2014 Annual Report
To Our Stockholders, Customers, Employees, and Suppliers,
Fiscal 2014 was highlighted by record revenue from our Pads, Aluminum and Advanced Dielectrics
product areas. Consistent strong execution of our strategic business initiatives enabled us to achieve solid
financial results for the full fiscal year, including strong profitability and cash flow generation, despite
soft semiconductor industry conditions in the first half, and lower annual sales from our QED
Technologies business and Data Storage product area. We believe that revenue from our CMP slurry
products for semiconductor applications is approximately three times the revenue of the next largest
provider, upholding our position as the world’s leading supplier of CMP polishing slurries. Furthermore,
as the second largest supplier of CMP pads, we remain confident that our attractive pad value proposition
will enable further growth in this large adjacent area. We ended the fiscal year with momentum,
reporting record revenue in the fourth fiscal quarter for our company, as well as in each of our Tungsten,
Pads and Aluminum product areas.
During fiscal 2014, the industry saw the continued scaling of semiconductor devices to smaller
geometries, which has introduced technical challenges and placed a heightened focus on new transistor
and device architectures. As a result, we have seen our customers put increasing emphasis on
development and production of advanced technologies like High-K Metal Gate, 3D NAND and FinFET,
which are driving the need for new and critically important CMP steps. These require more rigorously
formulated and higher quality CMP solutions, which we believe we are well-positioned to provide and
which will create attractive growth opportunities for our company.
As such, we are seeing that many of our new products are becoming critical to overcoming our
customers’ technical and physical obstacles. During the year, we continued to focus on innovation, in
collaboration with our technology leading customers, to expand our product offerings, and we invested
approximately $59 million, or 14 percent of our revenue, in research and development. We believe this is
far in excess of any other CMP consumables provider, and underscores our strong commitment to
innovation within the CMP consumables space. Our CMP solutions for polishing Tungsten and
Aluminum are specific examples of our ability to innovate to meet our customers’ challenging product
performance requirements. Notably, we continued to maintain our leadership in Tungsten, and revenue
from our Aluminum product area grew by 23 percent compared to the prior fiscal year. Additionally,
during the second half of the fiscal year, we introduced a new family of Dielectrics slurries for both
legacy and advanced applications that are designed to deliver higher performance and significantly lower
costs to our customers, while also improving profitability in this product area.
In conjunction with the ongoing execution of our strategic business initiatives related to technology
leadership and collaboration with our customers, we continue to also focus on supply chain excellence.
Fiscal 2014 was another prolific year for us in terms of customer recognition of our excellent quality
systems and supply chain management capabilities. During the year, we were awarded seven supplier
excellence awards, including Samsung’s Best in Value Award and Intel’s Supplier Continuous Quality
Improvement Award. These awards recognize our product quality and reliability, and our service to our
customers, and we are honored to be regarded as an elite supplier within our customers’ broader supply
chains.
In addition to executing our strategic business initiatives, we continued to deploy capital to stockholders
through our share repurchase program. During fiscal 2014, we expanded our share repurchase program
and purchased $53 million of our stock, significantly more than the $40 million and $33 million we
purchased during fiscal 2013 and 2012, respectively.
2014 Annual Report
On December 16, 2014, our Board of Directors announced the election of David Li as President and Chief
Executive Officer (CEO) and member of the Board, effective January 1, 2015. After 11 years as Cabot
Microelectronics’ Chairman, President and CEO, Bill Noglows will continue to serve as Chairman of the
Board. David has 15 years of experience with our company, including serving for the last eight years as
our Vice President of the Asia Pacific Region, with responsibility for all of our business activities in this
critical geographic area -- the Asia Pacific region represents over 80 percent of our revenue,
approximately 75 percent of our production activity, and over half of our fixed assets and our employees.
David’s appointment as CEO and Bill’s continuing role as Chairman represent an orderly leadership
transition, based on long-term succession planning by our Board, as well as our continued shift of
leadership and operations to the Asia Pacific region. We look forward to Bill’s continued support of our
company in his ongoing role as Chairman, and David’s strong leadership as our CEO and member of our
Board.
Looking forward, during fiscal 2015 we expect Cabot Microelectronics to continue to capitalize on
evolving technology trends by developing and commercializing superior leading-edge CMP solutions, in
collaboration with our technology leading customers, while leveraging our global infrastructure and
expertise in quality systems and supply chain management. We remain confident in our company’s
ability to execute our strategic initiatives and provide value to our stockholders over a range of industry
and macroeconomic environments. We both would like to thank our stockholders, customers, employees,
and suppliers for your continued support and confidence in Cabot Microelectronics Corporation.
Sincerely,
William P. Noglows
Chairman of the Board
David H. Li
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
xxxx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014
or
oooo 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 00030205
CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of Incorporation)
870 NORTH COMMONS DRIVE
AURORA, ILLINOIS
(Address of principal executive offices)
364324765
(I.R.S. Employer Identification No.)
60504
(Zip Code)
Registrant's telephone number, including area code: (630) 3756631
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ X ] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
[ X ]
Accelerated filer
[ ]
Non-accelerated filer
[ ]
Smaller reporting company
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of the registrant's Common Stock held beneficially or of record by stockholders who are not affiliates of the registrant, based upon the closing price of the Common Stock on March
31, 2014, as reported by the NASDAQ Global Select Market, was approximately $1,030,587,000. For the purposes hereof, "affiliates" include all executive officers and directors of the registrant.
As of October 31, 2014, the Company had 23,792,980 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 3, 2015, 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.
1
PART I.
PART II.
PART III.
PART IV.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
CABOT MICROELECTRONICS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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
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26
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PART I
ITEM 1. BUSINESS
OUR COMPANY
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "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 polishing pad supplier used in the manufacture of advanced integrated circuit (IC) devices within the semiconductor
industry, in a process called chemical 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 complex IC devices with fewer defects. Our mission is to create value by developing reliable and innovative solutions, through close
customer collaboration, that solve today's challenges and help enable tomorrow's technology.
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, insulating and isolating 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. In addition, we 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.
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 mobile internet devices (MIDs) such as smart phones and tablets, microprocessors, application processors and memory chips in their desktop or
laptop computers, and in MP3 players, gaming devices, and digital cameras. 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 manufactured on each wafer at the same time. The initial steps in the
manufacturing process build transistors and other electronic components on the silicon wafer. These are isolated from each other using a layer of insulating material, most often silicon
dioxide, to prevent electrical signals from bridging from one transistor to another. These components are then wired together using conducting materials such as aluminum or copper in
a particular sequence to produce a 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 consumables products, including slurries and pads, used in the production of IC devices is primarily based on the number of wafer starts by semiconductor
manufacturers and the type and complexity of the IC devices they produce. To enhance the performance of IC devices, IC device manufacturers have progressively increased the
number and density of electronic components and wiring layers in each IC device. This is typically done in conjunction with shrinking the key dimensions on an IC device from one
technology generation, or "node," to another. As a result, the number of transistors, wires and the number of discrete wiring layers have increased, increasing the complexity of the IC
device and the related demand for CMP consumables products. As semiconductor technology has advanced and performance requirements of IC devices have increased, the
percentage of IC devices that utilize CMP in the manufacturing process has increased steadily over time. We believe that CMP is used in the majority of all IC devices made today, and
we expect that the use of CMP will continue to increase in the future.
3
In the CMP polishing process, CMP consumables are used to remove excess material that is deposited during the IC manufacturing process, and to level and smooth the surfaces
of the layers of IC devices, via a combination of chemical reactions and mechanical abrasion, leaving minimal residue and defects on the surface, with only the material necessary for
circuit integrity remaining. CMP slurries are liquid solutions generally composed of high-purity deionized water and a proprietary mix of chemical additives and engineered abrasives
that chemically and mechanically interact at an atomic level with the surface material of the IC device. CMP pads are engineered polymeric materials designed to distribute and transport
the slurry to the surface of the wafer and distribute it evenly across the wafer. Grooves are cut into the surface of the pad to facilitate distribution of the slurry. The CMP process is
performed on a CMP polishing tool. During the CMP process, the wafer is held on a rotating carrier, which is pressed down against a CMP pad. The CMP pad is attached to a rotating
polishing table that spins in a circular motion in the opposite 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 processes to smooth the surface of substrate disks.
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 processes through an extensive
series of tests and evaluations. These qualifications are intended to ensure that the CMP consumable product will function properly within the customer's 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 implementing 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 components. With smaller
IC devices, IC device manufacturers can increase the number of IC devices that fit on a wafer, which increases their throughput, or the number of IC devices that can be manufactured in
a given time period. 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, which improves the return on its significant investment in manufacturing capacity, which is a high priority for a
semiconductor manufacturer. 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 expanding range of applications.
PRECISION POLISHING
Through our ESF business, we are applying our technical expertise in CMP consumables and polishing techniques developed for the semiconductor industry to demanding
applications in other industries where shaping, enabling and enhancing the performance of surfaces is critical to success, such as for precision optics and electronic substrates,
including silicon and silicon-carbide wafers. We sell our CMP consumables products to 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 processes. Our wholly-owned subsidiary, QED Technologies International, Inc. (QED), is a leading provider of deterministic finishing technology for
the precision optics industry. We believe precision optics are pervasive, serving several existing large markets such as semiconductor equipment, aerospace, defense, biomedical,
research and digital imaging.
4
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 applications) and aluminum. Slurries for polishing tungsten are used heavily in the production of advanced memory and logic devices for a
multitude of end use applications such as computers and servers, MIDs such as smart phones and tablets, MP3 players, gaming devices, and digital cameras, as well as in mature logic
applications such as those used in automobiles and communication devices. Slurries for polishing copper and barrier materials are used in the production of advanced IC logic devices
such as microprocessors for computers, and devices for graphic systems, gaming systems and communication devices, as well as in the production of advanced memory devices.
These products include different slurries for polishing the copper film and the thin barrier layer used to separate copper from the adjacent insulating material. Slurries for polishing
aluminum are relatively new in the CMP consumables market and are used in the most advanced transistor gate structures currently in production. We offer multiple products for each
technology node to enable different integration schemes depending on specific customer needs.
We also develop, manufacture and sell slurry products used to polish the dielectric insulating materials that separate conductive layers within logic and memory IC devices. Our
slurry products for these materials are primarily used in mature, high volume polishing applications called Interlayer Dielectric, or ILD, in the production of both logic and memory
devices. Our more advanced dielectrics products are designed to deliver higher performance and lower cost of ownership in traditional ILD applications, as well as to meet the more
stringent and complex performance requirements of lower-volume, more specialized dielectrics polishing applications at advanced technology nodes. Some of the applications for
advanced dielectrics slurries include shallow trench isolation (STI), "stop on poly" isolation, bulk oxide polishing, and polishing of various dielectrics in advanced transistor designs.
We develop, produce and sell CMP polishing pads, which are consumable materials that work in conjunction with CMP slurries in the CMP polishing process. We believe that
CMP polishing pads represent a natural adjacency to our CMP slurry business, since the technologies are closely related and utilize the same technical, sales and support infrastructure.
We believe our unique pad material and our continuous pad manufacturing process enable us to produce a pad with a longer pad life, greater consistency from pad to pad, and
enhanced performance compared to other pad offerings, resulting in lower cost of ownership for our customers. We are producing and selling pads that can be used on a variety of
polishing tools, over a range of applications, including tungsten, copper, and dielectrics, over a range of technology nodes, and on both 200mm and 300mm wafers.
CMP CONSUMABLES FOR THE DATA STORAGE INDUSTRY
We develop, produce and sell 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 technology 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
efficiency of manufacturers of hard disk drives by helping increase their throughput and yield.
5
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. Historically, advanced optics have been produced using labor-intensive artisanal processes,
and variability has been common. QED has automated the polishing process for advanced optics to enable rapid, deterministic and repeatable surface correction to the most demanding
levels of precision in dramatically less time than with traditional means. QED's polishing systems use Magneto-Rheological Finishing (MRF), a proprietary surface figuring and
finishing technology that employs magnetic fluids and sophisticated computer technology to polish a variety of shapes and materials. QED's metrology systems use proprietary
Subaperture Stitching Interferometry (SSI) technology, which captures precise metrology data for large and/or strongly curved optical parts. SSI technology includes proprietary
Aspheric Stitching Interferometry (ASI), 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 strategies related to technology, customer collaboration and supply chain excellence. We are also leveraging our expertise in CMP consumable processes to
expand our ESF business in the optics and electronic substrates markets.
STRENGTHENING AND GROWING OUR CORE CMP CONSUMABLES BUSINESS
Developing Innovative Solutions: We believe that technology and innovation are vital to success in our CMP consumables business, and we devote significant resources to
research and development. We focus our research and development activity on developing innovative new CMP consumables products for leading-edge applications for our
technology-leading customers. We have established research and development facilities in the United States, Japan, Taiwan, Singapore, and South Korea, in order to meet our
customers' technology needs on a global basis.
We believe our ability to create innovative products for leading-edge applications has been demonstrated, in particular, by the growth in revenues over the past few years from our
slurry products for polishing aluminum and advanced dielectrics, both of which achieved record revenue levels in fiscal 2014. We believe our focused effort on advanced technologies
with technology-leading customers will enable us to create more compelling new products as technology continues to advance. In addition, we believe our polishing pads product area,
in which we also achieved record revenue in fiscal 2014, represents an excellent opportunity for continued growth. We believe our pads are innovative, offering a compelling value
proposition in terms of longer pad life and lower defectivity for certain applications, as compared with competitive offerings.
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 to identify and develop new and improved CMP solutions, to integrate our products into their manufacturing processes, and to assist them with supply, warehouse
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 have strategically located our research and
development and clean room facilities, manufacturing operations, and 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.
6
We believe the seven supplier excellence awards we received from our customers in fiscal 2014 exemplify our commitment to delivering high-performing and high-quality products
to our customers through close collaboration with them. These awards recognized our product quality and reliability, as well as customer support capabilities. Our global business
teams are focused on a range of projects with our customers to address specific business opportunities at advanced technology nodes.
Robust Global Supply Chain: We believe that product and supply chain quality is critical to success in our business. 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 consumables products. Reducing variability becomes more important to our customers as they
migrate to smaller, advanced technology nodes. Our global manufacturing sites are managed 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, which we believe has contributed to lower
variability in our products and sustained improvement in productivity in our operations. Six Sigma is a systematic, data-driven approach and methodology for improving quality by
reducing variability.
We also believe that continuous improvement and variation reduction in our global supply chain are critical to our success and the success of our customers. We believe our
capabilities in supply chain management and quality systems differentiate us from our competitors. Our worldwide CMP consumables manufacturing plants and global network of
suppliers also provide supply chain flexibility if unexpected events occur.
LEVERAGING OUR EXPERTISE INTO NEW MARKETS - ENGINEERED SURFACE FINISHES BUSINESS
In addition to strengthening and growing our core CMP consumables 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 consumables
business. Our primary focus in our ESF business 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 a number of trends: demand within the semiconductor business is currently being driven more by MIDs than by
personal computers (PCs); overall industry growth is slowing; our customer base continues to consolidate; the industry has become less cyclical, with more seasonal swings in
demand; there is continued pressure to reduce costs; and, the pace of technology advancement appears to be slowing.
The significant shift in semiconductor industry demand over the past several years to MIDs from devices for PCs continued in fiscal 2014. Demand for MIDs increased again
during our fiscal year, while demand for PCs continued to decline, although at a slower rate than the past two years. Since the semiconductor content of MIDs is much lower than that
of PCs, this shift in demand has resulted in slower overall growth within the semiconductor industry over the last several years, and industry experts generally expect this trend to
continue. We continue to believe that semiconductor industry demand will grow over the long term, albeit at a slower rate than in the past, based on increased usage of IC devices in
existing applications, as well as an expanding range of new uses of IC devices.
7
Our customer base within the semiconductor industry is consolidating as larger semiconductor manufacturers have generally grown faster than the smaller ones, through mergers
and acquisitions as well as through alliances among and between different companies. The costs to achieve the required scale in manufacturing within the semiconductor industry
continue to rise, along with the related costs of research and development, and larger manufacturers generally have greater access to the resources necessary to manage their
businesses, than do smaller ones. This trend is particularly evident in capital spending within the industry. The largest semiconductor companies now account for a significant
majority of total capital spending in the industry. It appears that this concentration of capital investment may be resulting in more-rational capacity addition, thereby reducing the
cyclicality of the industry. At the same time, the greater demand for MIDs, which are consumer-oriented, versus the more corporate-driven PC demand of the past, appears to be causing
more prominent seasonal shifts in demand around "back to school" and "holiday" periods of the year. Over the course of the last three fiscal years, we have seen this seasonality in the
form of softer demand for our products in the first half of the fiscal year followed by stronger demand in the second half, and there are indications that demand may be softening again
as we enter fiscal 2015. As we have successfully demonstrated in our business to-date, we believe that we are well-positioned to operate successfully over a range of demand
environments.
As demand for more advanced and lower cost electronic 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. In addition, manufacturers seek to reduce their production costs by increasing their production yields regardless of the
number of units they produce. Thus, 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 third-party manufacturers, or foundries, which also leads to increasing scale and lower costs for these foundries.
Manufacturers also have historically reduced cost, and simultaneously improved device performance, by migrating to smaller technology nodes. However, as the industry
continues to shrink dimensions, leading edge technology node transitions are becoming more challenging due to technical and physical obstacles, and the pace of technology change
appears to be slowing. In response, to achieve performance and cost improvements, semiconductor manufacturers appear to be placing a greater emphasis on new device architecture,
including high K metal gate structures, 3D NAND and FinFET. We believe these new device architectures will require more highly engineered materials to be supplied to the
semiconductor manufacturers, including innovative new CMP solutions.
CMP CONSUMABLES INDUSTRY
Demand for CMP consumables is primarily driven by wafer starts, so the CMP consumables industry reflects the semiconductor industry demand patterns in terms of cyclicality,
seasonality and specific device types. Our revenue and net income for fiscal years 2012 through 2014 demonstrated seasonal swings in demand as we saw softer demand for our
products in the first half of each of these fiscal years, followed by stronger demand during the second half. 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 produce
these devices and the introduction of new materials that will require CMP, including those related to new device architectures such as high K metal gate, 3D NAND and FinFET.
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. As discussed above, semiconductor manufacturers look for ways to lower the cost of CMP consumables in their production operations, including improvements in
technology, dilution of slurry, use of concentrated slurry products, or reduction of slurry flow rate during production to reduce the total amount of slurry used, and extension of pad
lives. In addition, CMP demand also depends upon the specific mix of IC device demand, since the intensity of CMP usage varies by IC device type.
8
We believe that CMP technical solutions are becoming more complex, with leading-edge technologies generally requiring greater customization by customer, tool set and process
integration approach. As a result, we generally see customers selecting suppliers earlier in their development processes and maintaining preferred supplier relationships through
production. Therefore, we believe that close collaboration with our customers at the beginning of development cycles offers the best opportunity for optimal CMP solutions. We also
believe that research and development programs with customers and suppliers 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 requirements. We face
competition from other CMP consumables suppliers. We also may face competition in the future from significant changes in technology or emerging technologies. However, we believe
we are well-positioned to continue our leadership in CMP slurries, and to continue to grow our CMP pad product area. We believe we have the experience, scale, capabilities and
infrastructure that are required for success, and we work closely with the largest customers in the semiconductor industry to meet their growing expectations as a trusted business
partner.
Our CMP slurry competitors range from small companies that compete with a single product or in a single geographic region, to divisions of global companies with multiple lines of
CMP products. However, we believe we are the leader in CMP slurries. 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, with a proven track record of supplying these products globally in high volumes with the requisite high level of
technical support services.
With respect to CMP polishing pads, a division of Dow Chemical has held the leading position in this area for many years. We believe we are the second largest supplier of CMP
polishing pads to the industry. A number of other companies have entered this area of the CMP consumables business, providing potentially viable product alternatives. We believe
our pad materials and our continuous pad manufacturing process have enabled us to produce pads that provide our customers with longer pad life, lower defectivity and greater
consistency than traditional offerings, thus reducing our customers' total pad cost. We believe this has fueled adoption of our pad products.
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 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 providers of IC foundry services. Logic customers often
outsource some or all of the production of their devices to foundries, which provide contract manufacturing 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 2014, excluding revenue attributable to data storage and ESF customers, approximately 49%
of our revenue was from foundry customers, 34% from memory customers and 17% from logic customers.
9
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; product quality and consistency; product performance and its impact on a customer's
overall yield; engineering support; and, delivery and supply assurance. We believe that greater customer sophistication in the CMP process, more challenging integration schemes,
additional and unique polishing materials, and cost pressures will continue to increase demands on CMP consumables suppliers such as our Company. 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 consumables suppliers will thrive.
We use a 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
commercialization and sales, we have research teams that collaborate with technology-leading customers on emerging applications years before the products are required by the market.
We also have development teams that interact closely with these customers, 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 supply, warehouse and inventory management for our customers.
We market our products primarily through direct sales to our customers, although we use distributors in certain areas. We believe this strategy of primarily direct sales provides us
an additional means to collaborate with our customers.
Our QED subsidiary supports customers in the semiconductor equipment, aerospace, defense, research, biomedical and digital imaging markets. QED counts among its worldwide
customers leading precision optics manufacturers, major semiconductor original equipment manufacturers, research institutions, and technology providers to the United States
government.
In fiscal 2014, our five largest customers accounted for approximately 54% of our revenue, with Taiwan Semiconductor Manufacturing Corporation and Samsung accounting for
approximately 22% and 14% 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 focus our R&D efforts on
product innovation at leading-edge applications for our technology-leading customers. We develop new and enhanced CMP solutions tailored to these customers' requirements using
our expertise in formulation science, product engineering and manufacturing technology. We work closely with these 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 focused on five main areas that span the early conceptual stage of product development involving new materials, processes and designs several years in
advance of commercialization, 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 of new and enhanced CMP consumables products, including collaboration on joint development projects with key customers;
· Process development to support rapid and effective commercialization of new products;
· Technical support of our CMP products in our customers' research, development and manufacturing facilities; and,
· Evaluation and development of new polishing and metrology applications outside of the semiconductor industry.
10
Our research in CMP slurries and pads addresses a breadth of complex and interrelated performance criteria that relate to the functional performance of the IC, 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 comprise the semiconductor circuitry. In addition, 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 materials and designs increase in complexity, these
challenges require significant investments in R&D.
We also commit internal R&D resources to our ESF business. We believe that application areas such as precision optics and electronic substrates represent natural adjacencies to
our core CMP business and technology. Products under development include products used to polish silicon and silicon-carbide wafers to improve the surface quality of these wafers
and reduce the customers' total cost of ownership.
We believe that a competitive advantage can be gained through technology, and that our investments in R&D provide us with polishing and metrology capabilities that support
the most advanced and challenging customer technology requirements on a global basis. In fiscal years 2014, 2013 and 2012, we incurred approximately $59.4 million, $61.4 million and
$58.6 million, respectively, in R&D expenses. We believe our Six Sigma initiatives in our R&D efforts allow us to conduct more research at a lower cost than through other means.
Investments in property, plant and equipment to support our R&D efforts are capitalized and depreciated over their useful lives.
Our global R&D team includes experts from the semiconductor 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, including 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 that includes a clean room with 200mm polishing capability; an R&D facility in South Korea that provides 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 that supports our QED business. All of
these facilities underscore our commitment to continuing to invest in our technology infrastructure to maintain our technology leadership and to be responsive to the needs of our
customers.
RAW MATERIALS SUPPLY
Engineered abrasive particles are significant raw materials we use in many of our CMP slurries. Our strategy is to secure various sources of different raw materials, as appropriate,
to enable the desired performance of our products, and monitor those sources as necessary to provide supply assurance. Also, we have entered into multi-year supply agreements with
a number 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, 2014, we had 1,248 active worldwide patents, of which 242 are U.S. patents, and 429
pending worldwide patent applications, of which 80 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 worldwide coverage of any material patent through expiration
within the next two 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 development by
infringing our intellectual property, and have been successful in upholding the validity of our patents.
11
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 can enhance our competitive advantage by providing us with future product development opportunities and expanding our already substantial intellectual property portfolio.
ENVIRONMENTAL MATTERS
Our facilities are subject to various environmental laws and regulations, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and
hazardous wastes, and occupational safety and health. We believe that our facilities are in substantial compliance with applicable environmental laws and regulations. Our major
operations in the United States, Japan, Singapore, South Korea and Taiwan are ISO 14001 Environmental and OHSAS 18001 Safety and Health certified, which requires that we
implement and operate according to various procedures that demonstrate our dedication to waste reduction, energy conservation and other sustainability concerns. We are committed
to maintaining these certifications. We will also seek to obtain additional certifications, as applicable, in the areas in which we do business. We have incurred, and will continue to
incur, capital and operating expenditures and other costs in complying with these laws and regulations in both the United States and 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 are the foundation of the Company's success. As of October 31, 2014, we employed 1,054 individuals, including 556 in
operations, 278 in research and development and technical, 92 in sales and marketing and 128 in administration. In general, none of our employees are covered by collective bargaining
agreements. We have not experienced any work stoppages and consider our relations with our employees to be good.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We sell our products worldwide. We believe our geographic coverage allows us to utilize our business and technical expertise from a worldwide workforce, provides stability to our
operations and earnings streams to offset geography-specific economic exposures, 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 statements, and other information that we
file electronically with the SEC.
12
ITEM 1A. RISK FACTORS
We do not believe there have been any material changes in our risk factors since the filing of our Annual Report on Form 10-K for the fiscal year ended September 30, 2013.
However, we may update our risk factors, including adding or deleting them, 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 conditions and our revenue is primarily dependent upon semiconductor demand. Semiconductor demand, in turn, is impacted
by changes in consumer demand such as the significant shift in demand in recent years from semiconductor devices for personal computers to those for mobile internet devices.
Historically, semiconductor demand has fluctuated significantly due to industry cycles and seasonal shifts in demand, which can dramatically affect our business, causing demand for
our products to fluctuate. For example, we experienced soft demand conditions in the semiconductor industry during the first half of fiscal years 2012 and 2013, followed by stronger
demand in the second half of each of those years. During our first half of fiscal 2014, we again experienced relatively soft demand for our products, which we believe was primarily due
to seasonal weakness that we typically have experienced in the first half of our fiscal year. We experienced improved demand conditions during the second half of fiscal 2014, as our
revenue in the second half of fiscal 2014 increased 12.4% from our revenue in the first half of the fiscal year. Furthermore, competitive dynamics within the semiconductor industry may
impact our business. Our limited visibility to future customer orders makes it difficult for us to predict industry trends. If the global economy or the semiconductor industry weakens,
whether in general or as a result of specific factors, such as macroeconomic factors, or unpredictable events such as natural disasters, we could experience material 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 fiscal 2012, related to the Elpida Memory, Inc. bankruptcy
filing in Japan, 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 electronic devices that are in demand, such as smart phones and tablets versus PCs; products that
our customers may produce, such as logic devices versus memory devices; the various technology nodes at which those products are manufactured; customers' specific manufacturing
process integration schemes; the short order to delivery time for our products; quarter-to-quarter changes in customer order patterns; market share gains and losses; and pricing
changes by us and our competitors.
13
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. We also continue to develop our business in
CMP pads. Our business would suffer if these products became obsolete or if consumption of these products decreased. Our success depends on our ability to keep pace with
technological changes and advances in the semiconductor industry and to adapt, improve and customize our products for advanced IC applications in response to evolving customer
needs and industry trends. Since its inception, the semiconductor 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 quality and 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 this drive toward
lower costs, higher quality and performance 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, including through use of smaller quantities could render our products less important to the IC device manufacturing 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 semiconductor industry is consolidating as the larger semiconductor
manufacturers have generally grown faster than the smaller ones, through mergers and acquisitions as well as through strategic alliances. Industry analysts predict that this trend will
continue, which means the semiconductor industry will be comprised of fewer and larger participants if their prediction is correct. One or more of these principal customers could stop
buying CMP consumables 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 could seriously harm
our business, financial condition and results of operations.
In fiscal 2014, our five largest customers accounted for approximately 54% of our revenue, with Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung accounting
for approximately 22% and 14%, respectively, of our revenue. In fiscal year 2013, our five largest customers accounted for approximately 53% of our revenue, with TSMC and Samsung
accounting for approximately 21% and 13%, respectively.
OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR COMPETITORS DEVELOP SUPERIOR CMP CONSUMABLES PRODUCTS, OFFER BETTER PRICING TERMS OR
SERVICE, OR OBTAIN CERTAIN INTELLECTUAL PROPERTY RIGHTS
Competition from other CMP consumables manufacturers or any new entrants could seriously harm our business and results of operations, and this competition could continue to
increase. Increased competition has and may continue to impact the prices we are able to charge for our CMP consumables products, as well as our overall business. In addition, our
competitors could have or obtain intellectual property rights which could restrict our ability to market our existing products and/or to innovate and develop new products.
14
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, or any problem or interruption that may occur during production or delivery of our products, such as weather-related problems
or natural disasters. 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
materials suppliers.
We believe it would be difficult to promptly secure alternative sources of key raw materials in the event one of our suppliers becomes unable to supply us with sufficient quantities
of raw materials that meet the quality and technical specifications required by us and our customers. In addition, new contract terms, contractual amendments to the existing agreements
with, or non-performance by, our suppliers, including any significant financial distress our suppliers may suffer, could adversely affect us. Also, if we change the 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 products. The requalification process could take a
significant amount of time and expense to complete and could occupy technical resources of our customers that might otherwise be used to evaluate our new products, thus delaying
potential revenue growth, or motivate our customers to consider purchasing products from our competitors, possibly interrupting or reducing our sales of CMP consumables to these
customers.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We currently have operations and a large customer base outside of the United States. Approximately 88%, 88% and 87% of our revenue was generated by sales to customers
outside of the United States for fiscal 2014, 2013 and 2012, respectively. We may 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 may encounter the risks that we may not be able to repatriate earnings from our foreign
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 important in our industry because we develop complex technical formulas and processes 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 combination of patent, trademark, copyright and trade secret laws, as well as employee and third-party nondisclosure and assignment agreements. Due to our
international operations, we pursue protection in different jurisdictions, which may provide varying degrees of protection, and we cannot provide assurance that we can obtain
adequate protection in each such jurisdiction. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason, including through the patent
prosecution process or in the event of litigation related to such intellectual property, could seriously harm our business. In addition, the costs of obtaining or protecting our intellectual
property could negatively affect our operating results.
15
WE MAY PURSUE ACQUISITIONS OF, INVESTMENTS IN, AND MERGERS OR 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 technologies, assets and companies, either through acquisitions, mergers, investments or alliances, in order to supplement our
internal growth and development efforts. Acquisitions, mergers, and investments involve numerous risks, including the following: difficulties and risks in integrating the operations,
technologies, products and personnel of acquired companies; diversion of management's attention from normal daily operations of the business; increased risk associated with foreign
operations; potential difficulties and risks in entering markets in which we have limited or no direct prior experience and where competitors in such markets have stronger market
positions; potential difficulties in operating new businesses with different business models; potential difficulties with regulatory or contract compliance in areas in which we have
limited experience; initial dependence on unfamiliar supply chains or relatively small supply partners; insufficient revenues to offset increased expenses associated with acquisitions;
potential loss of key employees of the acquired companies; or inability to effectively cooperate and collaborate with our alliance partners.
Further, we may never realize the perceived or anticipated benefits of a business combination or merger with, or asset or other acquisition of, or investments in, other entities.
Transactions such as these could have negative effects on our results of operations, in areas such as contingent liabilities, gross profit margins, 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 inherently
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, technological expertise and other capabilities to expand our business beyond CMP slurries into
other areas, such as CMP polishing pads and, more broadly, into other electronic materials. Additionally, in our Engineered Surface Finishes business, we are pursuing other surface
modification applications. Expanding our business into new product areas could involve technologies, production processes and business models in which we have limited experience,
and we may not be able to develop and produce products or provide services that satisfy customers' needs or we may be unable to keep pace with technological or other developments.
Also, our competitors may have or obtain intellectual property rights that could restrict our ability to market our existing products and/or to innovate and develop new products.
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 customers,
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.
16
RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK
THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
The market price of our common stock has fluctuated and could continue to fluctuate significantly as a result of factors such as: economic and stock market conditions generally
and specifically as they may impact participants in the semiconductor and related industries; changes in financial estimates and recommendations by securities analysts who follow our
stock; earnings and other announcements by, and changes in market evaluations of, us or participants in the semiconductor and related industries; changes in business or regulatory
conditions affecting us or participants in the semiconductor and related industries; announcements or implementation by us, our competitors, or our customers of technological
innovations, new products or different business strategies; changes in our capital management strategy, including the incurrence of debt or entering into a business combination; 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 provides 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 covering our executive officers and other key employees. These arrangements provide for a cash severance payment, 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.
17
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 distribution center in Aurora, Illinois, comprising approximately 175,000 square feet;
a commercial polishing pad manufacturing plant and offices in Aurora, Illinois, comprising approximately 48,000 square feet;
an additional 13.2 acres of vacant land in Aurora, Illinois; and,
a facility in Addison, Illinois, comprising approximately 15,000 square feet.
In addition, we lease a facility in Rochester, New York, comprising approximately 23,000 square feet.
Our principal foreign facilities that we or our subsidiaries own consist of:
a commercial slurry and pad manufacturing plant, automated warehouse, research and development facility and offices in Kaohsiung County, Taiwan, comprising
approximately 170,000 square feet;
a commercial slurry manufacturing plant and distribution center, and a development and technical support facility in Geino, Japan, comprising approximately 144,000 square
feet; and,
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; and,
a commercial slurry manufacturing plant, research and development facility and business office in Singapore, comprising approximately 24,000 square feet.
We believe that our facilities are suitable and adequate for their intended purpose and provide us with sufficient capacity and capacity expansion opportunities and technological
capability to meet our current and expected demand in the foreseeable future.
18
ITEM 3. LEGAL PROCEEDINGS
While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we
periodically become a party to legal proceedings in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
19
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information concerning our executive officers and their ages as of October 31, 2014.
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
56
54
58
57
41
44
51
50
55
52
51
53
Chairman of the Board, President and Chief Executive Officer
Vice President, Secretary and General Counsel
Vice President, Japan and Asia Operations
Executive 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
Executive Vice President
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 management 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 Asia Operations 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. Ms. Damashek is also a director of Reno
Sub-Systems, Inc.
WILLIAM S. JOHNSON has served as our Vice President and Chief Financial Officer since April 2003, and was named an Executive Vice President in April 2013. Prior to joining 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 process engineering. Mr. Li received a B.S. in Chemical
Engineering from Purdue University and an M.B.A. from Northwestern University.
20
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 the microelectronic materials division of Cabot Corporation from 1996 to 1999. Prior to that, Mr. Pike worked for FMC Corporation in various
marketing and finance positions. Mr. Pike received his B.S. in Chemical Engineering from the University of Buffalo and his M.B.A. from the Wharton School, 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 Management 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 Management since April
2005, and our Vice President of Sales and Marketing from October 2001. Prior to joining us, Mr. Smith served as Vice President, Sales & Business Development for Buildpoint
Corporation from 2000 to April 2001. Prior to that, Mr. Smith spent 17 years at Tyco Electronics Group, formerly known as AMP Incorporated, in various management positions. Mr.
Smith earned a B.S. in Industrial Engineering from Grove City College and an M.B.A. from Wake Forest University.
ADAM F. WEISMAN has served as our Vice President of Business Operations since September 2006, and prior to that was our Vice President of Operations. Mr. Weisman was named
an Executive Vice President in April 2013. 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 operations 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 various 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.
21
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 2013
Fiscal 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2015 First Quarter (through October 31, 2014)
HIGH
35.51
37.38
36.54
39.10
45.70
47.73
45.88
46.08
48.70
LOW
29.04
33.61
31.51
33.38
37.98
39.11
41.03
39.74
40.12
As of October 31, 2014, there were approximately 662 holders of record of our common stock. No dividends were declared or paid in fiscal 2014 or fiscal 2013, and we have no
current plans to pay cash dividends.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Jul. 1 through
Jul. 31, 2014
Aug. 1 through
Aug. 31, 2014
Sep. 1 through
Sep. 30, 2014
Total
Total Number of
Shares
Purchased
Average Price
Paid Per Share
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)
145,111 $
44.22
145,111 $
125,000
-
-
145,111 $
-
-
44.22
- $
125,000
$
-
145,111 $
125,000
125,000
In April 2014, our Board of Directors authorized an increase in the amount available under our share repurchase program from the previously remaining $62.0 million to $150.0
million. Under this program, we repurchased 1,229,494 shares for $53.0 million in fiscal 2014. As of September 30, 2014, $125.0 million remains outstanding under our share repurchase
program. The manner in which the Company repurchases its shares is discussed in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, under the heading "Liquidity and Capital Resources", of this Form 10-K. To date, we have funded share purchases under our share repurchase program from our available
cash balance, and anticipate we will continue to do so.
Separate from this share repurchase program, a total of 46,518 shares were purchased during fiscal 2014 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) as shares withheld from award recipients to cover payroll taxes on the vesting
of shares of restricted stock granted under the EIP and OIP.
22
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.
23
STOCK PERFORMANCE GRAPH
The following graph illustrates the cumulative total stockholder return on our common stock during the period from September 30, 2009 through September 30, 2014 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, 2009 in our
common stock and in each of the foregoing indices and assumes reinvestment of the special cash dividend we paid to our stockholders in fiscal 2012. The performance shown is not
necessarily indicative of future performance. See "Risk Factors" in Part I, Item 1A above.
9/09
12/09
3/10
6/10
9/10
12/10
3/11
6/11
9/11
12/11
3/12
Cabot Microelectronics Corporation
NASDAQ Composite
Philadelphia Semiconductor
100.00
100.00
100.00
94.55
107.15
108.00
108.52
113.06
108.12
99.23
100.32
95.77
92.31
112.55
106.18
118.90
126.11
124.44
149.89
132.39
130.49
133.30
132.59
130.04
98.65
116.28
113.44
135.54
127.05
126.29
159.11
150.42
149.98
6/12
9/12
12/12
3/13
6/13
9/13
12/13
3/14
6/14
9/14
Cabot Microelectronics Corporation
NASDAQ Composite
Philadelphia Semiconductor
119.54
143.37
133.23
143.81
153.12
134.67
145.32
148.65
139.50
142.21
162.06
152.75
135.09
169.67
158.26
157.60
189.49
167.80
187.02
210.39
182.92
180.07
212.17
197.73
182.73
222.55
214.08
169.63
227.09
217.80
24
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each year of the five-year period ended September 30, 2014, 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)
2014
2013 (1)
Year Ended September 30,
2012 (1)(2)
2011 (1)
2010
Consolidated Statement of Income Data:
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
Cash dividends per share
Consolidated Balance Sheet Data:
Cash and cash equivalents
Other current assets
Property, plant and equipment, net
Other assets
Total assets
Current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
$
$
$
$
$
$
424,666
221,573
203,093
$
433,131
221,015
212,116
$
427,657
223,630
204,027
$
445,442
231,336
214,106
59,354
26,513
45,418
131,285
71,808
3,354
140
68,594
17,843
50,751
$
61,373
27,985
46,287
135,645
76,471
3,643
1,392
74,220
21,642
52,578
$
58,642
29,516
49,345
137,503
66,524
2,309
(1,011)
63,204
23,110
40,094
$
58,035
29,758
45,928
133,721
80,385
155
(1,318)
78,912
27,250
51,662
$
408,201
204,704
203,497
51,818
26,885
50,783
129,486
74,011
233
(501)
73,277
23,819
49,458
2.12
$
2.27
$
1.76
$
2.26
$
2.14
23,704
22,924
22,506
22,896
23,084
2.04
$
2.19
$
1.71
$
2.20
$
2.13
24,611
23,760
23,244
23,435
23,273
-
$
-
$
15.00
$
-
$
-
2014
2013 (1)
As of September 30,
2012 (1)(2)
2011 (1)
2010
284,155
143,838
100,821
72,353
601,167
55,448
164,063
9,654
229,165
372,002
601,167
$
$
$
$
226,029
136,769
111,985
76,809
551,592
68,221
150,937
8,992
228,150
323,442
551,592
$
$
$
$
178,459
135,906
125,020
74,006
513,391
62,920
161,875
9,058
233,853
279,538
513,391
$
$
$
$
302,546
124,848
130,791
69,292
627,477
55,439
-
6,325
61,764
565,713
627,477
$
$
$
$
254,164
126,865
115,811
74,916
571,756
53,330
-
4,083
57,413
514,343
571,756
(1) As discussed in Note 1 of the Notes to the Consolidated Financial Statements, the Company has revised prior period financial statements to reflect the correction of certain items of
income tax accounting identified in fiscal 2014, which related to fiscal years 2011 through 2013. As part of this revision, we also corrected previously disclosed out-of-period
adjustments identified in our fiscal 2012 and 2013 financial statements. The Consolidated Statements of Income for fiscal years 2012 and 2013 in the table above reflect these revisions. It
was not practical to identify the specific periods to which certain adjustments related. Consequently, the adjustments relating to fiscal years 2011 and prior have been reflected in the
table above as adjustments to the ending Consolidated Balance Sheet as of September 30, 2011. These adjustments include a decrease of $3,011 in current assets, an increase of $2,259
in other assets, a decrease of $111 in current liabilities, and a decrease of $641 in stockholders' equity from the amounts reported in prior SEC filings.
(2) 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 $347,140 in
the aggregate. The dividend was funded with a $175,000 term loan and $172,140 of existing Company cash balances.
25
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
identifying 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; various economic factors; product performance; the generation, protection and
acquisition of intellectual property, and litigation related to such intellectual property; new product introductions; development of new products, technologies and markets; natural
disasters; the acquisition of or investment in other entities; uses and investment of the Company's cash balance; financing facilities and related debt, payment of principal and interest,
and compliance with covenants and other terms; the Company's capital structure; 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 statements reflect our current expectations and are inherently uncertain. Our actual results may differ significantly from our expectations. We assume no obligation to
update this forward-looking information. The section entitled "Risk Factors" describes some, but not all, of the factors that could cause these differences.
The following discussion and analysis should be read in conjunction with our historical financial statements and the notes to those financial statements which are included in Item
8 of Part II of this Form 10-K.
OVERVIEW
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our'') supplies high-performance polishing slurries and pads used in the manufacture
of advanced integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP). CMP polishes surfaces at an atomic level,
thereby enabling IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. We operate predominantly in one industry segment – the
development, manufacture and sale of CMP 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 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.
As we discussed throughout the past fiscal year, our fiscal 2014 results reflect the continued trend of seasonal changes in demand in the semiconductor industry around consumer-
oriented "back-to-school" and "holiday" calendar periods. Consistent with this trend, we experienced strengthening of demand for our products during the second half of the fiscal
year after the relatively soft industry demand conditions we saw during the first half, similar to what we experienced during fiscal years 2013 and 2012. The semiconductor industry
continues to be driven by growth in demand for mobile electronic devices, but that growth appears to have been muted by continued weak demand for personal computers (PCs). Since
we serve the entire semiconductor market, fluctuations in demand for our products have generally reflected overall industry activity. 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.
26
As discussed in Note 1 of the Notes to the Consolidated Financial Statements of this Form 10-K and previously in our Report on Form 10-Q for the quarter ended June 30, 2014, the
Company has revised prior year financial statements to reflect adjustments and corrections of amounts recorded in fiscal years 2011 through 2013. Specifically, references in this
MD&A related to other income and expense, income tax expense, effective income tax rate, net income and diluted earnings per share for fiscal 2013 and fiscal 2012 reflect these revised
amounts.
Revenue for fiscal 2014 was $424.7 million, which represented a decrease of 2.0% from $433.1 million reported for fiscal 2013. The decrease in revenue from fiscal 2013 was mainly
driven by: lower revenue from our QED Technologies International, Inc. (QED) subsidiary within our ESF business, which is primarily capital-equipment oriented; lower revenue from
our data storage slurry products, which are tied to the contracting PC market; and, the adverse impact of foreign exchange rate changes, primarily related to the Japanese yen. These
decreases were partially offset by increased sales of our polishing pad products and increased sales of slurries for polishing tungsten and aluminum.
Gross profit expressed as a percentage of revenue for fiscal 2014 was 47.8%, which represents a decrease from the 49.0% reported for fiscal 2013. The decrease in gross profit
percentage from fiscal 2013 was primarily due to higher variable manufacturing costs, including higher raw material costs, partially offset by benefits associated with foreign exchange
rate changes, primarily due to the weaker Japanese yen. The gross profit percentage in fiscal 2014 included a 50 basis point reduction due to the effect of an asset impairment charge
recorded in the second quarter of fiscal 2014, related to certain manufacturing assets. We expect our gross profit percentage for full fiscal year 2015 to be in the range of 48% to 50% of
revenue. However, we may continue to experience fluctuations in our gross profit due to a number of factors, including the extent to which we utilize our manufacturing capacity, and
fluctuations in our product mix or raw material costs, which may cause our quarterly gross profit to be above or below this annual guidance range.
Operating expenses of $131.3 million, which include research, development and technical, selling and marketing, and general and administrative expenses, decreased 3.2%, or $4.4
million, from the $135.6 million reported for fiscal 2013. The decrease was primarily due to lower staffing-related costs, including costs associated with our annual incentive bonus
program (AIP), partially offset by higher professional fees. We expect total operating expenses for our full fiscal year 2015 to be in the range of $132 million to $137 million.
Diluted earnings per share of $2.04 in fiscal 2014 decreased 6.8%, or $0.15, from $2.19 in fiscal 2013. The decrease was primarily due to a lower gross profit margin and lower
revenue, partially offset by lower operating expense and a lower effective tax rate. Diluted earnings per share included a $0.06 adverse effect of the asset impairment charge noted
above.
As discussed in Note 9 of the Notes to the Consolidated Financial Statements of this Form 10-K, on June 27, 2014, we entered into an amendment to our existing Credit Agreement,
which increased the total commitments under our term loan to $175.0 million, the same level as the original commitment under the Credit Agreement at its inception in 2012. The
amendment also increased the uncommitted accordion feature on our revolving credit facility and improved certain pricing and covenant terms in the Credit Agreement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This MD&A, as well as disclosures included elsewhere in this Form 10-K, are based upon our audited consolidated 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 disclosure of contingencies. On an ongoing basis, we evaluate the estimates used, including those related to bad debt
expense, warranty obligations, inventory valuation, valuation and classification of auction rate securities, impairment of long-lived assets and investments, business combinations,
goodwill, other intangible assets, share-based compensation, income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ
from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve significant judgments and estimates used in the
preparation of our consolidated financial statements.
27
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. Our allowance for doubtful
accounts is based on historical collection experience, adjusted for any specific known conditions or circumstances. While historical experience may provide a reasonable estimate of
uncollectible accounts, actual results may differ from what was recorded. In fiscal 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. Elpida was acquired by Micron Technology, Inc. in fiscal 2014 and is paying the Company a portion of the
balance owed over a period of seven years pursuant to its approved bankruptcy plan. We will continue to monitor the financial solvency of our customers and, if global economic, or
individual customer, conditions weaken, we may have to record additional increases to our allowance for doubtful accounts. As of September 30, 2014, our allowance for doubtful
accounts represented 2.2% of gross accounts receivable. If we had increased our estimate of bad debts to 3.2% of gross accounts receivable, our general and administrative expenses
would have increased by $0.6 million.
WARRANTY RESERVE
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance
requirements, 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. Should actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability may be required. As of September 30, 2014, our warranty
reserve represented 0.2% of the current quarter revenue. If we had increased our warranty reserve estimate to 1.2% of the current quarter revenue, our cost of goods sold would have
increased by $1.2 million.
INVENTORY VALUATION
We value inventory at the lower of cost or market and write down the value of inventory for estimated obsolescence or if inventory is deemed unmarketable. An inventory 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 inventory that is obsolete. Should actual product marketability 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, 2014 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, 2014, we owned two auction rate securities (ARS) with an estimated fair value of $5.3 million and par value of $5.9 million which are classified as other long-term
assets on our Consolidated Balance Sheet and are considered held-to-maturity investments. 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. Our ARS, when purchased, were issued by A-rated municipalities.
Although the credit ratings of both municipalities have been downgraded since our original investment, one of the ARS is credit enhanced with bond insurance, and the other has
become an obligation of the bond insurer. Both ARS currently carry a credit rating of AA- by Standard & Poor's.
We classify these investments as held-to-maturity based on our intention and ability to hold the securities until maturity. Although there has been select trading activity on these
securities, the ARS market is not considered active. Consequently, we determine the fair value of these securities using level 2 fair value inputs, including trading activity. The
calculation of fair value and the balance sheet classification for our ARS requires critical judgments and estimates by management, including the probabilities that a security may be
monetized through a future successful auction, of a refinancing of the underlying debt, or of a default in payment by the issuer or the bond insurance carrier.
28
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 security. However, we believe the gross $0.6 million unrecognized loss on these securities is due to illiquidity in the ARS market rather than credit loss. If
auctions involving our ARS continue to fail, if issuers of our ARS are unable to refinance the underlying securities, if the issuing municipalities are unable to pay their debt 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 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 perform a periodic review of our long-lived assets to determine if such impairment indicators exist. We must exercise judgment in assessing whether an
event of impairment has occurred. For purposes of recognition and measurement of an impairment loss, long-lived assets are either individually identified or grouped with other assets
and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in this grouping. If
the sum of the undiscounted future cash flows expected to result from the identified asset group is less than the carrying value of the asset group, an impairment provision may be
required. The amount of the impairment to be recognized 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 2014, we recorded $2.3 million in impairment expense, primarily
related to the write-off of certain operational assets. In fiscal 2013, we recorded $0.2 million in impairment expense. In fiscal 2012, we recorded impairment expense of $1.0 million.
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 in this Form 10-K, we were required to adopt new accounting standards for business combinations commencing after October 1, 2009. However, we have not made any
acquisitions for 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 estimates and assumptions, especially with respect to long-lived
and intangible assets. Contingent consideration was recorded as a liability when the outcome of the contingency became determinable. Goodwill represents the excess of the purchase
price over the fair value of net assets and amounts assigned to identifiable intangible assets. Purchased IPR&D, for which technological feasibility has not yet been established and no
future alternative uses exist, has been expensed immediately.
29
Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows related to acquired developed technologies and patents and
assumptions about the period of time the technologies will continue to be used in the Company's product portfolio; expected costs to develop the IPR&D into commercially viable
products and estimated cash flows from the products when completed; and discount rates. Management's estimates of value are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may cause actual
realized values to be different from management's estimates.
GOODWILL AND INTANGIBLE ASSETS
Purchased intangible assets with finite lives are amortized over their estimated useful lives and are evaluated for impairment using a process similar to that used to evaluate other
long-lived assets. Goodwill and indefinite lived intangible assets are not amortized and are tested annually in our fourth fiscal quarter or more frequently if indicators of potential
impairment exist, using a fair-value-based approach.
The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. A component is a
reporting unit when the component constitutes a business for which discreet financial information is available and segment management regularly reviews the operating results of the
component. Components may be combined into one reporting unit when they have similar economic characteristics. We have four reporting units, three of which have goodwill and
intangible assets as of September 30, 2014, the date of our annual impairment test.
Accounting guidance provides an entity the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a discounted cash flow analysis
("step one"). In fiscal 2012, we used the step zero approach in our annual impairment analysis for goodwill. In fiscal 2013 and 2014, we chose to refresh our step one analysis for
goodwill impairment.
Similarly, an entity has the option to use a step zero or step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2012, we used the step zero
approach in our annual impairment review. In fiscal 2013 and 2014, we used a royalty savings method to determine the recoverability of indefinite-lived intangible assets.
Factors requiring significant judgment include assumptions related to future growth rates, discount factors, royalty rates and tax rates, among others. Changes in economic and
operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these assumptions may result in future impairment charges. As a
result of the review performed in the fourth quarter of fiscal 2014, and the related sensitivity analysis, we determined that there was no impairment of our goodwill and intangible assets
as of September 30, 2014.
SHARE-BASED COMPENSATION
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock
purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an
estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We
use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of
highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options and the risk-free interest rate. We estimate the expected
volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected
term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement eligible
pursuant to their grants during the contractual term of the grant. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
30
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award.
ACCOUNTING FOR INCOME TAXES
Current income taxes are determined based on estimated taxes payable or refundable on tax returns for the 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 assess whether our
deferred tax assets will ultimately be realized and record an estimated valuation allowance on those deferred tax assets that may not be realized. We recognize the tax benefit of an
uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position. In fiscal 2012, we
elected to permanently reinvest the earnings of certain of our foreign subsidiaries outside the U.S. rather than repatriating the earnings to the U.S. In fiscal 2013 and 2014, we elected to
permanently reinvest the earnings of all of our foreign subsidiaries. See the section titled "Liquidity and Capital Resources" in this MD&A and Note 15 of the Notes to the
Consolidated Financial Statements of this Form 10-K 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 suppliers. 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 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 of this Form 10-K 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.
31
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:
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
Net income
2014
100.0%
52.2
47.8
14.0
6.2
10.7
16.9
0.8
0.1
16.2
4.2
Year Ended September 30,
2013
100.0%
51.0
49.0
14.2
6.5
10.7
17.6
0.8
0.3
17.1
5.0
2012
100.0%
52.3
47.7
13.7
6.9
11.6
15.5
0.5
(0.2)
14.8
5.4
12.0%
12.1%
9.4%
YEAR ENDED SEPTEMBER 30, 2014, VERSUS YEAR ENDED SEPTEMBER 30, 2013
REVENUE
Revenue was $424.7 million in fiscal 2014, which represented a decrease of 2.0%, or $8.5 million, from fiscal 2013. The decrease in revenue was primarily due to a $7.5 million
decrease in sales volume and a $2.4 million decrease due to the effect of foreign exchange rate changes, primarily due to the weakening of the Japanese yen versus the U.S. dollar,
partially offset by a $1.3 million increase due to a higher-priced product mix. The decrease in revenue from fiscal 2013 was driven by lower revenue from QED, which is primarily capital-
equipment oriented and, consequently, is volatile. We also recorded lower revenue from our data storage slurry products, which are tied to the contracting PC market. These decreases
were partially offset by increased sales of our polishing pad products and increased sales of slurries for polishing tungsten and aluminum. Similar to both fiscal 2013 and 2012, we saw a
strengthening of demand in the second half of fiscal 2014 after a period of softer demand during the first half of the fiscal year.
COST OF GOODS SOLD
Total cost of goods sold was $221.6 million in fiscal 2014, which represented an increase of 0.3%, or $0.6 million, from fiscal 2013. The increase in cost of goods sold was primarily
due to a $10.2 million increase due to higher variable manufacturing costs, including higher raw material costs, and a $2.1 million asset impairment charge on certain manufacturing
assets recorded in the second quarter of fiscal 2014, as discussed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014. These increases in cost of goods sold
were mostly offset by a $5.3 million decrease due to the effects of foreign exchange rate changes, primarily due to the weakening of the Japanese yen, a $5.0 million decrease due to
lower sales volume, and a $0.9 million decrease due to a lower cost product mix.
Engineered abrasive particles 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 performance 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.
32
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 that are different from those in the existing agreements. For example, we have had higher cost of goods sold associated with a
contract with an existing raw material supplier, which became effective in fiscal 2013. In addition, a number of factors could impact the future cost of raw materials, packaging, freight
and labor. We also expect to continue to invest in our supply chain to improve product quality, reduce variability and improve our manufacturing product yields.
GROSS PROFIT
Our gross profit as a percentage of revenue was 47.8% in fiscal 2014 as compared to 49.0% for fiscal 2013, and was slightly below our full year guidance range of 48% to 50%. The
decrease in gross profit percentage from fiscal 2013 was primarily due to higher variable manufacturing costs, including higher raw material costs, and lower sales volume, partially offset
by benefits associated with foreign exchange rate changes, primarily due to the weaker Japanese yen and a higher-valued product mix. The gross profit percentage in fiscal 2014
included a 50 basis point reduction due to the effect of the asset impairment charge noted above. We expect our gross profit percentage for full fiscal year 2015 to be in the range of
48% to 50% of revenue. However, we may continue to experience fluctuations in our gross profit due to a number of factors, including the extent to which we utilize our manufacturing
capacity, and fluctuations in our product mix or raw material costs, which may cause our quarterly gross profit to be above or below this annual guidance range.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $59.4 million in fiscal 2014, which represented a decrease of 3.3%, or $2.0 million, from fiscal 2013. The decrease was
primarily due to $1.6 million in lower staffing-related costs, including costs associated with our AIP, $0.4 million in lower equipment-related costs, and $0.4 million in lower clean room
material costs, partially offset by $0.7 million in higher facility-related costs.
Our research, development and technical efforts are focused on the following main areas:
· Research related to fundamental CMP technology;
· Development of new and enhanced CMP consumable products, including collaboration on joint development projects with key customers;
· Process development to support rapid and effective commercialization of new products;
· Technical support of CMP products in our customers' research, 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 $26.5 million in fiscal 2014, which represented a decrease of 5.3%, or $1.5 million, from fiscal 2013. The decrease was primarily due to $1.1
million in lower staffing-related costs, including costs associated with our AIP, and $0.4 million in lower facility-related costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $45.4 million in fiscal 2014, which represented a decrease of 1.9%, or $0.9 million, from fiscal 2013. The decrease was primarily due to $2.7
million in lower staffing-related costs, including costs associated with our AIP, and $0.3 million in lower bad debt expense, partially offset by $1.5 million in higher professional fees.
33
INTEREST EXPENSE
Interest expense was $3.4 million in fiscal 2014, which represented a decrease of $0.3 million from fiscal 2013. See Note 9 of the Notes to the Consolidated Financial Statements of
this Form 10-K for a detailed discussion of our long-term debt.
OTHER INCOME (EXPENSE), NET
Other income was $0.1 million in fiscal 2014 compared to $1.4 million in fiscal 2013. The decrease in other income was due to the impact of foreign currency fluctuations on monetary
assets and liabilities denominated in currencies other than the functional currency, net of the gains and losses on forward foreign exchange contracts discussed in Note 10 of the Notes
to the Consolidated Financial Statements of this Form 10-K.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 26.0% in fiscal 2014 compared to 29.2% in fiscal 2013. The decrease in the effective tax rate was primarily due to lower income tax expense on
foreign earnings in conjunction with our election to permanently reinvest the earnings of our foreign subsidiaries. In particular, as discussed in Note 15 of the Notes to the Consolidated
Financial Statements of this Form 10-K, the Company was awarded a tax holiday in South Korea in conjunction with our investment in research, development and manufacturing
facilities there. This tax holiday reduced our income tax provision by approximately $3.8 million in fiscal 2014 compared to only $0.5 million in fiscal 2013. We expect our effective tax rate
for full fiscal 2015 to be in the range of 18.0% to 20.0%.
NET INCOME
Net income was $50.8 million in fiscal 2014, which represented a decrease of 3.5%, or $1.8 million, from fiscal 2013. The decrease was primarily due to a lower gross profit
percentage, including the previously mentioned asset impairment charge, which reduced net income by $1.5 million in fiscal 2014, and decreased revenue, partially offset by lower
operating expenses and a lower effective tax rate.
YEAR ENDED SEPTEMBER 30, 2013, VERSUS YEAR ENDED SEPTEMBER 30, 2012
REVENUE
Revenue was $433.1 million in fiscal 2013, which represented an increase of 1.3%, or $5.5 million, from fiscal 2012. The increase in revenue was primarily due to an $11.8 million
increase from a higher-priced product mix, partially offset by a $5.9 million decrease due to the effect of foreign exchange rate changes, primarily due to the weakening of the Japanese
yen. We saw increases in sales of our slurries for polishing aluminum and in our dielectrics slurry product line, partially offset by decreases in revenue in our tungsten slurry, ESF and
polishing pads product lines. Similar to fiscal 2012, we saw a strengthening of demand in the second half of fiscal 2013 after a period of softer demand during the first half of the fiscal
year.
COST OF GOODS SOLD
Total cost of goods sold was $221.0 million in fiscal 2013, which represented a decrease of 1.2%, or $2.6 million, from fiscal 2012. The decrease in cost of goods sold was primarily
due to a $7.1 million decrease due to the effects of foreign exchange rate changes, primarily due to the weakening of the Japanese yen, a $4.7 million decrease in variable manufacturing
costs and $3.2 million in lower fixed manufacturing costs. These decreases in cost of goods sold were partially offset by a $13.7 million increase due to a higher-cost product mix.
34
GROSS PROFIT
Our gross profit as a percentage of revenue was 49.0% in fiscal 2013 as compared to 47.7% for fiscal 2012. The increase in gross profit as a percentage of revenue was primarily due
to the favorable impact of the weaker Japanese yen and lower fixed manufacturing costs.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $61.4 million in fiscal 2013, which represented an increase of 4.7%, or $2.7 million, from fiscal 2012. The increase was
primarily due to $4.9 million in higher staffing-related costs, including costs associated with our AIP, partially offset by $1.7 million lower depreciation expense and $0.3 million in lower
product sample costs.
SELLING AND MARKETING
Selling and marketing expenses were $28.0 million in fiscal 2013, which represented a decrease of 5.2%, or $1.5 million, from fiscal 2012. The decrease was primarily due to $0.8 million
in lower travel-related costs and $0.2 million in lower staffing-related costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $46.3 million in fiscal 2013, which represented a decrease of 6.2%, or $3.1 million, from fiscal 2012. The decrease was primarily due to the
absence of $3.7 million in bad debt expense related to the Elpida bankruptcy recorded in the second quarter of fiscal 2012, and $2.7 million in lower professional fees, including the
absence of fees we incurred in fiscal 2012 associated with our leveraged recapitalization with a special cash dividend. These decreases were partially offset by $3.4 million in higher
staffing-related costs, including costs associated with our AIP.
INTEREST EXPENSE
Interest expense was $3.6 million in fiscal 2013, which represented an increase of $1.3 million from fiscal 2012. The increase was due to a full year of interest expense in fiscal 2013
recorded on the term loan we entered into in fiscal 2012 to partially fund the special cash dividend we paid in fiscal 2012, compared to seven months of interest expense in fiscal 2012.
OTHER INCOME (EXPENSE), NET
Other income was $1.4 million in fiscal 2013 compared to other expense of $1.0 million in fiscal 2012. The increase in other income was due to the impact of foreign currency
fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency, primarily related to the weakening of the Japanese yen. The increase in
other income is net of gains and losses on forward foreign exchange contracts discussed in Note 10 of the Notes to the Consolidated Financial Statements of this Form 10-K.
35
PROVISION FOR INCOME TAXES
Our effective income tax rate was 29.2% in fiscal 2013 compared to 36.6% in fiscal 2012. The decrease in the effective tax rate was primarily due to the reinstatement of the U.S.
research and experimentation tax credit, retroactively effective January 1, 2012, as the American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, and a $1.8 million
decrease in income tax expense related to our election to permanently reinvest the earnings of our subsidiaries in Japan and South Korea. We recorded approximately $0.9 million in
discrete income tax benefits related to fiscal 2012 research and experimentation expenses in the second quarter of fiscal 2013 and we recorded $1.5 million in tax benefits for full fiscal
year 2013, subject to actual qualified research and development spending as defined by the law. These decreases were partially offset by the recognition of a $1.0 million valuation
allowance on a deferred tax asset related to a past equity investment in an entity that was legally dissolved during the quarter ended March 31, 2013.
NET INCOME
Net income was $52.6 million in fiscal 2013, which represented an increase of 31.1%, or $12.5 million, from fiscal 2012. The increase was primarily due to a higher gross profit
percentage, a lower effective tax rate, the favorable impact of the weaker Japanese yen reflected in other income, and higher sales.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, 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 $67.5 million in fiscal 2014, $85.5 million in fiscal 2013 and $69.1 million in fiscal 2012. Our cash provided by operating activities in
fiscal 2014 represented $86.4 million in net income plus non-cash items and an $18.9 million decrease in cash flow due to a net increase in working capital. The decrease in cash flow
from operations in fiscal 2014 from fiscal 2013 was primarily due to changes in the timing and amount of payments for accrued expenses, including payments made in the first quarter of
fiscal 2014 related to our fiscal 2013 AIP, net of the accruals for our fiscal 2014 AIP, an increase in inventory related to higher raw material costs and higher volumes maintained in
conjunction with Company sourcing initiatives, and changes in the amount of income tax payments. The increase in cash from operations in fiscal 2013 from fiscal 2012 was primarily
due to increased net income and decreases in working capital amounts associated with lower inventories and higher accrued liabilities. The decrease in inventories was primarily due to
raw material purchases made in the fourth quarter of fiscal 2012 associated with a new supply agreement with an existing supplier, which did not repeat in fiscal 2013. The increase in
accrued liabilities was primarily due to increased accruals for compensation, including costs associated with our AIP.
In fiscal 2014, we used $9.0 million in investing activities representing $12.6 million in purchases of property plant and equipment, partially offset by $2.3 million received from the
liquidation of a portion of our auction rate securities and $1.3 million received from other investing activities. We used $14.6 million in investing activities in fiscal 2013 representing
purchases of property, plant and equipment. We used $19.7 million in investing activities in fiscal 2012 of which $19.6 million represented purchases of property, 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 estimate that our total capital expenditures in
fiscal 2015 will be in the range of $10.0 to $15.0 million.
36
In fiscal 2014, cash flows provided by financing activities were $1.2 million. We received $43.1 million from the issuance of common stock related to the exercise of stock options
granted under our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (EIP), our 2012 Omnibus Incentive Plan (OIP) and from the sale of
shares to employees under our 2007 Employee Stock Purchase Plan, as amended and restated September 23, 2013 (ESPP), $17.5 million from the issuance of long-term debt under our
amended credit agreement, and $2.8 million in tax benefits related to exercises of stock options and vesting of restricted stock granted under the EIP and OIP. We used $53.0 million to
repurchase common stock under our share repurchase program and $2.1 million to repurchase common stock pursuant to the terms of our EIP and OIP for shares withheld from award
recipients to cover payroll taxes on the vesting of restricted stock granted under these plans. We also used $6.6 million to repay long-term debt and paid $0.6 million in debt issuance
costs. In fiscal 2013, cash flows used in financing activities were $20.2 million. We used $40.0 million to repurchase common stock under our share repurchase program and $1.3 million
to repurchase common stock pursuant to the terms of our EIP and OIP for shares withheld from award recipients to cover payroll taxes on the vesting of restricted stock granted under
these plans. We also used $10.9 million to repay long-term debt. We received $30.9 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 ESPP, and we received $1.1 million in tax benefits related to exercises of stock options and vesting of restricted stock granted
under our EIP and OIP. In fiscal 2012, cash flows used in financing activities were $174.4 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 EIP and our OIP for shares withheld from award recipients to cover payroll taxes on the vesting of restricted stock granted under these plans. We also paid
$2.7 million in debt issuance costs. 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 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.
In April 2014, our Board of Directors authorized an increase in the amount available under our share repurchase program from the previously remaining $62.0 million to $150.0
million. Under this program, we repurchased 1,229,494 shares for $53.0 million in fiscal 2014, 1,144,836 shares for $40.0 million in fiscal 2013, and 929,407 shares for $33.0 million in fiscal
2012. As of September 30, 2014, $125.0 million remains outstanding under our share repurchase program. Share repurchases are made from time to time, depending on market
conditions, in open market transactions, at management's discretion. The timing, manner, price and amounts of repurchases will be determined at the Company's discretion, and the
share repurchase program may be suspended, terminated or modified at any time for any reason. The repurchase program does not obligate the Company to acquire any specific number
of shares. To date, we have funded share purchases under our share repurchase program from our available cash balance, and anticipate we will continue to do so. In addition, as part of
the share repurchase program, on May 1, 2014, the Company entered into a "10b5-1" stock purchase plan agreement with an independent broker, which expired on July 25, 2014, to
repurchase shares of the Company's common stock in accordance with guidelines pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. A plan under Rule 10b5-1 allows a
company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.
Repurchases are subject to SEC regulations as well as certain conditions specified in the plan.
37
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". In June 2014, we entered into an
amendment to the Credit Agreement (the "Amendment"), which provided for an additional $17.5 million in Term Loan commitments to bring the total commitments to the same as the
original amount under the Credit Agreement at its inception in 2012, an extension of the maturity date of the Credit Facilities, and changes to certain terms of the agreement. The
Amendment also increased the uncommitted accordion feature that allows us to request the existing lenders or, if necessary, third-party financial institutions to provide additional
capacity in the Revolving Credit Facility, from $75.0 million to $100.0 million. The Term Loan has periodic scheduled principal repayments; however, we may prepay the loan without
penalty. The Credit Facilities, as amended, are now scheduled to expire on June 27, 2019. The additional Term Loan commitments were drawn on June 27, 2014, and the Revolving Credit
Facility remains undrawn. The Term Loan has $172.8 million outstanding as of September 30, 2014. The Credit Agreement contains covenants that restrict the ability of the Company
and its subsidiaries to take certain actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments,
engaging in mergers, selling property, paying dividends or amending organizational documents. The Credit Agreement requires us to comply with certain financial ratio maintenance
covenants, including, as amended, a maximum consolidated leverage ratio of 3.00 to 1.00 through December 31, 2015 and a minimum consolidated fixed charge coverage ratio of 1.25 to
1.00. As amended, the maximum consolidated leverage ratio will decrease to 2.75 to 1.00 from January 1, 2016 through the termination of the Credit Agreement. As of September 30,
2014, our consolidated leverage ratio was 1.60 to 1.00 and our consolidated fixed charge coverage ratio was 6.49 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 of this Form 10-K for
additional information regarding the Credit Agreement.
As of September 30, 2014, we had $284.2 million of cash and cash equivalents, $62.4 million of which was held in foreign subsidiaries in the Netherlands, Japan, Singapore, South
Korea and Taiwan where we have elected 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 additional 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 Revolving Credit Facility will
be sufficient to fund our operations, expected capital expenditures, merger and acquisition activities and share repurchases for the foreseeable future. However, in order to further
expand our business, 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 financing in the type or amount necessary to pursue these objectives.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2014 and 2013, we did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which might have been established for the purpose of facilitating off-balance sheet arrangements.
38
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at September 30, 2014, 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
Total
Less Than
1 Year
1-3
Years
3-5
Years
After 5
Years
$
$
172.8
11.8
96.4
10.4
9.1
300.5
$
$
8.8
3.1
54.5
2.0
-
68.4
$
$
16.4
4.9
41.4
2.8
-
65.5
$
$
147.6
3.8
0.3
1.4
1.0
154.1
$
$
-
-
0.2
4.2
8.1
12.5
* We have excluded $0.5 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, 2014. Commitment fees are based on our estimated consolidated leverage ratio in
future periods. See Note 9 of the Notes to the Consolidated Financial Statements of this Form 10-K for additional information regarding our long-term debt.
PURCHASE OBLIGATIONS
We have entered into a multi-year supply agreement with Cabot Corporation, our former parent company that is not a related party, for the purchase of fumed silica, which became
effective January 1, 2013 with an initial term of four years. This agreement requires us to purchase certain minimum quantities of fumed silica each year of the agreement, and to pay a
shortfall if we purchase less than the minimum. The purchase obligations in the table above reflect management's expectation that we will meet the minimum purchase quantities each
year of the contract. Purchase obligations include an aggregate amount of $76.7 million of contractual commitments related to this agreement.
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.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities at September 30, 2014 primarily consist of liabilities related to our Japan retirement allowance, which represents approximately $5.0 million, our liability for
future payments to be made under our Cabot Microelectronics Supplemental Employee Retirement Plan and our liability for uncertain tax positions.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our foreign operations. Some of our foreign operations maintain their accounting records in their local
currencies. Consequently, period to period comparability of results of operations is affected by fluctuations in exchange rates. The primary currencies to which we have exposure are the
Japanese yen, the New Taiwan dollar and the Korean won. Approximately 15% of our revenue is transacted in currencies other than the U.S. dollar. However, we also incur expenses in
foreign countries that are transacted in currencies other than the U.S. dollar, which mitigates the exposure on the Consolidated Statement of Income. We periodically enter into forward
contracts in an effort to manage foreign currency exchange exposure. However, we are unlikely to be able to hedge these exposures completely. We do not currently enter into forward
exchange contracts or other derivative instruments for speculative or trading purposes.
The weakening of the Japanese yen against the U.S. dollar in fiscal 2013 and fiscal 2014 adversely affected our revenue, but had a net favorable impact on our gross profit
percentage, as our yen-denominated cost of goods sold was greater than our yen-denominated revenue. The weakening of the yen accounted for an approximate 100 basis point
increase in our gross profit percentage for fiscal 2013 compared to fiscal 2012, and accounted for an approximate 90 basis point increase in our gross profit percentage for fiscal 2014
compared to fiscal 2013. To a lesser extent, we have also seen a favorable foreign exchange impact on our yen-denominated operating expenses. The weakening of the yen also
favorably impacted other income on our Consolidated Statement of Income, and significantly impacted accumulated other comprehensive income on our Consolidated Balance Sheet.
Other income has been positively impacted based on the settlement or remeasurement of receivables and payables denominated in yen, including intercompany loans, net of the gains
and losses on forward foreign exchange contracts used to hedge the yen exposure. The positive impacts on other income were more pronounced in fiscal 2013 than they were in fiscal
2014. During the fiscal years ended September 30, 2014 and 2013, we recorded $8.1 and $13.0 million, respectively, in currency translation losses, net of tax, that are included in other
comprehensive income on our Consolidated Balance Sheet. These losses primarily relate to changes in the U.S. dollar value of assets and liabilities denominated in yen when these
asset and liability amounts are translated at month-end exchange rates.
MARKET RISK AND SENSITIVITY ANALYSIS RELATED TO FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10% additional adverse movement in foreign exchange rates. As of September 30, 2014, the analysis
demonstrated that such market movements would not have a material adverse effect on our consolidated financial position, results of operations or cash flows over a one-year period.
Actual gains and losses in the future may differ materially from this analysis based on changes in the timing and amount of foreign currency rate movements and our actual exposures.
INTEREST RATE RISK
At September 30, 2014, we have $172.8 million in long-term debt at variable interest rates. Assuming a hypothetical 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, 2014, we owned two auction rate securities (ARS) with a total estimated fair value of $5.3 million and par value of $5.9 million 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 "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 Form 10-K.
40
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, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended September 30, 2014, 2013 and 2012
Consolidated Balance Sheets at September 30, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended September 30, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2014, 2013 and 2012
Notes to the Consolidated Financial Statements
Selected Quarterly Operating Results
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts
Page
42
43
44
45
46
47
48
77
78
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.
41
To the Stockholders and Board of Directors of
Cabot Microelectronics Corporation:
Report of Independent Registered Public Accounting Firm
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, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2014 in
conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014, based on criteria established in Internal Control – Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in Management's Report on Internal Control 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 material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chicago, IL
November 19, 2014
42
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
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
2014
Year Ended September 30,
2013
2012
$
424,666
$
433,131
$
427,657
221,573
203,093
59,354
26,513
45,418
131,285
71,808
3,354
140
68,594
17,843
221,015
212,116
61,373
27,985
46,287
135,645
76,471
3,643
1,392
74,220
21,642
50,751
$
52,578
$
223,630
204,027
58,642
29,516
49,345
137,503
66,524
2,309
(1,011)
63,204
23,110
40,094
2.12
$
2.27
$
1.76
23,704
22,924
22,506
2.04
$
2.19
$
1.71
24,611
23,760
23,244
-
$
-
$
15.00
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
43
Net income
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments
Minimum pension liability adjustment
Unrealized gain on investments
Other comprehensive income (loss), net of tax
Comprehensive income
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
2014
Year Ended September 30,
2013
2012
$
50,751
$
52,578
$
40,094
(8,136)
(196)
151
(8,181)
(13,037)
7
-
(13,030)
3,421
(537)
-
2,884
$
42,570
$
39,548
$
42,978
The accompanying notes are an integral part of these consolidated financial statements.
44
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,392 at September 30, 2014, and $1,532 at September 30, 2013
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
Current liabilities:
Accounts payable
Current portion of long-term debt
Accrued expenses, income taxes payable and other current liabilities
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities
Long-term debt, net of current portion
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 16)
Stockholders' equity:
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 31,927,601 shares at September 30, 2014, and 30,213,577 shares
at September 30, 2013
Capital in excess of par value of common stock
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost, 8,142,687 shares at September 30, 2014, and 6,866,675 shares at September 30, 2013
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
45
$
$
$
September 30,
2014
2013
284,155 $
60,693
64,979
10,645
7,521
427,993
100,821
43,245
7,163
11,353
10,592
601,167 $
15,304 $
8,750
31,394
55,448
164,063
510
9,144
229,165
226,029
54,640
63,786
10,684
7,659
362,798
111,985
44,306
9,785
10,291
12,427
551,592
16,663
10,938
40,620
68,221
150,937
1,559
7,433
228,150
32
437,266
227,942
9,255
(302,493)
372,002
30
376,206
177,191
17,436
(247,421)
323,442
$
601,167 $
551,592
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:
2014
Year Ended September 30,
2013
2012
$
50,751
$
52,578
$
40,094
Depreciation and amortization
Provision for doubtful accounts
Share-based compensation expense
Deferred income tax benefit
Non-cash foreign exchange loss
(Gain)/loss on disposal of property, plant and equipment
Impairment of long-lived assets
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
Net cash provided by operating activities
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
Other investing activities
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
Debt issuance costs
Tax benefits associated with share-based compensation expense
Principal payments under capital lease obligations
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplemental disclosure of non-cash investing and financing activities:
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of period
Issuance of restricted stock
Assets acquired under capital lease
19,941
(170)
14,042
(700)
943
(51)
2,320
(724)
(8,181)
(3,794)
576
(850)
(6,625)
67,478
(12,551)
202
-
2,305
1,062
(8,982)
-
17,500
(6,562)
(55,072)
43,070
(550)
2,806
-
1,192
20,457
173
13,350
(4,722)
3,832
551
160
(1,400)
(5,936)
(1,683)
(3,471)
(1,359)
12,953
85,483
(14,633)
20
-
25
-
(14,588)
-
-
(10,937)
(41,294)
30,905
-
1,148
(21)
(20,199)
(1,562)
58,126
226,029
284,155
$
(3,126)
47,570
178,459
226,029
$
18,041
3,355
$
$
17,661
3,643
$
$
1,267
7,785
-
$
$
$
1,232
5,926
-
$
$
$
$
$
$
$
$
$
23,545
3,771
13,306
(2,733)
748
247
968
(2,033)
(4,622)
(10,228)
4,328
2,026
(352)
69,065
(19,586)
8
(155)
50
-
(19,683)
(347,140)
175,000
(2,188)
(34,537)
36,497
(2,658)
636
(11)
(174,401)
932
(124,087)
302,546
178,459
22,701
2,336
1,894
6,374
20
The accompanying notes are an integral part of these consolidated financial statements.
46
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Common
Stock
Capital
In Excess
Of Par
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Total
Balance at September 30, 2011
$
28
$
278,360
$
431,333
$
27,582
$
(171,590) $
565,713
Share-based compensation expense, net of
compensation related to dividends on unvested
restricted stock
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 benefits from share-based compensation plans
Tax deduction for the dividend paid on unvested
restricted stock, net of expected forfeitures
Net income
Foreign currency translation adjustment
Minimum pension liability adjustment
1
12,980
34,106
155
2,228
1,273
1,455
(33,026)
(1,511)
12,980
(33,026)
(1,511)
34,107
155
2,228
(346,814)
1,273
1,455
40,094
3,421
(537)
(346,814)
40,094
3,421
(537)
Balance at September 30, 2012
$
29
$
330,557
$
124,613
$
30,466
$
(206,127) $
279,538
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
Tax benefits from share-based compensation plans
Net income
Foreign currency translation adjustment
Minimum pension liability adjustment
1
13,350
28,525
154
2,226
1,394
(40,000)
(1,294)
13,350
(40,000)
(1,294)
28,526
154
2,226
1,394
52,578
(13,037)
7
52,578
(13,037)
7
Balance at September 30, 2013
$
30
$
376,206
$
177,191
$
17,436
$
(247,421) $
323,442
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
Tax benefits from share-based compensation plans
Net income
Net unrealized gain on marketable securities
Foreign currency translation adjustment
Minimum pension liability adjustment
2
14,042
40,246
210
2,612
3,950
(53,000)
(2,072)
14,042
(53,000)
(2,072)
40,248
210
2,612
3,950
50,751
151
(8,136)
(196)
50,751
151
(8,136)
(196)
Balance at September 30, 2014
$
32
$
437,266
$
227,942
$
9,255
$
(302,493) $
372,002
The accompanying notes are an integral part of these consolidated financial statements.
47
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'' or "our'') supplies high-performance polishing slurries and pads used in the manufacture
of advanced integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP). CMP polishes surfaces at an atomic level,
thereby 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. In addition, we 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 Securities and Exchange Commission (SEC) and accounting principles generally
accepted in the United States of America. We operate predominantly in one industry segment - the development, manufacture, and sale of CMP consumables.
Revision of Prior Period Amounts
As disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, in the third quarter of fiscal 2014, the Company recorded adjustments to prior periods to
correct certain items of income tax accounting, which related to fiscal years 2011 through 2013. The adjustments related to the accounting for intercompany profit in inventory at our
foreign branch locations and the accounting for annual incentive program costs and related fringe benefits, and are reflected in the Consolidated Balance Sheet table below as of
September 30, 2013. In evaluating the cumulative materiality of the corrections, we considered guidance in Accounting Standard Codification (ASC) Topic 250, "Accounting Changes
and Error Corrections", and its subtopics, ASC 250-10-S99-1, "Assessing Materiality" and ASC 250-10-S99-2, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements". We concluded that the cumulative effect of correcting these prior period amounts was not material individually or in the
aggregate to any of the prior reporting periods. We also evaluated the effect that these adjustments would have had on our consolidated financial statements for the fiscal year ended
September 30, 2014, had we chosen to address them at once in the third quarter, and concluded these adjustments would have had a material impact. As such, we concluded that
revision of prior periods for the cumulative effect of these adjustments was appropriate. Since the cumulative impact of the adjustments is not material to prior periods, we have not
amended previously filed reports.
As part of this revision, we also corrected previously disclosed out-of-period adjustments, which were immaterial to their respective prior periods. These out-of-period adjustments
included the correction of certain historical income tax accounting and the remeasurement of certain foreign cash balances into their functional currency amounts in fiscal 2012, and the
correction of certain historical income tax accounting in fiscal 2013. See Note 1 of the Notes to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended
September 30, 2013 for additional information regarding the out-of-period adjustments recorded in fiscal years 2012 and 2013. The cumulative effect of the adjustments recorded in fiscal
2014, and the correction of out-of-period adjustments recorded in fiscal 2012 and 2013 are reflected in the financial information herein and will be reflected in future filings containing
such financial information. The cumulative effect of these adjustments and corrections on retained earnings was a reduction of $3,635 as of September 30, 2013. In addition, we have
corrected the presentation of debt issuance costs of $2,658 in the Consolidated Statement of Cash Flows for the fiscal year ended September 30, 2012. The debt issuance costs were
originally reported as an operating cash outflow, but now are presented as a financing cash outflow in the revision tables below.
The following tables summarize the effects of the revisions to the financial statements for the comparative periods of fiscal 2012 and 2013 (in thousands, except per share data):
48
CONSOLIDATED STATEMENTS OF INCOME
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Weighted average diluted shares outstanding
Diluted earnings per share
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Foreign currency translation adjustments
Other comprehensive income (loss), net of tax
Comprehensive income
Net income
Other comprehensive income (loss), net of tax
Comprehensive income
$
$
$
$
$
$
$
$
$
$
49
Year Ended September 30, 2012
As
Originally
Reported
Adjustment
As
Revised
(1,344) $
62,871
22,045
40,826
1.81
23,280
1.75
$
$
$
333
333
1,065
(732)
(0.05) $
(36)
(0.04) $
(1,011)
63,204
23,110
40,094
1.76
23,244
1.71
Year Ended September 30, 2013
As
Originally
Reported
Adjustment
As
Revised
74,220
22,835
51,385
2.22
2.14
$
$
$
-
(1,193)
1,193
0.05
0.05
$
$
$
74,220
21,642
52,578
2.27
2.19
Year Ended September 30, 2012
As
Originally
Reported
Adjustment
As
Revised
40,826
6,876
6,339
47,165
$
$
(732) $
(3,455)
(3,455)
(4,187) $
40,094
3,421
2,884
42,978
Year Ended September 30, 2013
As
Originally
Reported
Adjustment
As
Revised
51,385
(13,030)
38,355
$
$
1,193
-
1,193
$
$
52,578
(13,030)
39,548
CONSOLIDATED BALANCE SHEET
Prepaid expenses and other current assets
Total current assets
Total assets
Accrued expenses, income taxes payable and other current liabilities
Total current liabilities
Total liabilities
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
CONSOLIDATED STATEMENT OF CASH FLOWS
Net income
Deferred income tax expense (benefit)
Other
Change in prepaid expenses and other assets
Change in accrued expenses, income taxes payable and other current liabilities
Net cash provided by operating activities
Debt issuance costs
Net cash provided by (used in) financing activities
Net income
Deferred income tax expense (benefit)
Other
Change in prepaid expenses and other assets
Change in accrued expenses, income taxes payable and other current liabilities
Net cash provided by operating activities
Results of Operations
September 30, 2013
As
Originally
Reported
Adjustment
As
Revised
13,598
365,712
554,506
39,899
67,500
227,429
180,826
327,077
554,506
$
$
(2,914) $
(2,914)
(2,914)
721
721
721
(3,635)
(3,635)
(2,914) $
10,684
362,798
551,592
40,620
68,221
228,150
177,191
323,442
551,592
Year Ended September 30, 2012
As
Originally
Reported
Adjustment
As
Revised
$
40,826
(3,523)
(925)
432
(164)
66,407
-
(171,743)
(732) $
790
(1,108)
3,896
(188)
2,658
(2,658)
(2,658)
$
40,094
(2,733)
(2,033)
4,328
(352)
69,065
(2,658)
(174,401)
Year Ended September 30, 2013
As
Originally
Reported
Adjustment
As
Revised
$
51,385
(3,118)
(2,175)
(2,087)
11,933
85,483
1,193
(1,604)
775
(1,384)
1,020
-
$
$
52,578
(4,722)
(1,400)
(3,471)
12,953
85,483
$
$
$
$
$
$
As disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, the results of operations for the year ended September 30, 2014 include an asset
impairment charge of $2,111 ($1,475 net of tax) related to certain manufacturing assets recorded in the quarter ended March 31, 2014. This asset impairment charge included in cost of
goods sold reduced our gross profit percentage by 210 basis points during the second quarter of fiscal 2014 and by 50 basis points on a full year basis. The impairment charge reduced
diluted earnings per share by approximately $0.06 on a full year basis.
50
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies
have been eliminated as of September 30, 2014.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to
make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require
management's most difficult and subjective judgments include, but are not limited to, those estimates related to bad debt expense, warranty obligations, inventory valuation, valuation
and classification of auction rate securities, impairment of long-lived assets and investments, business combinations, goodwill, other intangible assets, share-based compensation,
income taxes and contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates under different
assumptions or conditions.
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, 2014 or 2013. See Note 3 for a more detailed
discussion of other financial instruments.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the
potential inability of our customers to make required payments. Our allowance for doubtful accounts is based on historical collection experience, adjusted for any specific known
conditions or circumstances such as customer bankruptcies and increased risk due to economic conditions. Uncollectible account balances are charged against the allowance when we
believe that it is probable that the receivable will not be recovered.
Accounts receivable, net of allowances for doubtful accounts, were $60,693 as of September 30, 2014 and $54,640 as of September 30, 2013. The increase in accounts receivable was
primarily due to the timing of collection in certain foreign locations, partially offset by the negative impact of foreign currency fluctuations, primarily due to the continued weakening of
the Japanese yen. In fiscal 2012, we recorded $3,727 in bad debt expense for Elpida Memory, Inc. (Elpida) a customer in Japan that filed for bankruptcy protection in February 2012.
Elpida was acquired by Micron Technology, Inc. in fiscal 2014 and is paying the Company a portion of the balance owed over a period of seven years pursuant to its approved
bankruptcy plan. Amounts charged to expense are recorded in general and administrative expenses. A portion of our receivables and the related allowance for doubtful accounts is
denominated in foreign currencies, so they are subject to foreign exchange fluctuations which are included in the table below under the deductions and adjustments. Our allowance for
doubtful accounts changed during the fiscal year ended September 30, 2014 as follows:
Balance as of September 30, 2013
Amounts charged to expense
Deductions and adjustments
Balance as of September 30, 2014
1,532
(170)
30
1,392
$
$
51
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 Elpida bankruptcy in fiscal 2012, we had not experienced significant losses relating to accounts
receivable from individual customers or groups of customers in a number of years.
Customers who represented more than 10% of revenue are as follows:
Taiwan Semiconductor Manufacturing Co. (TSMC)
Samsung Group (Samsung)
2014
Year Ended September 30,
2013
2012
22%
14%
21%
13%
18%
13%
TSMC accounted for 19.4% and 16.7% of net accounts receivable at September 30, 2014 and 2013, respectively. Samsung accounted for 10.2% and 11.8% of net accounts
receivable at September 30, 2014 and 2013, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, and accounts payable approximate their fair values due to their short-term, highly liquid characteristics. See Note 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 lack of marketability. An inventory reserve is
maintained based upon a historical percentage of actual inventories written off and applied against inventory value at the end of the period, adjusted for known conditions and
circumstances.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is based on the following estimated useful lives of the assets using the straight-line method:
Buildings
Machinery and equipment
Furniture and fixtures
Information systems
Assets under capital leases
15-25 years
3-10 years
5-10 years
3-5 years
Lesser of term of lease or estimated useful life
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized and depreciated over the remaining
useful lives. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of
operations. We capitalize the costs related to the design and development of software used for internal purposes; however, these costs are not material.
52
IMPAIRMENT OF LONG-LIVED ASSETS
Reviews are regularly performed to determine whether facts and circumstances exist that indicate the carrying amount of assets may not be recoverable or the useful life is shorter
than originally estimated. Asset recoverability assessment begins by comparing the projected undiscounted cash flows associated with the related asset or group of assets over their
remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If assets are determined
to be recoverable, but their useful lives are shorter than originally estimated, the net book value of the asset is depreciated over the newly determined remaining useful life. See Note 5
for more information regarding impairment expense recorded in fiscal years 2014, 2013 and 2012.
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 component. A component is a reporting unit when the component
constitutes a business for which discreet financial information is available and segment management regularly reviews the operating results of the component. Components may be
combined into one reporting unit when they have similar economic characteristics. We have four reporting units, three of which have goodwill and intangible assets as of September 30,
2014. 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 and the "implied" fair value of goodwill. The fair value of the reporting unit may be determined
using a discounted cash flow analysis of our projected future results. An entity has the option to assess qualitative factors to determine if the two-step impairment test must be
performed. We elected to perform a discounted cash flow analysis in fiscal 2014 when we performed our annual impairment review of goodwill. An entity also has the option to assess
qualitative factors in its impairment review of indefinite-lived intangible assets. However, we elected to use the royalty savings method in fiscal 2014 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, 2014, and none of our reporting units
were at risk for impairment.
WARRANTY RESERVE
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance
requirements. The warranty reserve is based upon a historical product return rate, adjusted for any specific known conditions or circumstances. Adjustments to the warranty reserve
are recorded in cost of goods sold.
FOREIGN CURRENCY TRANSLATION
Certain operating activities in Asia and Europe are denominated in local currency, considered to be the functional currency. Assets and liabilities of these operations are translated
using exchange rates in effect at the end of the year, and revenue and costs are translated using average exchange rates for the year. The related translation adjustments are reported in
comprehensive income in stockholders' equity.
FOREIGN EXCHANGE MANAGEMENT
We transact business in various foreign currencies, primarily the Japanese yen, New Taiwan dollar and Korean won. Our exposure to foreign currency exchange risks has not been
significant because a large portion of our business is denominated in U.S. dollars. However, there was a weakening of the Japanese yen against the U.S. dollar during fiscal years 2013
and 2014, which had some positive impact on our results of operations. Periodically, we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with
currency fluctuations on certain foreign currency balance sheet exposures. Our foreign exchange contracts do not qualify for hedge accounting under the accounting rules for
derivative instruments. See Note 10 for a discussion of derivative financial instruments.
53
INTERCOMPANY LOAN ACCOUNTING
We maintain an intercompany loan agreement with our wholly-owned subsidiary, Nihon Cabot Microelectronics K.K. ("Nihon"), under which we provided funds to Nihon to
finance the purchase of certain assets from our former Japanese branch at the time of the establishment of this subsidiary, for the purchase of land adjacent to our 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 Nihon, as well
as for general business purposes. Since settlement of the note is expected in the foreseeable future, and our subsidiary has been consistently making timely payments on the loan, the
loan is considered a foreign-currency transaction. Therefore the associated foreign exchange gains and losses are recognized as other income or expense rather than being deferred in
the cumulative translation account in other comprehensive income.
We also maintain an intercompany loan between two of our wholly-owned foreign subsidiaries, from Cabot Microelectronics Singapore Pte. Ltd. to Hanguk Cabot Microelectronics,
LLC in South Korea. This loan provided funds for the construction and operation of our research, development and manufacturing facility in South Korea. This loan is also considered a
foreign currency transaction and is accounted for in the same manner as our intercompany loan to Nihon.
PURCHASE COMMITMENTS
We have entered into unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. On an ongoing basis,
we review our agreements and assess the likelihood of a shortfall in purchases and determine if it is necessary to record a liability. To date, we have not recorded such a liability.
REVENUE RECOGNITION
Revenue from CMP consumables products is recognized when title is transferred to the customer, assuming all revenue recognition criteria are met. Title transfer generally occurs
upon shipment to the customer or when inventory held on consignment is consumed by the customer, subject to the terms and conditions of the particular customer arrangement. We
have consignment agreements with a number of our customers that require, at a minimum, monthly consumption reports that enable us to record revenue and inventory usage in the
appropriate period.
We market our products through distributors in certain areas of the world. We recognize revenue upon shipment and when title is transferred to the distributor. We do not have
any arrangements with distributors that include payment terms, rights of return, or rights of exchange outside the ordinary course of business, or any other significant matters that we
believe would impact the timing of revenue recognition.
Within our Engineered Surface Finishes (ESF) business, sales of equipment are recorded as revenue upon delivery and customer acceptance. Amounts allocated to installation and
training are deferred until those services are provided and are not material.
Revenues are reported net of any value-added tax or other such tax assessed by a governmental authority on our revenue-producing activities.
SHIPPING AND HANDLING
Costs related to shipping and handling are included in cost of goods sold.
RESEARCH, DEVELOPMENT AND TECHNICAL
Research, development and technical costs are expensed as incurred and consist primarily of staffing costs, materials and supplies, depreciation, utilities and other facilities costs.
54
INCOME TAXES
Current income taxes are determined based on estimated taxes payable or refundable on tax returns for the current year. Deferred income taxes are determined using enacted tax
rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Provisions are made for both U.S. and any foreign deferred income tax liability or benefit. We assess whether our
deferred tax assets will ultimately be realized and record an estimated valuation allowance on those deferred tax assets that may not be realized. We recognize the tax benefit of an
uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position. In fiscal 2012, we
elected to permanently reinvest the earnings of certain of our foreign subsidiaries outside the U.S. rather than repatriate the earnings to the U.S. In fiscal 2013 and 2014, we elected to
permanently reinvest the earnings of all of our foreign subsidiaries. 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
purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an
estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We
use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of
highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options and the risk-free interest rate. We estimate the expected
volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected
term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement eligible
pursuant to their grants during the contractual term of the grant. The 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 outstanding during the
period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two
class method under ASC Topic 260, Earnings Per Share (ASC 260). Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding
during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.
COMPREHENSIVE INCOME
Comprehensive income primarily differs from net income due to foreign currency translation adjustments.
55
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, "Income Taxes (Topic 740) – Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11). The provisions of ASU 2013-11 require an
entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward when the related deferred tax asset is available to be utilized. ASU 2013-11 is effective for us beginning October 1, 2014. We do not expect the adoption of ASU
2013-11 will have a material impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), an updated standard on revenue recognition. ASU 2014-09 provides
enhancements to how revenue is reported and improves comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new
standard is for companies to recognize revenue for goods or services in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods
or services. The new standard is intended to enhance disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, such as
service revenue and contract modifications, and improve guidance for multiple-element arrangements. ASU 2014-09 will be effective for us beginning October 1, 2017, and may be
applied on a full retrospective or modified retrospective approach. We are evaluating the impact of implementation of this standard on our financial statements.
In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after
the Requisite Service Period" (Topic 718). ASU 2014-14 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as
a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of an award, and compensation cost should be recognized in the
period in which it becomes probable that the performance target will be achieved. The compensation cost should represent the amount attributable to the periods for which the requisite
service has been rendered. ASU 2014-09 will be effective for us beginning October 1, 2016 and may be applied on a prospective or retrospective basis. We do not expect the
implementation of this standard to have a material effect on our financial statements as we have not granted any awards with a performance condition.
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 estimate fair value. Level 1 inputs consist of valuations based on quoted market prices in active markets for identical assets or liabilities. Level 2 inputs
consist of valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in an inactive market, or other observable inputs. Level 3
inputs consist of valuations based on unobservable inputs that are supported by little or no market activity.
56
The following table presents financial instruments, other than long-term debt, that we measured at fair value on a recurring basis at September 30, 2014 and 2013. See Note 9 for a
detailed discussion of our long-term debt. We have chosen to not measure any of our other financial instruments at fair value as we believe their carrying value approximates their fair
value. We have classified the following assets in accordance with the fair value hierarchy set forth in the applicable standards. In instances where the inputs used to measure the fair
value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest level input that is significant to the determination of the fair value.
September 30, 2014
Cash and cash equivalents
Other long-term investments
Total
September 30, 2013
Cash and cash equivalents
Other long-term investments
Total
Level 1
Level 2
Level 3
284,155 $
1,654
285,809 $
-
-
-
$
$
Level 1
Level 2
Level 3
226,029 $
1,375
227,404 $
-
-
-
$
$
$
$
$
$
Total
Fair Value
284,155
1,654
285,809
Total
Fair Value
226,029
1,375
227,404
- $
-
- $
- $
-
- $
Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active
markets. The other long-term investments are included in other long-term assets on our Consolidated Balance Sheet. Our other long-term investments represent the fair value of
investments under the Cabot Microelectronics Supplemental Employee Retirement Plan (SERP), which is a nonqualified supplemental savings plan. The fair value of the investments is
determined through quoted market prices within actively traded markets. Although the investments are allocated to individual participants and investment decisions are made solely by
those participants, the SERP is a nonqualified plan. Consequently, the Company owns the assets and the related offsetting liability for disbursement until such time as a participant
makes a qualifying withdrawal. The long-term asset was adjusted to $1,654 in the fourth quarter of fiscal 2014 to reflect its fair value as of September 30, 2014.
4. INVENTORIES
Inventories consisted of the following:
Raw materials
Work in process
Finished goods
Total
September 30,
2014
2013
$
$
37,009 $
4,505
23,465
64,979 $
38,004
5,001
20,781
63,786
The increase in finished goods inventory is primarily due to higher raw material costs used in production during fiscal 2014 and the amount of certain manufacturing variances,
which are included in cost of goods sold in the period when the inventory is sold to customers.
57
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
Less: accumulated depreciation and amortization of assets under capital leases
Net property, plant and equipment
September 30,
2014
2013
$
$
17,834 $
97,513
171,461
6,224
27,673
-
3,166
323,871
(223,050)
100,821 $
18,914
97,542
175,406
6,234
26,208
-
5,072
329,376
(217,391)
111,985
Depreciation expense, including amortization of assets recorded under capital leases, was $17,467, $17,835 and $20,863 for the years ended September 30, 2014, 2013 and 2012,
respectively.
In fiscal 2014, we recorded $2,320 in impairment expense primarily related to the decision to write-off certain manufacturing assets in foreign locations in accordance with the
applicable accounting standards for the impairment and disposal of long-lived assets. Of this amount, $2,236 and $84 was included in cost of goods sold and selling and marketing
expense, respectively. In fiscal 2012, we recorded $968 in impairment expense primarily related to the write-off of certain operational assets at one of our foreign locations. Of this
amount, $842 and $126 was included in cost of goods sold and selling and marketing expense, respectively. Impairment expense for fiscal 2013 was insignificant.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $43,245 and $44,306 as of September 30, 2014 and 2013, respectively. The decrease in goodwill was due to foreign exchange fluctuations of the New Taiwan dollar.
The components of other intangible assets are as follows:
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*
September 30, 2014
September 30, 2013
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
8,278 $
8,270
2,550
12,193
31,291
1,190
$
6,750
7,534
2,550
8,484
25,318
8,362 $
8,270
2,550
12,496
31,678
1,190
5,853
7,196
2,550
7,484
23,083
Total other intangible assets
$
32,481 $
25,318
$
32,868 $
23,083
* Total other intangible assets not subject to amortization primarily consist of trade names.
58
Amortization expense was $2,474, $2,622 and $2,682 for fiscal 2014, 2013 and 2012, respectively. Estimated future amortization expense for the five succeeding fiscal years is as
follows:
Fiscal Year
2015
2016
2017
2018
2019
Estimated
Amortization
Expense
$
2,384
1,973
1,146
453
11
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of our fiscal year or more frequently if indicators of potential impairment exist,
using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an
operating segment. An entity has the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a discounted cash flow analysis ("step one").
Similarly, an entity has the option to use a step zero or a step one approach to determine the recoverability of indefinite-lived intangible assets. In fiscal 2013 and 2014, we chose to use a
step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment.
We completed our annual impairment test during our fourth quarter of fiscal 2014 and concluded that no impairment existed. There have been no cumulative impairment charges
recorded on the goodwill for any of our reporting units.
7. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
Auction rate securities (ARS)
Other long-term assets
Other long-term investments
Total
September 30,
2014
2013
$
$
5,895 $
3,043
1,654
10,592 $
7,966
3,086
1,375
12,427
We classify our ARS investments as held-to-maturity and have recorded them at cost. Our ARS investments at September 30, 2014 consisted of two tax exempt municipal debt
securities with a total par value of $5,895, which both mature in more than ten years. The ARS market began to experience illiquidity in early 2008, and this illiquidity continues. Despite
this lack of liquidity, there have been no defaults in payment of the underlying securities and interest income on these holdings continues to be received on scheduled interest payment
dates. Our ARS, when purchased, were issued by A-rated municipalities. Although the credit ratings of both municipalities have been downgraded since our original investment, one
of the ARS is credit enhanced with bond insurance, and the other has become an obligation of the bond insurer. Both ARS currently carry a credit rating of AA- by Standard & Poor's.
59
The fair value of our ARS, determined using level 2 fair value inputs, was $5,292 as of September 30, 2014. We have classified our ARS as held-to-maturity based on our intention
and ability to hold the securities until maturity. We believe the gross unrecognized loss of $603 is due to the illiquidity in the ARS market, rather than to credit loss. Although we
believe these securities will ultimately be collected in full, we believe that it is not likely that we will be able to monetize the securities in our next business cycle (which for us is generally
one year). We will continue to monitor our ARS for impairment indicators, which may require us to record an impairment charge that is deemed other-than-temporary. In November
2011, the municipality that issued one of our ARS filed for bankruptcy protection. As a result of the approval of the municipality's reorganization plan, and our voting elections, we
received 65% of the par value outstanding, or $2,113, during the quarter ended December 31, 2013, and we reversed the $234 temporary impairment that we previously recorded.
Other long-term assets are comprised of the long-term portion of prepaid unamortized debt costs as well as miscellaneous deposits and prepayments on contracts extending
beyond the next 12 months. As discussed in Note 3, we recorded a long-term asset and a corresponding long-term liability of $1,654 representing the fair value of our SERP investments
as of September 30, 2014.
8. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current 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,
2014
2013
24,601
4,681
458
324
7,652
951
1,953
40,620
$
$
16,980 $
3,167
1,223
246
5,448
1,182
3,148
31,394 $
60
9. DEBT
On February 13, 2012, we entered into a credit agreement (the "Credit Agreement") among the Company, as Borrower, Bank of America, N.A., as administrative agent, swing line
lender and an L/C issuer, Bank of America Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, JPMorgan Chase Bank, N.A., as syndication
agent, and Wells Fargo Bank, N.A. as documentation agent. The Credit Agreement provided us with a $175,000 term loan (the "Term Loan"), which we drew on February 27, 2012 to
fund approximately half of the special cash dividend we paid to our stockholders on March 1, 2012, and a $100,000 revolving credit facility (the "Revolving Credit Facility"), which has
never been drawn, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans. The Term Loan and the Revolving Credit Facility are referred to as the "Credit
Facilities." On June 27, 2014, we entered into an amendment (the "Amendment") to the Credit Agreement, which (i) increased term loan commitments by $17,500, from $157,500 to
$175,000, the same level as the original amount under the Credit Agreement at its inception in 2012; (ii) increased the uncommitted accordion feature on the Revolving Credit Facility
from $75,000 to $100,000; (iii) extended the expiration date of the Credit Facilities from February 13, 2017 to June 27, 2019; (iv) relaxed the consolidated leverage ratio financial covenant;
and (v) revised certain pricing terms and other terms within the Credit Agreement. On June 27, 2014, we drew the $17,500 of increased term loan commitments, bringing the total
outstanding commitments under the Term Loan to $175,000.
Borrowings under the amended Credit Facilities (other than in respect of swing-line loans) bear interest at a rate per annum equal to the "Applicable Rate" (as defined below) plus,
at our option, either (1) a LIBOR rate determined by reference to the cost of funds for deposits in the relevant currency for the interest period relevant to such borrowing or (2) the "Base
Rate", which is the highest of (x) the prime rate of Bank of America, N.A., (y) the federal funds rate plus 1/2 of 1.00% and (z) the one-month LIBOR rate plus 1.00%. The current
Applicable Rate for borrowings under the Credit Facilities is 1.50%, as amended, with respect to LIBOR borrowings and 0.25% with respect to Base Rate borrowings, with such
Applicable Rate subject to adjustment based on our consolidated leverage ratio. Swing-line loans bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the
Revolving Credit Facility. In addition to paying interest on outstanding principal under the Credit Agreement, we pay a commitment fee to the lenders under the Revolving Credit
Facility in respect of the unutilized commitments thereunder. As amended, the fee ranges from 0.20% to 0.30%, based on our consolidated leverage ratio. Interest expense and
commitment fees are paid according to the relevant interest period and no less frequently than at the end of each calendar quarter. We paid $2,658 in arrangement fees, upfront fees and
administration fees in February 2012 and we paid an additional $550 in upfront fees and arrangement fees in June 2014, of which $411 and $1,466 remains in prepaid expenses and other
current assets and other long-term assets, respectively, on our Consolidated Balance Sheet as of September 30, 2014. We also pay letter of credit fees as necessary. The Term Loan has
periodic scheduled repayments; however, we may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary "breakage" fees and reemployment costs in
the case of LIBOR borrowings. All obligations under the Credit Agreement are guaranteed by certain of our existing and future direct and indirect domestic subsidiaries. The
obligations under the Credit Agreement and guarantees of those obligations are secured, subject to certain exceptions, by first priority liens and security interests in the assets of the
Company and certain of its domestic subsidiaries.
The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain
significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents. The
Credit Agreement requires us to comply with certain financial ratio maintenance covenants. As amended, these include a maximum consolidated leverage ratio of 3.00 to 1.00 through
December 31, 2015 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. As amended, the maximum consolidated leverage ratio will decrease to 2.75 to 1.00 from
January 1, 2016 through the termination of the Credit Agreement. As of September 30, 2014, our consolidated leverage ratio was 1.60 to 1.00 and our consolidated fixed charge coverage
ratio was 6.49 to 1.00. The Credit Agreement also contains customary affirmative covenants and events of default. We believe we are in compliance with these covenants.
At September 30, 2014, the fair value of the Term Loan, using level 2 inputs, approximates its carrying value of $172,813 as the loan bears a floating market rate of interest. As of
September 30, 2014, $8,750 of the debt outstanding is classified as short-term.
61
Principal repayments of the Term Loan are generally made on the last calendar day of each quarter if that day is considered to be a business day. As of September 30, 2014,
scheduled principal repayments of the Term Loan were as follows:
Fiscal Year
2015
2016
2017
2018
2019
Total
Principal
Repayments
8,750
$
8,750
7,656
14,219
133,438
172,813
$
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 contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on our
forward foreign exchange contracts are recognized as other income or expense in the accompanying consolidated income statements in the period in which the exchange rates change.
We do not use derivative financial instruments for trading or speculative purposes. In addition, all derivatives, whether designated in hedging relationships or not, are required to be
recorded on the balance sheet at fair value. At September 30, 2014, we had forward foreign exchange contracts to either buy or sell Japanese yen and British pound for the purpose of
hedging the risk associated with a net transactional exposure in those currencies.
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
Asset Derivatives
Liability Derivatives
Fair Value at
September 30,
2014
Fair Value at
September 30,
2013
Fair Value at
September 30,
2014
Fair Value at
September 30,
2013
Prepaid expenses and other current assets
Accrued expenses and other current liabilities
$
$
100
-
$
$
60
-
$
$
- $
270 $
-
-
The following table summarizes the effect of our derivative instrument on our Consolidated Statement of Income for the fiscal years ended September 30, 2014, 2013 and 2012:
Derivatives not designated as hedging instruments
Statement of Income Location
Gain (Loss) Recognized in Statement of Income
Fiscal Year Ended
September 30,
2013
September 30,
2014
September 30,
2012
Foreign exchange contracts
Other income (expense), net
$
(1,289) $
252
$
154
62
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 Corporation 2000 Equity Incentive Plan (the "EIP"), as amended and restated
September 23, 2008. On March 6, 2012, our stockholders approved the 2012 Omnibus Incentive Plan (the "OIP"), which is the successor plan to the EIP. As of such time, all share-based
awards have been 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 management with the flexibility to attract, retain and reward our employees, directors, consultants and advisors. The OIP allows for the granting of six types of
equity incentive awards: stock options, restricted stock, restricted stock units, stock appreciation rights (SARs), performance-based awards and substitute awards. The OIP also
provides for cash incentive awards to be made. Substitute awards under the OIP are those awards that, in connection with an acquisition, may be granted to employees, directors,
consultants or advisors of the acquired company, in substitution for equity incentives held by them in the seller or the acquired company. No SARs, performance awards, or substitute
awards have been granted to date under either plan. No awards of any type have been granted to date to consultants or advisors under either plan. The OIP authorizes up to 4,934,444
shares of stock to be granted thereunder, including up to 2,030,952 shares of stock in the aggregate of awards other than options or SARs, and up to 2,538,690 incentive stock options.
The 4,934,444 shares of stock represents 2,901,360 shares of newly authorized shares and 2,033,084 shares previously available under the EIP. In addition, shares that become available
from awards under the EIP and the OIP because of events such as forfeitures, cancellations or expirations, or because shares subject to an award are withheld to satisfy tax withholding
obligations, will also be available for issuance under the OIP. Shares issued under our share-based compensation plans are issued from new shares rather than from treasury shares.
On March 2, 2012, we completed a leveraged recapitalization pursuant to which we paid a special cash dividend of $15 per share to our stockholders. In conjunction with this
recapitalization, the EIP and the OIP required us to proportionally adjust the shares available for issuance under them. The number of shares available under the plans was increased by
multiplying the number by a factor of 1.45068, representing the ratio of the official NASDAQ closing price of $51.92 per share on March 1, 2012, the dividend payment date, to the official
NASDAQ opening price of $35.79 per share on March 2, 2012, the ex-dividend date. The number of authorized shares in the OIP noted above includes the effects of this proportional
adjustment.
Non-qualified stock options issued under the OIP, as they were under the EIP, are generally time-based and provide for a ten-year term, with options generally vesting equally over
a four-year period, with first vesting on the first anniversary of the award date. Non-qualified stock options granted to non-employee directors on an annual basis vest 100% on the first
anniversary of the award date. Compensation expense related to our stock option awards was $6,947, $6,878 and $6,802 in fiscal 2014, 2013 and 2012, respectively. For additional
information on our accounting for share-based compensation, see Note 2. Under the OIP, as under the EIP, employees may also be granted ISOs to purchase common stock at not less
than the fair value on the date of the grant. 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. Restricted stock units granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award
date. In general, shares of restricted stock and restricted stock units may not be sold, assigned, transferred, pledged, disposed of or otherwise encumbered. Holders of restricted stock,
and restricted stock units, if specified in the award agreements, have all the rights of stockholders, including voting and dividend rights, subject to the above restrictions, although the
current holders of restricted stock units 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. Compensation expense related to our restricted stock and
restricted stock unit awards and restricted shares matched at 50% pursuant to the Deposit Share Program was $6,320, $5,793 and $5,674 for fiscal 2014, 2013 and 2012, respectively.
63
EMPLOYEE STOCK PURCHASE PLAN
In March 2008, our stockholders approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the "ESPP"), which amended the ESPP for the primary purpose of
increasing the authorized shares of common stock to be purchased under the ESPP from 475,000 designated shares to 975,000 shares. The ESPP required us to proportionally adjust the
cumulative number of shares designated under the plan to reflect the effect of the leveraged recapitalization with a special cash dividend. The cumulative number of shares designated
under the ESPP was increased by a factor of 1.45068 representing the ratio of the official NASDAQ closing price of $51.92 per share on the dividend payment date, to the official
NASDAQ opening price of $35.79 per share on the ex-dividend date. As of September 30, 2014, a total of 648,323 shares are available for purchase under the ESPP. The ESPP allows all
full-time, and certain part-time, employees of our Company and its subsidiaries to purchase shares of our common stock through payroll deductions. Employees can elect to have up to
10% of their annual earnings withheld to purchase our stock, subject to a maximum number of shares that a participant may purchase and a maximum dollar expenditure in any six-month
offering period, and certain other criteria. The provisions of the ESPP allow shares to be purchased at a price no less than the lower of 85% of the closing price at the beginning or end
of each semi-annual stock purchase period. A total of 81,700, 84,602, and 70,645 shares were issued under the ESPP during fiscal 2014, 2013 and 2012, respectively. Compensation
expense related to the ESPP was $680, $584 and $735 in fiscal 2014, 2013 and 2012, respectively.
DIRECTORS' DEFERRED COMPENSATION PLAN
The Directors' Deferred Compensation Plan (DDCP), as amended and restated September 23, 2008, became effective in March 2001 and applies only to our non-employee directors.
The cumulative number of shares deferred under the plan was 76,633 and 74,469 as of September 30, 2014 and 2013, 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 for each of fiscal 2014, 2013 and 2012.
ACCOUNTING FOR SHARE-BASED COMPENSATION
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock
purchase plan purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an
estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We
use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases. This model requires the input of
highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options and the risk-free interest rate. We estimate the expected
volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected
term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement eligible
pursuant to their grants during the contractual term of the grant. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
64
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
2014
Year Ended September 30,
2013
2012
$
$
$
15.78
6.40
32%
1.9%
-
$
9.11
0.50
25%
0.1%
-
$
12.13
6.37
36%
0.9%
-
$
7.41
0.50
25%
0.1%
-
15.66
6.38
38%
1.3%
-
8.78
0.50
36%
0.1%
-
The Black-Scholes model is primarily used in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. Because
employee stock options and ESPP purchases have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can
materially affect the estimated value, our use of the Black-Scholes model for estimating the fair value of stock options and ESPP purchases may not provide an accurate measure.
Although the value of our stock options and ESPP purchases are determined in accordance with applicable accounting standards using an option-pricing model, those values may not
be indicative of the fair values observed in a willing buyer/willing seller market transaction.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award. Share-based compensation expense
related to restricted stock and restricted stock unit awards is recorded net of expected forfeitures.
SHARE-BASED COMPENSATION EXPENSE
Total share-based compensation expense for the years ended September 30, 2014, 2013 and 2012, 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 compensation expense, net of tax
2014
Year Ended September 30,
2013
2012
1,866
1,475
1,298
9,403
(4,722)
9,320
$
$
1,707
1,301
1,367
8,975
(4,581)
8,769
$
$
1,541
1,105
1,392
9,268
(4,118)
9,188
$
$
65
Our non-employee directors received annual equity awards in March 2014 at the time of our Annual Meeting of Stockholders, 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. Seven of the Company's eight non-employee directors had completed at least two full terms of service as of the date of the March 2014 award. Consequently, the requisite
service period for the award had already been satisfied and we recorded the fair value of $1,325 of the awards to these seven directors to share-based compensation expense in the fiscal
quarter ended March 31, 2014 rather than recording that expense over the one-year vesting period stated in the award agreement, as is done for the other non-employee director.
STOCK OPTION ACTIVITY
In fiscal 2012, as required by the EIP, the exercise prices and the number of outstanding non-qualified stock options (NQSOs) were proportionally adjusted to reflect the leveraged
recapitalization with a special cash dividend. The exercise prices of outstanding NQSOs were reduced by multiplying them by a factor of 0.68933, representing the ratio of the official
opening price of our common stock on the NASDAQ stock market of $35.79 per share on the ex-dividend date, to the official closing price of our common stock on the NASDAQ stock
market of $51.92 per share on the last trading day immediately prior to the ex-dividend date. The number of outstanding NQSOs was increased by multiplying the number by a factor of
1.45068, representing the ratio of the official NASDAQ closing price of $51.92 per share on the dividend payment date to the official NASDAQ opening price of $35.79 per share on the
ex-dividend date. This adjustment did not result in additional share-based compensation expense in the period as the fair value of the outstanding NQSOs immediately following the
payment of the special cash dividend was equal to the fair value immediately prior to such distribution.
A summary of stock option activity under the EIP and OIP as of September 30, 2014, and changes during fiscal 2014 are presented below:
Outstanding at September 30, 2013
Granted
Exercised
Forfeited or canceled
Outstanding at September 30, 2014
Exercisable at September 30, 2014
Expected to vest after September 30, 2014
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
26.95
44.18
27.78
32.87
29.04
25.10
35.50
6.1 $
41,908
4.8 $
33,263
8.1 $
8,311
Stock
Options
4,273,887 $
475,856
(1,449,002)
(27,843)
3,272,898 $
2,034,461 $
1,193,375 $
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., for all in-the-money stock options, the difference between our closing stock price of
$41.45 per share on the last trading day of fiscal 2014 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option
holders exercised their options on the last trading day of fiscal 2014. The total intrinsic value of options exercised was $21,647, $9,847 and $6,879 for fiscal 2014, 2013 and 2012,
respectively.
The total cash received from options exercised was $40,248, $28,525 and $34,107 for fiscal 2014, 2013 and 2012, respectively. The actual tax benefit realized for the tax deductions
from options exercised was $7,611, $3,394 and $2,239 for fiscal 2014, 2013 and 2012, respectively. The total fair value of stock options vested during fiscal years 2014, 2013 and 2012 was
$6,645, $6,681 and $6,796, respectively. As of September 30, 2014, there was $10,035 of total unrecognized share-based compensation expense related to unvested stock options granted
under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.4 years.
66
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
Similarly, in fiscal 2012, the EIP required that we proportionally adjust the number of outstanding restricted stock units (RSUs) as a result of the leveraged recapitalization with a
special cash dividend. The number of outstanding RSUs was increased by multiplying the number by a factor of 1.45068, representing the ratio of the official NASDAQ closing price of
$51.92 per share on the dividend payment date to the official NASDAQ opening price of $35.79 per share on the ex-dividend date. This adjustment did not result in additional share-
based compensation expense in the period as the fair value of the outstanding RSUs immediately following the payment of the special cash dividend was equal to the fair value
immediately prior to such distribution.
A summary of the status of the restricted stock awards and restricted stock unit awards outstanding that were granted under the EIP and OIP as of September 30, 2014, and changes
during fiscal 2014, are presented below:
Nonvested at September 30, 2013
Granted
Vested
Forfeited
Nonvested at September 30, 2014
Restricted
Stock
Awards and
Units
Weighted
Average
Grant Date
Fair Value
396,429 $
181,172
(170,997)
(8,505)
398,099 $
34.84
44.13
34.60
37.70
39.11
As of September 30, 2014, there was $9,681 of total unrecognized share-based compensation expense related to unvested restricted stock awards and restricted stock units under
the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.5 years. The total fair value of restricted stock awards and restricted stock units vested
during fiscal years 2014, 2013 and 2012 was $5,916, $5,457 and $5,784, respectively.
12. SAVINGS PLAN
Effective in May 2000, we adopted the Cabot Microelectronics Corporation 401(k) Plan (the "401(k) Plan"), which is a qualified defined contribution plan, covering all eligible
U.S. employees meeting certain minimum age and eligibility requirements, as defined by the 401(k) Plan. Participants may make elective contributions of up to 60% of their eligible
compensation. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The 401(k) Plan provides for matching and fixed non-elective
contributions by the Company. Under the 401(k) Plan, the Company will match 100% of the first four percent of the participant's eligible compensation and 50% of the next two percent
of the participant's eligible compensation that is contributed, subject to limitations required by government regulations. Under the 401(k) Plan, all U.S. employees, even those who do
not contribute to the 401(k) Plan, receive a contribution by the Company in an amount equal to four percent of eligible compensation, and thus are participants in the 401(k) Plan.
Participants are 100% vested in all Company contributions at all times. The Company's expense for the 401(k) Plan totaled $4,547, $4,057 and $4,210 for the fiscal years ended September
30, 2014, 2013 and 2012, respectively.
67
13. OTHER INCOME (EXPENSE), NET
Other income (expense), net, consisted of the following:
Interest income
Other income (expense)
Total other income (expense), net
Year Ended September 30,
2013
2014
2012
$
$
194
(54)
140
$
$
145
1,247
1,392
$
$
146
(1,157)
(1,011)
Other income (expense) primarily represents the gains and losses recorded on transactions denominated in foreign currencies. The decrease in other income from fiscal 2013 to
fiscal 2014, as well as the increase in other income from fiscal 2012 to fiscal 2013, was primarily due to the impact of foreign currency fluctuations on monetary assets and liabilities
denominated in currencies other than the functional currency, net of the gains and losses on forward foreign exchange contracts discussed in Note 10.
14. STOCKHOLDERS' EQUITY
The following is a summary of our capital stock activity over the past three years:
September 30, 2011
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, 2012
Exercise of stock options
Restricted stock under EIP and OIP, 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, 2013
Exercise of stock options
Restricted stock under EIP and OIP, 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
Number of Shares
Common
Stock
27,652,336
976,645
159,879
5,022
70,645
28,864,527
1,071,750
185,925
6,773
84,602
30,213,577
1,449,002
176,026
7,296
81,700
Treasury
Stock
4,715,577
929,407
37,304
5,682,288
1,144,836
39,551
6,866,675
1,229,494
46,518
September 30, 2014
31,927,601
8,142,687
68
COMMON STOCK
Each share of common stock, including those awarded as restricted stock, but not restricted stock units, entitles the holder to one vote on all matters submitted to a vote of Cabot
Microelectronics' stockholders. Common stockholders are entitled to receive ratably the dividends, if any, as may be declared by the Board of Directors. The number of authorized
shares of common stock is 200,000,000 shares.
SHARE REPURCHASES
In April 2014, our Board of Directors authorized an increase in the amount available under our share repurchase program from $62,000 to $150,000. Under this program, we
repurchased 1,229,494 shares for $53,000 during fiscal 2014, 1,144,836 shares for $40,000 during fiscal 2013, and 929,407 shares for $33,026 during fiscal 2012. As of September 30, 2014,
$125,000 remains outstanding under our share repurchase program. To date, we have funded share repurchases under our share repurchase program from our existing cash balance, and
anticipate we will continue to do so. The program, which became effective on the authorization date, may be suspended or terminated at any time, at the Company's discretion. For
additional information on share repurchases, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" and
the section titled "Liquidity and Capital Resources" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K.
Separate from this share repurchase program, a total of 46,518, 39,551 and 37,304 shares were purchased during fiscal 2014, 2013 and 2012, 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,
2013
2012
2014
$
$
14,358 $
54,236
68,594 $
40,045 $
34,175
74,220 $
55,555
7,649
63,204
69
Taxes on income consisted of the following:
U.S. federal and state:
Current
Deferred
Total
Foreign:
Current
Deferred
Total
Total U.S. and foreign
Year Ended September 30,
2013
2012
2014
$
$
$
$
8,978 $
488
9,466 $
9,565 $
(1,188)
8,377
17,843 $
18,060 $
(3,494)
14,566 $
8,304 $
(1,228)
7,076
21,642 $
20,247
(608)
19,639
5,596
(2,125)
3,471
23,110
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
Change in valuation allowance
Executive compensation
Share-based compensation
Adjustment of prior amounts
Domestic production deduction
Other, net
Provision for income taxes
2014
Year Ended September 30,
2013
2012
35.0%
(0.6)
0.8
(9.4)
(0.0)
0.4
0.1
0.1
(0.3)
(0.1)
26.0%
35.0%
(2.0)
0.3
(5.3)
1.4
0.2
0.5
0.1
(0.2)
(0.8)
29.2%
35.0%
(0.5)
0.2
(0.7)
(0.0)
0.8
0.2
1.9
(0.5)
0.2
36.6%
In fiscal 2012, we elected to permanently reinvest the earnings of certain of our foreign subsidiaries outside the U.S. rather than repatriate the earnings to the U.S. In fiscal 2013 and
2014, we elected to permanently reinvest the earnings of all of our foreign subsidiaries. We have not provided for deferred taxes on approximately $67,955 of undistributed earnings of
such subsidiaries. These earnings could become subject to additional income tax if they are remitted as dividends to the U.S. parent company, loaned to the U.S. parent company, or
upon sale of subsidiary stock. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
The decrease in our effective tax rate in fiscal 2014 was primarily due to lower income tax expense on foreign earnings in conjunction with our election to permanently reinvest the
earnings of our foreign subsidiaries. In particular, as discussed in the following paragraph, the Company was awarded a tax holiday in South Korea, which contributed to the reduction
in our full year effective tax rate.
The Company was awarded a tax holiday in South Korea in conjunction with our investment in research, development and manufacturing facilities there. This arrangement allows
for a 0% tax in fiscal years 2013, 2014 and 2015, and a tax at 50% of the local statutory rate in effect for fiscal years 2016 and 2017. This tax holiday reduced our fiscal 2014 and 2013
income tax provision by approximately $3,770 and $467, respectively.
70
The accounting guidance regarding uncertainty in income taxes prescribes a threshold for the financial statement recognition and measurement of tax positions taken or expected to
be taken on a tax return. Under these standards, we may recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by
the taxing authorities, based on the technical merits of the position.
The following table presents the changes in the balance of gross unrecognized tax benefits during the last three fiscal years:
Balance September 30, 2011
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
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, 2013
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, 2014
$
$
603
51
114
(353)
(132)
283
228
247
-
-
758
59
125
(207)
(34)
701
We recognize interest and penalties related to uncertain tax positions as income tax expense in our financial statements. Interest accrued on our Consolidated Balance Sheet was
$42 and $60 at September 30, 2014 and 2013, respectively, and any interest and penalties charged to expense in fiscal years 2014, 2013 and 2012 was not material.
At September 30, 2014, the tax periods open to examination by the U.S. federal government included fiscal years 2011 through 2014. We believe the tax periods open to examination
by U.S. state and local governments include fiscal years 2010 through 2014 and the tax periods open to examination by foreign jurisdictions include fiscal years 2010 through 2014. We
do not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Significant components of net deferred tax assets and liabilities were as follows:
Deferred tax assets:
Employee benefits
Inventory
Bad debt reserve
Share-based compensation expense
Net operating losses
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Translation adjustment
Depreciation and amortization
Other
Total deferred tax liabilities
September 30,
2014
2013
3,889 $
3,385
515
12,150
641
3,084
(2,912)
20,752 $
1,615 $
(267)
1,040
2,388 $
3,892
3,138
515
13,907
759
2,723
(2,288)
22,646
3,247
2,046
962
6,255
$
$
$
$
71
As of September 30, 2014, the Company had foreign and state net operating loss carryforwards (NOLs) of $1,625 and $894, respectively, which will expire beginning in fiscal year
2017 through fiscal year 2034, for which we have recorded a $1,518 gross valuation allowance. As of September 30, 2014, the Company had $2,479 in state tax credit carryforwards, for
which we have recorded a $2,052 gross valuation allowance. As of September 30, 2014, the Company had a capital loss carryforward of $2,849, for which we have recorded a full
valuation allowance.
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 consolidated financial position, results of operations or cash flows, we
periodically become a party to legal proceedings in the ordinary course of business.
PRODUCT WARRANTIES
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance
requirements, and costs related to such replacement. The warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or
circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Our warranty reserve requirements changed during fiscal 2014 as follows:
Balance as of September 30, 2013
Reserve for product warranty during the reporting period
Settlement of warranty
Balance as of September 30, 2014
INDEMNIFICATION
$
$
324
760
(838)
246
In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters.
Generally, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the other party harmless against losses arising from items
such as a breach of certain representations and covenants including title to assets sold, certain intellectual property rights and certain environmental matters. These terms are common
in the industries in which we conduct business. In each of these circumstances, payment by us is subject to certain monetary and other limitations and is conditioned on the other party
making an adverse claim pursuant to the procedures specified in the particular agreement, which typically allow us to challenge the other party's claims.
We evaluate estimated losses for such indemnifications under the accounting standards related to contingencies and guarantees. We consider such factors as the degree of
probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not experienced material costs as a result of such
obligations and, as of September 30, 2014, 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.
72
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
September 30, 2014, and may be renewed by us. Rent expense under such arrangements during fiscal 2014, 2013 and 2012 totaled $2,425, $2,594 and $3,199, respectively.
Future minimum rental commitments under noncancelable leases as of September 30, 2014 are as follows:
Fiscal Year
2015
2016
2017
2018
2019
Thereafter
Operating
$
$
2,020
1,540
1,236
700
689
4,186
10,371
PURCHASE OBLIGATIONS
Purchase obligations include our take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the
purchase of goods and services. On an ongoing basis, we review our agreements and assess the likelihood of a shortfall in purchases and determine if it is necessary to record a
liability. To date, we have not recorded such a liability.
Prior to January 1, 2013, we operated under a fumed silica supply agreement with Cabot Corporation, our former parent company which is not a related party, under which we were
generally obligated to purchase 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 purchased less than these amounts. This agreement expired on December 31, 2012. We did not pay any shortfall under this agreement. We entered into a new fumed
silica supply agreement with Cabot Corporation that became effective as of January 1, 2013 with a term of four years. This new agreement has revised pricing and requires us to
purchase certain minimum quantities of fumed silica each year of the agreement, and to pay a shortfall if we purchase less than the minimum. Purchase obligations include $76,662 of
contractual commitments related to this agreement. Until April 2013, we also operated under a fumed alumina supply arrangement with Cabot Corporation, under which we were
obligated to pay certain fixed, capital and variable costs, and had take-or-pay obligations. We did not pay any shortfall under this agreement.
POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS
We have unfunded defined benefit plans covering employees in certain foreign jurisdictions as required by local law. Our plans in Japan, which represent the majority of our
pension liability for such plans, had a projected benefit obligation of $5,025 and $4,843 as of September 30, 2014 and 2013, respectively, and an accumulated benefit obligation of $3,782
and $3,631 as of September 30, 2014 and 2013, respectively. Key assumptions used in the actuarial measurement of the Japan pension liability include weighted average discount rates
of 1.50% and 1.75% at September 30, 2014 and 2013, respectively, and an expected rate of compensation increase of 2.00% at both September 30, 2014 and 2013. Total future Japan
pension costs included in accumulated other comprehensive income are $860 and $665 at September 30, 2014 and 2013, respectively. Benefit costs, consisting primarily of service costs,
are recorded as fringe benefit expense under cost of goods sold and operating expenses in our Consolidated Statement of Income. Benefit payments under all such unfunded plans to
be paid over the next 10 years are expected to be immaterial.
73
17. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the
period, excluding the effects of unvested restricted stock awards with a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-
class method under ASC 260. Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include
the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.
The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share
computations. Basic and diluted earnings per share were calculated as follows:
Numerator:
Net income
Less: income attributable to participating securities
Net income available to common shareholders
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
2014
Year Ended September 30,
2013
2012
50,751
(442)
50,309
$
$
52,578
(506)
52,072
$
$
40,094
(391)
39,703
23,704,024
22,924,056
22,506,408
906,884
24,610,908
836,010
23,760,066
737,548
23,243,956
2.12
2.04
$
$
2.27
2.19
$
$
1.76
1.71
$
$
$
$
For the twelve months ended September 30, 2014, 2013, and 2012, approximately 0.5 million, 1.5 million and 1.3 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.
74
18. FINANCIAL INFORMATION BY INDUSTRY SEGMENT, GEOGRAPHIC AREA AND PRODUCT LINE
We operate predominantly in one industry segment – the development, manufacture, and sale of CMP consumables. Revenues are attributed to the United States and foreign
regions based upon the customer location and not the geographic location from which our products were shipped. Financial information by geographic area was as follows:
Revenue:
United States
Asia
Europe
Total
Property, plant and equipment, net:
United States
Asia
Europe
Total
Year Ended September 30,
2013
2012
2014
$
$
$
$
51,036 $
347,669
25,961
424,666 $
44,585 $
56,236
-
100,821 $
53,955 $
347,797
31,379
433,131 $
47,436 $
64,546
3
111,985 $
56,770
342,958
27,929
427,657
49,325
75,690
5
125,020
The following table shows revenue from sales to customers in foreign countries that accounted for more than ten percent of our total revenue in fiscal 2014, 2013 and 2012:
Revenue:
Taiwan
South Korea
China
Japan
* Denotes less than ten percent of total
Year Ended September 30,
2013
2012
2014
$
138,049 $
71,420
45,200
*
133,273 $
73,778
*
*
124,732
68,573
*
56,488
The following table shows net property, plant and equipment in foreign countries that accounted for more than ten percent of our total net property, plant and equipment in fiscal
2014, 2013 and 2012:
Property, plant and equipment, net:
Japan
Taiwan
South Korea
Year Ended September 30,
2013
2012
2014
$
27,110 $
16,675
11,564
75
33,566 $
17,212
12,591
43,411
18,397
12,580
The following table shows revenue generated by product area in fiscal 2014, 2013 and 2012:
Revenue:
Tungsten slurries
Dielectric slurries
Other Metals slurries
Polishing pads
Data storage slurries
Engineered Surface Finishes
Total
Year Ended September 30,
2013
2012
2014
$
$
162,148 $
118,079
76,605
33,824
17,850
16,160
424,666 $
76
155,904 $
123,180
76,367
32,996
20,685
23,999
433,131 $
161,756
119,320
67,157
33,725
20,821
24,878
427,657
SELECTED QUARTERLY OPERATING RESULTS
The following table presents our unaudited financial information for the eight quarterly periods ended September 30, 2014. This unaudited financial information has been prepared
in accordance with accounting principles generally accepted in the United States of America, applied on a basis consistent with the annual audited financial statements and in the
opinion of management, include all necessary adjustments, which consist only of normal recurring adjustments necessary to present fairly the financial results for the periods. The
results for any quarter are not necessarily indicative of results for any future period.
CABOT MICROELECTRONICS CORPORATION
SELECTED QUARTERLY OPERATING RESULTS
(Unaudited and in thousands, except per share amounts)
Sept. 30,
2014
June 30,
2014
March 31,
2014
Dec. 31,
2013
Sept. 30,
2013 (1)
June 30,
2013 (1)(2)
March 31,
2013 (2)
Dec. 31,
2013 (1)(2)
Revenue
Cost of goods sold
$
116,337
59,209
$
108,358
56,632
$
$
99,456
52,931
100,515
52,801
$
116,266
57,143
$
109,968
55,359
$
100,364
52,019
$
106,533
56,494
Gross profit
57,128
51,726
46,525
47,714
59,123
54,609
48,345
50,039
Operating expenses:
Research, development and
technical
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 (1)
Net income (1)
Basic earnings per share (1) (2)
Weighted average basic shares
outstanding
$
$
15,051
6,846
12,236
34,133
22,995
807
(448)
21,740
5,694
15,368
6,489
11,380
33,237
18,489
832
(132)
17,525
4,223
14,364
6,471
11,076
31,911
14,614
843
103
13,874
3,779
14,571
6,707
10,726
32,004
15,710
872
617
15,455
4,147
15,835
7,360
12,270
35,465
23,658
911
(173)
22,574
7,099
15,149
6,470
10,776
32,395
22,214
907
248
21,555
5,261
15,073
7,046
12,287
34,406
13,939
872
463
13,530
4,110
15,316
7,109
10,954
33,379
16,660
953
854
16,561
5,172
16,046
$
13,302
$
10,095
$
11,308
$
15,475
$
16,294
$
9,420
$
11,389
0.67
$
0.55
$
0.42
$
0.47
$
0.66
$
0.70
$
0.40
$
0.49
23,500
23,753
23,982
23,590
23,041
22,951
22,974
22,845
Diluted earnings per share (1) (2)
$
0.65
$
0.53
$
0.40
$
0.45
$
0.64
$
0.68
$
0.39
$
0.48
Weighted average diluted shares
outstanding (2)
24,334
24,613
24,897
24,623
23,994
23,739
23,847
23,618
(1) As discussed in Note 1 of the Notes to the Consolidated Financial Statements, the Company revised prior period financial statements to reflect the correction of certain items of
income tax accounting identified in fiscal 2014, and the correction of previously identified out-of-period adjustments identified in fiscal years 2012 and 2013. The quarterly financial
results in the table above reflect a reduction in our provision for income taxes of $1,686 and $801 for the quarters ended December 31, 2012 and June 30, 2013, respectively, and
additional income tax expense of $1,294 for the quarter ended September 30, 2013. These corrections are also reflected in net income and earnings per share for each of these quarters.
(2) In conjunction with the financial statement revision discussed in Note 1, we revised the weighted average diluted shares outstanding in the quarters ended December 31, 2012, March
31, 2013, and June 30, 2014, to reflect the two-class method of calculating earnings per share. We have unvested restricted stock awards with a right to receive non-forfeitable
dividends, which are considered participating securities as prescribed by the two-class method. Consequently, our basic and diluted earnings per share for these quarters has been
corrected to exclude the effects of the participating securities.
77
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As discussed in more detail in Note 2 of the Notes to the Consolidated Financial Statements, in fiscal 2013, in relation to the bankruptcy filing of Elpida Memory, Inc., and
subsequent approved bankruptcy plan, we charged off an accounts receivable balance against its related allowance for doubtful accounts. The following table sets forth activities in
our allowance for doubtful accounts:
Allowance For Doubtful Accounts
Balance At
Beginning of Year
Amounts
Charged To
Expenses
Deductions and
Adjustments
Balance At End
Of Year
Year ended:
September 30, 2014
September 30, 2013
September 30, 2012
$
1,532 $
4,757
1,090
(170) $
173
3,771
30 $
(3,398)
(104)
1,392
1,532
4,757
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance
requirements, and costs related to such replacement. The warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or
circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Charges to expenses and deductions, shown below, represent the net change
required to maintain an appropriate reserve.
Warranty Reserves
Balance At
Beginning of Year
Reserve For
Product Warranty
During the
Reporting Period
Adjustments To
Pre-existing
Warranty Reserve
Settlement of
Warranty
Balance At End
Of Year
Year ended:
September 30, 2014
September 30, 2013
September 30, 2012
$
$
324
359
384
$
760
874
867
$
-
-
-
(838) $
(909)
(892)
246
324
359
We have provided a valuation allowance on certain deferred tax assets. The following table sets forth activities in our valuation allowance:
Valuation Allowance
Balance At
Beginning of Year
Amounts
Charged To
Expenses
Deductions and
Adjustments
Balance At End
Of Year
Year ended:
September 30, 2014
September 30, 2013
September 30, 2012
$
2,288 $
1,378
1,378
$
624
910
-
- $
-
-
2,912
2,288
1,378
78
MANAGEMENT RESPONSIBILITY
The accompanying consolidated financial statements were prepared by the Company in conformity with accounting principles generally accepted in the United States of America.
The Company's management is responsible for the integrity of these statements and of the underlying data, estimates and judgments.
The Company's management establishes and maintains a system of internal accounting controls designed to provide reasonable assurance that its assets are safeguarded from loss
or unauthorized use, transactions are properly authorized and recorded, and that financial records can be relied upon for the preparation of the consolidated financial statements. This
system includes written policies and procedures, a code of business conduct and an organizational structure that provides for appropriate division of responsibility and the training of
personnel. This system is monitored and evaluated on an ongoing basis by management in conjunction with its internal audit function.
The Company's management assesses the effectiveness of its internal control over financial reporting on an annual basis. In making this assessment, management uses the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (1992). Management acknowledges, however, that
all internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance with respect to financial statement preparation and
presentation. In addition, the Company's independent registered public accounting firm evaluates the Company's internal control over financial reporting and performs such tests and
other procedures as it deems necessary to reach and express an opinion on the fairness of the financial statements.
In addition, the Audit Committee of the Board of Directors provides general oversight responsibility for the financial statements. Composed entirely of Directors who are
independent and not employees of the Company, the Committee meets periodically with the Company's management, internal auditors and the independent registered public accounting
firm to review the quality of financial reporting and internal controls, as well as results of auditing efforts. The internal auditors and independent registered public accounting firm have
full and direct access to the Audit Committee, with and without management present.
/s/ William P. 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
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange Act")), as of September 30, 2014. Based on that
evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and
communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
While we believe the present design of our disclosure controls and procedures is effective enough to make known to our senior management in a timely fashion all material
information concerning our business, we intend to continue to improve the design and effectiveness of our disclosure controls and procedures to the extent necessary in the future to
provide our senior management with timely access to such material information, and to correct any deficiencies that we may discover in the future, as appropriate.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is
defined in Rule 13a-15(f) or Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company's CEO and CFO to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America. Internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect our transactions and dispositions of the Company's assets; provide reasonable assurance that transactions are recorded as necessary for
preparation of our financial statements in accordance with generally accepted accounting principles; provide reasonable assurance that receipts and expenditures of Company assets
are made in accordance with management authorization; and provide reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a
material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (1992) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that the Company's internal control over
financial reporting was effective as of September 30, 2014. The effectiveness of the Company's internal control over financial reporting as of September 30, 2014 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which appears under Item 8 of this Annual Report on Form 10-K.
80
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because of inherent limitations, our disclosure controls or our internal control over financial reporting may not prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls
may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-
effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
81
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K with respect to identification of directors, the existence of a separately-designated standing audit committee, identification of
members of such committee, and identification of an audit committee financial expert, is incorporated by reference from the information contained in the sections captioned "Election of
Directors" and "Board Structure and Compensation" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 3, 2015 (the "Proxy Statement"). In
addition, for information with respect to the executive officers of our Company, see "Executive Officers" in Part I of this Form 10-K and the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement. Information required by Item 405 of Regulation S-K is incorporated by reference from the information contained in the
section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.
We have adopted a code of business conduct for all of our employees and directors, including our principal executive officer, other executive officers, principal financial officer and
senior financial personnel. A copy of our code of business conduct is available free of charge on our Company website at www.cabotcmp.com. We intend to post on our website any
material changes to, or waivers from, our code of business conduct, if any, within two days of any such event.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned "Executive Compensation" in the Proxy
Statement.
82
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
Shown below is information as of September 30, 2014, with respect to the shares of common stock that may be issued under Cabot Microelectronics' existing equity compensation
plans.
Equity compensation plans approved by security holders (1)
Plan category
Equity compensation plans not approved by security holders
Total
(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))
3,431,640(2) $
-
3,431,640(2) $
29.04(2)
-
29.04(2)
4,574,582(3)
-
4,574,582(3)
(1) Equity Compensation plans consist of our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (EIP), as amended and restated
September 23, 2008, our 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 76,633 shares that non-employee directors, who defer their compensation under our Directors' Deferred Compensation Plan, have the right to acquire
pursuant thereto, and 82,109 shares that non-employee directors and non-U.S. employees have the right to acquire upon the vesting of the equivalent restricted stock units
that they have been awarded under our equity incentive plans. Column (b) excludes both of these from the weighted-average exercise price.
(3) Column (c) includes 648,323 shares available for future issuance under the ESPP.
The other information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the section captioned "Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in the section captioned "Fees of Independent Auditors and Audit
Committee Report" in the Proxy Statement.
83
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, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended September 30, 2014, 2013 and 2012
Consolidated Balance Sheets at September 30, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended September 30, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2014, 2013 and 2012
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 (5)
3.3 (1)
4.1 (2)
10.1 (6)
10.2 (9)
10.4 (8)
10.5 (8)
10.6 (9)
10.15 (13)
10.22 (7)
10.23 (6)
10.28 (6)
10.30 (12)
10.33 (6)
10.34 (8)
10.36 (3)
10.38 (4)
10.46 (8)
10.51 (6)
10.53 (6)
10.54 (8)
10.57 (7)
10.58 (8)
10.60 (14)
10.61 (10)
10.62 (12)
10.63 (12)
10.64 (11)
10.65 (11)
10.66 (14)
21.1
23.1
24.1
31.1
31.2
32.1
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.*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan Non-Qualified Stock Option Grant Agreement (non-
employee directors).*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan Non-Qualified Stock Option Grant Agreement
(employees (including executive officers)).*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan Restricted Stock Award Agreement (employees
(including executive officers)).*
Form of Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan Restricted Stock Units Award Agreement (non-
employee directors).*
Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated September 23, 2013.*
Cabot Microelectronics Corporation 401(k) Plan, as amended.*
Form of Amended and Restated Change in Control Severance Protection Agreement.**
Directors' Deferred Compensation Plan, as amended September 23, 2008.*
Form of Deposit Share Agreement.***
Adoption Agreement, as amended September 23, 2008, of Cabot Microelectronics Corporation Supplemental Employee Retirement Plan.*
Code of Business Conduct.
Directors' Cash Compensation Umbrella Program.*
Employment Offer Letter dated November 2, 2003.*
Non-Employee Directors' Compensation Summary effective March 2011.*
First Amendment to the Employment Offer Letter dated November 2, 2003.*
Cabot Microelectronics Corporation Supplemental Employee Retirement Plan, as amended.*
Cabot Microelectronics Corporation Annual Incentive and Sales Incentive Programs.*
Adoption Agreement, as amended January 1, 2010, of Cabot Microelectronics Corporation 401(k) Plan.*
Employee Stock Purchase Plan Prospectus as of November 24, 2010.*
Conformed Credit Agreement dated February 13, 2012 among Cabot Microelectronics Corporation, as Borrower, Bank of America, N.A., as Administrative
Agent, Bank of America Merrill Lynch and J.P. Morgan Securities LLC, as Joint Lead Arrangers and Joint Book Managers, JPMorgan Chase Bank, N.A., as
Syndication Agent, and Wells Fargo Bank, National Association, as Documentation Agent.
Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan.*
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Non-Qualified Stock Option Grant Agreement (employees (including executive
officers)).*
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Restricted Stock Award Agreement (employees (including executive officers)).*
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Non-Qualified Stock Option Grant Agreement (non-employee directors).*
Form of Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan Restricted Stock Units Award Agreement (non-employee directors).*
Amendment No. 1 to Credit Agreement dated as of June 27, 2014 among Cabot Microelectronics Corporation, as Borrower, each lender party, Bank of
America, N.A., as Administrative Agent, and each of the Guarantors.
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.
84
(1) Filed as an exhibit to, and incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 333-95093) filed with the Commission on March 27, 2000.
(2) Filed as an exhibit to, and incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 333-95093) filed with the Commission on April 3, 2000.
(3) Filed as an exhibit to, and incorporated by reference from the Registrant's Annual Report on Form 10-K (No. 000-30205) filed with the Commission on December 10, 2003.
(4) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on February 12, 2004.
(5) Filed as an exhibit to, and incorporated by reference from the Registrant's Current Report on Form 8-K (No. 000-30205) filed with the Commission on September 24, 2008.
(6) Filed as an exhibit to, and incorporated by reference from the Registrant's Annual Report on Form 10-K (No. 000-30205) filed with the Commission on November 25, 2008.
(7) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on February 8, 2010.
(8) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on February 8, 2011.
(9) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on May 9, 2011.
(10) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on May 9, 2012.
(11) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on August 8, 2012.
(12) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on February 8, 2013.
(13) Filed as an exhibit to, and incorporated by reference from the Registrant's Annual Report on Form 10-K (No. 000-30205) filed with the Commission on November 20, 2013.
(14) Filed as an exhibit to, and incorporated by reference from the Registrant's Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on August 8, 2014.
* Management contract, or compensatory plan or arrangement.
** Substantially similar change in control severance protection agreements have been entered into with William P. Noglows, 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 H. Carol Bernstein, William S. Johnson, David H. Li, Daniel J. Pike, Lisa A. Polezoes,
Thomas S. Roman and Daniel S. Wobby with differences only in the amount of initial deposit made and deposit shares purchased by such persons.
85
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:
CABOT MICROELECTRONICS CORPORATION
Date: November 19, 2014
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chairman of the Board, President and Chief Executive Officer
[Principal Executive Officer]
Date: November 19, 2014
/s/ WILLIAM S. JOHNSON
Date: November 19, 2014
William S. Johnson
Executive 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 19, 2014
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chairman of the Board, President and Chief Executive Officer
[Director]
Date: November 19, 2014
Date: November 19, 2014
Date: November 19, 2014
Date: November 19, 2014
Date: November 19, 2014
Date: November 19, 2014
Date: November 19, 2014
Date: November 19, 2014
/s/ ROBERT J. BIRGENEAU*
Robert J. Birgeneau
[Director]
/s/ JOHN P. FRAZEE, JR.*
John P. Frazee, Jr.
[Director]
/s/ H. LAURANCE FULLER*
H. Laurance Fuller
[Director]
/s/ RICHARD S. HILL*
Richard S. Hill
[Director]
/s/ BARBARA A. KLEIN*
Barbara A. Klein
[Director]
/s/ EDWARD J. MOONEY*
Edward J. Mooney
[Director]
/s/ STEVEN V. WILKINSON*
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.
86
EXHIBIT 21.1
SUBSIDIARIES OF CABOT MICROELECTRONICS CORPORATION
Cabot Microelectronics Global Corporation (Delaware, U.S.)
Cabot Microelectronics Polishing Corporation (Delaware, U.S.)
QED Technologies International, Inc. (Delaware, U.S.)
Cabot Microelectronics Japan KK (Japan)
Nihon Cabot Microelectronics KK (Japan)
Cabot Microelectronics B.V. (Netherlands)
Cabot Microelectronics Singapore Pte. Ltd. (Singapore)
Hanguk Cabot Microelectronics, LLC (South Korea)
Epoch Material Co., Ltd. (Taiwan)
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.'s 333-34272, 333-34270, 333-82680, 333-123692, 333-170810 and 333-179955) of
Cabot Microelectronics Corporation of our report dated November 19, 2014, relating to the financial statements, financial statement schedule, and the effectiveness of internal control
over financial reporting, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
November 19, 2014
EXHIBIT 24.1
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints H. Carol Bernstein, their Attorney-in-fact, with the power of
substitution, for him in any and all capacities, to sign the annual report on Form 10-K for the fiscal year ended September 30, 2014 and any amendments to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said
Attorney-in-fact, or her substitute or substitutes, may do or cause to be done by virtue hereof.
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.
SIGNATURE
/s/ William P. Noglows
----------------------------
William P. Noglows
/s/ Robert J. Birgeneau
----------------------------
Robert J. Birgeneau
/s/ John P. Frazee, Jr.
----------------------------
John P. Frazee, Jr.
/s/ H. Laurance Fuller
----------------------------
H. Laurance Fuller
/s/ Richard S. Hill
----------------------------
Richard S. Hill
/s/ Barbara A. Klein
----------------------------
Barbara A. Klein
/s/ Edward J. Mooney
----------------------------
Edward J. Mooney
/s/ Steven V. Wilkinson
----------------------------
Steven V. Wilkinson
/s/ Bailing Xia
----------------------------
Bailing Xia
TITLE
DATE
Chairman of the Board,
President and Chief
Executive Officer
Director
Director
Director
Director
Director
Director
Director
Director
November 19, 2014
November 19, 2014
November 19, 2014
November 19, 2014
November 19, 2014
November 19, 2014
November 19, 2014
November 19, 2014
November 19, 2014
Exhibit 31.1
I, William P. Noglows, certify that:
CERTIFICATION
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 19, 2014
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chief Executive Officer
Exhibit 31.2
I, William S. Johnson, certify that:
CERTIFICATION
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 19, 2014
/s/ WILLIAM S. JOHNSON
William S. Johnson
Chief Financial Officer
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, 2014, 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 19, 2014
Date: November 19, 2014
/s/ WILLIAM P. NOGLOWS
William P. Noglows
Chief Executive Officer
/s/ WILLIAM S. JOHNSON
William S. Johnson
Chief Financial Officer