PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
100,364
|
|
|
$
|
99,236
|
|
|
$
|
206,897
|
|
|
$
|
201,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
52,019
|
|
|
|
53,442
|
|
|
|
108,513
|
|
|
|
106,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
48,345
|
|
|
|
45,794
|
|
|
|
98,384
|
|
|
|
95,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and technical
|
|
|
15,073
|
|
|
|
14,071
|
|
|
|
30,389
|
|
|
|
27,826
|
|
Selling and marketing
|
|
|
7,046
|
|
|
|
7,434
|
|
|
|
14,155
|
|
|
|
14,770
|
|
General and administrative
|
|
|
12,287
|
|
|
|
15,177
|
|
|
|
23,241
|
|
|
|
28,078
|
|
Total operating expenses
|
|
|
34,406
|
|
|
|
36,682
|
|
|
|
67,785
|
|
|
|
70,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13,939
|
|
|
|
9,112
|
|
|
|
30,599
|
|
|
|
24,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
872
|
|
|
|
354
|
|
|
|
1,825
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
463
|
|
|
|
97
|
|
|
|
1,317
|
|
|
|
201
|
|
Income before income taxes
|
|
|
13,530
|
|
|
|
8,855
|
|
|
|
30,091
|
|
|
|
24,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
4,110
|
|
|
|
3,325
|
|
|
|
10,968
|
|
|
|
8,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,420
|
|
|
$
|
5,530
|
|
|
$
|
19,123
|
|
|
$
|
15,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.41
|
|
|
$
|
0.24
|
|
|
$
|
0.84
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
22,974
|
|
|
|
22,768
|
|
|
|
22,914
|
|
|
|
22,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.40
|
|
|
$
|
0.23
|
|
|
$
|
0.81
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
23,871
|
|
|
|
23,780
|
|
|
|
23,755
|
|
|
|
23,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
-
|
|
|
$
|
15.00
|
|
|
$
|
-
|
|
|
$
|
15.00
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Unaudited and in thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,420
|
|
|
$
|
5,530
|
|
|
$
|
19,123
|
|
|
$
|
15,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(7,055
|
)
|
|
|
(1,235
|
)
|
|
|
(11,751
|
)
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
(7,055
|
)
|
|
|
(1,235
|
)
|
|
|
(11,751
|
)
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,365
|
|
|
$
|
4,295
|
|
|
$
|
7,372
|
|
|
$
|
15,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share amounts)
|
|
|
|
|
|
March 31, 2013
|
|
|
September 30, 2012
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
188,354
|
|
|
$
|
178,459
|
|
Accounts receivable, less allowance for doubtful accounts of $4,061 at March 31, 2013, and $4,757 at September 30, 2012
|
|
|
51,220
|
|
|
|
53,506
|
|
Inventories
|
|
|
66,075
|
|
|
|
66,472
|
|
Prepaid expenses and other current assets
|
|
|
13,546
|
|
|
|
12,608
|
|
Deferred income taxes
|
|
|
6,851
|
|
|
|
6,843
|
|
Total current assets
|
|
|
326,046
|
|
|
|
317,888
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
112,632
|
|
|
|
125,020
|
|
Goodwill
|
|
|
43,916
|
|
|
|
44,620
|
|
Other intangible assets, net
|
|
|
11,025
|
|
|
|
12,473
|
|
Deferred income taxes
|
|
|
4,500
|
|
|
|
5,879
|
|
Other long-term assets
|
|
|
12,733
|
|
|
|
11,945
|
|
Total assets
|
|
$
|
510,852
|
|
|
$
|
517,825
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
13,913
|
|
|
$
|
19,542
|
|
Accrued expenses, income taxes payable and other current liabilities
|
|
|
29,411
|
|
|
|
32,738
|
|
Current portion of long-term debt
|
|
|
10,938
|
|
|
|
10,937
|
|
Capital lease obligations
|
|
|
-
|
|
|
|
2
|
|
Total current liabilities
|
|
|
54,262
|
|
|
|
63,219
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
157,500
|
|
|
|
161,875
|
|
Deferred income taxes
|
|
|
1,661
|
|
|
|
2,017
|
|
Capital lease obligations, net of current portion
|
|
|
-
|
|
|
|
19
|
|
Other long-term liabilities
|
|
|
7,286
|
|
|
|
7,104
|
|
Total liabilities
|
|
|
220,709
|
|
|
|
234,234
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 29,590,023 shares at March 31, 2013, and 28,864,527 shares at September 30, 2012
|
|
|
30
|
|
|
|
29
|
|
Capital in excess of par value of common stock
|
|
|
350,251
|
|
|
|
329,782
|
|
Retained earnings
|
|
|
148,564
|
|
|
|
129,441
|
|
Accumulated other comprehensive income
|
|
|
18,715
|
|
|
|
30,466
|
|
Treasury stock at cost, 6,319,094 shares at March 31, 2013, and 5,682,288 shares at September 30, 2012
|
|
|
(227,417
|
)
|
|
|
(206,127
|
)
|
Total stockholders' equity
|
|
|
290,143
|
|
|
|
283,591
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
510,852
|
|
|
$
|
517,825
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited and amounts in thousands)
|
|
Six Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
19,123
|
|
|
$
|
15,945
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,638
|
|
|
|
11,868
|
|
Provision for doubtful accounts
|
|
|
36
|
|
|
|
3,820
|
|
Share-based compensation expense
|
|
|
7,303
|
|
|
|
7,419
|
|
Deferred income tax expense (benefit)
|
|
|
4,061
|
|
|
|
(1,449
|
)
|
Non-cash foreign exchange loss
|
|
|
3,653
|
|
|
|
1,233
|
|
Loss on disposal of property, plant and equipment
|
|
|
44
|
|
|
|
189
|
|
Impairment of property plant and equipment
|
|
|
38
|
|
|
|
51
|
|
Other
|
|
|
(2,279
|
)
|
|
|
(949
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,952
|
)
|
|
|
(3,297
|
)
|
Inventories
|
|
|
(3,284
|
)
|
|
|
(1,745
|
)
|
Prepaid expenses and other assets
|
|
|
(3,485
|
)
|
|
|
2,856
|
|
Accounts payable
|
|
|
(3,817
|
)
|
|
|
(4,147
|
)
|
Accrued expenses, income taxes payable and other liabilities
|
|
|
90
|
|
|
|
(10,501
|
)
|
Net cash provided by operating activities
|
|
|
30,169
|
|
|
|
21,293
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(5,546
|
)
|
|
|
(11,641
|
)
|
Proceeds from the sale of property, plant and equipment
|
|
|
14
|
|
|
|
-
|
|
Proceeds from the sale of investments
|
|
|
25
|
|
|
|
50
|
|
Net cash used in investing activities
|
|
|
(5,507
|
)
|
|
|
(11,591
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
-
|
|
|
|
(347,140
|
)
|
Issuance of long-term debt
|
|
|
-
|
|
|
|
175,000
|
|
Repayment of long-term debt
|
|
|
(4,375
|
)
|
|
|
-
|
|
Repurchases of common stock
|
|
|
(21,290
|
)
|
|
|
(14,534
|
)
|
Net proceeds from issuance of stock
|
|
|
13,159
|
|
|
|
29,034
|
|
Tax benefits associated with share-based compensation expense
|
|
|
707
|
|
|
|
617
|
|
Principal payments under capital lease obligations
|
|
|
(21
|
)
|
|
|
(5
|
)
|
Net cash used in financing activities
|
|
|
(11,820
|
)
|
|
|
(157,028
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(2,947
|
)
|
|
|
(158
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
9,895
|
|
|
|
(147,484
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
178,459
|
|
|
|
302,546
|
|
Cash and cash equivalents at end of period
|
|
$
|
188,354
|
|
|
$
|
155,062
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of the period
|
|
$
|
1,171
|
|
|
$
|
2,385
|
|
Issuance of restricted stock
|
|
|
5,926
|
|
|
|
6,198
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share and per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'' or "our'') 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 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. 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. For additional information, refer to Part 1, Item 1, "Business", in our annual report on Form 10-K for the fiscal year ended September 30, 2012.
The unaudited consolidated financial statements have been prepared by Cabot Microelectronics Corporation pursuant to the rules of the Securities and Exchange Commission (SEC) and accounting principles generally accepted in the United States of America. In the opinion of management, these unaudited consolidated financial statements include all normal recurring adjustments necessary for the fair presentation of Cabot Microelectronics' financial position as of March 31, 2013, cash flows for the six months ended March 31, 2013 and March 31, 2012, and results of operations for the three and six months ended March 31, 2013 and March 31, 2012. The results of operations for the three and six months ended March 31, 2013 may not be indicative of results to be expected for future periods, including the fiscal year ending September 30, 2013. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Cabot Microelectronics' annual report on Form 10-K for the fiscal year ended September 30, 2012.
The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated as of March 31, 2013.
Results of Operations
The results of operations for the six months ended March 31, 2013 include a foreign tax adjustment, which was recorded during the first quarter of fiscal 2013, to correct prior period amounts, which we determined to be immaterial to the prior periods to which it relates and is expected to be immaterial to our full fiscal year 2013 results. This adjustment reduced net income for the first six months of fiscal 2013 by $1,686 and diluted earnings per share by approximately $0.07. The adjustment relates to the reversal of a deferred tax asset for cumulative net operating losses (NOLs) associated with our facility in South Korea since its opening in fiscal year 2011, as these NOLs are expected to be consumed during periods a tax holiday is in effect.
2. 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.
The following table presents financial instruments, other than long-term debt, that we measured at fair value on a recurring basis at March 31, 2013 and September 30, 2012. See Note 8 for a detailed discussion of our long-term debt. We have chosen to not measure any of our other financial instruments at fair value as we believe their carrying value approximates their fair value. We have classified the following assets in accordance with the fair value hierarchy set forth in the applicable standards. In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest level input that is significant to the determination of the fair value.
March 31, 2013
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
188,354
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
188,354
|
|
Auction rate securities (ARS)
|
|
|
-
|
|
|
|
-
|
|
|
|
7,966
|
|
|
|
7,966
|
|
Other long-term investments
|
|
|
1,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,274
|
|
Total
|
|
$
|
189,628
|
|
|
$
|
-
|
|
|
$
|
7,966
|
|
|
$
|
197,594
|
|
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
|
|
Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds which are traded in active markets. The ARS and other long-term investments are included in other long-term assets on our Consolidated Balance Sheet. The fair value of our long-term ARS is determined through two discounted cash flow analyses, one using a discount rate based on a market index comprised of tax exempt variable rate demand obligations and one using a discount rate based on the LIBOR swap curve, adding a risk factor to reflect current liquidity issues in the ARS market. Our other long-term investments represent the fair value of investments under the Cabot Microelectronics Supplemental Employee Retirement Plan (SERP), which is a nonqualified supplemental savings plan. The fair value of the investments is determined through quoted market prices within actively traded markets. Although the investments are allocated to individual participants and investment decisions are made solely by those participants, the SERP is a nonqualified plan. Consequently, the Company owns the assets and the related offsetting liability for disbursement until such time a participant makes a qualifying withdrawal. The long-term asset was adjusted to $1,274 in the second quarter of fiscal 2013 to reflect its fair value as of March 31, 2013.
We applied accounting standards regarding the classification and valuation of financial instruments to the valuation of our investment in ARS at March 31, 2013. Our ARS investments at March 31, 2013 consisted of two tax exempt municipal debt securities with a total par value of $8,200. The ARS market began to experience illiquidity in early 2008, and this illiquidity continues. Despite this lack of liquidity, there have been no defaults of the underlying securities and interest income on these holdings continues to be received on scheduled interest payment dates. Our ARS, when purchased, were generally issued by A-rated municipalities. Although the credit ratings of both municipalities have been downgraded since our original investment, the ARS are credit enhanced and insured with bond insurance and currently carry a credit rating of AA- by Standard and Poors.
Since an active market for ARS does not currently exist, we determine the fair value of these investments using a Level 3 discounted cash flow analysis and also consider other factors such as the reduced liquidity in the ARS market and nature of the insurance backing. Key inputs to our discounted cash flow model include projected cash flows from interest and principal payments and the weighted probabilities of improved liquidity or debt refinancing by the issuer. We also incorporate certain Level 2 market indices into the discounted cash flow analysis, including published rates such as the LIBOR rate, the LIBOR swap curve and a municipal swap index published by the Securities Industry and Financial Markets Association. The following table presents a reconciliation of the activity in fiscal 2013 for fair value measurements using level 3 inputs:
Balance as of October 1, 2012
|
|
$
|
7,991
|
|
Net sales of ARS
|
|
|
(25
|
)
|
Balance as of March 31, 2013
|
|
$
|
7,966
|
|
Based on our fair value assessment, we determined that one ARS continues to be impaired as of March 31, 2013. This security has a fair value of $3,016 (par value $3,250). We assessed the impairment in accordance with the applicable standards and determined that the impairment was due to the lack of liquidity in the ARS market rather than to credit risk. We have maintained the $234 temporary impairment that we previously recorded. We believe that this ARS is not permanently impaired because in the event of default by the issuer, we expect the insurance provider would pay interest and principal following the original repayment schedule, and we do not intend to sell the security nor do we believe we will be required to sell the security before the value recovers, which may be at maturity. We determined that the fair value of the other ARS was not impaired as of March 31, 2013. In November 2011, the municipality that issued our impaired ARS filed for bankruptcy protection. We considered this development, in light of the continued insurance backing, and have concluded the impairment we have maintained remains adequate and temporary. See Note 6 for more information on these investments.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances for doubtful accounts, was $51,220 as of March 31, 2013 and $53,506 as of September 30, 2012. The decrease was primarily due to lower revenue generated in the second quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012. As noted in our Quarterly Report on Form 10-Q for the period ended March 31, 2012, we recorded $3,727 in bad debt expense for Elpida Memory, Inc. (Elpida), a significant customer in Japan that filed for bankruptcy protection in February 2012. We have maintained a reserve for the entire balance as collection of any or all of this balance remains uncertain. Elpida has been paying the Company on a current basis for all shipments made subsequent to its bankruptcy filing. The Elpida receivable is denominated in Japanese yen, so it is subject to foreign exchange fluctuations which are included in the table below under the deductions and adjustments. Our allowance for doubtful accounts changed during the six months ended March 31, 2013 as follows:
Balance as of September 30, 2012
|
|
$
|
4,757
|
|
Amounts charged to expense
|
|
|
36
|
|
Deductions and adjustments
|
|
|
(732
|
)
|
Balance as of March 31, 2013
|
|
$
|
4,061
|
|
4. INVENTORIES
Inventories consisted of the following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
32,675
|
|
|
$
|
34,591
|
|
Work in process
|
|
|
7,358
|
|
|
|
6,333
|
|
Finished goods
|
|
|
26,042
|
|
|
|
25,548
|
|
Total
|
|
$
|
66,075
|
|
|
$
|
66,472
|
|
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $43,916 as of March 31, 2013, and $44,620 as of September 30, 2012. The decrease in goodwill was due to foreign exchange fluctuations of the New Taiwan dollar.
Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of the fiscal year or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. Historically, we consistently determined the fair value of our reporting units using a discounted cash flow analysis ("step one") of our projected future results. Effective September 30, 2011, we adopted a new accounting pronouncement related to our goodwill impairment analysis, which allowed an entity to first perform a qualitative analysis ("step zero") of the fair value of its reporting units to determine whether it is necessary to perform the historical two-step quantitative goodwill analysis. We used this new guidance in our annual impairment analysis for goodwill in both fiscal 2012 and 2011, determining that it was more likely than not that the carrying amounts of all reporting units exceeded their respective fair values. The recoverability of indefinite-lived intangible assets was historically measured using the royalty savings method. In fiscal 2012, we adopted new accounting pronouncements related to our impairment review of indefinite-lived intangible assets, which allows a qualitative assessment of factors used in the impairment review. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these assumptions may result in future impairment charges.
We completed our annual impairment test during our fourth quarter of fiscal 2012 and concluded that no impairment existed. There were no indicators of potential impairment during the quarter ended March 31, 2013, so it was not necessary to perform an impairment review for goodwill and indefinite-lived intangible assets during the quarter. There have been no cumulative impairment charges recorded on the goodwill of any of our reporting units.
The components of other intangible assets are as follows:
|
|
March 31, 2013
|
|
|
September 30, 2012
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product technology
|
|
$
|
8,331
|
|
|
$
|
5,353
|
|
|
$
|
8,387
|
|
|
$
|
4,902
|
|
Acquired patents and licenses
|
|
|
8,270
|
|
|
|
6,985
|
|
|
|
8,270
|
|
|
|
6,775
|
|
Trade secrets and know-how
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
Distribution rights, customer lists and other
|
|
|
12,384
|
|
|
|
6,812
|
|
|
|
12,586
|
|
|
|
6,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets subject to amortization
|
|
|
31,535
|
|
|
|
21,700
|
|
|
|
31,793
|
|
|
|
20,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets not subject to amortization*
|
|
|
1,190
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
32,725
|
|
|
$
|
21,700
|
|
|
$
|
32,983
|
|
|
$
|
20,510
|
|
*
Total other intangible assets not subject to amortization consist primarily of trade names.
Amortization expense on our other intangible assets was $658 and $1,319 for the three and six months ended March 31, 2013, respectively. Amortization expense on our other intangible assets was $675 and $1,344 for the three and six months ended March 31, 2012, respectively. Estimated future amortization expense for the five succeeding fiscal years is as follows:
Fiscal Year
|
|
Estimated Amortization
Expense
|
|
Remainder of 2013
|
|
$
|
1,303
|
|
2014
|
|
|
2,480
|
|
2015
|
|
|
2,412
|
|
2016
|
|
|
1,996
|
|
2017
|
|
|
1,166
|
|
6. OTHER LONG-TERM ASSETS
Other long-term assets consisted of the following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
7,966
|
|
|
$
|
7,991
|
|
Other long-term assets
|
|
|
3,493
|
|
|
|
2,872
|
|
Other long-term investments
|
|
|
1,274
|
|
|
|
1,082
|
|
Total
|
|
$
|
12,733
|
|
|
$
|
11,945
|
|
As discussed in Note 2 of this Form 10-Q, the two ARS that we owned as of March 31, 2013 are classified as long-term investments. The securities are credit enhanced and insured with bond insurance and all interest payments continue to be received on a timely basis. Although we believe these securities will ultimately be collected in full, we believe that it is not likely that we will be able to monetize the securities in our next business cycle (which for us is generally one year). We maintain a $234 pretax reduction ($151 net of tax) in fair value on one of the ARS that we first recognized in fiscal 2008. We continue to believe this decline in fair value is temporary based on: (1) the nature of the underlying debt; (2) the presence of bond insurance; (3) the fact that all interest payments have been received; (4) our successful monetization of $25 of this security during the quarter ended March 31, 2013; and (5) our intention not to sell the security nor be required to sell the security until the value recovers, which may be at maturity.
As discussed in Note 2 of this Form 10-Q, we recorded a long-term asset and a corresponding long-term liability of $1,274 representing the fair value of our SERP investments as of March 31, 2013.
7. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities consisted of the following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
14,840
|
|
|
$
|
18,532
|
|
Goods and services received, not yet invoiced
|
|
|
3,251
|
|
|
|
3,478
|
|
Deferred revenue and customer advances
|
|
|
3,627
|
|
|
|
3,341
|
|
Warranty accrual
|
|
|
290
|
|
|
|
359
|
|
Income taxes payable
|
|
|
3,731
|
|
|
|
2,843
|
|
Taxes, other than income taxes
|
|
|
1,393
|
|
|
|
1,041
|
|
Other
|
|
|
2,279
|
|
|
|
3,144
|
|
Total
|
|
$
|
29,411
|
|
|
$
|
32,738
|
|
The decrease in accrued compensation was primarily due to the payment of our annual incentive bonus program earned in fiscal 2012, partially offset by two quarters of accrual under our annual incentive bonus program related to fiscal 2013.
8. DEBT
On February 13, 2012, we entered into a credit agreement (the "Credit Agreement") among the Company, as Borrower, Bank of America, N.A., as administrative agent, swing line lender and an L/C issuer, Bank of America Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, JPMorgan Chase Bank, N.A., as syndication agent, and Wells Fargo Bank, N.A. as documentation agent. The Credit Agreement provided us with a $175,000 term loan (the "Term Loan"), which we drew on February 27, 2012 to fund approximately half of the special cash dividend we paid to our stockholders on March 1, 2012, and a $100,000 revolving credit facility (the "Revolving Credit Facility"), which remains undrawn, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans. The Term Loan and the Revolving Credit Facility are referred to as the "Credit Facilities." The Credit Agreement provides for an uncommitted 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 not to exceed $75,000. The Term Loan has periodic scheduled principal repayments; however, we may prepay the loan without penalty. The Credit Facilities are scheduled to expire on February 13, 2017. In connection with the Credit Agreement, the Company simultaneously terminated its previously existing $50,000 unsecured revolving credit facility, which had no outstanding balance at the time of termination.
Borrowings under the Credit Facilities (other than in respect of swing-line loans) bear interest at a rate per annum equal to the "Applicable Rate" (as defined below) plus, at our option, either (1) a LIBOR rate determined by reference to the cost of funds for deposits in the relevant currency for the interest period relevant to such borrowing or (2) the "Base Rate", which is the highest of (x) the prime rate of Bank of America, N.A., (y) the federal funds rate plus 1/2 of 1.00% and (z) the one-month LIBOR rate plus 1.00%. The initial Applicable Rate for borrowings under the Credit Facilities was 1.75% with respect to LIBOR borrowings and 0.25% with respect to Base Rate borrowings, with such Applicable Rate subject to adjustment based on our consolidated leverage ratio. Swing-line loans will bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the Revolving Credit Facility. In addition to paying interest on outstanding principal under the Credit Agreement, we pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder at a rate ranging from 0.25% to 0.35%, based on our consolidated 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, of which $550 and $1,536 remains in prepaid expenses and other current assets and other long-term assets, respectively, on our Consolidated Balance Sheet as of March 31, 2013. We must also pay letter of credit fees as necessary. We may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary "breakage" fees and reemployment costs in the case of LIBOR borrowings. All obligations under the Credit Agreement are guaranteed by each of our existing and future direct and indirect domestic subsidiaries (the "Guarantors"). 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 its domestic subsidiaries.
The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents. The Credit Agreement requires us to comply with certain financial ratio maintenance covenants, including a maximum consolidated leverage ratio of 3.00 to 1.00 through June 30, 2013 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. The maximum consolidated leverage ratio decreases to 2.75 to 1.00 between July 1, 2013 and June 30, 2014 and to 2.50 to 1.00 from July 1, 2014 through the termination of the Credit Agreement.
As of March 31, 2013, our consolidated leverage ratio was 1.50 to 1.00 and our consolidated fixed charge coverage ratio was 6.61 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 March 31, 2013, the fair value of the Term Loan approximates its carrying value of $168,438 as the loan bears a floating market rate of interest. As of March 31, 2013, $10,938 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 March 31, 2013, scheduled principal repayments of the Term Loan were as follows:
Fiscal Year
|
|
Principal
Repayments
|
|
Remainder of 2013
|
|
$
|
6,563
|
|
2014
|
|
|
10,938
|
|
2015
|
|
|
15,312
|
|
2016
|
|
|
21,875
|
|
2017
|
|
|
113,750
|
|
Total
|
|
$
|
168,438
|
|
9. DERIVATIVE FINANCIAL INSTRUMENTS
Periodically we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. Our foreign exchange contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on our forward foreign exchange contracts are recognized as other income or expense in the accompanying consolidated income statements in the period in which the exchange rates change. We do not use derivative financial instruments for trading or speculative purposes. In addition, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. At March 31, 2013, we had one forward foreign exchange contract to sell Japanese yen related to intercompany notes with one of our subsidiaries in Japan and for the purpose of hedging the risk associated with a net transactional exposure in Japanese yen.
The fair value of our derivative instrument included in the Consolidated Balance Sheet, which was determined using level 2 inputs, was as follows:
|
|
Asset Derivatives
|
Liability Derivatives
|
|
Balance Sheet Location
|
Fair Value at March 31, 2013
|
Fair Value at September 30, 2012
|
Fair Value at March 31, 2013
|
Fair Value at September 30, 2012
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
$ 59
|
$ 38
|
$ -
|
$ -
|
|
Accrued expenses and other current liabilities
|
$ -
|
$ -
|
$ -
|
$ -
|
The following table summarizes the effect of our derivative instrument on our Consolidated Statement of Income for the three and six months ended March 31:
|
|
Gain (Loss) Recognized in Statement of Income
|
|
|
Three Months Ended
|
Six Months Ended
|
|
Statement of Income Location
|
March 31, 2013
|
March 31, 2012
|
March 31, 2013
|
March 31, 2012
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
Foreign exchange contracts
|
Other income (expense), net
|
$82
|
$468
|
$323
|
$468
|
10. CONTINGENCIES
LEGAL PROCEEDINGS
While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we periodically become a party to legal proceedings in the ordinary course of business. 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.
Refer to Note 16 of "Notes to the Consolidated Financial Statements" in Item 8 of Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2012, for additional information regarding commitments and contingencies.
PRODUCT WARRANTIES
We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet customers' specifications and performance requirements, and costs related to such replacement. The warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Our warranty reserve requirements changed during the first six months of fiscal 2013 as follows:
Balance as of September 30, 2012
|
|
$
|
359
|
|
Reserve for product warranty during the reporting period
|
|
|
426
|
|
Settlement of warranty
|
|
|
(495
|
)
|
Balance as of March 31, 2013
|
|
$
|
290
|
|
11. SHARE-BASED COMPENSATION PLANS
We issue share-based payments under the following programs: our 2012 Omnibus Incentive Plan (OIP) and our Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated January 1, 2010 (ESPP). Prior to March 2012, when our stockholders approved our new OIP, we issued share-based payments under our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan, as amended and restated September 23, 2008 (EIP); our ESPP, and, pursuant to our EIP, our Directors' Deferred Compensation Plan, as amended September 23, 2008, and our 2001 Executive Officer Deposit Share Program. For additional information regarding these programs, refer to Note 11 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2012. Other than the ESPP, all share-based payments granted beginning March 6, 2012 are being made from the OIP, and the EIP is no longer available for any awards.
We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock purchases. We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate. Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate. We use the Black-Scholes model to estimate the grant date fair value of our stock options and employee stock purchases. This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options and the risk-free interest rate. We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock. We calculate the expected term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement eligible pursuant to their grants during the contractual term of the grant. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
Share-based compensation expense for the three and six months ended March 31, 2013, and 2012, was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
403
|
|
|
$
|
366
|
|
|
$
|
915
|
|
|
$
|
747
|
|
Research, development and technical
|
|
|
310
|
|
|
|
255
|
|
|
|
676
|
|
|
|
545
|
|
Selling and marketing
|
|
|
324
|
|
|
|
292
|
|
|
|
710
|
|
|
|
769
|
|
General and administrative
|
|
|
2,772
|
|
|
|
3,113
|
|
|
|
5,002
|
|
|
|
5,358
|
|
Total share-based compensation expense
|
|
|
3,809
|
|
|
|
4,026
|
|
|
|
7,303
|
|
|
|
7,419
|
|
Tax benefit
|
|
|
1,345
|
|
|
|
1,300
|
|
|
|
2,531
|
|
|
|
2,356
|
|
Total share-based compensation expense, net of tax
|
|
$
|
2,464
|
|
|
$
|
2,726
|
|
|
$
|
4,772
|
|
|
$
|
5,063
|
|
Our non-employee directors received annual equity awards in March 2013, pursuant to the OIP. The award agreements provide for immediate vesting of the award at the time of termination of service for any reason other than by reason of Cause, Death, Disability or a Change in Control, as defined in the OIP, if at such time the non-employee director has completed an equivalent of at least two full terms as a director of the Company, as defined in the Company's bylaws. Five of the Company's non-employee directors had completed at least two full terms of service as of the date of the March 2013 award. Consequently, the requisite service period for the award has already been satisfied and we recorded the fair value of $755 of the awards to these five directors to share-based compensation expense in the fiscal quarter ended March 31, 2013 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.
For additional information regarding the estimation of fair value, refer to Note 11 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2012.
12. OTHER INCOME (EXPENSE), NET
Other income, net, consisted of the following:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31
,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
33
|
|
|
$
|
28
|
|
|
$
|
78
|
|
|
$
|
79
|
|
Other income (expense)
|
|
|
430
|
|
|
|
69
|
|
|
|
1,239
|
|
|
|
122
|
|
Total other income (expense), net
|
|
$
|
463
|
|
|
$
|
97
|
|
|
$
|
1,317
|
|
|
$
|
201
|
|
The increase in other income was primarily due to the impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency, primarily related to the weakening of the Japanese yen against the U.S. dollar. The increase in other income is net of the gains and losses incurred on forward foreign exchange contracts discussed in Note 9 of this Form 10-Q.
13. INCOME TAXES
Our effective income tax rate was 30.4% and 36.4% for the three and six months ended March 31, 2013 compared to a 37.5% and 34.1% effective income tax rate for the three and six months ended March 31, 2012. The increase in the effective tax rate during the first six months of fiscal 2013 was primarily due to the recognition of a $1,686 foreign tax adjustment during the quarter ended December 31, 2012, as discussed in Note 1 under the heading "Results of Operations", and the recognition of a $1,015 valuation allowance on a deferred tax asset during the quarter ended March 31, 2013, related to a former equity investment in an entity that was legally dissolved during the quarter. The former equity investment, which had been fully impaired in fiscal 2007 for financial book purposes, represents a capital asset for tax purposes. Management has determined that it is not likely that capital gains will be generated within the relevant timeframe to offset the capital loss of this investment. Consequently, a valuation allowance has been established to reduce the deferred tax asset to zero. The resulting increase in our effective tax rate was partially offset by effects of the reinstatement of the U.S. research and experimentation tax credit, retroactively effective January 1, 2012, as the American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. During the quarter ended March 31, 2013, we recorded a $947 discrete tax credit related to qualified research and development spending in fiscal 2012 and we currently estimate we will receive an additional $1,100 in tax benefits for full fiscal year 2013, subject to actual qualified research and development spending as defined by the law.
14. EARNINGS PER SHARE
The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. Basic and diluted earnings per share were calculated as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings available to common shares
|
|
$
|
9,420
|
|
|
$
|
5,530
|
|
|
$
|
19,123
|
|
|
$
|
15,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
22,973,631
|
|
|
|
22,768,425
|
|
|
|
22,914,133
|
|
|
|
22,623,978
|
|
(Denominator for basic calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
897,394
|
|
|
|
1,011,108
|
|
|
|
840,539
|
|
|
|
753,824
|
|
Diluted weighted average common shares
|
|
|
23,871,025
|
|
|
|
23,779,533
|
|
|
|
23,754,672
|
|
|
|
23,377,802
|
|
(Denominator for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.41
|
|
|
$
|
0.24
|
|
|
$
|
0.84
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
0.23
|
|
|
$
|
0.81
|
|
|
$
|
0.68
|
|
For the three months ended March 31, 2013 and 2012, approximately 1.5 million and 0.4 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.
For the six months ended March 31, 2013 and 2012, approximately 2.0 million and 1.3 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the options was greater than the average market price of our common stock and, therefore, their inclusion would have been anti-dilutive.
15. FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND PRODUCT LINE
We operate predominantly in one industry segment – the development, manufacture, and sale of CMP consumables.
Revenue generated by product line for the three and six months ended March 31, 2013, and 2012, was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
Revenue:
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Tungsten slurries
|
|
$
|
36,819
|
|
|
$
|
38,218
|
|
|
$
|
77,525
|
|
|
$
|
78,946
|
|
Dielectric slurries
|
|
|
29,734
|
|
|
|
27,209
|
|
|
|
60,092
|
|
|
|
55,216
|
|
Copper slurry, including barrier and aluminum
|
|
|
17,057
|
|
|
|
16,061
|
|
|
|
35,041
|
|
|
|
32,101
|
|
Polishing pads
|
|
|
7,402
|
|
|
|
7,939
|
|
|
|
15,866
|
|
|
|
14,869
|
|
Data storage slurries
|
|
|
5,424
|
|
|
|
5,749
|
|
|
|
10,486
|
|
|
|
10,726
|
|
Engineered Surface Finishes
|
|
|
3,928
|
|
|
|
4,060
|
|
|
|
7,887
|
|
|
|
9,500
|
|
Total revenue
|
|
$
|
100,364
|
|
|
$
|
99,236
|
|
|
$
|
206,897
|
|
|
$
|
201,358
|
|
16. NEW ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (Topic 220) – Presentation of Comprehensive Income" (ASU 2011-05). The provisions of ASU 2011-05 require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. If two separate statements are presented, the statement of other comprehensive income should immediately follow the statement of net income. ASU 2011-05 became effective for us in the quarter ended December 31, 2012. The adoption of ASU 2011-05 changed the way we present comprehensive income as we now present comprehensive income in a separate statement immediately following the income statement rather than the prior annual presentation of comprehensive income within the statement of equity and quarterly presentation of comprehensive income within the footnotes to the financial statements.
In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" (ASU 2013-02). The provisions of ASU 2013-02 require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. An entity is also required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified by the respective line items of net income if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts not required by U.S. GAAP to be reclassified to net income in their entirety, an entity is required to cross reference to other disclosures required under U.S. GAAP. ASU 2013-02 became effective for us in the quarter ended March 31, 2013. The adoption of ASU 2013-02 had no impact on our financial statements as we did not have any reclassification adjustments out of accumulated other comprehensive income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as disclosures included elsewhere in this Form 10-Q, 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‑Q are forward‑looking. In particular, the statements herein regarding future sales and operating results; Company and industry growth, contraction or trends; growth or contraction of the markets in which the Company participates; international events, regulatory or legislative activity, or various economic factors; product performance; the generation, protection and acquisition of intellectual property, and litigation related to such intellectual property; new product introductions; development of new products, technologies and markets; natural disasters; the acquisition of or investment in other entities; uses and investment of the Company's cash balance; financing facilities and related debt, payment of principal and interest, and compliance with covenants and other terms; the Company's capital structure; 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.
This section, "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), should be read in conjunction with our annual report on Form 10-K for the fiscal year ended September 30, 2012, including the consolidated financial statements and related notes thereto.
SECOND QUARTER OF FISCAL 2013 OVERVIEW
The softening of demand within the semiconductor industry that began late in the fourth quarter of our fiscal 2012 continued through our second quarter of fiscal 2013. Industry reports suggest that demand has been particularly soft for personal computers, which has negatively impacted the DRAM portion of the memory segment of the semiconductor industry and has contributed to softer demand for some of our CMP consumable products. However, some industry analysts and semiconductor manufacturers continue to predict some strengthening of semiconductor demand during the June and September quarters, which likely would be driven by positive trends in mobile devices and mobile connectivity. T
here are many factors, however, that make it difficult for us to predict future revenue trends for our business, including those discussed in Part II, Item 1A entitled "Risk Factors" in this Form 10-Q.
Revenue for our second quarter of fiscal 2013 was $100.4 million,
which represented an increase of 1.1% from the second quarter of fiscal 2012 and a decrease of 5.8% from the previous quarter
. The increase from the second quarter of fiscal 2012 was due to growth in our dielectrics slurry business, primarily in South Korea, and increased sales of our copper slurry products, which include slurries for polishing aluminum. Revenues for all other product lines decreased compared to the year ago quarter. Compared to the prior quarter, revenues for our data storage slurry products increased, while revenues decreased for all other product lines. We believe the decrease in revenue from the prior quarter was primarily due to continued soft demand within the semiconductor industry and traditional seasonal weakness that we typically experience in the second quarter of our fiscal year.
Gross profit expressed as a percentage of revenue for our second quarter of fiscal 2013 was 48.2%, which represented an increase from 46.1%
reported in the second quarter of fiscal 2012 and from 47.0% in our prior quarter. The increase in gross profit percentage from the second quarter of fiscal 2012 was primarily due to lower variable manufacturing costs and benefits associated with a weaker Japanese yen versus the U.S. dollar, partially offset by a lower-valued product mix. The increase in gross profit percentage from the prior quarter was primarily due to lower variable and fixed manufacturing costs, including the positive impact of Japanese yen exchange rate changes, partially offset by lower sales volume and a lower-valued product mix. Our gross profit percentage was 47.6% on a year-to-date basis, which is within the upper half of our full fiscal year 2013 guidance range of 46% to 48%. However, we may continue to experience fluctuations in our gross profit due to a number of factors, including the extent to which we utilize our manufacturing capacity and fluctuations in our product mix, which may cause our quarterly gross profit to be above or below this annual guidance range.
Operating expenses were $34.4 million in our second quarter of fiscal 2013, compared to $36.7 million in the second quarter of fiscal 2012 and $33.4 million in the previous quarter. The decrease in operating expenses from the comparable quarter of fiscal 2012 was primarily driven by the absence of bad debt expense related to a customer bankruptcy and costs associated with our 2012 leveraged recapitalization with a special cash dividend, partially offset by higher staffing-related costs, including costs associated with our annual cash incentive bonus program (AIP). The increase in operating expenses from the prior quarter was primarily due to higher staffing-related costs, partially offset by lower depreciation expense and lower clean room material costs. We continue to expect full year operating expenses to be in the range of $132 million to $136 million.
Diluted earnings per share for the second quarter of fiscal 2013 were $0.40, which represents an increase from $0.23 reported in the second quarter of fiscal 2012 and a decrease from $0.41 reported in the previous fiscal quarter. The increase in diluted earnings per share from the second quarter of fiscal 2012 is primarily due to a higher gross profit margin and lower operating expenses, including approximately $0.12 related to the absence of bad debt expense and leveraged recapitalization fees recorded in the prior year quarter. The decrease in diluted earnings per share from the prior quarter was primarily due to lower revenue, partially offset by a lower effective tax rate due to enacted tax legislation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
We discuss our critical accounting estimates and effects of recent accounting pronouncements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2012. We believe there have been no material changes in our critical accounting estimates during the first six months of fiscal 2013. See Note 16 of the Notes to the Consolidated Financial Statements for a discussion of new accounting pronouncements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2013, VERSUS THREE MONTHS ENDED MARCH 31, 2012
REVENUE
Revenue was $100.4 million for the three months ended March 31, 2013, which represented a 1.1%, or $1.1 million, increase from the three months ended March 31, 2012. The increase in revenue was driven by a $1.8 million increase due to higher sales volume and $0.6 million due to a higher-priced product mix, partially offset by a $1.4 million decrease in revenue due to foreign exchange rate changes, primarily due to the significant strengthening of the U.S. dollar against the Japanese yen. Compared to the same quarter last year, we experienced revenue increases in our dielectrics slurry product line and in our copper slurry product line, which include slurries for polishing aluminum. These increases were partially offset by decreased revenue in our tungsten slurry, polishing pad, data storage slurry and Engineered Surface Finishes (ESF) product lines.
COST OF GOODS SOLD
Total cost of goods sold was $52.0 million for the three months ended March 31, 2013, which represented a decrease of 2.7%, or $1.4 million, from the three months ended March 31, 2012. The decrease in cost of goods sold was primarily due to $2.0 million from foreign exchange rate changes and $0.9 million due to certain production variances. These decreases in cost of goods sold were partially offset by a $1.5 million increase due to a higher-cost product mix.
Metal oxides, such as silica, are significant raw materials that we use in many of our CMP slurries. In an effort to mitigate our risk exposure to rising raw material costs and to increase supply assurance and quality performance requirements, we have entered into multi-year supply agreements with a number of suppliers. For more information about our supply contracts, see "Tabular Disclosure of Contractual Obligations" in this Quarterly Report on Form 10-Q as well as in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.
Our need for additional quantities or different kinds of key raw materials in the future has required, and will continue to require, that we enter into new supply arrangements with third parties. Future arrangements may result in costs which are different from those in the existing agreements. In addition, a number of factors could impact the future cost of raw materials, packaging, freight and labor. We 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 48.2% for the three months ended March 31, 2013, as compared to 46.1% for the three months ended March 31, 2012. The increase in gross profit as a percentage of revenue was primarily due to lower variable manufacturing costs, including benefits associated with a weaker Japanese yen versus the U.S. dollar and certain favorable production variances, partially offset by a lower-valued product mix. We continue to expect our gross profit percentage for full year fiscal 2013 to be within a range of 46% to 48%.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $15.1 million for the three months ended March 31, 2013, which represented an increase of 7.1%, or $1.0 million, from the three months ended March 31, 2012. The increase was primarily due to $1.5 million in higher staffing-related costs, including costs related to our AIP, partially offset by a $0.6 million decrease in depreciation expense as certain equipment is now fully depreciated.
Our research, development and technical efforts continue to focus on the following main areas:
·
|
Research related to fundamental CMP technology;
|
·
|
Development and formulation of new and enhanced CMP consumables products, including collaboration on joint development projects with key customers;
|
·
|
Process development to support rapid and effective commercialization of new products;
|
·
|
Technical support of CMP products in our customers' research, development and manufacturing facilities; and,
|
·
|
Evaluation and development of new polishing and metrology applications outside of the semiconductor industry.
|
SELLING AND MARKETING
Selling and marketing expenses were $7.0 million for the three months ended March 31, 2013, which represented a decrease of 5.2%, or $0.4 million, from the three months ended March 31, 2012. The decrease was primarily due to lower travel-related costs and lower professional fees.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $12.3 million for the three months ended March 31, 2013, which represented a decrease of 19.0%, or $2.9 million, from the three months ended March 31, 2012. The decrease was primarily due to $3.9 million in lower bad debt expense, including the absence of $3.7 million recorded in the second quarter of fiscal 2012 associated with a customer bankruptcy, partially offset by $1.0 million in higher staffing-related costs, including costs associated with our AIP.
INTEREST EXPENSE
Interest expense was $0.9 million for the three months ended March 31, 2013, which represented an increase of $0.5 million from the three months ended March 31, 2012. The increase was due to a full quarter of interest expense recorded on the term loan we entered into in fiscal 2012 to partially fund the special cash dividend we paid in fiscal 2012, compared to approximately one and one-half months of interest in the comparable quarter of fiscal 2012.
OTHER INCOME (EXPENSE), NET
Other income was $0.5 million for the three months ended March 31, 2013 compared to $0.1 million during the three months ended March 31, 2012. The increase in other income was primarily due to the impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency, primarily related to the weakening of the Japanese yen against the U.S. dollar. The increase in other income is net of the gains and losses incurred on forward foreign exchange contracts discussed in Note 9 of the Notes to the Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 30.4% for the three months ended March 31, 2013 compared to a 37.5% effective income tax rate for the three months ended March 31, 2012. The decrease in the effective tax rate during the second quarter of fiscal 2013 was primarily due to the reinstatement of the U.S. research and experimentation tax credit, retroactively effective January 1, 2012, as the American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. We recorded approximately $0.9 million in discrete income tax benefits related to fiscal 2012 in the second quarter of fiscal 2013 and we currently estimate we will receive an additional $1.1 million in tax benefits for full fiscal year 2013, subject to actual qualified research and development spending as defined by the law. The decrease in our effective tax rate was partially offset by a $1.0 valuation allowance established on a deferred tax asset related to a past equity investment in an entity that was legally dissolved during the quarter.
NET INCOME
Net income was $9.4 million for the three months ended March 31, 2013 which represented an increase of 70.3%, or $3.9 million, from the three months ended March 31, 2012. The increase was primarily due to a higher gross profit percentage and lower operating expenses, including the absence of the bad debt expense related to a customer bankruptcy recorded in the second quarter of fiscal 2012
.
SIX MONTHS ENDED MARCH 31, 2013, VERSUS SIX MONTHS ENDED MARCH 31, 2012
The results of operations for the six months ended March 31, 2013 include a foreign tax adjustment to correct prior period amounts, which we have determined to be immaterial to the prior periods to which it relates and is expected to be immaterial to our full fiscal year 2013 results. This adjustment, recorded in the first quarter of fiscal 2013, reduced net income for the first six months of fiscal 2013 by $1.7 million and diluted earnings per share by approximately $0.07. This adjustment relates to the reversal of a deferred tax asset for cumulative net operating losses (NOLs) associated with our facility in South Korea since its opening in 2011, as these NOLs are expected to be consumed during periods a tax holiday is in effect.
REVENUE
Revenue was $206.9 million for the six months ended March 31, 2013, which represented a 2.8%, or $5.5 million, increase from the six months ended March 31, 2012. The increase in revenue was driven by a $4.6 million increase due to a higher-priced product mix and a $3.7 million increase in sales volume. These increases were partially offset by a $1.7 million decrease in revenue due to the effect of foreign exchange rate changes. On a year-to-date basis, we experienced increased sales within our dielectrics slurry, copper slurry, which includes slurries for polishing aluminum, and polishing pad product lines, partially offset by decreased revenue in our tungsten slurry and ESF product lines.
COST OF GOODS SOLD
Total cost of goods sold was $108.5 million for the six months ended March 31, 2013, which represented an increase of 2.1%, or $2.2 million, from the six months ended March 31, 2012. The increase in cost of goods sold was primarily due to an $8.8 million increase due to a higher-cost product mix, a $1.7 million increase due to certain production variances and a $0.9 increase in fixed manufacturing costs. These increases in cost of goods sold were partially offset by a $6.2 million decrease in variable production costs and a $2.3 million decrease due to the effects of foreign exchange rate changes.
GROSS PROFIT
Our gross profit as a percentage of revenue was 47.6% for the six months ended March 31, 2013, as compared to 47.2% for the six months ended March 31, 2012. The increase in gross profit as a percentage of revenue was primarily due to higher sales volume and lower variable manufacturing costs, including benefits associated with a weaker Japanese yen versus the U.S. dollar, partially offset by a lower-valued product mix. Our year-to-date gross profit percentage of 47.6% is within the upper half of our full year fiscal 2013 guidance range of 46% to 48%.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $30.4 million for the six months ended March 31, 2013, which represented an increase of 9.2%, or $2.6 million, from the six months ended March 31, 2012. The increase was primarily due to $2.4 million in higher staffing-related costs, including costs related to our AIP and $0.7 million in higher expenses for clean room materials, partially offset by small decreases in various other types of expense.
SELLING AND MARKETING
Selling and marketing expenses were $14.2 million for the six months ended March 31, 2013, which represented a decrease of 4.2%, or $0.6 million, from the six months ended March 31, 2012. The decrease was primarily due to lower travel-related expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $23.2 million for the six months ended March 31, 2013, which represented a decrease of 17.2%, or $4.8 million, from the six months ended March 31, 2012. The decrease was primarily due to $3.8 million in lower bad debt expense, including $3.7 million related to a customer bankruptcy recorded in the second quarter of fiscal 2012, and $2.6 million in lower professional fees, including the absence of fees associated with our leveraged recapitalization with a special cash dividend completed in March 2012. These decreases were partially offset by $1.6 million in higher staffing-related costs, including costs associated with our AIP.
INTEREST EXPENSE
Interest expense was $1.8 million for the six months ended March 31, 2013, which represented an increase of $1.4 million from the six months ended March 31, 2012. The increase was due to interest expense recorded on the term loan we entered into in fiscal 2012 to partially fund the special cash dividend we paid in fiscal 2012.
OTHER INCOME (EXPENSE), NET
Other income was $1.3 million for the six months ended March 31, 2013 compared to $0.2 million during the six months ended March 31, 2012. The increase in other income was primarily due to the impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency, primarily related to the weakening of the Japanese yen against the U.S. dollar. The increase in other income is net of gains and losses incurred on forward foreign exchange contracts discussed in Note 9 of the Notes to the Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 36.4% for the six months ended March 31, 2013 compared to a 34.1% effective income tax rate for the six months ended March 31, 2012. The increase in the effective tax rate during fiscal 2013 was primarily due to the recognition of a $1.7 million foreign tax adjustment, as discussed in Note 1 under the heading "Results of Operations", and the recognition of a $1.0 million valuation allowance on a deferred tax asset related to a past equity investment in an entity that was legally dissolved during the quarter ended March 31, 2013. The increase in our effective tax rate was partially offset by the reinstatement of the U.S. research and experimentation tax credit, retroactively effective January 1, 2012, as the American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. We recorded approximately $0.9 million in discrete income tax benefits related to fiscal 2012 in the second quarter of fiscal 2013 and we currently estimate we will receive an additional $1.1 million in tax benefits for full fiscal year 2013, subject to actual qualified research and development spending as defined by the law.
NET INCOME
Net income was $19.1 million for the six months ended March 31, 2013 which represented an increase of 19.9%, or $3.2 million, from the six months ended March 31, 2012. The increase was primarily due to increased sales volume, lower operating expense, and a higher gross profit percentage, partially offset by higher interest expense and a higher effective tax rate
.
LIQUIDITY AND CAPITAL RESOURCES
We generated $30.2 million in cash flows from operating activities in the first six months of fiscal 2013, compared to $21.3 million in cash from operating activities in the first six months of fiscal 2012. Our cash flows provided by operating activities in the first six months of fiscal 2013 originated from $19.1 million in net income, $23.5 million in non-cash items and a $12.4 million decrease in cash flow due to a net increase in working capital. The increase in cash flows from operating activities compared to the first six months of fiscal 2012 was primarily due to increased net income and changes in the timing and amount of prepaid expense, accrued expense and income tax payments.
In the first six months of fiscal 2013, cash flows used in investing activities were $5.5 million for purchases of property, plant and equipment. In the first six months of fiscal 2012, cash flows used in investing activities were $11.6 million for purchases of property, plant and equipment, including payments to complete our manufacturing facility in South Korea, which we opened in fiscal 2011. We estimate our total capital expenditures in fiscal 2013 will be approximately $20.0 million, which is down from our previous guidance of between $20.0 million and $25.0 million.
In the first six months of fiscal 2013, cash flows used in financing activities were $11.8 million. We used $20.0 million to repurchase common stock under our share repurchase program and $1.3 million to repurchase common stock pursuant to the terms of our 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 the EIP and OIP. We also used $4.4 million to repay long-term debt. We received $13.2 million from the issuance of common stock related to the exercise of stock options granted under our EIP and the sale of shares to our employees under our 2007 Employee Stock Purchase Plan, as amended and restated January 1, 2010 (ESPP), and we received $0.7 million in tax benefits related to exercises of stock options and vesting of restricted stock granted under our EIP and OIP. In the first six months of fiscal 2012, cash flows used in financing activities were $157.0 million. We used $347.1 million to fund the special cash dividend in March 2012, $13.0 million to repurchase common stock under our share repurchase program and $1.5 million to repurchase common stock pursuant to the terms of our EIP for shares withheld from employees to cover payroll taxes on the vesting of restricted stock granted under the EIP. We received $175.0 million from the drawdown of our term loan (discussed in Note 8 of the Notes to the Consolidated Financial Statements), $29.0 million from the issuance of common stock related to the exercise of stock options granted under our EIP and the sale of shares to our employees under the ESPP, and we received $0.6 million in tax benefits related to exercises of stock options and vesting of restricted stock granted under our EIP.
In 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 capital management initiative that we announced in December 2011, on December 13, 2011, our Board of Directors authorized an increase in the amount available under our share repurchase program to $150.0 million. We repurchased 597,382 shares for $20.0 million during the first six months of fiscal 2013 and we repurchased 321,000 shares for $13.0 million during the first six months of fiscal 2012 under this expanded program. As of March 31, 2013, $110.0 million remains outstanding under our share repurchase program. Share repurchases are made from time to time, depending on market conditions, in open market transactions, at management's discretion. 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.
We entered into a Credit Agreement in February 2012, which provided us with a $175.0 million Term Loan and a $100.0 million Revolving Credit Facility, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans. The Term Loan and Revolving Credit Facility are referred to as the "Credit Facilities". The Credit Agreement provides us an uncommitted 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 not to exceed $75.0 million. The Term Loan has periodic scheduled principal repayments; however, we may prepay the loan without penalty. The Credit Facilities are scheduled to expire on February 13, 2017. The Term Loan was drawn on February 27, 2012 and the Revolving Credit Facility remains undrawn. In connection with the Credit Agreement, we terminated our previously existing $50.0 million unsecured revolving credit facility. The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents. The Credit Agreement requires us to comply with certain financial ratio maintenance covenants, including a maximum consolidated leverage ratio of 3.00 to 1.00 through June 30, 2013 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. The maximum consolidated leverage ratio decreases to 2.75 to 1.00 between July 1, 2013 and June 30, 2014 and to 2.50 to 1.00 from July 1, 2014 through the termination of the Credit Agreement. As of March 31, 2013, our consolidated leverage ratio was 1.50 to 1.00 and our consolidated fixed charge coverage ratio was 6.61 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 8 of the Notes to the Consolidated Financial Statements for additional information regarding the Credit Agreement.
As of March 31, 2013, we had $188.4 million of cash and cash equivalents, $33.8 million of which was held in foreign subsidiaries in Singapore and Taiwan where we have made a current election to permanently reinvest the earnings rather than repatriate the earnings to the U.S. If we choose to repatriate these earnings in the future through dividends or loans to the U.S. parent company, the earnings could become subject to additional income tax expense.
We believe that our current balance of cash and long-term investments, cash generated by our operations and available borrowing capacity under our new Credit Facility will be sufficient to fund our operations, expected capital expenditures, merger and acquisition activities and share repurchases for the foreseeable future. However, in order to further expand our business, we may need to raise additional funds in the future through equity or debt financing, strategic relationships or other arrangements. Depending on future conditions in the capital and credit markets, we could encounter difficulty securing additional financing in the type or amount necessary to pursue these objectives.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2013, and September 30, 2012, 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.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at March 31, 2013, 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
|
|
$
|
168.4
|
|
|
$
|
10.9
|
|
|
$
|
30.6
|
|
|
$
|
126.9
|
|
|
$
|
-
|
|
Interest expense and fees on long-term debt
|
|
|
11.4
|
|
|
|
3.6
|
|
|
|
5.8
|
|
|
|
2.0
|
|
|
|
-
|
|
Purchase obligations
|
|
|
173.9
|
|
|
|
59.4
|
|
|
|
82.9
|
|
|
|
31.2
|
|
|
|
0.4
|
|
Operating leases
|
|
|
9.5
|
|
|
|
3.6
|
|
|
|
3.5
|
|
|
|
1.9
|
|
|
|
0.5
|
|
Other long-term liabilities
|
|
|
7.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.3
|
|
Total contractual obligations
|
|
$
|
370.5
|
|
|
$
|
77.5
|
|
|
$
|
122.8
|
|
|
$
|
162.0
|
|
|
$
|
8.2
|
|
Prior to January 1, 2013, we operated under a fumed silica supply agreement with Cabot Corporation, our former parent company which is not a related party, under which we were generally obligated to purchase at least 90% of our six-month volume forecast for certain of our slurry products, to purchase certain minimum quantities every six months, and to pay for the shortfall if we purchased less than these amounts. This agreement expired on December 31, 2012. We did not pay any shortfall under this agreement. We entered into a new fumed silica supply agreement with Cabot Corporation that became effective as of January 1, 2013 with an initial term of four years. This new agreement has revised pricing and requires us to purchase certain minimum quantities of fumed silica each year of the agreement, and to pay a shortfall if we purchase less than the minimum. The purchase obligations in the table above reflect management's expectation that we will meet the minimum purchase quantities each year of the new contract. We also operated under a fumed alumina supply agreement with Cabot Corporation, which expired in April 2013, under which we were obligated to pay certain fixed, capital and variable costs, and had certain take-or-pay obligations. We did not pay any shortfall under this agreement. Purchase obligations include an aggregate amount of $154.5 million of contractual commitments related to our Cabot Corporation agreements for fumed silica.
Interest payments on long-term, variable rate debt reflect LIBOR rates in effect at March 31, 2013. Commitment fees are based on our estimated consolidated leverage ratio in future periods. See Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding our long-term debt.
Refer to Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of
Part II of our
annual report on Form 10-K for the fiscal year ended September 30, 2012, for additional information regarding our contractual obligations.