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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 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 January 31, 2005 the Company had 24,719,179 shares of Common Stock, par
value $0.001 per share, outstanding.
CABOT MICROELECTRONICS CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended December 31, 2004 and 2003........................................ 3
Consolidated Balance Sheets
December 31, 2004 and September 30, 2004............................................. 4
Consolidated Statements of Cash Flows
Three Months Ended December 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.................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 21
Item 4. Controls and Procedures.................................................................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............................. 22
Item 6. Exhibits................................................................................. 22
Signatures............................................................................... 23
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED DECEMBER 31,
2004 2003
------------- ------------
Revenue..................................................... $ 67,084 $ 76,279
Cost of goods sold.......................................... 33,472 39,026
------------- ------------
Gross profit....................................... 33,612 37,253
Operating expenses:
Research and development................................. 9,544 10,723
Selling and marketing.................................... 4,176 3,783
General and administrative............................... 5,580 5,124
Amortization of intangibles.............................. 85 85
------------- ------------
Total operating expenses.............................. 19,385 19,715
------------- ------------
Operating income............................................ 14,227 17,538
Other income, net........................................... 487 36
------------- ------------
Income before income taxes.................................. 14,714 17,574
Provision for income taxes.................................. 4,885 5,976
------------- ------------
Net income............................................ $ 9,829 $ 11,598
============= ============
Basic earnings per share.................................... $ 0.40 $ 0.47
============= ============
Weighted average basic shares outstanding................... 24,638 24,733
============= ============
Diluted earnings per share.................................. $ 0.40 $ 0.46
============= ============
Weighted average diluted shares outstanding................. 24,721 24,994
============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
2004 2004
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 169,796 $ 157,318
Accounts receivable, less allowance for doubtful accounts of $499 at
December 31, 2004 and $598 at September 30, 2004............................ 32,596 41,347
Inventories.................................................................... 30,480 24,474
Prepaid expenses and other current assets...................................... 4,360 3,264
Deferred income taxes.......................................................... 3,008 3,278
---------------- --------------
Total current assets..................................................... 240,240 229,681
Property, plant and equipment, net................................................ 128,526 127,794
Goodwill ......................................................................... 1,373 1,373
Other intangible assets, net...................................................... 272 350
Other long-term assets............................................................ 3,902 4,093
---------------- --------------
Total assets............................................................. $ 374,313 $ 363,291
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 12,429 $ 13,080
Capital lease obligations...................................................... 1,111 1,272
Accrued expenses, income taxes payable and other current liabilities........... 15,668 18,023
---------------- --------------
Total current liabilities................................................ 29,208 32,375
Capital lease obligations......................................................... 6,153 6,385
Deferred income taxes............................................................. 7,574 7,374
Deferred compensation and other long-term liabilities............................. 1,517 1,535
---------------- --------------
Total liabilities........................................................ 44,452 47,669
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock:
Authorized: 200,000,000 shares, $0.001 par value
Issued: 25,020,577 shares at December 31, 2004 and 24,855,495 at
September 30, 2004 ......................................................... 25 25
Capital in excess of par value of common stock................................. 140,856 136,259
Retained earnings.............................................................. 195,415 185,586
Accumulated other comprehensive income......................................... 5,556 1,905
Unearned compensation ......................................................... (259) (153)
Treasury stock at cost, 336,964 shares at December 31, 2004 and 241,865 shares
at September 30, 2004....................................................... (11,732) (8,000)
---------------- --------------
Total stockholders' equity............................................... 329,861 315,622
---------------- --------------
Total liabilities and stockholders' equity............................... $ 374,313 $ 363,291
================ ==============
The accompanying notes are an integral part of these consolidated
financial statements.
4
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
--------------------------------
2004 2003
-------------- ---------------
Cash flows from operating activities:
Net Income................................................................... $ 9,829 $ 11,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................. 4,519 4,165
Loss on equity investment................................................. 88 -
Non-cash compensation expense and non-employee stock options.............. 19 18
Provision for inventory writedown......................................... (630) 836
Provision for doubtful accounts........................................... (97) 14
Stock option income tax benefits.......................................... 1,051 505
Deferred income taxes..................................................... 533 (177)
Unrealized foreign exchange (gain)........................................ (1,612) (695)
Loss (Gain) on disposal of property, plant and equipment.................. 66 (11)
Other non-cash expenses, net.............................................. 196 204
Changes in operating assets and liabilities:
Accounts receivable....................................................... 10,484 (2,326)
Inventories............................................................... (4,310) 774
Prepaid expenses and other assets......................................... (890) (1,302)
Accounts payable, accrued liabilities and other current liabilities....... (2,282) (2,204)
Income taxes payable, deferred compensation and other noncurrent
liabilities............................................................ 674 5,079
-------------- --------------
Net cash provided by operating activities....................................... 17,638 16,478
Cash flows from investing activities:
Additions to property, plant and equipment................................... (2,849) (1,301)
Purchases of investments..................................................... (1,930) -
Proceeds from the sale of property, plant and equipment...................... - 11
-------------- --------------
Net cash used in investing activities........................................... (4,779) (1,290)
-------------- --------------
Cash flows from financing activities:
Repurchase of common stock................................................... (3,732) -
Net proceeds from issuance of stock.......................................... 3,179 972
Principal payments under capital lease obligations........................... (210) (198)
-------------- --------------
Net cash provided (used) by financing activities................................ (763) 774
-------------- --------------
Effect of exchange rate changes on cash......................................... 382 79
-------------- --------------
Increase in cash................................................................ 12,478 16,041
Cash and cash equivalents at beginning of period................................ 157,318 111,318
-------------- --------------
Cash and cash equivalents at end of period...................................... $ 169,796 $ 127,359
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
5
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND BASIS OF PRESENTATION
We believe we are the leading supplier of high-performance polishing
slurries used in the manufacture of the most advanced integrated circuit ("IC")
devices within the semiconductor industry, in a process called chemical
mechanical planarization ("CMP"). CMP is a polishing process used by IC device
manufacturers to planarize or flatten many of the multiple layers of material
that are built upon silicon wafers 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, while
leaving minimal residue or defects on the surface. CMP slurries are liquid
solutions generally composed of high-purity deionized water, proprietary
chemical additives and engineered abrasives that chemically and mechanically
interact with the surface material of the IC device at an atomic level. CMP pads
are typically flat engineered "disks" that help distribute and transport the
slurry to the surface of the wafer and across the wafer.
Prior to our initial public offering in April 2000, we operated as a
division of Cabot Corporation ("Cabot Corporation"). In September 2000 we became
a wholly independent entity upon Cabot Corporation's spin-off of its ownership
in us that remained after the initial public offering.
The unaudited consolidated financial statements have been prepared by
Cabot Microelectronics Corporation ("Cabot Microelectronics", "the Company",
"us", "we", or "our"), pursuant to the rules of the Securities and Exchange
Commission ("SEC") and accounting principles generally accepted in the United
States of America. In the opinion of management, these unaudited consolidated
financial statements include all adjustments necessary for the fair presentation
of Cabot Microelectronics' financial position as of December 31, 2004, cash
flows for the three months ended December 31, 2004 and December 31, 2003 and
results of operations for the three months ended December 31, 2004 and December
31, 2003. The results of operations for the three months ended December 31, 2004
may not be indicative of the results to be expected for future periods,
including the fiscal year ending September 30, 2005. 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, 2004. 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.
6
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. STOCK-BASED COMPENSATION
As currently permitted by the Financial Accounting Standards Board (FASB)
Statement No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148") and FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), we continue to apply the accounting provisions of
Accounting Principles Board Opinion Number 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations, with regard to the
measurement of compensation cost for options granted under our Equity Incentive
Plan (the "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 SFAS 123, using the Black-Scholes option-pricing model, we would have
reported the following results of operations:
THREE MONTHS ENDED
DECEMBER 31,
2004 2003
---------- ----------
Net income, as reported .................. $ 9,829 $ 11,598
Deduct: total stock-based compensation
expense determined under the fair
value method, net of tax ............ (11,446) (4,830)
----------- ----------
Pro forma net income ..................... ($ 1,617) $ 6,768
=========== ==========
Earnings per share:
Basic - as reported ................. $ 0.40 $ 0.47
=========== ==========
Basic - pro forma ................... ($ 0.07) $ 0.27
=========== ==========
Diluted - as reported ............... $ 0.40 $ 0.46
=========== ==========
Diluted - pro forma ................. ($ 0.07) $ 0.27
=========== ==========
In the fourth fiscal quarter of 2004 we revised certain assumptions used
in the Black-Scholes option-pricing model and have adjusted the previously
reported data for the three months ended December 31, 2003 to conform to this
presentation. The data previously reported for that period were as follows:
total stock-based compensation expense determined under the fair value method,
net of tax was $4,529, pro forma net income was $7,069, pro forma basic earnings
per share was $0.29, and pro forma diluted earnings per share was $0.28.
On September 27, 2004, to address certain issues arising pursuant to the
revision of SFAS 123 (at the time proposed) and as permitted by the Plan, the
Compensation Committee of the Board of Directors accelerated to September 1,
2005, the vesting of those stock options granted to employees, officers and
directors under the Plan, prior to September 27, 2004 that had an option price
equal to or greater than the fair market value of the shares of the Company on
September 27, 2004 ($34.65), through amendment made and effective as of
September 27, 2004 to the grant agreements for such stock options. Approximately
1.3 million options had option prices of greater than $34.65, and therefore are
subject to the acceleration provision, and as a result will become exercisable
as of September 1, 2005. Since the revision of SFAS 123 will require us to
recognize share-based compensation expense in our income statement for all
unvested options as of July 1, 2005, including those options that are
out-of-the-money, the Compensation Committee decided to accelerate the vesting
of these approximately 1.3 million options in order to mitigate the associated
future share-based compensation expense. The Compensation Committee chose to
delay the accelerated vesting of these options of September 1, 2005 to preserve,
until such time, the employee retention benefit of these stock options.
The increase in pro forma stock-based compensation expense for the three
months ended December 31, 2004 compared to the three months ended December 31,
2003 is primarily attributable to accelerated vesting of the 1.3 million
options. The costs presented in the preceding table may not be representative of
the total effects on reported income for future years. Factors that may also
impact future years include the attribution of the awards to the service period,
the vesting period of stock options, timing of additional grants of stock option
awards and number of shares granted for future awards. For additional
information regarding share-based compensation, see Note 9 to the consolidated
financial statements.
7
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computations. Basic and diluted
earnings per share were calculated as follows:
THREE MONTHS
ENDED DECEMBER 31,
2004 2003
----------- -----------
Numerator:
Earnings available to common shares .............. $ 9,829 $ 11,598
=========== ===========
Denominator:
Weighted average common shares ................... 24,637,520 24,733,440
(Denominator for basic calculation)
Weighted average effect of dilutive securities:
Stock based compensation .................... 83,112 260,400
----------- -----------
Diluted weighted average common shares ........... 24,720,632 24,993,840
=========== ===========
(Denominator for diluted calculation)
Earnings per share:
Basic ............................................ $ 0.40 $ 0.47
=========== ===========
Diluted .......................................... $ 0.40 $ 0.46
=========== ===========
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE MONTHS
ENDED DECEMBER 31,
2004 2003
------- -------
Net income ..................................... $ 9,829 $11,598
Other comprehensive income:
Net unrealized gain on derivative
instruments ......................... 9 9
Foreign currency translation adjustment.... 3,642 2,221
------- -------
Total comprehensive income ..................... $13,480 $13,828
======= =======
8
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
2004 2004
------- -------
Raw materials ....... $19,374 $14,639
Work in process...... 918 1,048
Finished goods ...... 10,188 8,787
------- -------
Total ............... $30,480 $24,474
======= =======
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,373, as of December 31, 2004, was unchanged from our fiscal
year ended September 30, 2004.
The components of intangible assets are as follows:
DECEMBER 31, 2004 SEPTEMBER 30, 2004
---------------------------- ----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Trade secrets and know-how ...................... $2,550 $2,424 $2,550 $2,360
Distribution rights, customer lists and other.... 1,103 957 1,095 935
------ ------ ------ ------
Total intangible assets ..................... 3,653 3,381 3,645 3,295
------ ------ ------ ------
Amortization expense of intangible assets was $85 for the three months
ended December 31, 2004. Estimated future amortization expense for the remaining
nine months of fiscal year 2005 is $170.
7. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities
consisted of the following:
DECEMBER 31, SEPTEMBER 30,
2004 2004
------- -------
Accrued compensation .............. $ 7,733 $10,254
Raw materials accrual ............. 1,635 1,726
Warranty accrual .................. 791 952
Due to equity method investee...... - 1,930
Income taxes payable .............. 1,311 522
Other ............................. 4,198 2,639
------- -------
Total ............................. $15,668 $18,023
======= =======
9
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 that does not meet customers' specifications and
performance requirements, and related costs. 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 decreased during the first
fiscal quarter of 2005 as follows:
Balance as of September 30, 2004.... $ 952
Net change ......................... (161)
-----
Balance as of December 31, 2004 .... $ 791
=====
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.
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 probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. To date, we have not experienced
material costs as a result of such obligations and as of December 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.
10
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values, and the pro forma disclosure alternative is no longer
allowable under SFAS 123R. The revised standard is effective for public entities
in the first interim or annual reporting period beginning after June 15, 2005,
and therefore, will be effective for us beginning with the fourth quarter of
fiscal 2005. We are currently evaluating the impact and implementation of SFAS
123R, which we believe will have a material impact on our consolidated results
of operations and earnings per share. Using our current fair value methodology,
utilizing the Black-Scholes option pricing model, we anticipate recognizing
approximately $11,000 of pre-tax share-based compensation expense in our fourth
quarter of fiscal 2005. The share-based compensation expense we expect to record
for our fourth fiscal quarter of this year is expected to primarily reflect
expense related to the approximately 1.3 million options, the vesting of which
we accelerated to September 1, 2005, plus a prorated portion of annual expense
related to stock option grants made in fiscal 2005, including our normal annual
employee stock option grant made in December 2004. The 1.3 million options that
are scheduled to vest on September 1, 2005 will not result in any further
compensation expense after fiscal 2005. For full fiscal year 2006 we currently
anticipate recognizing pre-tax share-based compensation expense of approximately
$11,000, assuming we consistently apply our historical approach to long-term
incentives and our approach in determining fair value utilizing the
Black-Scholes option pricing model. Other factors may also impact future
share-based compensation expense including the attribution of the awards to the
service period, the vesting period of stock options, timing and number of
additional grants of stock option awards, fluctuations in our stock price and
volatility, expected term and risk-free rate of interest.
In November 2004, the FASB issued FASB Statement No. 151, "Inventory
Costs, an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which adopts wording
from the International Accounting Standards Board's ("IASB") IAS 2,
"Inventories", in an effort to improve the comparability of cross-border
financial reporting. The new standard indicates that abnormal freight, handling
costs and wasted materials are required to be treated as current period charges
rather than as a portion of inventory costs. Additionally, the standard
clarifies that fixed production overhead should be allocated based on the normal
capacity of a production facility. SFAS 151 is effective for fiscal years
beginning after June 15, 2005. We do not expect the adoption of SFAS 151 will
have a material impact on our consolidated financial position, results of
operations or cash flows.
In December 2004, the FASB issued FASB Statement No 153, "Exchanges on
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" ("SFAS 153"), as part of its short-term international
convergence project with the IASB. Under SFAS 153, nonmonetary exchanges are
required to be accounted for at fair value, recognizing any gains or losses, if
their fair value is determinable within reasonable limits and the transaction
has commercial substance. SFAS 153 is effective for fiscal years beginning after
June 15, 2005. We do not expect the adoption of SFAS 153 will have a material
impact on our consolidated financial position, results of operations or cash
flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations", as well as disclosures included elsewhere in this
Form 10-Q, include "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected
11
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
future sales and operating results, company and industry growth and trends,
growth of the markets in which the company participates, international events,
product performance, new product introductions, development of new products and
technologies, the construction of new facilities by the company 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 Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year
ended September 30, 2004 including the consolidated financial statements and
related notes thereto.
FIRST FISCAL QUARTER OVERVIEW
We believe we are the leading supplier of high-performance polishing
slurries used in the manufacture of the most advanced integrated circuit ("IC")
devices within the semiconductor industry, in a process called chemical
mechanical planarization ("CMP"). 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 in the production of advanced ICs. 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. Demand for our
products is primarily based on the number of wafers, or "wafer starts", of these
advanced devices produced by semiconductor manufacturers.
Revenue for our first fiscal quarter was $67.1 million, which was down
18.9% from the previous fiscal quarter, and down 12.1% compared to the same
quarter in the last fiscal year. We believe that the decline in revenue from the
previous quarter was primarily due to the following factors:
- Reduced demand for our products which appears to be due to a
decrease in production of certain IC devices by our customers in
order to reduce their excess finished goods inventories that have
built up over the past few quarters,
- The remaining impact of one large customer transitioning to another
supplier of CMP slurry for polishing copper interconnects at 130
nanometer technology, which we disclosed in our third quarter of
fiscal 2004, and
- Continued competition and pricing pressure resulting in selected
price reductions, including one price reduction we granted to a
large semiconductor manufacturer in conjunction with a multi-year
supply arrangement to supply the majority of its CMP needs for
polishing copper interconnects at 130 nanometer technology.
As a percentage of revenue, gross profit increased to 50.1% this quarter
from 48.6% last quarter and 48.8% in the same quarter last year. Gross margin as
a percentage of revenue benefited this quarter from a higher valued product mix
and higher yields in our manufacturing operations, which were partially offset
by the impact of selected price reductions and lower capacity utilization due to
the lower level of sales. We expect our gross margin as a percentage of revenue
to be 48%, plus or minus 2%, for fiscal 2005. Diluted earnings per share was
$0.40, which was down from the $0.53 reported in the previous quarter and down
from the $0.46 reported in the first quarter of fiscal 2004, primarily as a
result of the lower level of revenue described above.
While 2004 was a growth year for the semiconductor industry, there are
indications that 2005 will be a year of moderating revenue growth and possibly
even a contraction, which we would expect to have an impact on our business.
Further, build-up of finished goods inventory at our customers has resulted in a
reduction of wafer starts across the industry, which has and may continue to
impact our revenues over the near term. We also expect continued competition
from current CMP slurry manufacturers and new entrants into the CMP slurry
market, as well as continued pricing pressure from these competitors and
customers' desires to gain purchasing leverage and lower their cost of
ownership. The cyclical nature of and continued uncertainty in the semiconductor
industry makes it difficult for us to predict future revenue trends.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004 VERSUS THREE MONTHS ENDED DECEMBER 31, 2003
REVENUE
Revenue was $67.1 million for the three months ended December 31, 2004,
which represented a 12.1%, or $9.2 million, decrease from the three months ended
December 31, 2003. Of this decrease, $5.0 million was due to a decrease in sales
volume and $4.2 million was due to a decrease in weighted average selling price
resulting from selective price reductions that were granted to certain
customers. These adverse effects were partially offset by a higher valued
product mix. Revenue would have been $0.4 million lower had the average exchange
rates for the Japanese Yen and Euro during the period held constant with the
prior year's first fiscal quarter average rates.
COST OF GOODS SOLD
Total cost of goods sold was $33.5 million for the three months ended
December 31, 2004, which represented a decrease of 14.2% or $5.6 million from
the three months ended December 31, 2003. Of this decrease, $2.6 million was due
to a decrease in volume and $3.0 million was due to lower average costs per
gallon resulting from improved manufacturing yields and a lower cost product mix
partially offset by higher fixed costs.
Fumed metal oxides, such as fumed silica and fumed alumina, are
significant raw materials we use in many of our CMP slurries. In an effort to
mitigate our risk to rising raw material costs and to increase supply assurance
and quality performance measures, we have entered into multi-year supply
agreements with Cabot Corporation, who supplies us with fumed silica and fumed
alumina, and other suppliers. We purchase fumed alumina under a fumed metal
oxide agreement with Cabot Corporation that will expire in June 2005 and a fumed
alumina supply agreement that will expire in December 2006 and may be renewed
for another five-year term, which would expire in December 2011. The fumed
alumina supply 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 of fumed alumina per year that meets our specifications. We
purchase fumed silica under a fumed silica supply agreement with Cabot
Corporation, which provides for the cost of fumed silica to increase
approximately 4% over the initial six-year term of the agreement, and in some
circumstances is subject to certain inflation adjustments and certain shared
cost savings adjustments resulting from our joint efforts. This agreement runs
through December 2009 and will automatically renew unless either party gives
certain notice of non-renewal.
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. We also expect to
continue to invest in our operations excellence initiative to improve our
manufacturing capabilities to meet our customers' increasing product performance
requirements.
GROSS PROFIT
Our gross profit as a percentage of revenue was 50.1%, for the three
months ended December 31, 2004 as compared to 48.8% for the three months ended
December 31, 2003. The 1.3 percentage point increase in gross profit expressed
as a percentage of revenue resulted primarily from a higher valued product mix
and improved manufacturing yields which were partially offset by selective price
reductions and lower capacity utilization due to the lower level of sales. We
continue to experience increasing competition and pricing pressure and therefore
expect that our gross profit as a percentage of revenue will be in the range of
48%, plus or minus 2%, for fiscal 2005.
13
RESEARCH AND DEVELOPMENT
Research and development expenses were $9.5 million in the three months
ended December 31, 2004, which represented a decrease of 11.0%, or $1.2 million,
from the three months ended December 31, 2003. Research and development expense
decreased primarily due to $1.2 million in reduced wafer and laboratory supply
costs and a decrease in technical service fees of $0.3 million. These decreases
were partially offset by an increase in depreciation expense of $0.3 million
related to the purchase of equipment for our CMP polishing and metrology clean
room in Aurora, Illinois. Research and development efforts were mainly related
to formulation and evaluation of new and enhanced CMP slurry products,
commercialization and transfer of new products to our customers and research
related to fundamental technology such as advanced chemistry and particle
technology.
In the fourth fiscal quarter of 2004 we commenced design work on a new
Asia Pacific technology center that will be constructed adjacent to our existing
manufacturing facility in Geino, Japan. The new 18,000 square foot facility will
provide polishing, metrology and product development capabilities and is
expected to become operational in October 2005.
SELLING AND MARKETING
Selling and marketing expenses were $4.2 million in the three months ended
December 31, 2004, which represented an increase of 10.4%, or $0.4 million, from
the three months ended December 31, 2003. Selling and marketing expense
increased primarily due to increased staffing costs of $0.6 million which was
partially offset by lower professional fees of $0.2 million.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $5.6 million in the three months
ended December 31, 2004, which represented an increase of 8.9%, or $0.5 million,
from the three months ended December 31, 2003. The increase resulted primarily
from an increase in staffing related costs.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.1 million for both the three months
ended December 31, 2004 and 2003.
OTHER INCOME, NET
Other income was $0.5 million in 2004, compared to being negligible in
2003. The increase in other income is primarily due to higher interest income
which is attributable to higher interest rates and an increased cash balance.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 33.2% for three months ended December
31, 2004 and 34.0% for three months ended December 31, 2003. The decrease in the
effective tax rate was primarily due to increased tax exempt interest income. We
expect our income tax rate for full fiscal year 2005 to be 33.2%.
NET INCOME
Net income was $9.8 million for the three months ended December 31, 2004,
which represented a decrease of 15.3%, or $1.8 million, from the three months
ended December 31, 2003 as a result of the factors discussed above.
14
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $17.6 million in the three
months ended December 31, 2004 and $16.5 million in the three months ended
December 31, 2003. Our cash provided by operating activities for the three
months ended December 31, 2004 originated from net income from operations of
$9.8 million, non-cash items of $4.1 million and a net decrease in working
capital of $3.7 million.
In the three months ended December 31, 2004, cash flows used in investing
activities were $4.8 million, of which $2.9 million was used for purchases of
production-related equipment and research and development tools. In addition, in
the fourth quarter of fiscal 2004 we acquired a minority equity ownership
interest in NanoProducts Corporation in exchange for $3.8 million, of which we
made an initial payment of $1.8 million in July 2004 and the final payment of
$1.9 million in December 2004. Full fiscal year 2005 capital spending is
anticipated to be approximately $33.0 million which includes the construction of
our Asia Pacific technology center in Geino, Japan. In the three months ended
December 31, 2003, capital spending was $1.3 million, primarily related to the
purchase of tools and equipment for our CMP polishing and metrology clean room
in Aurora, Illinois.
In the three months ended December 31, 2004, cash flows used in financing
activities of $0.8 million resulted from the repurchase of $3.7 million of
common stock and principal payments of $0.2 million made under capital lease
obligations. These outflows were partially offset by the issuance of common
stock of $3.2 million primarily related to the exercise of stock options under
our Equity Incentive Plan, that were granted at the time of our initial public
offering (IPO) that have an option price of $20.00 per share and are scheduled
to expire in April 2005. As of December 31, 2004, approximately 0.1 million of
these IPO stock options remained outstanding. In the three months ended December
31, 2003, cash flows provided by financing activities of $0.8 million resulted
from the issuance of common stock of $1.0 million, primarily related to the
exercise of stock options under our equity incentive plan, offset by principal
payments of $0.2 million made under capital lease obligations.
In July 2004 we announced that our Board of Directors had authorized a
share repurchase program for up to $25.0 million of our outstanding common
stock. Shares are repurchased from time to time, depending on market conditions,
in open market transactions, at management's discretion. We fund share
repurchases from our existing cash balance. The plan is primarily intended to
diminish earnings 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.
In July 2001 we entered into a $75.0 million unsecured revolving credit
and term loan facility with a group of commercial banks, and in February 2002
and August 2003, this agreement was amended with no material changes in terms.
On November 24, 2003, the then existing agreement was terminated and replaced
with an amended and restated unsecured revolving credit facility of $50.0
million with an option to increase the facility by up to $30.0 million. Under
this agreement, which terminates in November 2006, but can be renewed for two
one-year terms, interest accrues on any outstanding balance at either the
institution's base rate or the eurodollar rate plus an applicable margin. A
non-use fee also accrues. Loans under this facility are anticipated to be used
primarily for general corporate purposes, including working capital and capital
expenditures. The credit agreement also contains various covenants. No amounts
are currently outstanding under this credit facility and we believe we are
currently in compliance with the covenants.
We believe that cash generated by our operations and available borrowings
under our revolving credit facility will be sufficient to fund our operations,
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 December 31, 2004 and September 30, 2004, we did not have any
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which might have
been established for the purpose of facilitating off-balance sheet arrangements.
15
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at December 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............. $ 7.3 $ 1.1 $ 3.1 $ 2.4 $ 0.7
Operating leases ..................... 1.0 0.5 0.4 0.1 0.0
Purchase obligations ................. 63.0 47.0 11.2 3.2 1.6
Other long-term liabilities .......... 1.5 0.0 0.0 0.0 1.5
------- --------- -------- -------- --------
Total contractual obligations......... $ 72.8 $ 48.6 $ 14.7 $ 5.7 $ 3.8
======= ========= ======== ======== ========
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
made 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.
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 remaining obligation with respect to this
agreement is $1.2 million which is recorded in current liabilities and shown in
the preceding table under purchase obligations.
We operate under a fumed silica supply agreement with Cabot Corporation
under which we are 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. We
also operate under the fumed alumina supply agreement with Cabot Corporation,
described above in Capital Lease Obligations, under which 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 $36.9
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
16
facility. The initial term of the agreement expired in October 2004. In November
2004 the agreement was renewed for another year under similar terms and
conditions. The contract continues to have automatic one-year renewals and
contains a 90-day cancellation clause executable by either party. Purchase
obligations related to this agreement are $8.6 million, which include a
termination payment if the agreement is not renewed.
In June 2003 we entered into a technology licensing and co-marketing
agreement with a semiconductor equipment manufacturer under which we may
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 $1.2 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 term of the
agreement 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 $0.8 million for pension liabilities
and $0.7 for deferred compensation obligations.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values, and the pro forma footnote disclosure alternative is no
longer allowable under SFAS 123R. The revised standard is effective for public
entities in the first interim or annual reporting period beginning after June
15, 2005, and therefore, will be effective for us beginning with the fourth
quarter of fiscal 2005. We are currently evaluating the impact and
implementation of SFAS 123R, which we believe will have a material impact on our
consolidated results of operations and earnings per share. Using our current
fair value methodology, utilizing the Black-Scholes option pricing model, we
anticipate recognizing approximately $11.0 million of pre-tax share-based
compensation expense in our fourth quarter of fiscal 2005. The share-based
compensation expense we expect to record for our fourth fiscal quarter of this
year is expected to primarily reflect expense related to the approximately 1.3
million options, the vesting of which we accelerated to September 1, 2005, plus
a prorated portion of annual expense related to stock option grants made in
fiscal 2005, including our normal annual employee stock option grant made in
December 2004. The 1.3 million options that are scheduled to vest on September
1, 2005 will not result in any further compensation expense after fiscal 2005.
For full fiscal year 2006 we currently anticipate recognizing pre-tax
share-based compensation expense of approximately $11.0 million, assuming we
consistently apply our historical approach to long-term incentives and our
approach in determining fair value utilizing the Black-Scholes option pricing
model. Other factors may also impact future share-based compensation expense
including the attribution of the awards to the service period, the vesting
period of stock options, timing and number of additional grants of stock option
awards, fluctuations in our stock price and volatility, expected term and
risk-free rate of interest.
In November 2004, the FASB issued FASB Statement No. 151, "Inventory
Costs, an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which adopts wording
from the International Accounting Standards Board's ("IASB") IAS 2,
"Inventories", in an effort to improve the comparability of cross-border
financial reporting. The new standard indicates that abnormal freight, handling
costs and wasted materials are required to be treated as current period charges
rather than as a portion of inventory costs. Additionally, the standard
clarifies that fixed production overhead should be allocated based on the normal
capacity of a production facility. SFAS 151 is effective for fiscal years
beginning after June 15, 2005. We do not expect the adoption of SFAS 151 will
have a material impact on our consolidated financial position, results of
operations or cash flows.
17
In December 2004, the FASB issued FASB Statement No 153, "Exchanges on
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" ("SFAS 153"), as part of its short-term international
convergence project with the IASB. Under SFAS 153, nonmonetary exchanges are
required to be accounted for at fair value, recognizing any gains or losses, if
their fair value is determinable within reasonable limits and the transaction
has commercial substance. SFAS 153 is effective for fiscal years beginning after
June 15, 2005. We do not expect the adoption of SFAS 153 will have a material
impact on our consolidated financial position, results of operations or cash
flows.
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. For example, results for our fiscal first quarter reflect the remaining
impact of one large customer transitioning to another supplier of CMP slurry for
polishing copper interconnects at 130 nanometer technology. 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 52% and 54% of our revenue for the
three months ended December 31, 2004 and 2003, respectively.
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
18
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.
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 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 that 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.
BECAUSE WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF CMP SLURRIES,
EXPANSION OF OUR BUSINESS INTO NEW PRODUCTS AND APPLICATIONS 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 CMP polishing pads. Expanding our
business into new product areas involve technologies and production processes in
which we have 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. 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 of the
United States. For fiscal 2004, approximately 75% of our revenue was generated
by sales to customers outside of the United States. For the three months ended
December 31, 2004, approximately 78% 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.
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
19
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.
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 in fiscal years 2001
through 2003 was affected by the global economic slowdown and weakening in
demand for electronic systems, coupled with higher than normal chip inventories.
While the semiconductor industry recovered from this prolonged downturn in
fiscal 2004, we believe the outlook for 2005 is for moderating revenue growth
for the broad semiconductor industry and possibly even a contraction. Further,
the semiconductor industry has been cyclical, and the advent of the next
downturn could adversely affect 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.
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 industries; 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
and related industries; changes in business or regulatory conditions affecting
us or participants in the semiconductor and related industries; 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.
20
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 15% of our
revenue is transacted in currencies other than the U.S. dollar. We do not
currently enter into forward exchange contracts or other derivative instruments
for speculative or trading purposes.
MARKET RISK AND SENSITIVITY ANALYSIS OF FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in foreign exchange rates. As of December 31, 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 the
end of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of December 31, 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 our most recent fiscal quarter 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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 PLANS PURCHASED UNDER THE PLANS OR
PERIOD PURCHASED PER SHARE OR PROGRAMS PROGRAMS (IN THOUSANDS)
- -------------- ------------ ---------- ------------------------ ----------------------------
Oct. 1 through
Oct. 31, 2004 - - - $17,000
Nov. 1 through
Nov. 30, 2004 95,099 $39.24 95,099 $13,268
Dec. 1 through
Dec. 31, 2004 - - - $13,268
- -------------- ------------ ---------- ------------------------ ----------------------------
Total 95,099 $39.24 95,099 $13,268
In July 2004 we announced that our Board of Directors had authorized a
share repurchase program for up to $25.0 million of our outstanding common
stock. Shares are repurchased from time to time, depending on market conditions,
in open market transactions, at management's discretion. We fund share
repurchases from our existing cash balance. The program is primarily intended to
diminish earnings 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 6. 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.
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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: February 9, 2005 /s/ WILLIAM S. JOHNSON
------------------------------------------
William S. Johnson
Vice President and Chief Financial Officer
[Principal Financial Officer]
Date: February 9, 2005 /s/ THOMAS S. ROMAN
------------------------------------------
Thomas S. Roman
Corporate Controller
[Principal Accounting Officer]
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