, 2008
Additions for tax positions relating to the current
$ 316
fiscal year
Additions for tax positions relating to prior fiscal years
Settlements with taxing authorities
Lapse of statute of limitations
Balance September 30, 2009
Additions for tax positions relating to the current
fiscal year
Additions for tax positions relating to prior fiscal years
Settlements with taxing authorities
Lapse of statute of limitations
Balance September 30, 2010
Additions for tax positions relating to the current
fiscal year
Additions for tax positions relating to prior fiscal years
Settlements with taxing authorities
Lapse of statute of limitations
—
79
(10)
(136)
249
—
153
(28)
(201)
173
123
307
—
—
Balance September 30, 2011
$ 603
We recognize interest and penalties related to uncertain
tax positions as income tax expense in our financial state-
ments. Interest and penalties accrued on our Consolidated
Balance Sheet were $19 and $6 at September 30, 2011
and 2010, respectively, and interest and penalties
charged to expense were not material.
We believe the tax periods open to examination by the
U.S. federal government include fiscal years 2008 through
2010. We believe the tax periods open to examination
by U.S. state and local governments include fiscal years
2007 through 2010 and the tax periods open to exami-
nation by foreign jurisdictions include fiscal years 2004
through 2010. We do not anticipate a significant change
to the total amount of unrecognized tax benefits within
the next 12 months.
Significant components of deferred income taxes were
as follows:
Deferred tax assets:
Employee benefits
Inventory
Depreciation and amortization
Product warranty
Bad debt reserve
Share-based compensation expense
Other, net
September 30,
2011
2010
$ 3,246
2,886
—
137
387
12,184
2,189
$ 1,318
2,356
3,143
178
397
18,457
455
Total deferred tax assets
$ 21,029
$ 26,304
Deferred tax liabilities:
Translation adjustment
Depreciation and amortization
Other, net
$ 13,835
1,568
515
$ 10,839
3,881
Total deferred tax liabilities
$ 15,918
$ 14,720
52
17. Commitments and Contingencies
Legal Proceedings
While we are not involved in any legal proceedings that
we believe will have a material impact on our consoli-
dated financial position, results of operations or cash
flows, we periodically become a party to legal proceed-
ings in the ordinary course of business. For example,
from 2007 to 2011, we were involved in a legal action
against DuPont Air Products NanoMaterials LLC (DA
Nano), a CMP slurry competitor, regarding whether cer-
tain specific formulations of slurry products used for
tungsten CMP infringe certain CMP slurry patents that
we own, and the validity of those and other of our pat-
ents. All of the Cabot Microelectronics Corporation pat-
ents at issue in the case were found valid, but the
specific products at issue were found to not infringe the
asserted claims of these patents.
Product Warranties
We maintain a warranty reserve that reflects manage-
ment’s best estimate of the cost to replace product that
does not meet customers’ specifications and perfor-
mance requirements, and costs related to such replace-
ment. The warranty reserve is based upon a historical
product replacement rate, adjusted for any specific
known conditions or circumstances. Additions and
deductions to the warranty reserve are recorded in cost
of goods sold. Our warranty reserve requirements
changed during fiscal 2011 as follows:
Balance as of September 30, 2010
Reserve for product warranty during
the reporting period
Settlement of warranty
Balance as of September 30, 2011
$ 375
1,074
(1,065)
$ 384
Indemnification
In the normal course of business, we are a party to a
variety of agreements pursuant to which we may be
obligated to indemnify the other party with respect to
certain matters. Generally, these obligations arise in the
context of agreements entered into by us, under which
we customarily agree to hold the other party harmless
against losses arising from items such as a breach of
certain representations and covenants including title to
assets sold, certain intellectual property rights and cer-
tain environmental matters. These terms are common in
the industries in which we conduct business. In each of
these circumstances, payment by us is subject to certain
monetary and other limitations and is conditioned on
the other party making an adverse claim pursuant to the
procedures specified in the particular agreement, which
typically allow us to challenge the other party’s claims.
We evaluate estimated losses for such indemnifications
under the accounting standards related to contingen-
cies and guarantees. We consider such factors as the
degree of probability of an unfavorable outcome and
the ability to make a reasonable estimate of the amount
of loss. To date, we have not experienced material costs
as a result of such obligations and, as of September 30,
2011, have not recorded any liabilities related to such
indemnifications in our financial statements as we do
not believe the likelihood of such obligations is probable.
Lease Commitments
We lease certain vehicles, warehouse facilities, office
space, machinery and equipment under cancelable and
noncancelable leases, all of which expire within six years
from now and may be renewed by us. Lease commit-
ments also include certain costs associated with our pad
finishing operation located at Taiwan Semiconductor
Manufacturing Company, which are accounted for as an
operating lease which is currently scheduled to end in
August 2012. Rent expense under such arrangements
during fiscal 2011, 2010 and 2009 totaled $2,934, $2,480
and $1,883, respectively.
In December 2001 we entered into a fumed alumina
supply agreement with Cabot Corporation under which
we agreed to pay Cabot Corporation for the expansion
of a fumed alumina manufacturing facility in Tuscola,
Illinois. The arrangement for the facility has been treated
as a capital lease for accounting purposes and the pres-
ent value of the minimum quarterly payments resulted
in an initial $9,776 lease obligation and related leased
asset. The initial term of the agreement expired in
December 2006, but it was renewed for another five-
year term ending in December 2011.
53
Future minimum rental commitments under noncancel-
able leases as of September 30, 2011 are as follows:
Fiscal Year
2012
2013
2014
2015
2016
Thereafter
Amount related to interest
Capital lease obligation
Operating
Capital
$ 3,656
1,944
1,640
856
849
1,285
$10,230
$10
2
—
—
—
—
12
—
$12
Purchase Obligations
Purchase obligations include our take-or-pay arrange-
ments with suppliers, and purchase orders and other
obligations entered into in the normal course of business
regarding the purchase of goods and services.
We purchase fumed silica primarily under a fumed silica
supply agreement with Cabot Corporation, our former
parent company that is not a related party, that became
effective in January 2004, and was amended in September
2006 and in April 2008, the latter of which extended the
termination date of the agreement from December 2009
to December 2012 and also changed the pricing and
some other non-material terms of the agreement to the
benefit of both parties. We are generally obligated to
purchase fumed silica for at least 90% of our six-month
volume forecast for certain of our slurry products, to
purchase certain non-material minimum quantities every
six months, and to pay for the shortfall if we purchase
less than these amounts. We currently anticipate meet-
ing minimum forecasted purchase volume requirements.
We also operate under a fumed alumina supply agree-
ment with Cabot Corporation which runs through
December 2011, under which we are obligated to pay
certain fixed, capital and variable costs, which are no
longer material to our business. Purchase obligations
include $7,755 of contractual commitments for fumed
silica and fumed alumina under these contracts.
18. Earnings Per Share
The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator
and denominator of the basic and diluted earnings per share computations. Basic and diluted earnings per share
were calculated as follows:
Numerator:
Net Income
Denominator:
Weighted-average common shares
(Denominator for basic calculation)
Weighted-average effect of dilutive securities:
Share-based compensation
Diluted weighted-average common shares
(Denominator for diluted calculation)
Earnings per share:
Basic
Diluted
Year Ended September 30,
2011
2010
2009
$51,662
$49,458
$11,187
22,895,568
23,083,807
23,078,967
539,036
188,772
17,457
23,434,604
23,272,579
23,096,424
$ 2.26
$ 2.20
$ 2.14
$ 0.48
$ 2.13
$ 0.48
For the twelve months ended September 30, 2011, 2010, and 2009, approximately 1.3 million, 2.6 million and 3.9 million
shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings
per share because the exercise price of the options was greater than the average market price of our common stock
and, therefore, their inclusion would have been anti-dilutive.
54
The following table shows revenue generated by prod-
uct line in fiscal 2011, 2010 and 2009:
Revenue:
Tungsten slurries
Dielectric slurries
Copper slurries
Polishing pads
Data storage slurries
Engineered Surface
Finishes
Year Ended September 30,
2011
2010
2009
$ 164,098
121,543
76,285
31,045
27,786
$ 147,788
117,484
75,898
29,909
20,806
$ 111,364
85,761
49,311
17,704
15,532
24,685
16,316
11,700
Total
$ 445,442
$ 408,201
$ 291,372
19. Financial Information by Industry Segment,
Geographic Area and Product Line
We operate predominantly in one industry segment
—the development, manufacture, and sale of CMP
consumables.
Revenues are attributed to the United States and for-
eign regions based upon the customer location and not
the geographic location from which our products were
shipped. Financial information by geographic area was
as follows:
Revenue:
United States
Asia
Europe
Total
Property, plant and
equipment, net:
United States
Asia
Europe
Year Ended September 30,
2011
2010
2009
$ 61,540
356,074
27,828
$ 55,666
327,202
25,333
$ 46,781
227,142
17,449
$ 445,442
$ 408,201
$ 291,372
$ 50,503
80,280
8
$ 55,576
60,235
—
$ 62,462
60,319
1
Total
$ 130,791
$ 115,811
$ 122,782
The following table shows revenue from sales to cus-
tomers in foreign countries that accounted for more
than ten percent of our total revenue in fiscal 2011, 2010
and 2009:
Revenue:
Taiwan
Japan
South Korea
Singapore
Year Ended September 30,
2011
2010
2009
$ 132,089
57,889
56,321
47,441
$ 129,533
60,207
42,669
44,316
$ 92,023
44,307
30,873
*
*Denotes less than ten percent of total
The following table shows net property, plant and
equipment in foreign countries that accounted for more
than ten percent of our total net property, plant and
equipment in fiscal 2011, 2010 and 2009:
Property, plant and
equipment, net:
Japan
Taiwan
Year Ended September 30,
2011
2010
2009
$ 50,236
17,577
$ 42,225
17,542
$ 43,362
16,430
*Denotes less than ten percent of total
55
SELECTED QUARTERLY OPERATING RESULTS
(Unaudited and in thousands, except per share amounts)
The following table presents our unaudited financial information for the eight quarterly periods ended September 30,
2011. This unaudited financial information has been prepared in accordance with accounting principles generally
accepted in the United States of America, applied on a basis consistent with the annual audited financial statements
and in the opinion of management, include all necessary adjustments, which consist only of normal recurring adjust-
ments necessary to present fairly the financial results for the periods. The results for any quarter are not necessarily
indicative of results for any future period.
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research, development and technical
Selling and marketing
General and administrative
Total operating expenses
Operating income (loss)
Other income (expense), net
Income (loss) before income taxes
Provision (benefit) for income taxes
Sept. 30,
2011
June 30,
2011
March 31,
2011
Dec. 31,
2010
Sept. 30,
2010
June 30,
2010
March 31,
2010
Dec. 31,
2009
$ 109,731
58,814
$ 111,846
58,821
$ 109,660
56,927
$114,205
56,774
$ 110,318
56,590
$ 101,655
51,759
$98,556
49,091
$ 97,672
47,264
50,917
53,025
52,733
57,431
53,728
49,896
49,465
50,408
14,687
7,702
11,677
34,066
16,851
(873)
15,978
6,689
14,573
7,785
11,008
33,366
19,659
(311)
19,348
6,559
14,919
6,791
11,567
33,277
19,456
646
20,102
7,010
13,856
7,480
11,676
33,012
24,419
(935)
23,484
6,992
13,454
7,024
12,202
32,680
21,048
(527)
20,521
5,231
12,875
7,009
14,637
34,521
15,375
172
15,547
5,450
12,908
6,530
12,699
32,137
17,328
(440)
16,888
5,941
12,581
6,322
11,245
30,148
20,260
61
20,321
7,197
Net income (loss)
$ 9,289
$ 12,789
$ 13,092
$ 16,492
$ 15,290
$ 10,097
$10,947
$ 13,124
Basic earnings (loss) per share
$
0.41
$
0.55
$ 0.57
$
0.73
$
0.67
$
0.44
$ 0.47
$ 0.57
Weighted-average basic shares outstanding
22,816
23,119
23,032
22,710
22,821
23,143
23,263
23,167
Diluted earnings (loss) per share
$
0.40
$
0.54
$ 0.55
$
0.71
$
0.66
$
0.43
$ 0.47
$ 0.56
Weighted-average diluted shares outstanding
23,191
23,797
23,693
23,131
23,002
23,478
23,485
23,294
56
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activities in our allowance for doubtful accounts:
Allowance for Doubtful Accounts
Year ended:
September 30, 2011
September 30, 2010
September 30, 2009
Balance
at Beginning
of Year
Amounts
Charged to
Expenses
Deductions
and
Adjustments
Balance
at End
of Year
$1,121
1,277
403
$ (18)
(113)
856
$(13)
(43)
18
$1,090
1,121
1,277
We maintain a warranty reserve that reflects management’s best estimate of the cost to replace product that does
not meet customers’ specifications and performance requirements, and costs related to such replacement. The
warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or
circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Charges to
expenses and deductions, shown below, represent the net change required to maintain an appropriate reserve.
Warranty Reserves
Year ended:
September 30, 2011
September 30, 2010
September 30, 2009
Balance
at Beginning
of Year
Reserve for Product
Warranty During the
Reporting Period
Adjustments to
Pre-Existing
Warranty Reserve
Settlement
of Warranty
Balance
at End
of Year
$375
360
863
$1,074
1,161
1,067
$—
—
—
$(1,065)
(1,146)
(1,570)
$384
375
360
57
MANAGEMENT RESPONSIBILITY
The accompanying consolidated financial statements
were prepared by the Company in conformity with
accounting principles generally accepted in the United
States of America. The Company’s management is
responsible for the integrity of these statements and of
the underlying data, estimates and judgments.
The Company’s management establishes and maintains
a system of internal accounting controls designed to
provide reasonable assurance that its assets are safe-
guarded from loss or unauthorized use, transactions are
properly authorized and recorded, and that financial
records can be relied upon for the preparation of the
consolidated financial statements. This system includes
written policies and procedures, a code of business con-
duct and an organizational structure that provides for
appropriate division of responsibility and the training of
personnel. This system is monitored and evaluated on
an ongoing basis by management in conjunction with its
internal audit function.
The Company’s management assesses the effectiveness
of its internal control over financial reporting on an
annual basis. In making this assessment, management
uses the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control—Integrated Framework. Management acknowl-
edges, however, that all internal control systems, no
matter how well designed, have inherent limitations and
can provide only reasonable assurance with respect to
financial statement preparation and presentation. In
addition, the Company’s independent registered public
accounting firm evaluates the Company’s internal control
over financial reporting and performs such tests and other
procedures as it deems necessary to reach and express
an opinion on the fairness of the financial statements.
In addition, the Audit Committee of the Board of Directors
provides general oversight responsibility for the financial
statements. Composed entirely of Directors who are
independent and not employees of the Company, the
Committee meets periodically with the Company’s
management, internal auditors and the independent
registered public accounting firm to review the quality
of financial reporting and internal controls, as well as
results of auditing efforts. The internal auditors and
independent registered public accounting firm have full
and direct access to the Audit Committee, with and
without management present.
/s/ William P. Noglows
William P. Noglows
Chief Executive Officer
/s/ William S. Johnson
William S. Johnson
Chief Financial Officer
/s/ Thomas S. Roman
Thomas S. Roman
Principal Accounting Officer
58
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer
(CFO), has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended (“the Exchange Act”)), as of
September 30, 2011. Based on that evaluation, our CEO
and CFO have concluded that our disclosure controls and
procedures were effective to ensure that information
required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms,
and to ensure that such information is accumulated and
communicated to management, including the CEO and
CFO, as appropriate to allow timely decisions regarding
required disclosure.
While we believe the present design of our disclosure
controls and procedures is effective enough to make
known to our senior management in a timely fashion all
material information concerning our business, we intend
to continue to improve the design and effectiveness of
our disclosure controls and procedures to the extent
necessary in the future to provide our senior manage-
ment with timely access to such material information,
and to correct any deficiencies that we may discover in
the future, as appropriate.
Management’s Report on Internal Control Over
Financial Reporting
Our management is responsible for establishing and
main taining adequate internal control over financial
reporting for the Company. Internal control over finan-
cial reporting is defined in Rule 13a-15(f) or Rule 15d-15(f)
promulgated under the Securities Exchange Act of 1934
as a process designed by, or under the supervision of,
the Company’s CEO and CFO to provide reasonable
assurance regarding the reliability of our financial
reporting and the preparation of financial statements
for external purposes in accordance with generally
accepted accounting principles in the United States of
America. Internal control over financial reporting includes
policies and procedures that: pertain to the mainte-
nance of records that in reasonable detail accurately
and fairly reflect our transactions and dispositions of the
Company’s assets; provide reasonable assurance that
transactions are recorded as necessary for preparation
of our financial statements in accordance with generally
accepted accounting principles; provide reasonable
assurance that receipts and expenditures of Company
assets are made in accordance with management autho-
rization; and provide reasonable assurance that unauthor-
ized acquisition, use or disposition of Company assets
that could have a material effect on our financial state-
ments would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may
become inadequate because of changes in conditions,
or that the degree of compliance with the policies or
procedures may deteriorate.
Our management evaluated the effectiveness of our
internal control over financial reporting based on the
framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on this
evalu ation, our management concluded that the Com-
pany’s internal control over financial reporting was
effective as of September 30, 2011. The effectiveness
of the Company’s internal control over financial report-
ing as of September 30, 2011 has been audited by
PricewaterhouseCoopers LLP, an independent regis-
tered public accounting firm, as stated in their attesta-
tion report which appears under Item 8 of this Annual
Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over finan-
cial reporting that occurred during our most recent fiscal
quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over finan-
cial reporting.
Inherent Limitations on Effectiveness of Controls
Because of inherent limitations, our disclosure controls
or our internal control over financial reporting may not
prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objec-
tives of the control system are met. Further, the design
of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all con-
trol issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations
include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because
of a simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons,
by collusion of two or more people or by management
override of the controls. The design of any system of
59
controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving
its stated goals under all potential future conditions;
over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with
policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not
be detected.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and
Corporate Governance
The information required by Item 10 of Form 10-K with
respect to identification of directors, the existence of a
separately-designated standing audit committee, identi-
fication of members of such committee and identification
of an audit committee financial expert is incorporated
by reference from the information contained in the sec-
tions captioned “Election of Directors” and “Board
Structure and Compensation” in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be
held March 6, 2012 (the “Proxy Statement”). In addition,
for information with respect to the executive officers of
our Company, see “Executive Officers” at the end of
Part I of this Form 10-K and the section captioned “Section
16(a) Beneficial Ownership Reporting Compliance” in
the Proxy Statement. Information required by Item 405
of Regulation S-K is incorporated by reference from the
information contained in the section captioned “Section
16(a) Beneficial Ownership Reporting Compliance” in
the Proxy Statement.
We have adopted a code of business conduct for all of
our employees and directors, including our principal
executive officer, other executive officers, principal
financial officer and senior financial personnel. A copy of
our code of business conduct is available free of charge
on our Company website at www.cabotcmp.com. We
intend to post on our website any material changes to,
or waivers from our code of business conduct, if any,
within two days of any such event.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is
incorporated by reference from the information contained
in the section captioned “Executive Compen sation” in
the Proxy Statement.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
and Related Stockholder Matters
Equity Compensation Plan Information
The information required by Item 12 of Form 10-K is
incorporated by reference from the information con-
tained in the section captioned “Stock Ownership” in
the Proxy Statement.
Item 13. Certain Relationships and
Related Transactions and
Director Independence
The information required by Item 13 of Form 10-K is
incorporated by reference from the information con-
tained in the section captioned “Certain Relationships
and Related Transactions” in the Proxy Statement.
Item 14. Principal Accountant Fees
and Services
The information required by Item 14 of Form 10-K is
incorporated by reference from the information con-
tained in the section captioned “Fees of Independent
Auditors and Audit Committee Report” in the Proxy
Statement.
60
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following Financial Statements and Financial Statement Schedule are included in Item 8 herein:
1. Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2011, 2010 and 2009
Consolidated Balance Sheets at September 30, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2011, 2010 and 2009
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts
3. Exhibits—The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K:
Exhibit
Number
3.2 (14)
3.3 (1)
3.4 (2)
4.1 (2)
4.2 (3)
4.3 (4)
10.1 (15)
10.2 (20)
10.4 (19)
10.5 (19)
10.6 (20)
Description
Amended and Restated By-Laws of Cabot Microelectronics Corporation.
Form of Amended and Restated Certificate of Incorporation of Cabot Microelectronics Corporation.
Form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock.
Form of Cabot Microelectronics Corporation Common Stock Certificate.
Rights Agreement.
Amendment to Rights Agreement.
Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan, as
amended and restated September 23, 2008.*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan Non-Qualified Stock Option Grant Agreement (non-employee directors).*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan Non-Qualified Stock Option Grant Agreement (employees (including executive officers)).*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan Restricted Stock Award Agreement (employees (including executive officers)).*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan Restricted Stock Units Award Agreement (non-employee directors).*
10.15 (18) Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated
January 1, 2010.*
10.22 (18) Cabot Microelectronics Corporation 401(k) Plan, as amended.*
10.23 (15)
10.28 (15) Directors’ Deferred Compensation Plan, as amended September 23, 2008.*
10.29 (6)
Form of Amended and Restated Change in Control Severance Protection Agreement.**
Amended and Restated Credit Agreement dated November 24, 2003 among Cabot Microelectronics
Corporation, Various Financial Institutions and LaSalle Bank National Association, as Administrative
Agent, and National City Bank of Michigan/Illinois, as Syndication Agent.
10.30 (5)
10.31 (5)
Form of Deposit Share Agreement.***
Amendment No. 1 to Fumed Metal Oxide Agreement, between Cabot Microelectronics Corporation
and Cabot Corporation.+
10.32 (5)
10.33 (15) Adoption Agreement, as amended September 23, 2008, of Cabot Microelectronics Corporation Supple-
Fumed Alumina Supply Agreement.+
mental Employee Retirement Plan.*
10.34 (19) Code of Business Conduct.
10.36 (6)
10.37 (7)
10.38 (7)
10.39 (7)
Directors’ Cash Compensation Umbrella Program.*
Employment and Transition Agreement dated November 3, 2003.*
Employment Offer Letter dated November 2, 2003.*
Employment Offer Letter dated November 17, 2003.*
61
Exhibit
Number
Description
10.40 (8)
Amendment No. 2 to Fumed Metal Oxide Agreement, between Cabot Microelectronics Corporation
and Cabot Corporation.
10.41 (8)
Amendment No. 3 to Fumed Metal Oxide Agreement, between Cabot Microelectronics Corporation
and Cabot Corporation.
10.42 (8)
10.43 (8)
10.44 (9)
10.45 (9)
Fumed Silica Supply Agreement.+
General Release, Waiver and Covenant Not to Sue.*
Amendment as of January 17, 2005 to Four Grant Agreements for Non-Qualified Stock Option Awards
with Grant Dates of March 13, 2001, March 12, 2002, March 11, 2003 and March 9, 2004, respectively.*
Amendment as of January 29, 2005 to Three Grant Agreements for Non-Qualified Stock Option
Awards with Grant Dates of March 13, 2001, March 12, 2002 and March 11, 2003, respectively.*
10.46 (19) Non-Employee Directors’ Compensation Summary effective March 2011.*
10.47 (11) Asset Purchase Agreement by and among Cabot Microelectronic Corporation, QED Technologies
International, Inc., QED Technologies, Inc., Don Golini and Lowell Mintz dated June 15, 2006.
10.48 (11)
Technology Asset Purchase Agreement dated June 15, 2006 by and among Cabot Microelectronics
Corporation, QED Technologies International, Inc., and Byelocorp Scientific, Inc.
10.49 (12) Amendment No. 1 to Fumed Silica Supply Agreement, between Cabot Microelectronics Corporation
and Cabot Corporation.+
10.50 (13) Amendment No. 2 to Fumed Silica Supply Agreement, between Cabot Microelectronics Corporation
and Cabot Corporation.+
First Amendment to the Employment Offer Letter dated November 2, 2003.*
First Amendment to the Employment Offer Letter dated November 23, 2003.*
10.51 (15)
10.52 (15)
10.53 (15) Cabot Microelectronics Corporation Supplemental Employee Retirement Plan, as amended.*
10.54 (19) Cabot Microelectronics Corporation Annual Incentive and Sales Incentive Programs.*
10.55 (16)
Share Purchase Agreement dated December 19, 2008 among Cabot Microelectronics Global
Corporation, Eternal Chemical Co., Ltd., Major Co-Sellers, and Epoch Material Co., Ltd.+
10.56 (17)
First Amendment to Amended and Restated Credit Agreement dated October 30, 2008 among Cabot
Microelectronics Corporation, Bank of America, N.A., as Administrative Agent, Issuing Bank, and
Swing Line Bank, and JPMorgan Chase Bank, N.A., as Syndication Agent.
10.57 (18) Adoption Agreement, as amended January 1, 2010, of Cabot Microelectronics Corporation 401(k) Plan.*
10.58 (19)
10.59
21.1
23.1
24.1
31.1
Employee Stock Purchase Plan Prospectus as on November 24, 2010.*
General Release, Waiver and Covenant Not to Sue.*
Subsidiaries of Cabot Microelectronics Corporation.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney.
Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2
32.1
Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
62
(1)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Registration Statement on Form S-1
(No. 333-95093) filed with the Commission on March 27, 2000.
(2)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Registration Statement on Form S-1
(No. 333-95093) filed with the Commission on April 3, 2000.
(3)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Registration Statement on Form S-1
(No. 333-95093) filed with the Commission on April 4, 2000.
(4)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Current Report on Form 8-K
(No. 000-30205) filed with the Commission on October 6, 2000.
(5)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on February 12, 2002.
(6)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Annual Report on Form 10-K
(No. 000-30205) filed with the Commission on December 10, 2003.
(7)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on February 12, 2004.
(8)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on May 7, 2004.
(9)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on May 9, 2005.
(10)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Annual Report on Form 10-K
(No. 000-30205) filed with the Commission on December 7, 2005.
(11)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on August 9, 2006.
(12)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Annual Report on Form 10-K
(No. 000-30205) filed with the Commission on November 29, 2006.
(13)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on August 8, 2008.
(14)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Current Report on Form 8-K
(No. 000-30205) filed with the Commission on September 24, 2008.
(15)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Annual Report on Form 10-K
(No. 000-30205) filed with the Commission on November 25, 2008.
(16)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on February 5, 2009.
(17)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on May 8, 2009.
(18)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on February 8, 2010.
(19)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on February 8, 2011.
(20)
Filed as an exhibit to, and incorporated by reference from the Registrant’s Current Report on Form 10-Q
(No. 000-30205) filed with the Commission on May 9, 2011.
* Management contract, or compensatory plan or arrangement.
** Substantially similar change in control severance protection agreements have been entered into with William P. Noglows, H. Carol Bernstein,
Yumiko Damashek, David H. Li, William S. Johnson, Ananth Naman, Daniel J. Pike, Thomas S. Roman, Stephen R. Smith, Adam F. Weisman and
Daniel S. Wobby, with differences only in the amount of payments and benefits to be received by such persons.
*** Substantially similar deposit share agreements have been entered into with William P. Noglows, H. Carol Bernstein, David H. Li, William S.
Johnson, Daniel J. Pike, Thomas S. Roman and Daniel S. Wobby with differences only in the amount of initial deposit made and deposit shares
purchased by such persons.
+ This Exhibit has been filed separately with the Commission pursuant to the grant of a confidential treatment request. The confidential portions
of this Exhibit have been omitted and are marked by an asterisk.
63
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
Date: November 22, 2011
/s/ WILLIAM P. NOGLOWS
CABOT MICROELECTRONICS CORPORATION
William P. Noglows
Chairman of the Board, President and Chief Executive Officer
[Principal Executive Officer]
Date: November 22, 2011
/s/ WILLIAM S. JOHNSON
Date: November 22, 2011
William S. Johnson
Vice President and Chief Financial Officer
[Principal Financial Officer]
/s/ THOMAS S. ROMAN
Thomas S. Roman
Corporate Controller
[Principal Accounting Officer]
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Date: November 22, 2011
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chairman of the Board, President and Chief Executive Officer
[Director]
Date: November 22, 2011
/s/ ROBERT J. BIRGENEAU*
Robert J. Birgeneau
[Director]
Date: November 22, 2011
/s/ JOHN P. FRAZEE, JR.*
John P. Frazee, Jr.
[Director]
Date: November 22, 2011
/s/ H. LAURANCE FULLER*
H. Laurance Fuller
[Director]
Date: November 22, 2011
/s/ BARBARA A. KLEIN*
Barbara A. Klein
[Director]
Date: November 22, 2011
/s/ EDWARD J. MOONEY*
Edward J. Mooney
[Director]
Date: November 22, 2011
/s/ STEVEN V. WILKINSON*
Date: November 22, 2011
Steven V. Wilkinson
[Director]
/s/ BAILING XIA*
Bailing Xia
[Director]
*by H. Carol Bernstein as Attorney-in-fact pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
64
Exhibit 31.1
CERTIFICATION
I, William P. Noglows, certify that:
1. I have reviewed this Annual Report on Form 10-K of Cabot Microelectronics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: November 22, 2011
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chief Executive Officer
65
Exhibit 31.2
CERTIFICATION
I, William S. Johnson, certify that:
1. I have reviewed this Annual Report on Form 10-K of Cabot Microelectronics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: November 22, 2011
/s/ WILLIAM S. JOHNSON
William S. Johnson
Chief Financial Officer
66
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cabot Microelectronics Corporation (the “Company”) on Form 10-K for the
fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: November 22, 2011
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chief Executive Officer
Date: November 22, 2011
/s/ WILLIAM S. JOHNSON
William S. Johnson
Chief Financial Officer
67
STOCKHOLDERS’ INFORMATION
OFFICERS
BOARD OF DIRECTORS
CORPORATE INFORMATION
William P. Noglows
Chairman, President and
Chief Executive Officer
H. Carol Bernstein
Vice President, Secretary
and General Counsel
Yumiko Damashek
Vice President,
Japan and Asia Operations
William S. Johnson
Vice President and
Chief Financial Officer
David H. Li
Vice President, Asia Pacific Region
Ananth Naman
Vice President,
Research and Development
Daniel J. Pike
Vice President,
Corporate Development
Thomas S. Roman
Corporate Controller
Stephen R. Smith
Vice President, Marketing
Carmelina M. Stoklosa
Treasurer and Director, Finance
Adam F. Weisman
Vice President, Business Operations
Daniel S. Wobby
Vice President, Global Sales
William P. Noglows
Chairman, President and
Chief Executive Officer,
Cabot Microelectronics
Corporation
Robert J. Birgeneau
Chancellor,
University of California,
Berkeley
John P. Frazee, Jr.
Former Chairman and
Chief Executive Officer,
Centel Corporation
H. Laurance Fuller
Former Co-Chairman,
BP Amoco PLC
Barbara A. Klein
Former Chief Financial Officer,
CDW Computer Centers, Inc.
Edward J. Mooney
Former Chairman and
Chief Executive Officer,
Nalco Chemical Company
Steven V. Wilkinson
Former Partner,
Arthur Andersen LLP
Bailing Xia
Chairman and
Chief Executive Officer,
Summer Leaf, Inc.
HEADQUARTERS
Cabot Microelectronics Corporation
870 N. Commons Drive
Aurora, IL 60504
630.375.6631 phone
800.811.2756 toll free
630.499.2666 fax
www.cabotcmp.com
INVESTOR INFORMATION
Contact our offices by mail at
the address above, by telephone
at 630.499.2600 or at
www.cabotcmp.com.
STOCK INFORMATION
Cabot Microelectronics is traded on
the NASDAQ Global Select Market
under the symbol CCMP.
STOCK TRANSFER AGENT
AND REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
781.575.3400
www.computershare.com
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
Chicago, IL
STOCKHOLDERS’ MEETING
The Annual Meeting of Stockholders
will be held at 8 a.m. Central
Time on March 6, 2012, at
Cabot Microelectronics Corporation
870 N. Commons Drive
Aurora, IL
FORM 10-K
A copy of the Cabot Microelectronics
Annual Report on Form 10-K for the fiscal
year ended September 30, 2011, filed with
the Securities and Exchange Com mi s sion,
is enclosed and also available without
charge at www.cabotcmp.com.
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
Cabot Microelectronics Corporation
870 N. Commons Drive
Aurora, IL 60504
www.cabotcmp.com
Cabot Microelectronics is committed to conducting its business operations in a manner that preserves the
environment, which includes limiting waste, conserving energy and preventing pollution. Our commitment goes
beyond regulatory compliance and ISO certifications. Since initiating our environmental program in fiscal 2008, we
have successfully lessened our impact on the environment in the following ways:
58%
INC R E A SE IN
PA PER R EC YC L ING
26%
INC R E A SE IN
SO L ID WA S T E
R EC YC L ING
66%
1%
10%
R ED U C T I ON IN
L A NDFI L L WA S T E
R ED U C T I ON
IN C O 2 EM IS SI ONS
R ED U C T I ON IN
E L EC T R I C I T Y US AG E
We continue to partner with our customers to help them achieve their environmental goals. As we look to the future,
we plan to further reduce the environmental impact of doing business by strongly encouraging our suppliers to share
our commitment to the environment, and we plan to measure the progress of these preferred suppliers. Through
our own environmental initiatives, as well as through joint programs with our customers and suppliers, we strive to
continue to be a trusted business partner and model corporate citizen with respect to environmental issues.