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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 000-30205
CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4324765
(State of Incorporation) (I.R.S. Employer Identification No.)
870 NORTH COMMONS DRIVE 60504
AURORA, ILLINOIS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (630) 375-6631
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES x NO
----------- -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 ).
YES x NO
----------- -------------
As of April 30, 2003 the Company had 24,370,892 shares of Common Stock, par
value $0.001 per share, outstanding.
CABOT MICROELECTRONICS CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Three and Six Months Ended March 31, 2003 and 2002................................... 3
Consolidated Balance Sheets
March 31, 2003 and September 30, 2002................................................ 4
Consolidated Statements of Cash Flows
Six Months Ended March 31, 2003 and 2002............................................. 5
Notes to Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 20
Item 4. Controls and Procedures.................................................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders...................................... 21
Item 5. Other Information........................................................................ 21
Item 6. Exhibits and Reports on Form 8-K......................................................... 21
Signatures............................................................................... 22
Certifications........................................................................... 23
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------------- --------------------------
2003 2002 2003 2002
------------- ------------ ----------- -----------
Revenue ................................................... $ 62,201 $ 50,520 $ 119,474 $ 101,524
Cost of goods sold ......................................... 31,786 25,262 59,451 49,008
------------- ------------ ----------- -----------
Gross profit....................................... 30,415 25,258 60,023 52,516
Operating expenses:
Research and development................................. 9,609 6,429 18,244 13,376
Selling and marketing.................................... 2,554 2,370 5,132 4,728
General and administrative............................... 4,595 5,397 8,963 9,281
Litigation settlement.................................... -- 1,000 -- 1,000
Amortization of intangibles.............................. 85 91 170 181
------------- ------------ ----------- -----------
Total operating expenses.............................. 16,843 15,287 32,509 28,566
------------- ------------ ----------- -----------
Operating income............................................ 13,572 9,971 27,514 23,950
Other income (expense), net................................. 43 (151) 38 (468)
------------- ------------ ----------- -----------
Income before income taxes.................................. 13,615 9,820 27,552 23,482
Provision for income taxes.................................. 4,561 2,869 9,230 7,514
------------- ------------ ----------- -----------
Net income............................................ $ 9,054 $ 6,951 $ 18,322 $ 15,968
============= ============ =========== ===========
Basic earnings per share.................................... $ 0.37 $ 0.29 $ 0.75 $ 0.66
============= ============ =========== ===========
Weighted average basic shares outstanding................... 24,346 24,140 24,325 24,119
============= ============ =========== ===========
Diluted earnings per share.................................. $ 0.37 $ 0.28 $ 0.75 $ 0.65
============= ============ =========== ===========
Weighted average diluted shares outstanding................. 24,593 24,583 24,589 24,558
============= ============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, SEPTEMBER 30,
2003 2002
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 87,886 $ 69,605
Accounts receivable, less allowance for doubtful
accounts of $628 at March 31, 2003
and $667 at September 30, 2002.............................................. 28,147 26,082
Inventories.................................................................... 22,869 21,959
Prepaid expenses and other current assets...................................... 2,647 2,654
Deferred income taxes.......................................................... 3,744 2,983
---------------- --------------
Total current assets..................................................... 145,293 123,283
Property, plant and equipment, net................................................ 128,461 132,264
Goodwill ......................................................................... 1,373 1,373
Other intangible assets, net...................................................... 765 935
Deferred income taxes and other assets............................................ 534 530
---------------- --------------
Total assets............................................................. $ 276,426 $ 258,385
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 9,961 $ 11,748
Capital lease obligations...................................................... 1,639 1,585
Accrued expenses, income taxes payable and other current liabilities........... 16,957 17,238
---------------- --------------
Total current liabilities................................................ 28,557 30,571
Long-term debt.................................................................... -- 3,500
Capital lease obligations......................................................... 8,126 8,865
Deferred income taxes............................................................. 2,056 1,514
Deferred compensation and other long term liabilities............................. 764 429
---------------- --------------
Total liabilities........................................................ 39,503 44,879
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock:
Authorized: 200,000,000 shares, $0.001 par value
Issued and outstanding: 24,368,718 shares at March 31, 2003 and
24,254,819 at September 30, 2002 ........................................... $ 24 $ 24
Capital in excess of par value of common stock................................. 117,825 114,116
Retained earnings.............................................................. 119,447 101,125
Accumulated other comprehensive loss........................................... (358) (1,688)
Unearned compensation.......................................................... (15) (71)
----------------- ---------------
Total stockholders' equity............................................... 236,923 213,506
---------------- --------------
Total liabilities and stockholders' equity............................... $ 276,426 $ 258,385
================ ==============
The accompanying notes are an integral part of these
consolidated financial statements.
4
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income .................................................................... $ 18,322 $ 15,968
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................................. 7,512 4,876
Noncash compensation expense and non-employee stock options ................ (17) 335
Provision for inventory writedown .......................................... 1,511 28
Provision for doubtful accounts ............................................ 22 (279)
Stock option income tax benefits ........................................... 1,147 1,283
Deferred income taxes ...................................................... (217) 1,277
Unrealized foreign exchange gain ........................................... (466) --
Loss on disposal of property, plant and equipment .......................... 21 9
Other noncash expenses, net ................................................ 351 271
Changes in operating assets and liabilities:
Accounts receivable ........................................................ (1,744) 4,398
Inventories ................................................................ (2,154) (1,585)
Prepaid expenses and other assets .......................................... 101 (1,347)
Accounts payable, accrued liabilities and other current liabilities ........ (2,477) 3,281
Income taxes payable, deferred compensation and other noncurrent liabilities 536 (1,692)
-------- --------
Net cash provided by operating activities ........................................ 22,448 26,823
Cash flows from investing activities:
Additions to property, plant and equipment .................................... (4,714) (24,808)
Proceeds from the sale of property, plant and equipment ....................... 1,770 --
-------- --------
Net cash used in investing activities ............................................ (2,944) (24,808)
-------- --------
Cash flows from financing activities:
Prepayment of long-term debt .................................................. (3,500) --
Net proceeds from issuance of stock ........................................... 2,635 2,260
Principal payments under capital lease obligations ............................ (363) (507)
-------- --------
Net cash provided by (used in) financing activities .............................. (1,228) 1,753
-------- --------
Effect of exchange rate changes on cash .......................................... 5 (21)
-------- --------
Increase in cash ................................................................. 18,281 3,747
Cash and cash equivalents at beginning of period ................................. 69,605 47,677
-------- --------
Cash and cash equivalents at end of period ....................................... $ 87,886 $ 51,424
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND AMOUNTS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND BASIS OF PRESENTATION
We believe we are the leading supplier of high performance polishing
slurries used in the manufacture of the most advanced integrated circuit ("IC")
devices, within a process called chemical mechanical planarization ("CMP"). CMP
is a polishing process used by IC device manufacturers to planarize many of the
multiple layers of material that are built upon silicon wafers to produce
advanced devices.
Cabot Microelectronics, which was incorporated in October 1999 and formed
from the assets of Cabot Corporation's Microelectronics Materials Division,
completed its initial public offering in April 2000. As of September 29, 2000,
we became a wholly independent entity upon Cabot Corporation's spin-off of its
remaining ownership ("spin-off") in us by its distribution of 0.280473721 shares
of Cabot Microelectronics common stock as a dividend on each share of Cabot
Corporation common stock.
The unaudited consolidated financial statements have been prepared by Cabot
Microelectronics Corporation ("Cabot Microelectronics", "the Company", "us",
"we", or "our"), 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 adjustments necessary for the fair presentation of Cabot
Microelectronics' financial position as of March 31, 2003, cash flows for the
six months ended March 31, 2003 and March 31, 2002 and results of operations for
the three and six months ended March 31, 2003 and March 31, 2002. The results of
operations for the three and six months ended March 31, 2003 may not be
indicative of the results to be expected for the fiscal year ending September
30, 2003. 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, 2002. We operate predominantly in one industry segment
- - the development, manufacture, and sale of CMP slurries.
The consolidated financial statements include the accounts of Cabot
Microelectronics and its subsidiaries. All intercompany transactions and
balances between the companies have been eliminated.
2. STOCK-BASED COMPENSATION
We have adopted the disclosure requirements of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") effective
December 2002. SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation and also amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the methods of accounting for stock-based employee compensation
and the effect of the method used on reported results. As permitted by SFAS 148
and SFAS 123, we continue to apply the accounting provisions of Accounting
Principles Board ("APB") Opinion Number 25, "Accounting for Stock Issued to
Employees", and related interpretations, with regard to the measurement of
compensation cost for options granted under the Cabot Microelectronics
Corporation Amended and Restated 2000 Equity Incentive Plan ("Equity Incentive
Plan") and shares issued under our Employee Stock Purchase Plan. All options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant and no employee compensation expense has been
recorded.
6
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE AMOUNTS)
Had expense been recognized using the fair value method described in SFAS 123,
using the Black-Scholes option-pricing model, we would have reported the
following results of operations:
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported ......................... $ 9,054 $ 6,951 $ 18,322 $ 15,968
Deduct: total stock-based compensation expense
determined under the fair value method,
net of tax................................ (4,326) (2,985) (7,996) (5,877)
-------- -------- -------- --------
Pro forma net income............................. 4,728 3,966 10,326 10,091
======== ======== ======== ========
Earnings per share:
Basic - as reported......................... $ 0.37 $ 0.29 $ 0.75 $ 0.66
======== ======== ======== ========
Basic - pro forma........................... $ 0.19 $ 0.16 $ 0.42 $ 0.42
======== ======== ======== ========
Diluted - as reported....................... $ 0.37 $ 0.28 $ 0.75 $ 0.65
======== ======== ======== ========
Diluted - pro forma......................... $ 0.19 $ 0.16 $ 0.42 $ 0.41
======== ======== ======== ========
3. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share",
requires 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 SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerator:
Earnings available to common shares ........... $ 9,054 $ 6,951 $ 18,322 $ 15,968
=========== =========== =========== ===========
Denominator:
Weighted average common shares ................ 24,346,172 24,140,345 24,325,392 24,119,171
(Denominator for basic calculation)
Weighted average effect of dilutive securities:
Stock-based compensation ................. 247,176 442,867 263,130 438,576
----------- ----------- ----------- -----------
Diluted weighted average common shares ........ 24,593,348 24,583,212 24,588,522 24,557,747
=========== =========== =========== ===========
(Denominator for diluted calculation)
Earnings per share:
Basic............................................ $ 0.37 $ 0.29 $ 0.75 $ 0.66
=========== =========== ========== ===========
Diluted.......................................... $ 0.37 $ 0.28 $ 0.75 $ 0.65
=========== =========== ========== ===========
7
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE AMOUNTS)
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net Income ................................. $ 9,054 $ 6,951 $ 18,322 $ 15,968
Other comprehensive income:
Net unrealized gain on derivative
instruments .................... 8 8 17 14
Foreign currency translation adjustment 179 (335) 1,313 (3,208)
-------- -------- -------- --------
Total comprehensive income ................. $ 9,241 $ 6,624 $ 19,652 $ 12,774
======== ======== ======== ========
5. INVENTORIES
Inventories consisted of the following:
MARCH 31, SEPTEMBER 30,
2003 2002
--------- -------------
Raw materials ........... $16,196 $13,779
Work in process ......... 558 1,173
Finished goods .......... 6,115 7,007
--------- -------------
Total ................... $22,869 $21,959
========= =============
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,373, as of March 31, 2003, was unchanged from our fiscal
year ended September 30, 2002.
The components of intangible assets are as follows:
MARCH 31, 2003 SEPTEMBER 30, 2002
---------------------------- ----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMORTIZATION AMOUNT AMORTIZATION AMOUNT
-------------- ----------- -------------- -----------
Trade secrets and know-how .................. $2,550 $1,977 $2,550 $1,850
Distribution rights, customer lists and other 1,000 808 1,000 765
-------------- ----------- -------------- -----------
Total intangible assets .................. 3,550 2,785 3,550 2,615
-------------- ----------- -------------- -----------
Amortization expense of intangible assets was $85 and $170 for the three
and six months ended March 31, 2003, respectively. Estimated future amortization
expense for the remaining six months of fiscal year 2003, fiscal 2004 and fiscal
2005 are $170, $340, and $255, respectively.
8
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE AMOUNTS)
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,
2003 2002
----------- -------------
Raw material accruals................... $ 3,054 $ 851
Accrued compensation.................... 6,560 8,302
Warranty reserve........................ 1,265 858
Fixed asset accrual..................... 343 1,375
Income taxes payable.................... 2,899 2,662
Other................................... 2,836 3,190
----------- -------------
Total................................... $ 16,957 $ 17,238
=========== =============
With respect to our warranty reserve shown above, we provide for the
estimated cost of product returns based upon historical experience and any known
conditions or circumstances. Our warranty obligation is affected primarily by
product that does not meet specifications and performance requirements and any
related costs of addressing such matters. Revisions to the estimated warranty
liability are made when actual incidences of product not meeting specifications
and performance requirements differ from our estimates.
We have historically not recorded warranty claims directly against warranty
reserves, but rather provided for them in the period in which they occurred. As
such, charges to and reductions in expenses represent the net change required to
maintain an appropriate reserve.
The changes in the warranty reserve for the six months ended March 31, 2003
are as follows:
Balance as of September 30, 2002........ $ 858
Charges to (reductions in) expenses, net 407
-----------
Balance as of March 31, 2003............ $ 1,265
===========
8. LONG-TERM DEBT
On February 6, 2003, we prepaid the entire $3,500 unsecured term loan that
had been funded on the basis of the Illinois State Treasurer's Economic Program
which had been due on April 3, 2005 and had incurred interest at an annual rate
of 4.68%. No gain or loss was recognized with respect to the prepayment. As a
result of this prepayment, we have no outstanding long term debt.
On July 10, 2001 we entered into a $75,000 unsecured revolving credit and
term loan facility with a group of commercial banks. On February 5, 2002, this
agreement was amended with no material changes in terms. Under this agreement,
which terminates July 10, 2004, interest accrues on any outstanding balance at
either the institution's base rate or the eurodollar rate plus an applicable
margin. A non-use fee also accrues. Loans under this facility are anticipated to
be used primarily for general corporate purposes, including working capital and
capital expenditures. The credit agreement also contains various covenants. No
amounts are currently outstanding under this credit facility and we are
currently in compliance with the covenants.
9
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE AMOUNTS)
9. CONTINGENCIES
We periodically become subject to legal proceedings in the ordinary course
of business. We are not currently involved in any legal proceedings which we
believe will have a material impact on our consolidated financial position,
results of operations, or cash flows.
10. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") which applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. We have
adopted Interpretation No. 46 effective December 2002, which had no impact on
our consolidated financial position, results of operations or cash flows because
we have no variable interest entities.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149") which applies to
contracts entered into or modified after June 30, 2003. SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." We do not
expect the adoption of SFAS 149 will have a material impact on our consolidated
financial position, results of operations or cash flows.
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 statements included elsewhere in this
Form 10-Q, includes "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 industry or general economic prospects or trends, our future results
of operations or financial position 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 "Factors Affecting Future Operating Results"
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", 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, 2002.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 VERSUS THREE MONTHS ENDED MARCH 31, 2002
REVENUE
Total revenue was $62.2 million for the three months ended March 31, 2003,
which represented a 23.1%, or $11.7 million, increase from the three months
ended March 31, 2002. Of this increase, $8.2 million was due to an increase in
sales volume and $3.5 million was due to an increase in weighted average selling
prices resulting from improvements in product sales mix and foreign exchange
rates which more than offset price reductions granted to certain customers in a
few select instances in consideration of broader strategic relationships. Copper
product revenue increased 51.7% over the prior year quarter and tungsten and
dielectric product revenues combined increased by 20.2%. Revenue would have been
$0.9 million lower in the quarter had the Japanese Yen average exchange rate for
the quarter held constant with the prior year's second fiscal quarter average.
We previously announced our intention to sell directly to customers in
Europe, Singapore and Malaysia beginning in June, 2003. These customers have
been serviced through Metron, a third party distributor. During the transition
period, while this distributor draws down its inventory, we will not be making
further sales to them. Until we begin selling directly to customers in June 2003
there will be an adverse revenue impact for the fiscal third quarter, which we
expect to be approximately $3.7 million. Following this transition period, which
we currently anticipate to be completed within the fiscal third quarter, we
expect some revenue enhancement by virtue of the benefits of selling direct.
COST OF GOODS SOLD
Total cost of goods sold was $31.8 million for the three months ended March
31, 2003, which represented an increase of 25.8%, or $6.5 million, from the
three months ended March 31, 2002. Approximately $4.1 million of this increase
was due to higher sales volumes and $2.4 million was due to higher average costs
associated with product mix and higher costs from lower yields associated with
meeting customer requirements for higher product performance. These increases
were partially offset by the absence of the Rippey royalty payments which ended
in August 2002. To meet our customers' more stringent product quality
requirements, we plan to add staffing and make improvements in manufacturing
which will likely increase our production costs in the near term.
With respect to the key raw materials used to make our products, we expect
that the cost of fumed silica we purchase from Cabot Corporation used in the
manufacture of CMP slurries will continue to increase according to the terms of
our existing fumed metal oxide agreement with Cabot Corporation, which provides
for a fixed annual increase in the price of silica of 2.0% of the initial price
and additional price adjustments corresponding to Cabot Corporation's raw
material cost increases or decreases. Also, under the fumed alumina supply
agreement with Cabot Corporation, the price of fumed alumina could fluctuate
since it is based on all of Cabot Corporation's fixed and variable costs for
producing the fumed alumina, plus its capital costs for expanding its capacity,
plus an agreed upon rate of return on investment, plus incentive payments if
they produce more than a certain amount of fumed alumina per year that meets our
specifications.
GROSS PROFIT
Our gross profit as a percentage of net revenue was 48.9% for the three
months ended March 31, 2003 as compared to 50.0% for the three months ended
March 31, 2002. The 1.1% decrease in gross profit resulted primarily from an
increase in fixed manufacturing costs and costs associated with meeting customer
requirements for higher product performance, and to a lesser extent, price
reductions granted to certain customers in consideration of broader strategic
relationships. In the near term, we expect gross profit will be in the 50%
range, plus or minus 2%, as we add staffing and make improvements in
manufacturing.
11
RESEARCH AND DEVELOPMENT
Research and development expenses were $9.6 million in the three months
ended March 31, 2003, which represented an increase of 49.5%, or $3.1 million,
from the three months ended March 31, 2002. A significant portion of this
increase was due to depreciation and operating costs of $1.0 million relating to
our new R&D facility, which we opened in April 2002. An additional $0.5 million
increase resulted from allocating certain common facility operating costs to R&D
that had previously been treated as general and administrative expense prior to
the R&D facility addition to our existing office building. In addition, usage of
consumable supplies increased due to the higher capacity of the new facility and
because polishing activity in our former cleanroom was suspended during the
relocation to the new R&D facility in the year ago quarter. R&D expense also
increased due to higher staffing and outside consulting expenses. We expect R&D
expenses to continue to increase due to our planned additional staffing and
cleanroom capacity. Development efforts mainly related to new and enhanced
slurry products including products for copper applications, new CMP polishing
pad technology and advanced particle technology.
SELLING AND MARKETING
Selling and marketing expenses were $2.6 million in the three months ended
March 31, 2003, which represented an increase of 7.8%, or $0.2 million, from the
three months ended March 31, 2002. The increase resulted from higher staff
related costs associated with our customer support initiatives regarding our
transition to sell directly to customers in Europe, Singapore and Malaysia.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $4.6 million in the three months
ended March 31, 2003, which represented a decrease of 14.9%, or $0.8 million,
from the three months ended March 31, 2002. The decrease resulted from a $0.6
million reduction in legal and professional expenses, primarily due to the
absence of legal fees associated with the Rodel litigation, the absence of a
$0.2 million non-cash charge related to the modification of a former director's
stock option agreement and a decrease in facilities charges due to the change in
allocation of certain common facility operating costs described under Research
and Development. These decreases were partially offset by an increase in
depreciation of $0.3 million associated with administrative areas of the R&D
facility addition, costs associated with our business systems that were placed
in service midway through the second fiscal quarter of 2002 and higher insurance
premiums of $0.3 million.
LITIGATION SETTLEMENT
During the second fiscal quarter of 2002, we settled all pending patent
infringement litigation involving us and Rodel, Inc. for a one-time payment of
$1.0 million. Under the settlement agreement, we received a fully paid-up,
worldwide royalty-free license to all technology that was the subject of the
litigation and their foreign equivalents, and we have no further financial
obligation with respect to this matter.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.1 million for both the three months
ended March 31, 2003 and March 31, 2002.
OTHER INCOME (EXPENSE), NET
Other income was negligible for the three months ended March 31, 2003,
compared to other expense of $0.2 million, for the three months ended March 31,
2002. The reduction in other expense resulted primarily from higher interest
income on higher invested cash.
12
PROVISION FOR INCOME TAXES
The effective income tax rate was 33.5% for the three months ended March
31, 2003 and 29.2% for the three months ended March 31, 2002. The increase in
the effective tax rate was mainly driven by the decreased impact of research and
experimentation credits in relation to a higher taxable income base.
NET INCOME
Net income was $9.1 million for the three months ended March 31, 2003,
which represented an increase of 30.3%, or $2.1 million, from the three months
ended March 31, 2002 as a result of the factors discussed above.
SIX MONTHS ENDED MARCH 31, 2003 VERSUS SIX MONTHS ENDED MARCH 31, 2002
REVENUE
Total revenue was $119.5 million for the six months ended March 31, 2003,
which represented a 17.7%, or $18.0 million, increase from the six months ended
March 31, 2002. Of this increase, $12.2 million was due to an increase in sales
volume and $5.8 million was due to an increase in weighted average selling
prices from an improved sales mix and foreign exchange rates which more than
offset price reductions granted to certain customers in a few select instances
in consideration of broader strategic relationships. Revenue related to copper
slurries increased 50.0% over the year ago period. Total revenue would have been
$0.8 million lower had the Japanese Yen average exchange rate for the six month
period held constant with the prior year's six month average.
COST OF GOODS SOLD
Total cost of goods sold was $59.5 million for the six months ended March
31, 2003, which represented an increase of 21.3%, or $10.4 million, from the six
months ended March 31, 2002. Approximately $5.9 million of this increase was due
to higher sales volumes and $4.6 million was associated with higher average
costs due to product mix, higher fixed manufacturing costs and higher costs from
lower yields associated with meeting customer requirements for higher product
performance. These increases were partially offset by the absence of the Rippey
royalty payments which ended in August 2002.
GROSS PROFIT
Our gross profit as a percentage of net revenue was 50.2% for the six
months ended March 31, 2003 as compared to 51.7% for the six months ended March
31, 2002. The decrease in gross profit is primarily due to increased costs
associated with meeting customer requirements for higher product performance and
to a lesser extent, the price reductions mentioned above.
RESEARCH AND DEVELOPMENT
Research and development expense was $18.2 million for the six months ended
March 31, 2003, which represented an increase of 36.4%, or $4.9 million from the
six months ended March 31, 2002. The majority of this increase was due to
depreciation and operating costs of $2.1 million relating to our new R&D
facility which we opened in April 2002. An additional $1.0 million increase
resulted from allocating certain common facility operating costs to R&D that had
previously been treated as general and administrative expense prior to the R&D
facility addition to our existing office building. R&D expenses also increased
due to higher staffing and increased usage of consumable supplies resulting from
our higher capacity of the new facility
13
and increased R&D activities. Development efforts mainly related to new and
enhanced slurry products including products for copper applications, new CMP
polishing pad technology and advanced particle technology.
SELLING AND MARKETING
Selling and marketing expenses were $5.1 million in the six months ended
March 31, 2003, which represented an increase of 8.5%, or $0.4 million, from the
six months ended March 31, 2002. The increase resulted primarily from higher
costs associated with our customer support initiatives regarding our transition
to sell directly to customers in Europe, Singapore and Malaysia.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9.0 million in the six months
ended March 31, 2003, which represented a decrease of 3.4%, or $0.3 million,
from the six months ended March 31, 2002. The decrease resulted from a $0.8
million reduction in legal and professional expenses, primarily due to the
absence of legal fees associated with the Rodel litigation, and a decrease in
facilities charges due to the change in allocation of certain common facility
operating costs described under Research and Development. These decreases were
partially offset by an increase in depreciation of $0.5 million associated with
administrative areas of the R&D facility addition, costs associated with our
business systems that were placed in service midway through the second fiscal
quarter of 2002 and higher insurance premiums of $0.5 million.
LITIGATION SETTLEMENT
During the second fiscal quarter of 2002, we settled all pending patent
infringement litigation involving us and Rodel, Inc. for a one-time payment of
$1.0 million. Under the settlement agreement, we received a fully paid-up,
worldwide royalty-free license to all technology that was the subject of the
litigation and their foreign equivalents, and we have no further financial
obligation with respect to this matter.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.2 million for both the six months ended
March 31, 2003 and March 31, 2002.
OTHER INCOME (EXPENSE), NET
Other income was negligible for the six months ended March 31, 2003,
compared to other expense $0.5 million, for the six months ended March 31, 2002.
Other expense decreased primarily due to the absence of a payment to Cabot
Corporation in the prior year to reimburse them for certain capital improvements
made to equipment used to supply us with raw materials, which are no longer in
service. Other expense also decreased due to higher offsetting interest income
on higher invested cash.
PROVISION FOR INCOME TAXES
The effective income tax rate was 33.5% in the six months ended March 31,
2003 and 32.0% for the six months ended March 31, 2002. The increase in the
effective tax rate was mainly driven by the decreased impact of research and
experimentation credits in relation to a higher taxable income base.
14
NET INCOME
Net income was $18.3 million in the six months ended March 31, 2003, which
represented an increase of 14.7%, or $2.4 million, from the six months ended
March 31, 2002 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $22.4 million in the six
months ended March 31, 2003 and $26.8 million in the six months ended March 31,
2002. Our cash provided by operating activities for the six months ended March
31, 2003 originated from net income from operations of $18.3 million, non-cash
items of $9.8 million which were partially offset by a net increase in working
capital of $5.7 million due to increases in customer receivables, inventory and
a decrease in accounts payable and accrued liabilities.
In the six months ended March 31, 2003, capital spending was $4.7 million,
primarily due to the purchase of production-related equipment to be used in our
Aurora, Illinois facilities, and for metrology tools to support increased
polishing capacity in our cleanroom. Full fiscal year 2003 capital spending is
anticipated to be approximately $22.0 million, down $2.0 million from our
previous planned spending level of $24.0 million. We received cash of
approximately $1.8 million from the January 2003 sale of our distribution center
and land in Ansung, South Korea. The proceeds approximated the net book value of
the assets sold. In the six months ended March 31, 2002, capital spending was
$24.8 million, primarily due to the construction of our new research and
development facility in Aurora, Illinois and equipping the facility. We also
purchased additional production-related equipment to be used in our Aurora,
Illinois facilities and invested in the development and implementation of our
stand-alone business information systems.
In the six months ended March 31, 2003 we used $1.2 million of cash to fund
financing activities compared to $1.8 million of cash provided during the six
months ended March 31, 2002. On February 6, 2003, we prepaid the entire $3.5
million unsecured term loan that had been funded on the basis of the Illinois
State Treasurer's Economic Program which had been due on April 3, 2005 and had
incurred interest at an annual rate of 4.68%. We also made principal payments
under capital lease obligations. Cash used for these purposes was partially
offset by funds received from the issuance of common stock for the exercise of
stock options and the Employee Stock Purchase Plan. Cash provided from financing
activities for the six months ended March 31, 2002 resulted from the issuance of
common stock for the exercise of stock options and the Employee Stock Purchase
Plan and were partially offset by principal payments made under capital lease
obligations.
We believe that cash generated by our operations and available borrowings
under our revolving credit facility will be sufficient to fund our operations
and expected capital expenditures for the foreseeable future. However, we plan
to expand our business and continue to improve our technology and, to do so, we
may be required to raise additional funds in the future through public or
private equity or debt financing, strategic relationships or other arrangements.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
At March 31, 2003 and September 30, 2002, 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.
15
The following summarizes our contractual obligations at March 31, 2003 and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods.
CONTRACTUAL OBLIGATIONS LESS THAN 1-3 4-5 AFTER 5
(IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS
------- --------- -------- -------- --------
Capital lease obligations......................... $ 9.7 $ 1.6 $ 3.2 $ 2.1 $ 2.8
Operating leases ................................. 1.1 0.5 0.4 0.1 0.1
Unconditional purchase obligations ............... 23.2 8.8 7.3 3.0 4.1
Other long-term obligations....................... 1.4 0.2 1.2 0.0 0.0
------- --------- -------- -------- ---------
Total contractual cash obligations................ $ 35.4 $ 11.1 $ 12.1 $ 5.2 $ 7.0
======= ========= ======== ======== ========
CAPITAL LEASE OBLIGATIONS
On December 12, 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation. Under this agreement, Cabot Corporation expanded its capacity
in Tuscola, Illinois for the manufacture of fumed alumina. Payments by us with
respect to capital costs for the facility have been treated as a capital lease
for accounting purposes and the present value of the minimum quarterly payments
of approximately $0.3 million resulted in a $9.8 million lease obligation and
$9.8 million related leased asset. The agreement has an initial five year term,
which expires in 2006, but we can choose to renew the agreement for another five
year term, which would expire in 2011. We also can choose to not renew the
agreement subject to certain terms and conditions and the payment of certain
costs, after the initial five year term. Capital lease payments to Cabot
Corporation commenced in the second quarter of fiscal 2002 and a total of $1.2
million has been paid as of March 31, 2003.
On January 11, 2002 we entered into a CMP tool and polishing consumables
transfer agreement with a third party under which we agreed to transfer
polishing consumables to them in return for a CMP polishing tool. The polishing
tool has been treated as a capital lease and the aggregate fair market value of
the polishing consumables resulted in a $2.0 million lease obligation. The term
of the agreement is approximately three years, expiring in November 2004.
OPERATING LEASES
We lease certain vehicles, warehouse facilities, office space, machinery
and equipment under cancelable and noncancelable operating leases, most of which
expire within ten years and may be renewed by us.
UNCONDITIONAL PURCHASE OBLIGATIONS
Unconditional purchase obligations include our noncancelable purchase
commitments and take-or-pay arrangements with suppliers. We operate under an
amended fumed metal oxide agreement with Cabot Corporation for the purchase of
two key raw materials, fumed silica and fumed alumina. We are obligated to
purchase at least 90% of our six-month volume forecast of fumed silica from
Cabot Corporation and must pay for the shortfall if we purchase less than that
amount. We currently anticipate meeting minimum forecasted purchase volume
requirements. Also, under our fumed alumina supply agreement with Cabot
Corporation we are obligated to pay certain fixed, capital and variable costs
through December of 2006. This agreement has an initial five year term, but we
can choose to renew the agreement for another five year term, which would expire
in December 2011. If we do not renew the agreement, we will become subject to
certain terms and conditions and the payment of certain costs. Unconditional
purchase obligations include $18.6 million of contractual commitments based upon
our anticipated renewal of the agreement through December 2011.
We have a long-term agreement with a supplier to purchase materials for use
in a product that is not currently in commercial production. As of March 31,
2003, we are obligated to purchase, subject to the supplier's ability to
deliver, $3.2 million of materials over the remaining term of the agreement,
which expires in June, 2005. We may not require the entire amount of material
provided for under the agreement, but we would still be obligated to pay for it.
We have not
16
recorded a liability for this possible loss as we are evaluating and currently
plan to use the production capabilities of this supplier in conjunction with
this product strategy. We also are required to reimburse the supplier for all
approved research and development costs related to the materials. The supplier
will repay these research and development reimbursements if our material
purchases from them reach certain levels.
We also have unconditional purchase obligations with three other suppliers,
which include $1.1 million related to purchases of raw materials and $0.3
million associated with capital assets to be placed in service at one of these
suppliers.
OTHER LONG-TERM OBLIGATIONS
We have an agreement with Davies Imperial Coatings, Inc. ("Davies")
pursuant to which Davies will perform certain agreed-upon dispersion services.
We have agreed to purchase minimum amounts of services per year and to invest
approximately $0.2 million per year in capital improvements or other
expenditures to maintain capacity at the Davies dispersion facility. The initial
term of the agreement expires in October 2004, with automatic one-year renewals,
and contains a 90-day cancellation clause executable by either party. We are
obligated to make a termination payment if the agreement is not renewed.
On July 10, 2001 we entered into a $75.0 million unsecured revolving credit
and term facility with a group of commercial banks. Under this agreement, which
terminates on July 10, 2004, we are obligated to pay an administrative fee and a
non-use fee. No amounts are currently outstanding under this agreement and we
are currently in compliance with the covenants.
FACTORS AFFECTING FUTURE OPERATING RESULTS
RISKS RELATING TO OUR BUSINESS
WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR
TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN CMP CONSUMPTION
Our business is substantially dependent on a single class of products, CMP
slurries, which historically has accounted for almost all of our revenue. Our
business would suffer if these products became obsolete or if consumption of
these products decreased. Our success depends on our ability to keep pace with
technological changes and advances in the semiconductor industry and to adapt
and improve our products in response to evolving customer needs and industry
trends. Since its inception, the semiconductor industry has experienced rapid
technological changes and advances in the design, manufacture, performance and
application of IC devices and these changes and advances are expected to
continue in the future. Developments in the semiconductor industry could render
our products obsolete or less important to the IC device manufacturing process.
A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THEM AS CUSTOMERS
Our customer base is concentrated among a limited number of large
customers. One or more of these principal customers could stop buying CMP
slurries from us or could substantially reduce the quantity of CMP slurries they
purchase from us. Any cancellation, deferral or significant reduction in CMP
slurries sold to these principal customers or a significant number of smaller
customers could seriously harm our business, financial condition and results of
operations. Our five largest customers, of which two are distributors, accounted
for approximately 62% and 57% of our revenue for the six months ended March 31,
2003 and 2002, respectively. We have announced our intention, and are
implementing our transition, to sell directly (beginning in June, 2003) to
customers in Europe, Singapore and Malaysia who currently are serviced through
one of these distributors. As a result, selling directly may decrease the level
of business conducted with our top five customers.
17
DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY A FURTHER
DECLINE IN WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS
Our business is affected by current economic and industry conditions and it
is extremely difficult to predict sales of our products given uncertainties in
these factors. During fiscal 2001 and the first and second fiscal quarters of
2002 the global economic slowdown and weakening in demand for electronic
systems, coupled with higher than normal chip inventories, affected our
quarterly revenue trends. Although sales improved in the second half of fiscal
2002, we have not maintained this level of revenue into the first half of fiscal
2003 as weakness in end market demand continued. We remain cautious regarding
the health of the global economy and semiconductor industry, and further
declines or lack of improvement in current economic and industry conditions
could continue to adversely affect our business.
ANY PROBLEM OR INTERRUPTION IN SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS,
INCLUDING FUMED METAL OXIDES, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY
AFFECT OUR SALES
Fumed metal oxides, both fumed silica and fumed alumina, are significant
raw materials we use in many of our CMP slurries. Our business would suffer from
any problem or interruption in our supply of fumed metal oxides or other key raw
materials. We entered into a fumed metal oxide agreement with Cabot Corporation,
which became effective upon completion of our initial public offering in April,
2000. In December, 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation and an amendment to the fumed metal oxide agreement with
respect to fumed alumina. Under these agreements, Cabot Corporation continues to
be our primary supplier of certain fumed metal oxides for our slurry products
produced as of the date of our initial public offering with respect to fumed
silica and as of the effective date of the fumed alumina supply agreement with
respect to certain amounts of fumed alumina. We face the risk of significant
increases in the price of fumed metal oxides under these agreements if Cabot
Corporation's cost of production increases. It may be difficult to secure
alternative sources of fumed metal oxides in the event Cabot Corporation or
another supplier were unable to supply us with sufficient quantities of fumed
metal oxides which meet the quality required by our customers' supply needs and
technical specifications. In addition, contractual amendments to the existing
agreements with, or non-performance by, Cabot Corporation or another supplier,
could adversely affect us as well.
In addition, if we change the supplier or type of key raw materials such as
fumed metal oxides we use to make our existing CMP slurries or are required to
purchase them from a different manufacturer or manufacturing facility, whether
Cabot Corporation or another party, or otherwise modify our products, in certain
circumstances our customers might have to requalify our CMP slurries for their
manufacturing processes and products. The requalification process could take a
significant amount of time to complete, possibly interrupting or reducing our
sales of CMP slurries to these customers.
OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS
DEVELOP SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE, OBTAIN
CERTAIN INTELLECTUAL PROPERTY RIGHTS OR IF ANY OF OUR MAJOR CUSTOMERS DEVELOP OR
INCREASE IN-HOUSE SLURRY MANUFACTURING CAPABILITY
Competition from current CMP slurry manufacturers, new entrants to the CMP
slurry market or a decision by any of our major customers to produce, or
increase the production of slurry products in-house could seriously harm our
business and results of operations. Competition has increased from other
existing providers of CMP slurries and opportunities exist for other companies
with sufficient financial or technological resources to emerge as potential
competitors by developing their own CMP slurry products. The existence or threat
of increased competition and additional in-house production could impact the
prices we are able to charge for our slurry products. In addition, our
competitors could have or obtain intellectual property rights which could
restrict our ability to market our existing products and/or to innovate and
develop new products.
18
BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING
PADS, EXPANSION OF OUR BUSINESS INTO THIS AREA MAY NOT BE SUCCESSFUL
An element of our strategy is to leverage our current customer
relationships and technological expertise to expand our business into new
product areas and applications, including manufacturing and distributing CMP
polishing pads. We have had limited experience in developing and marketing these
products, which involve technologies and production processes that are
relatively new to us. We, our suppliers of the raw materials that we use to
develop our polishing pads, or our provider of pads for whom we act as
distributor, may not be able to solve technological or production problems that
we or they may encounter. In addition, we, our suppliers or pad provider may be
unable to keep pace with technological or other developments in the design and
production of polishing pads. Also, our competitors may have or obtain
intellectual property rights which could restrict our ability to market our
existing products and/or to innovate and develop new products.
BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY
OBTAIN OR PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS
Protection of intellectual property is particularly important in our
industry because CMP slurry and pad manufacturers develop complex and technical
formulas for CMP products which are proprietary in nature and differentiate
their products from those of competitors. Our intellectual property is important
to our success and ability to compete. We attempt to protect our intellectual
property rights through a combination of patent, trademark, copyright and trade
secret laws, as well as employee and third-party nondisclosure and assignment
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could seriously harm our business.
WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We currently have operations and a large customer base outside the United
States. Approximately 66% of our revenue was generated by sales to customers
outside the United States for our fiscal year ended 2002 and for the six months
ended March 31, 2003. We encounter risks in doing business in certain foreign
countries. These risks include, but are not limited to, adverse changes in
economic and political conditions, as well as the difficulty in enforceability
of business and customer contracts and agreements, including protection of
intellectual property rights. We have announced our intention, and are
implementing our transition, to sell directly to customers in Europe, Singapore
and Malaysia beginning in June, 2003. We currently service these customers
through Metron, a third party distributor. Selling directly may increase our
risk of conducting business in foreign countries.
RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK
THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
The market price of our common stock has and could continue to fluctuate
significantly as a result of factors such as: economic and stock market
conditions generally and specifically as they may impact participants in the
semiconductor industry; changes in financial estimates and recommendations by
securities analysts following our stock; earnings and other announcements by,
and changes in market evaluations of, us or participants in the semiconductor
industry; changes in business or regulatory conditions affecting us or
participants in the semiconductor industry; announcements or implementation by
us or our competitors of technological innovations or new products; and trading
volume of our common stock.
ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
OUR RIGHTS PLAN MAY DISCOURAGE THIRD PARTIES FROM MAKING A HOSTILE BID FOR OUR
COMPANY
Our certificate of incorporation, our bylaws, our rights plan and various
provisions of the Delaware General Corporation Law may make it more difficult to
effect a change in control of our company. For example, our amended certificate
of incorporation
19
authorizes our board of directors to issue up to 20 million shares of blank
check preferred stock and to attach special rights and preferences to this
preferred stock. Also our amended certificate of incorporation provides for the
division of our board of directors into three classes as nearly equal in size as
possible with staggered three-year terms. In addition, the rights issued to our
stockholders under our rights plan may make it more difficult or expensive for
another person or entity to acquire control of us without the consent of our
board of directors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our
foreign operations and approximately 16% of our revenue is transacted in
currencies other than the U.S. dollar. Our foreign operations maintain their
accounting records in their local currencies. Consequently, period to period
comparability of results of operations is affected by fluctuations in exchange
rates. The primary currencies which we have exposure to are the Japanese Yen
and, to a lesser extent, the British Pound and the Euro. From time to time we
enter into forward contracts in an effort to manage foreign currency exchange
exposure. We do not currently enter into forward exchange contracts for
speculative or trading purposes.
MARKET RISK AND SENSITIVITY ANALYSIS FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in foreign exchange rates. As of March 31, 2003, the analysis
demonstrated that such market movements would not have a material adverse effect
on our consolidated financial position, results of operations or cash flows over
a one year period. Actual gains and losses in the future may differ materially
from this analysis based on changes in the timing and amount of foreign currency
rate movements and our actual exposures. We believe that our exposure to foreign
currency exchange rate risk at March 31, 2003 was not material.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, the Company's Chief Executive
Officer and Chief Financial Officer have conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to make known to them
in a timely fashion material information related to the Company required to be
filed in this report. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
While we believe the present design of our disclosure controls and
procedures is effective to make known to our senior management in a timely
fashion all material information concerning our business, we will continue to
improve the design and effectiveness of our disclosure controls and procedures
to the extent necessary in the future to provide our senior management with
timely access to such material information, and to correct any deficiencies that
we may discover in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of Cabot Microelectronics held on
March 11, 2003, the following proposals were adopted:
Proposal I - Election of Directors
Number of Votes For Election Number of Votes Withheld
---------------------------- ------------------------
John P. Frazee, Jr. 21,965,462 166,047
Matthew Neville 21,817,267 314,242
Proposal II - Ratification of the selection of PricewaterhouseCoopers LLP as the
company's independent auditors for fiscal 2003
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
company's independent auditors for fiscal 2003 was approved with 21,593,203
shares cast for, 525,306 shares cast against, and 13,000 shares abstaining.
ITEM 5. OTHER INFORMATION
Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for
disclosing to investors the non-audit services approved by our Audit Committee
to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the law as services other than those provided in
connection with an audit or a review of the financial statements of the Company.
Our Audit Committee has pre-approved the following non-audit services performed
by PricewaterhouseCoopers LLP: (1) tax compliance; (2) tax advice related to our
foreign operations; and (3) advice with respect to our Equity Incentive Plans
and certain other compensation plans.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the
number assigned to such exhibits in the Exhibit Table of Item
601 of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
In a report dated January 23, 2003, Cabot Microelectronics
reported under Item 5. "Other Events" and Item 7. "Financial
Statements and Exhibits" that on January 23, 2003 Cabot
Microelectronics reported financial results for its first
fiscal quarter ended December 31, 2002.
In a report dated April 1, 2003, Cabot Microelectronics
reported under Item 5. "Other Events" and Item 7. "Financial
Statements and Exhibits" that on April 1, 2003 Cabot
Microelectronics announced the appointment of William S.
Johnson to the position of Vice President and Chief Financial
Officer.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABOT MICROELECTRONICS CORPORATION
Date: May 13, 2003 /s/ WILLIAM S. JOHNSON
------------------------------------------
William S. Johnson
Vice President and Chief Financial Officer
[Principal Financial Officer]
Date: May 13, 2003 /s/ DANIEL S. WOBBY
------------------------------------------
Daniel S. Wobby
Corporate Controller
[Principal Accounting Officer]
22
CERTIFICATIONS
I, Matthew Neville, Chief Executive Officer of Cabot Microelectronics
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cabot
Microelectronics Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ MATTHEW NEVILLE
-----------------------------
Matthew Neville
Chief Executive Officer
23
I, William S. Johnson, Chief Financial Officer of Cabot Microelectronics
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cabot
Microelectronics Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ WILLIAM S. JOHNSON
------------------------------
William S. Johnson
Chief Financial Officer
24