Back to GetFilings.com
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, 2004
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, 2004 the Company had 24,818,602 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, 2004 and 2003................................... 3
Consolidated Balance Sheets
March 31, 2004 and September 30, 2003................................................ 4
Consolidated Statements of Cash Flows
Six Months Ended March 31, 2004 and 2003............................................. 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............................... 21
Item 4. Controls and Procedures.................................................................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders...................................... 22
Item 5. Other Information........................................................................ 23
Item 6. Exhibits and Reports on Form 8-K......................................................... 23
Signatures............................................................................... 24
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,
2004 2003 2004 2003
---- ---- ---- ----
Revenue ................................................... $ 73,515 $ 62,201 $ 149,794 $ 119,474
Cost of goods sold ......................................... 37,366 31,786 76,392 59,451
------------- ------------ ----------- -----------
Gross profit....................................... 36,149 30,415 73,402 60,023
Operating expenses:
Research and development................................. 11,143 9,609 21,866 18,244
Selling and marketing.................................... 4,363 2,554 8,146 5,132
General and administrative............................... 5,749 4,595 10,873 8,963
Amortization of intangibles.............................. 85 85 170 170
------------- ------------ ----------- -----------
Total operating expenses.............................. 21,340 16,843 41,055 32,509
------------- ------------ ----------- -----------
Operating income............................................ 14,809 13,572 32,347 27,514
Other income (expense), net................................. (86) 43 (50) 38
------------- ------------ ----------- -----------
Income before income taxes.................................. 14,723 13,615 32,297 27,552
Provision for income taxes.................................. 5,006 4,561 10,982 9,230
------------- ------------ ----------- -----------
Net income............................................ $ 9,717 $ 9,054 $ 21,315 $ 18,322
============= ============ =========== ===========
Basic earnings per share.................................... $ 0.39 $ 0.37 $ 0.86 $ 0.75
============= ============ =========== ===========
Weighted average basic shares outstanding................... 24,785 24,346 24,761 24,325
============= ============ =========== ===========
Diluted earnings per share.................................. $ 0.39 $ 0.37 $ 0.85 $ 0.75
============= ============ =========== ===========
Weighted average diluted shares outstanding................. 24,926 24,593 24,935 24,589
============= ============ =========== ===========
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,
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 140,264 $ 111,318
Accounts receivable, less allowance for doubtful
accounts of $580 at March 31, 2004
and $585 at September 30, 2003.............................................. 38,452 37,564
Inventories.................................................................... 23,861 23,814
Prepaid expenses and other current assets...................................... 5,902 4,010
Deferred income taxes.......................................................... 2,525 2,406
---------------- --------------
Total current assets..................................................... 211,004 179,112
Property, plant and equipment, net................................................ 129,799 133,695
Goodwill ......................................................................... 1,373 1,373
Other intangible assets, net...................................................... 425 595
Other long-term assets............................................................ 862 842
---------------- --------------
Total assets............................................................. $ 343,463 $ 315,617
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 14,398 $ 12,521
Capital lease obligations...................................................... 1,591 1,716
Accrued expenses and other current liabilities................................. 12,141 14,679
---------------- --------------
Total current liabilities................................................ 28,130 28,916
Capital lease obligations......................................................... 6,835 7,452
Deferred income taxes............................................................. 6,148 5,384
Deferred compensation and other long-term liabilities............................. 2,521 2,092
---------------- --------------
Total liabilities........................................................ 43,634 43,844
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock:
Authorized: 200,000,000 shares, $0.001 par value
Issued and outstanding: 24,813,063 shares at March 31, 2004 and
24,712,740 at September 30, 2003 ........................................... $ 25 $ 25
Capital in excess of par value of common stock................................. 135,171 131,913
Retained earnings.............................................................. 160,173 138,858
Accumulated other comprehensive income......................................... 4,651 1,187
Unearned compensation.......................................................... (191) (210)
---------------- --------------
Total stockholders' equity............................................... 299,829 271,773
---------------- --------------
Total liabilities and stockholders' equity............................... $ 343,463 $ 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 AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
MARCH 31,
---------
2004 2003
---- ----
Cash flows from operating activities:
Net income................................................................... $ 21,315 $ 18,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................. 8,554 7,512
Noncash compensation expense and non-employee stock options............... 29 (17)
Provision for inventory writedown......................................... (348) 1,511
Provision for doubtful accounts........................................... 7 22
Stock option income tax benefits.......................................... 834 1,147
Deferred income taxes..................................................... 646 (217)
Unrealized foreign exchange gain.......................................... (1,148) (466)
(Gain) loss on disposal of property, plant and equipment ................. (5) 21
Other..................................................................... (18) 351
Changes in operating assets and liabilities:
Accounts receivable....................................................... 827 (1,744)
Inventories............................................................... 1,186 (2,154)
Prepaid expenses and other assets......................................... (339) 101
Accounts payable, accrued liabilities and other current liabilities....... (1,481) (2,477)
Income taxes payable, deferred compensation and other noncurrent
liabilities (871) 536
-------------- --------------
Net cash provided by operating activities....................................... 29,188 22,448
Cash flows from investing activities:
Additions to property, plant and equipment................................... (2,408) (4,714)
Proceeds from the sale of property, plant and equipment...................... 13 1,770
-------------- --------------
Net cash used in investing activities........................................... (2,395) (2,944)
-------------- --------------
Cash flows from financing activities:
Prepayment of long-term debt................................................. - (3,500)
Net proceeds from issuance of stock.......................................... 2,440 2,635
Principal payments under capital lease obligations........................... (400) (363)
--------------- ---------------
Net cash provided by (used in) financing activities............................. 2,040 (1,228)
-------------- ---------------
Effect of exchange rate changes on cash......................................... 113 5
-------------- --------------
Increase in cash................................................................ 28,946 18,281
Cash and cash equivalents at beginning of period................................ 111,318 69,605
-------------- --------------
Cash and cash equivalents at end of period...................................... $ 140,264 $ 87,886
============== ==============
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 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 a division of Cabot Corporation, completed its initial public
offering in April 2000. In September 2000 we became wholly independent 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 March 31, 2004, cash flows for the
six months ended March 31, 2004 and March 31, 2003 and results of operations for
the three and six months ended March 31, 2004 and March 31, 2003. The results of
operations for the three and six months ended March 31, 2004 may not be
indicative of the results to be expected for 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 AMOUNTS 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 SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported.......................... $ 9,717 $ 9,054 $ 21,315 $ 18,322
Deduct: total stock-based compensation
expense determined under the fair
value method, net of tax.................... (5,096) (4,326) (9,625) (7,996)
----------- ----------- ------------ -----------
Pro forma net income............................. 4,621 4,728 11,690 10,326
=========== =========== ============ ===========
Earnings per share:
Basic - as reported......................... $ 0.39 $ 0.37 $ 0.86 $ 0.75
=========== =========== ============ ===========
Basic - pro forma........................... $ 0.19 $ 0.19 $ 0.47 $ 0.42
=========== =========== ============ ===========
Diluted - as reported....................... $ 0.39 $ 0.37 $ 0.85 $ 0.75
=========== =========== ============ ===========
Diluted - pro forma......................... $ 0.19 $ 0.19 $ 0.47 $ 0.42
=========== =========== ============ ===========
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,
2004 2003 2004 2003
---- ---- ---- ----
Numerator:
Earnings available to common shares.............. $ 9,717 $ 9,054 $ 21,315 $ 18,322
=========== =========== ============ ===========
Denominator:
Weighted average common shares................... 24,785,052 24,346,172 24,761,317 24,325,392
(Denominator for basic calculation)
Weighted average effect of dilutive securities:
Stock-based compensation ................... 140,707 247,176 173,446 263,130
----------- ----------- ------------ -----------
Diluted weighted average common shares........... 24,925,759 24,593,348 24,934,763 24,588,522
=========== =========== ============ ===========
(Denominator for diluted calculation)
Earnings per share:
Basic............................................ $ 0.39 $ 0.37 $ 0.86 $ 0.75
=========== =========== ============ ===========
Diluted.......................................... $ 0.39 $ 0.37 $ 0.85 $ 0.75
=========== =========== ============ ===========
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,
----------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income....................................... $ 9,717 $ 9,054 $ 21,315 $ 18,322
Other comprehensive income:
Net unrealized gain on derivative
instruments ......................... 9 8 18 17
Foreign currency translation adjustment..... 1,225 179 3,446 1,313
------------ ----------- ----------- ----------
Total comprehensive income....................... $ 10,951 $ 9,241 $ 24,779 $ 19,652
============ =========== =========== ==========
5. INVENTORIES
Inventories consisted of the following:
MARCH 31, SEPTEMBER 30,
2004 2003
---- ----
Raw materials........................... $ 13,218 $ 13,327
Work in process......................... 1,231 1,110
Finished goods.......................... 9,412 9,377
----------- -----------
Total................................... $ 23,861 $ 23,814
=========== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,373, as of March 31, 2004, was unchanged from our fiscal
year ended September 30, 2003.
The components of intangible assets are as follows:
MARCH 31, 2004 SEPTEMBER 30, 2003
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------ ------------
Trade secrets and know-how............................... $ 2,550 $ 2,231 $ 2,550 $ 2,105
Distribution rights, customer lists and other............ 1,000 894 1,000 850
------------ ----------- ------------ -----------
Total intangible assets............................... 3,550 3,125 3,550 2,955
------------ ----------- ------------ -----------
Amortization expense of intangible assets was $85 and $170 for the three
and six months ended March 31, 2004, respectively. Estimated future amortization
expense for the remaining six months of fiscal year 2004 is $170 and $255 for
the full fiscal year 2005.
8
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
MARCH 31, SEPTEMBER 30,
2004 2003
---- ----
Raw materials accruals.................. $ 812 $ 2,305
Accrued compensation.................... 6,566 7,743
Warranty accrual........................ 841 836
Fixed asset accrual..................... 139 579
Other................................... 3,783 3,216
----------- -----------
Total................................... $ 12,141 $ 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 are incurred. 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 six months of fiscal 2004 as follows:
Balance as of September 30, 2003........ $ 836
Net change.............................. 5
-----------
Balance as of March 31, 2004............ $ 841
===========
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 March 31, 2004, 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 December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits, an Amendment of FASB Statements No. 87, 88, and 106,
and a Revision of FASB Statement No. 132" ("SFAS 132 (revised 2003)") which
revises employers' disclosures about pension plans and other postretirement
benefits plans including additional disclosures about the assets, obligations,
cash flows and net periodic benefit cost of defined benefit pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by FASB Statements No. 87, 88, and 106. The
adoption of SFAS No. 132 (revised 2003) did not impact our consolidated
financial position, results of operations or cash flow.
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 statements 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
SECOND 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.
Total revenue for our second fiscal quarter was $73.5 million, down 3.6%
from the previous fiscal quarter, but up 18.2% compared to the same quarter in
the last fiscal year. Sales volumes were up slightly from the prior quarter, but
our average selling price decreased by 5.3% from the prior quarter, causing the
revenue reduction. Approximately half of the average selling price decrease was
due to a lower priced product mix, and approximately half was due to selective
price reductions. In the second fiscal quarters of 2002 and 2003 we also
experienced price reductions from the prior quarter, and we believe that, to
date, pricing pressure has been particularly concentrated around a new calendar
year. Net income of $9.7 million for the quarter was down by 16.2% from last
quarter due to lower revenue and higher operating costs, and up 7.3% compared to
the same quarter in the last fiscal year due to higher revenue but also higher
operating costs.
We believe there are three CMP industry trends that are currently impacting
our business. First, we believe that rapid incorporation of CMP technology and
growth of the CMP industry, combined with our customers' desires to gain
purchasing leverage and lower their cost of ownership, have led to much greater
competitive activity. Second, as CMP technology has become more advanced, we
believe that CMP technical solutions have become more complicated, and leading
edge technologies often require customization by customer, tool set and process
integration approach. Third, as CMP technology has matured, we believe that
semiconductor manufacturers' processes have become highly sensitive to CMP
slurries, and customers now demand a very high level of consistency in CMP
slurry products. Beyond product consistency, we believe that product quality
requirements have also increased dramatically as IC feature sizes have continued
to shrink, resulting in higher costs. We believe that these three trends have
adversely impacted our margins, and going forward we expect our gross margin as
a percentage of revenue to be 48%, plus or minus 2%. This is a reduction from
our prior forecast for gross margin of 50% of revenue, plus or minus 2%. As we
face the challenges associated with these trends, we intend to continue to focus
on three key fundamentals: continuing to operate as the premium value slurry
provider, innovating to differentiate ourselves through technology; leveraging
our substantial existing global manufacturing and supply chain infrastructure to
achieve the product quality and consistency required by our customers, while
capturing economies and efficiencies we believe are accessible through our
significant scale; and, continuing our focus on customer relationships.
During the quarter, 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 its original term of June 2005. This fumed
silica supply agreement provides for improved supply assurance, reduces our risk
to rising raw material costs and incorporates increased quality performance
measures and requirements that support our initiative to increase product
quality and consistency. 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. The contract provides for the cost of fumed
silica to increase approximately 4% over the initial six-year term of the fumed
silica supply agreement, and in some circumstances is subject to certain
inflation adjustments and certain shared cost savings adjustments resulting from
our joint efforts.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 VERSUS THREE MONTHS ENDED MARCH 31, 2003
REVENUE
Total revenue was $73.5 million for the three months ended March 31, 2004,
which represented an 18.2%, or $11.3 million, increase from the three months
ended March 31, 2003. Of this increase, $11.9 million was due to an increase in
sales volume which was partially offset by a $0.6 million reduction in weighted
average selling prices. Our average selling price decreased due to selective
price reductions granted to certain customers, partially offset by benefits of a
higher priced product mix and foreign exchange fluctuation. Revenue for the
three months ended March 31, 2004 would have been $1.2 million lower had the
Japanese Yen and Euro average exchange rate for the quarter held constant with
the prior year's second fiscal quarter average.
COST OF GOODS SOLD
Total cost of goods sold was $37.4 million for the three months ended March
31, 2004, which represented an increase of 17.6% or $5.6 million from the three
months ended March 31, 2003. Of this increase, $6.1 million was due to an
increase in volume which was partially offset by a $0.5 million reduction in
costs, primarily due to improvements in our manufacturing yields and lower
product costs compared to the year ago quarter.
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 its original term
of June 2005. This fumed silica supply agreement provides for improved supply
assurance, reduces our risk to rising raw material costs and incorporates
increased quality performance measures and requirements that support our
initiative to increase product quality and consistency. 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. The contract
provides for the cost of fumed silica to increase approximately 4% over the
initial six-year term of the fumed silica supply agreement, and in some
circumstances is subject to certain inflation adjustments and certain shared
cost savings adjustments resulting from our joint efforts.
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, its capital costs for expanding
its capacity, an agreed upon rate of return on investment and 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 different from those in the existing agreements.
GROSS PROFIT
Our gross profit as a percentage of total revenue was 49.2% for the three
months ended March 31, 2004 as compared to 48.9% for the three months ended
March 31, 2003. The increase in gross profit expressed as a percentage of total
revenue resulted primarily from the sales volume increase, a higher valued
product mix and improved manufacturing yields, partially offset by
12
lower average selling prices. We continue to experience increasing competition
and pricing pressure, along with increasing costs to support the higher product
quality and advanced technology requirements of our customers. For these
reasons, we expect our gross profit as a percentage of total revenue in the
future to be in the range of 48%, plus or minus 2%. This is a reduction from our
previous expectations of gross profit of 50% of revenue, plus or minus 2%.
RESEARCH AND DEVELOPMENT
Research and development expenses were $11.1 million in the three months
ended March 31, 2004, which represented an increase of 16.0%, or $1.5 million,
from the three months ended March 31, 2003. Research and development expense
increased $0.6 million due to increased staffing, $0.4 million due to higher
supplies and $0.4 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 $4.4 million in the three months ended
March 31, 2004, which represented an increase of 70.8%, or $1.8 million, from
the three months ended March 31, 2003. The increase resulted primarily from our
increased customer support initiatives, including our transition to selling
direct to customers in Europe, Singapore, Malaysia and Japan, rather than
through a distributor. Contributing to the increase were higher staffing costs
of $0.7 million, higher customer support costs of $0.4 million, $0.3 million in
separation costs for certain employees, including an executive, and increased
technical and marketing support of $0.2 million.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $5.7 million in the three months
ended March 31, 2004, which represented an increase of 25.1%, or $1.2 million,
from the three months ended March 31, 2003. The increase resulted primarily from
$0.5 million in higher staffing costs, $0.2 million in separation costs for an
executive and higher insurance premiums of $0.1 million.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.1 million for both the three months
ended March 31, 2004 and 2003.
OTHER INCOME (EXPENSE), NET
Other expense was $0.1 million for the three months ended March 31, 2004 as
compared to negligible other income for the three months ended March 31, 2003.
Compared to the prior year, foreign exchange losses increased by $0.3 million
and were partially offset by higher interest income.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 34.0% for the three months ended March
31, 2004 and 33.5% for the three months ended March 31, 2003. The increase in
the effective tax rate was due to the anticipated June 2004 expiration of
current United States tax legislation related to research and experimentation
credits and the decreased impact of these credits in relation to higher taxable
income compared to the prior year. We expect our income tax rate for full fiscal
year 2004 to be 34.0%.
13
NET INCOME
Net income was $9.7 million for the three months ended March 31, 2004,
which represented an increase of 7.3%, or $0.7 million, from the three months
ended March 31, 2003 as a result of the factors discussed above.
SIX MONTHS ENDED MARCH 31, 2004 VERSUS SIX MONTHS ENDED MARCH 31, 2003
REVENUE
Total revenue was $149.8 million for the six months ended March 31, 2004,
which represented a 25.4%, or $30.3 million, increase from the six months ended
March 31, 2003. Of this increase, $29.3 million was due to an increase in sales
volume and $1.0 million was due to an increase in weighted average selling
prices from both an improved sales mix and favorable foreign exchange rate
changes, which more than offset selective price reductions that were granted to
certain customers. Total revenue for the six months ended March 31, 2004 would
have been $2.7 million lower had the average exchange rates for the Japanese Yen
and Euro during the six month period held constant with the prior year's six
month average.
COST OF GOODS SOLD
Total cost of goods sold was $76.4 million for the six months ended March
31, 2004, which represented an increase of 28.5%, or $16.9 million, from the six
months ended March 31, 2003. Approximately $14.6 million of this increase was
due to higher sales volumes and $2.4 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.
GROSS PROFIT
Our gross profit as a percentage of total revenue was 49.0% for the six
months ended March 31, 2004 as compared to 50.2% for the six months ended March
31, 2003. The decrease in gross profit expressed as a percentage of total
revenue resulted primarily from increased costs associated with meeting customer
requirements for higher product performance that was partially offset by an
increase in weighted average selling prices.
RESEARCH AND DEVELOPMENT
Research and development expense was $21.9 million for the six months ended
March 31, 2004, which represented an increase of 19.9%, or $3.6 million from the
six months ended March 31, 2003. Research and development expense increased $1.7
million due to higher staffing costs, $0.6 million due to higher technical
service and consulting fees, $0.7 million due to higher supplies and $0.5
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 $8.1 million in the six months ended
March 31, 2004, which represented an increase of 58.7%, or $3.0 million, from
the six months ended March 31, 2003. The increase resulted primarily from our
increased customer support initiatives, including our transition to selling
direct to customers in Europe, Singapore, Malaysia and Japan, rather than
through a distributor. Contributing to the increase were higher staffing costs
of $1.3 million, higher customer support costs of $0.5 million, increased
consulting fees of $0.5 million and $0.3 million in separation costs for certain
employees, including an executive.
14
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $10.9 million in the six months
ended March 31, 2004, which represented an increase of 21.3%, or $1.9 million,
from the six months ended March 31, 2003. The increase resulted from $0.9
million in higher staffing costs, $0.3 million due to higher insurance premiums,
$0.3 million of increased professional fees and $0.2 million in separation costs
for an executive.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.2 million for both the six months ended
March 31, 2004 and 2003.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was negligible for both the six months ended
March 31, 2004 and 2003. Compared to the prior year, foreign exchange losses
increased by $0.3 million, which was partially offset by decreased interest
expense due to the February 2003 prepayment of our entire $3.5 million unsecured
term loan and increased interest income.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 34.0% in the six months ended March 31,
2004 and 33.5 % for the six months ended March 31, 2003. The increase in the
effective tax rate was due to the anticipated June 2004 expiration of current
United States tax legislation related to research and experimentation credits
and the decreased impact of these credits in relation to higher taxable income
compared to the prior year.
NET INCOME
Net income was $21.3 million in the six months ended March 31, 2004, which
represented an increase of 16.3%, or $3.0 million, from the six months ended
March 31, 2003 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $29.2 million in the six
months ended March 31, 2004 and $22.4 million in the six months ended March 31,
2003. Our cash provided by operating activities for the six months ended March
31, 2004 originated from net income from operations of $21.3 million and
non-cash items of $8.6 million, which were partially offset by a net increase in
working capital of $0.7 million.
In the six months ended March 31, 2004, capital spending was $2.4 million,
primarily due to the purchase of production-related equipment to be used in our
Aurora, Illinois facilities and equipment for our CMP polishing and metrology
clean room. Full fiscal year 2004 capital spending is anticipated to be
approximately $17.0 million, down $5.0 million from our previously planned
spending level of $22.0 million due to slower than expected spending on clean
room equipment. 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 clean room. In addition, we received cash of
approximately $1.8 million from the January 2003 sale of our distribution center
and land in Ansung, South Korea.
15
Cash flows from financing activities were $2.0 million in the six months
ended March 31, 2004. Cash provided from financing activities resulted from the
issuance of common stock associated with the exercise of stock options and the
Employee Stock Purchase Plan, which was partially offset by principal payments
made under capital lease obligations. In the six months ended March 31, 2003 we
used $1.2 million of cash to fund financing activities. 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.
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 March 31, 2004 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 March 31, 2004 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.......................... $ 8.4 $ 1.6 $ 2.9 $ 2.3 $ 1.6
Operating leases .................................. 0.7 0.3 0.3 0.1 0.0
Purchase obligations .............................. 49.6 28.7 14.9 3.4 2.6
Other long-term liabilities ....................... 2.5 0.0 1.1 0.0 1.4
------- --------- -------- -------- --------
Total contractual obligations...................... $ 61.2 $ 30.6 $ 19.2 $ 5.8 $ 5.6
======= ========= ======== ======== ========
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.
16
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 are 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 its original term of 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 $20.5 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-day cancellation clause executable by
either party. Purchase obligations related to this agreement are $10.1
million, which include a termination payment if the agreement is not
renewed. We expect to renew the agreement at the end of the initial term.
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. Purchase obligations include
$1.8 million of contractual commitments related to this agreement. 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 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 $2.0 million over the
remaining period. Also included in purchase obligations is $0.5 million
related to certain marketing and technical support services, which was paid
in April 2004. 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.
17
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 $1.4
million for pension and deferred compensation obligations.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits, an Amendment of FASB Statements No. 87, 88, and 106,
and a Revision of FASB Statement No. 132" ("SFAS 132 (revised 2003)") which
revises employers' disclosures about pension plans and other postretirement
benefits plans including additional disclosures about the assets, obligations,
cash flows and net periodic benefit cost of defined benefit pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by FASB Statements No. 87, 88, and 106. The
adoption of SFAS No. 132 (revised 2003) did not impact our consolidated
financial position, results of operations or cash flow.
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.
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.
18
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 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 six months ended March 31, 2004. For the six months ended March 31, 2003 our
five largest customers, of which two were distributors, accounted for
approximately 62% 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 becomes
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.
Also, 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. Increased competition
and additional in-house production has and may continue to impact the prices we
are able to charge for our slurry products as well as our overall business. 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.
19
BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING
PADS AND BECAUSE PRICING HAS BECOME INCREASINGLY COMPETITIVE, EXPANSION OF OUR
BUSINESS INTO THIS AREA MAY NOT BE SUCCESSFUL
An element of our strategy has been 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. Further, 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 value-added reseller, may not be able to produce products that satisfy
our customers' needs or may be unable to keep pace with technological or other
developments in the design and production of polishing pads. In addition, under
our value-added reseller model, our suppliers may not be able to produce and we
may not be able to sell pads at prices that are competitive and provide a
positive contribution to our business. 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 six months
ended March 31, 2004, 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
20
chip inventories. While the semiconductor industry is now recovering from the
prolonged downturn, any further declines or lack of improvement in current
economic and industry conditions could continue to adversely affect our
business.
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 who follow 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, new products
or different business strategies; 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 March 31, 2004, 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.
21
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 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 between the date of their
evaluation and the filing of this report.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of Cabot Microelectronics held on
March 9, 2004, the following proposals were approved:
Proposal I - Election of two directors, each for a term of three years
Number of Votes For Election Number of Votes Withheld
---------------------------- ------------------------
Juan Enriquez-Cabot 23,412,240 299,423
H. Laurance Fuller 23,198,274 513,389
Proposal II - Ratification of the election of William P. Noglows to the board of
directors
A proposal to ratify the election of William P. Noglows was approved with
23,406,833 shares cast for, 263,090 shares cast against, and 41,740 shares
abstaining.
Proposal III - Ratification of the selection of PricewaterhouseCoopers LLP as
the company's independent auditors for fiscal 2004
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
company's independent auditors for fiscal 2004 was approved with 23,147,781
shares cast for, 540,285 shares cast against, and 23,597 shares abstaining.
Proposal IV - Approval of our Second Amended and Restated 2000 Equity Incentive
Plan
A proposal to approve our Second Amended and Restated 2000 Equity Incentive
Plan was approved with 15,537,783 shares cast for, 4,672,245 shares cast
against, and 185,732 shares abstaining. In addition, there were 3,315,903 broker
non-votes.
22
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
or reaffirmed approval of 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
------ -----------
10.40 Amendment No. 2 to Fumed Metal Oxide Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.
10.41 Amendment No. 3 to Fumed Metal Oxide Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.
10.42 Fumed Silica Supply Agreement (confidential treatment applied for).+
10.43 General Release, Waiver and Covenant Not to Sue.*
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.
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.
+ This Exhibit has been filed separately with the Commission pursuant
to an application for confidential treatment. The confidential portions
of this Exhibit have been omitted and are marked by brackets.
* Management contract, or compensatory plan or arrangement.
(b) Reports on Form 8-K
In a report dated January 22, 2004, Cabot Microelectronics
reported under Item 7. "Financial Statements and Exhibits" and
Item 12. "Results of Operations and Financial Condition" that
on January 22, 2004 Cabot Microelectronics reported financial
results for its first fiscal quarter ended December 31, 2003.
23
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 7, 2004 /s/ WILLIAM S. JOHNSON
------------------------------------------
William S. Johnson
Vice President and Chief Financial Officer
[Principal Financial Officer]
Date: May 7, 2004 /s/ THOMAS S. ROMAN
------------------------------------------
Thomas S. Roman
Corporate Controller
[Principal Accounting Officer]
24