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. Compared with 2008, when we established specific environmental
improvement goals, in 2012 we successfully lessened our impact on the environment as shown below:
54%
INC R E A SE IN
PA PER R EC YC L ING
25%
INC R E A SE IN
SO L ID WA S T E
R EC YC L ING
66%
4%
11%
R EDuC T I ON IN
L A NDf I L L WA S T E
R EDuC T I ON
IN C O 2 E m IS SI ONS
R EDuC 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 our 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.
2012 Annual Report
Revenue
(in millions)
Diluted Earnings Per Share
Cash From Operations
(in dollars)
(in millions)
500
400
300
200
100
0
2.5
2.0
1.5
1.0
0.5
0.0
100
80
60
40
20
0
ouR compAny
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.
FinAnciAl HigHligHts
Revenue
(in millions)
$375
$291
$445
$428
$408
Diluted Earnings Per Share
(in dollars)
$2.13 $2.20
$1.64
$1.75
$0.48
Cash From Operations
(in millions)
$94
$88
$71
$45
$66
FY08
FY09
FY10
FY11
FY12
FY08
FY09
FY10
FY11
FY12
FY08
FY09
FY10
FY11
FY12
In millions, except per share and percentage amounts
FY12*
FY11
Change
Revenue
Gross profit margin
Net income
Diluted earnings per share
Cash from operations
Cash dividends per share
Cash and short-term investments
Long-term debt (includes current portion)
After tax return on invested capital
$427.7
$445.4
(4.0)%
47.7
%
48.1%
40.8
1.75
66.4
15.00
178.5
172.8
51.7
2.20
93.6
—
302.5
—
15.4%
18.8%
(0.8)
(21.0)
(20.5)
(29.0)
100.0
(41.0)
100.0
(18.1)
* In fiscal 2012, in conjunction with a new capital management initiative, we completed a leveraged recapitalization with payment of a special cash dividend of $15.00 per share, or
$347.1 million in aggregate. The dividend was funded with a $175.0 million term loan and $172.1 million from existing Company cash balances.
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
lisa A. polezoes
Vice President, Human Resources
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
Richard s. Hill
Former Chairman and
Chief Executive Officer,
Novellus Systems, Inc.
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
630.375.5593 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 5, 2013, 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, 2012, 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
Annual Report Cover Photo by ©iStockphoto.com / Mikkel William Nielsen
TO OUR STOCKHOLDERS, CUSTOMERS,
SUPPLIERS AND EMPLOYEES
(L) William P. Noglows, Chairman, President & CEO (R) William S. Johnson, Vice President & CFO
As the leading supplier of CMP slurries to the semiconductor
momentum our Pads business demonstrated during the
industry and a growing supplier of CMP pads, we supply
year is fueled by the fundamental value proposition offered
virtually every semiconductor manufacturer in the world. Our
by our pad products of providing lower cost of ownership
broad exposure across the semiconductor industry, our
through longer pad life and lower defectivity. Through the
robust product portfolio and extensive global infrastructure
year, our first generation Epic® D100 and second generation
differentiate us from our competitors and enable us to better
Epic D200 pad products were adopted by our customers
serve the needs of our customers on a global basis. We
for a number of advanced applications. Since reporting our
continue to demonstrate our commitment and ability to
first Epic D200 pad business win in fiscal year 2011, we
provide leading edge solutions in close collaboration with
have continued to gain traction with this tunable platform,
our customers around the world as we pursue and win new
which allows us to modify several important properties of
business opportunities.
the pad material to meet specific customer performance
requirements. We believe we made significant progress in
Despite the challenging macroeconomic and semiconductor
our Pads business during the year as we continued to
industry environments in fiscal year 2012, we continued
engage closely with our customers around the world on
to execute our strategies to strengthen and grow our core
new business opportunities that are in various stages of
CMP consumables business, and also further develop our
evaluation and qualification.
Engineered Surface Finishes business. As a result, we
achieved solid financial results in fiscal year 2012. Total
Within our CMP slurry business, in fiscal year 2012 we
annual revenue was $427.7 million, gross profit margin was
continued developing and commercializing reliable and
47.7 percent of revenue, diluted earnings per share were
innovative solutions for our customers to address both
$1.75 and cash flow from operations was $66.4 million. Our
performance and cost of ownership, and we won new
full year revenue results reflect strengthening in demand for
business across our slurry product portfolio. Our collaborative
our products in the second half of the fiscal year after soft
efforts with customers on high-quality, high performing
industry demand during the first half of the year; we began
products and solutions were rewarded with customer
to see some softening of demand again late in the fourth
adoptions of our slurry products for Tungsten, Advanced
fiscal quarter.
CMP CONSUMABLES
Within our CMP consumables business, we believe our Pads
business represents our most significant organic growth
opportunity. We achieved record annual revenue of $33.7
million in our Pads business, representing an 8.6 percent
increase over last year’s record level. We believe the
Dielectrics, Copper and Data Storage applications. We are
also pleased with the growth we experienced with our slurry
products for polishing Aluminum, and we look forward to
continuing to leverage our technology within this important
emerging application.
We also made significant progress toward commercializing
and qualifying products and solutions from our new
research, development and manufacturing facility in South
distributing approximately 30 percent of our market value
Korea. South Korea is the second largest CMP consumables
to our shareholders through the special cash dividend. This
market in the world, and we have placed strategic emphasis
capital management initiative represented a significant
over the past several years on increasing our business there
change in our capital allocation strategy, and enabled us to
with a focus on memory applications. During fiscal 2012, we
provide additional value to our shareholders while maintaining
commercialized and qualified several Advanced Dielectrics
the resources necessary to continue to implement our
products from our facility in Korea by leveraging our expanded
business strategies and support future growth opportunities.
capabilities there to win more business. Our revenue in Korea
Ultimately, this capital management initiative exemplifies the
grew by 22 percent in fiscal 2012.
confidence we have in the future performance of our company.
During fiscal 2012, we were delighted to receive Intel’s
GLOBALLY POSITIONED FOR CONTINUED SUCCESS
Preferred Quality Supplier Award for the third consecutive
year, demonstrating our sustained ability to provide industry
leading technology and performance. In addition, we were
awarded SMIC’s Best Supplier Award, for providing CMP
polishing slurries deemed essential to its success and for
our support of SMIC’s operations in Beijing, Shanghai and
Tianjin. We believe these supplier awards reflect the
recognition of our unyielding commitment to consistently
deliver high-quality, reliable CMP solutions through a robust
supply chain.
ENGINEERED SURFACE FINISHES BUSINESS
We participate in a dynamic consumer electronics driven
industry by supplying CMP consumables products to the
semiconductor industry. The demand for CMP consumables
is driven by wafer starts and the increased usage of IC
devices as electronic systems increase in complexity. With
the continuation of positive trends in mobile connectivity,
mobile devices, including tablets and smart phones, cloud
computing and emerging markets, we believe these trends
should drive growth in demand for CMP consumables in the
future. We are excited by the potential long-term growth
opportunities associated with these trends and although
we remain mindful of the potential impact of global
Other notable business highlights during fiscal 2012 relate
macroeconomic uncertainties on the semiconductor industry
to our Engineered Surface Finishes, or ESF, business, where
and our business, we believe the investments we have made
we are leveraging our technology for perfecting surfaces
and the progress we have achieved position us well for
within the semiconductor industry into other demanding
continued success.
surface applications. Within our ESF business, QED, which
is a leader in polishing and metrology systems for precision
I would like to thank our stockholders, customers, suppliers
optics applications, achieved another year of record revenue,
and employees for your continued support and confidence
following record revenue performance last year. We also
in our company. We believe that Cabot Microelectronics is
made progress during the year commercializing slurries for
well positioned as a leading supplier of CMP consumables
silicon wafer polish applications to meet the needs of
to the semiconductor industry for continued success as we
customers in an approximately $200 million market adjacent
leverage our global capabilities to consistently deliver high-
to the CMP consumables market.
quality, reliable and innovative solutions to our customers
around the world.
Sincerely,
CAPITAL MANAGEMENT INITIATIVE
The fiscal year was also highlighted by our new capital
management initiative, which included the implementation of
a leveraged recapitalization with a payment of a $15 per
share special cash dividend, or approximately $347 million
in total, and a significant increase to our share repurchase
authorization. As a result of the leveraged recapitalization,
we achieved a more efficient balance sheet while also
WILLIAM P. NOGLOWS
Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2012
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 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
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 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 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.
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 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
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, 2012, as reported by
the NASDAQ Global Select Market, was approximately $892,790,000. For the purposes hereof, “affiliates” include all
executive officers and directors of the registrant.
As of October 31, 2012, the Company had 23,193,584 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 5,
2013, 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, 2012
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
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Exhibit Index
Signatures
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.
PART IV.
Item 15.
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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
leading 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
segment—the development, manufacture and sale of
CMP consumables 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 polishing 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 mem-
ory chips in computers, MP3 players, gaming devices,
cell phones and digital cameras, and in mobile Internet
devices such as smart phones and tablets. The multi-
step manufacturing process for IC devices typically
begins with a circular wafer of pure silicon, with the first
manufacturing step referred to as a “wafer start”. A
large number of identical IC devices, or dies, are manu-
factured 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 con-
ducting materials such as aluminum or copper in a par-
ticular sequence to produce a functional IC device with
specific characteristics. When the conducting wiring on
one layer of the IC device is completed, another layer of
insulating material is added. The process of alternating
insulating and conducting layers is repeated until the
desired wiring within the IC device is achieved. At the
end of the process, the wafer is cut into the individual
dies, which are then packaged to form individual chips.
Demand for CMP consumable products, including slur-
ries and pads, used in the production of IC devices is
primarily based on the number of wafer starts by semi-
conductor manufacturers and the type and complexity
of the IC devices they produce. To enhance the perfor-
mance 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 shrink-
ing the key dimensions on an IC device from one tech-
nology 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. As semiconductor technol-
ogy 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 combina-
tion 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 chem-
ically 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
3
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 pol-
ishing table that spins in a circular motion in the oppo-
site direction from the rotating wafer carrier. A CMP
slurry is continuously applied to the polishing pad to
facilitate and enhance the polishing process. Hard disk
drive and silicon wafer manufacturers use similar proc-
esses to smooth the surface of substrate disks before
depositing magnetic media onto the disk.
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 evalua-
tions. 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 density of transistors and other electronic com-
ponents than is possible without CMP. By enabling IC
device manufacturers 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. Improvements in throughput and yield
reduce an IC device manufacturer’s unit production
costs, and reducing costs is one of the highest priorities
of a semiconductor manufacturer as the return on its
significant investment in manufacturing capacity can be
enhanced by lower unit costs. More broadly, sustained
growth in the semiconductor industry traditionally has
been fueled by enhanced performance and lower unit
costs, making IC devices more affordable in an expand-
ing 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 demand-
ing applications in other industries where shaping,
enabling and enhancing the performance of surfaces is
critical to success, such as for precision optics and elec-
tronic substrates, including silicon and silicon-carbide
wafers. We have begun selling our CMP consumable
products to major silicon wafer manufacturers and we
anticipate future growth in this market.
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 semi-
conductor equipment, aerospace, defense, security,
biomedical 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 and
logic devices for a multitude of end applications such as
computers and servers, MP3 players, gaming devices,
cell phones and digital cameras, and in mobile Internet
devices such as smart phones and tablets, as well as in
mature logic applications such as those used in automo-
biles and communication devices. Our most advanced
slurries for tungsten polishing are designed to be
customized to provide customers greater flexibility,
improved performance and a reduced cost of owner-
ship. 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 mem-
ory 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 gate structures currently
in production. We offer multiple products for each tech-
nology node to enable different integration schemes
depending on specific customer needs.
4
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, and are used in the produc-
tion of both older logic devices as well as in mature and
advanced memory devices. 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 conjunc-
tion 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 tech-
nologies are closely related and utilize the same techni-
cal, sales and support infrastructure. We believe our
unique pad material and our continuous pad manufac-
turing process enable us to produce a pad with a longer
pad life, greater consistency from pad to pad, and
enhanced performance, resulting in lower cost of own-
ership 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 dielectrics, 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 generation D200 series.
CMP Consumables for the Data Storage Industry
We develop and produce CMP slurries for polishing
certain materials that are used in the production of rigid
disks and magnetic heads used in hard disk drives for
computer and other data storage applications, which
represent an extension of our core CMP slurry 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 believe that
opportunities for growth may exist within the data
storage industry as cloud computing activity grows
and the need for data centers utilizing hard disk drive
storage increases.
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-
torically, advanced optics have been produced using
labor-intensive artisanal processes, and variability has
been common. QED has automated the polishing proc-
ess for advanced optics to enable rapid, deterministic
and repeatable surface correction to the most demand-
ing levels of precision in dramatically less time than
with traditional means. QED’s polishing systems use
Magneto-Rheological Finishing (MRF), a proprietary
surface figuring and finishing technology, which employs
magnetic fluids and sophisticated computer technol-
ogy to polish a variety of shapes and materials. QED’s
metrology systems use proprietary Subaperture Stitch-
ing Interferometry (SSI) technology that captures pre-
cise metrology data for large and/or strongly curved
optical par ts and proprietar y Aspheric Stitching
Interferometry (ASI) technology, which is designed
to measure increasingly complex shapes, including
non-spherical surfaces, or aspheres. QED’s products
also include MRF polishing fluids and MRF polishing
components, as well as optical polishing services and
polishing support services.
Strategy
We collaborate closely with our customers to develop
and manufacture products that offer innovative and
reliable solutions to our customers’ challenges and we
strive to consistently and reliably deliver and support
these products around the world through what we
believe is a robust global infrastructure and supply
chain. We continue to focus on the execution of our
primary strategy of strengthening and growing our core
CMP consumables 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.
5
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 2012, we launched a number of new products
within our existing slurry and polishing pad businesses
and we expanded sales of some of our newer product
offerings crossing multiple applications over a range of
technology nodes. Several of our achievements are dis-
cussed below:
• We secured a number of business wins with both
first and second generation pad product platforms.
Revenue generated by our polishing pad business in
fiscal 2012 increased 8.6% from revenue generated in
fiscal 2011.
• In South Korea, we qualified new advanced dielectrics
products from our new research, development and
manufacturing facility that we opened in late fiscal
2011. We have placed strategic emphasis on increas-
ing business in Korea as it represents the second
largest CMP consumables market in the world, and
we successfully increased our fiscal 2012 revenue
generated in South Korea by 22% from fiscal 2011.
• Within our copper slurry business, we began deliver-
ing new copper slurry products in a concentrated
form, designed to be diluted by our customers. This
reduces transportation costs and assists our custom-
ers in lowering their overall cost of ownership.
• We secured new business for tungsten slurries for a
number of advanced applications.
• We also experienced growth in our aluminum slurry
products, which are used in advanced High-K metal
gate device integration.
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 collaborate with our customers on joint projects to
identify and develop new and improved CMP solutions,
to integrate our products into their manufacturing proc-
esses, 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 commercial use of our products. We strategi-
cally locate our research facilities and clean rooms,
manufacturing operations 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 competitive advantage.
In fiscal 2011, we expanded our facilities at several loca-
tions in the Asia Pacific region to further enhance our
customer relationships. We completed construction of a
new 56,000 square foot research, development and
manufacturing facility in Oseong, South Korea. We
believe this facility has enhanced our ability to support
our customers as South Korea is home to two of the
largest manufacturers of memory devices in the world.
We 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 reduce variation in
our products and processes in order to increase quality,
productivity and efficiency, and improve the uniformity
and consistency of performance of our CMP consum-
able products. Our global manufacturing sites are man-
aged to ensure we have the people, training and systems
needed to support the stringent 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
methodology for improving quality by reducing variabil-
ity. We believe our Six Sigma initiatives have contributed
to significant, sustained improvement in productivity in
our operations. We also believe the key supplier awards
we received in fiscal 2012 from customers such as Intel
and Semiconductor Manufacturing International Cor-
poration are evidence of our success in providing our
customers with high-quality 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 this differentiates
us from our competitors. We now have five slurry manu-
facturing plants worldwide and a global network of
suppliers, which we believe position us well to mitigate
supply interruptions when unexpected events occur.
6
The major earthquake and resulting tsunami in Japan in
March 2011 and the severe flooding in Thailand in late
2011 were prime examples of such unexpected events,
in which our global supply chain capabilities enabled us
to proactively address the needs of our customers and
suppliers to assist them during those difficult times.
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 that
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 continues 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. Following approxi-
mately two years of significant growth in the semicon-
ductor industry, we began to see some softening of
demand within the industry during the second half of
fiscal 2011 which we attributed to general uncertainty in
the global economy and a modest correction of IC
device inventory. This softness in demand continued
through the first half of our fiscal 2012. We saw strength-
ening in demand during the second half of fiscal 2012,
which was led by growth in Korea as well as higher
capacity utilization at certain foundries, where compa-
nies can outsource some or all of their manufacturing to
reduce their fixed costs. Late in our fourth fiscal quarter
of 2012, we saw some softening of demand, which
appears to be due to decreased demand for DRAM
memory, possibly due to softer demand for personal
computers (PCs). We believe that semiconductor indus-
try demand will grow over the long term based on
increased usage of certain types of IC devices in exist-
ing applications, as well as an expanding range of new
uses of these types of devices. This trend of increased
usage of IC devices is most evident in the area of mobile
connectivity, including mobile devices such as smart
phones and tablets. However, there continues to be
uncertainty regarding macroeconomic factors and the
outlook for the global economy. Therefore, we believe
the near-term outlook for the semiconductor 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 navi-
gated 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
manufacturers reduce costs by pursuing ever-increasing
scale in their operations. Manufacturers also try to
reduce costs by migrating to smaller technology nodes,
particularly in the production of memory devices. 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 lesser amounts
of CMP materials, and also aggressively pursue price
reductions for these materials. The pressure on IC
device manufacturers to reduce costs has led a number
of them to increase their use of foundries, which also
leads to increasing scale and lower costs for these
foundries.
The larger semiconductor manufacturers are generally
growing faster than the smaller ones, and we have seen
a decline in the number of companies that manufacture
semiconductor devices both through mergers and
acquisitions as well as through alliances among different
companies. The costs to achieve the required scale in
manufacturing within the semiconductor industry are
7
increasing, along with the related costs of research and
development, and the larger manufacturers generally
have greater access to the resources necessary to man-
age their businesses. Over time, smaller manufacturers
may not be able to compete with the larger manu-
facturers on a global basis. Additionally, several of our
customers have formed consortia and research and
development alliances to better manage the high cost
of their development activities, thus reducing the num-
ber 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 2011 and 2012 clearly
demonstrated these effects as we saw softening of
demand for our products beginning in the second half
of fiscal 2011, and this softness continued through the
first half of fiscal 2012. We saw significant growth in our
revenue and net income during the second half of fiscal
2012 compared to the revenue and net income earned
in the first half of fiscal 2012. However, macroeconomic
uncertainty continues to cloud the near-term outlook for
the semiconductor industry. Over the long term, we
anticipate the worldwide market for CMP consumables
used by IC device manufacturers will grow as a result of
expected long-term growth in wafer starts, an increase
in the number of CMP polishing steps required to pro-
duce these devices and the introduction of new materi-
als 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 efficiency
improvements in CMP consumable usage as customers
seek to reduce their costs. Semiconductor manufactur-
ers look for ways to lower the cost of CMP consumables
in their production operations, including improvements
in technology, diluting slurry or using concentrated
slurry products or reducing the slurry flow rate during
production to reduce the total amount of slurry used,
and extending the polishing time before replacing pads.
In addition, we expect to monitor demand trends for
PCs, and any related impact on the DRAM memory seg-
ment of the semiconductor industry to determine any
expected effect on the usage of CMP consumables.
As semiconductor technology continues to advance,
we believe that CMP technical solutions are becoming
more complex, and leading-edge technologies gener-
ally 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
solutions. As a result, we generally see customers select-
ing 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.
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 com-
panies that compete with a single product and/or in a
single geographic region to divisions of global com-
panies with multiple lines of CMP products for IC manu-
facturers. 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 customers by offering and supporting a full line of
CMP slurry solutions for all major applications, and that
has a proven track record of supplying these products
globally in high volumes with the attendant required
high level of technical support services.
With respect to CMP polishing pads, a division of Dow
Chemical has held the leading global position for many
years. We believe we are the second largest supplier
of polishing pads in the world. A number of other com-
panies are attempting to enter this area of the CMP con-
sumables business, providing potentially viable product
alternatives. We believe our pad materials and our
continuous pad manufacturing process have enabled us
to produce a pad that provides our customers with a
longer pad life, lower defectivity and greater consis-
tency than traditional offerings, thus reducing their total
pad cost. We believe this has fueled 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 still relatively new and unique.
We believe QED’s technology provides a competitive
8
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 or memory IC
devices, or they provide IC foundry service. Logic cus-
tomers often outsource some or all of the production of
their devices to foundries, which provide contract manu-
facturing services, in order to avoid the high cost of
process development, construction and operation of a
fab, or to provide additional capacity when needed.
In fiscal 2012, excluding revenue to data storage and
ESF customers, approximately 50% of our revenue was
from foundry customers, 30% of our revenue was from
memory customers and 20% of our revenue was from
logic customers.
Based upon our own observations and customer survey
results, we believe the following factors are the primary
influences of our customers’ CMP consumables buying
decisions: overall cost of ownership, which represents
the cost to purchase, use and maintain a product; prod-
uct quality and consistency; product performance and
its impact on a customer’s overall yield; engineering
support; and delivery/supply assurance. We believe that
greater customer sophistication in the CMP process,
more demanding integration schemes, additional and
unique polishing materials and cost pressures will add
further demands on CMP consumables suppliers like us.
When these factors 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 consum-
ables 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. 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 commercializa-
tion 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 cus-
tomers, 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
manufacturing processes. Finally, as part of our sales
process, our logistics and sales personnel provide sup-
ply, warehousing 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 semi-
conductor equipment, aerospace, defense, security,
research, biomedical and consumer imaging markets.
QED counts among its worldwide customers leading
precision optics manufacturers, major semiconductor
original equipment manufacturers, research institutions,
and the United States government and its contractors.
In fiscal 2012, our five largest customers accounted for
approximately 48% of our revenue, with TSMC and
Samsung accounting for approximately 18% and 13% of
our revenue, respectively. For additional information on
concentration of customers, refer to Note 2 of “Notes to
the Consolidated Financial Statements” included in
Item 8 of Part II of this Form 10-K.
Research, Development and Technical Support
We believe that technology is vital to success in our
CMP and ESF businesses, and we plan to continue to
devote significant resources to research, development
and technical support (R&D), and balance our efforts
between 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
product development involving new materials, proc-
esses and designs several years in advance of commer-
cialization, 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 collaboration
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 cus-
tomers’ development and manufacturing facilities; and,
• Evaluation and development of new polishing and
metrology applications outside of the semiconductor
industry.
9
Our research in CMP slurries and pads addresses a
breadth of complex and interrelated performance crite-
ria 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 devel-
opment 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 cus-
tomer technology requirements on a global basis. In
fiscal 2012, 2011 and 2010, we incurred approximately
$58.6 million, $58.0 million and $51.8 million, respec-
tively, in R&D expenses. We believe our Six Sigma initia-
tives 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 capital-
ized and depreciated 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
technology center in Japan, which includes a Class 1
clean room with 300mm polishing, metrology and slurry
development capabilities; 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, that pro-
vides slurry formulation capability; an R&D laboratory
in Singapore that provides polishing, metrology and
slurry development capabilities for the data storage
industry; and a research facility in Rochester, New York
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.
Intellectual Property
Our intellectual property is important to our success
and ability to compete. As of October 31, 2012, we had
964 active worldwide patents, of which 226 are U.S. pat-
ents, and 581 pending worldwide patent applications,
of which 69 are in the U.S. Many of these patents are
important to our continued development of new and
innovative products for CMP and related processes, as
well as for new businesses. Our patents have a range of
duration and we do not expect to lose any material pat-
ent through expiration within the next four years. We
attempt to protect our intellectual property rights
through a combination of patent, trademark, copyright
and trade secret laws, as well as employee and third
party nondisclosure and assignment agreements. We
vigorously and proactively pursue parties that attempt
to compromise our investments in research and devel-
opment by infringing our intellectual property. For
example, in 2011, we concluded litigation in the United
States against a competitor in which the validity of cer-
tain of our CMP slurry patents for tungsten CMP was
upheld, although the specific competitive products at
issue were found to not infringe the claims at issue. 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
portfolio. These enhancements may be via licenses or
assignments or we may acquire certain proprietary
technology and intellectual property when we make
acquisitions. We believe these technology rights
continue to enhance our competitive advantage by
10
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 emis-
sions, wastewater discharges, the handling and disposal
of solid and hazardous wastes, and occupational safety
and health. We believe that our facilities are in substan-
tial 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 preserving the
environment. Our operations in the United States,
Japan, Singapore, Europe and Taiwan are ISO 14001
certified, which requires that we implement and operate
according to various procedures that demonstrate our
dedication to waste reduction, energy conservation and
other environmental concerns. We are committed to
maintaining these certifications and are actively pursu-
ing ISO 18001 Safety and Health certification for our
existing operations. We will also seek to obtain addi-
tional 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 other countries. However,
we currently do not anticipate that the future costs of
environmental compliance 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 the Company successful. As of October 31,
2012, we employed 1,042 individuals, including 555 in
operations, 261 in research and development and tech-
nical, 102 in sales and marketing and 124 in administra-
tion. In general, none of our employees are covered by
collective bargaining agreements. We have not experi-
enced 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 cover-
age allows us to utilize our business and technical exper-
tise 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 18 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
reasonably 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 business day following the submission
to the SEC of such filings. In addition, the SEC’s website
(http://www.sec.gov) contains reports, proxy state-
ments, and other information that we file electronically
with the SEC.
Item 1A. Risk Factors
Other than the incurrence of $175.0 million of long-term
debt as described below and elsewhere in this Annual
Report on Form 10-K, 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, 2011. 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, following approximately two quarters of
soft demand in the semiconductor industry during the
first half of our fiscal 2012 that followed approximately
two years of growth, we again saw industry demand
strengthen somewhat during the second half of our fis-
cal 2012. By the very end of fiscal 2012, however, we
began to see what appears to be some softening of
demand. In addition, our business has experienced his-
torical seasonal trends as we saw our revenue decrease
in the second quarter of fiscal 2012 from the revenue
recorded in the first quarter of 2012. Furthermore, com-
petitive dynamics within the semiconductor industry
may impact our business. Our limited visibility to future
11
customer orders makes it difficult for us to predict
industry trends. If the global economy experiences fur-
ther weakness and/or the semiconductor industry weak-
ens, whether in general or as a result of specific factors,
such as current macroeconomic factors, or unpredict-
able natural disasters such as the March 2011 natural
disasters in Japan, or the November 2011 flooding in
Thailand, that have affected the semiconductor, data
storage and information technology industries over
approximately the last year, we could experience mate-
rial adverse impacts on our results of operations and
financial condition.
Adverse global economic and industry 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, as evidenced by the $3.7 million bad
debt expense we recorded in March 2012, related to a
customer bankruptcy filing in Japan in the second quar-
ter of fiscal 2012, or our production process may be
harmed if our suppliers 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 position 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 mem-
ory 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. Our business would suffer if these
products became obsolete or if consumption of these
products decreased. Our success depends on our abil-
ity 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 larger
semiconductor manufacturers are generally growing at
a faster rate than the smaller ones, and we have seen
the number of semiconductor manufacturers decline
both through mergers and acquisitions as well as
through strategic alliances. Industry analysts predict
that this trend will continue, which means the semicon-
ductor industry will be comprised of fewer and larger
participants if their prediction is correct. One or more of
these principal customers could stop buying CMP con-
sumables from us or could substantially reduce the
quantity of CMP consumables purchased from us. Our
principal customers also hold considerable purchasing
power, which can impact the pricing and terms of sale of
our products. Any deferral or significant reduction in
CMP consumables sold to these principal customers, or
a significant number of smaller customers, could seri-
ously harm our business, financial condition and results
of operations.
In fiscal 2012, our five largest customers accounted
for approximately 48% of our revenue, with Taiwan
Semiconductor Manufacturing Company (TSMC) and
Samsung accounting for approximately 18% and 13%,
respectively, of our revenue. In fiscal year 2011, our five
largest customers accounted for approximately 47% of
our revenue, with TSMC and Samsung accounting for
approximately 17% and 10%, respectively.
We Decreased Our Cash Balance Significantly and
Incurred a Substantial Amount of Indebtedness in
Conjunction With Our Leveraged Recapitalization
With a Special Cash Dividend, Which May Adversely
Affect Our Cash Flow and Our Ability to Expand
Our Business, and We May Be Unable to Comply
With Debt Covenants or Secure Additional Financing,
if Necessary or Desired, on Terms Acceptable to
Our Company
As we discussed in our Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2012, which was
filed with the Securities and Exchange Commission on
12
May 9, 2012, our Board of Directors determined to
pursue a new capital management initiative for our
Company, which included an increase in the available
authorization under our existing share repurchase pro-
gram and a leveraged recapitalization with a special
cash dividend of approximately $347.1 million in aggre-
gate, which we paid in March 2012 by using approxi-
mately $172.1 million from our existing cash balance and
$175.0 million from a new five-year term loan that is part
of the credit facility we finalized in February 2012.
The accompanying reduction in our cash balance may
reduce our flexibility to operate our business as we have
in the past, including limiting our ability to invest in
organic growth of our Company, pursue acquisitions,
and repurchase our stock. In addition, the new indebt-
edness may adversely affect our future cash flow and
our ability to pursue our core strategies of strengthen-
ing and growing our business, because the incurrence
of debt will require us to dedicate a portion of our cash
flow from operations to payments on our indebtedness,
thereby reducing the availability of cash flows to fund
working capital, capital expenditures, share repur-
chases, merger and acquisition activities, and other
general corporate purposes. The credit facility contains
restrictive covenants that impose operating and finan-
cial restrictions, including restrictions on our ability to
engage in activities and initiatives that we otherwise
might decide to pursue. These covenants include,
among other things, restrictions on our ability to incur
additional debt, engage in certain transactions, and pay
additional dividends or make other distributions to our
stockholders. The incurrence of debt pursuant to the
new credit facility also has required us to incur interest
expense charges and other debt related fees that could
adversely affect our financial condition and cash flows.
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 consumables
could continue to increase, and opportunities exist for
other companies to emerge as potential competitors by
developing their own CMP consumables products.
Increased competition has and may continue to impact
the prices we are able to charge for our CMP consum-
ables products as well as our overall business. In addi-
tion, 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
interruption 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 interruption that may occur during production or
delivery of our products, such as weather-related prob-
lems or natural disasters, like the March 2011 earth-
quakes and tsunami in Japan. Our supply chain may also
be negatively impacted by unanticipated price increases
due to supply restrictions beyond the control of our
Company or our raw material suppliers.
We believe it would be difficult to promptly secure
alternative sources of key raw materials, such as fumed
silica, in the event one of our suppliers becomes unable
to supply us with sufficient quantities of raw mate-
rials that meet the quality and technical specifications
required by us and our customers. In addition, contrac-
tual amendments to the existing agreements with, or
non-performance by, our suppliers, including any signifi-
cant financial distress our suppliers may suffer, could
adversely affect us. For instance, Cabot Corporation
continues to be our primary supplier of particular
amounts and types of fumed silica, and our current
fumed silica supply agreement with Cabot Corporation
expires December 31, 2012. We are in the process of
working with Cabot Corporation to negotiate the terms
of a new agreement for continued supply of fumed
silica; however, at present such negotiations are not
complete and any final terms could have an adverse
effect on our business. Also, if we change the supplier
or type of key raw materials we use to make our CMP
slurries or pads, or are required to purchase them from
a different manufacturer or manufacturing facility or
otherwise modify our products, in certain circumstances
our customers might have to requalify our CMP slurries
and pads for their manufacturing processes and prod-
ucts. The requalification process could take a signifi-
cant 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.
13
We Are Subject to Risks Associated With Our
Foreign Operations
We currently have operations and a large customer base
outside of the United States. Approximately 87%, 86%
and 86% of our revenue was generated by sales to cus-
tomers outside of the United States for the fiscal 2012,
2011 and 2010, 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 risks that we may not
be able to repatriate earnings from certain of our for-
eign operations, derive anticipated tax benefits of our
foreign operations or recover the investments made in
our foreign operations.
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
protect our intellectual property rights through a com-
bination of patent, trademark, copyright and trade
secret laws, as well as employee and third-party nondis-
closure and assignment agreements. Due to our inter-
national operations, we pursue protection in different
jurisdictions, which may provide varying degrees of pro-
tection, and we cannot provide assurance that we can
obtain adequate protection in each such jurisdiction.
Our failure to obtain or maintain adequate protection of
our intellectual property rights for any reason, including
through the patent prosecution process or in the event
of litigation related to such intellectual property, such as
the former litigation between us and a competitor, in
which the validity of all of our patents at issue in the
matter was upheld as further described in Part 1, Item 3
under the heading “Legal Proceedings”, could seriously
harm our business. In addition, the costs of obtaining or
protecting our intellectual property could negatively
affect our operating results.
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 tech-
nologies, assets and companies, either through acqui-
sitions, investments or alliances, in order to supplement
our internal growth and development efforts. Acqui-
sitions and investments involve numerous risks, includ-
ing the following: difficulties and risks in integrating the
operations, technologies, products and personnel of
acquired companies; diversion of management’s atten-
tion from normal daily operations of the business;
increased risk associated with foreign operations; poten-
tial 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 posi-
tions; potential difficulties in operating new businesses
with different business models; potential difficulties with
regulatory or contract compliance in areas in which we
have limited experience; initial dependence on unfamil-
iar supply chains or relatively small supply partners;
insufficient revenues to offset increased expenses asso-
ciated with acquisitions; potential loss of key employees
of the acquired companies; or inability to effectively
cooperate and collaborate with our alliance partners.
Further, we may never realize the perceived or 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 impair
the carrying value of these acquisitions or investments
to reflect other than temporary declines in their value,
which could harm our business and results of operations.
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, in
our Engineered Surface Finishes business, we are pursu-
ing other surface modification applications. Expanding
our business into new product areas could involve tech-
nologies, production processes and business models in
which we have limited experience, and we may not be
able to develop and produce products or provide serv-
ices 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 innovate and develop
new products.
14
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 $8.0 million ($8.2 million par value) at
September 30, 2012, which were classified as other long-
term assets on our Consolidated Balance Sheet. If cur-
rent illiquidity in the ARS market does not improve, 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 mar-
kets, then we may not be able to monetize these securi-
ties 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 condi-
tions generally and specifically as they may impact par-
ticipants 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 evalu-
ations of, us or participants in the semiconductor and
related industries; changes in business or regulatory
conditions affecting us or participants in the semicon-
ductor and related industries; announcements or imple-
mentation by us, our competitors, or our customers of
technological innovations, new products or different
business strategies; changes in our capital management
strategy, including the incurrence of debt; 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.
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 or our subsidiaries
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 approxi-
mately 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;
15
• a commercial slurry manufacturing plant and distribu-
tion center, and a development and technical support
facility in Geino, Japan, comprising approximately
144,000 square feet;
• a commercial slurry manufacturing plant, research and
development facility and offices in Oseong, South
Korea, comprising approximately 56,000 square feet.
Our principal foreign facilities that we lease consist of:
• an office, laboratory and commercial polishing pad
manufacturing plant in Hsin-Chu, Taiwan, comprising
approximately 31,000 square feet;
• 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 tech-
nological capability to meet our current and expected
demand in the foreseeable future.
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, in
2011, we concluded litigation in the United States
against a competitor in which the validity of certain of
our CMP slurry patents for tungsten CMP was upheld,
although the specific competitive products at issue
were found to not infringe the claims at issue.
Executive Officers of the Registrant
Set forth below is information concerning our executive officers and their ages as of October 31, 2012.
Name
Age
Position
William P. Noglows
H. Carol Bernstein
Yumiko Damashek
William S. Johnson
David H. Li
Ananth Naman
Daniel J. Pike
Lisa A. Polezoes
Stephen R. Smith
Adam F. Weisman
Daniel S. Wobby
Thomas S. Roman
54
52
56
55
39
42
49
48
53
50
49
51
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, Human Resources
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.
16
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
leadership positions for us in operations, sourcing and
investor relations between 1998 and 2005. Prior to
joining us, Mr. Li worked for UOP in marketing and proc-
ess engineering. Mr. Li received a B.S. in Chemical
Engineering from Purdue University and an M.B.A. from
Northwestern University.
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
University of Pennsylvania.
LISA A. POLEZOES has served as our Vice President
of Human Resources since October 2012. Prior to that,
Ms. Polezoes was our Global Director of Human
Resources from August 2006, and previously had
been our Director of Global Compensation and
Benefits from 2005. Prior to joining us, Ms. Polezoes had
various human resources and management positions at
Praxair, Montgomery Ward and Hyatt Corporation.
Ms. Polezoes received her B.S. in Institutional Manage-
ment from Purdue University and her M.B.A. from
Benedictine University.
STEPHEN R. SMITH has served as our Vice President of
Marketing since September 2006, and previously was
our Vice President of Marketing and Business Manage-
ment 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.
17
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 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2013
First Quarter (through October 31, 2012)
High
Low
$42.80
52.25
51.88
48.21
$48.39
52.50
39.82
35.93
$32.22
40.80
43.18
34.39
$33.09
33.89
28.11
28.14
$35.09
$29.17
As of October 31, 2012, there were approximately 929
holders of record of our common stock. In December
2011, we announced a new capital management initiative
for our Company, which included a leveraged recapital-
ization with a special cash dividend of $15 per share
and an increase in the amount available under our share
repurchase program. On February 13, 2012, our Board of
Directors declared the special cash dividend of $15 per
share, or $347.1 million in aggregate, to the Company’s
stockholders with a dividend payment date of March 1,
2012. The low price of our common stock shown above
for the second quarter of fiscal 2012, as well as the high
and low prices shown for the third and fourth quarters of
fiscal 2012, reflect the period after the payment of the
special cash dividend. No dividends were declared or
paid in fiscal 2011 or prior to the special cash dividend,
and we have no current plans to pay cash dividends in
the future.
Issuer Purchases of Equity Securities
Period
Jul. 1 through Jul. 31, 2012
Aug. 1 through Aug. 31, 2012
Sep. 1 through Sep. 30, 2012
Total
Total
Number
of Shares
Purchased
20
241,000
67,645
308,665
Average
Price Paid
Per Share
$28.76
$31.87
$34.30
$32.40
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)
—
241,000
67,645
308,645
$140,000
$132,319
$130,000
$130,000
In November 2010, our Board of Directors authorized a
share repurchase program for up to $125.0 million of our
outstanding common stock, which became effective on
the authorization date. As of December 13, 2011, we had
$82.9 million remaining under this share repurchase pro-
gram. In conjunction with our new capital management
initiative, on December 13, 2011, our Board of Directors
authorized an increase in the amount available under
our share repurchase program to $150.0 million. We
repurchased 929,407 shares for $33.0 million in fiscal
2012 under this program. Share repurchases are made
from time to time, depending on market conditions, in
open market transactions, at management’s discretion.
To date, we have funded share purchases under our
share repurchase program from our available cash bal-
ance, and anticipate we will continue to do so.
18
Separate from this share repurchase program, a total of
37,304 shares were purchased during fiscal 2012 pursu-
ant to the terms of our Second Amended and Restated
Cabot Microelectronics Corporation 2000 Equity Incen-
tive Plan (EIP) and our 2012 Omnibus Incentive Plan (OIP)
as shares withheld from award recipients to cover pay-
roll taxes on the vesting of shares of restricted stock
granted under the EIP and OIP.
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.
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, 2007 through September 30, 2012 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, 2007 in our common stock and in each of the foregoing indices and assumes reinvestment of the
special cash dividend paid in fiscal 2012. 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
9/07 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 12/11 3/12 6/12 9/12
Cabot Microelectronics Corporation
NASDAQ Composite
PHLX Semiconductor
*100 invested on 9/30/07 in stock or index, including reinvestment of dividends.
Fiscal year ending September 30.
Cabot Microelectronics Corporation
NASDAQ Composite
Philadelphia Semiconductor
100.00 84.00
100.00 96.04
100.00 95.66
75.20 77.54 75.04 60.98 56.21 66.18 81.54 77.10 88.49
80.51 81.48 69.59 56.69 53.28 64.21 74.90 79.18 82.59
87.22 90.83 77.39 61.34 67.70 74.21 90.32 96.78 94.85
9/07
12/07
3/08
6/08
9/08
12/08
3/09
6/09
9/09
12/09
3/10
Cabot Microelectronics Corporation
NASDAQ Composite
Philadelphia Semiconductor
80.91
73.97
86.58
75.27 96.96 122.22 108.70 80.44 110.53 129.75 97.48 117.27
84.99 93.86 99.57 98.43 86.87 94.82 108.29 105.27 110.79
91.48 110.04 110.61 112.90 100.44 111.85 132.24 120.05 127.57
6/10
9/10
12/10
3/11
6/11
9/11
12/11
3/12
6/12
9/12
19
Item 6. Selected Financial Data
The following selected financial data for each year of the five-year period ended September 30, 2012, 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,
2012*
2011
2010
2009
2008
$ 427,657
223,630
$ 445,442
231,336
$ 408,201
204,704
$ 291,372
162,918
$ 375,069
200,596
204,027
214,106
203,497
128,454
174,473
Research, development and technical
Selling and marketing
General and administrative
Purchased in-process research and development
58,642
29,516
49,345
—
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
—
Total operating expenses
137,503
133,721
129,486
112,431
125,031
Operating income
Interest expense
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
66,524
2,309
(1,344)
62,871
22,045
80,385
155
(1,318)
78,912
27,250
74,011
233
(501)
73,277
23,819
16,023
365
964
16,622
5,435
49,442
395
5,843
54,890
16,552
$ 40,826
$ 51,662
$ 49,458
$ 11,187
$ 38,338
$
1.81
$
2.26
$
2.14
$
0.48
$
1.64
Weighted average basic shares outstanding
22,506
22,896
23,084
23,079
23,315
Diluted earnings per share
$
1.75
$
2.20
$
2.13
$
0.48
$
1.64
Weighted average diluted shares outstanding
23,280
23,435
23,273
23,096
23,348
Cash dividends per share
$ 15.00
$
— $
— $
— $
—
Consolidated Balance Sheet Data:
Current assets
Property, plant and equipment, net
Other assets
Total assets
Current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Stockholders’ equity
As of September 30,
2012*
2011
2010
2009
2008
$ 317,888
125,020
74,917
$ 430,405
130,791
67,033
$ 381,029
115,811
74,916
$ 316,852
122,782
75,510
$ 330,592
115,843
31,002
$ 517,825
$ 628,229
$ 571,756
$ 515,144
$ 477,437
$ 63,219
161,875
9,140
234,234
283,591
$ 55,550
—
6,325
61,875
566,354
$ 53,330
—
4,083
57,413
514,343
$ 39,536
—
4,879
44,415
470,729
$ 37,801
—
5,403
43,204
434,233
Total liabilities and stockholders’ equity
$ 517,825
$ 628,229
$ 571,756
$ 515,144
$ 477,437
* In fiscal 2012, in conjunction with a new capital management initiative, we completed a leveraged recapitalization and paid a special cash dividend
of $15.00 per share, or $347.1 million in the aggregate. The dividend was funded with a $175.0 million term loan and $172.1 million of existing
Company cash balances.
20
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; natural disasters; the acquisition of or investment
in other entities; uses and investment of the Company’s
cash balance; financing facilities and related debt, pay-
ment of principal and interest, and compliance with cov-
enants and other terms; and 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 state-
ments reflect our current expectations and are inher-
ently 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 oper-
ate predominantly in one industry segment—the devel-
opment, manufacture and sale of CMP consumables.
We develop, produce and sell CMP slurries for polishing
many of the conducting and insulating materials used in
IC devices, and 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.
In December 2011, we announced a new capital man-
agement initiative for our Company, which included a
planned leveraged recapitalization with a special cash
dividend and an increase in the authorization available
under our existing share repurchase program, which we
believed would more efficiently allocate the Company’s
capital and provide additional value to our stockhold-
ers. In the second quarter of fiscal 2012, we completed
the leveraged recapitalization and paid the special
cash dividend. We entered into a credit agreement (the
“Credit Agreement”), which provided us with a $175.0
million, five-year term loan (the “Term Loan”), and a
$100.0 million revolving credit facility (the “Revolving
Credit Facility”). See “Liquidity and Capital Resources”
later in this MD&A for a more detailed discussion of our
Credit Agreement. On February 13, 2012, our Board of
Directors declared a special cash dividend of $15 per
share to the Company’s stockholders with a dividend
payment date of March 1, 2012. The dividend, in the
aggregate amount of $347.1 million, was paid on the
dividend payment date, with $175.0 million funded by
the Term Loan and the remaining $172.1 million funded
with existing Company cash balances.
Our fiscal 2012 results reflected a strengthening of
demand for our products during the second half of the
fiscal year after the soft industry demand conditions we
saw during the first half of the fiscal year. We saw solid
demand in Korea and at certain foundries within the
semiconductor industry, partially offset by what we
believe was softer demand from the DRAM memory
segment. At the end of our fourth fiscal quarter of 2012,
we began to see signs of softening of demand within
the semiconductor industry that we believe may persist
into calendar 2013. There appears to be uncertainty
within the industry, which is compounded by continued
macroeconomic uncertainty. However, we believe there
are long-term growth opportunities with the continua-
tion of positive trends in mobile connectivity, mobile
Internet devices, such as tablets and smart phones,
21
cloud computing and emerging markets. 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.
Revenue for fiscal 2012 was $427.7 million, which repre-
sented a decrease of 4.0% from the record $445.4 mil-
lion reported for fiscal 2011. The decrease in revenue
from fiscal 2011 was primarily due to the soft industry
conditions during the first half of the fiscal year. In spite
of the challenging industry and macroeconomic condi-
tions, we were able to grow both our polishing pads
business and our ESF business. We also increased our
revenue in South Korea by approximately 22% from fis-
cal 2011. South Korea has been an area of strategic
emphasis for the Company since it represents the sec-
ond largest CMP consumables market in the world.
Gross profit expressed as a percentage of revenue for
fiscal 2012 was 47.7%, which represents a decrease from
the 48.1% reported for fiscal 2011, but was near the
upper end of our full year guidance range of 46% to 48%
of revenue. The decrease in gross profit percentage
from fiscal 2011 was primarily due to higher fixed manu-
facturing costs, pricing impacts, and lower sales and
production volumes, partially offset by lower variable
manufacturing costs and higher manufacturing yields.
We expect our gross profit for full fiscal year 2013 to
continue to be in the range of 46% to 48% of revenue.
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 quar-
terly gross profit to be above or below this range.
Operating expenses of $137.5 million, which include
research, development and technical, selling and mar-
keting, and general and administrative expenses,
increased 2.8%, or $3.8 million, from the $133.7 million
reported for fiscal 2011. The increase was primarily due
to bad debt expense related to a customer bankruptcy
that we reported in the second quarter of fiscal 2012,
costs associated with our leveraged recapitalization with
a special cash dividend, and higher expenses for
research and development materials. These increases
were partially offset by lower staffing-related costs. In
fiscal 2013, we expect our full year operating expenses
to be in the range of $132 million to $136 million.
Diluted earnings per share of $1.75 in fiscal 2012 decreased
20.4%, or $0.45, from the record $2.20 reported in fiscal
2011. The decrease was primarily due to decreased sales
volume, a lower gross profit percentage, higher operat-
ing expenses noted above, and interest expense on our
Term Loan. Diluted earnings per share in fiscal 2012
included $0.20 in adverse items including the bad debt
expense related to a customer bankruptcy and costs
associated with our leveraged recapitalization with a
special cash dividend, as well as $0.06 for interest
expense on our Term Loan.
Critical Accounting Policies and Estimates
This MD&A, as well as disclosures included elsewhere
in this Form 10-K, are based upon our audited consoli-
dated financial statements, which have been prepared
in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclo-
sure of contingencies. On an ongoing basis, we evaluate
the estimates used, including those related to bad debt
expense, warranty obligations, inventory valuation, valu-
ation and classification of auction rate securities, impair-
ment of long-lived assets and investments, business
combinations, goodwill, other intangible assets, share-
based compensation, income taxes and contingencies.
We base our estimates on historical experience, current
conditions and on various other assumptions that we
believe to be reasonable under the circumstances, the
results of which form the basis for making judgments
about the carrying values of assets and liabilities that
are not readily apparent from other sources, as well as
for identifying and assessing our accounting treatment
with respect to commitments and contingencies. Actual
results may differ from these estimates under different
assumptions or conditions. We believe the following
critical accounting policies involve significant judgments
and estimates used in the preparation of our consoli-
dated 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 pro-
vide a reasonable estimate of uncollectible accounts,
actual results may differ from what was recorded. In fis-
cal 2012, we recorded $3.7 million in bad debt expense
for Elpida Memory, Inc. (Elpida), a significant customer
in Japan that filed for bankruptcy protection in February
2012. We will continue to monitor the financial solvency
of all of our customers and, if global economic condi-
tions worsen, we may have to record additional increases
to our allowance for doubtful accounts. As of September
30, 2012, our allowance for doubtful accounts repre-
sented 8.2% of gross accounts receivable. If we had
increased our estimate of bad debts to 9.2% of gross
accounts receivable, our general and administrative
expenses would have increased by $0.6 million.
22
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 war-
ranty costs differ substantially from our estimates, revi-
sions to the estimated warranty liability may be required.
As of September 30, 2012, our warranty reserve repre-
sented 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 $1.1 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 market-
ability 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, 2012 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, 2012, we owned two auction rate
securities (ARS) with an estimated fair value of $8.0 mil-
lion ($8.2 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. Beginning in 2008, general
uncertainties in the global credit markets reduced
liquidity in the ARS market, and this illiquidity continues.
As discussed in Notes 3 and 7 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 clas-
sification for our ARS requires critical judgments and
estimates by management including an appropriate dis-
count rate and the probabilities that a security may be
monetized through a future successful auction, of a refi-
nancing of the underlying debt, of a default in payment
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
continued 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
ARS continue to fail, if issuers of our ARS are unable to
refinance the underlying securities, if the issuing munici-
palities are unable to pay their debt obligations 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 securities in the near
term and may be required to further adjust the carrying
value of these 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 measure-
ment 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 inde-
pendent 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
23
be required. The amount of the impairment to be rec-
ognized 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 2012, we
recorded $1.0 million in impairment expense primarily
related to the decision to write-off certain operational
assets at one of our foreign locations. In each of fiscal
years 2011 and 2010, we recorded $0.2 million in impair-
ment expense.
We evaluate the estimated fair value of investments
annually or more frequently if indicators of potential
impairment exist, to determine if an other-than-temporary
impairment in the value of the investment has taken place.
Business Combinations
We 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 Com-
pany’s product portfolio; expected costs to develop the
IPR&D into commercially viable products and estimated
cash flows from the products when completed; and dis-
count rates. Management’s estimates of value are based
upon assumptions believed to be reasonable, but which
are inherently uncertain and unpredictable. Assumptions
may be incomplete or inaccurate, and unanticipated
events and circumstances may occur which may cause
actual realized values to be different from manage-
ment’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, 2012,
the date of our annual impairment test. Initially, our
Company had only one reporting unit as we were cre-
ated from a division of our former parent company,
Cabot Corporation, and we identified associated good-
will 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 acquisition through the use of independent
appraisal firms.
Prior to fiscal 2011, we determined the fair value of our
reporting units using a discounted cash flow analysis
(“step one” analysis) of our projected future results.
As discussed in Notes 2 and 6 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 guidance 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 2012 and
2011, we used this new guidance in our annual impair-
ment analysis for goodwill because our cash flows for all
of our reporting units continued to show positive trends.
Prior to fiscal 2012, the recoverability of indefinite-lived
intangible assets was measured using the royalty
savings method. As discussed in Notes 2 and 6 of the
Notes to the Consolidated Financial Statements, effec-
tive September 30, 2012, we adopted new accounting
24
pronouncements related to our indefinite-lived intan-
gible assets impairment review. The new accounting
guidance allows an entity to first assess qualitative fac-
tors to determine if it is more likely than not that the fair
value of an indefinite-lived intangible asset unit is less
than its carrying amount. In fiscal 2012, we used this new
guidance in our annual impairment review.
As a result of the review performed in the fourth quarter
of fiscal 2012, we determined that there was no impair-
ment of our goodwill and intangible assets as of
September 30, 2012.
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 purchases. We calculate share-based
compensation expense using the straight-line approach
based on awards ultimately expected to vest, which
requires the use of an estimated forfeiture rate. Our
estimated forfeiture rate is primarily based on historical
experience, but may be revised in future periods if
actual forfeitures differ from the estimate. We use the
Black-Scholes option-pricing model to estimate the
grant date fair value of our stock options and employee
stock purchase plan purchases. This model requires the
input of highly subjective assumptions, including the
price volatility of the underlying stock, the expected
term of our stock options and the risk-free interest rate.
We estimate the expected volatility of our stock options
based on a combination of our stock’s historical volatil-
ity and the implied volatilities from actively-traded
options on our stock. Prior to fiscal 2012, we calculated
the expected term of our stock options using the simpli-
fied method, due to our limited amount of historical
option exercise data, and we added a slight premium to
this expected term for employees who meet the defini-
tion of retirement eligible pursuant to their grants dur-
ing 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. We experienced a significant increase in the vol-
ume of stock option exercises in fiscal 2011. Conse-
quently, we used this exercise data, as well as historical
exercise data, to calculate the expected term of our
stock options granted in fiscal 2012, rather than using
the simplified method, and we continued to add a
slight premium for employees who meet the definition
of retirement eligible under their grant terms. The
expected term we calculated using option exercise his-
tory was within 1% of the expected term calculated
under the simplified method. 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 esti-
mated taxes payable or refundable on tax returns for
the current year. Deferred income taxes are determined
using enacted tax rates for the effect of temporary dif-
ferences 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 sus-
tained by the taxing authorities, based on the technical
merits of the position. In fiscal 2012, 2011 and 2010, we
elected to permanently reinvest the earnings of certain
of our foreign subsidiaries 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 15 of the Notes to the Consolidated Financial
Statements for additional information on income taxes
and permanent reinvestment.
Commitments and Contingencies
We have entered into certain unconditional purchase
obligations, which include noncancelable purchase
commitments and take-or-pay arrangements with 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 estimated loss contingency is accrued when it is
probable that an asset has been impaired or a liability
has been incurred and the amount of the loss can be
reasonably estimated. We regularly evaluate 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.
25
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,
2012
2011
2010
Revenue
Cost of goods sold
Gross profit
Research, development
and technical
Selling and marketing
General and administrative
Operating income
Interest expense
Other income (expense), net
Income before income taxes
Provision for income taxes
100.0% 100.0% 100.0%
51.9
50.1
52.3
47.7
48.1
49.9
13.7
6.9
11.6
15.5
0.5
(0.3)
14.7
5.2
13.1
6.7
10.3
18.0
0.0
(0.3)
17.7
6.1
12.7
6.6
12.5
18.1
0.1
(0.1)
17.9
5.8
Net income
9.5%
11.6%
12.1%
The results of operations for fiscal 2012 include certain
adjustments to correct prior period amounts, which we
have determined to be immaterial to the current period
and the prior periods to which they relate. These adjust-
ments included the correction of historical tax account-
ing related to the acquisition of Epoch Material Co., Ltd.
(Epoch) in fiscal 2009 and the correction of prior period
remeasurement of certain foreign cash balances into
their functional currency amounts, which were recorded
in the third quarter of fiscal 2012, and the correction of
additional historical tax accounting recorded in the
fourth quarter of fiscal 2012. The correction of tax
accounting related to the Epoch acquisition resulted in
additional income tax expense of $0.2 million in the
Consolidated Statement of Income and adjustments to
the Consolidated Balance Sheet including: an increase
of $2.2 million of cumulative translation adjustment
within accumulated other comprehensive income (CTA);
an increase in goodwill of $1.7 million; and a decrease of
$0.3 million in deferred tax liabilities. The correction of
the historical remeasurement of certain foreign cash
balances resulted in $0.3 million of additional expense
($0.2 million, net of tax) included in other income
(Expense) on the Consolidated Statement of Income.
The correction of tax accounting in the fourth quarter
resulted in additional income tax expense of $0.8 million
and adjustments to the Consolidated Balance Sheet
including: a decrease of $1.1 million in deferred tax lia-
bilities; a decrease of $0.1 million in deferred tax assets;
a decrease of $0.9 million in income taxes receivable;
and an increase of $1.0 million in CTA. Collectively, these
adjustments reduced net income for fiscal 2012 by $1.2
million and diluted earnings per share for the same
period by approximately $0.05.
26
Year Ended September 30, 2012, Versus Year
Ended September 30, 2011
Revenue
Revenue was $427.7 million in fiscal 2012, which repre-
sented a decrease of 4.0%, or $17.8 million, from fiscal
2011. The decrease in revenue was driven by a $29.3 mil-
lion decrease in sales volume and a $6.1 million decrease
due to pricing impacts. These decreases were partially
offset by a $16.1 million increase in revenue due to a
higher-priced product mix and a $1.3 million increase
due to the effect of foreign exchange rate changes.
Revenue from our polishing pad business increased
8.6% from fiscal 2011 and revenue from our ESF business
increased slightly. Revenue in fiscal 2012 from our tung-
sten, dielectric, copper and data storage slurry product
lines all decreased from fiscal 2011. We saw a strength-
ening of demand in the second half of fiscal 2012 after a
period of softer demand during the first half of the fiscal
year. However, we began to see signs of softening of
demand at the end of our fourth fiscal quarter which
may extend into calendar 2013. We continue to be cau-
tious regarding future demand trends due to uncer-
tainty within the semiconductor industry, compounded
by continued macroeconomic uncertainty.
Cost of Goods Sold
Total cost of goods sold was $223.6 million in fiscal 2012,
which represented a decrease of 3.3%, or $7.7 million,
from fiscal 2011. The decrease in cost of goods sold was
primarily due to $15.2 million from decreased sales vol-
ume, an $8.4 million decrease due to higher manufactur-
ing yields, and a $1.9 million decrease due to lower
logistics costs. These decreases in cost of goods sold
were partially offset by a $11.5 million increase due to a
higher-cost product mix, a $4.4 million increase due to
higher fixed manufacturing costs, including costs at our
new facility in South Korea, and a $1.5 million increase
due to the effect of foreign exchange rate changes.
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 supply chain to improve product quality,
reduce variability and improve our manufacturing prod-
uct yields.
Gross Profit
Our gross profit as a percentage of revenue was 47.7% in
fiscal 2012 as compared to 48.1% for fiscal 2011. The
decrease in gross profit as a percentage of revenue was
primarily due to higher fixed manufacturing costs, pric-
ing impacts and decreased sales and production vol-
umes, partially offset by lower variable manufacturing
costs and higher manufacturing yields. We expect our
gross profit percentage for full fiscal year 2013 to be in
the range of 46% to 48%, which is unchanged from the
full year guidance for fiscal 2012. However, we may expe-
rience 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.
Research, Development and Technical
Total research, development and technical expenses
were $58.6 million in fiscal 2012, which represented an
increase of 1.0%, or $0.6 million, from fiscal 2011. The
increase was primarily due to $1.5 million in higher
expenses for research and development materials and
$0.5 million in higher sample costs, partially offset by
$1.6 million in lower staffing-related costs, including
costs related to our annual incentive cash bonus pro-
gram (AIP).
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 collaboration
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’
development and manufacturing facilities; and,
• Evaluation and development of new polishing and
metrology applications outside of the semiconductor
industry.
Selling and Marketing
Selling and marketing expenses were $29.5 million in fis-
cal 2012, which represented a decrease of 0.8%, or $0.2
million, from fiscal 2011. The decrease was primarily due
to $0.5 million in lower depreciation and amortization
expense and $0.3 million in lower professional fees,
partially offset by $0.4 million in higher staffing related costs.
General and Administrative
General and administrative expenses were $49.3 million
in fiscal 2012, which represented an increase of 7.4%, or
$3.4 million, from fiscal 2011. The increase was primarily
due to $3.8 million in higher bad debt expense, of which
$3.7 million related to a customer bankruptcy filing, and
$1.5 million in higher professional fees, including fees
associated with our leveraged recapitalization with a
special cash dividend. These increases were partially
offset by $1.8 million in lower staffing-related costs,
including costs associated with our AIP.
Interest Expense
Interest expense was $2.3 million in fiscal 2012, which
represented an increase of $2.2 million from fiscal 2011.
The increase was due to interest expense recorded on
the Term Loan, as discussed in the Overview section of
this MD&A and in Note 9 of the Notes to the Consoli-
dated Financial Statements, which was used to partially
fund the special cash dividend we paid in fiscal 2012.
Other Income (Expense), Net
Other expense was $1.3 million in both fiscal 2012 and
2011. Other expense includes $0.3 million in amortiza-
tion of prepaid debt costs as well as gains and losses on
transactions denominated in foreign currencies, primar-
ily related to changes in the exchange rate of the
Japanese yen and the New Taiwan dollar to the U.S. dol-
lar, 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 35.1% in fiscal 2012
compared to 34.5% in fiscal 2011. The increase in the
effective tax rate was primarily due the expiration of the
U.S. research and experimentation tax credit effective
December 31, 2011, decreased income in certain foreign
subsidiaries where we have elected to permanently rein-
vest earnings, which are taxed at lower rates than in the
U.S., and certain adjustments made to prior year tax
estimates. These increases were partially offset by
decreased tax effects on share-based compensation
and the decreased taxable executive compensation in
excess of limits defined in section 162(m) of the Internal
Revenue Code. As discussed above at the beginning of
the “Results of Operations” section of this MD&A, our
income tax provision in fiscal 2012 included various non-
material adjustments to correct prior period amounts,
which resulted in additional income tax expense of $1.0
million. As discussed in our Annual Report on Form 10-K
for the fiscal year ended September 30, 2011, our income
tax provision in fiscal 2011 included adjustments to cor-
rect prior period amounts, including $0.7 million in tax
expense related to executive compensation in fiscal
27
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.
Net Income
Net income was $40.8 million in fiscal 2012, which repre-
sented a decrease of 21.0%, or $10.8 million, from fiscal
2011. The decrease was primarily due to decreased sales
volume coupled with a lower gross profit percentage,
increased bad debt expense related to a customer
bankruptcy filing, the expenses associated with our lev-
eraged recapitalization with a special cash dividend,
increased interest expense and a higher effective tax rate.
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 pricing impacts. The
economic and industry growth that we saw during fiscal
2010 continued 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.
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 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 partially offset by an $11.5 million
decrease in cost of goods sold due to a lower-cost
product mix.
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,
pricing impacts and the absence of a raw material sup-
plier 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.
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 research and development materials.
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.
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 16 of the Notes
to the Consolidated Financial Statements for more infor-
mation on the enforcement of our intellectual property.
Interest Expense
Interest expense was $0.2 million in both fiscal 2011 and
2010, which primarily represented interest expense on
our capital lease obligations.
Other Income (Expense), Net
Other expense was $1.3 million in fiscal 2011, compared
to $0.5 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
incurred on forward foreign exchange contracts dis-
cussed in Note 10 of the Notes to the Consolidated
Financial Statements.
28
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. 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.
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.
Liquidity and Capital Resources
We completed a leveraged recapitalization during our
fiscal quarter ended March 31, 2012. In conjunction with
this recapitalization, we declared and paid a special
cash dividend of $15 per share, or $347.1 million in
aggregate. We funded the dividend with $175.0 million
from our Term Loan and $172.1 million of existing
Company cash balances.
We had cash flows from operating activities of $66.4 mil-
lion in fiscal 2012, $93.6 million in fiscal 2011 and $88.4
million in fiscal 2010. Our cash provided by operating
activities in fiscal 2012 originated from $40.8 million in
net income and $38.1 million in non-cash items, partially
offset by a $12.5 million decrease in cash flow due to a
net increase in working capital. The decrease in cash
from operations in fiscal 2012 from fiscal 2011 was pri-
marily due to decreased net income and increases in
working capital amounts associated with higher invento-
ries and gross accounts receivable. The increase in
inventories was primarily due to raw material purchases
made in the fourth quarter of fiscal 2012 for business
continuity purposes as we negotiate the terms of a new
supply agreement with an existing supplier to replace
the current agreement, which will expire at the end of
December 2012. These negative cash flow effects were
partially offset by the increase in bad debt expense,
which is a non-cash expense, and changes in the timing
and magnitude of income tax payments.
We used $19.7 million in investing activities in fiscal 2012,
of which $19.6 million represented purchases of prop-
erty, plant and equipment. Capital expenditures in fiscal
2012 included the completion of payment for the fiscal
2011 construction of our facility in South Korea. We used
$28.2 million in investing activities in fiscal 2011 of which
$28.1 million represented purchases of property, plant
and equipment. Capital expenditures in fiscal 2011
included the majority of costs associated with the
construction of our facility in South Korea and capacity
expansions of our Japan and Singapore facilities, net of
the amounts that remained in accounts payable and
accrued expenses at the end of the fiscal year. We used
$11.9 million in investing activities in fiscal 2010 repre-
senting $11.7 million in purchases of property, plant and
equipment and $0.2 million in other investing cash out-
flows. We estimate that our total capital expenditures in
fiscal 2013 will be between $20 million and $25 million.
In fiscal 2012, cash flows used in financing activities were
$171.7 million. We used $347.1 million to fund the special
cash dividend paid in the quarter ended March 31, 2012,
$33.0 million to repurchase common stock under our
share repurchase program, $2.2 million to repay long-
term debt and $1.5 million to repurchase common stock
pursuant to the terms of our Second Amended and
Restated Cabot Microelectronics Corporation 2000
Equity Incentive Plan (EIP) and our 2012 Omnibus
Incentive Plan (OIP) for shares withheld from award
recipients to cover payroll taxes on the vesting of
restricted stock granted under our EIP and OIP. We
received $175.0 million from the drawdown of our Term
Loan, $36.5 million from the issuance of common stock
related to the exercise of stock options granted under
our EIP and the sale of shares to employees under our
2007 Employee Stock Purchase Plan, as amended and
restated January 1, 2010 (ESPP), and we received $0.6
million in tax benefits related to exercises of stock
options and vesting of restricted stock granted under
our EIP. The issuance of stock in fiscal 2012 included 1.0
million shares in exercises of stock options, of which
approximately half would have expired within one year,
which increased our weighted average shares outstand-
ing. In fiscal 2011, cash flows used in financing activities
were $17.9 million. We used $54.1 million to repurchase
common stock under our share repurchase program,
$1.4 million to repurchase common stock pursuant to
the terms of our EIP for shares withheld from award
recipients to cover payroll taxes on the vesting of
restricted stock granted under the EIP, and we made
$1.3 million in principal payments under capital lease
obligations. These cash outflows 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 the sale of shares to employees under
our ESPP. In addition, we received $0.8 million in tax
benefits related to stock options exercised and vesting
29
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 common
stock under our share repurchase plan, $0.8 million to
repurchase common stock pursuant to the terms of our
EIP for shares withheld from award recipients by the
Company to cover payroll taxes on the vesting of
restricted stock granted under the EIP, and we made
$1.2 million in principal payments under capital lease
obligations. These cash outflows were partially offset
by $3.4 million received from the issuance of common
stock related to the exercise of stock options granted
under our EIP and the sale of shares to employees under
our ESPP.
In November 2010, our Board of Directors authorized a
share repurchase program for up to $125.0 million of our
outstanding common stock, which became effective on
the authorization date. We repurchased 671,100 shares
for $29.1 million under this program in fiscal 2011 and we
repurchased 929,407 shares for $33.0 million during
fiscal 2012 under this program. As of December 13,
2011, we had $82.9 million remaining under this share
repurchase program. In conjunction with our new capital
management initiative, on December 13, 2011, our
Board of Directors authorized an increase in the amount
available under our share repurchase program to $150.0
million. With this increased authorization, as of
September 30, 2012, $130.0 million remains outstanding
under our share repurchase program. Share repurchases
are made from time to time, depending on market con-
ditions, in open market transactions, at management’s
discretion. We repurchased 564,568 shares for $25.0
million during fiscal 2011 under a prior share repurchase
program, which was completed during the fiscal quarter
ended March 31, 2011. To date, we have funded share
purchases under our share repurchase program from
our available cash balance, and anticipate we will con-
tinue to do so.
We entered into a Credit Agreement in February 2012,
which provided us with a $175.0 million Term Loan and a
$100.0 million Revolving Credit Facility, with sub-limits
for multicurrency borrowings, letters of credit and
swing-line loans. The Term Loan and Revolving Credit
Facility are referred to as the “Credit Facilities”. The
Credit Agreement provides us an uncommitted accor-
dion feature that allows us to request the existing lend-
ers or, if necessary, third-party financial institutions to
provide additional capacity in the Revolving Credit
Facility, in an amount not to exceed $75.0 million. The
Term Loan has periodic scheduled principal repayments;
however, we may prepay the loan without penalty. The
Credit Facilities are scheduled to expire on February 13,
2017. The Term Loan was drawn on February 27, 2012
and the Revolving Credit Facility remains undrawn. In
connection with the Credit Agreement, we terminated
our previously existing $50.0 million unsecured revolving
credit facility. The Credit Agreement contains covenants
that restrict the ability of the Company and its subsid-
iaries to take certain actions, including, among other
things and subject to certain significant exceptions:
creating liens, incurring indebtedness, making invest-
ments, engaging in mergers, selling property, paying
dividends or amending organizational documents. The
Credit Agreement requires us to comply with certain
financial ratio maintenance covenants, including a
maximum consolidated leverage ratio of 3.00 to 1.00
through June 30, 2013 and a minimum consolidated
fixed charge coverage ratio of 1.25 to 1.00. As of
September 30, 2012, our consolidated leverage ratio
was 1.60 to 1.00 and our consolidated fixed charge cov-
erage ratio was 10.93 to 1.00. The Credit Agreement
also contains customary affirmative covenants and
events of default. We believe we are in compliance
with these covenants. See Note 9 of the Notes to the
Consolidated Financial Statements for additional infor-
mation regarding the Credit Agreement.
As of September 30, 2012, we had $178.5 million of cash
and cash equivalents, $27.9 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 borrowing capacity under our new Credit
Facility will be sufficient to fund our operations,
expected capital expenditures, 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 on
future conditions in the capital and credit markets,
we could encounter difficulty securing additional financ-
ing in the type or amount necessary to pursue these
objectives.
Off-Balance Sheet Arrangements
At September 30, 2012 and 2011, we did not have any
unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or spe-
cial purpose entities, which might have been estab-
lished for the purpose of facilitating off-balance sheet
arrangements.
30
Tabular Disclosure of Contractual Obligations
The following summarizes our contractual obligations at
September 30, 2012, and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods.
Contractual
Obligations
(In millions)
Long-term debt
Interest expense
and fees on
long-term debt
Purchase
obligations
Operating leases
Other long-term
liabilities*
Total contractual
obligations
Less
Than
1 Year
Total
1–3
Years
3–5
Years
After
5 Years
$172.8
$10.9
$26.3
$135.6
$ —
13.2
3.7
27.0
8.4
26.0
2.8
7.1
—
6.2
0.3
3.3
—
3.3
0.3
1.8
—
—
0.4
0.5
7.1
$228.5
$43.4
$36.1
$141.0
$8.0
* We have excluded $2.0 million in deferred tax liabilities from the other
long-term liability amounts presented as the deferred taxes that will
be settled in cash are not known and the timing of any such payments
is uncertain.
Interest Expense and Fees on Long-Term Debt
Interest payments on long-term debt reflect LIBOR-
based floating rates in effect at September 30, 2012.
Commitment fees are based on our estimated consoli-
dated leverage ratio in future periods. See Note 9 of the
Notes to the Consolidated Financial Statements for
additional information regarding our long-term debt.
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 are cur-
rently working with Cabot Corporation to negotiate the
terms of a new fumed silica supply agreement that we
anticipate would take effect following the expiration of
the current agreement; however, the terms of the new
agreement may be different from those in the current
agreement. Since December 2001, we have purchased
fumed alumina primarily under a fumed alumina supply
agreement with Cabot Corporation that expired in
December 2011. We are now operating under a renewed
fumed alumina supply agreement with Cabot Corpora-
tion, which expires in April 2013, under which we are
obligated to pay certain fixed, capital and variable costs,
and have certain take-or-pay obligations. We currently
anticipate we will not have to pay any shortfall under
these agreements. Under these agreements, Cabot
Corporation continues to be our 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
certain 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 obliga-
tions include an aggregate amount of $9.0 million of
contractual commitments related to our Cabot Corpora-
tion agreements for fumed silica and fumed alumina.
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.
Other Long-Term Liabilities
Other long-term liabilities at September 30, 2012 consist
of liabilities related to our Japan retirement allowance,
which represents approximately $5.7 million, our liability
for future payments to be made under our Cabot Micro-
electronics Supplemental Employee Retirement Plan
and our liability for uncertain tax positions.
31
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 for-
eign operations maintain their accounting records in
their local currencies. Consequently, period to period
comparability of results of operations is affected by
fluctuations in exchange rates. The primary currencies
to which we have exposure are the Japanese yen and
the New Taiwan dollar. As noted in Item 7 of our Annual
Report on Form 10-K for the fiscal year ended Septem-
ber 30, 2011, the negative effects of foreign exchange
rate changes, primarily related to the Japanese yen,
accounted for a decrease in our full fiscal year 2011 gross
profit percentage compared to full fiscal year 2010.
From time to time we enter into forward contracts in an
effort to manage foreign currency exchange exposure.
However, we are unlikely to be able to hedge these
exposures completely. During fiscal 2012, we recorded
$6.9 million in currency translation gains, net of tax, that
are included in other comprehensive income on our
Consolidated Balance Sheet. These gains primarily
relate to changes in the U.S. dollar value of assets and
liabilities transacted in foreign currencies based on the
general fluctuations of the U.S. dollar relative to the
Japanese yen and the New Taiwan dollar. Approximately
13% of our revenue is transacted in currencies other
than the U.S. dollar. However, we also incur expenses in
foreign countries that are transacted in currencies other
than the U.S. dollar, so the net exposure on the
Consolidated Statement of Income is reduced. We do
not currently enter into forward exchange contracts or
other derivative instruments for speculative or trading
purposes.
Market Risk and Sensitivity Analysis Related to
Foreign Exchange Rate Risk
There was a significant weakening of the U.S. dollar
against the Japanese yen during our fiscal years 2010
and 2011, which had some negative impact on our
results of operations. We have performed a sensitivity
analysis assuming a hypothetical additional 10% adverse
movement in foreign exchange rates. As of September
30, 2012, the analysis demonstrated that such market
movements would not have a material adverse effect on
our consolidated financial position, results of operations
or cash flows over a one-year period. Actual gains and
losses in the future may differ materially from this analy-
sis based on changes in the timing and amount of for-
eign currency rate movements and our actual exposures.
Interest Rate Risk
At September 30, 2012, we have $172.8 million in long-
term debt at variable interest rates. Assuming a hypo-
thetical 100 basis point increase in our current variable
interest rate, our interest expense would increase by
approximately $0.4 million per quarter.
Market Risk Related to Investments in Auction
Rate Securities
At September 30, 2012, we owned two auction rate
securities (ARS) with a total estimated fair value of $8.0
million ($8.2 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 MD&A in Part II, Item 7, and Notes 3 and 7
of the Notes to the Consolidated Financial Statements
in Part II, Item 8 of this Annual Report on Form 10-K.
32
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, 2012, 2011 and 2010
Consolidated Balance Sheets at September 30, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended September 30, 2012, 2011 and 2010
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2012,
2011 and 2010
Notes to the Consolidated Financial Statements
Selected Quarterly Operating Results
Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts
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.
Page
34
35
36
37
38
39
59
60
33
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, 2012 and 2011, and the results of their
operations and their cash flows for each of the three
years in the period ended September 30, 2012 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, 2012, 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 20, 2012
34
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
Total operating expenses
Operating income
Interest expense
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Weighted-average basic shares outstanding
Diluted earnings per share
Weighted-average diluted shares outstanding
Dividends per share
The accompanying notes are an integral part of these consolidated financial statements.
Year Ended September 30,
2012
2011
2010
$ 427,657
223,630
$ 445,442
231,336
$ 408,201
204,704
204,027
214,106
203,497
58,642
29,516
49,345
58,035
29,758
45,928
51,818
26,885
50,783
137,503
133,721
129,486
66,524
2,309
(1,344)
62,871
22,045
80,385
155
(1,318)
78,912
27,250
74,011
233
(501)
73,277
23,819
$ 40,826
$ 51,662
$ 49,458
$
1.81
$
2.26
$
2.14
22,506
22,896
23,084
$
1.75
$
2.20
$
2.13
23,280
23,435
23,273
$ 15.00
$
— $
—
35
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 $4,757 at
September 30, 2012, and $1,090 at September 30, 2011
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
Current portion of long-term debt
Capital lease obligations
Accrued expenses, income taxes payable and other current liabilities
Total current liabilities
Long-term debt, net of current portion
Deferred income taxes
Capital lease obligations, net of current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 16)
September 30,
2012
2011
$ 178,459
$ 302,546
53,506
66,472
12,608
6,843
52,747
56,128
14,735
4,249
317,888
430,405
125,020
44,620
12,473
5,879
11,945
130,791
41,148
14,651
862
10,372
$ 517,825
$ 628,229
$ 19,542
10,937
2
32,738
$ 22,436
—
10
33,104
63,219
55,550
161,875
2,017
19
7,104
234,234
—
—
2
6,323
61,875
Stockholders’ equity:
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued:
28,864,527 shares at September 30, 2012, and 27,652,336 shares at September 30, 2011
Capital in excess of par value of common stock
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost, 5,682,288 shares at September 30, 2012, and 4,715,577 shares at
September 30, 2011
Total stockholders’ equity
Total liabilities and stockholders’ equity
29
329,782
129,441
30,466
28
278,360
435,429
24,127
(206,127)
(171,590)
283,591
566,354
$ 517,825
$ 628,229
The accompanying notes are an integral part of these consolidated financial statements.
36
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Provision for doubtful accounts
Share-based compensation expense
Deferred income tax expense (benefit)
Non-cash foreign exchange (gain)/loss
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,
2012
2011
2010
$ 40,826
$ 51,662
$ 49,458
23,545
3,771
13,306
(3,523)
748
247
968
(925)
(4,622)
(10,228)
432
2,026
(164)
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
88,385
Net cash provided by operating activities
66,407
93,566
Cash flows from investing activities:
Additions to property, plant and equipment
Proceeds from the sale of property, plant and equipment
Purchase of intangible assets
Proceeds from the sale of investments
Net cash used in investing activities
Cash flows from financing activities:
Dividends paid
Issuance of long-term debt
Repayment of long-term debt
Repurchases of common stock
Net proceeds from issuance of stock
Tax benefits associated with share-based compensation expense
Principal payments under capital lease obligations
Net cash used in financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplemental disclosure of non-cash investing and financing activities:
Purchases of property, plant and equipment in accrued liabilities and
accounts payable at the end of period
Issuance of restricted stock
Assets acquired under capital lease
The accompanying notes are an integral part of these consolidated financial statements.
37
(19,586)
8
(155)
50
(19,683)
(347,140)
175,000
(2,188)
(34,537)
36,497
636
(11)
(28,052)
41
(200)
25
(11,657)
2
(315)
50
(28,186)
(11,920)
—
—
—
(55,499)
38,051
830
(1,296)
—
—
—
(25,764)
3,429
—
(1,210)
(171,743)
(17,914)
(23,545)
932
916
1,292
(124,087)
302,546
48,382
254,164
54,212
199,952
$ 178,459
$ 302,546
$ 254,164
$ 22,701
2,336
$
$ 19,788
158
$
$ 29,174
257
$
$
$
$
1,894
6,374
20
$ 6,322
$ 6,774
$
— $
$
974
$ 4,985
—
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Balance at September 30, 2009
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
Balance at September 30, 2010
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
Balance at September 30, 2011
Share-based compensation expense, net of
compensation related to dividends on unvested
restricted stock
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
Dividends paid, net of expected forfeitures of
unvested restricted stock
Tax deduction for the exercise of stock options
granted prior to the adoption of ASC 718
Tax deduction for the dividend paid on unvested
restricted stock, net of expected forfeitures
Net income
Foreign currency translation adjustment
Minimum pension liability adjustment
Total comprehensive income
Balance at September 30, 2012
Common
Stock
Capital In
Excess of
Par
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Comprehensive
Income
(net of tax)
$ 26
$ 213,031 $ 334,309
$ 13,690
11,643
2,283
45
1,101
49,458
4,580
268
$49,458
4,580
268
$54,306
Treasury
Stock
Total
$
(90,327) $ 470,729
11,643
(24,998)
(766)
(24,998)
(766)
2,283
45
1,101
54,306
$ 26
$ 228,103 $ 383,767
$ 18,538
$ (116,091) $ 514,343
12,646
2
35,953
145
1,951
(700)
262
(54,106)
(1,393)
12,646
(54,106)
(1,393)
35,955
145
1,951
(700)
262
57,251
51,662
5,490
99
$51,662
5,490
99
$57,251
$ 28
$ 278,360 $ 435,429
$ 24,127
$ (171,590) $ 566,354
12,980
1
34,106
155
2,228
498
1,455
(346,814)
40,826
(33,026)
(1,511)
12,980
(33,026)
(1,511)
34,107
155
2,228
(346,814)
498
1,455
47,165
6,876
(537)
$40,826
6,876
(537)
$47,165
$29
$ 329,782 $ 129,441
$30,466
$ (206,127) $ 283,591
The accompanying notes are an integral part of these consolidated financial statements.
38
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 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
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 consumables for the
semiconductor 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 Secu-
rities 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. Reclassifications of prior period
amounts have been made to separate interest expense
from other income (expense) to conform to the current
period presentation.
Results of Operations
The results of operations for the fiscal year ended
September 30, 2012 include certain adjustments to cor-
rect prior period amounts, which we have determined to
be immaterial to the current period and the prior peri-
ods to which they relate. These adjustments included
the correction of historical tax accounting related to the
acquisition of Epoch Material Co., Ltd. (Epoch) in fiscal
2009 and the correction of prior period remeasurement
of certain foreign cash balances into their functional cur-
rency amounts, which were recorded in the third quarter
of fiscal 2012, and the correction of additional historical
tax accounting recorded in the fourth quarter of fiscal
2012. The correction of tax accounting related to the
Epoch acquisition resulted in additional income tax
expense of $172 in the Consolidated Statement of
Income and adjustments to the Consolidated Balance
Sheet including: an increase of $2,172 in cumulative
translation adjustment within accumulated other com-
prehensive income (CTA); an increase of $1,712 in good-
will; and a decrease of $288 in deferred tax liabilities.
The correction of the historical remeasurement of cer-
tain foreign cash balances resulted in $333 of additional
expense ($222, net of tax) included in other income
(expense) on the Consolidated Statement of Income.
Additional tax accounting related corrections recorded
in the fourth quarter resulted in additional income tax
expense of $801 and adjustments to the Consolidated
Balance Sheet including: a decrease of $1,104 in deferred
tax liabilities; a decrease of $64 in deferred tax assets;
a decrease of $891 in income tax receivable; and an
increase of $950 in CTA. Collectively, these adjustments
reduced net income for fiscal 2012 by $1,195 and diluted
earnings per share by approximately $0.05.
The results of operations for the fiscal year ended
September 30, 2011 include certain adjustments to cor-
rect prior period amounts, which we have determined to
be immaterial to the current period and the prior peri-
ods to which they relate. Adjustments in fiscal 2011
listed below related to: (1) $1,474 ($1,014, net of tax) in
employer-paid fringe benefits 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 ben-
efit should not have been recorded; (3) the reversal of a
$497 deferred tax asset regarding certain share-based
compensation 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, 2012.
39
Use of Estimates
The preparation of financial statements and related dis-
closures in conformity with accounting principles gener-
ally accepted in the United States of America requires
management to make judgments, assumptions and
estimates that affect the amounts reported in the con-
solidated financial statements and accompanying notes.
The accounting estimates that require management’s
most difficult and subjective judgments include, but are
not limited to, those estimates related to bad debt
expense, warranty obligations, inventory valuation, valu-
ation and classification of auction rate securities, impair-
ment of long-lived assets and investments, business
combinations, goodwill, other intangible assets, share-
based compensation, income taxes and contingencies.
We base our estimates on historical experience, current
conditions and on various other assumptions that we
believe are reasonable under the circumstances.
However, future events are subject to change and 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, 2012 or 2011.
See Note 3 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 result-
ing from the potential inability of our customers to make
required payments. Our allowance for doubtful accounts
is based on historical collection experience, adjusted for
any specific known conditions or circumstances such as
customer bankruptcies and increased risk due to 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.
Accounts receivable, net of allowances for doubtful
accounts, was $53,506 as of September 30, 2012 and
$52,747 as of September 30, 2011. The increase was pri-
marily due to the increase in revenue recorded in the
fourth quarter of fiscal 2012 as compared to the fourth
quarter of fiscal 2011, partially offset by an increase in
the allowance for doubtful accounts. The increase in the
allowance for doubtful accounts was primarily related to
$3,727 in bad debt expense recorded in the second
quarter of fiscal 2012 for Elpida Memory, Inc. (Elpida), a
significant customer in Japan that filed for bankruptcy
protection in February 2012. Amounts charged to
expense are recorded in general and administrative
expenses. Elpida owed the Company $3,727 in accounts
receivable for shipments made prior to its bankruptcy
filing. To our understanding, Elpida’s bankruptcy plan
has not been formally approved, and collection of any or
all of this balance remains uncertain. Consequently, we
have maintained a reserve for the entire balance. Elpida
has been paying the Company on a current basis for all
shipments made subsequent to its bankruptcy filing.
The Elpida receivable is denominated in Japanese yen,
so it is subject to foreign exchange fluctuations which
are included in the table below under the deductions
and adjustments. Our allowance for doubtful accounts
changed during the fiscal year ended September 30,
2012 as follows:
Balance as of September 30, 2011
Amounts charged to expense
Deductions and adjustments
Balance as of September 30, 2012
$ 1,090
3,771
(104)
$ 4,757
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. Prior to the one situation
in fiscal 2012, we had not experienced significant
losses relating to accounts receivable from individual
customers or groups of customers.
Customers who represented more than 10% of revenue
are as follows:
Year Ended
September 30,
2012
2011
2010
18% 17%
13% 10%
18%
*
*
*
11%
Taiwan Semiconductor
Manufacturing Co. (TSMC)
Samsung
United Microelectronics
Corporation (UMC)
*Denotes less than ten percent of total
40
TSMC accounted for 17.1% and 12.9% of net accounts
receivable at September 30, 2012 and 2011, respec-
tively. Samsung accounted for 12.1% and 11.4% of net
accounts receivable at September 30, 2012 and 2011,
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 3 for a more detailed discussion of the fair value of
financial instruments.
Inventories
Inventories are stated at the lower of cost, determined
on the first-in, first-out (FIFO) basis, or 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 inven-
tory reserve is maintained based upon a historical per-
centage of actual inventories written off and applied
against inventory value at the end of the period, adjusted
for known conditions and circumstances.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost.
Depreciation is based on the following estimated useful
lives of the assets using the straight-line method:
Buildings
Machinery and equipment
Furniture and fixtures
Information systems
Assets under capital leases
15–25 years
3–10 years
5–10 years
3–5 years
Term of lease or
estimated useful life
Expenditures for repairs and maintenance are charged
to expense as incurred. Expenditures for major renewals
and betterments are capitalized and depreciated over
the remaining useful lives. As assets are retired or sold,
the related cost and accumulated depreciation are
removed from the accounts and any resulting gain or
loss is included in the results of operations. We 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 deter-
mined to be recoverable, but their useful lives are
shorter than originally estimated, the net book value of
the asset is depreciated over the newly determined
remaining useful life.
Goodwill and Intangible Assets
We amortize intangible assets with finite lives over their
estimated useful lives, which range from one 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
when they have similar economic characteristics. We
had three reporting units to which we allocated good-
will and intangible assets as of September 30, 2012.
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 dis-
cussed 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 both fiscal 2012 and 2011 when we
performed our annual impairment review of goodwill.
As also discussed under “Effects of Recent Accounting
Pronouncements”, an entity now has the option to
assess qualitative factors in its impairment review of
indefinite-lived intangible assets. We elected this option
in fiscal 2012 when we performed our impairment review
of our indefinite-lived intangible assets. We determined
that goodwill and other intangible assets were not
impaired as of September 30, 2012.
41
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 per-
formance requirements. The warranty reserve is based
upon a historical product return rate, adjusted for any
specific known conditions or circumstances. Adjust-
ments 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 was a
significant weakening of the U.S. dollar against the
Japanese yen during our fiscal years 2010 and 2011,
which had some negative impact on our results of oper-
ations. As noted in our Annual Report on Form 10-K for
the fiscal year ended September 30, 2011, the negative
effects of foreign exchange rate changes, primarily
related to the Japanese yen, accounted for an approxi-
mate 1.5 percentage point decline in our gross profit
margin in fiscal 2011 compared to fiscal 2010. Periodically
we enter into forward foreign exchange contracts in an
effort to mitigate the risks associated with currency fluc-
tuations on certain foreign currency balance sheet
exposures. Our foreign exchange contracts do not qual-
ify 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 establish-
ment of this subsidiary, for the purchase of land adja-
cent 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
equipment, all of which are part of the K.K., as well as for
general business purposes. Since settlement of the
notes is expected in the foreseeable future, and our
subsidiary has been consistently making timely pay-
ments on the loans, the loans are considered foreign-
currency transactions. 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 comprehen-
sive income.
We also maintain intercompany loan agreements between
some of our wholly-owned foreign subsidiaries, includ-
ing Cabot Microelectronics Singapore Pte. Ltd., Epoch
Material Co., Ltd. in Taiwan and Hanguk Cabot Micro-
electronics, LLC in South Korea. These loans have pro-
vided funds for the construction and operation of our
research, development and manufacturing facility in
South Korea. These loans are also considered foreign
currency transactions and are accounted for in the same
manner as our intercompany loans to the K.K.
Purchase Commitments
We have entered into unconditional purchase obliga-
tions, which include noncancelable purchase commit-
ments and take-or-pay arrangements with suppliers. We
review our agreements and make an assessment of the
likelihood 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 collectability 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
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.
42
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,
materials and supplies, depreciation, utilities and other
facilities costs.
Income Taxes
Current income taxes are determined based on esti-
mated taxes payable or refundable on tax returns for
the current year. Deferred income taxes are determined
using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded
assets and liabilities. The effect on deferred tax assets
and liabilities of 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 sus-
tained by the taxing authorities, based on the technical
merits of the position. In fiscal 2012, 2011 and 2010, we
elected to permanently reinvest the earnings of certain
of our foreign subsidiaries outside the U.S. rather than
repatriating the earnings to the U.S. See Note 15 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 purchases. We calculate share-based
compensation expense using the straight-line approach
based on awards ultimately expected to vest, which
requires the use of an estimated forfeiture rate. Our
estimated forfeiture rate is primarily based on historical
experience, but may be revised in future periods if
actual forfeitures differ from the estimate. We use the
Black-Scholes option-pricing model to estimate the
grant date fair value of our stock options and employee
stock purchase plan purchases. This model requires the
input of highly subjective assumptions, including the
price volatility of the underlying stock, the expected
term of our stock options and the risk-free interest rate.
We estimate the expected volatility of our stock options
based on a combination of our stock’s historical volatil-
ity and the implied volatilities from actively-traded
options on our stock. Prior to fiscal 2012, we calculated
the expected term of our stock options using the simpli-
fied method, due to our limited amount of historical
option exercise data, and we added a slight premium to
this expected term for employees who meet the defini-
tion of retirement eligible pursuant to their grants dur-
ing 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. We experienced a significant increase in the vol-
ume of stock option exercises in fiscal 2011. Conse-
quently, we used this exercise data, as well as historical
exercise data, to calculate the expected term of our
stock options granted in fiscal 2012, rather than using
the simplified method, and we continued to add a
slight premium for employees who meet the definition
of retirement eligible under their grant terms. The
expected term we calculated using option exercise his-
tory was within 1% of the expected term calculated
under the simplified method. The risk-free rate is
derived from the U.S. Treasury yield curve in effect at
the time of grant.
The fair value of our restricted stock and restricted stock
unit awards represents the closing price of our common
stock on the date of award.
For additional information regarding our share-based
compensation plans, refer to Note 11.
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
outstanding 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.
43
Effects of Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) No.
2011-04, “Fair Value Measurement (Topic 820)—Amend-
ments 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
requirements for measuring fair value and disclosing
information about fair value measurements. Some of the
amendments clarify the FASB’s intent about the appli-
cation 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 begin-
ning after December 15, 2011. The adoption of ASU
2011-04 did 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,
“Comprehensive 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 comprehen-
sive income or in two separate but consecutive state-
ments. If two separate statements are presented, the
statement of other comprehensive income should
immediately follow 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 retrospectively. The adoption of ASU 2011-
05 will change the way we present comprehensive
income as current U.S. GAAP permits an annual presen-
tation of comprehensive income within the statement
of equity and quarterly presentation of comprehensive
income within the footnotes to the financial statements.
We expect to present comprehensive income in a sepa-
rate statement immediately following the statement
of net income beginning in our fiscal quarter ending
December 31, 2012.
In 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 exis-
tence of events or circumstances leads to the determi-
nation that it is more-likely-than-not that the fair value of
a reporting unit is less than its carrying amount. This
qualitative 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
chose to early adopt these new accounting provisions
effective with our goodwill impairment review during
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 carrying
value. See Note 6 for a more detailed discussion of our
goodwill and intangible assets.
In December 2011, the FASB issued ASU No. 2011-12,
“Comprehensive Income (Topic 220)—Deferral of the
Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other
Comprehensive Income in ASU 2011-05” (ASU 2011-12).
The provisions of ASU 2011-12 supersede the require-
ment of ASU 2011-05 to present the effect of reclas-
sification adjustments on the face of the financial
statements where net income is presented, by compo-
nent of net income, and on the face of the financial
statements where other comprehensive income is pre-
sented, by component of other comprehensive income.
ASU 2011-12 is effective for fiscal years, and interim peri-
ods within those years, beginning after December 15,
2011. We do not expect the adoption of ASU 2011-12 will
have a material effect on our financial statements as we
do not expect material reclassification adjustments out
of accumulated other comprehensive income.
In July 2012, the FASB issued ASU No. 2012- 02,
“Intangibles-Goodwill and Other (Topic) 350)—Testing
Indefinite-Lived Intangible Assets for Impairment” (ASU
2012-02). The provisions of ASU 2012-20 provide an entity
with the option to assess qualitative factors to deter-
mine whether it is more-likely-than-not that the fair value of
an indefinite-lived intangible asset is less than its carrying
value. If, based on the review of the qualitative factors,
an entity determines it is not more-likely-than-not that
44
the fair value of an indefinite-lived intangible asset is
less than its carrying value, no further action is required.
If an entity determines otherwise, then it is required to
determine the fair value of the indefinite-lived intan-
gible asset and perform the quantitative impairment
test required by prior accounting guidance. Similar to
under ASU 2011-08, the entity has the option to bypass
the qualitative assessment and proceed directly to the
fair value calculation and the entity may resume per-
forming the qualitative analysis in any subsequent
period. ASU 2012-02 is effective for fiscal years begin-
ning after September 15, 2012, with early adoption per-
mitted if the financial statements for the most recent
annual or interim period have not yet been issued.
We chose to early adopt these new accounting provi-
sions effective with our goodwill impairment review
during the fourth quarter of fiscal 2012. We determined,
based upon our qualitative assessment, that the fair
value calculation was not required as there were no
indications that the fair value of our indefinite-lived
intangible assets was less than their carrying value. See
Note 6 for a more detailed discussion of our goodwill
and intangible assets.
3. Fair Value of Financial Instruments
Fair value is defined as the price that would be received
from the sale of an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between
market participants on the measurement date. The
FASB established a three-level hierarchy for disclosure
based on the extent and level of judgment used to 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 inactive market, or other observable inputs. Level
3 inputs consist of valuations based on unobservable
inputs that are supported by little or no market activity.
The following tables present financial assets that we
measured at fair value on a recurring basis at September
30, 2012 and 2011. 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, 2012
Level 1
Level 2
Level 3
Total Fair
Value
Cash and cash
equivalents
Auction rate
securities (ARS)
Other long-term
investments
$ 178,459
$— $ — $ 178,459
—
1,082
—
—
7,991
7,991
—
1,082
Total
$ 179,541
$— $ 7,991 $ 187,532
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
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
investments under the Cabot Microelec tronics
Supplemental Employee Retirement Plan (SERP), which
is a nonqualified supplemental savings plan. The fair
value of the investments is determined through quoted
market prices within actively traded markets. Although
the investments are allocated to individual participants
and investment decisions are made solely by those par-
ticipants, the SERP has been deemed a nonqualified
plan. Consequently, the Company owns the assets and
the related liability for disbursement until such time a
participant makes a qualifying withdrawal. The long-
term asset and long-term liability were adjusted to
$1,082 in the fourth quarter of fiscal 2012 to reflect their
fair value as of September 30, 2012.
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, 2012
45
and 2011. Our ARS investments at September 30, 2012
consisted of two tax exempt municipal debt securities
with a total par value of $8,225. 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 cur-
rently 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
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 rec-
onciliation of the activity in fiscal 2012 for fair value mea-
surements using level 3 inputs:
Balance as of September 30, 2011
Net sales of ARS
Balance as of September 30, 2012
$ 8,041
(50)
$ 7,991
Based on our fair value assessment, we determined that
one ARS continues to be impaired as of September 30,
2012. This security has a fair value of $3,041 (par value
$3,275). 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 $50 of this secu-
rity during our fiscal quarter ended March 31, 2012 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, 2012. 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 7 for more information on
these investments.
4. Inventories
Inventories consisted of the following:
Raw materials
Work in process
Finished goods
Total
September 30,
2012
2011
$ 34,591
6,333
25,548
$ 26,217
4,964
24,947
$ 66,472
$ 56,128
The increase in our inventory balance at September 30,
2012 was primarily due to raw material purchases made
for business continuity purposes as we negotiate the
terms of a new supply agreement with an existing sup-
plier to replace the current agreement, which will expire
at the end of December 2012.
5. 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,
2012
2011
$ 21,566
101,627
181,117
6,417
25,346
66
4,890
$ 21,597
100,779
171,595
6,247
23,318
9,820
5,166
341,029
338,522
Less: accumulated depreciation
and amortization of assets under
capital leases
(216,009)
(207,731)
Net property, plant and equipment
$ 125,020
$ 130,791
Depreciation expense, including amortization of assets
recorded under capital leases, was $20,863, $21,271 and
$22,568 for the years ended September 30, 2012, 2011
and 2010, respectively.
In fiscal 2012, we recorded $968 in impairment expense
primarily related to the decision to write-off certain
operational assets at one of our foreign locations in
accordance with the applicable accounting standards
for the impairment and disposal of long-lived assets. Of
this amount, $842 and $126 was included in cost of
goods sold and selling and marketing expense, respec-
tively. Impairment expense for fiscal 2011 and 2010 was
not material.
46
6. Goodwill and Other Intangible Assets
Goodwill was $44,620 and $41,148 as of September 30,
2012 and 2011, respectively. The increase in goodwill
was due to a $1,712 correction discussed in Note 1,
related to the calculation of foreign deferred tax lia-
bilities associated with our fiscal 2009 acquisition of
Epoch, and to $1,760 in foreign exchange fluctuations of
the New Taiwan dollar.
The components of other intangible assets are as follows:
September 30, 2012
September 30, 2011
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
$ 8,387
8,270
2,550
12,586
31,793
1,190
$32,983
$ 4,902
6,775
2,550
6,283
20,510
$20,510
$ 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
* Total other intangible assets not subject to amortization primarily consist of trade names.
In fiscal 2012, we acquired $155 in other intangible
assets, and other intangible assets increased by $553
due to foreign exchange fluctuations of the New Taiwan
dollar. In fiscal 2011, other intangible assets increased
by $275 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 quar-
ter or more frequently if indicators of potential impair-
ment 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 seg-
ment or one level below an operating segment. We
have consistently determined the fair value of our
reporting units using a discounted cash flow analysis
(“step one”) of our projected future results. As dis-
cussed in Note 2 under the heading “Effects of Recent
Accounting Pronouncements”, 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 reporting units. We used this new
guidance in our annual impairment analysis for goodwill
in both fiscal 2012 and 2011. As also discussed in Note 2,
in fiscal 2012, we adopted new accounting pronounce-
ments related to our impairment review of indefinite-
lived intangible assets, which allows a qualitative
assessment of factors used in the impairment review.
Changes in economic and operating conditions that
occur after the annual impairment analysis or an interim
impairment analysis that impact our assumptions may
result in future impairment charges. As a result of the
review performed in the fourth quarter of fiscal 2012, we
determined that there was no impairment of our good-
will and intangible assets as of September 30, 2012.
Amortization expense was $2,682, $2,720 and $2,426 for
fiscal 2012, 2011 and 2010, respectively. Estimated future
amortization expense for the five succeeding fiscal years
is as follows:
Fiscal Year
2013
2014
2015
2016
2017
Estimated
Amortization
Expense
$2,637
2,510
2,442
2,020
1,187
7. 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,
2012
2011
$ 7,991
2,872
1,082
$ 8,041
1,504
827
$ 11,945
$ 10,372
As discussed in Note 3 of this Form 10-K, the two ARS
that we owned as of September 30, 2012 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
47
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 first recog-
nized 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 insurance; (3)
the fact that all interest payments have been received;
(4) our successful monetization of $50 of this ARS during
the quarter ended March 31, 2012; and (5) our intention
not to sell the security nor be required to sell the secu-
rity 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 3 of this Form 10-K, we recorded a
long-term asset and a corresponding long-term liability
of $1,082 representing the fair value of our SERP invest-
ments as of September 30, 2012.
8. Accrued Expenses, Income Taxes Payable
and Other Current Liabilities
Accrued expenses, income taxes payable and other cur-
rent liabilities consisted of the following:
Accrued compensation
Goods and services received,
not yet invoiced
Deferred revenue and
customer advances
Warranty accrual
Income taxes payable
Taxes, other than income taxes
Other
Total
September 30,
2012
2011
$ 18,532
$ 23,922
3,478
3,457
3,341
359
2,843
1,041
3,144
2,420
384
—
808
2,113
$ 32,738
$ 33,104
The decrease in accrued compensation was primarily
due to the payment of our AIP earned in fiscal 2011,
partially offset by the accrual of our AIP related to fiscal
2012. The income taxes payable represents amounts
payable in foreign tax jurisdictions, which are presented
gross of the income tax receivable amounts due from
U.S. tax jurisdictions as of September 30, 2012.
9. Debt
On February 13, 2012, we entered into a credit agree-
ment (the “Credit Agreement”) among the Company, as
Borrower, Bank of America, N.A., as administrative
agent, swing line lender and an L/C issuer, Bank of
America Merrill Lynch and J.P. Morgan Securities LLC, as
joint lead arrangers and joint book managers, JPMorgan
Chase Bank, N.A., as syndication agent, and Wells
Fargo Bank, N.A. as documentation agent. The Credit
Agreement provided us with a $175,000 term loan (the
“Term Loan”), which we drew on February 27, 2012 to
fund approximately half of the special cash dividend
we paid to our stockholders on March 1, 2012, and a
$100,000 revolving credit facility (the “Revolving Credit
Facility”), which remains undrawn, with sub-limits for
multicurrency borrowings, letters of credit and swing-
line loans. The Term Loan and the Revolving Credit
Facility are referred to as the “Credit Facilities”. The
Credit Agreement provides for an uncommitted accor-
dion feature that allows us to request the existing lend-
ers or, if necessary, third-party financial institutions to
provide additional capacity in the Revolving Credit
Facility, in an amount not to exceed $75,000. The Term
Loan has periodic scheduled principal repayments;
however, we may prepay the loan without penalty. The
Credit Facilities are scheduled to expire on February 13,
2017. In connection with the Credit Agreement, the
Company simultaneously terminated its previously exist-
ing $50,000 unsecured revolving credit facility, which
had no outstanding balance at the time of termination.
Borrowings under the Credit Facilities (other than in
respect of swing-line loans) bear interest at a rate per
annum equal to the “Applicable Rate” (as defined
below) plus, at our option, either (1) a LIBOR rate deter-
mined by reference to the cost of funds for deposits in
the relevant currency for the interest period relevant to
such borrowing or (2) the “Base Rate”, which is the high-
est of (x) the prime rate of Bank of America, N.A., (y) the
federal funds rate plus 1/2 of 1.00% and (z) the one-
month LIBOR rate plus 1.00%. The initial Applicable
Rate for borrowings under the Credit Facilities was
1.75% with respect to LIBOR borrowings and 0.25% with
respect to Base Rate borrowings, with such Applicable
Rate subject to adjustment based on our consolidated
leverage ratio. Swing-line loans will bear interest at the
Base Rate plus the Applicable Rate for Base Rate loans
under the Revolving Credit Facility. In addition to paying
interest on outstanding principal under the Credit
Agreement, we will pay a commitment fee to the lend-
ers under the Revolving Credit Facility in respect of the
unutilized commitments thereunder at a rate ranging
from 0.25% to 0.35%, based on our consolidated lever-
age ratio. Interest expense and commitment fees are
paid according to the relevant interest period and no
less frequently than at the end of each calendar quarter.
We paid $2,658 in customary arrangement fees, upfront
fees and administration fees, of which $537 and $1,800
remains in prepaid expenses and other current assets
and other long-term assets, respectively, on our
Consolidated Balance Sheet as of September 30, 2012.
48
We must also pay letter of credit fees as necessary. We
may voluntarily prepay the Credit Facilities without pre-
mium or penalty, subject to customary “breakage” fees
and reemployment costs in the case of LIBOR borrow-
ings. All obligations under the Credit Agreement are
guaranteed by each of our existing and future direct
and indirect domestic subsidiaries (the “Guarantors”).
The obligations under the Credit Agreement and guar-
antees of those obligations are secured, subject to
certain exceptions, by first priority liens and security
interests in the assets of the Company and its domestic
subsidiaries.
The Credit Agreement contains covenants that restrict
the ability of the Company and its subsidiaries to take
certain actions, including, among other things and sub-
ject to certain significant exceptions: creating liens,
incurring indebtedness, making investments, engaging
in mergers, selling property, paying dividends or
amending organizational documents. The Credit Agree-
ment requires us to comply with certain financial ratio
maintenance covenants, including a maximum consoli-
dated leverage ratio of 3.00 to 1.00 through June 30,
2013 and a minimum consolidated fixed charge cover-
age ratio of 1.25 to 1.00. As of September 30, 2012, our
consolidated leverage ratio was 1.60 to 1.00 and our
consolidated fixed charge coverage ratio was 10.93 to
1.00. The Credit Agreement also contains customary
affirmative covenants and events of default. We believe
we are in compliance with these covenants.
At September 30, 2012, we believe the fair value of the
Term Loan approximates its carrying value of $172,812 as
the loan bears a floating market rate of interest. As of
September 30, 2012, $10,937 of the debt outstanding is
classified as short term.
As of September 30, 2012, scheduled principal repay-
ments of the Term Loan were as follows:
Fiscal Year
2013
2014
2015
2016
2017
Total
Principal
Repayments
$ 10,937
10,938
15,312
21,875
113,750
$172,812
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
derivatives, whether designated in hedging relation-
ships or not, are required to be recorded on the balance
sheet at fair value. At September 30, 2012, 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 associated 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 2 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,
2012
Fair Value at
September 30,
2011
Fair Value at
September 30,
2012
Fair Value at
September 30,
2011
$38
$ —
$48
$—
$—
$—
$—
$—
The following table summarizes the effect of our derivative instrument on our Consolidated Statement of Income for
the fiscal years ended September 30, 2012, 2011 and 2010:
Gain (Loss) Recognized in Statement of Income
Fiscal Year Ended
Derivatives Not Designated
as Hedging Instruments
Statement of Income Location
September 30,
2012
September 30,
2011
September 30,
2010
Foreign exchange contracts
Other income (expense), net
$154
$(806)
$(555)
49
11. Share-Based Compensation Plans
Equity Incentive Plan and Omnibus Incentive Plan
In March 2004, our stockholders approved our Second
Amended and Restated Cabot Microelectronics Corpo-
ration 2000 Equity Incentive Plan (the “EIP”), as amended
and restated September 23, 2008. On March 6, 2012,
our stockholders approved our new 2012 Omnibus
Incentive Plan (the “OIP”). As of this time, all share-
based awards are now being made from the OIP, and
the EIP is no longer available for any awards. The OIP is
administered by the Compensation Committee of the
Board of Directors and is intended to provide manage-
ment with the flexibility to attract, retain and reward our
employees, directors, consultants and advisors. The OIP
allows for the granting of six types of equity incentive
awards: stock options, restricted stock, restricted stock
units, stock appreciation rights (SARs), performance-
based awards and substitute awards. The OIP also pro-
vides for cash incentive awards to be made. Substitute
awards under the OIP are those awards that, in connec-
tion with an acquisition, may be granted to employees,
directors, consultants or advisors of the acquired com-
pany, in substitution for equity incentives held by them
in the seller or the acquired company. No SARs, perfor-
mance awards, or substitute awards have been granted
to date under either plan. The OIP authorizes up to
4,934,444 shares of stock to be granted thereunder,
including up to 2,030,952 shares of stock in the aggre-
gate of awards other than options or SARs, and up to
2,538,690 incentive stock options. The 4,934,444 shares
of stock represents 2,901,360 shares of newly authorized
shares and 2,033,084 shares previously available under
the EIP. In addition, shares that become available from
awards under the EIP and the OIP because of events
such as forfeitures, cancellations or expirations, or
because shares subject to an award are withheld to sat-
isfy tax withholding obligations, will also be available for
issuance under the OIP. Shares issued under our share-
based compensation plans are issued from new shares
rather than from treasury shares.
On March 2, 2012, we completed a leveraged recapital-
ization pursuant to which we paid a special cash divi-
dend of $15 per share to our stockholders. In conjunction
with this recapitalization, the EIP and the OIP required
us to proportionally adjust the shares available for
issuance under them. The number of shares available
under the plans was increased by multiplying the num-
ber by a factor of 1.45068, representing the ratio of the
official NASDAQ closing price of $51.92 per share on
March 1, 2012, the dividend payment date, to the official
NASDAQ opening price of $35.79 per share on March 2,
2012, the ex-dividend date. The number of authorized
shares in the OIP noted above includes the effects of
this recapitalization.
Non-qualified stock options issued under the OIP, as
they were under the EIP, are generally time-based and
provide for a ten-year term, with options generally vest-
ing 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 $6,802,
$6,871 and $7,081 in fiscal 2012, 2011 and 2010, respec-
tively. For additional information on our accounting for
share-based compensation, see Note 2 to the consoli-
dated financial statements. Under the OIP, as under the
EIP, employees may also be granted ISOs to purchase
common stock at not less than the fair value on the date
of the grant. No ISOs have been granted to date under
either plan.
Under the OIP, as under the EIP, employees and non-
employees may be awarded shares of restricted stock
or restricted stock units, which generally vest over a
four-year period, with first vesting on the anniversary of
the grant date. 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. Hold-
ers of restricted stock, and restricted stock units, if
specified in the award agreements, have all the rights
of stockholders, including voting and dividend rights,
subject to the above restrictions, although the current
holders of restricted stock units do not have such rights.
Restricted shares under the OIP, as under the EIP,
also may be purchased and placed “on deposit”
by executive officers pursuant to the 2001 Deposit
Share Program. Shares purchased under this Deposit
Share Program receive a 50% match in restricted shares
(“Award Shares”). These Award Shares vest at the end
of a three-year period, and are subject to forfeiture
upon early withdrawal of the deposit shares. Compen-
sation expense related to our restricted stock and
restricted stock unit awards and restricted shares
matched at 50% pursuant to the Deposit Share Program
was $5,674, $5,184 and $4,134 for fiscal 2012, 2011 and
2010, respectively.
Employee Stock Purchase Plan
In March 2008, our stockholders approved our 2007
Cabot Microelectronics Employee Stock Purchase Plan
(the “ESPP”), which amended the ESPP for the primary
purpose of increasing the authorized shares of common
stock to be purchased under the ESPP from 475,000
designated shares to 975,000 shares. The ESPP required
us to proportionally adjust the cumulative number of
shares designated under the plan to reflect the effect
of the leveraged recapitalization with a special cash
50
dividend. The cumulative number of shares designated
under the ESPP was increased by a factor of 1.45068
representing the ratio of the official NASDAQ closing
price of $51.92 per share on the dividend payment date,
to the official NASDAQ opening price of $35.79 per
share on the ex-dividend date. As of September 30,
2012, a total of 814,625 shares are available for purchase
under the ESPP. The ESPP allows all full-time, and
certain part-time, employees of our Company and its
subsidiaries to purchase shares of our common stock
through payroll deductions. Employees can elect to
have up to 10% of their annual earnings withheld to
purchase our stock, subject to a maximum number of
shares that a participant may purchase and a maximum
dollar expenditure in any six-month offering period,
and certain other criteria. The provisions of the ESPP
allow shares to be purchased at a price no less than the
lower of 85% of the closing price at the beginning
or end of each semi-annual stock purchase period. A
total of 70,645, 61,364, and 38,050 shares were issued
under the ESPP during fiscal 2012, 2011 and 2010,
respectively. Compensation expense related to the
ESPP was $735, $508 and $360 in fiscal 2012, 2011 and
2010, respectively.
Directors’ Deferred Compensation Plan
The Directors’ Deferred Compensation Plan (DDCP), as
amended and restated September 23, 2008, became
effective in March 2001 and applies only to our non-
employee directors. The cumulative number of shares
deferred under the plan was 71,781 and 47,530 as of
September 30, 2012 and 2011, respectively. The DDCP
required us to proportionally adjust the cumulative
number of shares deferred under the plan to reflect the
effect of the leveraged recapitalization with a special
cash dividend. The cumulative number of shares deferred
under the DDCP was increased by a factor of 1.45068
representing the ratio of the official NASDAQ closing
price of $51.92 per share on the dividend payment date,
to the official NASDAQ opening price of $35.79 per
share on the ex-dividend date. Compensation expense
related to the DDCP was $95, $83 and $68 for fiscal 2012,
2011 and 2010, 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 purchases. We calculate share-based
compensation expense using the straight-line approach
based on awards ultimately expected to vest, which
requires the use of an estimated forfeiture rate. Our
estimated forfeiture rate is primarily based on historical
experience, but may be revised in future periods if
actual forfeitures differ from the estimate. We use the
Black-Scholes option-pricing model to estimate the
grant date fair value of our stock options and employee
stock purchase plan purchases. This model requires the
input of highly subjective assumptions, including the
price volatility of the underlying stock, the expected
term of our stock options and the risk-free interest rate.
We estimate the expected volatility of our stock options
based on a combination of our stock’s historical volatil-
ity and the implied volatilities from actively-traded
options on our stock. Prior to fiscal 2012, we calculated
the expected term of our stock options using the simpli-
fied method, due to our limited amount of historical
option exercise data, and we added a slight premium
to this expected term for employees who meet the defi-
nition 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. We experienced a significant increase in the vol-
ume of stock option exercises in fiscal years 2011 and
2012. Consequently, we used this exercise data, as
well as historical exercise data, to calculate the expected
term of our stock options granted in fiscal 2012, rather
than using the simplified method, and we continued
to add a slight premium for employees who meet the
definition of retirement eligible under their grant terms.
The expected term we calculated using option exercise
history was within 1% of the expected term calculated
under the simplified method. 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 share-based awards, as shown below,
was estimated using the Black-Scholes model with the
following weighted-average assumptions, excluding the
effect of our leveraged recapitalization:
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,
2012
2011
2010
$ 15.66
6.38
$ 16.49
6.28
$ 13.42
6.35
38%
1.3%
—
36%
2.1%
—
39%
2.6%
—
$ 8.78
0.50
$ 9.05
0.50
$ 7.45
0.50
36%
0.1%
—
28%
0.2%
—
33%
0.3%
—
51
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 transfer-
able. Because employee stock options and employee
stock purchases have certain characteristics that are
significantly different from traded options, and because
changes in the subjective assumptions can materially
affect the estimated value, our use of the Black-Scholes
model for estimating the fair value of stock options and
employee stock purchases may not provide an accurate
measure. Although the value of our stock options and
employee stock purchases are determined in accor-
dance with applicable accounting standards using an
option-pricing model, those values may not be indica-
tive of the fair values observed in a willing buyer/willing
seller market transaction.
The fair value of our restricted stock and restricted stock
unit awards represents the closing price of our common
stock on the date of award. Share-based compensation
expense related to restricted stock and restricted stock
unit awards is recorded net of expected forfeitures.
Share-Based Compensation Expense
Total share-based compensation expense for the years
ended September 30, 2012, 2011 and 2010, 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,
2012
2011
2010
$ 1,541 $ 1,221
$ 986
1,105
1,392
9,268
(4,118)
1,060
1,124
9,241
(4,060)
908
1,025
8,724
(4,145)
$ 9,188 $ 8,586
$ 7,498
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 annual equity
awards in March 2012 at the time of our Annual Meeting
of Stockholders, and a new non-employee director
received an initial and annual equity award in June 2012,
pursuant to the OIP. The award agreements for non-
employee directors provide for immediate vesting of
the award at the time of termination of service for any
reason other than by reason of Cause, Death, Disability
or a Change in Control, as defined in the OIP, if at such
time the non-employee director has completed an
equivalent of at least two full terms as a director of the
Company, as defined in the Company’s bylaws. Five of
the Company’s non-employee directors had completed
at least two full terms of service as of the date of the
March 2012 award. Consequently, the requisite service
period for the award has already been satisfied and we
recorded the fair value of $749 of the awards to these
five directors to share-based compensation expense in
the fiscal quarter ended March 31, 2012 rather than
recording that expense over the one-year vesting period
stated in the award agreement, as is done for the other
three non-employee directors.
Stock Option Activity
As required by the EIP, the exercise prices and the num-
ber of outstanding non-qualified stock options (NQSOs)
were adjusted to reflect the leveraged recapitalization
with a special cash dividend. The exercise prices of out-
standing NQSOs were reduced by multiplying them by
a factor of 0.68933, representing the ratio of the official
opening price of our common stock on the NASDAQ
stock market of $35.79 per share on the ex-dividend
date, to the official closing price of our common stock
on the NASDAQ stock market of $51.92 per share on the
last trading day immediately prior to the ex-dividend
date. The number of outstanding NQSOs was increased
by multiplying the number by a factor of 1.45068, repre-
senting the ratio of the official NASDAQ closing price of
$51.92 per share on the dividend payment date to the
official NASDAQ opening price of $35.79 per share on
the ex-dividend date. This adjustment did not result in
additional share-based compensation expense in the
period as the fair value of the outstanding NQSOs
immediately following the payment of the special cash
dividend was equal to the fair value immediately prior to
such distribution.
52
A summary of stock option activity under the EIP and OIP as of September 30, 2012, and changes during the fiscal
2012 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, 2011
Granted
Exercised
Forfeited or canceled
Mandatory proportional adjustment
due to recapitalization
Outstanding at September 30, 2012
Exercisable at September 30, 2012
Expected to vest at September 30, 2012
3,950,537
477,444
(976,645)
(98,104)
1,780,394
5,133,626
3,585,204
1,388,924
$ 39.52
39.57
34.92
36.76
—
$26.75
$27.18
$26.21
4.9
3.4
8.3
$44,262
$29,725
$12,399
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 $35.14 per share on the last trading day of
fiscal 2012 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 2012. The total
intrinsic value of options exercised was $6,879, $13,135
and $492 for fiscal 2012, 2011 and 2010, respectively.
The total cash received from options exercised was
$34,107, $35,955 and $2,283 for fiscal 2012, 2011 and
2010, respectively. The actual tax benefit realized for the
tax deductions from options exercised was $2,239,
$4,401 and $175 for fiscal 2012, 2011 and 2010, respec-
tively. The total fair value of stock options vested during
fiscal years 2012, 2011 and 2010 was $6,796, $6,321 and
$8,494, respectively. As of September 30, 2012, there
was $9,623 of total unrecognized share-based com-
pensation expense related to unvested stock options
granted under the EIP and OIP. That cost is expected
to be recognized over a weighted-average period of
2.5 years.
the ex-dividend date. This adjustment did not result in
additional share-based compensation expense in the
period as the fair value of the outstanding RSUs imme-
diately following the payment of the special cash divi-
dend was equal to the fair value immediately prior to
such distribution.
A summary of the status of the restricted stock awards
and restricted stock unit awards outstanding that were
granted under the EIP and OIP as of September 30, 2012,
and changes during fiscal 2012, are presented below:
Restricted
Stock Awards
and Units
Weighted-
Average Grant
Date Fair Value
Nonvested at
September 30, 2011
Granted
Vested
Forfeited
Mandatory proportional
adjustment due to
recapitalization
Nonvested at
September 30, 2012
369,681
164,170
(167,159)
(10,242)
$ 34.29
39.77
34.60
31.55
37,674
—
394,124
$34.15
Restricted Stock
Similarly, the EIP required that we adjust the number of
outstanding restricted stock units (RSUs) as a result of
the leveraged recapitalization with a special cash divi-
dend. The number of outstanding RSUs was increased
by multiplying the number by a factor of 1.45068, repre-
senting the ratio of the official NASDAQ closing price
of $51.92 per share on the dividend payment date to the
official NASDAQ opening price of $35.79 per share on
As of September 30, 2012, there was $8,084 of total
unrecognized share-based compensation expense
related to nonvested restricted stock awards and
restricted stock units under the EIP and OIP. That cost is
expected to be recognized over a weighted-average
period of 2.5 years. The total fair values of restricted
stock awards and restricted stock units vested during
fiscal years 2012, 2011 and 2010 were $5,784, $4,452 and
$3,209, respectively.
53
13. Other Income (Expense), Net
Other income (expense), net, consisted of the following:
stock—other
September 30, 2011
12. Savings Plan
Effective in May 2000, we adopted the Cabot Microelec-
tronics Corporation 401(k) Plan (the “401(k) Plan”), which
is a qualified defined contribution plan, covering all eli-
gible U.S. employees meeting certain minimum age and
eligibility requirements, as defined by the 401(k) Plan.
Participants may make elective contributions of up to
60% of their eligible compensation. All amounts contrib-
uted 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 $4,210,
$4,201 and $2,981 for the fiscal years ended September
30, 2012, 2011 and 2010, respectively.
Interest income
Other expense
Year Ended September 30,
2012
2011
2010
$ 146
(1,490)
$ 238
(1,556)
$ 228
(729)
Total other income (expense), net
$ (1,344)
$ (1,318)
$ (501)
Other expense primarily represents the gains and losses
recorded on transactions denominated in foreign cur-
rencies. Other expense in fiscal 2012 was consistent with
other expense recorded in fiscal 2011. The increase in
other expense in fiscal 2011 from fiscal 2010 was primar-
ily 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 con-
tracts discussed in Note 10 of this Form 10-K. As dis-
closed in Note 1, prior period other income (expense)
amounts have been adjusted to exclude interest
expense to conform to the current year presentation.
14. Stockholders’ Equity
The following is a summary of our capital stock activity
over the past three years:
Number of Shares
September 30, 2009
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
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
Exercise of stock options
Restricted stock under EIP and
OIP, 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
26,143,116
74,019
127,390
2,140
38,050
26,384,715
1,085,965
115,069
5,223
61,364
27,652,336
976,645
159,879
5,022
70,645
Treasury
Stock
2,698,234
723,184
24,651
3,446,069
1,235,668
33,840
4,715,577
929,407
37,304
September 30, 2012
28,864,527
5,682,288
Common Stock
Each share of common stock, including of restricted
stock awards, but not restricted stock units, entitles the
holder to one vote on all matters submitted to a vote
of Cabot Microelectronics’ stockholders. Common
stockholders are entitled to receive ratably the divi-
dends, if any, as may be declared by the Board of
Directors. The number of authorized shares of common
stock is 200,000,000 shares.
Share Repurchases
In November 2010, our Board of Directors authorized
a 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 and we repurchased
929,407 shares for $33,026 during fiscal 2012 under this
54
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
Adjustment of prior amounts, net
of valuation allowance
Domestic production deduction
Tax-exempt interest income
Other, net
Year Ended
September 30,
2012
2011
2010
35.0% 35.0% 35.0%
(0.5)
0.2
(1.9)
0.8
0.7
0.9
(0.5)
(0.0)
0.4
(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
Provision for income taxes
35.1% 34.5% 32.5%
In fiscal 2012, 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. We have not provided deferred taxes on
approximately $31.1 million of undistributed earnings of
such subsidiaries. These earnings could become subject
to additional income tax if they are remitted as divi-
dends to the U.S. parent company, loaned to the U.S.
parent company, or upon sale of subsidiary stock.
Determination of the amount of unrecognized deferred
tax liability related to these earnings is not practicable.
The increase in our effective tax rate in fiscal 2012
was primarily due to the expiration of the research and
experimentation tax credit effective December 31, 2011,
decreased income in the foreign subsidiaries where we
have elected to permanently reinvest earnings, and cer-
tain adjustments made to prior year tax estimates.
These increases were partially offset by decreased tax
effects on share-based compensation and decreased
taxable executive compensation 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 head-
ing “Results of Operations”, income tax expense in fis-
cal 2012 included $973 of non-material adjustments to
correct various prior period amounts and income tax
expense in fiscal 2011 included $671 of adjustments to
executive compensation in fiscal 2008 through 2010 and
a $497 reversal of a deferred tax asset for certain share-
based compensation expense.
program. As of December 13, 2011, we had $82,869
remaining under this share repurchase program. In
conjunction with a new capital management initiative,
on December 13, 2011, our Board of Directors autho-
rized an increase in the amount available under our
share repurchase program to $150,000. With this
increased authorization, as of September 30, 2012,
$130,000 remains outstanding under our share repur-
chase program. Shares are repurchased from time to
time, depending on market conditions, in open market
transactions, at management’s discretion. We repur-
chased 564,568 shares for $25,000 in fiscal 2011 under a
prior share repurchase 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 prior program at a cost of $24,998. To
date, we have funded share repurchases under our share
repurchase program from our existing cash balance,
and anticipate we will continue to do so. The program,
which became effective on the authorization date, may
be suspended or terminated at any time, at the
Company’s discretion. For additional information on
share repurchases, see Part II, Item 5. “Market for
Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities”.
Separate from this share repurchase program, a total of
37,304, 33,840 and 24,651 shares were purchased during
fiscal 2012, 2011 and 2010, respectively, pursuant to the
terms of our EIP and OIP as shares withheld from award
recipients to cover payroll taxes on the vesting of shares
of restricted stock granted under the EIP and OIP.
15. Income Taxes
Income before income taxes was as follows:
Domestic
Foreign
Total
Year Ended September 30,
2012
2011
2010
$ 55,555
7,316
$ 54,886
24,026
$ 39,835
33,442
$ 62,871
$ 78,912
$ 73,277
Taxes on income consisted of the following:
U.S. federal and state:
Current
Deferred
Total
Foreign:
Current
Deferred
Total
Year Ended September 30,
2012
2011
2010
$ 19,975
(308)
$ 15,700
6,194
$ 15,372
(2,643)
$ 19,667
$ 21,894
$ 12,729
$ 5,593
(3,215)
$ 6,616
(1,260)
$ 10,597
493
2,378
5,356
11,090
Total U.S. and foreign
$ 22,045
$ 27,250
$ 23,819
55
The accounting guidance regarding uncertainty in income
taxes prescribes a threshold for the financial statement
recognition and measurement of tax positions taken or
expected to be taken on a tax return. Under these stan-
dards, we may recognize the tax benefit of an uncertain
tax position only if it is more likely than not that the tax
position will be sustained by the taxing authorities,
based on the technical merits of the position.
The following table presents the changes in the balance
of gross unrecognized tax benefits during the last three
fiscal years:
Balance September 30, 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
Balance September 30, 2011
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, 2012
$ 249
—
153
(28)
(201)
173
123
307
—
—
603
51
114
(353)
(132)
$ 283
We recognize interest and penalties related to uncertain
tax positions as income tax expense in our financial
statements. Interest and penalties accrued on our
Consolidated Balance Sheet were $4 and $19 at
September 30, 2012 and 2011, 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 2009
through 2011. We believe the tax periods open to exam-
ination by U.S. state and local governments include fis-
cal years 2008 through 2011 and the tax periods open to
examination by foreign jurisdictions include fiscal years
2008 through 2011. We do not anticipate a significant
change to the total amount of unrecognized tax bene-
fits within the next 12 months.
Significant components of deferred income taxes were
as follows:
Deferred tax assets:
Employee benefits
Inventory
Bad debt reserve
Share-based compensation expense
Net operating losses
Other
Valuation allowance
September 30,
2012
2011
$ 4,035
2,930
1,708
12,659
2,292
2,656
(1,378)
$ 3,246
2,886
387
12,184
768
1,558
—
Total deferred tax assets
$ 24,902
$ 21,029
Deferred tax liabilities:
Translation adjustment
Depreciation and amortization
Unremitted foreign earnings
Other
$ 7,966
3,776
1,810
645
$ 10,576
1,568
3,647
127
Total deferred tax liabilities
$ 14,197
$ 15,918
As of September 30, 2012, the Company had foreign
and state net operating loss carryforwards (NOLs) of
$7,772 and $1,528, respectively, which will expire begin-
ning in fiscal year 2017 through fiscal year 2030. We pro-
vided a gross valuation allowance of $1,699 on these
NOLs during fiscal 2012. As of September 30, 2012,
the Company also had $1,818 in state tax credit carry-
forwards, for which we have recorded a $1,047 gross
valuation allowance in fiscal 2012.
16. 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,
in 2011, we concluded litigation in the United States
against a competitor in which the validity of certain of
our CMP slurry patents for tungsten CMP was upheld,
although the specific competitive products at issue
were found to not infringe the claims at issue.
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
56
cost of goods sold. Our warranty reserve requirements
changed during fiscal 2012 as follows:
Balance as of September 30, 2011
Reserve for product warranty during
the reporting period
Settlement of warranty
Balance as of September 30, 2012
$ 384
867
(892)
$ 359
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, 2012, 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. Rent expense under such arrange-
ments during fiscal 2012, 2011 and 2010 totaled $3,199,
$2,934 and $2,480, 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 agreement expired in December 2011.
Future minimum rental commitments under noncancel-
able leases as of September 30, 2012 are as follows:
Fiscal Year
2013
2014
2015
2016
2017
Thereafter
Amount related to interest
Capital lease obligation
Operating
Capital
$2,830
2,179
1,116
1,013
785
520
$8,443
$ 2
5
5
5
4
—
21
—
$21
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 busi-
ness 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 gener-
ally 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 are currently working with
Cabot Corporation to negotiate the terms of a new
fumed silica supply agreement that we anticipate would
take effect following the expiration of the current agree-
ment. Since December 2001, we have purchased fumed
alumina primarily under a fumed alumina supply agree-
ment with Cabot Corporation that expired in December
2011. We are now operating under a renewed fumed
alumina supply agreement with Cabot Corporation,
which expires in April 2013, under which we are obli-
gated to pay certain fixed, capital and variable costs,
and have certain take-or-pay obligations, We currently
anticipate we will not have to pay any shortfall under
these agreements. Purchase obligations include $8,994
of contractual commitments for fumed silica and fumed
alumina under these contracts.
57
17. 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,
2012
2011
2010
$40,826
$51,662
$49,458
22,506,408
22,895,568
23,083,807
773,890
539,036
188,772
23,280,298
23,434,604
23,272,579
$ 1.81
$ 1.75
$ 2.26
$ 2.20
$ 2.14
$ 2.13
For the twelve months ended September 30, 2012, 2011,
and 2010, approximately 1.3 million, 1.3 million and 2.6
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.
than ten percent of our total revenue in fiscal 2012, 2011
and 2010:
Revenue:
Taiwan
South Korea
Japan
Singapore
Year Ended September 30,
2012
2011
2010
$124,732
68,573
56,488
*
$132,089
56,321
57,889
47,441
$129,533
42,669
60,207
44,316
18. Financial Information by Industry Segment,
*Denotes less than ten percent of total
Geographic Area and Product Line
We operate predominantly in one industry segment—
the development, manufacture, and sale of CMP con-
sumables. Revenues are attributed to the United States
and foreign regions based upon the customer location
and not the geographic location from which our prod-
ucts 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,
2012
2011
2010
$ 56,770
342,958
27,929
$ 61,540
356,074
27,828
$ 55,666
327,202
25,333
$ 427,657
$ 445,442
$ 408,201
$ 49,325
75,690
5
$ 50,503
80,280
8
$ 55,576
60,235
—
Total
$ 125,020
$ 130,791
$ 115,811
The following table shows revenue from sales to cus-
tomers in foreign countries that accounted for more
The following table shows net property, plant and equip-
ment in foreign countries that accounted for more than
ten percent of our total net property, plant and equip-
ment in fiscal 2012, 2011 and 2010:
Property, plant and
equipment, net:
Japan
Taiwan
South Korea
Year Ended September 30,
2012
2011
2010
$ 43,411
18,397
12,580
$ 50,236
17,577
*
$ 42,225
17,542
*
*Denotes less than ten percent of total
The following table shows revenue generated by prod-
uct line in fiscal 2012, 2011 and 2010:
Revenue:
Tungsten slurries
Dielectric slurries
Copper slurries
Polishing pads
Engineered Surface
Finishes
Data storage slurries
Year Ended September 30,
2012
2011
2010
$ 161,756
119,320
67,157
33,725
$ 164,098
121,543
76,285
31,045
$ 147,788
117,484
75,898
29,909
24,878
20,821
24,685
27,786
16,316
20,806
Total
$ 427,657
$ 445,442
$ 408,201
58
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, 2012. 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)
Interest expense
Other income (expense), net
Income (loss) before income taxes
Provision (benefit) for income taxes
Sept. 30,
2012
June 30, March 31,
2012
2012
Dec. 31,
2011
Sept. 30,
2011
June 30, March 31,
2011
2011
Dec. 31,
2010
$ 110,621
56,883
$ 115,678
60,462
$99,236
53,442
$ 102,122
52,843
$ 109,731
58,814
$ 111,846
58,821
$ 109,660
56,927
$ 114,205
56,774
53,738
55,216
45,794
49,279
50,917
53,025
52,733
57,431
15,401
7,288
10,572
33,261
20,477
961
(681)
18,835
7,196
15,415
7,458
10,695
33,568
21,648
955
(864)
19,829
6,587
14,071
7,434
15,177
36,682
9,112
354
97
8,855
3,325
13,755
7,336
12,901
33,992
15,287
39
104
15,352
4,937
14,687
7,702
11,677
34,066
16,851
44
(829)
15,978
6,689
14,573
7,785
11,008
33,366
19,659
30
(281)
19,348
6,559
14,919
6,791
11,567
33,277
19,456
37
683
20,102
7,010
13,856
7,480
11,676
33,012
24,419
44
(891)
23,484
6,992
Net income (loss)
$ 11,639
$ 13,242
$ 5,530
$ 10,415
$ 9,289
$ 12,789
$ 13,092
$ 16,492
Basic earnings (loss) per share
$
0.51
$
0.57
$ 0.24
$
0.46
$
0.41
$
0.55
$
0.57
$
0.73
Weighted-average basic shares outstanding
22,920
23,120
22,768
22,508
22,816
23,119
23,032
22,710
Diluted earnings (loss) per share
$
0.49
$
0.55
$ 0.23
$
0.45
$
0.40
$
0.54
$
0.55
$
0.71
Weighted-average diluted shares outstanding
23,706
23,939
23,780
22,926
23,191
23,797
23,693
23,131
Dividends per share
$
— $
— $ 15.00
$
— $
— $
— $
— $
—
59
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, 2012
September 30, 2011
September 30, 2010
Balance
at Beginning
of Year
Amounts
Charged to
Expenses
Deductions
and
Adjustments
Balance
at End
of Year
$1,090
1,121
1,277
$3,771
(18)
(113)
$ (104)
(13)
(43)
$4,757
1,090
1,121
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, 2012
September 30, 2011
September 30, 2010
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
$384
375
360
$ 867
1,074
1,161
$ —
—
—
$ (892)
(1,065)
(1,146)
$ 359
384
375
We have provided a valuation allowance on certain deferred tax assets. The following table sets forth activities in our
valuation allowance:
Valuation Allowance
Year ended:
September 30, 2012
Balance
at Beginning
of Year
Amounts
Charged to
Expenses
Deductions
and
Adjustments
Balance
at End
of Year
$ —
$1,378
$ —
$1,378
60
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
61
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 proce-
dures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (“the Exchange
Act”)), as of September 30, 2012. Based on that eval-
uation, 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, summa-
rized and reported within the time periods specified in
the SEC’s rules and forms, and to ensure that such infor-
mation is accumulated and communicated to manage-
ment, 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
maintaining 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
evaluation, our management concluded that the Com-
pany’s internal control over financial reporting was
effective as of September 30, 2012. The effectiveness
of the Company’s internal control over financial report-
ing as of September 30, 2012 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 rea-
sonably likely to materially affect, our internal control
over financial reporting.
62
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
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
sections captioned “Election of Directors” and “Board
Structure and Compensation” in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be
held March 5, 2013 (the “Proxy Statement”). In addition,
for information with respect to the executive officers of
our Company, see “Executive Officers” in Part I of this
Form 10-K and the section captioned “Section 16(a)
Beneficial Ownership Reporting Compliance” in the
Proxy Statement. Information required by Item 405 of
Regulation S-K is incorporated by reference from the
information contained in the section captioned “Section
16(a) Beneficial Ownership Reporting Compliance” in
the Proxy Statement.
We have adopted a code of business conduct for all of
our employees and directors, including our principal
executive officer, other executive officers, principal
financial officer and senior financial personnel. A copy of
our code of business conduct is available free of charge
on our Company website at www.cabotcmp.com. We
intend to post on our website any material changes to,
or waivers from our code of business conduct, if any,
within two days of any such event.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is
incorporated by reference from the information con-
tained in the section captioned “Executive Compensa-
tion” in the Proxy Statement.
63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Equity Compensation Plan Information
Shown below is information as of September 30, 2012, with respect to the shares of common stock that may be
issued under Cabot Microelectronics’ existing equity compensation plans.
(a)
(b)
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
5,314,202(2)
—
5,314,202(2)
$26.75(2)
—
$26.75(2)
5,750,242(3)
—
5,750,242(3)
Plan Category
Equity compensation plans approved
by security holders(1)
Equity compensation plans not approved
by security holders
Total
(1) Equity Compensation plans consist of our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (EIP),
as amended and restated September 23, 2008, our 2012 Omnibus Incentive Plan (OIP), and our Employee Stock Purchase Plan (ESPP). As of
March 6, 2012, all securities available for future issuance under the EIP were transferred to the OIP and the EIP is no longer available for any
future awards. All share amounts in the above table reflect the effect of the leveraged recapitalization with a special cash dividend. See Note 11
of the Notes to the Consolidated Financial Statements for more information regarding our equity compensation plans.
(2) Column (a) includes 71,781 shares that non-employee directors, who defer their compensation under our Directors’ Deferred Compensation
Plan, have the right to acquire pursuant thereto, and 108,795 shares that non-employee directors and non-U.S. employees have the right to
acquire upon the vesting of the equivalent restricted stock units that they have been awarded under our equity incentive plan. Column (b)
excludes both of these from the weighted-average exercise price.
(3) Column (c) includes 814,625 shares available for future issuance under the ESPP.
The other information required by Item 12 of Form 10-K
is incorporated by reference from the information 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.
64
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, 2012, 2011 and 2010
Consolidated Balance Sheets at September 30, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended September 30, 2012, 2011 and 2010
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2012, 2011 and 2010
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 (9)
3.3 (1)
4.1 (2)
10.1 (10)
Description
Amended and Restated By-Laws of Cabot Microelectronics Corporation.
Form of Amended and Restated Certificate of Incorporation of Cabot Microelectronics Corporation.
Form of Cabot Microelectronics Corporation Common Stock Certificate.
Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan, as
amended and restated September 23, 2008.*
10.2 (13)
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan Non-Qualified Stock Option Grant Agreement (non-employee directors).*
10.4 (12)
10.5 (12)
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)).*
10.6 (13)
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan Restricted Stock Units Award Agreement (non-employee directors).*
10.15 (11) Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated
January 1, 2010.*
Form of Amended and Restated Change in Control Severance Protection Agreement.**
10.22 (11) Cabot Microelectronics Corporation 401(k) Plan, as amended.*
10.23 (10)
10.28 (10) Directors’ Deferred Compensation Plan, as amended September 23, 2008.*
10.30 (3)
10.32 (3)
10.33 (10) Adoption Agreement, as amended September 23, 2008, of Cabot Microelectronics Corporation
Form of Deposit Share Agreement.***
Fumed Alumina Supply Agreement.+
Supplemental Employee Retirement Plan.*
10.34 (12) Code of Business Conduct.
10.36 (4)
10.38 (5)
10.42 (6)
10.46 (12) Non-Employee Directors’ Compensation Summary effective March 2011.*
10.49 (7)
Directors’ Cash Compensation Umbrella Program.*
Employment Offer Letter dated November 2, 2003.*
Fumed Silica Supply Agreement.+
Amendment No. 1 to Fumed Silica Supply Agreement, between Cabot Microelectronics Corporation
and Cabot Corporation.+
10.50 (8)
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.*
10.51 (10)
10.53 (10) Cabot Microelectronics Corporation Supplemental Employee Retirement Plan, as amended.*
10.54 (12) Cabot Microelectronics Corporation Annual Incentive and Sales Incentive Programs.*
10.57 (11) Adoption Agreement, as amended January 1, 2010, of Cabot Microelectronics Corporation 401(k) Plan.*
10.58 (12)
10.59 (14) General Release, Waiver and Covenant Not to Sue.*
Employee Stock Purchase Plan Prospectus as of November 24, 2010.*
65
10.60 (15) Credit Agreement dated February 13, 2012 among Cabot Microelectronics Corporation, as Borrower,
Bank of America, N.A., as Administrative Agent, Bank of America Merrill Lynch and J.P. Morgan
Securities LLC, as Joint Lead Arrangers and Joint Book Managers, JPMorgan Chase Bank, N.A.,
as Syndication Agent, and Wells Fargo Bank, National Association, as Documentation Agent.
10.61 (15) Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan.*
10.62 (16)
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Non-Qualified Stock
Option Grant Agreement (employees (including executive officers)).*
10.63 (16)
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Restricted Stock Award
Agreement (employees (including executive officers)).*
10.64 (16)
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Non-Qualified Stock
Option Grant Agreement (non-employee directors).*
10.65 (16)
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Restricted Stock Units
21.1
23.1
24.1
31.1
31.2
32.1
Award Agreement (non-employee directors).*
Subsidiaries of Cabot Microelectronics Corporation.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney.
Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
66
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on May 9, 2011.
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 22, 2011.
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on May 9, 2012.
Filed as an exhibit to, and incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q
(No. 000-30205) filed with the Commission on August 8, 2012.
* 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, Lisa A. Polezoes, 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.
67
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 20, 2012
/s/ WILLIAM P. NOGLOWS
CABOT MICROELECTRONICS CORPORATION
William P. Noglows
Chairman of the Board, President and Chief Executive Officer
[Principal Executive Officer]
Date: November 20, 2012
/s/ WILLIAM S. JOHNSON
Date: November 20, 2012
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 20, 2012
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chairman of the Board, President and Chief Executive Officer
[Director]
Date: November 20, 2012
/s/ ROBERT J. BIRGENEAU*
Robert J. Birgeneau
[Director]
Date: November 20, 2012
/s/ JOHN P. FRAZEE, JR.*
John P. Frazee, Jr.
[Director]
Date: November 20, 2012
/s/ H. LAURANCE FULLER*
Date: November 20, 2012
H. Laurance Fuller
[Director]
/s/ RICHARD S. HILL*
Richard S. Hill
[Director]
Date: November 20, 2012
/s/ BARBARA A. KLEIN*
Barbara A. Klein
[Director]
Date: November 20, 2012
/s/ EDWARD J. MOONEY*
Edward J. Mooney
[Director]
Date: November 20, 2012
/s/ STEVEN V. WILKINSON*
Date: November 20, 2012
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.
68
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 20, 2012
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chief Executive Officer
69
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 20, 2012
/s/ WILLIAM S. JOHNSON
William S. Johnson
Chief Financial Officer
70
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, 2012, 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 20, 2012
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chief Executive Officer
Date: November 20, 2012
/s/ WILLIAM S. JOHNSON
William S. Johnson
Chief Financial Officer
71
Revenue
(in millions)
Diluted Earnings Per Share
Cash From Operations
(in dollars)
(in millions)
500
400
300
200
100
0
2.5
2.0
1.5
1.0
0.5
0.0
100
80
60
40
20
0
ouR compAny
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.
FinAnciAl HigHligHts
Revenue
(in millions)
$375
$291
$445
$428
$408
Diluted Earnings Per Share
(in dollars)
$2.13 $2.20
$1.64
$1.75
$0.48
Cash From Operations
(in millions)
$94
$88
$71
$45
$66
FY08
FY09
FY10
FY11
FY12
FY08
FY09
FY10
FY11
FY12
FY08
FY09
FY10
FY11
FY12
In millions, except per share and percentage amounts
FY12*
FY11
Change
Revenue
Gross profit margin
Net income
Diluted earnings per share
Cash from operations
Cash dividends per share
Cash and short-term investments
Long-term debt (includes current portion)
After tax return on invested capital
$427.7
$445.4
(4.0)%
47.7
%
48.1%
40.8
1.75
66.4
15.00
178.5
172.8
51.7
2.20
93.6
—
302.5
—
15.4%
18.8%
(0.8)
(21.0)
(20.5)
(29.0)
100.0
(41.0)
100.0
(18.1)
* In fiscal 2012, in conjunction with a new capital management initiative, we completed a leveraged recapitalization with payment of a special cash dividend of $15.00 per share, or
$347.1 million in aggregate. The dividend was funded with a $175.0 million term loan and $172.1 million from existing Company cash balances.
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
lisa A. polezoes
Vice President, Human Resources
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
Richard s. Hill
Former Chairman and
Chief Executive Officer,
Novellus Systems, Inc.
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
630.375.5593 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 5, 2013, 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, 2012, 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
Annual Report Cover Photo by ©iStockphoto.com / Mikkel William Nielsen
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. Compared with 2008, when we established specific environmental
improvement goals, in 2012 we successfully lessened our impact on the environment as shown below:
54%
INC R E A SE IN
PA PER R EC YC L ING
25%
INC R E A SE IN
SO L ID WA S T E
R EC YC L ING
66%
4%
11%
R EDuC T I ON IN
L A NDf I L L WA S T E
R EDuC T I ON
IN C O 2 E m IS SI ONS
R EDuC 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 our 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.
2012 Annual Report