CMC Materials, Inc. (CCMP) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Cabot Microelectronics Corporation second-quarter fiscal 2014 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Ms. Trisha Tuntland, Manager of Investor Relations. Ma'am, you may begin.

Good morning. With me today are Bill Noglows, Chairman and CEO, and Bill Johnson, Executive Vice President and CFO.

This morning we reported results for our second quarter of fiscal year 2014 which ended March 31. A copy of our earnings release is available in the investor relations section of our website, CabotCMP.com or by calling our investor relations office at 630-499-2600. A webcast of today's conference call and the script of this morning's formal comments will also be available on our website.

Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings, including our report filed on Form 10-K for the fiscal year ended September 30, 2013. We assume no obligation to update any of this forward-looking information.

Also our prepared remarks this morning reference non-GAAP financial measures. Our earnings release includes a reconciliation of non-GAAP financial measures.

I will now turn the call to Bill Noglows.

Thanks, Trisha. Good morning, everyone, and thank you for joining us.

This morning we announced solid financial results for our second fiscal quarter of 2014. We reported total Company revenue of $99.5 million, a gross profit margin of 46.8% of revenue which includes the adverse effect of a $2.1 million asset impairment charge and earnings per share of $0.40.

Excluding this impairment, our non-GAAP profit margin was 48.9% of revenue which is 70 basis points higher than in the same quarter last year and non-GAAP earnings per share were $0.46 which is an increase of 15% compared to the same quarter a year ago on slightly lower revenue. On this basis, we have now expanded gross margins year over year for five consecutive quarters.

While we are pleased with these results, they reflect a continuation of the soft industry conditions that we referenced in January when we reported results for our first fiscal quarter. As you may recall from our prior communications, we have talked in the past about seasonal trends within our business in tandem with evolving trends within the global semiconductor industry including greater seasonal swings in demand.

This now marks the third fiscal year in which our CMP consumables business has experienced soft industry demand conditions during the first half of the year. Consistent with the previous two fiscal years we have seen a relatively slow start to the year and expect strengthening in demand in the second half. Bill Johnson will provide more detail on our financial results later in the call.

Let me start this morning with an overview of the global semiconductor industry environment. Various industry reports and comments made by some of our strategic customers suggest that currently most IC inventories are at relatively lean levels and indicate a promising outlook for strengthening demand in the industry going into the June quarter. This is likely due to a continued conservative management of IC device inventory in the supply chain. Certain industry analysts continue to expect further growth in demand for mobile electronic devices and are forecasting double-digit growth in demand for smartphones and tablets through 2017.

However, overall semiconductor industry demand will likely continue to be muted by weak demand for PCs. For the first quarter of the calendar year, Gartner reported a lower decline of PC shipments compared to the past seven quarters but still a decline none the less. As a result of all of this, it appears that IC manufacturers are generally increasing fab utilization rates and manufacturing capacity for IC devices at leading-edge technology nodes is now at or near full utilization.

Throughout the history of the semiconductor industry, scale in semiconductor devices to smaller and smaller geometries has resulted in both increasing performance and lower cost of semiconductor devices. As the industry continues to shrink dimensions, these technology node transitions become more challenging and introduce new requirements for power and speed. New transistor and device architectures and innovations in fab materials will become more critical to overcoming technical and physical obstacles in the future.

For example, advanced technologies like high-k metal gate, FinFET and 3-D NAND involve new CMP applications increasing the role that highly engineered materials and highly formulated CMP solutions like ours, are likely to play going forward.

We believe that the confluence of all of these trends means that our Company with its deep relationships with strategic customers is well-positioned to respond quickly and effectively to increasingly challenging customer demands and requirements by leveraging our industry-leading technology, global infrastructure, robust supply chain and rich quality systems.

Now let me discuss Company-related matters. As a result of our intensive focus on supporting our customers, during the quarter we earned a number of awards from our customers for our performance in 2013. The criteria to win these awards are extremely rigorous. Accordingly, we are proud to have earned Intel's most prestigious award for suppliers, the Supplier Continuous Quality Improvement award for the second consecutive year. In particular, we are one of only eight of Intel's more than 15,000 suppliers who won this award and we believe this repeated recognition exemplifies our commitment to being a long-term strategic partner successfully delivering the highest standards for quality, manufacturing efficiency and technology.

In addition, we are honored to also have received awards from SMIC, Huali and HHGrace. We believe the recognition by these three customers is evidence of our success in supporting our customers in China, an important and growing region for the semiconductor industry.

Our close collaborations with our customers in China resulted in approximately 23% revenue growth there when compared to the same quarter a year ago. We are delighted to be recognized as an elite supplier within our customers' broader supply chains and we look forward to continuing our efforts to consistently exceed their expectations.

Turning to our CMP polishing pads business, we are pleased that our pads business achieved year-over-year revenue growth of approximately 5% during the quarter. Our pipeline of business opportunities for our D100 and D200 pad products is that an all-time high and our global business teams continue to partner with existing and new customers. As a result of these collaborations during the quarter, we earned a new D100 business at one of our strategic customers by displacing the incumbent technology.

Furthermore, we saw an increase in the level of product evaluation and qualification activity of our D200 soft pad technology by a number of our strategic customers for several applications where we believe our pads low defectivity provides particular value. This momentum reinforces our continued belief that our pads business represents a significant growth opportunity for our Company.

Turning to our CMP slurry business, we continue to gain traction as we focus our research and development activity on innovating game-changing technology for leading-edge applications with technology leading customers. This increased focus led to business wins during the quarter in advanced node copper and dielectrics applications at certain strategic customers. With the ongoing introduction of the new materials to be polished and evolving device architectures that I mentioned earlier, we believe we are well-positioned to continue to be a key technology enabler supporting our customers' activities to address both performance and cost of ownership requirements.

Let me now provide a few comments on our capital allocation strategy. Through our strong financial performance throughout our history we have established a track record of delivering significant value to our shareholders.

Over the last decade, we have repurchased roughly $270 million of our stock under several share repurchase programs including repurchasing $20 million of our stock during our second fiscal quarter and also distributing nearly $350 million to our shareholders as a special cash dividend as part of our capital management initiative in 2012. Through this capital allocation we have distributed around $620 million in total to our shareholders.

In further support of continuing to provide additional value to our shareholders on April 22, our Board of Directors authorized an increase in our existing share repurchase program to $150 million from the previously remaining approximately $62 million. Our key priorities for capital allocation continue to be funding the organic growth opportunities within the Company, share repurchases and acquisition opportunities in closely related areas.

In conclusion as I mentioned in my introductory remarks, based on demand trends within the industry and in our Company over the previous two fiscal years, we generally expect softer demand conditions in the first half of the fiscal year followed by strong demand in the second half. It appears that we are now seeing firming of demand early in our third fiscal quarter which we believe represents the start of a stronger second half.

We are encouraged by the high-level engagement with our technology leading customers on a wide range of new business opportunities. Over the years we have made capital investments particularly in the Asia-Pacific region to strengthen our ability to serve the global semiconductor industry including three facilities located in the two largest CMP consumable markets in the world.

We believe that our global infrastructure and our technical, operational and commercial capabilities are unmatched by our competitors. We believe these capabilities enable us to collaborate in real-time with our strategic customers to a degree that our competitors cannot and we are confident that this positions us well for continued success.

With that I will turn the call over to Bill.

Thanks, Bill, and good morning, everyone. Revenue for the second quarter of fiscal 2014 was $99.5 million which represents a 0.9% decrease from the same quarter last year. We believe the decrease in revenue primarily reflects continued soft demand within the global semiconductor industry as Bill mentioned, as well as a $1 million adverse impact associated with foreign exchange rate changes primarily the weaker Japanese yen versus the US dollar.

Compared to the same quarter last year, revenue from our CMP consumables business was down by 0.2%. Year-to-date, revenue of $200 million represents a decrease of 3.3% from the prior year and includes a $2.8 million adverse impact associated with foreign exchange rate changes primarily the weaker yen.

Drilling down into revenue by business area, tungsten slurries contributed 37.8% of total quarterly revenue with revenue up 2% from the same quarter a year ago. Dielectric slurries provided 29.3% of our revenue this quarter with sales down 2.1% compared to last year.

Sales of slurries for polishing metals other than tungsten including copper, aluminum and barrier, represented 17.4% of our total revenue and increased 1.6% from the same quarter last year.

Sales of our polishing pads represented 7.8% of our total revenue for the quarter and reflect an increase of 4.8% from the same quarter last year.

As Bill mentioned, we were able to secure a new D100 pad business win during the quarter as well as increase the level of qualification and evaluation activity for our D200 pad products.

Datastorage products represented 4.5% of our quarterly revenue, down 17.3% from the same quarter last year. Finally, revenue from our engineered surface finishes business which includes QED, generated 3.2% of our total sales and was down 18.7% from the same quarter last year. Volatility in our QED revenue is common given that it is primarily a capital equipment oriented business.

Our gross profit this quarter represented 46.8% of revenue and this includes a $2.1 million asset impairment charge related to certain manufacturing assets. Excluding this impairment charge, non-GAAP gross profit was 48.9% of revenue which is 70 basis points higher than the 48.2% of revenue we reported in the same quarter a year ago.

Other factors impacting gross profit this quarter include benefits associated with a weaker Japanese yen and lower compensation costs partially offset by higher variable manufacturing costs including higher raw material costs.

Year to date gross profit represented 47.1% of revenue. Excluding the impairment charge, year-to-date non-GAAP gross profit was 48.1% which represents a 50 basis point improvement over the first six months of fiscal 2013. In light of first-half results including the impairment, we currently expect gross profit for the full fiscal year to be near the lower end of our guidance range of 48% to 50% of revenue.

Now I will turn to operating expenses which include research, development and technical, selling and marketing, and general and administrative costs.

Operating expenses this quarter of $31.9 million were $2.5 million lower than in the second quarter of fiscal 2013. The decrease was primarily due to lower staffing related costs including incentive compensation costs.

Year to date total operating expenses were $63.9 million which is 5.7% lower than during the same period last year. As a reflection of this we are lowering our full fiscal year guidance range for operating expenses to be within a range of $127 million to $131 million. This is $4 million lower than our prior guidance range of $131 million to $135 million.

Diluted earnings per share were $0.40 this quarter. Excluding the referenced asset impairment, non-GAAP diluted earnings per share were $0.46 which represents an increase of 15% compared to $0.40 reported in the second quarter of fiscal year 2013. Year to date diluted earnings per share were $0.86 or $0.92 on a non-GAAP basis excluding the impairment compared to $0.81 last year. Last year's results included a $0.07 adverse impact of a foreign tax adjustment.

Our cumulative year-to-date effective income tax rate was 27%. We continue to benefit from increased pretax profits in certain jurisdictions which have lower tax rates than the US. We now expect our effective tax rate for full fiscal year 2014 to be within the range of 27% to 29% which is less than our previous estimate of roughly 30%.

Turning now to cash and balance sheet related items, capital investments for the quarter were $3.6 million bringing our year-to-date capital spending to $7.3 million. For full fiscal year 2014, we continue to expect capital spending to be approximately $15 million.

Depreciation and amortization expense for the quarter was $4.9 million. In addition, we purchased $20 million of our stock during the quarter compared to $10 million in the same quicker last year. As Bill mentioned earlier, our Board of Directors has authorized an increase in our existing share repurchase program to $150 million from the previously remaining approximately $62 million. We ended the quarter with a cash balance of $239.1 million and have $157.5 million of debt outstanding.

I will conclude my remarks with a few comments on recent sales and order patterns. During the second fiscal quarter which is traditionally the seasonally weakest quarter of our fiscal year, we saw a decrease in revenue for our CMP consumables products of approximately 1% compared to the prior quarter. As we observe orders for our CMP consumables products received to date in April that we expect to ship by the end of the month, we see April results trending approximately 7% higher than the average rate in our second fiscal quarter. I would caution as I always do, that several weeks of CMP related orders out of a quarter represent only a limited window on full quarter results.

Now I will turn the call back to the operator as we prepare to take your questions.

(Operator Instructions). Avinash Kant, D.A. Davidson.

Good morning. A question, first one, just the tax rate. You talked about 27% to 29% tax rate for the fiscal year. Since you have had a lower tax thus far do you think the remainder of the year will have roughly 30% still?

No, we expect now 27% to 29% for the full-year. We are getting a continued benefit of a tax holiday in Korea based on our investment there in 2011 and are benefiting from that as we ramp production there at that facility.

Okay. In the past business you talked to about the new D100 customers. Is this an absolute renewed relationship or they have been working with you on some other products before? How should we think of it and are they in a position to ramp?

I'm sorry. Can you repeat the question?

Just to get some color on the D100 pad customer that you won in the quarter, is this something that has got potential to be ramping multiple lines going forward? Was this an absolutely new relationship, they have been buying slurries from you beforehand and now they are getting into pads? If you could give some color on that.

I'm sorry for not hearing you the first time. The win was with an existing customer for a new application that we had not been selling pads into. We are excited about the application because we think it will be extendable into other lines and as we gain experience with that particular application we think it will be extendable to other customers.

But it is another great win for the pad business and we continue to see a lot of interest in our D100 and as I think I talked in my prepared comments, accelerating interest in our D200 pad because of its low defectivity at some of these advanced node technologies.

Bill, have you ever given us some color in terms of within the past business that you have, how much is D100 and how much is D200? I am sure D200 is much smaller but how much?

D200 is much smaller. It is a relatively new technology. It is in -- I would say it is in the early stages of evaluation and qualification. We do have HVM sales of our D200 but relative to our D100 business, it is very small. Our expectations are that it will grow rapidly once we get through this series of evaluations and qualifications. But I am reluctant to even give you a timeframe of that because I have done that before and been wrong. So I just think we are excited by the level of activity and the number of customers that are evaluating that technology.

And then one color on the gross margin guidance and you are now talking about gross margins at the lower end of the previous guidance. What are the factors that are impacting that?

Well, I think the single largest factor is the write-off we took, the asset impairment charge we took this quarter for $2.1 million. I will let Bill comment further but that is the single largest effect on that on a GAAP basis for sure.

The other factors just the lower level of revenue in the first half of the year and recognition of actual results year to date and included in that is some higher raw material costs that we talked about first I think last September quarter in conjunction with the transition to a new contract for a key raw material and we expect that to be somewhat transitional.

Bill, the lower end is driven -- of course, it is inclusive of the charges but excluding the charges, where would you come in?

Well, the impact for the quarter was about 2% so on a full-year basis, you'd expect that to be about the 0.5%.

Okay, so including that. One other question, final one actually was more of a longer-term -- more for the quarter guidance and of course you have had only a month thus far. But some of your customers have been talking about very strong growth and we were listening to another peer group company, [Integris], and they were talking about 10% sequential growth in the June quarter in the unit side of the business. So given that you have seen kind of 7% growth thus far, what is your visibility into the quarter and do you see things ramping from here or do you see things slowing down from here or flattish? How do you see the order book coming in at this point?

In Bill's comments this morning, he mentioned that we are up 7% for the first three weeks of the quarter. Three weeks out of I guess 13 or 14 weeks -- I'm not sure that is telling us a whole lot other than it is up. Our history has been this is the time of year when we expect to see a rebound and expect to see the industry strengthen and we are quite happy to see that we are seeing strengthening in April.

As you pointed out, we have heard some very strong optimistic forecasts from some of our main customers. As you know, TSMC is a very large customer of ours, halfway through the year I think they are 21% of our sales and we are really well positioned there. And they have come out with some very bullish numbers and so we would expect to see be same trend we have seen in the last two years.

As I said in my prepared comments, we expected a weak first half of our fiscal year and a strong second half so we are optimistic that we are going to finish the year strong.

Thanks so much, Bill.

Edward Mok, Needham & Company.

Good morning. So thanks for taking my questions. So a question I have first actually just kind of make sure I got this correct. The asset impairment charge that you guys have, was it a plant that you guys had to shut down or was it something that happened before and you are just taking the charge now? Can you give some color on that?

No, it is nothing as significant as a closure of a plant or anything like that. It was a $2.1 million asset impairment charge related to some manufacturing assets. These are related to an early stage production of a product that we have now kind of scaled back our expectations. It is still a commercial product but it won't be as commercialized as broadly as we first thought so we impaired $2.1 million assets. But that is small within our overall PP&E so relatively modest.

I see. So you invested in that product but you decided to scale back. That is very helpful.

Then talk a little about environment. I noticed that your tungsten was up quarterly as well as year-over-year for the last quarter on this seasonally weaker quarter. And we have heard from some other chipmakers talking about the PC market condition has improved. Should we tie those two together and if that is the case, should that translate to continued improvement for the tungsten business?

Traditionally we see our oxide business and our tungsten business tracking side-by-side and I think it might be a little bit of a stretch to use our growth in tungsten as an indication of the strength of the PC market. We are seeing more tungsten incorporation sort of across the board in a lot of different applications and the tungsten business remains a very strong part of our Company and we see a lot of growth there.

But I'm not so sure that we could draw a straight line between the growth in tungsten and PC sales. What do you think, Bill?

In fact, PCs are still contracted at a lower rate but it has not turned up yet but so we were happy to see some modest growth in tungsten and maybe it related to PCs but PCs are still tracking down rather than up.

I see. Okay, that is fair. Then talk a little bit about advanced dielectric which is an area that you guys have highlighted for growth previously, right? Just curious if there is any additional activity that you guys are seeing on the customer side and if you think that there is incremental wins that you can secure to drive some growth there maybe not for this particular quarter but for the longer term?

You are right. We have talked a lot about advanced dielectric and it is a key part of our growth strategy going forward. We see a lot of opportunity to bring a family of new advanced dielectric products to the market particularly in the memory market in South Korea. We are seeing growth there. We expect to see continued growth going forward. So it is one of our key growth areas within our Company, Edwin.

That is great. Can I ask you a little about 3-D NAND which is an area that a lot of people talk about and new process being developed. To the extent that more companies and more production of 3-D NANDs happen going forward, how does that benefit or hurt you guys?

We think it benefits us, Edwin. We think there is approximately two to five additional CMP passes for a 3-D NAND device so we believe that as 3-D NAND goes to HVM, that it will be more CMP intensive than the incumbent technology. So in general we think it will be good for us.

I think in addition to that, 3-D NAND is hard and it is complicated and it requires some pretty sophisticated CMP solutions and that in general equates to higher value and an opportunity to continue to maintain the kind of gross margin performance that we have seen in the Company over our history.

So we think that is a good opportunity for us as are all these new leading-edge opportunities. FinFET is another one that has been proven to be very difficult and requires some very sophisticated CMP solutions. Anytime it gets hard, we think that is really good for our Company.

Great. I have two more questions and then I will go away. First, on the gross margin guidance, thanks for clarifying that the full-year guidance included the impairment charge. But to the extent that business is trending higher, you see some -- stronger than second half of this year, typically with higher sales I would imagine your gross margin could potentially expand from the current level. Am I thinking about it the right way?

Yes, in fact year to date ex the impairment, we are and 48.2% and our guidance is inclusive of the impairment so it is a GAAP basis. So yes, if you look historically, as sales are stronger there is a capacity utilization factor and that tends to provide some lift on gross margin.

Great. Thanks for clarifying that. Then lastly on the buyback, I noticed that your buyback has been around $10 million per quarter until this quarter that you bumped it up to $20 million. The increased size of the program, should we expect this $20 million per quarter is not like a new level of buyback that we should expect from the Company?

Well, I think you can expect to see us -- historically we have always tried to be in the market. We haven't been as maybe opportunistic as we maybe could have or would have or should have. I don't think we are going to put out a number that is sort of a regular number per quarter but we will continue to stay in the market and be regular buyers of the stock and go up and down depending on how we see our capital needs and sort of other capital requirements. But we see it as really a meaningful way to return cash to shareholders and we have had a great track record of doing that and we would like to state on that path.

Further to that, Edwin, historically all of our repurchases have been through the 10b-18 program so open market purchases during open trading windows and in conjunction with our press release today, we issued an 8-K where we talked about also in the future implementing a 10b5-1 program so doing share repurchases through that in addition to 10b-18 which would allow us to trade during the closed trading windows that had been closed to us in the past.

Great. Thanks for pointing that out. I appreciate it.

Jairam Nathan, Sidoti.

Thanks for taking my question. So I just had -- my first question was on the operating expense side so you guys have been consistently getting your operating expense number down and a great job on that. But can you give us some idea on how is that happening? What is sort of helping you achieve that and is there more room?

Yes, kind of a couple of elements. One in just a softer industry environment, we have been more careful about hiring and have been more conservative about refilling positions that are vacated and hiring new people so you see an element of that.

There is also an element of lower incentive compensation this year. We accrue for incentive compensation based on performance against goals and the accruals have just been lower than in the past -- in the first half of the year.

In the past, we have targeted around 30% of revenue as an appropriate operating expense level. Given our gross margin which is high, that comes with a need for quite a bit of investment in technology and so it requires a relatively high level of operating expense. In the softer environment, we have been a little higher than that, 31% or 32% and we are trying to trend toward that 30% level.

Okay, thanks. My other question, you mentioned the [pretty impressive] growth in China on a year-over-year basis. How should we -- what is driving that, is the competitive environment different than it is otherwise or should we think of it as starting from a very small base. Can you just give us some more color on that?

It is a small base. I think a number of things working in our favor in China. The first is we have been there for a very long time and we've had a presence in China from the start of the industry and when many of these companies first started.

The second thing is many of the companies that we serve in China, they are looking for world-class technology and world-class solutions and that turns them to our Company. Their point is we have a terrific team in China, an account team that covers these accounts really well and they are highly regarded and respected as you can see from the awards that we win by the companies in China.

China has been in the history of a semiconductor industry, it has been sort of a small part of the overall industry but there has been some significant investments there by both Hynix and now Samsung. So we think China will become important, more important as we go forward. We think we are well-positioned because of our manufacturing facility in Kaohsiung, Taiwan, and our laboratories there to serve and access the Chinese market. So we are delighted to see the growth in China and we are delighted to get these customer awards from our customers there.

Great. That is all I had. Thank you.

(Operator Instructions). Chris Kapsch, Topeka Capital Markets.

A couple of questions. One, just on the sequential trends thus far into April and I know it is only a few weeks but is there any way you could characterize those trends by key CMP product lines, tungsten, dielectric metals? Is the strength, the seasonal strength or the sequential strength more pronounced in tungsten vis-a-vis dielectrics or metals?

I think a better way to answer that is the strength that we are seeing and the rest of the industry is seeing is largely coming from the foundry segment which is a significant part of our sales overall and the foundries tend to drive the entire portfolio of products that we manufacture and sell.

So I think we would rather answer the question that way in that we think the foundry segment will lead the industry this year in terms of growth. And as I said earlier, that but makes us happy. We are really well positioned in the big foundry markets of the world particularly Taiwan but with GF as well. So growth in the foundries is good for our Company.

Traditionally foundries have sort of been thought of more skewed towards logic versus memory. Is that still a fair way to think of it in terms of your characterization of the sequential growth or is it really more balanced these days with (multiple speakers)?

No, no. We tend to think of the foundries as more logic than memory as well.

Right. Okay. And then on your comments about the pad business, the D100 win, was it for an advanced node application or is it really more displacing an incumbent in a mature legacy node application?

It was a displacement of an incumbent technology and I would call it a legacy application. I wouldn't necessarily call it a mature legacy application but I would call it a legacy application.

The reason I ask is because when we have been around with you guys, you have characterized your strategy in the pad business as initially you felt like you needed to establish credibility as a viable suppliers so you were targeting more of those types of applications. And then over time, it became difficult to displace the incumbents and the incumbency and then so developing D200 which was the variable tunable pad really more for advanced application seemed like a better way to penetrate the market.

And so it sounds like -- just wondering if anything has changed in the competitive dynamic now with the ability to have more success in what was really more your initial strategy in terms of targeting more of these legacy applications with the D100?

I think the longer we are in the market as a pad supplier and a capable competent pad supplier, I think what is happening is we are going down the learning curve with our customers. They are becoming, the industry in general is becoming aware of the value proposition that our D100 pad provides and they are quickly becoming aware of the value proposition of the D200 technology.

We have demonstrated to the industry that all the qualities systems and all the supply chain management systems that we use on the slurry side we have brought to bear on the pad side in a meaningful way and so it is clear we are a very credible supplier of CMP pads.

I think what we are seeing with the D100 is people are really pushing it. We knew it was going to provide longer pad life and our customers are pushing it as hard as they can to get that pad life and that is creating real value with the customers that have switched to our pad. And the industry we serve is a pretty small industry and it is a pretty small family and word gets around when there is something good out there.

And so I think it is an interesting time for our pad business and time will tell how successful we are with both the D100 and D200 but we are certainly seeing a lot of activity.

Okay, fair enough. I did have a follow-up also on the notion of returning cash to shareholders in the context of stepping up the buyback pace in this most recent quarter and then adding the 10b5-1 method of also acquiring stock. So in returning cash to shareholders, obviously you guys have been a steady, prolific free cash flow generator but if you look at the share count over the last five, six years, it really hasn't really been a net reduction in common shares outstanding. So it looks as though during that timeframe you have really maybe just been preventing options related creep.

And so I am just wondering if the step up in the activity, the additional program which could be viewed maybe as a way to repurchase shares on a more opportunistic basis, is this a way of suggesting that you are actually stepping up the return of cash to shareholders via buybacks and would we expect maybe some net reduction in the share count?

Let me give you a little bit of history, Chris. When we started buying back shares a decade ago, 2004, our share count was about 25 million shares, something on the order of 25 million shares. And we continued to buy shares all of the way through. By 2009, we had reduced the share count by about two million shares.

And the good news is -- the bad news -- over that period of time, all of our options were under water, essentially all of our options were under water. The Company started to perform really well, the options got in the money and people started to exercise options and the share count creeped right back up and we were continuing to buy shares, we just couldn't keep up with it.

I think we had a nonlinear exercise of options that occurred in the last couple of years of the decade. We think we are pretty much through that and we would hope that that stays a significant sort of constant. But you are right, our share count has crept up and our intent is to certainly manage the dilution and if we can return value to shareholders in a meaningful way, we will.

And you saw an increased activity in the second quarter so we bought $20 million worth of stock and historically we have done about half of that. So we will report this by quarter by quarter and you can get a sense as to sort of the direction. But I think a couple of important data points is the increase in authorization back to $150 million, that is significant. The activity we just did and the indications of a future 10b5-1, I think those are three good data points.

Yes, I wanted to make sure I was interpreting that. To me it's suggests -- I am interpreting that as you will be more aggressive and even maybe more opportunistic as opposed to -- the other program has been fairly deliberate over time.

That's right. One other point I would mention is we have talked about share repurchase but we also did the special cash dividend in 2012, that was $347 million, around 30% of our market cap at the time. So that was another example of a pretty significant return of value, distribution of value to shareholders.

I remember it well. And then just one last small one. Just on the impairment charge, the asset impairment charge, just wondering what product line that manufacturing asset had to do with, was it pad, slurries, DSF?

It was a specialized asset for us, a slurry related product.

Got you. Okay. Thank you.

Jason Ursaner, CJS Securities.

Just following up on a couple of the last questions. How do you see the foundry customers performing versus the rest of the market in terms of either Q2 month to month trend or the small data point you provided for April in Q3 just because you did mention the positive public announcements from some key customers. So I'm wondering if you have seen that translate through to put some context around the 7% on an immediate poll or if there is a delay there?

Let's see, when we have looked at the correlation between our revenue and customers' revenue in particular TSMC and UMC because they report on a monthly basis, so we have looked at what is the best correlation, is it current or a leading or a lagging and we found the best correlation was kind of concurrent. So in the past when foundries have turned up, we have seen a pretty immediate impact to that and that may be what we are seeing in April through the first three weeks of April.

Okay. And following up on Edwin's question before about 3-D memory, I realize your support of the process would almost entirely be consumable driven. But if you look at some of the commentary from the CapEx side, there had been a lot of optimism for this year and it hasn't really materialized yet and a lot of that has been the memory producers of the 2X pitch.

So just given the heavier skew of some of your slurry products towards memory, to the extent it is delayed a bit on the transition to the next node, how would that impact either shorter-term or longer-term your product iterations if you are seeing that push forward that comes with it, the yield challenges, and chemical depositions, etc.?

As I said earlier, we believe that the 3-D NAND will be more CMP intensive which equates to just higher volume of CMP slurry sales. So the longer it is delayed, the longer we missed that opportunity. We think we are well-positioned and we have products ready to go and they have been trialed and we have been working with our customers on 3-D technology now for some time.

Again, I think some of these advanced node technologies are proving to be very difficult and expensive in some cases and the industry is not moving as quickly as we are historically used to in these node transitions. So for us, we are purely a consumables business so the industry is still -- they are still moving memory wafers and they are still using CMP so the overall impact on us is perhaps the missed opportunity of the advanced technology and more CMP passes.

Is there any concern though that the longer it is delayed the more price pressure and ASP degradation that puts on the existing high-volume formulations? Does it become more commodity like or the yield challenges there are smaller over time?

No, I don't think so, Jason. I think we have talked more broadly about the macro consolidation trend that is going on. The big customers are getting bigger and the small customers are struggling and what does that mean to the supply chain over the long term in companies like ours that are sort of highly specialized technology companies serving the industry but small. We are a small company relative to TSMC and Samsung and Intel and some of these giants.

We think about that a lot more than we think about pricing and margin pressure on our product line. In our history we have been able to continuously innovate our product lines. The products we sell are sold -- for tungsten CMP as an example five years ago, the price we sell today are very different and the formulations are totally different and with the intent to both add value in the form of higher performance and lower cost of ownership. So as long as we can continue to sort of innovate and bring new products to market to stay on those two paths of increasing performance and lower cost of ownership, I think we are in a good position to maintain the value that we bring and continue to see the kind of gross margins that we bring and the pricing power we have as a result of the innovating technologies we have.

But the bigger macro what happens five, six, seven, eight years from now when maybe we have five customers instead of the tens of customers we have today, that one I think we spend a lot more time thinking about that one.

Okay. And just shifting to the gross margin topic, you had mentioned earlier in the call the five consecutive quarters of year-on-year expansion and the comps really begin to step up and get tougher in the back half here and you indicated towards the lower end. So I'm just wondering as you look at last year, is the comp going to be mostly driven by sales leverage or is it a bit independent of that given the new raw material agreement you mentioned and some of the other pressure on COGS relative to last year?

A couple of things have been providing a lift recently. The foreign exchange rate, so the weaker yen and we will calendarize that shortly. So that is one of the reasons that comps will be tougher so that will sort of be comparable compared to the comparable period. Then it is sort of a sales lift.

I guess another thing that we have talked about is ramping business in our facility in South Korea. Last year we didn't have a lot of production there and you had the fixed cost of that which was a bit of a drag. And as we ramp more production in Korea, then you get a little bit of a gross margin lift. So it is probably sales level, gross margin, continued productivity improvements which were a big part of our history over the last six to eight years I guess and then the sales lift like you mentioned.

But the raw material agreements sounds -- obviously there was a new contract but it doesn't sound like it is a big impact one way or the other?

Well, we started to see, I'm speaking from memory here but I think we started to see that in the September quarter last year so that comp will get a little tougher but we also described that is somewhat transitional and so you heard from the commentary we are still seeing a bit of that impact but we would expect that to diminish some over time. On balance, we would point you to the lower end of the guidance for the full fiscal year.

Okay. Lastly, on the pads, you mentioned a lot of encouraging qualification activity going on with the D200. Just wondering maybe if you could update people on what is sort of the longer-term sales cycle there? How does it go from qualification and test to really a full commercialized sale and have you seen any new competitive response on the technical capabilities that the D200 is offering?

Let me tackle that. So the sales cycle, it is flawed. We were talking about this yesterday. On average we think it takes about 12 months evaluation and then about 12 months of qualification and then it goes into HVM. So that is two years right there. Some customers move faster than others but that is two years right there and it is a long cycle, longer than we had anticipated to be honest.

As far as the technology goes, we have not seen any other pad technology that can match our capabilities here. This is a capability to sort of modify and tune these pads to specific applications is unique and we think it is unique in that it will bring significant value to our customers and being able to tailor performance as we go forward and in some cases match the pad to our slurries in ways that make the combination of more powerful than if you use either one alone.

So we are excited by the technology and we are excited by the pull we are seeing on the qualifications side and evaluation side. But to answer your question, no, we don't see anything out there that we think can match either the capability of the pad or the performance of the pad.

Okay, great. Just actually one last quick question on ESF, obviously you guys had pretty subdued expectations for the backlog position. Just wondering how you saw orders trend through the quarter because it is a lumpy timing business and where you see that going in the second half?

Yes, our backlog position there is still quite limited. So no real change in that business area.

Okay, great. Appreciate all of the commentary. Thanks.

Edwin Mok, Needham & Company.

Just one quick follow-up on the pad business. I guess two-part question. First is, for the new win that you guys talk about for the D100, can you tell me what application or what type of materials the pad is used to polish is the first part question.

Second thing, I think Bill, you previously said that you guys are actively running around 30 to 40 engagements for the pad business and you mentioned on this call that you increased number of evaluation for the D200. Any way you can update that number or those ranges?

It is higher than the last time we talked, Edwin. I think we are going to stop talking about 30 or 32 or 34. We just see a lot of intensity. It is more intensity than the last time we talked. And as I said earlier, it is exciting. You know the application is something that we are not going to talk about. We consider that competitive information and we would rather not talk about specific applications and wins for our pad technology.

Okay, great. That is all I have. Thank you.

Thank you, Edwin. That is all the questions we have this morning. Thank you for your time and your interest in Cabot Microelectronics.