| DELAWARE | 364324765 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
| 870 NORTH COMMONS DRIVE | 60504 | |
| AURORA, ILLINOIS | (Zip Code) | |
| (Address of principal executive offices) |
Registrant's telephone number, including area code: (630) 375-66313756631
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, $0.001 par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 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. Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sregistrant'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"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of the registrant’sregistrant's Common Stock held beneficially or of record by stockholders who are not affiliates of the registrant, based upon the closing price of the Common Stock on March 31, 2012,2015, as reported by the NASDAQ Global Select Market, was approximately $892,790,000.$1,206,403,000. For the purposes hereof, "affiliates" include all executive officers and directors of the registrant.
As of October 31, 2012,2015, the Company had 23,193,58424,456,503 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’sregistrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 5, 2013,8, 2016, 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”"forward-looking statements" within the meaning of federal securities regulations. For more detail regarding “forward-looking statements”"forward-looking statements" see Item 7 of Part II of this Form 10-K.
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CABOT MICROELECTRONICS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 20122015
| PART I. | Page | ||
| Item 1. | 3 | ||
| Item 1A. | |||
| Item 1B. | 17 | ||
| Item 2. | Properties | 18 | |
| Item 3. | Legal Proceedings | 19 | |
| Item | Mine Safety Disclosures | ||
| PART II. | |||
| Item 5. | 22 | ||
| Item 6. | Selected Financial Data | 24 | |
| Item | |||
| Item 7A. | 39 | ||
| Item 8. | Financial Statements and Supplementary Data | 41 | |
| Item | |||
| Item 9A. | |||
| Item 9B. | |||
| PART III. | |||
| Item 10. | |||
| Item 11. | |||
| Item 12. | |||
| Item 13. | |||
| Item 14. | |||
| PART IV. | |||
| Item 15. | |||
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PART I
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 CMPpolishing 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 insulatingisolating 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 alsoIn 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.
On October 22, 2015, we completed the acquisition of NexPlanar Corporation ("NexPlanar"), a U.S. based company that had been privately held, which specializes in the development, manufacture and sale of advanced CMP pad solutions for the semiconductor industry. We believe the acquisition of NexPlanar provides an opportunity to expand our polishing pad product offerings with a complementary technology, and leverage our global infrastructure to better serve our customers on a global basis, including offering performance-advantaged slurry and pad consumable sets.
CMP PROCESS WITHIN IC DEVICE MANUFACTURING
IC devices, or “chips”"chips", are components in a wide range of electronic systems for computing, communications, manufacturing and transportation. Individual consumers most frequently encounter IC devices in mobile internet devices (MIDs) such as smart phones and tablets, microprocessors, application processors and memory chips in their desktop or laptop computers, and as memory chips in computers, MP3 players, gaming devices, cell phones and digital cameras, and in mobile internet devices such as smart phones and tablets.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”"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 consumableconsumables 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”,"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 consumableconsumables 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.
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In the CMP polishing process, CMP consumables are used to remove excess material that is deposited during the IC manufacturing process, and to level and smooth the surfaces of the layers of IC devices, via a combination of chemical reactions and mechanical abrasion, leaving minimal residue and defects on the surface, and leavingwith only the material necessary for circuit integrity.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 cutformed 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 before depositing magnetic media onto the disk.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 customers’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 than is possible without CMP. By enablingcomponents. With smaller IC devices, IC device manufacturers to make smaller IC devices, CMP also allows them tocan increase the number of IC devices that fit on a wafer. This increase in the number of IC devices per wafer, in turnwhich increases thetheir throughput, or the number of IC devices that can be manufactured in a given time period, and thereby reduces the cost per device.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, and reducing costs is one of the highest priorities of a semiconductor manufacturer aswhich improves the return on its significant investment in manufacturing capacity, can be enhanced by lower unit costs.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.
We believe CMP remains a critical process in leading-edge semiconductor technology, enabling IC device manufacturers to efficiently produce the complex chips, particularly where higher performance may now be accompanied by higher unit costs.
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 have begun sellingsell our CMP consumableconsumables products to major silicon wafer manufacturers and we anticipate future revenue growth in this market.area.
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, security, biomedical, research and consumerdigital imaging.
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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”"barrier"), which is used in copper wiring applications)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, MP3 players, gaming devices, cell phones and digital cameras, and in mobile internet devicesMIDs 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. OurTungsten slurries are also used in some of the most advanced slurriestechnologies, such as 3D memory and FinFET for tungsten polishing are designed to be customized to provide customers greater flexibility, improved performance and a reduced cost of ownership.advanced logic IC 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 mostcertain advanced transistor gate structures currently in production.structures. 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 core slurry products for these materials are primarily used forin mature, high volume polishing applications called Interlayer Dielectric, or ILD, and are used in the production of both older logic devices as well as in mature and advanced 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 dielectricdielectrics polishing applications such as pre-metal dielectric (PMD) andat advanced technology nodes. Some of the applications for advanced dielectrics slurries include shallow trench isolation (STI), at"stop on poly" isolation, bulk oxide polishing, and polishing of various dielectrics in advanced technology nodes.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 thermoplastic polyurethane 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 producingproduce and sellingsell 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. OurThe acquisition of NexPlanar adds pad product offerings includeproducts to our EPIC D100 series ofportfolio that use thermoset polyurethane material, which we believe will be complementary to our existing pads and our next generation D200 series.
products.
CMP CONSUMABLES FOR THE DATA STORAGE INDUSTRY
We develop, produce and producesell 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. We believe that opportunities for growth may exist within the data storage industry as cloud computing activity grows and the need for data centers utilizing hard disk drive storage increases.drives.
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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’sQED's polishing systems use Magneto-Rheological Finishing (MRF), a proprietary surface figuring and finishing technology whichthat employs magnetic fluids and sophisticated computer technology to polish a variety of shapes and materials. QED’sQED's metrology systems use proprietary Subaperture Stitching Interferometry (SSI) technology, thatwhich captures precise metrology data for large and/or strongly curved optical parts andparts. SSI technology includes proprietary Aspheric Stitching Interferometry (ASI) technology,, which is designed to measure increasingly complex shapes, including non-spherical surfaces, or aspheres. QED’sQED'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’customers' challenges, and we strive to consistently and reliably deliver and support these products around the world through what we believe is a robust global infrastructure and supply chain. We continue to focus on the execution of our primary strategy of strengtheningstrategies related to technology leadership, customer collaboration and growing our core CMP consumables business within the semiconductor and hard disk drive industries.supply chain excellence. We are also leveraging our expertise in CMP process and slurry formulationconsumable 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 need to stay ahead of the rapid technological advances in the electronics industry in order to deliver a broad line offocus our research and development activity on developing innovative new CMP consumables products that meet or exceedfor leading-edge applications for our customers' evolving needs.technology-leading customers. We have established research and development facilities in Japan, Singapore, South Korea, Taiwan, and the United States, Japan, Taiwan, Singapore, and most recently in South Korea, in order to meet our customers’customers' technology needs on a global basis.
Close Collaboration Withwith Our Customers: We believe that building close relationships with our customers is keyessential to achieving long-term success in our business. We collaborate with our customers on joint projects to identify and develop new and improved CMP solutions, to integrate our products into their manufacturing processes, and to assist them with supply, warehousingwarehouse 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 locatelocated our research facilitiesand development and clean rooms,room facilities, manufacturing operations, and the related technical and customer support teams to be responsive to our customers’customers' needs. We believe our extensive research and development facilities, in close proximity to our customers, provide a competitive advantage.
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We believe the two supplier excellence awards we received from our customers in fiscal 2015 are evidence of our commitment to, and success in, 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 our 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 consumableconsumables products. Variability reduction becomes more important to our customers as they migrate to more advanced technology nodes. Our global manufacturing sites are managed to ensure we haveprovide 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.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 believe our Six Sigma initiatives have contributed to significant, sustained improvement in productivity in our operations. We also believe the key supplier awards we received in fiscal 2012 from customers such as Intel and Semiconductor Manufacturing International Corporation are evidence of our success in providing our customers with high quality solutions.
We also believe that the depthcontinuous improvement and breadth ofvariation reduction in our global supply chain are critical to our success and the success of our customers. We believe this differentiatesour capabilities in supply chain management and quality systems differentiate us from our competitors. We now have five slurrybelieve our worldwide CMP consumables manufacturing plants worldwide and a global network of suppliers which we believe position us well to mitigate supply interruptions when unexpected events occur. The major earthquake and resulting tsunami in Japan in March 2011 and the severe flooding in Thailand in late 2011 were prime examples of such unexpected events, in which our globalalso provide supply chain capabilities enabled us to proactively address the needs of our customers and suppliers to assist them during those difficult times. We believe that our ability to address our customers’ concerns with openness and speed reflects the strength of our customer relationships and their trust in us as a global supplier and business partner.
flexibility if needed.
LEVERAGING OUR EXPERTISE INTO NEW MARKETSAREAS - 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 this regard, is on opportunitiesOpportunities in precision optics and electronic substrates.substrates are our primary focus in ESF.
Our QED subsidiary continues to be the technology leader in deterministic finishing for the precision optics industry. QED’sQED's polishing and metrology technology enables customers to replace manual processes with automated solutions that provide more precise and repeatable results. Another focusIn addition, another aspect of our ESF business is the polishing of electronic substrates, including silicon and silicon-carbide wafers. A key stepCMP is utilized in the production of these wafers is CMP, which is utilized to ensure that wafers meet the stringent specifications required by IC manufacturers.
INDUSTRY TRENDS
SEMICONDUCTOR INDUSTRY
We believe the semiconductor industry continues to demonstrate several clearexhibit a number of trends: demand within the semiconductor business is definedcurrently being driven more by cyclical growth; thereMIDs than by personal computers (PCs); overall industry growth is constantslowing; our customer base continues to consolidate; pressure to reduce costs while advancing technology;continues; and, the customer base continuespace of technology advancement appears to consolidate.be slowing.
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Over the area of mobile connectivity, including mobile devices such as smart phones and tablets. However, there continues to be uncertainty regarding macroeconomic factors and the outlook for the global economy. Therefore,past several years, we believe the near-term outlook forhave seen our customer base within the semiconductor industry consolidate 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 also uncertain. We believe that our Company is well positioned to operate successfully overparticularly evident in capital spending within the industry, as the largest semiconductor companies account for a rangelarger majority of demand environments as we have successfully navigated our business through industry and macroeconomic cyclestotal capital spending in the past.industry compared to several years ago.
As the 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. Manufacturers also try to reduce costs by migrating to smaller technology nodes, particularly in the production of memory devices. In addition, manufacturers seek ways to increasereduce their production yield while reducingcosts by increasing their production costsyields regardless of the number of units they produce. TheyThus, they look for CMP consumables products with quality and performance attributes that can help them reduce their overall cost of ownership, pursue ways to use lessersmaller 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.
these new architectures, requiring innovative new CMP solutions.
CMP CONSUMABLES INDUSTRY
Demand for CMP consumables is primarily driven by wafer starts, so the CMP consumables industry reflects the cyclicality of the semiconductor industry as well as changesdemand patterns in global economic conditions.terms of cyclicality, seasonality and specific device types. Our revenue and net income for fiscal years 20112012, 2013 and 2012 clearly2014 demonstrated these effectsseasonal swings in demand as we saw softening ofsofter demand for our products beginning in the second half of fiscal 2011, and this softness continued through the first half of fiscal 2012. We saw significant growth in our revenue and net income during the second half of fiscal 2012 compared to the revenue and net income earned in the first half of each of these fiscal 2012.years, followed by stronger demand during the second half. However, macroeconomic uncertainty continues to cloudconsistent with overall semiconductor industry demand, in fiscal 2015, we saw a departure from this trend as demand for our products was stronger during the near-term outlook forfirst half of the semiconductor industry.fiscal year, but weaker in the second. Over the long term, we anticipate the worldwide marketdemand 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 in the manufacture of semiconductor devices that will require CMP.
CMP, including those related to new device architectures such as 3D memory 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. SemiconductorAs discussed above, semiconductor manufacturers look for ways to lower the cost of CMP consumables in their production operations, including improvements in technology, dilutingdilution of slurry, or usinguse of concentrated slurry products, or reducing thereduction of slurry flow rate during production to reduce the total amount of slurry used, and extending the polishing time before replacing pads.extension of pad lives. In addition, we expect to monitorCMP demand trends for PCs, and any related impact onalso depends upon the DRAM memory segmentspecific mix of IC device demand, since the semiconductor industry to determine any expected effect on the usageintensity of CMP consumables.usage varies by IC device type.
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We believe that CMP technical solutions are becoming more complex, andwith leading-edge technologies generally requirerequiring greater customization by customer, tool set and process integration approach. Leading-edge device designs are introducing more materials and processes into next generation chips, and these new materials and processes must be considered in developing CMP solutions. As a result, we generally see customers 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, and wesuppliers. We also may face competition in the future from significant changes in technology or emerging technologies. However, we believe we are well positionedwell-positioned to continue our leadership in CMP slurries, and to continue to grow our business in CMP pad business.pads. We believe we have the experience, scale, capabilities and infrastructure that are required for success, and we work closely with the largesttechnology-leading customers in the semiconductor industry to meet their growing expectations as a trusted business partner.
Our CMP slurry competitors range from small companies that compete with a single product and/or in a single geographic region, to divisions of global companies with multiple lines of CMP products for IC manufacturers.products. However, we believe we have moreare the leader in CMP slurry business than any other provider.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, and that haswith a proven track record of supplying these products globally in high volumes with the attendant requiredrequisite high level of technical support services.
With respect to CMP polishing pads, a division of Dow Chemical has held the leading global position in this area for many years. WeSubsequent to our acquisition of NexPlanar, we believe we are the second largest supplier of CMP polishing pads into the world.industry. A number of other companies are attempting to enteralso participate in this area of the CMP consumables business, providing potentially viable product alternatives.business. We believe our unique thermoplastic polyurethane pad materials and our continuous pad manufacturing process have enabledenable us to produce a padpads that providesprovide our customers with a longer pad life, lower defectivity and greater consistency than traditional offerings, thus reducing theirour customers' total pad cost. WeIn addition, we believe this has fueled growth in salesthat the combination of our pad products in recent years.product portfolio with NexPlanar's pad product portfolio and their complementary thermoset polyurethane technology, will enable us to better serve our customers on a global basis, including offering performance-differentiated slurry and pad consumable sets.
Our QED subsidiary operates in the precision optics industry. There are few direct competitors of QED becauseand we believe its technology is still relatively new and unique. We believe QED’sQED'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 they provideproviders of IC foundry service. Logicservices. Some logic customers, oftenand so-called "fabless" companies, 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 2012,2015, excluding revenue attributable to data storage and ESF customers, approximately 50%45% of our revenue was from foundry customers, 30% of our revenue was37% from memory customers and 20% of our revenue was18% from logic customers.
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We use a highly collaborative approach to build close relationships with our customers in a variety of areas, and we have customer-focused teams located in each major geographic region. Our sales process begins long before the actual sale of our products, and occurs on a number of levels. Due to the long lead times from research and development to product commercialization and sales, we have research teams that collaborate with technology-leading customers on emerging applications years before the products are requiredby the market.We also have development teams that interact closely with ourthese 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, warehousingwarehouse and inventory management services for our customers.
We market our products primarily through direct sales to our customers, although we use distributors in selectcertain areas. We believe this strategy of primarily direct sales provides us an additional means to collaborate with our customers.customers, and provides our customers with the most efficient means by which to procure our products.
Our QED subsidiary supports customers in the semiconductor equipment, aerospace, defense, security, research, biomedical and consumerdigital imaging markets. QED counts among its worldwide customers leading precision optics manufacturers, major semiconductor original equipment manufacturers, research institutions, and contractors to the United States government and its contractors.other governments.
In fiscal 2012,2015, our five largest customers accounted for approximately 48%58% of our revenue, with TSMCTaiwan Semiconductor Manufacturing Corporation and Samsung accounting for approximately 18% and 13%15% of our revenue, respectively. For additional information on concentration ofour customers, refer to Note 2 of “Notes"Notes to the Consolidated Financial Statements”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.us. We focus our R&D efforts on product innovation at leading-edge applications for our technology-leading customers. We develop and formulate new and enhanced CMP solutions tailored to these customers' requirements using our customers' requirements.expertise in chemical formulation, materials science, product engineering and manufacturing technology. We work closely with ourthese customers at their facilities to identify their specific technology and manufacturing challenges and to translate these challenges into viable CMP process solutions.
Our technology efforts are currently focused on five main areas that span the early conceptual stage of product development involving new materials, processes and designs several years in advance of commercialization, to continuous improvement of already commercialized products in daily use in our customers’customers' manufacturing facilities. These five areas are:facilities:
| · | Research related to fundamental CMP technology; |
| · | Development |
| · | Process development to support rapid and effective commercialization of new products; |
| · | Technical support of our CMP products in our |
| · | Evaluation and development of new polishing and metrology applications outside of the semiconductor industry. |
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Our research in CMP slurries and pads addresses a breadth of complex and interrelated performance criteria that relate to the functional performance of the chip,IC device, our customers’customers' manufacturing yields, and their overall cost of ownership. We design slurries and pads that are capable of polishing one or more materials of differing hardness, sometimes at the same time, that make upcomprise the semiconductor circuitry. Additionally,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 economicscost of ownership for our customers. As dimensions become smaller and as materials and designs increase in complexity, these challenges require significant investments in R&D.
We also commit internal R&D resources to our ESF business. We believe that application areas we are currently developing, such as precision optics and electronic substrates, represent natural adjacencies to our core CMP business and technology. Products under development in this area include products used to polish silicon and silicon-carbide wafers to improve the surface quality of these wafers and reduce the customers’customers' total cost of ownership.
We believe that technology provides us with 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.requirements. In fiscal 2012, 2011years 2015, 2014 and 2010,2013, we incurred approximately $58.6$59.8 million, $58.0$59.4 million and $51.8$61.4 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.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 within our Epoch subsidiary that includes a clean room with 200mm300mm polishing capability; a newan R&D facility in South Korea that was opened in August 2011, that provides slurry formulation capability and 300mm polishing capability; an R&D laboratory in Singapore that provides polishing, metrology and slurry development capabilities for the data storage industry; and, a research facility in Rochester, New York to supportthat supports our QED business. All of theseThese facilities underscore our commitment both to continuing to invest in our technology infrastructure to maintain our technology leadership and to becoming even morebe responsive to the needs of our customers.
RAW MATERIALS SUPPLY
INTELLECTUAL PROPERTY
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Most of our intellectual property has been developed internally, but we also may acquire intellectual property from others to enhance our intellectual property portfolio. These enhancements may be via licenses or assignments or we may acquire certain proprietary technology and intellectual property when we make acquisitions. We believe these technology rights continue tocan 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, safety and health laws and regulations, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes, and occupational safety and health. We believe that our facilities are in substantial compliance with applicable environmental laws and regulations. By utilizing Six Sigma in our environmental management system process, we believe we have improved operating efficiencies while preserving the environment. Our major operations in the United States, Japan, Singapore, EuropeSouth 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, injury reduction and other environmental, concerns. We are committed to maintaining these certificationshealth and are actively pursuing ISO 18001 Safety and Health certification for our existing operations. We will also seek to obtain additional certifications, as applicable, in the areas in which we do business.safety objectives. We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with theseenvironmental, safety and health laws and regulations in both the United States and other countries. However,countries in which we currentlydo business, but we do not anticipate that the futureexpect these costs of environmental compliance will have a material adverse effect on our business, financial condition or results of operations.be material.
EMPLOYEES
We believe we have a world-class teamour employees are the foundation of employees who make the Company successful.our success. As of October 31, 2012,2015, including employees at NexPlanar, we employed 1,0421,111 individuals, including 555617 in operations, 261260 in research and development and technical, 102 in sales and marketing and 124132 in administration. In general, none of our employees are not covered by collective bargaining agreements. We have not experienced any work stoppages and in general consider our relations with our employees to be good.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We sell our products worldwide. OurWe believe our geographic coverage allows us to utilize our business and technical expertise from a worldwidediverse, global workforce, provides stabilitystrategically located in close proximity to our operations and revenue streams to offset geography-specific economic trends, and offers us an opportunity to take advantage of new markets for products.
customers. For more financial information about geographic areas, see Note 1819 of “Notes"Notes to the Consolidated Financial Statements”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). Any materials that the Company files with the SEC are also available to read and copy at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Statements of changes inregarding 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 SECfiling of such filings.with the SEC. In addition, the SEC’sSEC's website (http://www.sec.gov) contains reports, proxy statements, and other information that we file electronically with the SEC.
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 ismay be 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, since in recent years the industry has seen a significant shift in demand from semiconductor devices for personal computers, which now are largely enterprise-related, to those for mobile internet devices (MIDs), which are more consumer-oriented. Historically, semiconductor demand has fluctuated significantly due to economic and industry cycles and these cyclesseasonal shifts in demand, which can dramatically affect our business. These cycles may be characterized by rapid increases or decreases in productbusiness, causing demand excess or low customer inventories, and rapid changes in prices of IC devices.for our products to fluctuate. For example, following approximately two quarters ofwe experienced soft demand conditions in the semiconductor industry during the first half of our fiscal years 2012, that2013 and 2014, followed approximately two years of growth, we again saw industryby stronger demand strengthen somewhat duringin the second half of oureach of those years. However, in fiscal 2012. By2015, we saw a departure from the very end of fiscal 2012, however,seasonal demand pattern we began to see what appears to be some softening of demand. In addition, our business has experienced historical seasonal trendshad seen over these three years, as we saw our revenue decreaseexperienced somewhat stronger than "normal" seasonal demand during the first half of the fiscal year, but weaker demand in the second quarter of fiscal 2012 from the revenue recorded in the first quarter of 2012.half. 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 experiences further weakness and/or the semiconductor industry weakens, whether in general or as a result of specific factors, such as current macroeconomic factors, or unpredictable natural disastersevents such as the March 2011 natural disasters, in Japan, or the November 2011 flooding in Thailand, that have affected the semiconductor, data storage and information technology industries over approximately the last year, we could experience material adverse impacts on our results of operations and financial condition.
Adverse global economic and industry conditions maycould have other negative effects on our Company. For instance, we maycould experience negative impacts on cash flows due to the inability of our customers to pay their obligations to us, as evidenced by the $3.7 million bad debt expense we recorded in March 2012, related to a customer bankruptcy filing in Japan in the second quarter of fiscal 2012, or our production process maycould be harmed if our suppliers cannot fulfill their obligations to us. We maycould 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 MIDs versus PCs; products that our customers may produce, such as logic IC devices versus memory devices; the various technology nodes at which those products are manufactured; customers’customers' efficiencies in the use of CMP consumables; customers' specific manufacturing process integration schemes; the short order to delivery time for our products; quarter-to-quarter changes in customer order patterns; market share gains and losses; and pricing changes by us and our competitors.
WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN THE CONSUMPTION OF CMP SLURRIES AND PADS
Our business is substantially dependent on a single class of products, CMP slurries, which account for the majority of our revenue. OurWe also continue to develop our business in CMP pads, is also developing.and, in relation to this, we recently acquired NexPlanar Corporation (NexPlanar), another CMP pad supplier. 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 advances, 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’customers' efforts to reduce consumption of CMP consumables, and to possibly reuse or recycle these products,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 arehave generally growing at agrown faster rate than the smaller ones, and we have seen the number of semiconductor manufacturers decline both through business gains, mergers and acquisitions, as well as throughand strategic alliances. Industry analysts predict that this trend will continue, which means the semiconductor industry will be comprised of fewer and larger participants in the future 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 or a significant number of smaller customers, could seriously harm our business, financial condition and results of operations.
In fiscal 2012,2015, our five largest customers accounted for approximately 48%58% of our revenue, with Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung accounting for approximately 18% and 13%15%, respectively, of our revenue. In fiscal year 2011,2014, our five largest customers accounted for approximately 47%54% of our revenue, with TSMC and Samsung accounting for approximately 17%22% and 10%14%, respectively.
OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR COMPETITORS DEVELOP SUPERIOR SLURRYCMP CONSUMABLES PRODUCTS, OFFER BETTER PRICING, TERMSSERVICE OR SERVICE,OTHER TERMS, OR OBTAIN CERTAIN INTELLECTUAL PROPERTY RIGHTS
Competition from other CMP slurryconsumables manufacturers or any new entrants could seriously harm our business and results of operations. Competition from other providers of CMP consumablesoperations, and this competition could continue to increase, and opportunities exist for other companies to emerge as potential competitors by developing their own CMP consumables products.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 whichthat could restrict our ability to market our existing products and/or to innovate and develop new products.
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ANY PROBLEM OR DISRUPTION IN OUR SUPPLY CHAIN, INCLUDING SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS, OR IN OUR ABILITY TO MANUFACTURE AND DELIVER OUR PRODUCTS TO OUR CUSTOMERS, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
We depend on our supply chain to enable us to meet the demands of our customers. Our supply chain includes the raw materials we use to manufacture our products, our production operations and the means by which we deliver our products to our customers. Our business could be adversely affected by any problem or interruption in our supply of the key raw materials we use in our CMP slurries and pads, including fumed silica, which we use for certainraw materials that do not meet the stringent quality and consistency requirements of our slurries,customers, or any problem or interruption that may occur during production or delivery of our products, such as weather-related problems, or natural disasters, like the March 2011 earthquakes and tsunamior labor-related issues. For example, in Japan.our third quarter of fiscal 2015, we incurred significant costs associated with raw material that did not meet our material quality requirements. 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 materialmaterials suppliers.
We believe it would be difficult to promptly secure alternative sources of key raw materials such as fumed silica, in the event one of our suppliers becomes unable to supply us with sufficient quantities of raw 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. For instance, Cabot Corporation continues to be our primary supplier of particular amounts and types of fumed silica, and our current fumed silica supply agreement with Cabot Corporation expires December 31, 2012. We are in the process of working with Cabot Corporation to negotiate the terms of a new agreement for continued supply of fumed silica; however, at present such negotiations are not complete and any final terms could have an adverse effect on our business. Also, if we change the supplier or type of key raw materials we use to make our CMP slurries or pads, or are required to purchase them from a different manufacturer or manufacturing facility or otherwise modify our products, in certain circumstances our customers might have to requalify our CMP slurries and pads for their manufacturing processes and 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 87%86%, 86%88% and 86%88% of our revenue was generated by sales to customers outside of the United States for the fiscal 2012, 20112015, 2014 and 2010,2013, 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 risks that we may not be able to repatriate earnings from certain of our foreign operations, derive anticipated tax benefits of our foreign operations or recover the investments made in our foreign operations.
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, including our acquisition of NexPlanar, which we completed on October 22, 2015, 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.
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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 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, such as the former litigation between us and a competitor, in which the validity of all of our patents at issue in the matter was upheld as further described in Part 1, Item 3 under the heading “Legal Proceedings”, could seriously harm our business. In addition, the costs of obtaining or protecting our intellectual property could negatively affect our operating results.
BECAUSE WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF CMP SLURRIES,CONSUMABLES, EXPANSION OF OUR BUSINESS INTO NEWOTHER PRODUCTS AND APPLICATIONS MAY NOT BE SUCCESSFUL
An element of our strategy has been to leverage our current customer relationships, and technological expertise and other capabilities to expand our business beyond CMP business from CMP slurriesconsumables into other areas, such as CMP polishing pads.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’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.
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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 by securities analysts 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 managementdeployment 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’semployee's employment following a change in control, which may make it more expensive to acquire our Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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.
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. For example, in 2011, we concluded litigation in the United States against a competitor in which the validity of certain of our CMP slurry patents for tungsten CMP was upheld, although the specific competitive products at issue were found to not infringe the claims at issue.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information concerning our executive officers and their ages as of October 31, 2012.2015.
NAME | AGE | POSITION | ||||
| William P. Noglows | 57 | Executive Chairman of the Board of Directors | ||||
| David H. Li | 42 | President and Chief Executive Officer | ||||
| H. Carol Bernstein | 55 | Vice President, Secretary and General Counsel | ||||
| Yumiko Damashek | 59 | Vice President, | ||||
| Richard Hui | 40 | Vice President, Global Sales | ||||
| William S. Johnson | 58 | Executive Vice President and Chief Financial Officer | ||||
| Ananth Naman | 45 | Vice President | ||||
| Daniel J. Pike | 52 | Vice President, Corporate Development | ||||
| Lisa A. Polezoes | 51 | Vice President, Human Resources | ||||
| 45 | Vice President, Marketing | |||||
| Thomas S. Roman | 54 | Principal Accounting Officer and Corporate Controller |
WILLIAM P. NOGLOWS has served as our Executive Chairman of our Board of Directors since January 2015, and Chairman, President and Chief Executive Officer sincefrom November 2003. Mr. Noglows had previously2003 through December 2014. From 1984 through 2003, he 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 heldin various management positions at Cabot Corporation, including General Manager of Cabot Corporation’s Cab-O-Sil Division, whereculminating in serving as an executive vice president and general manager. While there, he was one of the primary founders of our Company when our business was a division of Cabot Corporation,company and was responsible for identifying and encouraging the development of the CMP application.application, which is the core of our business. Mr. Noglows had previously served as a director of our company from December 1999 until April 2002. Mr. Noglows received his B.S. in Chemical Engineeringchemical engineering from the Georgia Institute of Technology. Mr. Noglows also is also a director of Littelfuse,Aspen Aerogels, Inc. and Aspen Aerogels,Littlefuse, Inc.
DAVID H. LI has served as our President and Chief Executive Officer, and as a director of our Company, since January 2015. From June, 2008 through December 2014, Mr. Li served as our Vice President of the Asia Pacific Region. Prior to that role, Mr. Li held various leadership roles, including our Managing Director of China and Korea, and our Global Business Director for Tungsten and Advanced Dielectrics. Prior to that, he held a variety of leadership positions in operations, sourcing and investor relations since joining us in 1998. Mr. Li received a B.S. in chemical engineering from Purdue University and an M.B.A. from Northwestern University.
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 of Operations and Quality since January 2015. From November 2005 through June 2008, Ms. Damashek served as our Vice President, Japan, and subsequently as Vice President, Japan and Asia Operations in Asia since June 2008. Previously,through December 2014. Prior to that, 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 toBefore 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.
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RICHARD HUI has served as our Vice President of Global Sales since January 2015. From October 2013 through December 2014, Mr. Hui served as our Managing Director of Korea. Prior to that, Mr. Hui served as our Regional Sales Director of China from January 2011. Previously, Mr. Hui served as a Product Line Manager and held other sales leadership positions for us in Asia from March 2003 to January 2011. Before joining Cabot Microelectronics, Mr. Hui held management roles at Advanced Semiconductor Manufacturing Corp. and HHNEC. Mr. Hui received a B.S. in Electronics Engineering and an M.B.A. from JiaoTong University.
WILLIAM S. JOHNSON has served as our Vice President and Chief Financial Officer since April 2003.2003, and was named 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 spentworked for BP Amoco for 16 years at BP Amoco in various senior finance and management positions, the most recent of which wasculminating in serving as 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. Mr. Johnson is also a director of CTS Corporation.
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 athe 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 of the University of Pennsylvania.
LISA A. POLEZOES has served as our Vice President of Human Resources since October 2012. Prior to that, Ms. Polezoes was our Global Director of Human Resources from August 2006, and previously had been our Director of Global Compensation and Benefits from 2005. Prior to joining us, Ms. Polezoes had various human resources and management positions at Praxair, Montgomery Ward and Hyatt Corporation. Ms. Polezoes received her B.S. in Institutional Management from Purdue University and her M.B.A. from Benedictine University.
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.
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.
HIGH | LOW | ||
| Fiscal 2011 | |||
| First Quarter | 42.80 | 32.22 | |
| Second Quarter | 52.25 | 40.80 | |
| Third Quarter | 51.88 | 43.18 | |
| Fourth Quarter | 48.21 | 34.39 | |
| Fiscal 2012 | |||
| First Quarter | 48.39 | 33.09 | |
| Second Quarter | 52.50 | 33.89 | |
| Third Quarter | 39.82 | 28.11 | |
| Fourth Quarter | 35.93 | 28.14 | |
| Fiscal 2013 First Quarter (through October 31, 2012) | 35.09 | 29.17 | |
| HIGH | LOW | |||
| Fiscal 2014 | ||||
| First Quarter | 45.70 | 37.98 | ||
| Second Quarter | 47.73 | 39.11 | ||
| Third Quarter | 45.88 | 41.03 | ||
| Fourth Quarter | 46.08 | 39.74 | ||
| Fiscal 2015 | ||||
| First Quarter | 48.70 | 40.12 | ||
| Second Quarter | 52.53 | 44.93 | ||
| Third Quarter | 50.97 | 45.97 | ||
| Fourth Quarter | 47.17 | 38.23 | ||
| Fiscal 2016 First Quarter (through October 31, 2015) | 42.17 | 38.70 | ||
As of October 31, 2012,2015, there were approximately 929794 holders of record of our common stock. In December 2011, we announced a new capital management initiative for our Company, which included a leveraged recapitalization with a special cash dividend of $15 per share and an increase in the amount available under our share repurchase program. On February 13, 2012, our Board of Directors declared the special cash dividend of $15 per share, or $347.1 million in aggregate, to the Company’s stockholders with a dividend payment date of March 1, 2012. The low price of our common stock shown above for the second quarter of fiscal 2012, as well as the high and low prices shown for the third and fourth quarters of fiscal 2012, reflect the period after the payment of the special cash dividend. No dividends were declared or paid in fiscal 20112015 or prior to the special cash dividend,fiscal 2014, and we have no current plans to pay cash dividends in the future.dividends.
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | 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) | ||||
Jul. 1 through Jul. 31, 2012 | 20 | $28.76 | - | $140,000 | ||||
Aug. 1 through Aug. 31, 2012 | 241,000 | $31.87 | 241,000 | $132,319 | ||||
Sep. 1 through Sep. 30, 2012 | 67,645 | $34.30 | 67,645 | $130,000 | ||||
| Total | 308,665 | $32.40 | 308,645 | $130,000 |
| Period | 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) | |||||||||||
| Jul. 1 through Jul. 31, 2015 | 21 | $ | 43.90 | - | $ | 84,975 | |||||||||
| Aug. 1 through Aug. 31, 2015 | - | - | - | $ | 84,975 | ||||||||||
| Sep. 1 through Sep. 30, 2015 | - | - | - | $ | 84,975 | ||||||||||
| Total | 21 | $ | 43.90 | - | $ | 84,975 | |||||||||
In November 2010, our Board of Directors authorized a share repurchase program for up to $125.0 million of our outstanding common stock, which became effective on the authorization date. As of December 13, 2011, we had $82.9 million remaining under this share repurchase program. In conjunction with our new capital management initiative, on December 13, 2011,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. WeUnder this program, we repurchased 929,407851,245 shares for $33.0$40.0 million in fiscal 20122015. As of September 30, 2015, $85.0 million remains available 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 program. Share repurchases are made from time to time, depending on market conditions, in open market transactions, at management’s discretion.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, we purchased a total of 37,30447,746 shares were purchased during fiscal 20122015 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 grantedawarded 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’sCompany's existing equity compensation plans.
STOCK PERFORMANCE GRAPH
The following graph illustrates the cumulative total stockholder return on our common stock during the period from September 30, 20072009 through September 30, 20122014 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, 20072009 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”"Risk Factors" in Part I, Item 1A above.
| 9/10 | 12/10 | 3/11 | 6/11 | 9/11 | 12/11 | 3/12 | 6/12 | 9/12 | 12/12 | 3/13 | |
| Cabot Microelectronics Corporation | 100.00 | 128.81 | 162.37 | 144.41 | 106.87 | 146.83 | 172.36 | 129.50 | 155.78 | 157.42 | 154.06 |
| NASDAQ Composite | 100.00 | 112.25 | 117.58 | 117.69 | 103.65 | 113.23 | 134.01 | 127.55 | 136.22 | 132.28 | 144.26 |
| Philadelphia Semiconductor | 100.00 | 117.03 | 123.55 | 123.92 | 108.39 | 121.63 | 144.00 | 128.43 | 129.80 | 134.47 | 146.94 |
| 6/13 | 9/13 | 12/13 | 3/14 | 6/14 | 9/14 | 12/14 | 3/15 | 6/15 | 9/15 | |
| Cabot Microelectronics Corporation | 146.34 | 170.72 | 202.60 | 195.06 | 197.94 | 183.76 | 209.78 | 221.53 | 208.85 | 171.74 |
| NASDAQ Composite | 150.87 | 168.91 | 187.77 | 189.33 | 199.10 | 202.57 | 213.62 | 220.66 | 225.33 | 208.69 |
| Philadelphia Semiconductor | 152.73 | 163.14 | 178.39 | 192.42 | 208.78 | 212.42 | 227.40 | 222.52 | 215.11 | 193.42 |
| 9/07 | 12/07 | 3/08 | 6/08 | 9/08 | 12/08 | 3/09 | 6/09 | 9/09 | 12/09 | 3/10 | |
| Cabot Microelectronics Corporation | 100.00 | 84.00 | 75.20 | 77.54 | 75.04 | 60.98 | 56.21 | 66.18 | 81.54 | 77.10 | 88.49 |
| NASDAQ Composite | 100.00 | 96.04 | 80.51 | 81.48 | 69.59 | 56.69 | 53.28 | 64.21 | 74.90 | 79.18 | 82.59 |
| Philadelphia Semiconductor | 100.00 | 95.66 | 87.22 | 90.83 | 77.39 | 61.34 | 67.70 | 74.21 | 90.32 | 96.78 | 94.85 |
| 6/10 | 9/10 | 12/10 | 3/11 | 6/11 | 9/11 | 12/11 | 3/12 | 6/12 | 9/12 | |
| Cabot Microelectronics Corporation | 80.91 | 75.27 | 96.96 | 122.22 | 108.70 | 80.44 | 110.53 | 129.75 | 97.48 | 117.27 |
| NASDAQ Composite | 73.97 | 84.99 | 93.86 | 99.57 | 98.43 | 86.87 | 94.82 | 108.29 | 105.27 | 110.79 |
| Philadelphia Semiconductor | 86.58 | 91.48 | 110.04 | 110.61 | 112.90 | 100.44 | 111.85 | 132.24 | 120.05 | 127.57 |
The following selected financial data for each year of the five-year period ended September 30, 2012,2015, 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
| CABOT MICROELECTRONICS CORPORATION | ||||||||||||||||||||
| SELECTED FINANCIAL DATA - FIVE YEAR SUMMARY | ||||||||||||||||||||
| (Amounts in thousands, except per share amounts) | ||||||||||||||||||||
| Year Ended September 30, | ||||||||||||||||||||
| 2012 * | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| Consolidated Statement of Income Data: | ||||||||||||||||||||
| Revenue | $ | 427,657 | $ | 445,442 | $ | 408,201 | $ | 291,372 | $ | 375,069 | ||||||||||
| Cost of goods sold | 223,630 | 231,336 | 204,704 | 162,918 | 200,596 | |||||||||||||||
| Gross profit | 204,027 | 214,106 | 203,497 | 128,454 | 174,473 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research, development and technical | 58,642 | 58,035 | 51,818 | 48,150 | 49,155 | |||||||||||||||
| Selling and marketing | 29,516 | 29,758 | 26,885 | 22,239 | 28,281 | |||||||||||||||
| General and administrative | 49,345 | 45,928 | 50,783 | 40,632 | 47,595 | |||||||||||||||
| Purchased in-process research and development | - | - | - | 1,410 | - | |||||||||||||||
| Total operating expenses | 137,503 | 133,721 | 129,486 | 112,431 | 125,031 | |||||||||||||||
| Operating income | 66,524 | 80,385 | 74,011 | 16,023 | 49,442 | |||||||||||||||
| Interest expense | 2,309 | 155 | 233 | 365 | 395 | |||||||||||||||
| Other income (expense), net | (1,344 | ) | (1,318 | ) | (501 | ) | 964 | 5,843 | ||||||||||||
| Income before income taxes | 62,871 | 78,912 | 73,277 | 16,622 | 54,890 | |||||||||||||||
| Provision for income taxes | 22,045 | 27,250 | 23,819 | 5,435 | 16,552 | |||||||||||||||
| Net income | $ | 40,826 | $ | 51,662 | $ | 49,458 | $ | 11,187 | $ | 38,338 | ||||||||||
| Basic earnings per share | $ | 1.81 | $ | 2.26 | $ | 2.14 | $ | 0.48 | $ | 1.64 | ||||||||||
| Weighted average basic shares outstanding | 22,506 | 22,896 | 23,084 | 23,079 | 23,315 | |||||||||||||||
| Diluted earnings per share | $ | 1.75 | $ | 2.20 | $ | 2.13 | $ | 0.48 | $ | 1.64 | ||||||||||
| Weighted average diluted shares outstanding | 23,280 | 23,435 | 23,273 | 23,096 | 23,348 | |||||||||||||||
| Cash dividends per share | $ | 15.00 | $ | - | $ | - | $ | - | $ | - | ||||||||||
| As of September 30, | ||||||||||||||||||||
| 2012 * | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| Consolidated Balance Sheet Data: | ||||||||||||||||||||
| Current assets | $ | 317,888 | $ | 430,405 | $ | 381,029 | $ | 316,852 | $ | 330,592 | ||||||||||
| Property, plant and equipment, net | 125,020 | 130,791 | 115,811 | 122,782 | 115,843 | |||||||||||||||
| Other assets | 74,917 | 67,033 | 74,916 | 75,510 | 31,002 | |||||||||||||||
| Total assets | $ | 517,825 | $ | 628,229 | $ | 571,756 | $ | 515,144 | $ | 477,437 | ||||||||||
| Current liabilities | $ | 63,219 | $ | 55,550 | $ | 53,330 | $ | 39,536 | $ | 37,801 | ||||||||||
| Long-term debt | 161,875 | - | - | - | - | |||||||||||||||
| Other long-term liabilities | 9,140 | 6,325 | 4,083 | 4,879 | 5,403 | |||||||||||||||
| Total liabilities | 234,234 | 61,875 | 57,413 | 44,415 | 43,204 | |||||||||||||||
| Stockholders' equity | 283,591 | 566,354 | 514,343 | 470,729 | 434,233 | |||||||||||||||
| Total liabilities and stockholders' equity | $ | 517,825 | $ | 628,229 | $ | 571,756 | $ | 515,144 | $ | 477,437 | ||||||||||
| * In fiscal 2012, in conjunction with a new capital management initiative, we completed a leveraged recapitalization and paid a special cash dividend of $15.00 per share, | ||||||||||||||||||||
| or $347.1 million in the aggregate. The dividend was funded with a $175.0 million term loan and $172.1 million of existing Company cash balances. | ||||||||||||||||||||
(Amounts in thousands, except per share amounts)
| Year Ended September 30, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 (1) | 2011 | ||||||||||||||||
| Consolidated Statement of Income Data: | ||||||||||||||||||||
| Revenue | $ | 414,097 | $ | 424,666 | $ | 433,131 | $ | 427,657 | $ | 445,442 | ||||||||||
| Cost of goods sold | 201,866 | 221,573 | 221,015 | 223,630 | 231,336 | |||||||||||||||
| Gross profit | 212,231 | 203,093 | 212,116 | 204,027 | 214,106 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research, development and technical | 59,778 | 59,354 | 61,373 | 58,642 | 58,035 | |||||||||||||||
| Selling and marketing | 24,983 | 26,513 | 27,985 | 29,516 | 29,758 | |||||||||||||||
| General and administrative | 52,430 | 45,418 | 46,287 | 49,345 | 45,928 | |||||||||||||||
| Total operating expenses | 137,191 | 131,285 | 135,645 | 137,503 | 133,721 | |||||||||||||||
| Operating income | 75,040 | 71,808 | 76,471 | 66,524 | 80,385 | |||||||||||||||
| Interest expense | 4,524 | 3,354 | 3,643 | 2,309 | 155 | |||||||||||||||
| Other income (expense), net | 681 | 140 | 1,392 | (1,011 | ) | (1,318 | ) | |||||||||||||
| Income before income taxes | 71,197 | 68,594 | 74,220 | 63,204 | 78,912 | |||||||||||||||
| Provision for income taxes | 15,051 | 17,843 | 21,642 | 23,110 | 27,250 | |||||||||||||||
| Net income | $ | $56,146 | $ | $50,751 | $ | $52,578 | $ | $40,094 | $ | $51,662 | ||||||||||
| Basic earnings per share | $ | $2.32 | $ | $2.12 | $ | $2.27 | $ | $1.76 | $ | $2.26 | ||||||||||
| Weighted average basic shares outstanding | 24,040 | 23,704 | 22,924 | 22,506 | 22,896 | |||||||||||||||
| Diluted earnings per share | $ | $2.26 | $ | $2.04 | $ | $2.19 | $ | $1.71 | $ | $2.20 | ||||||||||
| Weighted average diluted shares outstanding | 24,632 | 24,611 | 23,760 | 23,244 | 23,435 | |||||||||||||||
| Cash dividends per share | $ | - | $ | - | $ | - | $ | 15.00 | $ | - | ||||||||||
| As of September 30, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 (1) | 2011 | ||||||||||||||||
| Consolidated Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 354,190 | $ | 284,155 | $ | 226,029 | $ | 178,459 | $ | 302,546 | ||||||||||
| Other current assets | 140,318 | 143,838 | 136,769 | 135,906 | 124,848 | |||||||||||||||
| Property, plant and equipment, net | 93,743 | 100,821 | 111,985 | 125,020 | 130,791 | |||||||||||||||
| Other assets | 72,223 | 72,353 | 76,809 | 74,006 | 69,292 | |||||||||||||||
| Total assets | $ | 660,474 | $ | 601,167 | $ | 551,592 | $ | 513,391 | $ | 627,477 | ||||||||||
| Current liabilities | $ | 60,644 | $ | 55,448 | $ | 68,221 | $ | 62,920 | $ | 55,439 | ||||||||||
| Long-term debt | 155,313 | 164,063 | 150,937 | 161,875 | - | |||||||||||||||
| Other long-term liabilities | 15,553 | 9,654 | 8,992 | 9,058 | 6,325 | |||||||||||||||
| Total liabilities | 231,510 | 229,165 | 228,150 | 233,853 | 61,764 | |||||||||||||||
| Stockholders' equity | 428,964 | 372,002 | 323,442 | 279,538 | 565,713 | |||||||||||||||
| Total liabilities and stockholders' equity | $ | 660,474 | $ | 601,167 | $ | 551,592 | $ | 513,391 | $ | 627,477 | ||||||||||
(1) In fiscal 2012, 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management's"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, ofand trends in the industry and markets in which the Company participates; international events, regulatory or legislative activity, or 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;entities, including NexPlanar Corporation ("NexPlanar"), the potential risks and uncertainties of which include, among others, the reaction of customers of the Company and NexPlanar to the transaction, the Company's ability to successfully integrate NexPlanar's operations and employees, to maintain, develop and grow NexPlanar's business, and to realize the expected benefits of the acquisition; uses and investment of the Company’sCompany'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.
Revenue for fiscal 20122015 was $427.7$414.1 million, which represented a decrease of 4.0%2.5% from the record $445.4$424.7 million reported for fiscal 2011.2014. The decrease in revenue from fiscal 2011 was2014 reflects continued softness of demand in the global semiconductor industry and the loss of some legacy dielectrics slurry business that we communicated during the fiscal year. The decrease in revenue also reflects a $7.5 million adverse impact of foreign exchange rate changes, primarily due to the soft industry conditions duringweaker Japanese yen and Korean won versus the first half of the fiscal year. In spite of the challenging industryU.S. dollar. We achieved higher revenue from our slurries for polishing tungsten, which generated record annual revenue, and macroeconomic conditions, weincreased revenue from our ESF products. However, these increases were able to grow bothmore than offset by lower revenue from our slurries for polishing certain dielectrics, aluminum and data storage applications, as well as from our polishing pads business and our ESF business. We also increased our revenue in South Korea by approximately 22% from fiscal 2011. South Korea has been an area of strategic emphasis for the Company since it represents the second largest CMP consumables market in the world.pads.
Gross profit expressed as a percentage of revenue for fiscal 20122015 was 47.7%51.3%, which represents a decreasean increase from the 48.1%47.8% reported for fiscal 2011, but was near the upper end of our full year guidance range of 46% to 48% of revenue.2014. The decreaseincrease in gross profit percentage from fiscal 20112014 was primarily due to higher fixed manufacturing costs, pricing impacts,product mix, the favorable impact associated with foreign exchange rate changes, primarily due to the weaker yen, and lower sales and production volumes,the absence of a $2.1 million asset impairment charge recorded in the second quarter of fiscal 2014. These increases were partially offset by lower variable manufacturing yields, including $1.4 million, in costs and higher manufacturing yields.associated with an inventory write-off in the third quarter of fiscal 2015 related to raw material that did not meet our quality requirements. Our gross profit percentage was slightly above our fiscal 2015 guidance range of 50.0% to 51.0%. We expect our gross profit percentage for full fiscal year 2013 to continue2016 to be in the rangebetween 49% and 51% of 46% to 48% of revenue. However, werevenue, including NexPlanar. We may experience fluctuations in our gross profit due to a number of factors, including the extent to which we utilize our manufacturing capacity, and changes in our product mix, which may cause our quarterly gross profit to be above or below this annual guidance range.
Operating expenses of $137.5$137.2 million, which include research, development and technical, selling and marketing, and general and administrative expenses, increased 2.8%4.5%, or $3.8$5.9 million, from the $133.7$131.3 million reported for fiscal 2011.2014. The increase was primarily due to bad debt expense related to a customer bankruptcy that we reported inhigher staffing-related costs, including costs associated with the second quarter of fiscal 2012,executive officer transitions discussed above and costs associated with our leveraged recapitalization with a specialannual cash dividend, and higher expenses for research and development materials. These increases werebonus program (AIP), partially offset by lower staffing-related costs. In fiscal 2013, wetravel-related expenses and lower depreciation expense. We expect total operating expenses for our full fiscal year operating expenses2016 to be in the range of $132$143.0 million to $136 million.$147.0 million, including NexPlanar.
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, interest rate swaps, 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.
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. We will continue to monitor the financial solvency of all of our customers and, if global economic, or individual customer, conditions worsen,weaken, we may have to record additional increases to our allowance for doubtful accounts. As of September 30, 2012,2015, our allowance for doubtful accounts represented 8.2%2.4% of gross accounts receivable. If we had increased our estimate of bad debts to 9.2%3.4% of gross accounts receivable, our general and administrative expenses would have increased by $0.6$0.5 million.
WARRANTY RESERVE
We maintain a warranty reserve that reflects management’smanagement's best estimate of the cost to replace product that does not meet customers’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, 2012,2015, our warranty reserve represented 0.3%0.2% of the current quarter revenue. If we had increased our warranty reserve estimate to 1.3%1.2% of the current quarter revenue, our cost of goods sold would have increased by $1.1$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. For instance, we wrote off approximately $1.4 million of inventory during the third quarter of fiscal 2015 related to raw material that did not meet our quality requirements. Should actual product marketability and fitness for use be affected by conditions that are different from those projected by management, revisions to the estimated inventory reserve may be required. If we had increased our reserve for obsolete inventory at September 30, 20122015 by 10%, our cost of goods sold would have increased by $0.2 million.
VALUATION AND CLASSIFICATION OF AUCTION RATE SECURITIES
As of September 30, 2012,2015, we owned two auction rate securities (ARS) recorded at cost with a par value of $5.7 million and an estimated fair value of $8.0$5.2 million, ($8.2 million par value) which are classified as other long-term assets on our Consolidated Balance Sheet.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.
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. We performed two discounted cash flow analyses, one using a discount rate basedHowever, we believe the gross $0.5 million unrecognized loss on a market index comprised of tax exempt variable rate demand obligations and one using a discount rate based on the LIBOR swap curve, and we applied a risk factorthese securities is due to reflect current liquidity issuesilliquidity in the ARS market. Key inputs to our discounted cash flow model include projected cash flows from interest and principal payments and the weighted probabilities of improved liquidity or debt refinancing by the issuer. We also incorporate certain Level 2 market indices into the discounted cash flow analysis, including published rates such as the LIBOR rate, the LIBOR swap curve and a municipal swap index published by the Securities Industry and Financial Markets Association. We also considered the probability of default in payment by the issuer of the securities, the strength of the insurance backing and the probability of failure by the insurance carrier in the case of default by the issuer of the securities. In November 2011, the municipality that issued our impaired ARS filed for bankruptcy protection. We considered these developments, in light of the continued insurance backing, and have concluded the impairment we have maintained remains adequate and temporary. We do not intend to sell the securities at a loss and we believe we will not be required to sell the securities at a loss in the future.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 further adjust the carrying value of these instruments through an impairment charge that may be deemed other-than-temporary.
IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
We assess the recoverability of the carrying value of long-lived assets, including finite lived intangible assets, whenever events or changes in circumstances indicate that the assets may be impaired. We 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 duringWe did not record any impairment expense in fiscal 2012,2015. In fiscal 2014, we recorded $1.0$2.3 million in impairment expense primarily related to the decision to write-off certain operational assets at one of our foreign locations.expense. In each of fiscal years 2011 and 2010,2013, we recorded impairment expense of $0.2 million in impairment expense.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,September 30, 2015, we have not made any acquisitions for which we were required to adopt newapply current standards of accounting standards for business combinations commencing after October 1, 2009. However, we have not made any acquisitionsThe current standards will be applied to our acquisition of NexPlanar, which we were required to apply these new standards. We have allocated the purchase price of acquired entitiescompleted on October 22, 2015, pursuant to the tangibleMerger Agreement for such transaction as discussed above in the "Overview". Assets and intangible assetsliabilities of an acquired liabilities assumed, and in-process research and development (IPR&D) based onbusiness are recognized at their estimated fair values.value. 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 excessresidual value of the purchase price over the fair value of net assets and amounts assigned toacquired, including 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.
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’sCompany'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’sManagement'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’smanagement'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 theour 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 had threehave four reporting units, tothree of which we allocatedhad goodwill and intangible assets as of September 30, 2012,2015, the date of our annual impairment test. Initially, our Company had only one reporting unit as we were created from a division of our former parent company, Cabot Corporation, and we identified associated goodwill and intangible assets under one reporting unit at that time. Other amounts of goodwill and intangible assets have been attributed to acquired businesses at the time of acquisition through the use of independent appraisal firms.
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 2013, 2014 and 2015, we used this new guidancea 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 oureconomic and operating conditions that occur after the annual impairment analysis for goodwill because our cash flows for all of our reporting units continued to show positive trends.
charges. As a result of the review performed in the fourth quarter of fiscal 2012,2015, and the related sensitivity analysis, we determined that there was no impairment of our goodwill and intangible assets as of September 30, 2012.2015.
In the first quarter of fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. The fair value of our interest rate swaps is estimated using standard valuation models and market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value. We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income. Hedge effectiveness is tested quarterly to determine if hedge treatment is appropriate.
SHARE-BASED COMPENSATION
We 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 beand is revised in future periods iffrom time-to-time when 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’sstock's historical volatility and the implied volatilities from actively-traded options on our stock. Prior to fiscal 2012, we calculatedWe calculate the expected term of our stock options using the simplified method, due to our limited amount of historical stock option exercise data, and we addedadd a slight premium to this expected term for employees who meet the definition of retirement eligible pursuant to their grants during the contractual term of the grant. The simplified method uses an average of the vesting term and the contractual term of the option to calculate the expected term. We experienced a significant increase in the volume of stock option exercises in fiscal 2011. Consequently, we used this exercise data, as well as historical exercise data, to calculate the expected term of our stock options granted in fiscal 2012, rather than using the simplified method, and we continued to add a slight premium for employees who meet the definition of retirement eligible under their grant terms. The expected term we calculated using option exercise history was within 1% of the expected term calculated under the simplified method. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award.
Through September 30, 2015, we had not granted incentive stock options (ISOs) to our employees pursuant to our equity incentive plans. However, as allowed under our current Omnibus Incentive Plan, pursuant to the Merger Agreement for our acquisition of NexPlanar, certain NexPlanar employees were awarded ISOs in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. We will use the Black-Scholes option-pricing model to estimate the grant date fair value of these ISOs to calculate share-based compensation expense for future periods.
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 changechanges in tax rates is recognized in income in the period that includes the enactment date. Provisions are made for both U.S. and any foreign deferred income tax liability or benefit. We assess whether or not our deferred tax assets will ultimately be realized and record an estimated valuation allowance on those deferred tax assets that may not be realized. We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained by the taxing authorities, based on the technical merits of the position. In fiscal 2012, 20112013, 2014 and 2010,2015, we elected to permanently reinvest the earnings of certainall of our foreign subsidiaries outside the U.S. rather than repatriating the earnings to the U.S.subsidiaries. See the section titled “Liquidity"Liquidity and Capital Resources”Resources" in this MD&A and Note 1516 of the Notes to the Consolidated Financial Statements of this Form 10-K for additional information on income taxes and permanent reinvestment.
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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 current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of revenue of certain line items included in our historical statements of income:
| Year Ended September 30, | Year Ended September 30, | |||||
| 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | |
| Revenue | 100.0% | 100.0% | ||||
| Cost of goods sold | 52.3 | 51.9 | 50.1 | 48.7 | 52.2 | 51.0 |
| Gross profit | 47.7 | 48.1 | 49.9 | 51.3 | 47.8 | 49.0 |
| Research, development and technical | 13.7 | 13.1 | 12.7 | 14.5 | 14.0 | 14.2 |
| Selling and marketing | 6.9 | 6.7 | 6.6 | 6.0 | 6.2 | 6.5 |
| General and administrative | 11.6 | 10.3 | 12.5 | 12.7 | 10.7 | |
| Operating income | 15.5 | 18.0 | 18.1 | 18.1 | 16.9 | 17.6 |
| Interest expense | 0.5 | 0.0 | 0.1 | 1.1 | 0.8 | |
| Other income (expense), net | (0.3) | (0.1) | ||||
| Other income, net | 0.2 | 0.1 | 0.3 | |||
| Income before income taxes | 14.7 | 17.7 | 17.9 | 17.2 | 16.2 | 17.1 |
| Provision for income taxes | 5.2 | 6.1 | 5.8 | 3.6 | 4.2 | 5.0 |
| Net income | 9.5% | 11.6% | 12.1% | 13.6% | 12.0% | 12.1% |
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YEAR ENDED SEPTEMBER 30, 2012,2015, VERSUS YEAR ENDED SEPTEMBER 30, 20112014
REVENUE
Revenue was $427.7$414.1 million in fiscal 2012,2015, which represented a decrease of 4.0%2.5%, or $17.8$10.6 million, from fiscal 2011.2014. The decrease in revenue was driven byprimarily due to a $29.3$12.0 million decrease in sales volume, and a $6.1$7.5 million decrease due to pricing impacts. These decreases were partially offset by a $16.1 million increase in revenue due to a higher-priced product mix and a $1.3 million increase due to the effect of foreign exchange rate changes. Revenuechanges, primarily due to the weakening of the Japanese yen and the Korean won versus the U.S. dollar, and $1.9 million due to changes in average selling prices. These decreases were partially offset by a $10.8 million increase due to product mix. The decrease in revenue from fiscal 2014 reflects continued softness of demand in the in global semiconductor industry and the loss of approximately $20.0 million in annualized legacy dielectrics slurry business for lower-performing applications for 200 millimeter wafers, as noted in the "Overview" above and discussed in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015. We also generated lower revenue from our slurries for polishing aluminum and data storage applications, as well as from our polishing pad businesspads. These decreases were partially offset by increased 8.6%revenue from fiscal 2011our slurries for polishing tungsten, which generated record annual revenue, and increased revenue from our ESF business increased slightly. Revenue in fiscal 2012 from our tungsten, dielectric, copper and data storage slurry product lines all decreased from fiscal 2011. We saw a strengthening of demand in the second half of fiscal 2012 after a period of softer demand during the first half of the fiscal year. However, we began to see signs of softening of demand at the end of our fourth fiscal quarter which may extend into calendar 2013. We continue to be cautious regarding future demand trends due to uncertainty within the semiconductor industry, compounded by continued macroeconomic uncertainty.
products.
COST OF GOODS SOLD
Total cost of goods sold was $223.6$201.9 million in fiscal 2012,2015, which represented a decrease of 3.3%8.9%, or $7.7$19.7 million, from fiscal 2011.2014. The decrease in cost of goods sold was primarily due to $15.2 million from decreased sales volume, an $8.4a $12.3 million decrease due to higher manufacturing yields,product mix, an $8.9 million decrease due to foreign exchange fluctuations, primarily due to the weakening of the yen, and a $1.9$3.7 million decrease due to lower logistics costs.sales volume. These decreases in cost of goods sold were partially offset by a $11.5$4.7 million increase due to lower manufacturing yields, including the $1.4 million in costs related to raw material that did not meet our quality requirements that we recorded in the third quarter of fiscal 2015, as noted in the "Overview" above, and a higher-cost product mix, a $4.4$1.2 million increase due to higher fixed manufacturing costs, including costs at our new facility in South Korea, and a $1.5 million increase due to the effect of foreign exchange rate changes.sample costs.
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 or amended supply arrangements with third parties. Future arrangements may result in costs whichthat are different from those in the existing agreements. 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 47.7%51.3% in fiscal 20122015 as compared to 48.1%47.8% for fiscal 2011.2014, and was slightly above our revised full year guidance range of 50.0% to 51.0%. The decreaseincrease in gross profit as a percentage of revenuefrom fiscal 2014 was primarily due to higher fixed manufacturing costs, pricing impactsproduct mix and decreased sales and production volumes,foreign exchange benefits, partially offset by lower variablesales volume and lower manufacturing costs and higher manufacturing yields. We expect our gross profit percentage for full fiscal year 2013 to be in the range of 46% to 48%, which is unchanged from the full year guidance for fiscal 2012. However, we may experience fluctuations in our gross profit due to a number of factors, including the extent to which we utilize our manufacturing capacity and changes in our product mix, which may cause our quarterly gross profit to be above or below this range.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $58.6$59.8 million in fiscal 2012,2015, which represented an increase of 1.0%0.7%, or $0.6$0.4 million, from fiscal 2011.2014. The increase was primarily due to $1.5 million in higher expenses for researchclean room material costs and development materials$0.4 million in higher staffing-related costs, partially offset by $0.6 million in lower facility-related costs and $0.5 million in higher sample costs, partially offset by $1.6 million in lower staffing-related costs, including costs related to our annual incentive cash bonus program (AIP).depreciation expense.
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Our research, development and technical efforts are focused on the following main areas:
| · | Research related to fundamental CMP technology; |
| · | Development |
| · | Process development to support rapid and effective commercialization of new products; |
| · | Technical support of CMP products in our |
| · | Evaluation and development of new polishing and metrology applications outside of the semiconductor industry. |
SELLING AND MARKETING
Selling and marketing expenses were $29.5$25.0 million in fiscal 2012,2015, which represented a decrease of 0.8%5.8%, or $0.2$1.5 million, from fiscal 2011.2014. The decrease was primarily due to $0.5$1.6 million in lower depreciation and amortization expensestaffing-related costs, $0.4 million in lower travel-related costs, and $0.3 million in lower professional fees,marketing costs, partially offset by $0.4$1.2 million in higher staffing related costs.separation costs associated with the departure of three executive officers, as discussed in the "Overview" above.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $49.3$52.4 million in fiscal 2012,2015, which represented an increase of 7.4%15.4%, or $3.4$7.0 million, from fiscal 2011.2014. The increase was primarily due to $3.8$8.0 million in higher bad debt expense, of which $3.7 million related to a customer bankruptcy filing, and $1.5 million in higher professional fees,staffing-related costs, including feescosts associated with our leveraged recapitalizationAIP and the executive officer transitions, partially offset by a $0.7 million decrease in certain foreign goods and services tax.
INTEREST EXPENSE
Interest expense was $4.5 million in fiscal 2015, which represented an increase of $1.2 million from fiscal 2014. The increase was primarily due to the higher fixed interest rate on the portion of our outstanding debt on which we have fixed the interest rate via interest rate swaps versus the variable interest rate on the rest of our outstanding debt.
OTHER INCOME, NET
Other income was $0.7 million in fiscal 2015 compared to $0.1 million in fiscal 2014. The increase in other income was primarily due to the reimbursement of overfunding of a foreign benefit plan, and higher interest income earned on higher cash and investment balances, partially offset by the negative impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 21.1% in fiscal 2015 compared to 26.0% in fiscal 2014. The decrease in the effective tax rate was primarily due to higher taxable income in foreign jurisdictions with lower income tax rates and the reinstatement of the U.S. research and experimentation tax credit, retroactive to January 1, 2014, partially offset by income taxes incurred related to the restructuring of our operations in Taiwan. We expect our effective tax rate for full fiscal 2016 to be in the range of 21.0% to 24.0%, including NexPlanar.
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NET INCOME
Net income was $56.1 million in fiscal 2015, which represented an increase of 10.6%, or $5.4 million, from fiscal 2014. The increase was primarily due to a special cash dividend.higher gross profit percentage, and a lower effective income tax rate, partially offset by lower revenue and higher operating expenses.
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 weaker 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 Technologies International, Inc. subsidiary, which is primarily capital-equipment oriented and, consequently, is volatile. We also recorded lower revenue from our data storage slurry products related to the contracting PC market. These increasesdecreases were partially offset by $1.8increased sales of our polishing pad products and increased sales of slurries for polishing tungsten and aluminum.
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 weaker 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.
GROSS PROFIT
Our gross profit as a percentage of revenue was 47.8% in fiscal 2014 as compared to 49.0% 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, 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.
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.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.
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.
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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.
INTEREST EXPENSE
Interest expense was $2.3$3.4 million in fiscal 2012,2014, which represented an increasea decrease of $2.2$0.3 million from fiscal 2011. The increase was due to interest expense recorded on the Term Loan, as discussed in the Overview section of this MD&A and in Note 9 of the Notes to the Consolidated Financial Statements, which was used to partially fund the special cash dividend we paid in fiscal 2012.2013.
OTHER INCOME, (EXPENSE), NET
Other expenseincome was $1.3$0.1 million in both fiscal 2012 and 2011. Other expense includes $0.32014 compared to $1.4 million in amortizationfiscal 2013. The decrease in other income was due to the impact of prepaid debt costs as well as gainsforeign currency fluctuations on monetary assets and losses on transactionsliabilities denominated in foreign currencies primarily related to changes inother than the exchange rate of the Japanese yen and the New Taiwan dollar to the U.S. dollar,functional currency, net of the gains and losses incurred on forward foreign exchange contracts discussed in Note 10 of the Notes to the Consolidated Financial Statements.Statements of this Form 10-K.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 35.1%26.0% in fiscal 20122014 compared to 34.5%29.2% in fiscal 2011.2013. The increasedecrease in the effective tax rate was primarily due the expiration of the U.S. research and experimentationto lower income tax credit effective December 31, 2011, decreased incomeexpense on foreign earnings in certain foreign subsidiaries where we have electedconjunction with our election to permanently reinvest the earnings which are taxed at lower rates thanof our foreign subsidiaries. In addition, the Company was awarded a tax holiday in the U.S.,South Korea in conjunction with our investment in research, development and certain adjustments made to prior yearmanufacturing facilities there. This tax estimates. These increases were partially offset by decreased tax effects on share-based compensation and the decreased taxable executive compensation in excess of limits defined in section 162(m) of the Internal Revenue Code. As discussed above at the beginning of the “Results of Operations” section of this MD&A,holiday reduced our income tax provision by approximately $3.8 million in fiscal 2012 included various non-material adjustments2014 compared to correct prior period amounts, which resulted in additional income tax expense of $1.0 million. As discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, our income tax provisiononly $0.5 million in fiscal 2011 included adjustments to correct prior period amounts, including $0.7 million in tax expense related to executive compensation in fiscal 2008 through 2010 for which a previous tax benefit should not have been recorded, and the reversal of a $0.5 million deferred tax asset related to certain share-based compensation expense.2013.
NET INCOME
Net income was $40.8$50.8 million in fiscal 2012,2014, which represented a decrease of 21.0%3.5%, or $10.8$1.8 million, from fiscal 2011.2013. The decrease was primarily due to decreased sales volume coupled with a lower gross profit percentage, increased bad debt expense related to a customer bankruptcy filing,including the expenses associated with our leveraged recapitalization with a special cash dividend, increased interest expense and a higher effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $66.4$98.7 million in fiscal 2012, $93.62015, $67.5 million in fiscal 20112014 and $88.4$85.5 million in fiscal 2010.2013. Our cash provided by operating activities in fiscal 2012 originated from $40.82015 represented $93.5 million in net income and $38.1 million inplus non-cash items partially offset byand a $12.5$5.2 million decreaseincrease in cash flow due to a net increasedecrease in working capital. The decreaseincrease in cash flow from operations in fiscal 20122015 from fiscal 20112014 was primarily due to decreasedhigher net income, and increasesa decrease in working capital amounts associated with higher inventories and gross accounts receivable. The increase in inventories was primarilyreceivable due to raw material purchases madelower revenue in the fourth quarter of fiscal 2012 for business continuity purposes as we negotiate2015 compared to the termssame quarter of a new supply agreement with an existing supplier to replace the current agreement, which will expire at the end of December 2012. These negative cash flow effects were partially offset by the increase in bad debt expense, which is a non-cash expense,fiscal 2014, and changes in the timing and magnitudeamount of payments for accrued expenses, including payments related to our AIP, partially offset by a larger increase in inventories, primarily due to higher raw material costs. 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.
In fiscal 2012,2015, cash flows used in financing activities were $171.7$9.0 million. We used $347.1 million to fund the special cash dividend paid in the quarter ended March 31, 2012, $33.0$40.0 million to repurchase common stock under our share repurchase program, $2.2 million to repay long-term debt and $1.5$2.2 million to repurchase common stock pursuant to the terms of our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (EIP) and our 2012 Omnibus Incentive Plan (OIP) for shares withheld from award recipients to cover payroll taxes on the vesting of restricted stock granted under these plans. We also used $8.8 million to repay long-term debt. We received $35.8 million from the issuance of common stock related to the exercise of stock options granted under our EIP and our OIP and for the sale of shares to employees under our 2007 Employee Stock Purchase Plan, as amended and restated September 23, 2013 (ESPP), and we received $6.2 million in tax benefits related to exercises of stock options and vesting of restricted stock granted under these plans. 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 EIP, our OIP and from the sale of shares to employees under our 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 received $175.0used $53.0 million fromto repurchase common stock under our share repurchase program and $2.1 million to repurchase common stock pursuant to the drawdownterms of our Term Loan, $36.5EIP 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 2007 Employee Stock Purchase Plan, as amended and restated January 1, 2010 (ESPP),ESPP, and we received $0.6$1.1 million in tax benefits related to exercises of stock options and vesting of restricted stock granted under our EIP. The issuance of stock in fiscal 2012 included 1.0 million shares in exercises of stock options, of which approximately half would have expired within one year, which increased our weighted average shares outstanding. In fiscal 2011, cash flows used in financing activities were $17.9 million. We used $54.1 million to repurchase common stock under our share repurchase program, $1.4 million to repurchase common stock pursuant to the terms of our EIP for shares withheld from award recipients to cover payroll taxes on the vesting of restricted stock granted under the EIP and we made $1.3 million in principal payments under capital lease obligations. These cash outflows were partially offset by $38.1 million received from the issuance of common stock related to the exercise of stock options granted under our EIP and the sale of shares to employees under our ESPP. In addition, we received $0.8 million in tax benefits related to stock options exercised and vesting of restricted stock awarded under our EIP. In fiscal 2010, cash flows used in financing activities were $23.5 million. We used $25.0 million to repurchase common stock under our share repurchase plan, $0.8 million to repurchase common stock pursuant to the terms of our EIP for shares withheld from award recipients by the Company to cover payroll taxes on the vesting of restricted stock granted under the EIP, and we made $1.2 million in principal payments under capital lease obligations. These cash outflows were partially offset by $3.4 million received from the issuance of common stock related to the exercise of stock options granted under our EIP and the sale of shares to employees under our ESPP.OIP.
In November 2010, our Board of Directors authorized a share repurchase program for up to $125.0 million of our outstanding common stock, which became effective on the authorization date. We repurchased 671,100 shares for $29.1 million under this program in fiscal 2011 and we repurchased 929,407 shares for $33.0 million during fiscal 2012 under this program. As of December 13, 2011, we had $82.9 million remaining under this share repurchase program. In conjunction with our new capital management initiative, on December 13, 2011,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. WithUnder this increased authorization, asprogram, we repurchased 851,245 shares for $40.0 million in fiscal 2015, 1,229,494 shares for $53.0 million in fiscal 2014, and 1,144,836 shares for $40.0 million in fiscal 2013. As of September 30, 2012, $130.02015, $85.0 million remains outstandingavailable under our share repurchase program. Share repurchases are made from time to time, depending on market conditions, in open market transactions,conditions. The timing, manner, price and amounts of repurchases are determined at management’s discretion. We repurchased 564,568 shares for $25.0 million during fiscal 2011 under a priorthe Company's discretion, and the share repurchase program which was completed duringmay be suspended, terminated or modified at any time for any reason. The repurchase program does not obligate the fiscal quarter ended March 31, 2011.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.
During fiscal 2015, the Company entered into "10b5-1" stock purchase plan agreements with independent brokers, which expired at various points during the fiscal year, 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. Subsequent to the end of fiscal 2015, we entered into a new 10b5-1 agreement. 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.
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”"Credit Facilities". TheIn June 2014, we entered into an amendment to the Credit Agreement provides us(the "Amendment"), which provided for an additional $17.5 million in Term Loan commitments to bring the total commitments to the same level as the original amount under the Credit Agreement at its inception in 2012, an extension of the maturity date of the Credit Facilities to June 27, 2019, and changes to certain pricing and other terms of the agreement, including a relaxed consolidated leverage ratio financial covenant. 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, in an amount notfrom $75.0 million to exceed $75.0$100.0 million. The Term Loan has periodic scheduled principal repayments; however, we may prepay the loan without penalty. The Credit Facilities are scheduled to expire on February 13, 2017. Theadditional Term Loan wascommitments were drawn on FebruaryJune 27, 20122014, and the Revolving Credit Facility remains undrawn. In connection with the Credit Agreement, we terminated our previously existing $50.0The Term Loan has $164.1 million unsecured revolving credit facility.outstanding as of September 30, 2015. 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:exceptions and according to certain terms: 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 a maximum consolidated leverage ratio of 3.00 to 1.00 through June 30, 2013December 31, 2015 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. 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, 2012,2015, our consolidated leverage ratio was 1.601.52 to 1.00 and our consolidated fixed charge coverage ratio was 10.935.54 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, 2012,2015, we had $178.5$354.2 million of cash and cash equivalents, $27.9$105.7 million of which was held atin foreign subsidiaries in the Japan, the Netherlands, Singapore, South Korea and Taiwan where we have made a current electionelected 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. As of October 30, subsequent to our acquisition of NexPlanar, we had approximately $225.0 million of cash and cash equivalents.
We believe that our current balance of cash and long-term investments, cash generated by our operations and available borrowing capacity under our newRevolving Credit Facility will be sufficient to fund our operations, expected capital expenditures, merger and acquisition activities and share repurchases for the foreseeable future. However, we planin order to further expand our business; therefore,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.
As discussed above in the "Overview" and below under the caption "Contractual Obligations", we completed our acquisition of NexPlanar Corporation on October 22, 2015. We paid an aggregate consideration of approximately $142.3 million in cash to acquire NexPlanar. At closing, NexPlanar had approximately $15.0 million of cash and no debt.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 20122015 and 2011,2014, 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.
37
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at September 30, 2012,2015, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
| CONTRACTUAL OBLIGATIONS | Less Than | 1-3 | 3-5 | After 5 | ||||||||||||||||
| (In millions) | Total | 1 Year | Years | Years | Years | |||||||||||||||
| Long-term debt | $ | 164.1 | $ | 8.8 | $ | 21.9 | $ | 133.4 | $ | - | ||||||||||
| Interest expense and fees on long-term debt | 12.4 | 3.8 | 6.4 | 2.2 | - | |||||||||||||||
| Acquisition of business | 142.3 | 142.3 | - | - | - | |||||||||||||||
| Purchase obligations | 46.1 | 41.8 | 4.3 | - | - | |||||||||||||||
| Operating leases | 8.5 | 1.7 | 2.2 | 1.4 | 3.2 | |||||||||||||||
| Severance agreements | 0.7 | 0.7 | - | - | - | |||||||||||||||
| Other long-term liabilities * | 15.1 | - | 3.9 | 1.5 | 9.7 | |||||||||||||||
| Total contractual obligations | $ | 389.2 | $ | 199.1 | $ | 38.7 | $ | 138.5 | $ | 12.9 | ||||||||||
| CONTRACTUAL OBLIGATIONS | Less Than | 1-3 | 3-5 | After 5 | ||||||||||||||||
| (In millions) | Total | 1 Year | Years | Years | Years | |||||||||||||||
| Long-term debt | $ | 172.8 | $ | 10.9 | $ | 26.3 | $ | 135.6 | $ | - | ||||||||||
| Interest expense and fees on long-term debt | 13.2 | 3.7 | 6.2 | 3.3 | - | |||||||||||||||
| Purchase obligations | 27.0 | 26.0 | 0.3 | 0.3 | 0.4 | |||||||||||||||
| Operating leases | 8.4 | 2.8 | 3.3 | 1.8 | 0.5 | |||||||||||||||
| Other long-term liabilities * | 7.1 | - | - | - | 7.1 | |||||||||||||||
| Total contractual obligations | $ | 228.5 | $ | 43.4 | $ | 36.1 | $ | 141.0 | $ | 8.0 | ||||||||||
* We have excluded $2.0$0.1 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. We have also excluded $0.5 million related to the fair value of the long-term portion of our interest rate swaps as the expected interest payments are included in the table above under the caption "Interest expense and fees on long-term debt".
INTEREST EXPENSE AND FEES ON LONG-TERM DEBT
Interest payments on long-term debt reflect LIBOR-based floatinginterest rates in effect at September 30, 2012.2015. The interest payments reflect LIBOR rates currently in effect on $82.0 million of our outstanding debt, and reflect fixed interest rates on $82.0 million of outstanding debt for which we have executed interest rate swaps. 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.
ACQUISITION OF BUSINESS
As discussed above in the "Overview", we completed the acquisition of NexPlanar Corporation on October 22, 2015. We paid an aggregate consideration of approximately $142.3 million from our available cash balances. A portion of the purchase price was deposited with an escrow agent to fund payment obligations with respect to post-closing purchase price adjustments and indemnification obligations.
PURCHASE OBLIGATIONS
We have entered intobeen operating under a multi-year supply agreementsagreement with Cabot Corporation, our former parent company which is not a related party, for the purchase of certain fumed metal oxides. We purchase fumed silica, primarily under a fumed silica supply agreement with Cabot Corporation thatwhich became effective in January 2004,1, 2013 and was amended in September 2006 and in April 2008, the latter of which extended thehad a termination date of theDecember 31, 2016. This agreement from December 2009required us to December 2012 and also changed the pricing and some other non-material termspurchase certain minimum quantities of fumed silica each year of the agreement, and to pay a shortfall if we purchased less than the benefitminimum. This agreement was amended effective June 1, 2015 to, among other things, extend the term of both parties. We are generally obligatedthe agreement through December 31, 2019, revise certain minimum purchase requirements through 2016, and provide us the option to purchase fumed silica for at least 90%the remaining term of our six-month volume forecastthe agreement beyond calendar year 2016, for certainwhich we will pay a fee of our slurry products, to$1.5 million in each of calendar years 2017, 2018 and 2019. The purchase certain minimum quantities every six months, and to pay forobligations in the shortfall if we purchase less than these amounts. We are currently working with Cabot Corporation to negotiate the terms of a new fumed silica supply agreementtable above reflect management's expectation that we anticipate would take effect followingwill meet the expiration of the current agreement; however, the terms of the new agreement may be different from thoseminimum purchase quantities in the current agreement. Since December 2001, we have purchased fumed alumina primarily under a fumed alumina supply agreement with Cabot Corporation that expired in December 2011. We are now operating under a renewed fumed alumina supply agreement with Cabot Corporation, which expires in April 2013, under which we are obligated to pay certain fixed, capitalcalendar 2015 and variable costs, and have certain take-or-pay obligations. We currently anticipate we will not have to pay any shortfall under these agreements. Under these agreements, Cabot Corporation continues to be our exclusive supplier of certain quantities and types of fumed silica and fumed alumina for certain products we produced as of the effective dates of these agreements. Subject to certain terms, Cabot Corporation is prohibited from selling certain types of fumed alumina to third parties for use in CMP applications, as well as engaging itself in CMP applications. If Cabot Corporation fails to supply us with our requirements for any reason, including if we require product specification changes that Cabot Corporation cannot meet, we have the right to purchase products meeting those specifications from other suppliers. We also may purchase fumed alumina and fumed silica from other suppliers for certain products, including those commercialized after certain dates related to these agreements and their amendments.2016. Purchase obligations include an aggregate amount of $9.0$23.2 million of contractual commitments related to our Cabot Corporation agreementssupply agreement for fumed silica and fumed alumina.silica. The long-term fee is included in other long-term liabilities in the table above.
38
OPERATING LEASES
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable operating leases, most of which expire within ten years of their respective commencement dates and may be renewed by us. Operating lease obligations also include certain costs associated
SEVERANCE AGREEMENTS
Liabilities for severance agreements at September 30, 2015 represent payments to be made to former executive officers in conjunction with our pad finishing operation located at Taiwan Semiconductor Manufacturing Company, which are accounted for as operating lease payments.executive officer transitions discussed above in the "Overview".
OTHER LONG-TERM LIABILITIES
Other long-term liabilities at September 30, 20122015 primarily consist of liabilities related to our foreign benefit plans in Japan retirement allowance,and Korea, which represents approximately $5.7$6.2 million, the $4.5 million contract fee noted above under "Purchase Obligations", our liability for future payments to be made under our Cabot Microelectronics Supplemental Employee Retirement Plan and our liability for uncertain tax positions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our foreign operations. Some of our foreign operations maintain their accounting records in their local currencies. Consequently, period to period comparability of results of operations is affected by fluctuations in exchange rates. The primary currencies to which we have exposure are the Japanese yen, and the New Taiwan dollar. As noted in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, the negative effects of foreign exchange rate changes, primarily related to the Japanese yen, accounted for a decrease in our full fiscal year 2011 gross profit percentage compared to full fiscal year 2010. From time to time we enter into forward contracts in an effort to manage foreign currency exchange exposure. However, we are unlikely to be able to hedge these exposures completely. During fiscal 2012, we recorded $6.9 million in currency translation gains, net of tax, that are included in other comprehensive income on our Consolidated Balance Sheet. These gains primarily relate to changes in the U.S. dollar value of assets and liabilities transacted in foreign currencies based on the general fluctuations of the U.S. dollar relative to the Japanese yen and the New Taiwan dollar.Korean won. Approximately 13%17% 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, sowhich mitigates the net exposure on the Consolidated Statement of Income is reduced.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 significant weakening of the Japanese yen against the U.S. dollar in fiscal years 2013, 2014 and 2015 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 115 basis point increase in our gross profit percentage for fiscal 2015 compared to fiscal 2014, and an approximate 90 basis point increase in our gross profit percentage for fiscal 2014 compared to fiscal 2013. To a lesser extent, we also have seen a favorable foreign exchange impact on our yen-denominated operating expenses. The weakening of the yen, the New Taiwan dollar and the Korean won also has had a significant adverse impact on other comprehensive income on our Consolidated Balance Sheet. During the fiscal years ended September 30, 2014 and 2015, we recorded $14.1 million and $8.1 million, respectively, in currency translation losses, net of tax, that are included in other comprehensive income. These losses primarily relate to changes in the U.S. dollar value of assets and liabilities denominated in local currencies when these asset and liability amounts are translated at month-end exchange rates.
MARKET RISK AND SENSITIVITY ANALYSIS RELATED TO FOREIGN EXCHANGE RATE RISK
39
INTEREST RATE RISK
At September 30, 2012,2015, we have $172.8had $164.1 million in long-term debt outstanding on our Term Loan. In the first quarter of fiscal 2015, we entered into interest rate swap agreements to hedge the variability in LIBOR-based interest rate payments on half of our outstanding debt. The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal payment to maintain a fixed rate of interest on half of our outstanding debt. As of September 30, 2015, the fair value of this cash flow hedge is a liability of $1.4 million. At September 30, 2015, we had $82.0 million of outstanding debt at a variable interest rates.rate of interest. Assuming a hypothetical 100 basis point increase in our current variable interest rate, our interest expense would increase by approximately $0.4$0.2 million per quarter.
MARKET RISK RELATED TO INVESTMENTS IN AUCTION RATE SECURITIES
At September 30, 2012,2015, we owned two auction rate securities (ARS) with a total estimated fair value of $8.0$5.2 million ($8.2and par value of $5.7 million par value) which were classified as other long-term assets on our Consolidated Balance Sheet. Beginning in 2008, general uncertainties in the global credit markets significantly reduced liquidity in the ARS market, and this illiquidity continues. For more information on our ARS, see “Risk Factors” set forth in Part I, Item 1A, “Critical"Critical Accounting Policies and Estimates”Estimates" in MD&A in Part II, Item 7, and Notes 3 and 7 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page | ||
| Consolidated Financial Statements: | ||
| 2013 | 43 | |
| Consolidated Statements of Comprehensive Income for the years ended September 30, 2015, 2014 and 2013 | 44 | |
| 2014 | 45 | |
| 2013 | 46 | |
| 2013 | 47 | |
| 48 | ||
| Financial Statement Schedule: | ||
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.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Cabot Microelectronics Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Cabot Microelectronics Corporation and its subsidiaries at September 30, 20122015 and 2011,2014, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 20122015 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, 2012,2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCompany'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’sManagement'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’sCompany'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’scompany'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’scompany'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’scompany'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 20, 2012
18, 2015
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
| Year Ended September 30, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Revenue | $ | 414,097 | $ | 424,666 | $ | 433,131 | ||||||
| Cost of goods sold | 201,866 | 221,573 | 221,015 | |||||||||
| Gross profit | 212,231 | 203,093 | 212,116 | |||||||||
| Operating expenses: | ||||||||||||
| Research, development and technical | 59,778 | 59,354 | 61,373 | |||||||||
| Selling and marketing | 24,983 | 26,513 | 27,985 | |||||||||
| General and administrative | 52,430 | 45,418 | 46,287 | |||||||||
| Total operating expenses | 137,191 | 131,285 | 135,645 | |||||||||
| Operating income | 75,040 | 71,808 | 76,471 | |||||||||
| Interest expense | 4,524 | 3,354 | 3,643 | |||||||||
| Other income, net | 681 | 140 | 1,392 | |||||||||
| Income before income taxes | 71,197 | 68,594 | 74,220 | |||||||||
| Provision for income taxes | 15,051 | 17,843 | 21,642 | |||||||||
| Net income | $ | 56,146 | $ | 50,751 | $ | 52,578 | ||||||
| Basic earnings per share | $ | 2.32 | $ | 2.12 | $ | 2.27 | ||||||
| Weighted-average basic shares outstanding | 24,040 | 23,704 | 22,924 | |||||||||
| Diluted earnings per share | $ | 2.26 | $ | 2.04 | $ | 2.19 | ||||||
| Weighted-average diluted shares outstanding | 24,632 | 24,611 | 23,760 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| Year Ended September 30, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Revenue | $ | 427,657 | $ | 445,442 | $ | 408,201 | ||||||
| Cost of goods sold | 223,630 | 231,336 | 204,704 | |||||||||
| Gross profit | 204,027 | 214,106 | 203,497 | |||||||||
| Operating expenses: | ||||||||||||
| Research, development and technical | 58,642 | 58,035 | 51,818 | |||||||||
| Selling and marketing | 29,516 | 29,758 | 26,885 | |||||||||
| General and administrative | 49,345 | 45,928 | 50,783 | |||||||||
| Total operating expenses | 137,503 | 133,721 | 129,486 | |||||||||
| Operating income | 66,524 | 80,385 | 74,011 | |||||||||
| Interest expense | 2,309 | 155 | 233 | |||||||||
| Other income (expense), net | (1,344 | ) | (1,318 | ) | (501 | ) | ||||||
| Income before income taxes | 62,871 | 78,912 | 73,277 | |||||||||
| Provision for income taxes | 22,045 | 27,250 | 23,819 | |||||||||
| Net income | $ | 40,826 | $ | 51,662 | $ | 49,458 | ||||||
| Basic earnings per share | $ | 1.81 | $ | 2.26 | $ | 2.14 | ||||||
| Weighted-average basic shares outstanding | 22,506 | 22,896 | 23,084 | |||||||||
| Diluted earnings per share | $ | 1.75 | $ | 2.20 | $ | 2.13 | ||||||
| Weighted-average diluted shares outstanding | 23,280 | 23,435 | 23,273 | |||||||||
| Dividends per share | $ | 15.00 | $ | - | $ | - | ||||||
43
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
| Year Ended September 30, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Net income | $ | 56,146 | $ | 50,751 | $ | 52,578 | ||||||
| Other comprehensive income (loss), net of tax | ||||||||||||
| Foreign currency translation adjustments | (14,126 | ) | (8,136 | ) | (13,037 | ) | ||||||
| Minimum pension liability adjustment | (318 | ) | (196 | ) | 7 | |||||||
| Net unrealized loss on cash flow hedges | (901 | ) | ||||||||||
| Unrealized gain on investments | - | 151 | - | |||||||||
| Other comprehensive loss, net of tax | (15,345 | ) | (8,181 | ) | (13,030 | ) | ||||||
| Comprehensive income | $ | 40,801 | $ | 42,570 | $ | 39,548 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
44
CABOT MICROELECTRONICS CORPORATION
(In thousands, except share and per share amounts)
| September 30, | September 30, | |||||||||||||||
| 2012 | 2011 | 2015 | 2014 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 178,459 | $ | 302,546 | $ | 354,190 | $ | 284,155 | ||||||||
| Accounts receivable, less allowance for doubtful accounts of $4,757 at September 30, 2012, and $1,090 at September 30, 2011 | 53,506 | 52,747 | ||||||||||||||
| Accounts receivable, less allowance for doubtful accounts of $1,224 at September 30, 2015, and $1,392 at September 30, 2014 | 49,405 | 60,693 | ||||||||||||||
| Inventories | 66,472 | 56,128 | 70,678 | 64,979 | ||||||||||||
| Prepaid expenses and other current assets | 12,608 | 14,735 | 12,840 | 10,645 | ||||||||||||
| Deferred income taxes | 6,843 | 4,249 | 7,395 | 7,521 | ||||||||||||
| Total current assets | 317,888 | 430,405 | 494,508 | 427,993 | ||||||||||||
| Property, plant and equipment, net | 125,020 | 130,791 | 93,743 | 100,821 | ||||||||||||
| Goodwill | 44,620 | 41,148 | 40,442 | 43,245 | ||||||||||||
| Other intangible assets, net | 12,473 | 14,651 | 4,565 | 7,163 | ||||||||||||
| Deferred income taxes | 5,879 | 862 | 12,212 | 11,353 | ||||||||||||
| Other long-term assets | 11,945 | 10,372 | 15,004 | 10,592 | ||||||||||||
| Total assets | $ | 517,825 | $ | 628,229 | $ | 660,474 | $ | 601,167 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 19,542 | $ | 22,436 | $ | 15,448 | $ | 15,304 | ||||||||
| Current portion of long-term debt | 10,937 | - | 8,750 | 8,750 | ||||||||||||
| Capital lease obligations | 2 | 10 | ||||||||||||||
| Accrued expenses, income taxes payable and other current liabilities | 32,738 | 33,104 | 36,446 | 31,394 | ||||||||||||
| Total current liabilities | 63,219 | 55,550 | 60,644 | 55,448 | ||||||||||||
| Long-term debt, net of current portion | 161,875 | - | 155,313 | 164,063 | ||||||||||||
| Deferred income taxes | 2,017 | - | 76 | 510 | ||||||||||||
| Capital lease obligations, net of current portion | 19 | 2 | ||||||||||||||
| Other long-term liabilities | 7,104 | 6,323 | 15,477 | 9,144 | ||||||||||||
| Total liabilities | 234,234 | 61,875 | 231,510 | 229,165 | ||||||||||||
| Commitments and contingencies (Note 16) | ||||||||||||||||
| Commitments and contingencies (Note 17) | ||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 28,864,527 shares at September 30, 2012, and 27,652,336 shares at September 30, 2011 | 29 | 28 | ||||||||||||||
| Stockholders' equity: | ||||||||||||||||
| Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 33,489,181 shares at September 30, 2015, and 31,927,601 shares at September 30, 2014 | 33 | 32 | ||||||||||||||
| Capital in excess of par value of common stock | 329,782 | 278,360 | 495,673 | 437,266 | ||||||||||||
| Retained earnings | 129,441 | 435,429 | 284,088 | 227,942 | ||||||||||||
| Accumulated other comprehensive income | 30,466 | 24,127 | ||||||||||||||
| Treasury stock at cost, 5,682,288 shares at September 30, 2012, and 4,715,577 shares at September 30, 2011 | (206,127 | ) | (171,590 | ) | ||||||||||||
| Total stockholders’ equity | 283,591 | 566,354 | ||||||||||||||
| Accumulated other comprehensive income (loss) | (6,090 | ) | 9,255 | |||||||||||||
| Treasury stock at cost, 9,041,678 shares at September 30, 2015, and 8,142,687 shares at September 30, 2014 | (344,740 | ) | (302,493 | ) | ||||||||||||
| Total stockholders' equity | 428,964 | 372,002 | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | 517,825 | $ | 628,229 | ||||||||||||
| Total liabilities and stockholders' equity | $ | 660,474 | $ | 601,167 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
45
CABOT MICROELECTRONICS CORPORATION
(In thousands)
Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||
| Net income | $ | 40,826 | $ | 51,662 | $ | 49,458 | $ | 56,146 | $ | 50,751 | $ | 52,578 | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Depreciation and amortization | 23,545 | 23,992 | 24,994 | 18,719 | 19,941 | 20,457 | ||||||||||||||||||
| Provision for doubtful accounts | 3,771 | (18 | ) | (113 | ) | (84 | ) | (170 | ) | 173 | ||||||||||||||
| Share-based compensation expense | 13,306 | 12,646 | 11,643 | 16,445 | 14,042 | 13,350 | ||||||||||||||||||
| Deferred income tax expense (benefit) | (3,523 | ) | 4,934 | (2,150 | ) | 869 | (700 | ) | (4,722 | ) | ||||||||||||||
| Non-cash foreign exchange (gain)/loss | 748 | (212 | ) | (498 | ) | |||||||||||||||||||
| Loss on disposal of property, plant and equipment | 247 | 140 | 107 | |||||||||||||||||||||
| Impairment of property, plant and equipment | 968 | 198 | 158 | |||||||||||||||||||||
| Non-cash foreign exchange loss | 1,391 | 943 | 3,832 | |||||||||||||||||||||
| (Gain)/loss on disposal of property, plant and equipment | (28 | ) | (51 | ) | 551 | |||||||||||||||||||
| Impairment of long-lived assets | - | 2,320 | 160 | |||||||||||||||||||||
| Other | (925 | ) | (723 | ) | 92 | (524 | ) | (724 | ) | (1,400 | ) | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||||||
| Accounts receivable | (4,622 | ) | 6,623 | (1,985 | ) | 9,013 | (8,181 | ) | (5,936 | ) | ||||||||||||||
| Inventories | (10,228 | ) | (2,816 | ) | (5,715 | ) | (8,290 | ) | (3,794 | ) | (1,683 | ) | ||||||||||||
| Prepaid expenses and other assets | 432 | (658 | ) | (6,021 | ) | (3,662 | ) | 576 | (3,471 | ) | ||||||||||||||
| Accounts payable | 2,026 | (1,021 | ) | 1,555 | 801 | (850 | ) | (1,359 | ) | |||||||||||||||
| Accrued expenses, income taxes payable and other liabilities | (164 | ) | (1,181 | ) | 16,860 | 7,390 | (6,625 | ) | 12,953 | |||||||||||||||
| Net cash provided by operating activities | 66,407 | 93,566 | 88,385 | 98,186 | 67,478 | 85,483 | ||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||
| Additions to property, plant and equipment | (19,586 | ) | (28,052 | ) | (11,657 | ) | (13,812 | ) | (12,551 | ) | (14,633 | ) | ||||||||||||
| Proceeds from the sale of property, plant and equipment | 8 | 41 | 2 | 201 | 202 | 20 | ||||||||||||||||||
| Purchase of intangible assets | (155 | ) | (200 | ) | (315 | ) | ||||||||||||||||||
| Proceeds from the sale of investments | 50 | 25 | 50 | 202 | 2,305 | 25 | ||||||||||||||||||
| Other investing activities | - | 1,062 | - | |||||||||||||||||||||
| Net cash used in investing activities | (19,683 | ) | (28,186 | ) | (11,920 | ) | (13,409 | ) | (8,982 | ) | (14,588 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||
| Dividends paid | (347,140 | ) | - | - | ||||||||||||||||||||
| Issuance of long-term debt | 175,000 | - | - | - | 17,500 | - | ||||||||||||||||||
| Repayment of long-term debt | (2,188 | ) | - | - | (8,750 | ) | (6,562 | ) | (10,937 | ) | ||||||||||||||
| Repurchases of common stock | (34,537 | ) | (55,499 | ) | (25,764 | ) | (42,247 | ) | (55,072 | ) | (41,294 | ) | ||||||||||||
| Net proceeds from issuance of stock | 36,497 | 38,051 | 3,429 | 35,782 | 43,070 | 30,905 | ||||||||||||||||||
| Debt issuance costs | - | (550 | ) | - | ||||||||||||||||||||
| Tax benefits associated with share-based compensation expense | 636 | 830 | - | 6,207 | 2,806 | 1,148 | ||||||||||||||||||
| Principal payments under capital lease obligations | (11 | ) | (1,296 | ) | (1,210 | ) | - | - | (21 | ) | ||||||||||||||
| Net cash used in financing activities | (171,743 | ) | (17,914 | ) | (23,545 | ) | ||||||||||||||||||
| Net cash provided by (used in) financing activities | (9,008 | ) | 1,192 | (20,199 | ) | |||||||||||||||||||
| Effect of exchange rate changes on cash | 932 | 916 | 1,292 | (5,734 | ) | (1,562 | ) | (3,126 | ) | |||||||||||||||
| Increase (decrease) in cash | (124,087 | ) | 48,382 | 54,212 | ||||||||||||||||||||
| Increase in cash | 70,035 | 58,126 | 47,570 | |||||||||||||||||||||
| Cash and cash equivalents at beginning of year | 302,546 | 254,164 | 199,952 | 284,155 | 226,029 | 178,459 | ||||||||||||||||||
| Cash and cash equivalents at end of year | $ | 178,459 | $ | 302,546 | $ | 254,164 | $ | 354,190 | $ | 284,155 | $ | 226,029 | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||||||||||
| Cash paid for income taxes | $ | 8,543 | $ | 18,041 | $ | 17,661 | ||||||||||||||||||
| Cash paid for interest | $ | 4,107 | $ | 3,355 | $ | 3,643 | ||||||||||||||||||
| 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 | $ | 1,503 | $ | 1,267 | $ | 1,232 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
46
| Supplemental disclosure of cash flow information: | |||||||||||||
| Cash paid for income taxes | $ | 22,701 | $ | 19,788 | $ | 29,174 | |||||||
| Cash paid for interest | $ | 2,336 | $ | 158 | $ | 257 | |||||||
| 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 | $ | 1,894 | $ | 6,322 | $ | 974 | |||||||
| Issuance of restricted stock | $ | 6,374 | $ | 6,774 | $ | 4,985 | |||||||
| Assets acquired under capital lease | $ | 20 | $ | - | $ | - | |||||||
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, 2012 | $ | 29 | $ | 330,557 | $ | 124,613 | $ | 30,466 | $ | (206,127 | ) | $ | 279,538 | |||||||||||
| Share-based compensation expense | 13,350 | 13,350 | ||||||||||||||||||||||
| Repurchases of common stock under share repurchase plans, at cost | (40,000 | ) | (40,000 | ) | ||||||||||||||||||||
| Repurchases of common stock - other, at cost | (1,294 | ) | (1,294 | ) | ||||||||||||||||||||
| Exercise of stock options | 1 | 28,525 | 28,526 | |||||||||||||||||||||
| Issuance of Cabot Microelectronics restricted stock under Deposit Share Plan | 154 | 154 | ||||||||||||||||||||||
| Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | 2,226 | 2,226 | ||||||||||||||||||||||
| Tax benefits from share-based compensation plans | 1,394 | 1,394 | ||||||||||||||||||||||
| Net income | 52,578 | 52,578 | ||||||||||||||||||||||
| Foreign currency translation adjustment | (13,037 | ) | (13,037 | ) | ||||||||||||||||||||
| Minimum pension liability adjustment | 7 | 7 | ||||||||||||||||||||||
| Balance at September 30, 2013 | $ | 30 | $ | 376,206 | $ | 177,191 | $ | 17,436 | $ | (247,421 | ) | $ | 323,442 | |||||||||||
| Share-based compensation expense | 14,042 | 14,042 | ||||||||||||||||||||||
| Repurchases of common stock under share repurchase plans, at cost | (53,000 | ) | (53,000 | ) | ||||||||||||||||||||
| Repurchases of common stock - other, at cost | (2,072 | ) | (2,072 | ) | ||||||||||||||||||||
| Exercise of stock options | 2 | 40,246 | 40,248 | |||||||||||||||||||||
| Issuance of Cabot Microelectronics restricted stock under Deposit Share Plan | 210 | 210 | ||||||||||||||||||||||
| Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | 2,612 | 2,612 | ||||||||||||||||||||||
| Tax benefits from share-based compensation plans | 3,950 | 3,950 | ||||||||||||||||||||||
| Net income | 50,751 | 50,751 | ||||||||||||||||||||||
| Net unrealized gain on marketable securities | 151 | 151 | ||||||||||||||||||||||
| Foreign currency translation adjustment | (8,136 | ) | (8,136 | ) | ||||||||||||||||||||
| Minimum pension liability adjustment | (196 | ) | (196 | ) | ||||||||||||||||||||
| Balance at September 30, 2014 | $ | 32 | $ | 437,266 | $ | 227,942 | $ | 9,255 | $ | (302,493 | ) | $ | 372,002 | |||||||||||
| Share-based compensation expense | 16,445 | 16,445 | ||||||||||||||||||||||
| Repurchases of common stock under share repurchase plans, at cost | (40,026 | ) | (40,026 | ) | ||||||||||||||||||||
| Repurchases of common stock - other, at cost | (2,221 | ) | (2,221 | ) | ||||||||||||||||||||
| Exercise of stock options | 1 | 33,175 | 33,176 | |||||||||||||||||||||
| Issuance of Cabot Microelectronics restricted stock under Deposit Share Plan | 23 | 23 | ||||||||||||||||||||||
| Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | 2,583 | 2,583 | ||||||||||||||||||||||
| Tax benefits from share-based compensation plans | 6,181 | 6,181 | ||||||||||||||||||||||
| Net income | 56,146 | 56,146 | ||||||||||||||||||||||
| Foreign currency translation adjustment | (14,126 | ) | (14,126 | ) | ||||||||||||||||||||
| Interest rate swaps | (901 | ) | (901 | ) | ||||||||||||||||||||
| Minimum pension liability adjustment | (318 | ) | (318 | ) | ||||||||||||||||||||
| Balance at September 30, 2015 | $ | 33 | $ | 495,673 | $ | 284,088 | $ | (6,090 | ) | $ | (344,740 | ) | $ | 428,964 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| CABOT MICROELECTRONICS CORPORATION | ||||||||||||||||||||||||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Capital | Other | Comprehensive | ||||||||||||||||||||||||||
| Common | In Excess | Retained | Comprehensive | Income | Treasury | |||||||||||||||||||||||
| Stock | Of Par | Earnings | Income | (net of tax) | Stock | Total | ||||||||||||||||||||||
| Balance at September 30, 2009 | $ | 26 | $ | 213,031 | $ | 334,309 | $ | 13,690 | $ | (90,327 | ) | $ | 470,729 | |||||||||||||||
| Share-based compensation expense | 11,643 | 11,643 | ||||||||||||||||||||||||||
| Repurchases of common stock under share repurchase plans, at cost | (24,998 | ) | (24,998 | ) | ||||||||||||||||||||||||
| Repurchases of common stock - other, at cost | (766 | ) | (766 | ) | ||||||||||||||||||||||||
| Exercise of stock options | 2,283 | 2,283 | ||||||||||||||||||||||||||
| Issuance of Cabot Microelectronics restricted stock under deposit share plan | 45 | 45 | ||||||||||||||||||||||||||
| Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | 1,101 | 1,101 | ||||||||||||||||||||||||||
| Net income | 49,458 | $ | 49,458 | |||||||||||||||||||||||||
| Foreign currency translation adjustment | 4,580 | 4,580 | ||||||||||||||||||||||||||
| Minimum pension liability adjustment | 268 | 268 | ||||||||||||||||||||||||||
| Total comprehensive income | $ | 54,306 | 54,306 | |||||||||||||||||||||||||
| Balance at September 30, 2010 | $ | 26 | $ | 228,103 | $ | 383,767 | $ | 18,538 | $ | (116,091 | ) | $ | 514,343 | |||||||||||||||
| Share-based compensation expense | 12,646 | 12,646 | ||||||||||||||||||||||||||
| Repurchases of common stock under share repurchase plans, at cost | (54,106 | ) | (54,106 | ) | ||||||||||||||||||||||||
| Repurchases of common stock - other, at cost | (1,393 | ) | (1,393 | ) | ||||||||||||||||||||||||
| Exercise of stock options | 2 | 35,953 | 35,955 | |||||||||||||||||||||||||
| Issuance of Cabot Microelectronics restricted stock under deposit share plan | 145 | 145 | ||||||||||||||||||||||||||
| Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | 1,951 | 1,951 | ||||||||||||||||||||||||||
| Deferred tax effect of long-term incentives | (700 | ) | (700 | ) | ||||||||||||||||||||||||
| Tax deduction for the exercise of stock options granted prior to the adoption of ASC 718 | 262 | 262 | ||||||||||||||||||||||||||
| Net income | 51,662 | $ | 51,662 | |||||||||||||||||||||||||
| Foreign currency translation adjustment | 5,490 | 5,490 | ||||||||||||||||||||||||||
| Minimum pension liability adjustment | 99 | 99 | ||||||||||||||||||||||||||
| Total comprehensive income | $ | 57,251 | 57,251 | |||||||||||||||||||||||||
| Balance at September 30, 2011 | $ | 28 | $ | 278,360 | $ | 435,429 | $ | 24,127 | $ | (171,590 | ) | $ | 566,354 | |||||||||||||||
| Share-based compensation expense, net of compensation related to dividends on unvested restricted stock | 12,980 | 12,980 | ||||||||||||||||||||||||||
| Repurchases of common stock under share repurchase plans, at cost | (33,026 | ) | (33,026 | ) | ||||||||||||||||||||||||
| Repurchases of common stock - other, at cost | (1,511 | ) | (1,511 | ) | ||||||||||||||||||||||||
| Exercise of stock options | 1 | 34,106 | 34,107 | |||||||||||||||||||||||||
| Issuance of Cabot Microelectronics restricted stock under deposit share plan | 155 | 155 | ||||||||||||||||||||||||||
| Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | 2,228 | 2,228 | ||||||||||||||||||||||||||
| Dividends paid, net of expected forfeitures of unvested restricted stock | (346,814 | ) | (346,814 | ) | ||||||||||||||||||||||||
| Tax deduction for the exercise of stock options granted prior to the adoption of ASC 718 | 498 | 498 | ||||||||||||||||||||||||||
| Tax deduction for the dividend paid on unvested restricted stock, net of expected forfeitures | 1,455 | 1,455 | ||||||||||||||||||||||||||
| Net income | 40,826 | $ | 40,826 | |||||||||||||||||||||||||
| Foreign currency translation adjustment | 6,876 | 6,876 | ||||||||||||||||||||||||||
| Minimum pension liability adjustment | (537 | ) | (537 | ) | ||||||||||||||||||||||||
| Total comprehensive income | $ | 47,165 | 47,165 | |||||||||||||||||||||||||
| Balance at September 30, 2012 | $ | 29 | $ | 329,782 | $ | 129,441 | $ | 30,466 | $ | (206,127 | ) | $ | 283,591 | |||||||||||||||
| 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,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 IC device manufacturersour customers to produce smaller, faster and more complex IC devices with fewer defects. We develop, produce and sell CMP slurries for polishing many of the conducting and insulating materials used in IC devices, and also for polishing the disk substrates and magnetic heads used in hard disk drives. We also develop, manufacture and sell CMP polishing pads, which are used in conjunction with slurries in the CMP process. We alsoIn 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 industryreportable segment - the development, manufacture, and sale of CMP consumables. Reclassifications of prior period amounts have been made to separate interest expense from other income (expense) to conform to the current period presentation.
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, 2012.2015.
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’smanagement's most difficult and subjective judgments include, but are not limited to, those estimates related tobad 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, interest rate swaps, 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.
48
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, 20122015 or 2011.2014. 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, was $53,506were $49,405 as of September 30, 20122015 and $52,747$60,693 as of September 30, 2011.2014. The increasedecrease in accounts receivable was primarily due to the increase13.9% decrease in revenue recorded in the fourth quarter of fiscal 2012 as2015 compared to the fourth quarter ofsame period in fiscal 2011, partially offset by an increase in the allowance for doubtful accounts. The increase in the allowance for doubtful accounts was primarily related to $3,727 in bad debt expense recorded in the second quarter of fiscal 2012 for Elpida Memory, Inc. (Elpida), a significant customer in Japan that filed for bankruptcy protection in February 2012.2014. Amounts charged to bad debt expense are recorded in general and administrative expenses. Elpida owedA portion of our receivables and the Company $3,727 inrelated allowance for doubtful accounts receivable for shipments made prior to its bankruptcy filing. To our understanding, Elpida’s bankruptcy plan has not been formally approved, and collection of any or all of this balance remains uncertain. Consequently, we have maintained a reserve for the entire balance. Elpida has been paying the Company on a current basis for all shipments made subsequent to its bankruptcy filing. The Elpida receivable is denominated in Japanese yen,foreign currencies, so it isthey 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, 20122015 as follows:
| Balance as of September 30, 2011 | $ | 1,090 | ||||||
| Balance as of September 30, 2014 | $ | 1,392 | ||||||
| Amounts charged to expense | 3,771 | (84 | ) | |||||
| Deductions and adjustments | (104 | ) | (84 | ) | ||||
| Balance as of September 30, 2012 | $ | 4,757 | ||||||
| Balance as of September 30, 2015 | $ | 1,224 | ||||||
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 toWith the exception of one situationcustomer bankruptcy in fiscal 2012, we hadhave not experienced significant losses relating to accounts receivable from individual customers or groups of customers.
Customers who represented more than 10% of revenue are as follows:
| Year Ended September 30, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Taiwan Semiconductor Manufacturing Co. (TSMC) | 18 | % | 17 | % | 18 | % | ||||||
| Samsung | 13 | % | 10 | % | * | |||||||
| United Microelectronics Corporation (UMC) | * | * | 11 | % | ||||||||
| * denotes less than ten percent of total | ||||||||||||
| Year Ended September 30, | ||||||||
| 2015 | 2014 | 2013 | ||||||
| Taiwan Semiconductor Manufacturing Co. (TSMC) | 18% | 22% | 21% | |||||
| Samsung Group (Samsung) | 15% | 14% | 13% | |||||
TSMC accounted for 17.1%12.6% and 12.9%19.4% of net accounts receivable at September 30, 20122015 and 2011,2014, respectively. Samsung accounted for 12.1%9.7% and 11.4%10.2% of net accounts receivable at September 30, 20122015 and 2011,2014, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, and accounts payable approximate their fair values due to their short-term, highly liquid characteristics. The fair value of our long-term auction rate securities (ARS) is determined through discounted cash flow analyses. See Note 3 for a more detailed discussion of the fair value of financial instruments.
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INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) basis, or market. Finished goods and work in process inventories include material, labor and manufacturing overhead costs. We regularly review and write down the value of inventory as required for estimated obsolescence or unmarketability.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 | 15-25 years |
| Machinery and equipment | 3-10 years |
| Furniture and fixtures | 5-10 years |
| Information systems | 3-5 years |
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.purposes; however, these costs are not material.
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 2015, 2014 and 2013.
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 livedindefinite-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 had threehave four reporting units, tothree of which we allocatedhave goodwill and intangible assets as of September 30, 2012.2015. 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, goodwillthen the fair value of the assets and liabilities for the reporting unit is considered impaired.used to determine the "implied" fair value of goodwill. The amount of the impairment is the difference between the carrying value of goodwill and the “implied”implied fair value.value of goodwill. The fair value of the reporting unit may be determined using a discounted cash flow analysis of our projected future results. As discussed later in this Note 2 under the heading “Effects of Recent Accounting Pronouncements”, anAn entity now has the option to assess qualitative factors to determine if the two-step impairment test must be performed. We elected this optionto perform a discounted cash flow analysis in both fiscal 2012 and 20112015 when we performed our annual impairment review of goodwill. AsAn entity also discussed under “Effects of Recent Accounting Pronouncements”, an entity now has the option to assess qualitative factors in its impairment review of indefinite livedindefinite-lived intangible assets. WeHowever, we elected this optionto use the royalty savings method in fiscal 20122015 when we performed our impairment review of our indefinite-lived intangible assets. We determined that goodwill and other intangible assets were not impaired as of September 30, 2012.2015, as the fair value of our reporting units was substantially in excess of carrying value.
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WARRANTY RESERVE
We maintain a warranty reserve that reflects management’smanagement's best estimate of the cost to replace product that does not meet customers’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 weighted-averageaverage exchange rates for the year. The related translation adjustments are reported in comprehensive income in stockholders’stockholders' equity.
FOREIGN EXCHANGE MANAGEMENT
We transact business in various foreign currencies, primarily the Japanese yen, and New Taiwan dollar.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 significant weakening of the Japanese yen against the U.S. dollar against the Japanese yen during our fiscal years 20102013, 2014 and 2011,2015, which had some negativenet positive impact on our results of operations. As noted ingross margin percentage and our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, the negative effects of foreign exchange rate changes, primarily related to the Japanese yen, accounted for an approximate 1.5 percentage point decline in our gross profit margin in fiscal 2011 compared to fiscal 2010.net income. Periodically, we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. Our foreign exchange contracts do not qualify for hedge accounting under the accounting rules for derivative instruments. See Note 10 for a more detailed discussion of derivative financial instruments.
INTERCOMPANY LOAN ACCOUNTING
We maintain an intercompany loan agreementsagreement with our wholly-owned subsidiary, Nihon Cabot Microelectronics K.K. (“the K.K.”("Nihon"), under which we provided funds to the K.K.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 the K.K.,Nihon, as well as for general business purposes. Since settlement of the notesnote is expected in the foreseeable future, and our subsidiary has been consistently making timely payments on the loans,loan, the loans areloan is considered a foreign-currency transactions.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 agreements between sometwo of our wholly-owned foreign subsidiaries, includingfrom Cabot Microelectronics Singapore Pte. Ltd., Epoch Material Co., Ltd. in Taiwan and to Hanguk Cabot Microelectronics, LLC in South Korea. These loans haveThis loan provided funds for the construction and operation of our research, development and manufacturing facility in South Korea. These loans areThis loan is also considered a foreign currency transactionstransaction and areis accounted for in the same manner as our intercompany loansloan to the K.K.Nihon.
PURCHASE COMMITMENTS
We have entered into unconditional purchase obligations, which include noncancelable purchase commitments and take-or-pay arrangements with suppliers. WeOn an ongoing basis, we review our agreements and make an assessment ofassess 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.
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REVENUE RECOGNITION
Revenue from CMP consumableconsumables products is recognized when title is transferred to the customer, provided acceptance and collectabilityassuming all revenue recognition criteria are reasonably assured.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.
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.
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, 2011 and 2010, we elected to permanently reinvest the earnings of certain of our foreign subsidiaries outside the U.S. rather than repatriatingrepatriate the earnings to the U.S. In fiscal years 2013, 2014 and 2015, we elected to permanently reinvest the earnings of all of our foreign subsidiaries. See Note 1516 for additional information on income taxes.
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INTEREST RATE SWAPS
In the first quarter of fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. The fair value of our interest rate swaps is estimated using standard valuation models using market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value. We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income. Hedge effectiveness is tested quarterly to determine if hedge treatment is appropriate.
SHARE-BASED COMPENSATION
We 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 beand is revised in future periods iffrom time-to-time when 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’sstock's historical volatility and the implied volatilities from actively-traded options on our stock. Prior to fiscal 2012, we calculatedWe calculate the expected term of our stock options using the simplified method, due to our limited amount of historical stock option exercise data, and we addedadd a slight premium to this expected term for employees who meet the definition of retirement eligible pursuant to their grants during the contractual term of the grant. The simplified method uses an average of the vesting term and the contractual term of the option to calculate the expected term. We experienced a significant increase in the volume of stock option exercises in fiscal 2011. Consequently, we used this exercise data, as well as historical exercise data, to calculate the expected term of our stock options granted in fiscal 2012, rather than using the simplified method, and we continued to add a slight premium for employees who meet the definition of retirement eligible under their grant terms. The expected term we calculated using option exercise history was within 1% of the expected term calculated under the simplified method. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The fair value of our 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 11.12.
EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period.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 by usingin 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”"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.
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EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). The amendments in ASU 2011-04 change some of the wording used to describe certain U.S. GAAP requirements for measuring fair value and disclosing information about fair value measurements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the fair value measurements and their related disclosures in our financial statements.
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. In September 2011,August 2015, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other2015-14, "Deferral of Effective Date" (Topic 350) – Testing Goodwill for Impairment” (ASU 2011-08)606). The provisionsThis standard officially defers the effective date of ASU 2011-08 provide an entity with the option to assess qualitative factors to determine whether the existence of events2014-09 by one year. ASU 2014-09 will be effective for us beginning October 1, 2018, and may be applied on a full retrospective or circumstances leadsmodified retrospective approach. Adoption is not permitted prior to the determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. This qualitative assessment is referred to as a “step zero” approach. If, based on the revieworiginal effective date of the qualitative factors, an entity determines it is not more-likely-than-not thatASU, which for us was October 1, 2017. We are evaluating the fair valueimpact of a reporting unit is less than its carrying value, the entity may skip the two-step impairment test required by prior accounting guidance. If an entity determines otherwise, the first step (“step one”)implementation of the two-step impairment test is required. This new accounting guidance also gives the entity the option to bypass “step zero” and proceed directly to “step one”; an entity may resume performing “step zero” in any subsequent period. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, with early adoption permitted if thethis standard on our financial statements for the most recent annual or interim period have not yet been issued. We chose to early adopt these new accounting provisions effective with our goodwill impairment review during the fourth quarter of fiscal 2011. We determined, based upon our qualitative assessment, that “step one” was not required as there were no indications that the fair value of our reporting units was less than the carrying value. See Note 6 for a more detailed discussion of our goodwill and intangible assets.statements.
In December 2011,June 2014, the FASB issued ASU No. 2011-12, “Comprehensive Income2014-12, "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 220) – Deferral718). ASU 2014-12 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 Effective Date for Amendmentsperiod in which it becomes probable that the performance target will be achieved. The compensation cost should represent the amount attributable to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income inperiods for which the requisite service has been rendered. ASU 2011-05” (ASU 2011-12). The provisions of ASU 2011-12 supersede the requirement of ASU 2011-05 to present the effect of reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. ASU 2011-12 is2014-12 will be effective for fiscal years,us beginning October 1, 2016 and interim periods within those years, beginning after December 15, 2011.may be applied on a prospective or retrospective basis. We do not expect the adoptionimplementation of ASU 2011-12 willthis standard to have a material effect on our financial statements as we have not granted any awards with a performance condition.
In January 2015, the FASB issued ASU No. 2015-01, "Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items" (Subtopic 225-20). ASU 2015-01 eliminates the concept of extraordinary items from U.S. GAAP, so an entity no longer needs to consider whether an underlying event or transaction is extraordinary. ASU 2015-01 retains the prior presentation and disclosure guidance for items that are unusual in nature or occur infrequently and will expand the guidance to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 will be effective for us beginning October 1, 2016. We do not expect the implementation of this standard to have a material reclassification adjustments out of accumulated other comprehensive income.effect on our financial statements as we have not had any events or transactions that were considered to be extraordinary.
In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis" (Topic 810). ASU 2015-02 amends the criteria for determining which entities are considered variable interest entities (VIEs), amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. ASU 2015-02 will be effective for us beginning October 1, 2016. We do not expect the implementation of this standard to have a material effect on our financial statements as we have no interests in any entities which may be considered VIEs.
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In July 2012,April 2015, the FASB issued ASU No. 2012-02, “Intangibles-Goodwill and Other (Topic) 350) – Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02)2015-03, "Simplifying the Presentation of Debt Issuance Costs" (Subtopic 835-30). The provisions of ASU 2012-20 provide2015-03 require an entity to present the debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction to the carry amount of that debt liability. ASU 2015-03 will be effective for us beginning October 1, 2016, but early adoption is permitted. The implementation of this standard will require us to reclassify our debt issuance costs from their asset position on our balance sheet to a liability position as an offset to the carrying amount of our outstanding debt. We are considering early adoption of ASU 2015-03 in fiscal 2016; the implementation is not expected to have a material effect on our financial statements.
In April 2015, the FASB issued ASU No. 2015-05, "Customer Accounting for Fees Paid in a Cloud Computing Arrangement" (Subtopic 350-40). ASU 2015-05 provides guidance to entities on accounting for entering into a cloud computing arrangement with and without a software license. If an arrangement includes a software license, then the purchaser should account for the software license element of the arrangement consistent with the optiontreatment of other software licenses. If an arrangement does not include a software license, it should be treated as a service contract. ASU 2015-05 will be effect for us beginning October 1, 2016, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In July 2015, the FASB issued ASU No, 2015-11, "Simplifying the Measurement of Inventory" (Topic 330). The provisions of ASU 2015-11 require an entity to assess qualitative factorsmeasure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation. ASU 2015-11 will be effective for us beginning October 1, 2017 but early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our financial statements.
In August 2015, the FASB issued ASU No. 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" (Subtopic 835-30). ASU 2015-15 provides guidance on the treatment of debt issuance cost related to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If,line-of-credit arrangements based on comments provided by the reviewSEC staff. The SEC staff stated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance cost ratably over the term of the qualitative factors,line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 will be effective for us beginning October 1, 2016, but early adoption is permitted. We are currently evaluating the impact of implementation of this standard on our financial statements.
In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement Period Adjustments" (Topic 805). The provisions of ASU 2015-16 require an acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires an acquirer to record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the account had been completed at the acquisition date. ASU 2015-16 also requires an entity determines it is not more-likely-than-not thatto present separately on the fair value of an indefinite-lived intangible asset is less than its carrying value, no further action is required. If an entity determines otherwise, then it is required to determine the fair valueface of the indefinite-lived intangible asset and performincome statement or disclose in the quantitative impairment test requiredfootnotes the portion of the amount recorded in current-period earnings by prior accounting guidance. Similar to underline item that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition date. ASU 2011-08, the entity has the option to bypass the qualitative assessment and proceed directly to the fair value calculation and the entity may resume performing the qualitative analysis in any subsequent period. ASU 2012-02 is2015-16 will be effective for fiscal yearsus beginning after September 15, 2012, withOctober 1, 2017, but early adoption permitted ifis permitted. We are currently evaluating the impact of implementation of this standard on our financial statements for the most recent annual or interim period have not yet been issued. We chose to early adopt these new accounting provisions effective with our goodwill impairment review during the fourth quarter of fiscal 2012. We determined, based upon our qualitative assessment, that the fair value calculation was not required as there were no indications that the fair value of our indefinite-lived intangible assets was less than their carrying value. See Note 6 for a more detailed discussion of our goodwill and intangible assets.statements.
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.
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The following tables presenttable presents financial assetsinstruments, other than long-term debt, that we measured at fair value on a recurring basis at September 30, 20122015 and 2011. As permitted under the relevant standards, we have chosen to not measure any2014. See Note 9 for a detailed discussion of our liabilities at fair value as we believe our liabilities approximate their fair value due to their short-term, highly liquid characteristics.long-term debt. We have classified the following assets in accordance with the fair value hierarchy set forth in the applicable standards. In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest level input that is significant to the determination of the fair value.
September 30, 2012 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
| Cash and cash equivalents | $ | 178,459 | $ | - | $ | - | $ | 178,459 | ||||||||
| Auction rate securities (ARS) | - | - | 7,991 | 7,991 | ||||||||||||
| Other long-term investments | 1,082 | - | - | 1,082 | ||||||||||||
| Total | $ | 179,541 | $ | - | $ | 7,991 | $ | 187,532 | ||||||||
September 30, 2011 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
| Cash and cash equivalents | $ | 302,546 | $ | - | $ | - | $ | 302,546 | ||||||||
| Auction rate securities (ARS) | - | - | 8,041 | 8,041 | ||||||||||||
| Other long-term investments | 827 | - | - | 827 | ||||||||||||
| Total | $ | 303,373 | $ | - | $ | 8,041 | $ | 311,414 | ||||||||
| September 30, 2015 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 354,190 | $ | - | $ | - | $ | 354,190 | ||||||||
| Other long-term investments | 1,720 | - | - | 1,720 | ||||||||||||
| Derivative financial instruments | - | 14 | - | 14 | ||||||||||||
| Total assets | $ | 355,910 | $ | 14 | $ | - | $ | 355,924 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivative financial instruments | - | 1,406 | - | 1,406 | ||||||||||||
| Total liabilities | $ | - | $ | 1,406 | $ | - | $ | 1,406 | ||||||||
| September 30, 2014 | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 284,155 | $ | - | $ | - | $ | 284,155 | ||||||||
| Other long-term investments | 1,654 | - | - | 1,654 | ||||||||||||
| Derivative financial instruments | - | 100 | - | 100 | ||||||||||||
| Total assets | $ | 285,809 | $ | 100 | $ | - | $ | 285,909 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivative financial instruments | - | 270 | - | 270 | ||||||||||||
| Total liabilities | $ | - | $ | 270 | $ | - | $ | 270 | ||||||||
Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds whichthat are traded in active markets. The ARS and other long-term investments are included in other long-term assets on our Consolidated Balance Sheet. The fair value of our long-term ARS is determined through two discounted cash flow analyses, one using a discount rate based on a market index comprised of tax exempt variable rate demand obligations and one using a discount rate based on the LIBOR swap curve, adding a risk factor to reflect current liquidity issues in the ARS market. Our other long-term investments represent the fair value of investments under the Cabot 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 has been deemedis 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 and long-term liability werewas adjusted to $1,082$1,720 in the fourth quarter of fiscal 20122015 to reflect theirits fair value as of September 30, 2012.2015.
| Balance as of September 30, 2011 | $ | 8,041 | ||
| Net sales of ARS | (50 | ) | ||
| Balance as of September 30, 2012 | $ | 7,991 |
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4. INVENTORIES
Inventories consisted of the following:
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| Raw materials | $ | 42,603 | $ | 37,009 | ||||
| Work in process | 5,487 | 4,505 | ||||||
| Finished goods | 22,588 | 23,465 | ||||||
| Total | $ | 70,678 | $ | 64,979 | ||||
| September 30, | ||||||||
| 2012 | 2011 | |||||||
| Raw materials | $ | 34,591 | $ | 26,217 | ||||
| Work in process | 6,333 | 4,964 | ||||||
| Finished goods | 25,548 | 24,947 | ||||||
| Total | $ | 66,472 | $ | 56,128 | ||||
The increase in our inventory balance at September 30, 2012 wasis primarily due to higher raw material purchases made for business continuity purposes as we negotiatecosts and the termsamount of a new supply agreement with an existing suppliercertain manufacturing variances, which are included in cost of goods sold in the period when the inventory is sold to replace the current agreement, which will expire at the end of December 2012.customers.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| September 30, | September 30, | |||||||||||||||
| 2012 | 2011 | 2015 | 2014 | |||||||||||||
| Land | $ | 21,566 | $ | 21,597 | $ | 17,076 | $ | 17,834 | ||||||||
| Buildings | 101,627 | 100,779 | 92,720 | 97,513 | ||||||||||||
| Machinery and equipment | 181,117 | 171,595 | 167,448 | 171,461 | ||||||||||||
| Furniture and fixtures | 6,417 | 6,247 | 6,172 | 6,224 | ||||||||||||
| Information systems | 25,346 | 23,318 | 28,528 | 27,673 | ||||||||||||
| Capital leases | 66 | 9,820 | ||||||||||||||
| Construction in progress | 4,890 | 5,166 | 7,553 | 3,166 | ||||||||||||
| Total property, plant and equipment | 341,029 | 338,522 | 319,497 | 323,871 | ||||||||||||
| Less: accumulated depreciation and amortization of assets under | ||||||||||||||||
| capital leases | (216,009 | ) | (207,731 | ) | ||||||||||||
| Less: accumulated depreciation | (225,754 | ) | (223,050 | ) | ||||||||||||
| Net property, plant and equipment | $ | 125,020 | $ | 130,791 | $ | 93,743 | $ | 100,821 | ||||||||
Depreciation expense including amortization of assets recorded under capital leases, was $20,863, $21,271$16,060, $17,467 and $22,568$17,835 for the years ended September 30, 2012, 20112015, 2014 and 2010,2013, respectively.
We did not record any impairment expense in fiscal 2015. In fiscal 2012,2014, we recorded $968$2,320 in impairment expense primarily related to the decision to write-off certain operationalmanufacturing assets at one of ourin foreign locations in accordance with the applicable accounting standards for the impairment and disposal of long-lived assets. Of this amount, $842$2,236 and $126$84 was included in cost of goods sold and selling and marketing expense, respectively. Impairment expense for fiscal 2011 and 20102013 was not material.insignificant.
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6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $44,620$40,442 and $41,148$43,245 as of September 30, 20122015 and 2011,2015, respectively. The increasedecrease in goodwill was due to a $1,712 correction discussed in Note 1, related to the calculation of foreign deferred tax liabilities associated with our fiscal 2009 acquisition of Epoch, and to $1,760 in foreign exchange fluctuations of the New Taiwan dollar.
The components of other intangible assets are as follows:
| September 30, 2012 | September 30, 2011 | |||||||||||||||||||||||||||||||
| Gross Carrying | Accumulated | Gross Carrying | Accumulated | September 30, 2015 | September 30, 2014 | |||||||||||||||||||||||||||
| Amount | Amortization | Amount | Amortization | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||||
| Other intangible assets subject to amortization: | ||||||||||||||||||||||||||||||||
| Product technology | $ | 8,387 | $ | 4,902 | $ | 8,266 | $ | 3,890 | $ | 8,053 | $ | 7,490 | $ | 8,278 | $ | 6,750 | ||||||||||||||||
| Acquired patents and licenses | 8,270 | 6,775 | 8,115 | 6,446 | 8,270 | 7,845 | 8,270 | 7,534 | ||||||||||||||||||||||||
| Trade secrets and know-how | 2,550 | 2,550 | 2,550 | 2,550 | 2,550 | 2,550 | 2,550 | 2,550 | ||||||||||||||||||||||||
| Customer relationships, distribution rights and other | 12,586 | 6,283 | 12,154 | 4,738 | 11,392 | 9,005 | 12,193 | 8,484 | ||||||||||||||||||||||||
| Total other intangible assets subject to amortization | 31,793 | 20,510 | 31,085 | 17,624 | 30,265 | 26,890 | 31,291 | 25,318 | ||||||||||||||||||||||||
| Total other intangible assets not subject to amortization* | 1,190 | 1,190 | 1,190 | 1,190 | ||||||||||||||||||||||||||||
| Total other intangible assets | $ | 32,983 | $ | 20,510 | $ | 32,275 | $ | 17,624 | $ | 31,455 | $ | 26,890 | $ | 32,481 | $ | 25,318 | ||||||||||||||||
* Total other intangible assets not subject to amortization primarily consist of trade names.
| Fiscal Year | Estimated Amortization Expense | ||||
| 2016 | $ | 1,875 | |||
| 2017 | 1,064 | ||||
| 2018 | 419 | ||||
| 2019 | 11 | ||||
| 2020 | 6 | ||||
Goodwill and indefinite livedindefinite-lived intangible assets are tested for impairment annually in the fourth quarter of our fiscal quarteryear 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. We have consistently determinedAn entity has the option to assess the fair value of oura reporting unitsunit either using a qualitative analysis ("step zero") or a discounted cash flow analysis (“("step one”one"). Similarly, an entity has the option to use a step zero or a step one approach to determine the recoverability of our projected future results. As discussed in Note 2 under the heading “Effects of Recent Accounting Pronouncements”, effective September 30, 2011,indefinite-lived intangible assets. In fiscal 2014 and 2015, we adopted new accounting pronouncements relatedchose to ouruse a step one analysis for both goodwill impairment analysis, which allows an entity to perform a “step zero” assessment of the fair value of their reporting units. and for indefinite-lived intangible asset impairment.
We used this new guidance incompleted our annual impairment analysis for goodwill in both fiscal 2012 and 2011. As also discussed in Note 2, in fiscal 2012, we adopted new accounting pronouncements related totest during our impairment review of indefinite-lived intangible assets, which allows a qualitative assessment of factors used in the impairment review. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact our assumptions may result in future impairment charges. As a result of the review performed in the fourth quarter of fiscal 2012, we determined2015 and concluded that there was no impairment existed. There have been no cumulative impairment charges recorded on the goodwill for any of our goodwill and intangible assets as of September 30, 2012.reporting units.
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Fiscal Year | Estimated Amortization Expense | |
| 2013 | $2,637 | |
| 2014 | 2,510 | |
| 2015 | 2,442 | |
| 2016 | 2,020 | |
| 2017 | 1,187 |
7. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
| September 30, | September 30, | |||||||||||||||
| 2012 | 2011 | 2015 | 2014 | |||||||||||||
| Auction rate securities | $ | 7,991 | $ | 8,041 | ||||||||||||
| Auction rate securities (ARS) | $ | 5,694 | $ | 5,895 | ||||||||||||
| Other long-term assets | 2,872 | 1,504 | 3,595 | 3,043 | ||||||||||||
| Long-term contract asset | 3,995 | - | ||||||||||||||
| Other long-term investments | 1,082 | 827 | 1,720 | 1,654 | ||||||||||||
| Total | $ | 11,945 | $ | 10,372 | $ | 15,004 | $ | 10,592 | ||||||||
The fair value of our ARS, determined using level 2 fair value inputs, was $5,182 as of September 30, 2015. WWe have classified our ARS as held-to-maturity based on our intention and all interest paymentsability to hold the securities until maturity. We believe the gross unrecognized loss of $512 is due to the illiquidity in the ARS market, rather than to credit loss. We will continue to be received on a timely basis. Although we believe these securities will ultimately be collected in full, we believemonitor our ARS for impairment indicators, which may require us to record an impairment charge that it is not likelydeemed other-than-temporary. In November 2011, the municipality that we will be able to monetize the securities in our next business cycle (which for us is generally one year). We maintain a $234 pretax reduction ($151 net of tax) in fair value onissued one of theour ARS that we first recognized in fiscal 2008. We continue to believe this decline in fair value is temporary based on: (1) the naturefiled for bankruptcy protection. As a result of the underlying debt; (2)approval of the presencemunicipality's reorganization plan, and our voting elections, we received 65% of bond insurance; (3) the fact that all interest payments have been received; (4) our successful monetization of $50 of this ARSpar value outstanding, or $2,113, during the quarter ended MarchDecember 31, 2012;2013, and (5) our intention not to sellwe reversed the security nor be required to sell the security until the value recovers, which may be at maturity, given our current cash position, our expected future cash flow, and our unused debt capacity.$234 temporary impairment that we previously recorded.
In the third quarter of fiscal 2015, we amended a supply contract with an existing supplier. The amended agreement includes a fee of $4,500, which provides us the option to purchase certain raw materials beyond calendar 2016. This fee was recorded as a long-term asset at its present value and is being amortized into cost of goods sold on a straight-line basis through December 31, 2019, the expiration date of the agreement. See Note 17 for more information regarding this contract.
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, of this Form 10-K, we recorded a long-term asset and a corresponding long-term liability of $1,082$1,720 representing the fair value of our SERP investments as of September 30, 2012.2015.
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8. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
| September 30, | ||||||||
| 2012 | 2011 | |||||||
| Accrued compensation | $ | 18,532 | $ | 23,922 | ||||
| Goods and services received, not yet invoiced | 3,478 | 3,457 | ||||||
| Deferred revenue and customer advances | 3,341 | 2,420 | ||||||
| Warranty accrual | 359 | 384 | ||||||
| Income taxes payable | 2,843 | - | ||||||
| Taxes, other than income taxes | 1,041 | 808 | ||||||
| Other | 3,144 | 2,113 | ||||||
| Total | $ | 32,738 | $ | 33,104 | ||||
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| Accrued compensation | $ | 23,793 | $ | 16,980 | ||||
| Goods and services received, not yet invoiced | 1,830 | 3,167 | ||||||
| Deferred revenue and customer advances | 538 | 1,223 | ||||||
| Warranty accrual | 209 | 246 | ||||||
| Income taxes payable | 4,276 | �� | 5,448 | |||||
| Taxes, other than income taxes | 975 | 1,182 | ||||||
| Other | 4,825 | 3,148 | ||||||
| Total | $ | 36,446 | $ | 31,394 | ||||
9. DEBT
On February 13, 2012, we entered into a credit agreement (the “Credit Agreement”"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”"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"Revolving Credit Facility”Facility"), which remains undrawn,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"Credit Facilities.” The" On June 27, 2014, we entered into an amendment (the "Amendment") to the Credit Agreement, provides for anwhich (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 that allows us to request the existing lenders or, if necessary, third-party financial institutions to provide additional capacity inon the Revolving Credit Facility in an amount notfrom $75,000 to exceed $75,000. The$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 has periodic scheduled principal repayments; however, we may prepay the loan without penalty. The Credit Facilities are scheduled to expire on February 13, 2017. In connection with the Credit Agreement, the Company simultaneously terminated its previously existing $50,000 unsecured revolving credit facility, which had no outstanding balance at the time of termination.$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”"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”"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 initialcurrent Applicable Rate for borrowings under the Credit Facilities was 1.75%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 will bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the Revolving Credit Facility. In addition to paying interest on outstanding principal under the Credit Agreement, we will pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder at a rate rangingthereunder. As amended, the fee ranges from 0.25%0.20% to 0.35%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 customary arrangement fees, upfront fees and administration fees in February 2012 and we paid an additional $550 iin upfront fees and arrangement fees in June 2014, of which $537 and $1,800$410 remains in prepaid expenses and other current assets and $1,075 remains in other long-term assets respectively, on our Consolidated Balance Sheet as of September 30, 2012.2015. We must also pay letter of credit fees as necessary. WeThe Term Loan has periodic scheduled repayments; however, we may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary “breakage”"breakage" fees and reemployment costs in the case of LIBOR borrowings. All obligations under the Credit Agreement are guaranteed by eachcertain of our existing and future direct and indirect domestic subsidiaries (the “Guarantors”).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.
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In the first quarter of fiscal 2015, we entered into interest rate swap agreements that have the economic effect of converting the interest rate on 50% of our debt from variable into fixed at a weighted average fixed rate of 1.50% plus the Applicable Rate defined above. See Notes 3 and 10 for additional information on the interest rate swap agreements.
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, includingcovenants. These include a maximum consolidated leverage ratio of 3.00 to 1.00 through June 30, 2013December 31, 2015 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. 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, 2012,2015, our consolidated leverage ratio was 1.601.52 to 1.00 and our consolidated fixed charge coverage ratio was 10.935.54 to 1.00. The Credit Agreement also contains customary affirmative covenants and events of default. We believe we are in compliance with these covenants.
At September 30, 2012, we believe2015, the fair value of the Term Loan, using level 2 inputs, approximates its carrying value of $172,812$164,063 as the loan bears a floating market rate of interest. As of September 30, 2012, $10,9372015, $8,750 of the debt outstanding is classified as short-term.
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, 2012,2015, scheduled principal repayments of the Term Loan were as follows:
Fiscal Year | Principal Repayments | |
| 2013 | $10,937 | |
| 2014 | 10,938 | |
| 2015 | 15,312 | |
| 2016 | 21,875 | |
| 2017 | 113,750 | |
| Total | $172,812 |
Fiscal Year | Principal Repayments | ||||
| 2016 | $ | 8,750 | |||
| 2017 | 7,656 | ||||
| 2018 | 14,219 | ||||
| 2019 | 133,438 | ||||
| Total | $ | 164,063 | |||
10. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates. We enter into certain derivative transactions to mitigate the volatility associated with these exposures. We have policies in place that define acceptable instrument types we may enter into and we have established controls to limit our market risk exposure. We do not use derivative financial instruments for trading or speculative purposes. In addition, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value on a gross basis.
Cash Flow Hedges – Interest Rate Swap Agreements
In the first quarter of fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on $86,406 of our outstanding variable rate debt. The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal payment of debt. The notional value of the swaps was $82,031 as of September 30, 2015, and the swaps are scheduled to expire on June 27, 2019.
We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging". As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense. Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income. Hedge effectiveness is tested quarterly to determine if hedge treatment is appropriate.
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Foreign Currency Contracts Not Designated as Hedges
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. AtAs of September 30, 2012,2015 and September 30, 2014, respectively, the notional amounts of the forward contracts we had oneheld to purchase U.S. dollars in exchange for other international currencies were $1,034 and $4,695, respectively, and the notional amounts of forward foreigncontracts we held to sell U.S. dollars in exchange contract selling Japanese Yen related to intercompany notes with one of our subsidiaries in Japanfor other international currencies were $18,690 and for the purpose of hedging the risk associated with a net transactional exposure in Japanese Yen.$18,425, respectively.
The fair value of our derivative instrumentinstruments included in the Consolidated Balance Sheet, which was determined using Levellevel 2 inputs, was as follows:
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||||||
| Balance Sheet Location | Fair value at September 30, 2015 | Fair Value at September 30, 2014 | Fair Value at September 30, 2015 | Fair Value at September 30, 2014 | ||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||||||||||||||||
| Interest rate swap contracts | Other noncurrent assets | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||||||||||
Accrued expenses and other current liabilities | $ | - | $ | - | $ | 885 | $ | - | ||||||||||||||||||||||||||
| Other long-term liabilities | $ | - | $ | - | $ | 513 | $ | - | ||||||||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments | Balance Sheet Location | Fair Value at September 30, 2012 | Fair Value at September 30, 2011 | Fair Value at September 30, 2012 | Fair Value at September 30, 2011 | |||||||||||||||||||||||||||||
| Foreign exchange contracts | Prepaid expenses and other current assets | $ | 38 | $ | 48 | $ | - | $ | - | Prepaid expenses and other current assets | $ | 14 | $ | 100 | $ | - | $ | - | ||||||||||||||||
| Accrued expenses and other current liabilities | $ | - | $ | - | $ | - | $ | - | Accrued expenses and other current liabilities | $ | - | $ | - | $ | 8 | $ | 270 | |||||||||||||||||
The following table summarizes the effect of our derivative instrument on our Consolidated Statement of Income for the fiscal years ended September 30, 2012, 20112015, 2014 and 2010:2013:
| Gain (Loss) Recognized in Statement of Income | |||||||||||||||
| Fiscal Year Ended | |||||||||||||||
| Derivatives not designated as hedging instruments | Statement of Income Location | September 30, 2015 | September 30, 2014 | September 30, 2014 | |||||||||||
| Foreign exchange contracts | Other income (expense), net | $ | (1,674 | ) | $ | (1,289 | ) | $ | 252 | ||||||
The interest rate swap agreements have been deemed to be effective since inception, so there has been no impact on our Consolidated Statement of Income. We recorded a $901 unrealized loss, net of tax, in accumulated comprehensive income during the year ended September 30, 2015 for these interest rate swaps. During the next 12 months, we expect approximately $901 to be reclassified from accumulated other comprehensive income into interest expense related to our interest rate swaps as we expect the fixed interest rate on our interest rate swaps will be higher than the variable interest rate on our outstanding debt.
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| Gain (Loss) Recognized in Statement of Income | |||||||||||||
| Fiscal Year Ended | |||||||||||||
| Derivatives not designated as hedging instruments | Statement of Income Location | September 30, 2012 | September 30, 2011 | September 30, 2010 | |||||||||
| Foreign exchange contracts | Other income (expense), net | $ | 154 | $ | (806 | ) | $ | (555 | ) | ||||
| 11. | ACCUMULATED OTHER COMPREHENSIVE INCOME |
The table below summarizes the components of accummulated other comprehensive income (loss), net of tax for the years ended September 30, 2015, 2014, and 2013.
Foreign Currency Translation | Cash Flow Hedges | Other Postretirement Liabilities | Marketable Securities | Total | ||||||||||||||||
| Balance at September 30, 2012 | $ | 31,288 | $ | - | $ | (671 | ) | $ | (151 | ) | $ | 30,466 | ||||||||
| Foreign currency translation adjustment, net of tax of $(3,187) | (13,037 | ) | - | - | - | (13,037 | ) | |||||||||||||
| Change in pension and other postretirement, net of tax of $0 | - | - | 7 | - | 7 | |||||||||||||||
| Balance at September 30, 2013 | 18,251 | - | (664 | ) | (151 | ) | 17,436 | |||||||||||||
| Foreign currency translation adjustment, net of tax of $(1,597) | (8,136 | ) | - | - | (8,136 | ) | ||||||||||||||
| Unrealized gain (loss) on marketable securities | - | - | - | 151 | 151 | |||||||||||||||
| Change in pension and other postretirement, net of tax of $0 | - | - | (196 | ) | - | (196 | ) | |||||||||||||
| Balance at September 30, 2014 | 10,115 | - | (860 | ) | - | 9,255 | ||||||||||||||
| Foreign currency translation adjustment, net of tax of $(1,731) | (14,126 | ) | - | - | - | (14,126 | ) | |||||||||||||
| Unrealized gain (loss) on cash flow hedges | ||||||||||||||||||||
| Change in fair value, net of tax of $(833) | - | (1,511 | ) | - | - | (1,511 | ) | |||||||||||||
| Reclassification adjustment into earnings, net of tax of $336 | - | 610 | - | - | 610 | |||||||||||||||
| Change in pension and other postretirement, net of tax of $0 | - | - | (318 | ) | - | (318 | ) | |||||||||||||
| Balance at September 30, 2015 | $ | (4,011 | ) | $ | (901 | ) | $ | (1,178 | ) | $ | - | $ | (6,090 | ) | ||||||
The before tax amount reclassified from OCI to net income in fiscal 2015, related to our cash flow hedges, were recorded as interest expense on our Consolidated Statement of Income. Amounts reclassified from OCI to net income, related to pension liabilities, were not material in fiscal years 2015, 2014 and 2013.
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12. 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”"EIP"), as amended and restated September 23, 2008. On March 6, 2012, our stockholders approved our newthe 2012 Omnibus Incentive Plan (the “OIP”"OIP")., which is the successor plan to the EIP. As of thissuch time, all share-based awards are now beinghave 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. NoAs of September 30, 2015, no SARs, performance awards, or substitute awards had 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.
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. Beginning in March 2011, non-qualifiedNon-qualified stock options granted to non-employee directors on an annual basis vest 100%100 % on the first anniversary of the award date. Compensation expense related to our stock option awards was $6,802, $6,871$7,173, $6,947 and $7,081$6,878 in fiscal 2012, 20112015, 2014 and 2010,2013, respectively. For additional information on our accounting for share-based compensation, see Note 2 to the consolidated financial statements.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. NoAs of September 30, 2015, no ISOs havehad been granted to date under either plan.
Under the OIP, as under the EIP, employees and non-employees may be awarded shares of restricted stock or restricted stock units, which generally vest over a four-year period, with first vesting on the anniversary of the grant date. Beginning in March 2011, restrictedRestricted stock units granted to non-employee directors on an annual basis vest 100%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”"on deposit" by executive officers pursuant to the 2001 Deposit Share Program. Shares purchased under this Deposit Share Program receive a 50%50 % match in restricted shares (“("Award Shares”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%50 % pursuant to the Deposit Share Program was $5,674, $5,184$8,491, $6,320 and $4,134$5,793 for fiscal 2012, 20112015, 2014 and 2010,2013, respectively.
64
EMPLOYEE STOCK PURCHASE PLAN
In March 2008, our stockholders approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the “ESPP”"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, 2012,2015, a total of 814,625582,588 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%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%85 % of the closing price at the beginning or end of each semi-annual stock purchase period. A total of 70,645, 61,364,65,735, 81,700, and 38,05084,602 shares were issued under the ESPP during fiscal 2012, 20112015, 2014 and 2010,2013, respectively. Compensation expense related to the ESPP was $735, $508$686, $680 and $360$584 in fiscal 2012, 20112015, 2014 and 2010,2013, respectively.
The Directors’Directors' Deferred Compensation Plan (DDCP), as amended and restated September 23, 2008, became effective in March 2001 and applies only to our non-employee directors. The cumulative number of shares deferred under the plan was 71,78163,979 and 47,53076,633 as of September 30, 20122015 and 2011,2014, 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 $83for each of fiscal 2015, 2014 and $68 for fiscal 2012, 2011 and 2010, respectively.2013.
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 beand is revised in future periods iffrom time-to-time when 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’sstock's historical volatility and the implied volatilities from actively-traded options on our stock. Prior to fiscal 2012, we calculatedWe calculate the expected term of our stock options using the simplified method, due to our limited amount of historical stock option exercise data, and we addedadd a slight premium to this expected term for employees who meet the definition of retirement eligible pursuant to their grants during the contractual term of the grant. The simplified method uses an average of the vesting term and the contractual term of the option to calculate the expected term. We experienced a significant increase in the volume of stock option exercises in fiscal years 2011 and 2012. Consequently, we used this exercise data, as well as historical exercise data, to calculate the expected term of our stock options granted in fiscal 2012, rather than using the simplified method, and we continued to add a slight premium for employees who meet the definition of retirement eligible under their grant terms. The expected term we calculated using option exercise history was within 1% of the expected term calculated under the simplified method. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The fair value of our share-based awards, as shown below, was estimated using the Black-Scholes model with the following weighted-average assumptions, excluding the effect of our leveraged recapitalization:
| Year Ended September 30, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Stock Options | ||||||||||||
| Weighted-average grant date fair value | $ | 16.99 | $ | 15.78 | $ | 12.13 | ||||||
| Expected term (in years) | 6.30 | 6.40 | 6.37 | |||||||||
| Expected volatility | 33 | % | 32 | % | 36 | % | ||||||
| Risk-free rate of return | 1.9 | % | 1.9 | % | 0.9 | % | ||||||
| Dividend yield | - | - | - | |||||||||
Year Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
| Stock Options | ||||||||||||||||||||||||
| ESPP | ||||||||||||||||||||||||
| Weighted-average grant date fair value | $ | 15.66 | $ | 16.49 | $ | 13.42 | $ | 10.17 | $ | 9.11 | $ | 7.41 | ||||||||||||
| Expected term (in years) | 6.38 | 6.28 | 6.35 | 0.50 | 0.50 | 0.50 | ||||||||||||||||||
| Expected volatility | 38 | % | 36 | % | 39 | % | 24 | % | 25 | % | 25 | % | ||||||||||||
| Risk-free rate of return | 1.3 | % | 2.1 | % | 2.6 | % | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||||||
| Dividend yield | - | - | - | - | - | - | ||||||||||||||||||
65
| ESPP | ||||||||||||
| Weighted-average grant date fair value | $ | 8.78 | $ | 9.05 | $ | 7.45 | ||||||
| Expected term (in years) | 0.50 | 0.50 | 0.50 | |||||||||
| Expected volatility | 36 | % | 28 | % | 33 | % | ||||||
| Risk-free rate of return | 0.1 | % | 0.2 | % | 0.3 | % | ||||||
| Dividend yield | - | - | - | |||||||||
The Black-Scholes model is primarily used in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. Because employee stock options and employee stockESPP purchases have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, our use of the Black-Scholes model for estimating the fair value of stock options and employee stockESPP purchases may not provide an accurate measure. Although the value of our stock options and employee stockESPP 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 yearyears ended September 30, 2012, 20112015, 2014 and 2010,2013, is as follows:
| Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||||
| Income statement classifications: | 2012 | 2011 | 2010 | 2015 | 2014 | 2013 | ||||||||||||||||||
| Cost of goods sold | $ | 1,541 | $ | 1,221 | $ | 986 | $ | 1,912 | $ | 1,866 | $ | 1,707 | ||||||||||||
| Research, development and technical | 1,105 | 1,060 | 908 | 1,596 | 1,475 | 1,301 | ||||||||||||||||||
| Selling and marketing | 1,392 | 1,124 | 1,025 | 1,075 | 1,298 | 1,367 | ||||||||||||||||||
| General and administrative | 9,268 | 9,241 | 8,724 | 11,862 | 9,403 | 8,975 | ||||||||||||||||||
| Tax benefit | (4,118 | ) | (4,060 | ) | (4,145 | ) | (5,511 | ) | (4,722 | ) | (4,581 | ) | ||||||||||||
| Total share-based compensation expense, net of tax | $ | 9,188 | $ | 8,586 | $ | 7,498 | $ | 10,934 | $ | 9,320 | $ | 8,769 | ||||||||||||
Our non-employee directors received annual equity awards in March 2012 at the time of our Annual Meeting of Stockholders, and a new non-employee director received an initial and annual equity award in June 2012,2015, 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’sCompany's bylaws. FiveSix of the Company’sCompany's non-employee directors had completed at least two full terms of service as of the date of the March 20122015 award. Consequently, the requisite service period for the award hashad already been satisfied and we recorded the fair value of $749$1,308 of the awards to these fivesix directors to share-based compensation expense in the fiscal quarter ended March 31, 20122015 rather than recording that expense over the one-year vesting period stated in the award agreement, as is done for the other three non-employee directors.
directors who received annual equity awards in fiscal 2015.
66
On December 16, 2014, we announced that effective January 1, 2015, William P. Noglows would cease to serve as our President and Chief Executive Officer, and continue to serve only as the EIP,Executive Chairman of our Board of Directors until at least December 31, 2015. Under an employment letter with the exercise prices andCompany dated December 12, 2014, filed as an exhibit to our Form 10-Q for the number of outstanding non-qualifiedquarter ended December 31, 2014, all unvested stock options (NQSOs) were adjusted to reflect the leveraged recapitalization with a special cash dividend. The exercise prices of outstanding NQSOs were reducedand restricted stock held by multiplying them by a factor of 0.68933, representing the ratioMr. Noglows as of the official opening pricedate of our common stock onhis termination of service as Executive Chairman will vest in full, according to terms of, and if all service requirements under, the NASDAQ stock market of $35.79 per share onemployment letter have been met. We applied the ex-dividend date,accounting guidance under Accounting Standards Codification (ASC) Topic 718 "Stock Compensation" to determine 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 to be recorded as part of the modification of the outstanding equity in the periodlikely event that Mr. Noglows' service as Executive Chairman terminates according to the terms of the employment letter prior to the scheduled vesting of such equity. The additional share-based compensation expense was determined to be $378, which is being recorded ratably between December 12, 2014, the date of the modification, and December 31, 2015, the likely date of his termination of service. In addition, the original fair value of his unvested equity totaling $5,033 is being recorded ratably between the outstanding NQSOs immediately followingdate of modification and December 31, 2015, rather than over the payment of the special cash dividend was equal to the fair value immediately prior to such distribution.original vesting period.
A summary of stock option activity under the EIP and OIP as of September 30, 2012,2015, and changes during the fiscal 20122015 are presented below:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Remaining | Aggregate | ||||||||||||||
| Average | Contractual | Intrinsic | ||||||||||||||
| Stock | Exercise | Term | Value | |||||||||||||
Options | Price | (in years) | (in thousands) | |||||||||||||
| Outstanding at September 30, 2011 | 3,950,537 | $ | 39.52 | |||||||||||||
| Granted | 477,444 | 39.57 | ||||||||||||||
| Exercised | (976,645 | ) | 34.92 | |||||||||||||
| Forfeited or canceled | (98,104 | ) | 36.76 | |||||||||||||
| Mandatory proportional adjustment due to recapitalization | 1,780,394 | - | ||||||||||||||
| Outstanding at September 30, 2012 | 5,133,626 | $ | 26.75 | 4.9 | $ | 44,262 | ||||||||||
| Exercisable at September 30, 2012 | 3,585,204 | $ | 27.18 | 3.4 | $ | 29,725 | ||||||||||
| Expected to vest at September 30, 2012 | 1,388,924 | $ | 26.21 | 8.3 | $ | 12,399 | ||||||||||
Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at September 30, 2014 | 3,272,898 | $ | 29.04 | |||||||||||||
| Granted | 397,528 | 47.00 | ||||||||||||||
| Exercised | (1,324,646 | ) | 25.05 | |||||||||||||
| Forfeited or canceled | (185,987 | ) | 39.41 | |||||||||||||
| Outstanding at September 30, 2015 | 2,159,793 | $ | 33.90 | 6.5 | $ | 15,376 | ||||||||||
| Exercisable at September 30, 2015 | 1,256,818 | $ | 28.95 | 5.4 | $ | 12,995 | ||||||||||
| Expected to vest after September 30, 2015 | 901,535 | $ | 40.77 | 8.1 | $ | 2,381 | ||||||||||
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 $35.14$38.74 per share on the last trading day of fiscal 20122015 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on the last trading day of fiscal 2012.2015. The total intrinsic value of options exercised was $6,879, $13,135$31,546, $21,647 and $492$9,847 for fiscal 2012, 20112015, 2014 and 2010,2013, respectively.
The total cash received from options exercised was $34,107, $35,955$33,177, $40,248 and $2,283$28,525 for fiscal 2012, 20112015, 2014 and 2010,2013, respectively.The actual tax benefit realized for the tax deductions from options exercised was $2,239, $4,401$10,569,$7,611 and $175$3,394 for fiscal 2012, 20112015, 2014 and 2010,2013, respectively. The total fair value of stock options vested during fiscal years 2012, 20112015, 2014 and 20102013 was $6,796, $6,321$7,005, $6,645 and $8,494,$6,681, respectively. As of September 30, 2012,2015, there was $9,623$9,566 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 2.52.3 years.
67
RESTRICTED STOCK
A summary of the status of the restricted stock awards and restricted stock unit awards outstanding that were granted under the EIP and OIP as of September 30, 2012,2015, and changes during fiscal 2012,2015, are presented below:
| Weighted | Restricted Stock Awards and Units | Weighted Average Grant Date Fair Value | ||||||||||||||
| Restricted | Average | |||||||||||||||
| Stock | Grant Date | |||||||||||||||
Awards and Units | Fair Value | |||||||||||||||
| Nonvested at September 30, 2011 | 369,681 | $ | 34.29 | |||||||||||||
| Nonvested at September 30, 2014 | 398,099 | $ | 39.11 | |||||||||||||
| Granted | 164,170 | 39.77 | 228,492 | 47.13 | ||||||||||||
| Vested | (167,159 | ) | 34.60 | (180,417 | ) | 40.03 | ||||||||||
| Forfeited | (10,242 | ) | 31.55 | (63,678 | ) | 41.63 | ||||||||||
| Mandatory proportional adjustment due to recapitalization | 37,674 | - | ||||||||||||||
| Nonvested at September 30, 2012 | 394,124 | $ | 34.15 | |||||||||||||
| Nonvested at September 30, 2015 | 382,496 | $ | 43.05 | |||||||||||||
As of September 30, 2012,2015, there was $8,084$11,094 of total unrecognized share-based compensation expense related to nonvestedunvested 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 2.52.4 years. The total fair valuesvalue of restricted stock awards and restricted stock units vested during fiscal years 2012, 20112015, 2014 and 2010 were $5,784, $4,4522013 was $7,222, $5,916 and $3,209,$5,457, respectively.
Effective in May 2000, we adopted the Cabot Microelectronics Corporation 401(k) Plan (the “401(k) Plan”"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% ofoof 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’sparticipant's eligible compensation and 50% of the next two percent0.02 of the participant’sparticipant'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’sCompany's expense for the 401(k) Plan totaled $4,210, $4,201$4,111, $4,547 and $2,981$4,057 for the fiscal years ended September 30, 2012, 20112015, 2014 and 2010,2013, respectively.
Other income (expense), net, consisted of the following:
Year Ended September 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
| Interest income | $ | 146 | $ | 238 | $ | 228 | ||||||
| Other expense | (1,490 | ) | (1,556 | ) | (729 | ) | ||||||
| Total other income (expense), net | $ | (1,344 | ) | $ | (1,318 | ) | $ | (501 | ) | |||
| Year Ended September 30, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Interest income | $ | 365 | $ | 194 | $ | 145 | ||||||
| Other income (expense) | 316 | (54 | ) | 1,247 | ||||||||
| Total other income, net | $ | 681 | $ | 140 | $ | 1,392 | ||||||
The increase in other expenseincome was due to the reimbursement of overfunding of a foreign benefit plan, and higher interest income earned on higher cash and investment balances, partially offset by the negative impact of foreign currency fluctuations on monetary assets and liabilities denominated in fiscal 2011currencies other than the functional currency. The decrease in other income from fiscal 20102013 to fiscal 2014, was primarily due to the impact of foreign exchange effects, primarily related to changescurrency fluctuations on monetary assets and liabilities denominated in currencies other than the exchange rate of the Japanese yen and the New Taiwan dollar to the U.S. dollar,functional currency, net of the gains and losses incurred on forward foreign exchange contracts discussed in Note 10 of this Form 10-K. As disclosed in Note 1, prior period other income (expense) amounts have been adjusted to exclude interest expense to conform to the current year presentation.
10.
The following is a summary of our capital stock activity over the past three years:
| Number of Shares | Number of Shares | ||||||
Common Stock | Treasury Stock | Common Stock | Treasury Stock | ||||
| September 30, 2009 | 26,143,116 | 2,698,234 | |||||
| Exercise of stock options | 74,019 | ||||||
| Restricted stock under EIP, net of forfeitures | 127,390 | ||||||
| Restricted stock under Deposit Share Plan | 2,140 | ||||||
| Common stock under ESPP | 38,050 | ||||||
| Repurchases of common stock under share repurchase plans | 723,184 | ||||||
| Repurchases of common stock – other | 24,651 | ||||||
| September 30, 2010 | 26,384,715 | 3,446,069 | |||||
| September 30, 2012 | 28,864,527 | 5,682,288 | |||||
| Exercise of stock options | 1,085,965 | 1,071,750 | |||||
| Restricted stock under EIP, net of forfeitures | 115,069 | 185,925 | |||||
| Restricted stock under Deposit Share Plan, net of forfeitures | 5,223 | 6,773 | |||||
| Common stock under ESPP | 61,364 | 84,602 | |||||
| Repurchases of common stock under share repurchase plans | 1,235,668 | 1,144,836 | |||||
| Repurchases of common stock – other | 33,840 | 39,551 | |||||
| September 30, 2011 | 27,652,336 | 4,715,577 | |||||
| September 30, 2013 | 30,213,577 | 6,866,675 | |||||
| Exercise of stock options | 976,645 | 1,449,002 | |||||
| Restricted stock under EIP and OIP, net of forfeitures | 159,879 | 176,026 | |||||
| Restricted stock under Deposit Share Plan, net of forfeitures | 5,022 | 7,296 | |||||
| Common stock under ESPP | 70,645 | 81,700 | |||||
| Repurchases of common stock under share repurchase plans | 929,407 | 1,229,494 | |||||
| Repurchases of common stock – other | 37,304 | 46,518 | |||||
| September 30, 2012 | 28,864,527 | 5,682,288 | |||||
| September 30, 2014 | 31,927,601 | 8,142,687 | |||||
| Exercise of stock options | 1,324,646 | ||||||
| Restricted stock under EIP and OIP, net of forfeitures | 172,010 | ||||||
| Restricted stock under Deposit Share Plan, net of forfeitures | (811) | ||||||
| Common stock under ESPP | 65,735 | ||||||
| Repurchases of common stock under share repurchase plans | 851,245 | ||||||
| Repurchases of common stock – other | 47,746 | ||||||
| September 30, 2015 | 33,489,181 | 9,041,678 | |||||
COMMON STOCK
Each share of common stock, including ofthose awarded as restricted stock, awards, but not restricted stock units, entitles the holder to one vote on all matters submitted to a vote of Cabot Microelectronics’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.
69
SHARE REPURCHASES
In November 2010, our Board of Directors authorized a share repurchase program for up to $125,000 of our outstanding common stock, which became effective on the authorization date. We repurchased 671,100 shares for $29,105 during fiscal 2011 and we repurchased 929,407 shares for $33,026 during fiscal 2012 under this program. As of December 13, 2011, we had $82,869 remaining under this share repurchase program. In conjunction with a new capital management initiative, on December 13, 2011,April 2014, our Board of Directors authorized an increase in the amount available under our share repurchase program from $62,000 to $150,000. WithUnder this increased authorization, asprogram, we repurchased 851,245 shares for $40,026 during fiscal 2015, 1,229,494 shares for $53,000 during fiscal 2014, and 1,144,836 shares for $40,000 during fiscal 2013. As of September 30, 2012, $130,0002014, $84,975 remains outstandingavailable under our share repurchase program. Shares are repurchased from time to time, depending on market conditions, in open market transactions, at management’s discretion. We repurchased 564,568 shares for $25,000 in fiscal 2011 under a prior share repurchase program, which was completed during the fiscal quarter ended March 31, 2011. During fiscal 2010, we repurchased 723,184 shares of common stock under this prior program at a cost of $24,998. To date, we have funded share repurchases under our share repurchase program from our existing cash balance, and anticipate we will continue to do so. The program, which became effective on the authorization date, may be suspended or terminated at any time, at the Company’sCompany's discretion. For additional information on share repurchases, see Part II, Item 5. “Market5, "Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”.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 37,304, 33,84047,746 46,518 and 24,65139,551 shares were purchased during fiscal 2012, 20112015, 2014 and 2010,2013, 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.
Income before income taxes was as follows:
Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Domestic | $ | 55,555 | $ | 54,886 | $ | 39,835 | $ | 15,305 | $ | 14,358 | $ | 40,045 | ||||||||||||
| Foreign | 7,316 | 24,026 | 33,442 | 55,892 | 54,236 | 34,175 | ||||||||||||||||||
| Total | $ | 62,871 | $ | 78,912 | $ | 73,277 | $ | 71,197 | $ | 68,594 | $ | 74,220 | ||||||||||||
Taxes on income consisted of the following:
| Year Ended September 30, | ||||||||||||
| 2015 | 2015 | 2013 | ||||||||||
| U.S. federal and state: | ||||||||||||
| Current | $ | 6,496 | $ | 8,978 | $ | 18,060 | ||||||
| Deferred | 1,791 | 488 | (3,494 | ) | ||||||||
| Total | $ | 8,287 | $ | 9,466 | $ | 14,566 | ||||||
| Foreign: | ||||||||||||
| Current | $ | 7,686 | $ | 9,565 | $ | 8,304 | ||||||
| Deferred | (922 | ) | (1,188 | ) | (1,228 | ) | ||||||
| Total | 6,764 | 8,377 | 7,076 | |||||||||
| Total U.S. and foreign | $ | 15,051 | $ | 17,843 | $ | 21,642 | ||||||
Year Ended September 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
| U.S. federal and state: | ||||||||||||
| Current | $ | 19,975 | $ | 15,700 | $ | 15,372 | ||||||
| Deferred | (308 | ) | 6,194 | (2,643 | ) | |||||||
| Total | $ | 19,667 | $ | 21,894 | $ | 12,729 | ||||||
| Foreign: | ||||||||||||
| Current | $ | 5,593 | $ | 6,616 | $ | 10,597 | ||||||
| Deferred | (3,215 | ) | (1,260 | ) | 493 | |||||||
| Total | 2,378 | 5,356 | 11,090 | |||||||||
| Total U.S. and foreign | $ | 22,045 | $ | 27,250 | $ | 23,819 | ||||||
70
The provision for income taxes at our effective tax rate differed from the statutory rate as follows:
| Year Ended September 30, | ||||||||
| 2015 | 2014 | 2013 | ||||||
| Federal statutory rate | 35.0% | 35.0% | 35.0% | |||||
| U.S. benefits from research and experimentation activities | (2.2) | (0.6) | (2.0) | |||||
| State taxes, net of federal effect | 0.6 | 0.8 | 0.3 | |||||
| Foreign income at other than U.S. rates | (21.4) | (9.4) | (5.3) | |||||
| Change in valuation allowance | 0.0 | 0.0 | 1.4 | |||||
| Executive compensation | 0.6 | 0.4 | 0.2 | |||||
| Share-based compensation | 0.1 | 0.1 | 0.5 | |||||
| Adjustment of prior amounts | 1.4 | 0.1 | 0.1 | |||||
| Taiwan Restructuring | 7.2 | - | - | |||||
| Domestic production deduction | (1.3) | (0.3) | (0.2) | |||||
| Other, net | 1.1 | (0.1) | (0.8) | |||||
| Provision for income taxes | 21.1% | 26.0% | 29.2% | |||||
Year Ended September 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
| Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| U.S. benefits from research and experimentation activities | (0.5 | ) | (2.0 | ) | (0.6 | ) | ||||||
| State taxes, net of federal effect | 0.2 | 0.6 | 0.5 | |||||||||
| Foreign income at other than U.S. rates | (1.9 | ) | (2.8 | ) | (2.7 | ) | ||||||
| Executive compensation | 0.8 | 1.4 | - | |||||||||
| Share-based compensation | 0.7 | 3.3 | 0.3 | |||||||||
| Adjustment of prior amounts, net of valuation allowance | 0.9 | - | - | |||||||||
| Domestic production deduction | (0.5 | ) | (0.8 | ) | (0.1 | ) | ||||||
| Tax-exempt interest income | (0.0 | ) | (0.1 | ) | (0.1 | ) | ||||||
| Other, net | 0.4 | (0.1 | ) | 0.2 | ||||||||
| Provision for income taxes | 35.1 | % | 34.5 | % | 32.5 | % | ||||||
In fiscal 2012, 2011years 2013, 2014, and 2010,2015, we elected to permanently reinvest the historical earnings of certainall of our foreign subsidiaries outside the U.S. rather than repatriating the earnings to the U.S.subsidiaries. We have not provided for deferred taxes on approximately $31.1 million$122,625 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 increasedecrease in ourthe effective tax rate in fiscal 2012 was primarily due to higher taxable income in foreign jurisdictions with lower income tax rates, primarily Singapore, South Korea and Taiwan, and the expirationreinstatement of the U.S. research and experimentation tax credit, effective December 31, 2011, decreased income in the foreign subsidiaries where we have electedretroactive to permanently reinvest earnings, and certain adjustments made to prior year tax estimates. These increases wereJanuary 1, 2014, partially offset by decreasedincome taxes incurred related to the restructuring of our operations in Taiwan.
The results of operations for the fiscal year ended September 30, 2015 include tax effects on share-based compensation and decreased taxable executive compensation in excess of limits defined in section 162(m) of the Internal Revenue Code. As discussed in footnote 1 of this 10-K under the heading “Results of Operations”, income tax expense in fiscal 2012 included $973 of non-material adjustments to correct various prior period amounts, which we determined to be immaterial to the prior periods to which they related. These adjustments, relating to the tax treatment of intercompany activities between certain of our foreign and U.S. operations, were recorded in fiscal 2015 and reduced full year net income by $868 and diluted earnings per share by approximately $0.04.
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 2015, 2014, and 2013 income tax expense inprovision by approximately $5,446, $3,770 and $467, respectively. This tax holiday increased our fiscal 2011 included $671 of adjustments to executive compensation in fiscal 2008 through 20102015, 2014, and a $497 reversal of a deferred tax asset for certain share-based compensation expense.2013 diluted earnings per share by approximately $0.22, $0.15, and $0.02, respectively.
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, 2009 | $ | 249 | ||||||
| Balance September 30, 2012 | $ | 283 | ||||||
| Additions for tax positions relating to the current fiscal year | - | 228 | ||||||
| Additions for tax positions relating to prior fiscal years | 153 | 247 | ||||||
| Settlements with taxing authorities | (28 | ) | - | |||||
| Lapse of statute of limitations | (201 | ) | - | |||||
| Balance September 30, 2010 | 173 | |||||||
| Balance September 30, 2013 | 758 | |||||||
| Additions for tax positions relating to the current fiscal year | 123 | 59 | ||||||
| Additions for tax positions relating to prior fiscal years | 307 | 125 | ||||||
| Settlements with taxing authorities | - | (207 | ) | |||||
| Lapse of statute of limitations | - | (34 | ) | |||||
| Balance September 30, 2011 | 603 | |||||||
| Balance September 30, 2014 | 701 | |||||||
| Additions for tax positions relating to the current fiscal year | 51 | 194 | ||||||
| Additions for tax positions relating to prior fiscal years | 114 | 1,400 | ||||||
| Settlements with taxing authorities | (353 | ) | (522 | ) | ||||
| Lapse of statute of limitations | (132 | ) | - | |||||
| Balance September 30, 2012 | $ | 283 | ||||||
| Balance September 30, 2015 | $ | 1,773 | ||||||
The entire balance of unrecognized tax benefits shown above as of September 30, 2015 and 2014 would affect our effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions as income tax expense in our financial statements. Interest and penalties accrued on our Consolidated Balance Sheet were $4was $47 and $19$42 at September 30, 20122015 and 2011,2014, respectively, and any interest and penalties charged to expense werein fiscal years 2015, 2014 and 2013 was not material.
Significant components of net deferred income taxestax assets and liabilities were as follows:
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| Deferred tax assets: | ||||||||
| Employee benefits | $ | 4,061 | $ | 3,889 | ||||
| Inventory | 3,271 | 3,385 | ||||||
| Bad debt reserve | 391 | 515 | ||||||
| Share-based compensation expense | 9,863 | 12,150 | ||||||
| Net operating losses | 556 | 641 | ||||||
| Depreciation and amortization | 1,263 | 267 | ||||||
| Other | 3,599 | 3,084 | ||||||
| Valuation allowance | (3,079 | ) | (2,912 | ) | ||||
| Total deferred tax assets | $ | 19,925 | $ | 21,019 | ||||
| Deferred tax liabilities: | ||||||||
| Translation adjustment | $ | 55 | $ | 1,615 | ||||
| Other | 339 | 1,040 | ||||||
| Total deferred tax liabilities | $ | 394 | $ | 2,655 | ||||
September 30, | ||||||||
2012 | 2011 | |||||||
| Deferred tax assets: | ||||||||
| Employee benefits | $ | 4,035 | $ | 3,246 | ||||
| Inventory | 2,930 | 2,886 | ||||||
| Bad debt reserve | 1,708 | 387 | ||||||
| Share-based compensation expense | 12,659 | 12,184 | ||||||
| Net operating losses | 2,292 | 768 | ||||||
| Other | 2,656 | 1,558 | ||||||
| Valuation allowance | (1,378 | ) | - | |||||
| Total deferred tax assets | $ | 24,902 | $ | 21,029 | ||||
| Deferred tax liabilities: | ||||||||
| Translation adjustment | $ | 7,966 | $ | 10,576 | ||||
| Depreciation and amortization | 3,776 | 1,568 | ||||||
| Unremitted foreign earnings | 1,810 | 3,647 | ||||||
| Other | 645 | 127 | ||||||
| Total deferred tax liabilities | $ | 14,197 | $ | 15,918 | ||||
As of September 30, 2012,2015, the Company had foreign and state net operating loss carryforwards (NOLs) of $7,772$1,471 and $1,528,$848, respectively, which will expire beginning in fiscal year 2017 through fiscal year 2030. We provided2035, for which we have recorded a $1,378 gross valuation allowance, all of $1,699 on these NOLs during fiscal 2012.which was attributable to foreign NOLs. As of September 30, 2012,2015, the Company also had $1,818$2,497 in state tax credit carryforwards, for which we have recorded a $1,047$2,430 gross valuation allowance in fiscal 2012.allowance. As of September 30, 2015, the Company had a capital loss carryforward of $2,849, for which we have recorded a full valuation allowance.
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. For example, in 2011, we concluded litigation in the United States against a competitor in which the validity of certain of our CMP slurry patents for tungsten CMP was upheld, although the specific competitive products at issue were found to not infringe the claims at issue.
PRODUCT WARRANTIES
We maintain a warranty reserve that reflects management’smanagement's best estimate of the cost to replace product that does not meet customers’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 20122015 as follows:
| Balance as of September 30, 2011 | $ | 384 | ||||||
| Balance as of September 30, 2014 | $ | 246 | ||||||
| Reserve for product warranty during the reporting period | 867 | 608 | ||||||
| Settlement of warranty | (892 | ) | (645 | ) | ||||
| Balance as of September 30, 2012 | $ | 359 | ||||||
| Balance as of September 30, 2015 | $ | 209 | ||||||
INDEMNIFICATION
In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Generally, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the other party harmless against losses arising from items such as a breach of certain representations and covenants including title to assets sold, certain intellectual property rights and 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’sparty'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, 2012,2015, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of such obligations is probable.
LEASE COMMITMENTS
We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable leases, all of which expire within six years from nowSeptember 30, 2015, and may be renewed by us. Lease commitments also include certain costs associated with our pad finishing operation located at Taiwan Semiconductor Manufacturing Company, which are accounted for as an operating lease. Rent expense under such arrangements during fiscal 2012, 20112015, 2014 and 20102013 totaled $3,199, $2,934$2,195, $2,425 and $2,480,$2,594, respectively.
73
Future minimum rental commitments under noncancelable leases as of September 30, 20122015 are as follows:
Fiscal Year | Operating | Capital | ||||||
| 2013 | $ | 2,830 | $ | 2 | ||||
| 2014 | 2,179 | 5 | ||||||
| 2015 | 1,116 | 5 | ||||||
| 2016 | 1,013 | 5 | ||||||
| 2017 | 785 | 4 | ||||||
| Thereafter | 520 | - | ||||||
| $ | 8,443 | 21 | ||||||
| Amount related to interest | - | |||||||
| Capital lease obligation | $ | 21 | ||||||
Fiscal Year | Operating | ||||
| 2016 | $ | 1,708 | |||
| 2017 | 1,380 | ||||
| 2018 | 795 | ||||
| 2019 | 719 | ||||
| 2020 | 719 | ||||
| Thereafter | 3,191 | ||||
| $ | 8,512 | ||||
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.
We purchase fumed silica primarilyhave been operating under a fumed silica supply agreement with Cabot Corporation, our former parent company thatwhich is not a related party, that became effective in January 2004, and was amended in September 2006 and in April 2008, the latter of which extended the had a termination date of the agreement from December 200931, 2016, which required us to December 2012 and also changed the pricing and some other non-material termspurchase certain minimum quantities of fumed silica each year of the agreement, and to pay a shortfall if we purchased less than the benefitminimum. This agreement was amended effective June 1, 2015 to, among other things, extend the term of both parties. We are generally obligatedthe agreement through December 31, 2019, revise certain minimum purchase requirements through 2016, and provide us the option to purchase fumed silica for at least 90% of our six-month volume forecast for certain of our slurry products, to purchase certain minimum quantities every six months, and to pay for the shortfall if we purchase less than these amounts. We are currently working with Cabot Corporation to negotiate the terms of a new fumed silica supply agreement that we anticipate would take effect following the expirationremaining term of the current agreement. Since December 2001, we have purchased fumed alumina primarily under a fumed alumina supply agreement with Cabot Corporation that expired in December 2011. We are now operating under a renewed fumed alumina supply agreement with Cabot Corporation, which expires in April 2013, underbeyond calendar year 2016, for which we are obligated towill pay certain fixed, capitala fee of $1,500 in each of calendar years 2017, 2018 and variable costs, and have certain take-or-pay obligations, We currently anticipate we will not have to pay any shortfall under these agreements. Purchase2019. This fee is included in other long-term liabilities at its present value of $4,326 as of September 30, 2015. As of September 30, 2015, purchase obligations include $8,994$23,237 of contractual commitments related to our Cabot Corporation supply agreement for fumed silicasilica.
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 projected benefit obligations of $5,197 and fumed alumina under these contracts.$5,025 as of September 30, 2015 and 2014, respectively, and an accumulated benefit obligation of $3,941 and $3,782 as of September 30, 2015 and 2014, respectively. Key assumptions used in the actuarial measurement of the Japan pension liability include weighted average discount rates of 1.25% and 1.50% at September 30, 2015 and 2014, respectively, and an expected rate of compensation increase of 2.00% at both September 30, 2015 and 2014. Total future Japan pension costs included in accumulated other comprehensive income are $1,076 and $860 at September 30, 2015 and 2014, respectively.
Our plans in Korea had defined benefit obligations of $1,155 and $849 as of September 30, 2015 and 2014. Key assumptions used in the actuarial measurement of the Korea pension liability include weighted average discount rates of 4.00% and 4.25% at September 30, 2015 and 2014, respectively, and an expected rate of compensation increase of 4.50% at both September 30, 2015 and 2014. Total future Korea pension costs included in accumulated other comprehensive income are $102 and $0 at September 30, 2015 and 2014, respectively.
Benefit costs for the combined plans were $962, $652 and $686 in fiscal years 2015, 2014 and 2013, respectively, 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. Estimated future benefit payments are as follows:
| Fiscal Year | Amount | |||
| 2016 | 172 | |||
| 2017 | 260 | |||
| 2018 | 210 | |||
| 2019 | 232 | |||
| 2020 | 352 | |||
| 2021 to 2025 | 2,188 |
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:
Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||
| Net income | $ | 40,826 | $ | 51,662 | $ | 49,458 | $ | 56,146 | $ | 50,751 | $ | 52,578 | ||||||||||||
| Less: income attributable to participating securities | (483 | ) | (442 | ) | (506 | ) | ||||||||||||||||||
| Net income available to common shareholders | $ | 55,663 | $ | 50,309 | $ | 52,072 | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||
| Weighted-average common shares | 22,506,408 | 22,895,568 | 23,083,807 | 24,039,692 | 23,704,024 | 22,924,056 | ||||||||||||||||||
| (Denominator for basic calculation) | ||||||||||||||||||||||||
| Weighted-average effect of dilutive securities: | ||||||||||||||||||||||||
| Share-based compensation | 773,890 | 539,036 | 188,772 | 592,123 | 906,884 | 836,010 | ||||||||||||||||||
| Diluted weighted-average common shares | 23,280,298 | 23,434,604 | 23,272,579 | 24,631,815 | 24,610,908 | 23,760,066 | ||||||||||||||||||
| (Denominator for diluted calculation) | ||||||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||
| Basic | $ | 1.81 | $ | 2.26 | $ | 2.14 | $ | 2.32 | $ | 2.12 | $ | 2.27 | ||||||||||||
| Diluted | $ | 1.75 | $ | 2.20 | $ | 2.13 | $ | 2.26 | $ | 2.04 | $ | 2.19 | ||||||||||||
For the twelve months ended September 30, 2012, 2011,2015, 2014, and 2010,2013, approximately 1.30.7 million, 1.30.5 million and 2.61.5 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.
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:
Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| United States | $ | 56,770 | $ | 61,540 | $ | 55,666 | $ | 55,989 | $ | 51,036 | $ | 53,955 | ||||||||||||
| Asia | 342,958 | 356,074 | 327,202 | 328,669 | 347,669 | 347,797 | ||||||||||||||||||
| Europe | 27,929 | 27,828 | 25,333 | 29,439 | 25,961 | 31,379 | ||||||||||||||||||
| Total | $ | 427,657 | $ | 445,442 | $ | 408,201 | $ | 414,097 | $ | 424,666 | $ | 433,131 | ||||||||||||
| Property, plant and equipment, net: | ||||||||||||||||||||||||
| United States | $ | 49,325 | $ | 50,503 | $ | 55,576 | $ | 43,239 | $ | 44,585 | $ | 47,436 | ||||||||||||
| Asia | 75,690 | 80,280 | 60,235 | 50,504 | 56,236 | 64,546 | ||||||||||||||||||
| Europe | 5 | 8 | - | - | - | 3 | ||||||||||||||||||
| Total | $ | 125,020 | $ | 130,791 | $ | 115,811 | $ | 93,743 | $ | 100,821 | $ | 111,985 | ||||||||||||
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 2012, 20112015, 2014 and 2010:2013:
| Year Ended September 30, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Revenue: | ||||||||||||
| Taiwan | $ | 124,460 | $ | 138,049 | $ | 133,273 | ||||||
| South Korea | 70,608 | 71,420 | 73,778 | |||||||||
| China | 49,350 | 45,200 | * | |||||||||
* Denotes less than ten percent of total
Year Ended September 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
| Revenue: | ||||||||||||
| Taiwan | $ | 124,732 | $ | 132,089 | $ | 129,533 | ||||||
| South Korea | 68,573 | 56,321 | 42,669 | |||||||||
| Japan | 56,488 | 57,889 | 60,207 | |||||||||
| Singapore | * | 47,441 | 44,316 | |||||||||
| * Denotes less than ten percent of total | ||||||||||||
The following table shows net property, plant and equipment in foreign countries that accounted for more than ten percent of our total net property, plant and equipment in fiscal 2012, 20112015, 2014 and 2010:2013:
Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | 2010 | 2015 | 2014 | 2013 | |||||||||||||||||||
| Property, plant and equipment, net: | ||||||||||||||||||||||||
| Japan | $ | 43,411 | $ | 50,236 | $ | 42,225 | $ | 22,572 | $ | 27,110 | $ | 33,566 | ||||||||||||
| Taiwan | 18,397 | 17,577 | 17,542 | 17,419 | 16,675 | 17,212 | ||||||||||||||||||
| South Korea | 12,580 | * | * | 9,658 | 11,564 | 12,591 | ||||||||||||||||||
| * Denotes less than ten percent of total | ||||||||||||||||||||||||
76
The following table shows revenue generated by product linearea in fiscal 2012, 20112015, 2014 and 2010:2013:
| Year Ended September 30, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Revenue: | ||||||||||||
| Tungsten slurries | $ | 178,770 | $ | 162,148 | $ | 155,904 | ||||||
| Dielectric slurries | 96,386 | 118,079 | 123,180 | |||||||||
| Other Metals slurries | 71,640 | 76,605 | 76,367 | |||||||||
| Polishing pads | 32,048 | 33,824 | 32,996 | |||||||||
| Engineered Surface Finishes | 21,534 | 16,160 | 23,999 | |||||||||
| Data storage slurries | 13,719 | 17,850 | 20,685 | |||||||||
| Total | $ | 414,097 | $ | 424,666 | $ | 433,131 | ||||||
20. SUBSEQUENT EVENT
Year Ended September 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
| Revenue: | ||||||||||||
| Tungsten slurries | $ | 161,756 | $ | 164,098 | $ | 147,788 | ||||||
| Dielectric slurries | 119,320 | 121,543 | 117,484 | |||||||||
| Copper slurries | 67,157 | 76,285 | 75,898 | |||||||||
| Polishing pads | 33,725 | 31,045 | 29,909 | |||||||||
| Engineered Surface Finishes | 24,878 | 24,685 | 16,316 | |||||||||
| Data storage slurries | 20,821 | 27,786 | 20,806 | |||||||||
| Total | $ | 427,657 | $ | 445,442 | $ | 408,201 | ||||||
The following table presents our unaudited financial information for the eight quarterly periods ended September 30, 2012.2015. 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, 2015 | June 30, 2015 | March 31, 2015 | Dec. 31, 2014 | Sept. 30, 2014 | June 30, 2014 | March 31, 2014 | Dec. 31, 2013 | |||||||||||||||||||||||||
| Revenue | $ | 100,137 | $ | 97,168 | $ | 104,858 | $ | 111,934 | $ | 116,337 | $ | 108,358 | $ | 99,456 | $ | 100,515 | ||||||||||||||||
| Cost of goods sold | 48,115 | 48,609 | 50,182 | 54,960 | 59,209 | 56,632 | 52,931 | 52,801 | ||||||||||||||||||||||||
| Gross profit | 52,022 | 48,559 | 54,676 | 56,974 | 57,128 | 51,726 | 46,525 | 47,714 | ||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Research, development and technical | 14,856 | 14,773 | 15,131 | 15,018 | 15,051 | 15,368 | 14,364 | 14,571 | ||||||||||||||||||||||||
| Selling and marketing | 5,763 | 5,804 | 5,777 | 7,639 | 6,846 | 6,489 | 6,471 | 6,707 | ||||||||||||||||||||||||
| General and administrative | 13,553 | 12,830 | 14,296 | 11,751 | 12,236 | 11,380 | 11,076 | 10,726 | ||||||||||||||||||||||||
| Total operating expenses | 34,172 | 33,407 | 35,204 | 34,408 | 34,133 | 33,237 | 31,911 | 32,004 | ||||||||||||||||||||||||
| Operating income | 17,850 | 15,152 | 19,472 | 22,566 | 22,995 | 18,489 | 14,614 | 15,710 | ||||||||||||||||||||||||
| Interest expense | 1,494 | 1,065 | 1,059 | 906 | 807 | 832 | 843 | 872 | ||||||||||||||||||||||||
| Other income (expense), net | 116 | (160 | ) | (332 | ) | 1,057 | (448 | ) | (132 | ) | 103 | 617 | ||||||||||||||||||||
| Income before income taxes | 16,472 | 13,927 | 18,081 | 22,717 | 21,740 | 17,525 | 13,874 | 15,455 | ||||||||||||||||||||||||
| Provision for income taxes | 3,939 | 4,041 | 4,270 | 2,801 | 5,694 | 4,223 | 3,779 | 4,147 | ||||||||||||||||||||||||
| Net income | $ | 12,533 | $ | 9,886 | $ | 13,811 | $ | 19,916 | $ | 16,046 | $ | 13,302 | $ | 10,095 | $ | 11,308 | ||||||||||||||||
| Basic earnings per share | $ | 0.51 | $ | 0.40 | $ | 0.57 | $ | 0.83 | $ | 0.67 | $ | 0.55 | $ | 0.42 | $ | 0.47 | ||||||||||||||||
| Weighted average basic shares outstanding | 24,144 | 24,333 | 24,057 | 23,651 | 23,500 | 23,753 | 23,982 | 23,590 | ||||||||||||||||||||||||
| Diluted earnings per share | $ | 0.50 | $ | 0.39 | $ | 0.55 | $ | 0.80 | $ | 0.65 | $ | 0.53 | $ | 0.40 | $ | 0.45 | ||||||||||||||||
| Weighted average diluted shares outstandin | 24,583 | 24,813 | 24,693 | 24,486 | 24,334 | 24,613 | 24,897 | 24,623 | ||||||||||||||||||||||||
| CABOT MICROELECTRONICS CORPORATION | ||||||||||||||||||||||||||||||||
| SELECTED QUARTERLY OPERATING RESULTS | ||||||||||||||||||||||||||||||||
| (Unaudited and in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
| Sept. 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | Dec. 31, | |||||||||||||||||||||||||
| 2012 | 2012 | 2012 | 2011 | 2011 | 2011 | 2011 | 2010 | |||||||||||||||||||||||||
| Revenue | $ | 110,621 | $ | 115,678 | $ | 99,236 | $ | 102,122 | $ | 109,731 | $ | 111,846 | $ | 109,660 | $ | 114,205 | ||||||||||||||||
| Cost of goods sold | 56,883 | 60,462 | 53,442 | 52,843 | 58,814 | 58,821 | 56,927 | 56,774 | ||||||||||||||||||||||||
| Gross profit | 53,738 | 55,216 | 45,794 | 49,279 | 50,917 | 53,025 | 52,733 | 57,431 | ||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Research, development and technical | 15,401 | 15,415 | 14,071 | 13,755 | 14,687 | 14,573 | 14,919 | 13,856 | ||||||||||||||||||||||||
| Selling and marketing | 7,288 | 7,458 | 7,434 | 7,336 | 7,702 | 7,785 | 6,791 | 7,480 | ||||||||||||||||||||||||
| General and administrative | 10,572 | 10,695 | 15,177 | 12,901 | 11,677 | 11,008 | 11,567 | 11,676 | ||||||||||||||||||||||||
| Total operating expenses | 33,261 | 33,568 | 36,682 | 33,992 | 34,066 | 33,366 | 33,277 | 33,012 | ||||||||||||||||||||||||
| Operating income (loss) | 20,477 | 21,648 | 9,112 | 15,287 | 16,851 | 19,659 | 19,456 | 24,419 | ||||||||||||||||||||||||
| Interest expense | 961 | 955 | 354 | 39 | 44 | 30 | 37 | 44 | ||||||||||||||||||||||||
| Other income (expense), net | (681 | ) | (864 | ) | 97 | 104 | (829 | ) | (281 | ) | 683 | (891 | ) | |||||||||||||||||||
| Income (loss) before income taxes | 18,835 | 19,829 | 8,855 | 15,352 | 15,978 | 19,348 | 20,102 | 23,484 | ||||||||||||||||||||||||
| Provision (benefit) for income taxes | 7,196 | 6,587 | 3,325 | 4,937 | 6,689 | 6,559 | 7,010 | 6,992 | ||||||||||||||||||||||||
| Net income (loss) | $ | 11,639 | $ | 13,242 | $ | 5,530 | $ | 10,415 | $ | 9,289 | $ | 12,789 | $ | 13,092 | $ | 16,492 | ||||||||||||||||
| Basic earnings (loss) per share | $ | 0.51 | $ | 0.57 | $ | 0.24 | $ | 0.46 | $ | 0.41 | $ | 0.55 | $ | 0.57 | $ | 0.73 | ||||||||||||||||
| Weighted average basic shares outstanding | 22,920 | 23,120 | �� | 22,768 | 22,508 | 22,816 | 23,119 | 23,032 | 22,710 | |||||||||||||||||||||||
| Diluted earnings (loss) per share | $ | 0.49 | $ | 0.55 | $ | 0.23 | $ | 0.45 | $ | 0.40 | $ | 0.54 | $ | 0.55 | $ | 0.71 | ||||||||||||||||
| Weighted average diluted shares outstanding | 23,706 | 23,939 | 23,780 | 22,926 | 23,191 | 23,797 | 23,693 | 23,131 | ||||||||||||||||||||||||
| Dividends per share | $ | - | $ | - | $ | 15.00 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
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, 2015 | $ | 1,392 | $ | (84 | ) | $ | (84 | ) | $ | 1,224 | ||||||
| September 30, 2014 | 1,532 | (170 | ) | 30 | 1,392 | |||||||||||
| September 30, 2013 | 4,757 | 173 | (3,398 | ) | 1,532 | |||||||||||
| 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, 2012 | $ | 1,090 | $ | 3,771 | $ | (104 | ) | $ | 4,757 | |||||||
| September 30, 2011 | 1,121 | (18 | ) | (13 | ) | 1,090 | ||||||||||
| September 30, 2010 | 1,277 | (113 | ) | (43 | ) | 1,121 | ||||||||||
We maintain a warranty reserve that reflects management’smanagement's best estimate of the cost to replace product that does not meet customers’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, 2012 | $ | 384 | $ | 867 | $ | - | $ | (892 | ) | $ | 359 | |||||||||
| September 30, 2011 | 375 | 1,074 | - | (1,065 | ) | 384 | ||||||||||||||
| September 30, 2010 | 360 | 1,161 | - | (1,146 | ) | 375 | ||||||||||||||
| 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, 2015 | $ | 246 | $ | 608 | $ | - | $ | (645 | ) | $ | 209 | |||||||||
| September 30, 2014 | 324 | 760 | - | (838 | ) | 246 | ||||||||||||||
| September 30, 2013 | 359 | 874 | - | (909 | ) | 324 | ||||||||||||||
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, 2012 | $ | - | $ | 1,378 | $ | - | $ | 1,378 | ||||||||
| Valuation Allowance | Balance At Beginning of Year | Amounts Charged To Expenses | Deductions and Adjustments | Balance At End Of Year | ||||||||||||
| Year ended: | ||||||||||||||||
| September 30, 2015 | $ | 2,912 | $ | 167 | $ | - | $ | 3,079 | ||||||||
| September 30, 2014 | 2,288 | 624 | - | 2,912 | ||||||||||||
| September 30, 2013 | 1,378 | 910 | - | 2,288 | ||||||||||||
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’sCompany's management is responsible for the integrity of these statements and of the underlying data, estimates and judgments.
The Company’sCompany'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’sCompany'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(2013). 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’sCompany's independent registered public accounting firm evaluates the Company’sCompany'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’sCompany'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. NoglowsDavid H. Li
Chief Executive Officer
/s/ William S. Johnson
William S. Johnson
Chief Financial Officer
/s/ Thomas S. Roman
Thomas S. Roman
Principal Accounting Officer
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”Act")), as of September 30, 2012.2015. 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’sSEC'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.
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 Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’sCompany'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’sCompany'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 (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that the Company’sCompany's internal control over financial reporting was effective as of September 30, 2012.2015. The effectiveness of the Company’sCompany's internal control over financial reporting as of September 30, 20122015 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.
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.
None.
PART III
ITEM 10. DIRECTORS,, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K with respect to identification of directors, the existence of a separately-designated standing audit committee, 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"Board Structure and Compensation”Compensation" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 5, 20138, 2016 (the "Proxy Statement”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"Section 16(a) Beneficial Ownership Reporting Compliance”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"Section 16(a) Beneficial Ownership Reporting Compliance”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.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
Shown below is information as of September 30, 2012,2015, with respect to the shares of common stock that may be issued under Cabot Microelectronics’Microelectronics' existing equity compensation plans.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (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 |
| (2) | Column (a) includes |
| (3) | Column (c) includes |
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"Fees of Independent Auditors and Audit Committee Report”Report" in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following Financial Statements and Financial Statement Schedule are included in Item 8 herein:
| 1. | Financial Statements: |
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended September 30, 2012, 20112015, 2014 and 20102013
Consolidated Statements of Comprehensive Income for the years ended September 30, 2015, 2014 and 2013
Consolidated Balance Sheets at September 30, 20122015 and 20112014
Consolidated Statements of Cash Flows for the years ended September 30, 2012, 20112015, 2014 and 20102013
Consolidated Statements of Changes in Stockholders’Stockholders' Equity for the years ended September 30, 2012, 20112015, 2014 and 20102013
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: |
(16) 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 28, 2015. * Management contract, or compensatory plan or arrangement. ** Substantially similar change in control severance protection agreements have been entered into with William P. Noglows, David H. Li, H. Carol Bernstein, Yumiko Damashek, *** Substantially similar deposit share agreements have been entered into with 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:
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:
* 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. 87 |