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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
JUNE 30, 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
AURORA, ILLINOIS 60504
(Address of principal executive offices) (Zip Code)
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 July 30, 2004 the Company had 24,793,155 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 Nine Months Ended June 30, 2004 and 2003................................... 3
Consolidated Balance Sheets
June 30, 2004 and September 30, 2003................................................. 4
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2004 and 2003............................................. 5
Notes to Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 22
Item 4. Controls and Procedures.................................................................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 22
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities................................................ 23
Item 5. Other Information........................................................................ 23
Item 6. Exhibits and Reports on Form 8-K......................................................... 24
Signatures............................................................................... 25
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
------------- ------------ ----------- -----------
Revenue ................................................... $ 76,925 $ 64,288 $ 226,719 $ 183,762
Cost of goods sold ......................................... 37,915 31,360 114,307 90,811
------------- ------------ ----------- -----------
Gross profit....................................... 39,010 32,928 112,412 92,951
Operating expenses:
Research and development................................. 11,158 10,803 33,024 29,047
Selling and marketing.................................... 4,235 2,751 12,381 7,883
General and administrative............................... 5,659 4,655 16,532 13,618
Amortization of intangibles.............................. 85 85 255 255
------------- ------------ ----------- -----------
Total operating expenses.............................. 21,137 18,294 62,192 50,803
------------- ------------ ----------- -----------
Operating income............................................ 17,873 14,634 50,220 42,148
Other income, net........................................... 72 46 22 84
------------- ------------ ----------- -----------
Income before income taxes.................................. 17,945 14,680 50,242 42,232
Provision for income taxes.................................. 5,699 4,918 16,681 14,148
------------- ------------ ----------- -----------
Net income............................................ $ 12,246 $ 9,762 $ 33,561 $ 28,084
============= ============ =========== ===========
Basic earnings per share.................................... $ 0.49 $ 0.40 $ 1.35 $ 1.15
============= ============ =========== ===========
Weighted average basic shares outstanding................... 24,818 24,389 24,775 24,341
============= ============ =========== ===========
Diluted earnings per share.................................. $ 0.49 $ 0.40 $ 1.35 $ 1.14
============= ============ =========== ===========
Weighted average diluted shares outstanding................. 24,912 24,639 24,919 24,600
============= ============ =========== ===========
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)
JUNE 30, SEPTEMBER 30,
2004 2003
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 155,885 $ 111,318
Accounts receivable, less allowance for doubtful
accounts of $550 at June 30, 2004
and $585 at September 30, 2003.............................................. 37,952 37,564
Inventories.................................................................... 24,565 23,814
Prepaid expenses and other current assets...................................... 4,243 4,010
Deferred income taxes.......................................................... 3,043 2,406
---------------- --------------
Total current assets..................................................... 225,688 179,112
Property, plant and equipment, net................................................ 126,900 133,695
Goodwill ......................................................................... 1,373 1,373
Other intangible assets, net...................................................... 340 595
Other long-term assets............................................................ 655 842
---------------- --------------
Total assets............................................................. $ 354,956 $ 315,617
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 13,363 $ 12,521
Capital lease obligations...................................................... 1,434 1,716
Accrued expenses, income taxes payable and other current liabilities........... 13,597 14,679
---------------- --------------
Total current liabilities................................................ 28,394 28,916
Capital lease obligations......................................................... 6,612 7,452
Deferred income taxes............................................................. 6,981 5,384
Deferred compensation and other long-term liabilities............................. 2,542 2,092
---------------- --------------
Total liabilities........................................................ 44,529 43,844
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock:
Authorized: 200,000,000 shares, $0.001 par value
Issued and outstanding: 24,819,752 shares at June 30, 2004 and
24,712,740 at September 30, 2003 ........................................... $ 25 $ 25
Capital in excess of par value of common stock................................. 135,350 131,913
Retained earnings.............................................................. 172,419 138,858
Accumulated other comprehensive income......................................... 2,805 1,187
Unearned compensation.......................................................... (172) (210)
----------------- ---------------
Total stockholders' equity............................................... 310,427 271,773
---------------- --------------
Total liabilities and stockholders' equity............................... $ 354,956 $ 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)
NINE MONTHS ENDED
JUNE 30,
----------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income....................................................................... $ 33,561 $ 28,084
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................................. 13,017 11,488
Noncash compensation expense and non-employee stock options................... 48 (15)
Provision for inventory writedown............................................. 295 953
Provision for doubtful accounts............................................... (4) 41
Stock option income tax benefits.............................................. 879 1,622
Deferred income taxes......................................................... 961 2,281
Unrealized foreign exchange gain.............................................. (231) (176)
Loss on disposal of property, plant and equipment ............................ 30 21
Other......................................................................... (491) 329
Changes in operating assets and liabilities:
Accounts receivable........................................................... 477 (3,328)
Inventories................................................................... (664) (1,438)
Prepaid expenses and other assets............................................. (1,194) (1,731)
Accounts payable, accrued liabilities and other current liabilities.......... (911) (860)
Income taxes payable, deferred compensation and other noncurrent liabilities.. 1,983 (1,381)
-------------- --------------
Net cash provided by operating activities........................................... 47,756 35,890
-------------- --------------
Cash flows from investing activities:
Additions to property, plant and equipment....................................... (5,179) (8,061)
Proceeds from the sale of property, plant and equipment.......................... 15 1,849
-------------- --------------
Net cash used in investing activities............................................... (5,164) (6,212)
-------------- --------------
Cash flows from financing activities:
Prepayment of long-term debt..................................................... - (3,500)
Net proceeds from issuance of stock.............................................. 2,574 4,021
Principal payments under capital lease obligations............................... (604) (549)
--------------- --------------
Net cash provided by (used in) financing activities................................. 1,970 (28)
-------------- --------------
Effect of exchange rate changes on cash............................................. 5 13
-------------- --------------
Increase in cash.................................................................... 44,567 29,663
Cash and cash equivalents at beginning of period.................................... 111,318 69,605
-------------- --------------
Cash and cash equivalents at end of period.......................................... $ 155,885 $ 99,268
============== ==============
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 an enabling 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 June 30, 2004, cash flows
for the nine months ended June 30, 2004 and June 30, 2003 and results of
operations for the three and nine months ended June 30, 2004 and June 30, 2003.
The results of operations for the three and nine months ended June 30, 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
We have adopted the disclosure requirements of SFAS No. 148, "Accounting
for Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148")
effective December 2002. SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation, and also amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the methods of accounting for stock-based employee compensation
and the effect of the method used on reported results. As permitted by SFAS 148
and SFAS 123, we continue to apply the accounting provisions of Accounting
Principles Board ("APB") Opinion Number 25, "Accounting for Stock Issued to
Employees", and related interpretations, with regard to the measurement of
compensation cost for options granted under the Cabot Microelectronics
Corporation Amended and Restated 2000 Equity Incentive Plan ("Equity Incentive
Plan") and shares issued under our Employee Stock Purchase Plan. All options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant and no employee compensation expense has been
recorded.
6
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Had expense been recognized using the fair value method described in SFAS 123,
using the Black-Scholes option-pricing model, we would have reported the
following results of operations:
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
----------- ------------- ------------ --------
Net income, as reported ...................... $ 12,246 $ 9,762 $ 33,561 $ 28,084
Deduct: total stock-based compensation expense
determined under the fair value method,
net of tax ............................. (5,587) (4,373) (15,212) (12,369)
----------- ------------- ------------ --------
Pro forma net income ......................... $ 6,659 $ 5,389 $ 18,349 $ 15,715
=========== ============= ============ ========
Earnings per share:
Basic -- as reported .................... $ 0.49 $ 0.40 $ 1.35 $ 1.15
=========== ============= ============ ========
Basic -- pro forma ...................... $ 0.27 $ 0.22 $ 0.74 $ 0.65
=========== ============= ============ ========
Diluted -- as reported .................. $ 0.49 $ 0.40 $ 1.35 $ 1.14
=========== ============= ============ ========
Diluted -- pro forma .................... $ 0.27 $ 0.22 $ 0.74 $ 0.64
=========== ============= ============ ========
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 NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Numerator:
Earnings available to common shares ........... $ 12,246 $ 9,762 $ 33,561 $ 28,084
=========== =========== =========== ===========
Denominator:
Weighted average common shares ................ 24,818,487 24,389,395 24,775,078 24,341,482
(Denominator for basic calculation)
Weighted average effect of dilutive securities:
Stock-based compensation ................. 93,391 249,781 143,731 258,900
----------- ----------- ----------- -----------
Diluted weighted average common shares ........ 24,911,878 24,639,176 24,918,809 24,600,382
(Denominator for diluted calculation)
=========== =========== =========== ===========
Earnings per share:
Basic ......................................... $ 0.49 $ 0.40 $ 1.35 $ 1.15
=========== =========== =========== ===========
Diluted ....................................... $ 0.49 $ 0.40 $ 1.35 $ 1.14
=========== =========== =========== ===========
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 NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
-------- -------- -------- --------
Net Income .................................... $ 12,246 $ 9,762 $ 33,561 $ 28,084
Other comprehensive income:
Net unrealized gain on derivative
instruments ....................... 9 9 27 26
Foreign currency translation adjustment... (1,855) 570 1,591 1,883
-------- -------- -------- --------
Total comprehensive income .................... $ 10,400 $ 10,341 $ 35,179 $ 29,993
======== ======== ======== ========
5. INVENTORIES
Inventories consisted of the following:
JUNE 30, SEPTEMBER 30,
2004 2003
------- --------
Raw materials ........... $12,852 $ 13,327
Work in process ......... 1,407 1,110
Finished goods .......... 10,306 9,377
-------- -----------
Total ................... $24,565 $ 23,814
======== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,373, as of June 30, 2004, was unchanged from our fiscal
year ended September 30, 2003.
The components of intangible assets are as follows:
JUNE 30, 2004 SEPTEMBER 30, 2003
------------------------------ -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Trade secrets and know-how ..................... $ 2,550 $ 2,295 $ 2,550 $ 2,105
Distribution rights, customer lists and other... 1,000 915 1,000 850
-------------- ------------ -------------- ------------
Total intangible assets ..................... 3,550 3,210 3,550 2,955
-------------- ------------ -------------- ------------
Amortization expense of intangible assets was $85 and $255 for the three
and nine months ended June 30, 2004, respectively. Estimated future amortization
expense for the remaining three months of fiscal year 2004 is $85 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, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities
consisted of the following:
JUNE 30, SEPTEMBER 30,
2004 2003
----------- -----------
Raw materials accruals.................. $ 1,106 $ 2,305
Accrued compensation.................... 8,529 7,743
Warranty accrual........................ 986 836
Fixed asset accrual..................... 105 579
Income taxes payable.................... 206 -
Other................................... 2,665 3,216
----------- -----------
Total................................... $ 13,597 $ 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 maintain a warranty reserve that reflects management's best estimate of
the cost to replace product and related costs. Our warranty obligation
results primarily from product that does not meet specifications and
performance requirements. The warranty reserve is based upon a historical
product return rate applied against sales made in the current quarterly
period, plus an additional amount related to any specific known conditions or
circumstances. Adjustments to the warranty reserve are recorded in cost of
goods sold. Our warranty reserve requirements increased during the first nine
months of fiscal 2004 as follows:
Balance as of September 30, 2003 ....... $836
Net change ............................. 150
----
Balance as of June 30, 2004 ............ $986
====
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 items such as a
breach of certain representations and covenants including title to assets
sold, certain intellectual property rights and certain 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 June
30, 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. 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 supersedes 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, superseded 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.
The adoption of SAB 104 did not impact our consolidated financial position,
results of operations or cash flow.
10. SUBSEQUENT EVENTS
On July 1, 2004 we entered into a strategic alliance with NanoProducts
Corporation, a privately-held company specializing in the development and
manufacture of nanoscale particles and related nanotechnology products. Under
this arrangement, we intend to collaborate with NanoProducts to develop
nanoscale particles for use in CMP slurries, and other fine finish polishing
applications. In addition, we have obtained a minority equity ownership interest
in NanoProducts Corporation. As of July 30, 2004 we have invested $1,820 in
NanoProducts and intend to pay an additional $1,930, subject to NanoProducts
meeting certain terms and conditions, representing a total investment of $3,750.
This investment will be accounted for under the equity method of accounting
which requires us to record earnings and losses of NanoProducts in proportion to
our share of ownership.
On July 22, 2004 we announced that our Board of Directors authorized a share
repurchase program for up to $25,000 of our outstanding common stock. Shares
will be repurchased from time to time, depending on market conditions, in open
market transactions, at management's discretion. We intend to fund share
repurchases from our existing cash balance. The program is primarily intended to
diminish dilution from the issuance of stock from the exercise of stock options
under our equity incentive plan and purchases under our employee stock purchase
plan. The program, which became effective on the announcement date, may be
suspended or terminated at any time, at the Company's discretion.
10
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 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.
THIRD 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
by 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 coatings on disks in hard disk drives. In addition, we are developing
CMP polishing pads, which are used in conjunction with slurries in the CMP
process.
We continue to believe that there are three CMP industry trends that are
currently impacting our business -- the requirement of more customized CMP
solutions for the most advanced IC applications, higher product quality
requirements by our customers and greater competitive activity. For example,
during the third fiscal quarter we were notified by one of our customers that
they have chosen to transition to another supplier of CMP slurry for polishing
130 nanometer copper interconnects. In light of these trends that we believed
had been adversely impacting our margins, following our second fiscal quarter,
we reduced our guidance on gross margin from 50% of revenue, plus or minus 2%,
to 48% of revenue, plus or minus 2%.
Revenue for our third fiscal quarter was $76.9 million, up 4.6% from the
previous fiscal quarter, and up 19.7% compared to the same quarter in the last
fiscal year. Gross profit this quarter represented 50.7% of revenue, slightly
higher than the upper end of our new guidance range; our guidance for gross
margin remains at 48% of revenue, plus or minus 2%. Net income of $12.2 million
for the quarter increased by 26.0% from last quarter, and increased 25.4%
compared to the same quarter in the last fiscal year.
This quarter, 74% of our revenue was generated from sales to customers
located outside of the United States with the majority of that revenue coming
from Asia Pacific. The Asia Pacific region has been the fastest growing region
in the world for the semiconductor industry, and we believe this trend will
continue in the near term. We intend to expand our existing presence in Asia,
and to support this growth we entered into an agreement to purchase additional
land adjacent to our existing site in Geino, Japan for possible future expansion
of our technology and manufacturing infrastructure. The total cost of the land
purchase is approximately $3.2 million.
We previously have participated in the polishing pad business as a value
added reseller of pads supplied to us by a third party. However, due to what we
believe was a less than acceptable level of profitability under this value-added
reseller
11
model, the distribution agreement was terminated by mutual agreement in June
2004. We continue to develop pads utilizing our own technology.
Subsequent to the end of our third fiscal quarter, on July 1, 2004 we entered
into a strategic alliance with NanoProducts Corporation, a privately-held
company specializing in developing and manufacturing nanoscale particles and
related nanotechnology products. Under this arrangement, we intend to
collaborate with NanoProducts to develop nanoscale particles for use in CMP
slurries, as well as other fine finish polishing applications. We also obtained
a minority equity ownership interest in the company. We believe that through
collaborations of this nature, we may be able to develop more innovative and
customized CMP solutions to meet the needs of our customers' future generation
products.
In addition, on July 22, 2004 we announced that our Board of Directors had
authorized a share repurchase program for up to $25 million of our outstanding
common stock. Shares will be repurchased from time to time, depending on market
conditions, in open market transactions, at management's discretion. We intend
to fund share repurchases from our existing cash balance. The plan is primarily
intended to diminish dilution from the issuance of stock from the exercise of
stock options under our equity incentive plan and purchases under our employee
stock purchase plan. The program, which became effective on the announcement
date, may be suspended or terminated at any time, at the Company's discretion.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 VERSUS THREE MONTHS ENDED JUNE 30, 2003
REVENUE
Revenue was $76.9 million for the three months ended June 30, 2004,which
represented a 19.7%, or $12.6 million, increase from the three months ended June
30, 2003. This increase was almost entirely attributable to an increase in sales
volumes. Sales in the third fiscal quarter of 2003 were adversely impacted by
approximately $3.7 million as we began selling directly to customers in Europe,
Singapore and Malaysia that previously had been serviced through a distributor.
During this transition period we discontinued sales to the distributor while it
drew down its inventory of our products. Revenue for the three months ended June
30, 2004 would have been $1.1 million lower had the Japanese Yen and Euro
average exchange rates for the quarter held constant with the prior year's third
fiscal quarter average rates.
COST OF GOODS SOLD
Total cost of goods sold was $37.9 million for the three months ended June
30, 2004, which represented an increase of 20.9% or $6.6 million from the three
months ended June 30, 2003. Of this increase, $6.1 million was due to an
increase in sales volume and $0.4 million relates to an increase in average
costs associated with meeting our customers' more stringent product quality
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 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.
12
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 revenue was 50.7 % for the three months
ended June 30, 2004 as compared to 51.2% for the three months ended June 30,
2003. The 0.5% decrease in gross profit expressed as a percentage of revenue
resulted primarily from increased costs associated with meeting customer
requirements for higher product quality. 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 revenue in the
future to be in the range of 48%, plus or minus 2%.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $11.2 million in the three
months ended June 30, 2004, which represented an increase of 3.3%, or $0.4
million, from the three months ended June 30, 2003. Research and development
expense increased $0.8 million due to higher staffing costs and $0.4 million due
to higher depreciation. These costs were partially offset by reduced consumable
supplies expense. R&D efforts were mainly related to new and enhanced CMP slurry
products for copper and other applications, advanced chemistry and particle
technology and new CMP polishing pad technology.
SELLING AND MARKETING
Selling and marketing expenses were $4.2 million in the three months ended
June 30, 2004, which represented an increase of 53.9%, or $1.5 million, from the
three months ended June 30, 2003. The increase resulted primarily from higher
staffing costs of $0.8 million, increased office expenses of $0.2 million and
higher travel costs of $0.2 million. The higher selling and marketing expenses
are primarily in respect of our increased customer support initiatives,
including the addition of and expansions to a number of sales offices and 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 $5.7 million in the three months
ended June 30, 2004, which represented an increase of 21.6%, or $1.0 million,
from the three months ended June 30, 2003. This increase resulted primarily from
higher staffing costs.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.1 million for both the three months ended
June 30, 2004 and June 30, 2003.
13
OTHER INCOME, NET
Other income was $0.1 million for the three months ended June 30, 2004,
compared to negligible other income for the three months ended June 30, 2003.
The increase in other income is attributable to higher interest income and lower
interest expense, offset by increased foreign exchange losses.
PROVISION FOR INCOME TAXES
The effective income tax rate was 31.8% for the three months ended June 30,
2004 and 33.5% for the three months ended June 30, 2003. The decrease in the
effective tax rate was primarily due to increased extraterritorial income tax
deductions related to export sales of our products from North America. We expect
our income tax rate for full fiscal year 2004 to be 33.2%.
NET INCOME
Net income was $12.2 million for the three months ended June 30, 2004, which
represented an increase of 25.4%, or $2.5 million, from the three months ended
June 30, 2003 as a result of the factors discussed above.
NINE MONTHS ENDED JUNE 30, 2004 VERSUS NINE MONTHS ENDED JUNE 30, 2003
REVENUE
Revenue was $226.7 million for the nine months ended June 30, 2004, which
represented a 23.4%, or $43.0 million, increase from the nine months ended June
30, 2003. Of this increase, $41.9 million was due to an increase in sales volume
and $1.1 million was due to an increase in weighted average selling price
resulting from both a higher valued product mix and favorable foreign exchange
rate changes, which more than offset selective price reductions that were
granted to certain customers. Revenue for the nine months ended June 30, 2004
would have been $3.8 million lower had the average exchange rates for the
Japanese Yen and Euro during the nine month period held constant with the prior
year's nine month average rates.
COST OF GOODS SOLD
Total cost of goods sold was $114.3 million for the nine months ended June
30, 2004, which represented an increase of 25.9%, or $23.5 million, from the
nine months ended June 30, 2003. Approximately $20.7 million of this increase
was due to higher sales volume and $2.8 million was associated with higher
average costs primarily due to higher costs associated with meeting increased
customer performance requirements for our products.
GROSS PROFIT
Our gross profit as a percentage of revenue was 49.6% for the nine months
ended June 30, 2004 as compared to 50.6% for the nine months ended June 30,
2003. The 1.0% decrease in gross profit expressed as a percentage of revenue
resulted primarily from increased costs associated with meeting customer
requirements for higher product quality.
RESEARCH AND DEVELOPMENT
Total research and development expenses were $33.0 million in the nine months
ended June 30, 2004, which represented an increase of 13.7%, or $4.0 million,
from the nine months ended June 30, 2003. Research and development expense
increased $2.5 million due to higher staffing costs, $0.9 million due to higher
depreciation related to the purchase of equipment for our CMP polishing and
metrology clean room and $0.5 million due to higher technical service and
consulting fees. R&D efforts were
14
mainly related to new and enhanced CMP slurry products for copper and other
applications, advanced chemistry and particle technology and new CMP polishing
pad technology.
SELLING AND MARKETING
Selling and marketing expenses were $12.4 million in the nine months ended
June 30, 2004, which represented an increase of 57.1%, or $4.5 million, from the
nine months ended June 30, 2003. The increase resulted primarily from higher
staffing costs of $2.1 million, increased office expenses of $0.5 million,
higher consulting fees of $0.5 million, increased travel costs of $0.4 million
and $0.3 million in separation costs for certain employees, including an
executive. The higher selling and marketing expenses are primarily in respect of
our increased customer support initiatives, including the addition of and
expansions to a number of sales offices and 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 $16.5 million in the nine months
ended June 30, 2004, which represented an increase of 21.4%, or $2.9 million,
from the nine months ended June 30, 2003. The increase resulted from $1.6
million in higher staffing costs, $0.4 million of increased professional fees,
$0.3 million due to higher insurance premiums and $0.2 million in separation
costs for an executive.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.3 million for both the nine months ended
June 30, 2004 and June 30, 2003.
OTHER INCOME, NET
Other income was negligible for the nine months ended June 30, 2004, compared
to $0.1 million for the nine months ended June 30, 2003. Compared to the prior
year, foreign exchange losses increased by $0.4 million and were partially
offset by higher interest income and lower interest expense.
PROVISION FOR INCOME TAXES
The effective income tax rate was 33.2% in the nine months ended June 30,
2004 and 33.5% for the nine months ended June 30, 2003. The decrease in the
effective tax rate was primarily due to increased extraterritorial income tax
deductions related to export sales of our products from North America.
NET INCOME
Net income was $33.6 million in the nine months ended June 30, 2004, which
represented an increase of 19.5%, or $5.5 million, from the nine months ended
June 30, 2003 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $47.8 million in the nine
months ended June 30, 2004 and $35.9 million in the nine months ended June 30,
2003. Our cash provided by operating activities for the nine months ended June
30, 2004 originated
15
from net income from operations of $33.6 million and non-cash items of $14.5
million, which were partially offset by a net increase in working capital of
$0.3 million.
In the nine months ended June 30, 2004, cash flows from investing activities
were $5.2 million, primarily due to capital spending in our research and
development, manufacturing and information technology areas. Full fiscal year
2004 capital spending, including our investment in NanoProducts and purchase of
additional land adjacent to our existing facilities in Geino, Japan, is
anticipated to be approximately $17.0 million. In the nine months ended June 30,
2003, capital spending was $8.1 million, primarily due to the purchase of
additional production-related equipment and for metrology tools to support
increased polishing capacity in our CMP polishing and metrology 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.
Cash flows from financing activities were $2.0 million in the nine months
ended June 30, 2004. Cash provided from financing activities resulted from the
issuance of common stock associated with the issuance of stock from the exercise
of stock options under our equity incentive plan and purchases under our
employee stock purchase plan, which was partially offset by principal payments
made under capital lease obligations. Cash flows from financing activities were
negligible in the nine months ended June 30, 2003. 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%. In the year
ago period, we also made principal payments under capital lease obligations.
Cash used for these purposes was offset by funds received from the issuance of
common stock from the exercise of stock options under our equity incentive plan
and purchases under our employee stock purchase plan.
On July 22, 2004 we announced that our Board of Directors had authorized a
share repurchase program for up to $25 million of our outstanding common stock.
Shares will be repurchased from time to time, depending on market conditions, in
open market transactions, at management's discretion. We intend to fund share
repurchases from our existing cash balance. The program is primarily intended to
diminish dilution from the issuance of stock from the exercise of stock options
under our equity incentive plan and purchases under our employee stock purchase
plan. The program, which was effective on the announcement date, may be
suspended or terminated at any time, at the Company's discretion.
We believe that cash generated by our operations and available borrowings
under our revolving credit facility will be sufficient to fund our operations,
expected capital expenditures and share repurchases 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 June 30, 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 June 30, 2004 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 .............. $ 8.0 $ 1.4 $ 3.0 $ 2.3 $ 1.3
Operating leases ....................... 1.3 0.6 0.6 0.1 0.0
Purchase obligations ................... 70.3 49.3 14.8 3.7 2.5
Other long-term liabilities ............ 2.5 0.0 1.2 0.0 1.3
------- --------- -------- ------- -------
Total contractual obligations .......... $ 82.1 $ 51.3 $ 19.6 $ 6.1 $ 5.1
======= ========= ======== ======= =======
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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 $2.3 million, of which $1.1 million is recorded in current
liabilities and shown in the preceding table under purchase obligations and $1.2
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 $40.5
million of contractual commitments for fumed silica and fumed alumina under
these contracts based upon our anticipated renewal of the fumed alumina
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 $9.5 million, which
17
include a termination payment if the agreement is not renewed. We expect to
renew the agreement at the end of the initial term.
In June 2003 we entered into a technology licensing and co-marketing
agreement with a semiconductor equipment manufacturer under which we 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 certain free commercially available polishing pads, up to an agreed upon
dollar amount, for particular uses over a seven year period. The table above
includes estimated total costs associated with these products of $1.7 million
over the remaining period. We are also obligated to supply the equipment
manufacturer with certain commercially available 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.
We had been operating under a distribution agreement with an existing
supplier of polishing pads to the semiconductor industry pursuant to which
the supplier sold pads to us for our resale to end users. However, due to
what we believe was a less than acceptable level of profitability under this
value-added reseller model, the distribution agreement was terminated by
mutual agreement in June 2004. Pursuant to our June 2004 termination
agreement, we are obligated to pay a non-material transition fee, which is
included in the table.
In June 2004 we entered into a land purchase agreement to purchase
additional land adjacent to our existing facilities in Geino, Japan for the
purpose of possible future expansion of our technology and manufacturing
infrastructure. The total cost of the land purchase is approximately $3.2
million. The table above includes our fourth fiscal quarter payment
obligation.
Subsequent to the end of our third fiscal quarter, in July 2004 we formed
a strategic alliance with NanoProducts Corporation. Under this arrangement,
we intend to collaborate with NanoProducts to develop nanoscale particles for
use in CMP slurries, and other fine finish polishing applications. In
addition, we obtained a minority equity ownership interest in NanoProducts
Corporation. As of July 30, 2004 we have invested $1.8 million in
NanoProducts and intend to pay an additional $1.9 million, subject to
NanoProducts meeting certain terms and conditions, representing a total
investment of $3.8 million. The table above does not reflect this obligation
because we did not incur the obligation until after the end of the third
fiscal quarter.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities include the $1.2 million long-term portion of
the purchase obligation discussed in "Purchase Obligations" 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 $1.3 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. 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 supersedes Staff Accounting Bulletin No. 101, "Revenue Recognition in
18
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, superseded 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.
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,
improve and customize our products for the most advanced IC applications 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 our customers continually pursue lower cost of ownership of materials
consumed in their manufacturing processes, including CMP slurries. We expect
these technological changes and advances, and this drive toward lower costs, to
continue in the future. Emerging technologies in the semiconductor industry,
such as polishing pads containing abrasives and electrochemical mechanical
planarization ("ECMP"), as well as our customers' efforts to reduce consumption
of CMP slurries, could render our products 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, as
we saw in the third fiscal quarter with respect to one customer who has notified
us of their decision to transition to another supplier of CMP slurries for
polishing 130 nanometer copper interconnects. Our principal customers 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 nine months ended June 30, 2004.
For the nine months ended June, 2003 our five largest customers, of which two
were distributors, accounted for approximately 63% 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, such as 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 is for the supply of
19
fumed silica and two of which are 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. 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 has been to leverage our current customer
relationships and technological expertise to expand our business into new
product areas and applications, including manufacturing and selling CMP
polishing pads. Developing, manufacturing and marketing these products involve
technologies and production processes in which we have more limited experience,
and we may not be able to develop and produce products that satisfy our
customers' needs or we 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 nine months
ended June 30, 2004, approximately 74% 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 difficulty in enforcing 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.
20
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 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 the semiconductor industry has been recovering from this prolonged
downturn, the period over which the recovery may continue is uncertain. Further,
the semiconductor industry has been cyclical, and the advent of the next
downturn could 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.
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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 June 30, 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.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June
30, 2004. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of June 30, 2004.
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 intend to 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.
There were no changes in our internal controls over financial reporting that
occurred during the quarter ended June 30, 2004 that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
22
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITITES
ISSUER PURCHASES OF EQUITY SECURITIES
TOTAL NUMBER OF SHARES APPROXIMATE DOLLAR VALUE OF
TOTAL NUMBER AVERAGE PURCHASED AS PART OF SHARES THAT MAY YET BE
OF SHARES PRICE PAID PUBLICLY ANNOUNCED PURCHASED UNDER THE PLANS
PERIOD PURCHASED PER SHARE PLANS OR PROGRAMS OR PROGRAMS
- -------------- ------------- ----------- ---------------------- ---------------------------
April 1, 2004
through
April 30, 2004 - - - -
May 1, 2004
through
May 31, 2004 - - - -
June 1, 2004
through
June 30, 2004 - - - -
------------- ----------- ---------------------- ---------------------------
Total (1) - - - -
(1) No shares were repurchased during the reporting period of this Form 10-Q.
On July 22, 2004 we announced that our Board of Directors had authorized a
share repurchase program for up to $25 million of our outstanding common stock.
Shares will be repurchased from time to time, depending on market conditions, in
open market transactions, at management's discretion. We intend to fund share
repurchases from our existing cash balance. The program is primarily intended to
diminish dilution from the issuance of stock from the exercise of stock options
under our equity incentive plan and purchases under our employee stock purchase
plan. The program, which was effective on the announcement date, may be
suspended or terminated at any time, at the Company's discretion.
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.
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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
------- -----------
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.
(b) Reports on Form 8-K
In a report dated April 22, 2004, Cabot Microelectronics reported
under Item 7. "Financial Statements and Exhibits" and Item 12.
"Results of Operations and Financial Condition" that on April 22,
2004 Cabot Microelectronics reported financial results for its
second fiscal quarter ended March 31, 2004.
In a report dated July 1, 2004, Cabot Microelectronics reported
under Item 7. "Financial Statements and Exhibits" and Item 9.
"Regulation FD Disclosure" that on July 1, 2004 Cabot
Microelectronics announced that it has entered into a strategic
alliance with NanoProducts Corporation, a privately-held technology
leader in nanoscale particles and related nanotechnology products.
In a report dated July 22, 2004, Cabot Microelectronics reported
under Item 7. "Financial Statements and Exhibits", Item 9.
"Regulation FD Disclosure" and Item 12. "Results of Operations and
Financial Condition" that on July 22, 2004 Cabot Microelectronics
reported financial results for its third fiscal quarter ended June
30, 2004. The Company also announced that its Board of Directors
has authorized a share repurchase program for up to $25 million of
the company's outstanding stock.
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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: August 6, 2004 /s/ WILLIAM S. JOHNSON
---------------------------------------------
William S. Johnson
Vice President and Chief Financial Officer
[Principal Financial Officer]
Date: August 6, 2004 /s/ THOMAS S. ROMAN
---------------------------------------------
Thomas S. Roman
Corporate Controller
[Principal Accounting Officer]
25