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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
DECEMBER 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 January 30, 2004 the Company had 24,787,628 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 Months Ended December 31, 2003 and 2002........................................ 3
Consolidated Balance Sheets
December 31, 2003 and September 30, 2003............................................. 4
Consolidated Statements of Cash Flows
Three Months Ended December 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............................... 19
Item 4. Controls and Procedures.................................................................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 20
Item 5. Other Information........................................................................ 20
Item 6. Exhibits and Reports on Form 8-K......................................................... 20
Signatures............................................................................... 22
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED DECEMBER 31,
2003 2002
---- ----
Revenue ................................................... $ 76,279 $ 57,273
Cost of goods sold ......................................... 39,026 27,665
------------- ------------
Gross profit....................................... 37,253 29,608
Operating expenses:
Research and development................................. 10,723 8,635
Selling and marketing.................................... 3,783 2,578
General and administrative............................... 5,124 4,368
Amortization of intangibles.............................. 85 85
------------- ------------
Total operating expenses.............................. 19,715 15,666
------------- ------------
Operating income............................................ 17,538 13,942
Other income (expense), net................................. 36 (5)
------------- ------------
Income before income taxes.................................. 17,574 13,937
Provision for income taxes.................................. 5,976 4,669
------------- ------------
Net income............................................ $ 11,598 $ 9,268
============= ============
Basic earnings per share.................................... $ 0.47 $ 0.38
============= ============
Weighted average basic shares outstanding................... 24,733 24,300
============= ============
Diluted earnings per share.................................. $ 0.46 $ 0.38
============= ============
Weighted average diluted shares outstanding................. 24,994 24,579
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
2003 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 127,359 $ 111,318
Accounts receivable, less allowance for doubtful
accounts of $599 at December 31, 2003
and $585 at September 30, 2003.............................................. 41,009 37,564
Inventories.................................................................... 22,682 23,814
Prepaid expenses, income taxes refundable and other current assets............. 3,988 4,010
Deferred income taxes.......................................................... 3,051 2,406
---------------- --------------
Total current assets..................................................... 198,089 179,112
Property, plant and equipment, net................................................ 132,117 133,695
Goodwill ......................................................................... 1,373 1,373
Other intangible assets, net...................................................... 510 595
Other long-term assets............................................................ 845 842
---------------- --------------
Total assets............................................................. $ 332,934 $ 315,617
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 12,819 $ 12,521
Capital lease obligations...................................................... 1,746 1,716
Accrued expenses, income taxes payable and other current liabilities........... 16,133 14,679
---------------- --------------
Total current liabilities................................................ 30,698 28,916
Capital lease obligations......................................................... 7,054 7,452
Deferred income taxes............................................................. 5,851 5,384
Deferred compensation and other long-term liabilities............................. 2,257 2,092
---------------- --------------
Total liabilities........................................................ 45,860 43,844
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock:
Authorized: 200,000,000 shares, $0.001 par value
Issued and outstanding: 24,756,292 shares at December 31, 2003 and
24,712,740 at September 30, 2003 ........................................... 25 25
Capital in excess of par value of common stock................................. 133,393 131,913
Retained earnings.............................................................. 150,456 138,858
Accumulated other comprehensive gain........................................... 3,417 1,187
Unearned compensation.......................................................... (217) (210)
---------------- --------------
Total stockholders' equity............................................... 287,074 271,773
---------------- --------------
Total liabilities and stockholders' equity............................... $ 332,934 $ 315,617
================ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
------------
2003 2002
---- ----
Cash flows from operating activities:
Net Income ....................................................................... $ 11,598 $ 9,268
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................................. 4,165 3,745
Noncash compensation expense and non-employee stock options ................... 18 (19)
Provision for inventory writedown ............................................. 836 547
Provision for doubtful accounts ............................................... 14 26
Stock option income tax benefits .............................................. 505 1,115
Deferred income taxes ......................................................... (177) 164
Unrealized foreign exchange gain .............................................. (695) (439)
Gain on disposal of property, plant and equipment ............................. (11) -
Other noncash expenses, net ................................................... 204 278
Changes in operating assets and liabilities:
Accounts receivable ........................................................... (2,326) (1,706)
Inventories ................................................................... 774 (2,656)
Prepaid expenses and other assets ............................................. (1,302) (100)
Accounts payable, accrued liabilities and other current liabilities ........... (2,204) (4,276)
Income taxes payable, deferred compensation and other noncurrent liabilities... 5,079 1,801
---------- ----------
Net cash provided by operating activities ........................................... 16,478 7,748
Cash flows from investing activities:
Additions to property, plant and equipment ....................................... (1,301) (2,286)
Proceeds from the sale of property, plant and equipment .......................... 11 -
---------- ----------
Net cash used in investing activities ............................................... (1,290) (2,286)
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of stock .............................................. 972 1,853
Principal payments under capital lease obligations ............................... (198) (180)
---------- ----------
Net cash provided by financing activities ........................................... 774 1,673
---------- ----------
Effect of exchange rate changes on cash ............................................. 79 56
---------- ----------
Increase in cash .................................................................... 16,041 7,191
Cash and cash equivalents at beginning of period .................................... 111,318 69,605
---------- ----------
Cash and cash equivalents at end of period .......................................... $ 127,359 $ 76,796
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND 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 the semiconductor industry, in a process called chemical
mechanical planarization ("CMP"). CMP is a polishing process used by IC device
manufacturers to planarize or flatten many of the multiple layers of material
that are built upon silicon wafers, and is a necessary step in the production of
advanced ICs. Planarization is a polishing process that uses CMP slurries and
pads to level, smooth and remove excess material from the surfaces of these
layers. CMP slurries are liquid formulations that facilitate and enhance this
polishing process and generally contain engineered abrasives and proprietary
chemicals. CMP pads are typically flat engineered "disks" that help distribute
and transport the slurry to the surface of the wafer and across the wafer.
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. In September 2000 we became
a wholly independent entity upon Cabot Corporation's spin-off of its remaining
ownership ("spin-off") in our company 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 December 31, 2003, cash
flows for the three months ended December 31, 2003 and December 31, 2002 and
results of operations for the three months ended December 31, 2003 and December
31, 2002. The results of operations for the three months ended December 31, 2003
may not be indicative of the results to be expected for future periods,
including the fiscal year ending September 30, 2004. 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, 2003. 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
In December 2002 we adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148"). 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 our Equity Incentive Plan and shares issued under our
Employee Stock Purchase Plan. No employee compensation expense has been recorded
as all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. Had expense been recognized using
the fair value method described in
6
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SFAS 123, using the Black-Scholes option-pricing model, we would have reported
the following results of operations:
THREE MONTHS ENDED
DECEMBER 31,
2003 2002
---- ----
Net income, as reported................. $ 11,598 $ 9,268
Deduct: total stock-based compensation
expense determined under the fair
value method, net of tax........... (4,529) (3,670)
-------- --------
Pro forma net income.................... $ 7,069 $ 5,598
======== ========
Earnings per share:
Basic - as reported................ $ 0.47 $ 0.38
======== ========
Basic - pro forma.................. $ 0.29 $ 0.23
======== ========
Diluted - as reported.............. $ 0.46 $ 0.38
======== ========
Diluted - pro forma................ $ 0.28 $ 0.23
======== ========
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
ENDED DECEMBER 31,
2003 2002
---- ----
Numerator:
Earnings available to common shares.............. $ 11,598 $ 9,268
=========== ===========
Denominator:
Weighted average common shares................... 24,733,440 24,300,495
(Denominator for basic calculation)
Weighted average effect of dilutive securities:
Stock based compensation ................... 260,400 278,559
----------- -----------
Diluted weighted average common shares........... 24,993,840 24,579,054
=========== ===========
(Denominator for diluted calculation)
Earnings per share:
Basic............................................ $ 0.47 $ 0.38
=========== ===========
Diluted.......................................... $ 0.46 $ 0.38
=========== ===========
7
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE MONTHS
ENDED DECEMBER 31,
2003 2002
---- ----
Net income....................................... $ 11,598 $ 9,268
Other comprehensive income:
Net unrealized gain on derivative
instruments .......................... 9 9
Foreign currency translation adjustment..... 2,221 1,134
------------ -----------
Total comprehensive income....................... $ 13,828 $ 10,411
============ ===========
5. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
2003 2003
---- ----
Raw materials........................... $ 12,381 $ 13,327
Work in process......................... 1,154 1,110
Finished goods.......................... 9,147 9,377
----------- -----------
Total................................... $ 22,682 $ 23,814
=========== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,373, as of December 31, 2003, was unchanged from our fiscal
year ended September 30, 2003.
The components of intangible assets are as follows:
DECEMBER 31, 2003 SEPTEMBER 30, 2003
------------------------------ -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Trade secrets and know-how............................... $ 2,550 $ 2,168 $ 2,550 $ 2,105
Distribution rights, customer lists and other............ 1,000 872 1,000 850
-------------- ------------ -------------- ------------
Total intangible assets............................... 3,550 3,040 3,550 2,955
-------------- ------------ -------------- ------------
Amortization expense of intangible assets was $85 for the three months
ended December 31, 2003. Estimated future amortization expense for the remaining
nine months of fiscal year 2004 and also for fiscal 2005 is $255.
8
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND 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:
DECEMBER 31, SEPTEMBER 30,
2003 2003
---- ----
Raw material accruals................... $ 1,385 $ 2,305
Accrued compensation.................... 5,618 7,743
Warranty accrual........................ 1,437 836
Fixed asset accrual..................... 576 579
Income taxes payable.................... 3,607 -
Other................................... 3,510 3,216
------------ -------------
Total................................... $ 16,133 $ 14,679
============ =============
8. CONTINGENCIES
LEGAL PROCEEDINGS
We periodically become subject to legal proceedings in the ordinary
course of business. We are not currently involved in any legal proceedings
that we believe will have a material impact on our consolidated financial
position, results of operations, or cash flows.
PRODUCT WARRANTIES
We record warranty expense in cost of goods sold in the period in which
the warranty claims occur. We calculate our warranty reserve shown below
using historical experience and any known conditions or circumstances, and
we perform periodic reviews of our warranty reserve requirements and make
appropriate adjustments to the reserve as necessary. Our warranty obligation
is affected primarily by product that does not meet specifications or
performance requirements and any related costs of addressing such matters.
Our warranty reserve requirements increased during the first fiscal quarter
of 2004 as follows:
Balance as of September 30, 2003........ $ 836
Net change.............................. 601
-----------
Balance as of December 31, 2003......... $ 1,437
===========
INDEMNIFICATION DISCLOSURE
In the normal course of business, we are a party to a variety of
agreements pursuant to which we may be obligated to indemnify the other
party with respect to certain matters. Generally, these obligations arise in
the context of agreements entered into by us, under which we customarily
agree to hold the other party harmless against losses arising from a breach
of representations and covenants related to such matters as title to assets
sold, certain intellectual property rights and, in certain circumstances,
specified environmental matters. These terms are common in the industry in
which we conduct business. In each of these circumstances, payment by us is
subject to certain monetary and other limitations and is conditioned on the
other party making an adverse claim pursuant to the procedures specified in
the particular agreement, which typically allow us to challenge the other
party's claims.
9
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
We evaluate estimated losses for such indemnifications under SFAS No.
5, "Accounting for Contingencies" as interpreted by FASB Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). We
consider such factors as the degree of probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. To
date, we have not encountered material costs as a result of such obligations
and as of December 31, 2003, have not recorded any liabilities related to
such indemnifications in our financial statements as we do not believe the
likelihood of a material obligation is probable.
9. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
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." The
adoption of SFAS 149 has not had a material impact on our consolidated financial
position, results of operations or cash flows, and we do not expect it to have a
material impact in the future.
In December 2003, the Staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB
104") which supercedes Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements" ("SAB 101"). The primary purpose of SAB 104 is to
rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superceded as a result of the issuance of Emerging Issue
Task Force Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). Additionally, SAB 104 rescinds the SEC's "Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers"
("the FAQ") issued with SAB 101 that had been codified in SEC Topic 13, "Revenue
Recognition". Selected portions of the FAQ have been incorporated into SAB 104.
While the wording of SAB 104 reflects the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104. The adoption of SAB 104 did not impact our consolidated financial
position, results of operations or cash flow.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations", as well as disclosures included elsewhere in this
Form 10-Q, include "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Form 10-Q are forward-looking. In particular, the statements herein
regarding 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, 2003.
10
FIRST FISCAL QUARTER OVERVIEW
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 the semiconductor industry, in a process called chemical
mechanical planarization ("CMP"). We develop, produce and sell CMP slurries for
polishing copper, tungsten and oxide in IC devices, and also for polishing
magnetic heads and the coating on disks in hard disk drives. We are currently
operating as a value-added reseller of CMP polishing pads produced by a third
party and are also developing our own pad technologies.
Our first quarter revenue of $76.3 million grew from the previous fiscal
quarter by 12.3%, and by 33.2% compared to the same quarter in the last fiscal
year. We believe this revenue growth, along with other signs we see in the
industry, is evidence of a recovery from the sustained semiconductor industry
downturn. Net income grew by 20.2% from the previous fiscal quarter and by 25.1%
from the same quarter last fiscal year. Our gross margin percentage of 48.8% of
revenue was lower than in the previous quarter and the first quarter of fiscal
2003, due to higher costs related to lower yields in our manufacturing process,
increased product warranty costs and higher freight costs. These higher costs
were required to meet our customers' increased demands for higher product
quality and consistency. We expect gross profit as a percentage of revenue to be
in the range of 50%, plus or minus 2%, in fiscal 2004. We anticipate that from
time to time we may experience periods of higher manufacturing costs, as we did
this quarter, and as we previously experienced in other periods, such as the
second quarter of fiscal 2003, due to more strenuous product requirements from
our customers. During the quarter, we entered into an amended and restated
unsecured revolving credit facility of $50.0 million with an option to increase
the facility by up to $30.0 million. This agreement replaces our $75.0 million
unsecured revolving credit and term loan facility that we entered into in July
2001.
We anticipate the worldwide market for CMP consumables used by IC device
manufacturers will grow in the future as a result of expected increases in the
number of IC devices produced, the percentage of IC devices produced that
require CMP and the number of CMP polishing steps used to produce these devices.
In addition, we believe that technology advances will require the use of new
materials in IC device manufacture that will require new CMP solutions. We
expect this anticipated growth will be mitigated somewhat by efficiencies in CMP
slurry and pad usage such as IC device manufacturers moving from 200 mm to 300
mm wafers. We are aware of several other manufacturers of CMP consumables with
sales of CMP slurries for IC devices and, due to the attractive growth outlook
for CMP, we expect competition will continue to increase as other companies
attempt to enter this market.
In November 2003 we announced the election of William P. Noglows as
Chairman, President and Chief Executive Officer, following the resignation of
Matthew Neville from these positions and from the board of directors. Mr.
Noglows previously served as an outside director of our company from 2000 until
2002 and is a 23-year veteran executive of the specialty chemical industry, with
an emphasis on highly engineered performance materials for the semiconductor and
electronics industries. In December 2003, we announced that Clifford L. Spiro
had joined us as our Vice President, Research and Development. We also made
certain other changes within our management team to strengthen our focus on the
Asia Pacific region, and on corporate strategy and development. We continue to
focus on three key strategies; remaining the technology leader in CMP slurries,
achieving operations excellence through improved product quality and
consistency, and building and maintaining close customer relationships.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 VERSUS THREE MONTHS ENDED DECEMBER 31, 2002
REVENUE
Total revenue was $76.3 million for the three months ended December 31,
2003, which represented a 33.2%, or $19.0 million, increase from the three
months ended December 31, 2002. Of this increase, $17.4 million was due to an
increase in sales volume and $1.6 million from an increase in weighted average
selling prices. Revenue in the year ago quarter was
11
depressed as the semiconductor industry experienced a fall off in business as
the perceived industry recovery was not sustained following stronger performance
in the June and September quarters of 2002. Copper product revenue increased
29.0% over the prior year quarter and tungsten and dielectric product revenues
combined increased by 37.5%. Revenue would have been $1.5 million lower had the
Japanese Yen and Euro average exchange rate for the quarter held constant with
the prior year's first fiscal quarter average.
COST OF GOODS SOLD
Total cost of goods sold was $39.0 million for the three months ended
December 31, 2003, which represented an increase of 41.1% or $11.4 million from
the three months ended December 31, 2002. Of this increase, $8.4 million was due
to an increase in volume and $3.0 million from higher costs. These higher costs
were related primarily to lower yields in our manufacturing process, increased
product warranty costs and higher freight costs required to meet our customers'
increased demand for product quality and consistency. From time to time we may
experience similar periods of higher manufacturing costs in the future as we
continue to respond to our customers' more strenuous requirements.
Fumed metal oxides, both fumed silica and fumed alumina, are significant
raw materials we use in many of our CMP slurries. From the time of our initial
public offering in April 2000 to January 2004, we purchased fumed silica and
fumed alumina under a fumed metal oxide agreement with Cabot Corporation that
was due to expire June 2005. In January 2004 we entered into a fumed silica
supply agreement with Cabot Corporation, which replaces the original fumed metal
oxide agreement with respect to fumed silica, and accordingly amended our fumed
metal oxide agreement with respect to its fumed silica terms such that the
agreement now only applies to fumed alumina and runs through June 2005. This
fumed silica supply agreement provides for improved supply assurance, reduces
our risk to rising raw material costs and implements improved quality
performance measures and requirements that support our initiative to increase
product quality and consistency. The contract provides for the cost of fumed
silica to increase approximately 4% over the initial term of the fumed silica
supply agreement, subject to inflation adjustments and shared cost savings
adjustments resulting from our joint efforts. This agreement has an initial
six-year term, which expires in December 2009 and will automatically renew
unless either party gives certain notice of non-renewal.
In addition, since December 2001, we have operated under a fumed alumina
supply agreement with Cabot Corporation under which Cabot Corporation expanded
its capacity for the manufacture of fumed alumina and we have the first right to
all this expanded capacity. The agreement provides that the price Cabot
Corporation charges us for fumed alumina is based on all of its 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 per year that
meets our specifications.
Our need for additional quantities or different kinds of key raw materials
in the future has required and will continue to require that we enter into new
supply arrangements with third parties. Future arrangements may result in costs
which are higher than those in the existing agreements.
GROSS PROFIT
Our gross profit as a percentage of total revenue was 48.8%, for the three
months ended December 31, 2003 as compared to 51.7% for the three months ended
December 31, 2002. The decrease in gross profit expressed as a percentage of
total revenue resulted primarily from an increase in production and warranty
costs associated with increased product performance requirements of our
customers. We expect our gross profit as a percentage of total revenue in fiscal
year 2004 to be in the range of 50%, plus or minus 2%.
12
RESEARCH AND DEVELOPMENT
Research and development expenses were $10.7 million in the three months
ended December 31, 2003, which represented an increase of 24.2%, or $2.1
million, from the three months ended December 31, 2002. Research and development
expense increased $1.1 million due to increased staffing, $0.4 due to higher
technical service and consulting fees, $0.3 million due to higher supplies and
$0.2 million due to higher depreciation related to the purchase of equipment for
our CMP polishing and metrology clean room. R&D efforts were mainly related to
new and enhanced CMP products including slurry products for copper applications,
new CMP polishing pad technology and advanced chemistry and particle technology.
SELLING AND MARKETING
Selling and marketing expenses were $3.8 million in the three months ended
December 31, 2003, which represented an increase of 46.7%, or $1.2 million, from
the three months ended December 31, 2002. The increase resulted primarily from
higher staffing costs associated with our increased customer support initiatives
including our transition to selling direct to customers in Europe, Singapore,
Malaysia and Japan, rather than through a distributor.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $5.1 million in the three months
ended December 31, 2003, which represented an increase of 17.3%, or $0.8
million, from the three months ended December 31, 2002. The increase resulted
from a $0.2 million increase in staffing, $0.2 million of costs associated with
the transition to our new chief executive officer, $0.2 million related to
higher insurance premiums and increased professional fees of $0.1 million.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.1 million for both the three months
ended December 31, 2003 and 2002.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was negligible for both the three months ended
December 31, 2003 and 2002.
PROVISION FOR INCOME TAXES
The effective income tax rate was 34.0% for the three months ended December
31, 2003 and 33.5% for the three months ended December 31, 2002. The increase in
the effective tax rate was due to the anticipated June 2004 expiration of the
current tax legislation related to research and experimentation credits and the
decreased impact of these credits in relation to higher taxable income as
compared to the prior year. We expect our income tax rate for full fiscal year
2004 to be 34.0%.
NET INCOME
Net income was $11.6 million for the three months ended December 31, 2003,
which represented an increase of 25.1%, or $2.3 million, from the three months
ended December 31, 2002 as a result of the factors discussed above.
13
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $16.5 million in the three
months ended December 31, 2003 and $7.7 million in the three months ended
December 31, 2002. Our cash provided by operating activities for the three
months ended December 31, 2003 originated from net income from operations of
$11.6 million and non-cash items of $4.9 million.
In the three months ended December 31, 2003, capital spending was $1.3
million, primarily related to tools and equipment for our CMP polishing and
metrology cleanroom. Full fiscal year 2004 capital spending and depreciation
expense are anticipated to be approximately $22.0 million and $19.4 million,
respectively. In the three months ended December 31, 2002, capital spending was
$2.3 million, primarily for manufacturing equipment for the production of new
products and additional research and development equipment.
Cash flows from financing activities were $0.8 million in the three months
ended December 31, 2003 and $1.7 million in the three months ended December 31,
2002. Cash provided from financing activities for both periods resulted from the
issuance of common stock associated with the exercise of stock options, which
was partially offset by principal payments made under capital lease obligations.
In July 2001 we entered into a $75.0 million unsecured revolving credit and
term loan facility with a group of commercial banks, and in February 2002 and
August 2003 this agreement was amended with no material changes in terms. On
November 24, 2003 the existing agreement was terminated and replaced with an
amended and restated unsecured revolving credit facility of $50.0 million with
an option to increase the facility by up to $30.0 million. Under this agreement,
which terminates in November 2006, but can be renewed for two one year terms,
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 believe we are currently in
compliance with the covenants.
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.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2003 and September 30, 2003, we did not have any
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which might have
been established for the purpose of facilitating off-balance sheet arrangements.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at December 31, 2003
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.
CONTRACTUAL OBLIGATIONS
(IN MILLIONS)
LESS THAN 1-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
----- --------- ----- ----- -----
Capital lease obligations.......................... $ 8.8 $ 1.7 $ 2.9 $ 2.3 $ 1.9
Operating leases .................................. 0.8 0.4 0.3 0.1 0.0
Purchase obligations .............................. 69.7 44.0 16.7 6.0 3.0
Other long-term liabilities ....................... 2.2 0.0 1.1 0.0 1.1
------- --------- -------- -------- --------
Total contractual obligations...................... $ 81.5 $ 46.1 $ 21.0 $ 8.4 $ 6.0
======= ========= ======== ======== ========
14
CAPITAL LEASE OBLIGATIONS
Since December 2001 we have operated under a fumed alumina supply agreement
with Cabot Corporation, under which 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.
In January 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 this entity 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.
PURCHASE OBLIGATIONS
Purchase obligations include our take-or-pay arrangements with suppliers,
and purchase orders and other obligations entered into in the normal course of
business regarding the purchase of goods and services. In the fourth quarter of
fiscal 2003, we recorded a $2.0 million liability for a raw material supply
agreement for a polishing pad technology that was previously under development,
but is no longer being pursued. Our total obligation with respect to this
agreement is $2.2 million, of which $1.1 million is recorded in current
liabilities and shown in the preceding table under purchase obligations and $1.1
million is included in other long-term liabilities, which is discussed below.
From the time of our initial public offering in April 2000 to January 2004,
we purchased fumed silica and fumed alumina under a fumed metal oxide agreement
with Cabot Corporation that was due to expire June 2005. Under this agreement,
we were obligated to purchase at least 90% of our six-month volume forecast of
fumed silica from Cabot Corporation and were obligated to pay for the shortfall
if we purchased less than that amount. In January 2004 we entered into a fumed
silica supply agreement with Cabot Corporation, which replaces the original
fumed metal oxide agreement with respect to fumed silica, and accordingly
amended our fumed metal oxide agreement with respect to its fumed silica terms
such that the agreement now only applies to fumed alumina through June 2005.
Under the fumed silica supply agreement, we continue to be obligated to purchase
at least 90% of our six-month volume forecast and to pay for the shortfall if we
purchase less than that amount. This agreement has an initial six-year term,
which expires in December 2009 and will automatically renew unless either party
gives certain notice of non-renewal. 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 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. Purchase obligations include $33.1 million of contractual commitments
based upon our anticipated renewal of the agreement through December 2011.
We have an agreement with a toll manufacturer pursuant to which the
manufacturer performs 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 manufacturer's dispersion facility. The initial term of the
agreement expires in October 2004, with automatic one-year renewals, and
contains a 90-
15
day cancellation clause executable by either party. Purchase obligations related
to this agreement are $13.6 million, which include a termination payment if the
agreement is not renewed.
We have a distribution agreement with an existing supplier of polishing
pads to the semiconductor industry pursuant to which the supplier sells product
to us for our resale to end users. The initial term of the contract runs through
September 2007 and we are required to make certain agreed-upon payments in order
to maintain the agreement. Included in purchase obligations is $5.0 million
which we intend to pay by September 2004. We have the ability to cancel the
agreement at any time with no cancellation fee.
In June 2003 we entered into a technology licensing and co-marketing
agreement with a semiconductor equipment manufacturer under which we plan to
develop, manufacture and sell polishing pads utilizing endpoint detection window
technology licensed from the manufacturer for use on the manufacturer's
equipment. Under this agreement, we are obligated to pay $6.6 million, of which
$5.1 million has been paid as of December 31, 2003, for the purchase of capital
equipment, approximately one year of certain marketing and technical support
services, and equipment services. In addition, we are obligated to supply this
manufacturer with free polishing pads, up to an agreed upon dollar amount, for
particular uses over a seven year period. We currently estimate our total cost
associated with these products will be $2.1 million over the remaining period.
We are also obligated to supply the equipment manufacturer with polishing pads,
up to an agreed upon dollar amount over the seven year period, which the
manufacturer will purchase from us at our cost. We will also pay a royalty to
the equipment manufacturer and, in certain circumstances, to another party to
whom we are a sub-licensee under our agreement, based upon net revenue earned
with respect to commercial sales of polishing pads covered under the agreement.
The agreement's term lasts as long as the patents on the technology subject to
the license agreement remain valid and enforceable.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities include the $1.1 million long-term portion of
the purchase obligation discussed above, that we recorded for a raw material
supply agreement for a polishing pad technology that was previously under
development, but is no longer being pursued. Also included is $1.1 million for
pension and deferred compensation obligations.
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, including 300 mm
wafers, 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 may stop buying CMP slurries
from us or may substantially reduce the quantity of CMP slurries they purchase
from us. They also
16
hold considerable purchasing power, which can impact the pricing, and terms of
sale of our products. 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 one is a distributor, accounted
for approximately 54% of our revenue for the three months ended December 31,
2003. For the three months ended December 31, 2002 our five largest customers,
of which two were distributors, accounted for approximately 59% of our revenue.
In June 2003, we completed our transition to selling directly to customers in
Europe, Singapore and Malaysia who previously had been serviced through one of
these distributors.
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 operate under three raw material supply agreements with Cabot
Corporation, one of which for the supply of fumed silica and two of which for
the supply of fumed alumina. Under these agreements, Cabot Corporation continues
to be our primary supplier of particular amounts and types of fumed alumina and
fumed silica. We believe it would 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 and technical specifications required by our customers. 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. We may also face
competition arising from significant changes in technology, such as the
development of polishing pads containing abrasives and emerging technologies
such as electrochemical mechanical planarization ("ECMP"). 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.
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, manufacturing 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
17
pads for whom we act as value-added reseller, may not be able to produce
products that satisfy our customers' needs. 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.
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 68% of our revenue was generated by sales to customers
outside the United States for our fiscal year ended 2003. For the three months
ended December 31, 2003, approximately 73% of our revenue was generated by sales
to customers outside the United States. We encounter risks in doing business in
certain foreign countries, including but 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. In June 2003 we completed our transition to
selling directly to customers in Europe, Singapore and Malaysia who previously
had been serviced through a third party distributor. Selling directly may
increase our risk of conducting business in foreign countries.
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.
OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO
SUFFER
If we fail to attract and retain the necessary managerial, technical and
customer support personnel, our business and our ability to maintain existing
and obtain new customers, develop new products and provide acceptable levels of
customer service could suffer. Competition for qualified personnel, particularly
those with significant experience in the CMP and IC device industries, is
intense. The loss of services of key employees could harm our business and
results of operations.
DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY 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. For example, our quarterly revenue trends in fiscal years 2001
through 2003 were affected by the global economic slowdown and weakening in
demand for electronic systems, coupled with higher than normal chip inventories.
While there are currently encouraging indications that the semiconductor
industry is recovering from this prolonged downturn, any further declines or
lack of improvement in current economic and industry conditions could continue
to adversely affect our business.
18
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, our competitors, or our customers 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 AN UNSOLICITED 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 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. Our foreign operations maintain their accounting records in
their local currencies. Consequently, period to period comparability of results
of operations is affected by fluctuations in exchange rates. The primary
currencies to which we have exposure are the Japanese Yen and, 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. However, we
may be unable to hedge these exposures completely. Approximately 17% of our
revenue is transacted in currencies other than the U.S. dollar. We do not
currently enter into forward exchange contracts or other derivative instruments
for speculative or trading purposes.
MARKET RISK AND SENSITIVITY ANALYSIS OF FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in foreign exchange rates. As of December 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.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our 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-15(e) and 15d-15(e) as of the end of the period covered by
this report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to make
19
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.
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 independent 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. During the quarter covered by this filing our Audit Committee approved
the following non-audit services performed by PricewaterhouseCoopers LLP: (1)
tax compliance and consultations related to research and experimentation tax
credits; (2) tax compliance and consultations related to our foreign operations;
and (3) tax consultations with respect to our Equity Incentive Plan and 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
- ------ -----------
10.29 Amended and Restated Credit Agreement dated November 24, 2003 among
Cabot Microelectronics Corporation, Various Financial Institutions
and LaSalle Bank National Association, as Administrative Agent, and
National City Bank of Michigan/Illinois, as Syndication Agent.
10.37 Employment and Transition Agreement dated November 3, 2003.*
10.38 Employment Offer Letter dated November 2, 2003.*
10.39 Employment Offer Letter dated November 17, 2003.*
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
20
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract, or compensatory plan or arrangement.
(b) Reports on Form 8-K
In a report dated October 23, 2003, Cabot Microelectronics reported
under Item 7. "Financial Statements and Exhibits" and Item 12.
"Results of Operations and Financial Condition" that on October 23,
2003 Cabot Microelectronics reported financial results for its fourth
fiscal quarter and for the year ended September 30, 2003.
In a report dated November 3, 2003, Cabot Microelectronics reported
under Item 5. "Other Events" and Item 7. "Financial Statements and
Exhibits" that on November 3, 2003 Cabot Microelectronics announced
the election of William P. Noglows as Chairman, President and Chief
Executive 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: February 12, 2004 /s/ WILLIAM S. JOHNSON
----------------------------------------
William S. Johnson
Vice President and Chief Financial Officer
[Principal Financial Officer]
Date: February 12, 2004 /s/ THOMAS S. ROMAN
-------------------------------------------
Thomas S. Roman
Corporate Controller
[Principal Accounting Officer]
22