cmc10qfiled020808.htm
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, 2007
or
o
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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
|
X
|
Accelerated
filer
|
|
Non-accelerated
filer
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As
of
January 31, 2008, the Company had 23,695,490 shares of Common Stock, par value
$0.001 per share, outstanding.
CABOT
MICROELECTRONICS CORPORATION
Part
I. Financial Information
|
Page
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
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|
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5
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|
|
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6
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|
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Item
2.
|
|
14
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|
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Item
3.
|
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19
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|
|
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Item
4.
|
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20
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Part
II. Other Information
|
|
|
|
|
Item
1.
|
|
21
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|
|
|
Item
1A.
|
|
21
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|
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Item
2.
|
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25
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|
|
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Item
6.
|
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25
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26
|
PART
I. FINANCIAL INFORMATION
ITEM
1.
CABOT
MICROELECTRONICS CORPORATION
(Unaudited
and in thousands, except per share amounts)
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
93,378
|
|
|
$ |
81,816
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
44,773
|
|
|
|
39,315
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research,
development and technical
|
|
|
11,421
|
|
|
|
12,247
|
|
Selling
and marketing
|
|
|
6,284
|
|
|
|
5,476
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
16,229
|
|
|
|
12,167
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
17,864
|
|
|
|
13,341
|
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average diluted shares outstanding
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
(Unaudited
and in thousands, except share amounts)
|
|
|
|
|
|
December
31,
2007
|
|
|
September
30, 2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
54,617
|
|
|
$ |
54,557
|
|
Short-term
investments
|
|
|
154,810
|
|
|
|
157,915
|
|
Accounts
receivable, less allowance for doubtful accounts of $483 at December
31,
2007,
|
|
|
|
|
|
|
|
|
and
$635 at September 30, 2007
|
|
|
50,064
|
|
|
|
52,302
|
|
Inventories
|
|
|
41,287
|
|
|
|
37,266
|
|
Prepaid
expenses and other current assets
|
|
|
6,309
|
|
|
|
5,853
|
|
Deferred
income taxes
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
309,988
|
|
|
|
310,754
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
121,754
|
|
|
|
118,454
|
|
Goodwill
|
|
|
7,069
|
|
|
|
7,069
|
|
Other
intangible assets, net
|
|
|
10,829
|
|
|
|
11,549
|
|
Deferred
income taxes
|
|
|
8,419
|
|
|
|
6,686
|
|
Other
long-term assets
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
15,615
|
|
|
$ |
15,859
|
|
Capital
lease obligations
|
|
|
1,078
|
|
|
|
1,066
|
|
Accrued
expenses, income taxes payable and other current
liabilities
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
36,512
|
|
|
|
36,563
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
|
3,336
|
|
|
|
3,608
|
|
Other
long-term liabilities
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
42,200
|
|
|
|
41,925
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Authorized:
200,000,000 shares, $0.001 par value
|
|
|
|
|
|
|
|
|
Issued:
25,746,637 shares at December 31, 2007, and
|
|
|
|
|
|
|
|
|
25,635,730 shares at September 30, 2007
|
|
|
24
|
|
|
|
24
|
|
Capital
in excess of par value of common stock
|
|
|
181,980
|
|
|
|
178,068
|
|
Retained
earnings
|
|
|
296,983
|
|
|
|
284,843
|
|
Accumulated
other comprehensive income
|
|
|
2,610
|
|
|
|
1,259
|
|
Treasury
stock at cost, 1,993,062 shares at December 31, 2007,
|
|
|
|
|
|
|
|
|
and
1,627,337 shares at September 30, 2007
|
|
|
(64,994 |
) |
|
|
(50,990 |
) |
Total
stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
|
|
|
$ |
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
(Unaudited
and amounts in thousands)
|
|
|
|
|
|
Three
Months Ended
December
31,
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,199
|
|
|
$ |
9,125
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,359
|
|
|
|
6,109
|
|
Share-based
compensation expense
|
|
|
3,494
|
|
|
|
2,925
|
|
Deferred
income tax benefit
|
|
|
(1,733 |
) |
|
|
(1,719 |
) |
Non-cash
foreign exchange gain
|
|
|
(1,290 |
) |
|
|
(59 |
) |
Other
|
|
|
718
|
|
|
|
203
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,737
|
|
|
|
211
|
|
Inventories
|
|
|
(3,609 |
) |
|
|
(1,668 |
) |
Prepaid
expenses and other assets
|
|
|
(492 |
) |
|
|
62
|
|
Accounts
payable
|
|
|
(2,602 |
) |
|
|
(3,668 |
) |
Accrued
expenses, income taxes payable and other liabilities
|
|
|
|
|
|
|
(4,621 |
) |
Net
cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(5,599 |
) |
|
|
(3,476 |
) |
Proceeds
from the sale of property, plant and equipment
|
|
|
-
|
|
|
|
100
|
|
Acquisition
of patent license
|
|
|
-
|
|
|
|
(3,000 |
) |
Purchases
of short-term investments
|
|
|
(139,875 |
) |
|
|
(29,100 |
) |
Proceeds
from the sale of short-term investments
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(2,494 |
) |
|
|
(1,676 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repurchases
of common stock
|
|
|
(14,004 |
) |
|
|
(5,996 |
) |
Net
proceeds from issuance of stock
|
|
|
418
|
|
|
|
176
|
|
Principal
payments under capital lease obligations
|
|
|
(261 |
) |
|
|
(243 |
) |
Net
cash used in financing activities
|
|
|
(13,847 |
) |
|
|
(6,063 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash
|
|
|
60
|
|
|
|
(835 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
|
|
|
$ |
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Purchases
of property, plant and equipment in accrued liabilities and accounts
payable at the end of the period
|
|
$ |
2,699
|
|
|
$ |
864
|
|
Issuance
of restricted stock
|
|
|
4,281
|
|
|
|
4,097
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
(Unaudited
and in thousands, except share and per share amounts)
1.
BACKGROUND AND BASIS OF PRESENTATION
Cabot
Microelectronics Corporation
("Cabot Microelectronics'', "the Company'', "us'', "we'' or "our'') supplies
high-performance polishing slurries used in the manufacture of advanced
integrated circuit (IC) devices within the semiconductor industry, in a process
called chemical mechanical planarization (CMP). CMP polishes surfaces
at an atomic level, thereby enabling IC device manufacturers to produce smaller,
faster and more complex IC devices with fewer defects. We believe we
are the world’s leading supplier of slurries for IC devices. We also
develop, manufacture and sell CMP slurries for polishing certain components
in
hard disk drives, specifically rigid disk substrates and magnetic heads, and
we
believe we are one of the leading suppliers in this area. In
addition, we develop, produce and sell CMP polishing pads, which are used in
conjunction with slurries in the CMP process. We also pursue a
variety of surface modification applications outside of the semiconductor and
hard disk drive industries for which our capabilities and knowledge may provide
previously unseen surface performance or improved productivity. For
additional information, refer to Part 1, Item 1, “Business”, in our annual
report on Form 10-K for the fiscal year ended September 30, 2007.
The
unaudited consolidated financial
statements have been prepared by Cabot Microelectronics Corporation 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 normal recurring adjustments necessary for the fair presentation of Cabot
Microelectronics’ financial position as of December 31, 2007, cash flows for the
three months ended December 31, 2007, and December 31, 2006, and results of
operations for the three months ended December 31, 2007, and December 31,
2006. The results of operations for the three months ended December
31, 2007, may not be indicative of the results to be expected for future
periods, including the fiscal year ending September 30, 2008. 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, 2007. We currently operate predominantly in one
industry segment - the development, manufacture and sale of CMP
consumables.
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.
INVENTORIES
Inventories
consisted of the
following:
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
19,622
|
|
|
$ |
18,011
|
|
Work
in process
|
|
|
2,075
|
|
|
|
1,735
|
|
Finished
goods
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
3.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
was $7,069 as of December 31,
2007, and September 30, 2007.
The
components of other intangible assets are as follows:
|
|
December
31, 2007
|
|
|
September
30, 2007
|
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Other
intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
technology
|
|
$ |
5,380
|
|
|
$ |
807
|
|
|
$ |
5,380
|
|
|
$ |
673
|
|
Acquired
patents and licenses
|
|
|
8,000
|
|
|
|
3,099
|
|
|
|
8,000
|
|
|
|
2,560
|
|
Trade
secrets and know-how
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
|
|
2,550
|
|
Distribution
rights, customer lists and other
|
|
|
1,457
|
|
|
|
1,292
|
|
|
|
1,457
|
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets subject to amortization
|
|
|
17,387
|
|
|
|
7,748
|
|
|
|
17,387
|
|
|
|
7,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets not subject to amortization*
|
|
|
1,190
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets
|
|
$ |
18,577
|
|
|
$ |
7,748
|
|
|
$ |
18,577
|
|
|
$ |
7,028
|
|
* Total
other intangible assets not subject to amortization primarily consist of
trade
names.
Amortization
expense was $720 and $645
for the three months ended December 31, 2007 and 2006,
respectively. Estimated future amortization expense for the five
succeeding fiscal years is as follows:
Fiscal
Year
|
|
Estimated
amortization expense
|
|
|
|
|
|
Remainder
of 2008
|
|
$ |
2,118
|
|
2009
|
|
|
1,663
|
|
2010
|
|
|
854
|
|
2011
|
|
|
847
|
|
2012
|
|
|
847
|
|
|
|
|
|
|
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
4.
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation
|
|
$ |
9,131
|
|
|
$ |
13,965
|
|
Goods
and services received, not yet invoiced
|
|
|
2,879
|
|
|
|
2,365
|
|
Warranty
accrual
|
|
|
484
|
|
|
|
527
|
|
Income
taxes payable
|
|
|
3,891
|
|
|
|
-
|
|
Taxes,
other than income taxes
|
|
|
1,328
|
|
|
|
911
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
19,819
|
|
|
$ |
19,638
|
|
5.
CONTINGENCIES
While
we are not involved in any legal
proceedings that we currently believe will have a material impact on our
consolidated financial position, results of operations or cash flows, we
periodically become a party to legal proceedings in the ordinary course of
business. For example, in January 2007, we filed a legal action
against DuPont Air Products NanoMaterials LLC (DA Nano), a competitor of ours,
in the United States District Court for the District of Arizona, charging that
DA Nano’s manufacturing and marketing of CMP slurries infringe five CMP slurry
patents that we own. The affected DA Nano products include those used
for tungsten CMP. We filed our infringement complaint as a
counterclaim in response to an action filed by DA Nano in the same court in
December 2006 that seeks declaratory relief and alleges non-infringement,
invalidity and unenforceability regarding some of the patents at issue in our
complaint against DA Nano. DA Nano filed its complaint following our
refusal of its request that we license to it our patents raised in its
complaint. DA Nano’s complaint does not allege any infringement by
our products of intellectual property owned by DA Nano. While the
outcome of this and any legal matter cannot be predicted with certainty, we
believe that our claims and defenses in the pending action are meritorious,
and
we intend to pursue and defend them vigorously.
Refer
to Note 15 of “Notes to the
Consolidated Financial Statements” in Item 8 of Part II of our annual report on
Form 10-K for the fiscal year ended September 30, 2007, for additional
information regarding commitments and contingencies.
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 costs related
to such replacement. The warranty reserve is based upon a historical
product replacement rate, adjusted for any specific known conditions or
circumstances. Adjustments to the warranty reserve are recorded in
cost of goods sold. Our warranty reserve requirements changed during
our first quarter of fiscal 2008 as follows:
Balance
as of September 30, 2007
|
|
$ |
527
|
|
Additions
charged to expense
|
|
|
-
|
|
Deductions
|
|
|
(43 |
) |
Balance
as of December 31, 2007
|
|
$ |
484
|
|
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
|
6.
SHARE-BASED COMPENSATION
PLANS
|
We
record share-based compensation
expense in accordance with Statement of Financial Accounting Standards No.
123
(revised 2004), “Share-Based Payment” (SFAS 123R). We currently issue
share-based payments under the following programs: our Second Amended and
Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan, as
amended and restated September 26, 2006 (“2000 Equity Incentive Plan”); our
Cabot Microelectronics Corporation Employee Stock Purchase Plan, as amended
and
restated September 17, 2007; and, pursuant to our 2000 Equity Incentive Plan,
our Directors’ Deferred Compensation Plan, as amended September 26, 2006 and our
2001 Executive Officer Deposit Share Program. For additional
information regarding these programs, refer to Note 10 of “Notes to the
Consolidated Financial Statements” included in Item 8 of Part II of our annual
report on Form 10-K for the fiscal year ended September 30, 2007.
We
record share-based compensation for
all of our share-based awards including stock options, restricted stock,
restricted stock units and employee stock purchases. We continue to
use the Black-Scholes model to value our stock options and employee stock
purchases. A number of the inputs in the Black-Scholes model are
highly subjective, including the price volatility of the underlying stock and
the expected term of our stock options. We estimate the expected
volatility of our stock based on a combination of our stock’s historical
volatility and the implied volatilities from actively-traded options on our
stock. We calculate the expected term of our stock options using the
simplified method of SAB No. 107, “Share-Based Payments”, due to our limited
amount of historical option exercise data, and we add a slight premium to this
expected term for employees who will meet the definition of retirement pursuant
to their grants during the contractual term. The fair value of our
restricted stock and restricted stock unit awards represents the closing price
of our common stock on the date of grant. Share-based compensation
expense related to stock option grants, restricted stock and restricted stock
unit awards is recorded net of expected forfeitures. Our estimated
forfeiture rate is primarily based on historical experience, but may be revised
in future periods if actual forfeitures differ from the estimate.
Share-based
compensation expense under
SFAS 123R for the three months ended December 31, 2007, and 2006, was as
follows:
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
$ |
249
|
|
|
$ |
187
|
|
Research,
development and technical
|
|
|
301
|
|
|
|
290
|
|
Selling
and marketing
|
|
|
352
|
|
|
|
309
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
Total
share-based compensation expense
|
|
|
3,494
|
|
|
|
2,925
|
|
Tax
benefit
|
|
|
|
|
|
|
|
|
Total
share-based compensation expense, net of tax
|
|
$ |
|
|
|
$ |
|
|
For
additional information regarding
the estimation of fair value, refer to Note 10 of “Notes to the Consolidated
Financial Statements” included in Item 8 of Part II of our annual report on Form
10-K for the fiscal year ended September 30, 2007.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
7.
OTHER INCOME, NET
Other
income, net, consisted of the
following:
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
1,942
|
|
|
$ |
1,453
|
|
Interest
expense
|
|
|
(105 |
) |
|
|
(124 |
) |
Other
income (expense)
|
|
|
(202 |
) |
|
|
(155 |
) |
Total
other income, net
|
|
$ |
|
|
|
$ |
|
|
8.
COMPREHENSIVE INCOME
|
The
components of comprehensive income were as
follows:
|
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,199
|
|
|
$ |
9,125
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Net
unrealized gain on derivative instruments
|
|
|
9 |
|
|
|
9 |
|
Foreign
currency translation adjustment
|
|
|
1,338
|
|
|
|
(251 |
) |
Minimum
pension liability adjustment
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$ |
|
|
|
$ |
|
|
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
9.
INCOME TAXES
Our
effective income tax rate of 31.7%
for the three months ended December 31, 2007 was comparable to 31.6% for the
three months ended December 31, 2006.
On
October 1, 2007, we adopted the
provisions of Financial Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), which
prescribes a threshold for the financial statement recognition and measurement
of tax positions taken or expected to be taken on a tax return. Under
FIN 48, we may recognize the tax benefit of an uncertain tax position only
if it
is more likely than not that the tax position will be sustained by the taxing
authorities, based on the technical merits of the position. Upon
adoption, we recognized a $59 reduction to our beginning retained earnings
balance and we reclassified $450 from current income taxes payable to a
non-current tax liability for unrecognized tax benefits, including interest
and
penalties. We made this reclassification to a non-current liability
because settlement is not expected to occur within one year of the balance
sheet
date.
The
total amount of gross unrecognized
tax benefits as of October 1, 2007, the date of adoption of FIN 48, was
$464. If we are able to utilize the unrecognized tax benefits, the
entire $464 would favorably impact our effective tax rate. We
recognize interest and penalties related to unrecognized tax positions as income
tax expense in our financial statements. The gross amount of interest
and penalties accrued at the date of adoption was $45.
We
believe the tax periods open to
examination by the U.S. federal government include fiscal years 2004 through
2007. We believe the tax periods open to examination by U.S. state
and local governments include fiscal years 2003 through 2007 and the tax periods
open to examination by foreign jurisdictions include fiscal years 2001 through
2007. We do not anticipate a significant change to the total amount
of unrecognized tax benefits within the next 12 months.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
10.
EARNINGS PER SHARE
SFAS
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,
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Earnings
available to common shares
|
|
$ |
12,199
|
|
|
$ |
9,125
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23,716,490
|
|
|
|
23,838,984
|
|
(Denominator
for basic calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares
|
|
|
|
|
|
|
|
|
(Denominator
for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.51
|
|
|
$ |
0.38
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
|
|
|
$ |
|
|
For
the three months ended December 31,
2007 and 2006, approximately 2.0 million and 4.4 million shares, respectively,
attributable to outstanding stock options were excluded from the calculation
of
diluted earnings per share because their inclusion would have been
anti-dilutive.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
11.
NEW ACCOUNTING PRONOUNCEMENTS
On
October 1, 2007, we adopted the
provisions of FIN 48, which prescribes a threshold for the financial statement
recognition and measurement of tax positions taken or expected to be taken
on a
tax return. Under FIN 48, we may recognize the tax benefit of an
uncertain tax position only if it is more likely than not that the tax position
will be sustained by the taxing authorities, based on the technical merits
of
the position. Upon adoption, we recognized a $59 reduction to our
beginning retained earnings balance and we reclassified $450 to a non-current
tax liability for unrecognized tax benefits, including interest and
penalties. See Note 9, “Income Taxes”, for additional discussion of
the adoption of this pronouncement.
In
December 2007, the FASB issued
Statement of Accounting Standards No. 141 (revised 2007), “Business
Combinations” (SFAS 141R), which replaces SFAS No. 141. The statement
retains the purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and liabilities are
recognized in purchase accounting. It also changes the recognition of
assets acquired and liabilities assumed arising from contingencies, requires
the
capitalization of in-process research and development at fair value, and
requires acquisition-related costs to be charged to expense as
incurred. SFAS 141R is effective for us October 1, 2009 and will
apply prospectively to business combinations completed on or after that
date.
In
December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an
Amendment of ARB 51” (SFAS 160), which changes the accounting and reporting for
minority equity interests in our subsidiaries. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity separate from the parent’s equity, and purchases or sales of equity
interests that do not result in a change of control will be accounted for as
equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the
face
of the statement of operations and, upon loss of control, the interest sold,
as
well as any interest retained, will be recorded at fair value with any gain
or
loss recognized in earnings. SFAS 160 is effective for us beginning
October 1, 2009 and will apply prospectively, except for the presentation and
disclosure requirements, which will apply retrospectively. We are
currently assessing the potential impact that the adoption of this pronouncement
would have on our results of operations, financial position or cash
flows. Currently, there are no minority interests in any of our
subsidiaries.
In
September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurement” (SFAS 157). SFAS 157 establishes a
common definition for fair value in generally accepted accounting principles,
establishes a framework for measuring fair value and expands disclosure about
such fair value measurements. SFAS is effective for us beginning
October 1, 2008. We are currently evaluating the impact of adopting
SFAS 157 on our results of operations, financial position and cash
flows.
12.
SUBSEQUENT EVENT
On
January 23, 2008, we announced that
our Board of Directors authorized a new share repurchase program for up to
$75,000 of our outstanding common stock. Shares may be 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, which became effective on
the authorization date, may be suspended or terminated at any time, at the
Company’s discretion.
The
following "Management's Discussion
and Analysis of Financial Condition and Results of Operations", as well as
disclosures included elsewhere in this Form 10-Q, include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act
of 1995. This Act provides a safe harbor for forward-looking
statements to encourage companies to provide prospective information about
themselves so long as they identify these statements as forward-looking and
provide meaningful cautionary statements identifying important factors that
could cause actual results to differ from the projected results. All
statements other than statements of historical fact we make in this Form 10-Q
are forward-looking. In particular, the statements herein regarding
future sales and operating results; Company and industry growth and trends;
growth of the markets in which the Company participates; international events;
product performance; the generation, protection and acquisition of intellectual
property, and litigation related to such intellectual property; new product
introductions; development of new products, technologies and markets; the
acquisition of or investment in other entities; uses of the Company’s cash
balance; the construction of new or refurbishment of existing 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 "Risk Factors"
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, 2007, including the consolidated financial
statements and related notes thereto.
FIRST
QUARTER OF FISCAL 2008 OVERVIEW
We
believe we are the world’s leading
supplier of high-performance polishing slurries used in the manufacture of
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. Demand for our CMP products for IC
devices is primarily based on the number of wafers produced by semiconductor
manufacturers, or “wafer starts”. We develop, produce and sell CMP
slurries for polishing materials such as copper, tungsten and dielectric in
IC
devices, and also for polishing the coatings on disks in hard disk drives and
magnetic heads. In addition, we develop, manufacture and sell CMP
polishing pads, which are used in conjunction with slurries in the CMP
process. We remain focused on the consistent and successful execution
of our three strategic initiatives within our core CMP business: maintaining
our
technological leadership, achieving operations excellence and connecting with
our customers.
In
addition to strengthening and
growing our core CMP business, through our Engineered Surface Finishes (ESF)
business we are exploring a variety of surface modification applications where
we believe our technical ability to shape, enable and enhance the performance
of
surfaces at an atomic level may provide previously unseen surface performance
or
improved productivity. By supplementing our internal development
efforts with externally acquired technologies and businesses, we seek to
leverage our expertise in CMP formulation, materials and polishing techniques
for the semiconductor industry to address other demanding market applications
requiring nanoscale control of surface shape and finish, and gain access to
a
variety of markets that we do not currently serve.
Revenue
for our first quarter of fiscal
2008 was $93.4 million, which represented an increase of 3.3%, or $3.0 million,
from the previous fiscal quarter and an increase of 14.1%, or $11.6 million,
from the first quarter of fiscal 2007. The increase from the prior
quarter primarily reflects solid business performance, strong industry
conditions through our first fiscal quarter and contributions from our polishing
pad business. We continued to see solid demand for our slurry
products from memory customers during the quarter, but we began to experience
some weakening in demand in the foundry and logic sectors of our
business. The first quarter of fiscal 2008 was our first quarter of
meaningful polishing pad revenue and we expect to see continued growth in pad
sales during our second fiscal quarter.
There
are many factors
that make it difficult for us to predict future revenue trends for our business,
including: the cyclical nature of the semiconductor industry; timing of
potential future acquisitions; short order to delivery time for our products
and
the associated lack of visibility to future customer orders; and quarter to
quarter changes in customer orders regardless of industry
strength. The recent weakening of the U.S. and global economy may
lead to slower economic growth, which may affect future customer demand for
our
products. Additionally, in recent years we have experienced lower
revenue during our second fiscal quarter, which we believe is due to the
seasonality of the semiconductor industry.
Gross
profit expressed as a percentage
of revenue for our first quarter of fiscal 2008 was 47.9%, which is near the
upper end of our full fiscal year guidance range of 46% to 48% of
revenue. Gross profit decreased from both the 49.1% reported in the
previous fiscal quarter and the 48.1% reported in the first quarter of fiscal
2007 primarily due to higher fixed manufacturing costs related to
staffing. We may experience quarterly gross profit above or below our
annual guidance range due to a number of factors, including fluctuations in
our
product mix and the extent to which we utilize our manufacturing
capacity.
Operating
expenses were $28.5 million
in our first quarter of fiscal 2008, compared to $30.3 million in the previous
fiscal quarter and $27.1 million in the first quarter of fiscal
2007. Total operating expenses this quarter are in the middle of our
quarterly guidance range of $27 to $30 million. The decrease from the
previous fiscal quarter was primarily driven by lower staffing related
costs. The increase in operating expenses from the same quarter in
the prior year was mainly due to higher professional fees and higher staffing
related costs, partially offset by lower depreciation expense.
Diluted
earnings per share for our
first fiscal quarter was $0.51, an increase from the $0.43 per share reported
in
the previous fiscal quarter and from the $0.38 per share reported in the same
quarter of fiscal 2007.
We
completed our $40 million share
repurchase program during our first quarter of fiscal 2008, which was authorized
by our Board of Directors in October 2005. In January 2008, our Board
of Directors authorized a new share repurchase program for up to $75 million
of
our outstanding common stock. Additionally, during this fiscal
quarter, we purchased and began installation of a 300-millimeter polishing
tool
for our Asia Pacific technology center which complements our 300-millimeter
capabilities in the United States. We expect this tool will be placed
in service during our second quarter of fiscal 2008.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING
PRONOUNCEMENTS
We
discuss our critical accounting
estimates and effects of recent accounting pronouncements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7 of Part II of our annual report on Form 10-K for the fiscal
year ended September 30, 2007. We believe there have been no material
changes in our critical accounting estimates during the first fiscal quarter
of
2008. As discussed in Note 8 of the Notes to the Consolidated
Financial Statements, we adopted the provisions of FASB Interpretation No.
48,
“Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement 109” (FIN 48) during the quarter. The cumulative effect of
adopting FIN 48 was immaterial; however, FIN 48 substantially increases the
sensitivities of the estimation process used in the accounting for and reporting
of tax contingencies. New accounting pronouncements issued are
discussed in Note 11 of the Notes to the Consolidated Financial
Statements.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED DECEMBER 31, 2007, VERSUS THREE MONTHS ENDED DECEMBER 31,
2006
REVENUE
Revenue
was $93.4 million for the three
months ended December 31, 2007, which represented a 14.1%, or $11.6 million,
increase from the three months ended December 31, 2006. Of this
increase, $10.3 million was due to increased sales volume in our core CMP
business and $1.3 million was due to a higher weighted average selling price
for
our slurry products, primarily resulting from a higher-priced product
mix.
COST
OF GOODS SOLD
Total
cost of goods sold was $48.6
million for the three months ended December 31, 2007, which represented an
increase of 14.4%, or $6.1 million, from the three months ended December 31,
2006. Of this increase, $5.3 million was due to increased sales
volume, $2.8 million was due to increased fixed manufacturing costs and $1.9
million was due to certain other manufacturing variances. These
increases were partially offset by a $1.9 million benefit of a lower-cost
product mix and by a $1.9 million benefit of higher utilization of our
manufacturing capacity on the higher level of sales.
Fumed
metal oxides, such as fumed
silica and fumed alumina, are significant raw materials that 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
requirements, we have entered into multi-year supply agreements with a number
of
suppliers. For more financial information about our supply contracts,
see “Tabular Disclosure of Contractual Obligations” in this filing as well as in
Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended
September 30, 2007.
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. In addition, rising energy
costs may also impact the cost of raw materials, packaging and freight
costs. We also expect to continue to invest in our operations
excellence initiative to improve product quality, reduce variability and improve
product yields in our manufacturing process.
GROSS
PROFIT
Our
gross profit as a percentage of
revenue was 47.9% for the three months ended December 31, 2007, as compared
to
48.1% for the three months ended December 31, 2006. The slight
decrease was primarily due to higher fixed production costs related to staffing
and higher manufacturing variances partially offset by a favorable product
mix
and increased capacity utilization. We expect our gross profit as a
percentage of revenue to be in the range of 46% to 48% for full fiscal year
2008. Quarterly gross profit may be above or below this range due to
fluctuations in our product mix, the extent to which we utilize our
manufacturing capacity or other factors.
RESEARCH,
DEVELOPMENT AND TECHNICAL
Total
research, development and
technical expenses were $11.4 million for the three months ended December 31,
2007, which represented a decrease of 6.7%, or $0.8 million, from the three
months ended December 31, 2006. The decrease was primarily related to
lower clean room materials and laboratory supplies.
Our
research, development and technical
efforts are focused on the following main areas:
·
|
Research
related to fundamental CMP
technology;
|
·
|
Development
and formulation of new and enhanced CMP consumable
products;
|
·
|
Process
development to support rapid and effective commercialization of new
products;
|
·
|
Technical
support of CMP products in our customers’ manufacturing facilities;
and
|
·
|
Evaluation
of new polishing applications outside of the semiconductor
industry.
|
SELLING
AND MARKETING
Selling
and marketing expenses of $6.3
million for the three months ended December 31, 2007, were 14.8%, or $0.8
million, higher than the three months ended December 31, 2006. The
increase was primarily due to higher staffing related costs.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses
were $10.8 million for the three months ended December 31, 2007, which
represented an increase of 15.0%, or $1.4 million, from the three months ended
December 31, 2006. The increase resulted primarily from
$1.7 million in higher professional fees, including costs to enforce our
intellectual property and $0.2 million in higher staffing related
costs. These increases were partially offset by a $0.4 million
decrease in depreciation expense.
OTHER
INCOME, NET
Other
income was $1.6 million for the
three months ended December 31, 2007, compared to $1.2 million in the three
months ended December 31, 2006. The increase in other income was
primarily due to $0.5 million greater interest income from higher interest
rates
and higher average balances of our cash and short-term investments.
PROVISION
FOR INCOME TAXES
Our
effective income tax rate of 31.7%
for the three months ended December 31, 2007 was comparable to 31.6% for the
three months ended December 31, 2006. In October 2007, we adopted FIN
48 which did not have a material effect on our consolidated financial position,
results of operations or cash flows. See Notes 9 and 11 of the Notes
to the Consolidated Financial Statements for further information on the adoption
of this pronouncement.
NET
INCOME
Net
income was $12.2 million for the
three months ended December 31, 2007, which represented an increase of 33.7%,
or
$3.1 million, from the three months ended December 31, 2006, as a result of
the
factors discussed above.
LIQUIDITY
AND CAPITAL RESOURCES
We
had cash flows from operating
activities of $16.0 million in the first quarter of fiscal 2008, and $6.9
million in the first quarter of fiscal 2007. Our cash provided by
operating activities in the first quarter of fiscal 2008 originated from $19.7
million of net income adjusted for non-cash items, partially offset by a $3.7
million decrease in cash flow due to a net increase in working
capital. The increase in cash from operations was primarily due to
increased net income in the quarter and a smaller increase in working capital
as
compared to the first quarter of fiscal 2007, due to improved accounts
receivable collections and the timing of accounts payable and accrued liability
payments, partially offset by higher inventory levels.
In
the first quarter of fiscal 2008,
cash flows used in investing activities were $2.5 million. We used
$5.6 million in cash for purchases of property, plant and equipment primarily
for the purchase and installation of a 300-millimeter polishing tool and related
metrology equipment at our Asia Pacific technology center. This cash
outflow was partially offset by $3.1 million provided by net sales of short-term
investments. In the first quarter of fiscal 2007, cash flows used in
investing activities were $1.7 million. Purchases of property, plant
and equipment of $3.5 million were made primarily for the expansion of our
pad
manufacturing capabilities and $3.0 million was used to acquire a license of
patents. These cash outflows were partially offset by $4.7 million in
net sales of short-term investments. We estimate that our total
capital expenditures in fiscal 2008 will be approximately $20.0
million.
In
the first quarter of fiscal 2008,
cash flows used in financing activities were $13.8 million, primarily as a
result of $14.0 million in repurchases of common stock under our share
repurchase program. In the first quarter of fiscal 2007, cash flows
used in financing activities were $6.1 million, including $6.0 million in
purchases of common stock under our share repurchase program. We
completed this share repurchase program during the first quarter of fiscal
2008,
which was authorized by our Board of Directors in October 2005 for up to $40.0
million. In January 2008, the Board of Directors authorized a new
share repurchase program for up to $75.0 million of our outstanding common
stock. Share repurchases will continue to be made from time-to time,
depending on market conditions, at management’s discretion. The new
program is expected to be funded from our available cash balance. We
view this program as a flexible and effective means to return cash to
stockholders.
We
have an unsecured revolving credit
facility of $50.0 million with an option to increase the facility up to $80.0
million. This agreement runs through November 2008, but we expect to have a
new
agreement in place prior to its expiration. Interest accrues on any
outstanding balance at either the lending institution’s base rate or the
Eurodollar rate plus an applicable margin. We also pay a non-use
fee. Loans under this facility are anticipated to be used primarily
for general corporate purposes, including for 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, including
merger and acquisition activities, and share repurchases for the foreseeable
future. However, we plan to expand our business and continue to
improve our technology, and to do so may require us to raise additional funds
in
the future through equity or debt financing, strategic relationships or other
arrangements.
OFF-BALANCE
SHEET ARRANGEMENTS
At
December 31, 2007, and September 30,
2007, we did not have any unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which might have been established for the purpose of facilitating
off-balance sheet arrangements.
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The
following summarizes our
contractual obligations at December 31, 2007, and the effect such obligations
are expected to have on our liquidity and cash flow in future
periods.
CONTRACTUAL
OBLIGATIONS
|
|
|
|
|
Less
Than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
5
|
|
(In
millions)
|
|
Total
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
$ |
4.4
|
|
|
$ |
1.1
|
|
|
$ |
2.3
|
|
|
$ |
1.0
|
|
|
$ |
-
|
|
Operating
leases
|
|
|
1.5
|
|
|
|
1.1
|
|
|
|
0.4
|
|
|
|
-
|
|
|
|
-
|
|
Purchase
obligations
|
|
|
60.0
|
|
|
|
51.8
|
|
|
|
7.0
|
|
|
|
1.2
|
|
|
|
-
|
|
Other
long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$ |
68.3
|
|
|
$ |
54.0
|
|
|
$ |
9.7
|
|
|
$ |
2.2
|
|
|
$ |
2.4
|
|
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 for certain of our slurry products
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 a
fumed alumina supply agreement with Cabot Corporation that runs through December
2011, under which we are obligated to pay certain fixed, capital and variable
costs. Purchase obligations include an aggregate amount of $29.9
million of contractual commitments for fumed silica and fumed alumina under
these contracts.
Refer
to Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
of Part II of
our
annual report on Form 10-K for the fiscal year ended September 30, 2007,
for additional information regarding our contractual obligations.
EFFECT
OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK
MANAGEMENT
We
conduct business operations outside
of the United States through our foreign operations. Some of 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 12% 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 RELATED TO FOREIGN EXCHANGE RATE
RISK
We
have performed a sensitivity
analysis assuming a hypothetical 10% adverse movement in foreign exchange
rates. As of December 31, 2007, 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.
EVALUATION
OF DISCLOSURE 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, 2007.
While
we believe the present design of
our disclosure controls and procedures is effective enough 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 we believe necessary in the
future to provide our senior management with timely access to such material
information, and to correct deficiencies that we may discover in the future,
as
appropriate.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in our internal
control over financial reporting that occurred during our most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
INHERENT
LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because
of inherent limitations, our
disclosure controls or our internal control over financial reporting may not
prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further,
the design of a control system must take into account the benefits of controls
relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have
been
detected. These inherent limitations include possible faulty judgment
in decision making and breakdowns due to a simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the controls. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with policies or procedures may deteriorate. Because of
the inherent limitations in a cost-effective control system, misstatements
due
to error or fraud may occur and not be detected.
PART
II. OTHER INFORMATION
While
we are not involved in any legal
proceedings that we believe will have a material impact on our consolidated
financial position, results of operations or cash flows, we periodically become
a party to legal proceedings in the ordinary course of business. For
example, in January 2007, we filed a legal action against DuPont Air Products
NanoMaterials LLC (DA Nano), a competitor of ours, in the United States District
Court for the District of Arizona, charging that DA Nano’s manufacturing and
marketing of CMP slurries infringe five CMP slurry patents that we
own. The affected DA Nano products include those used for tungsten
CMP. We filed our infringement complaint as a counterclaim in
response to an action filed by DA Nano in the same court in December 2006 that
seeks declaratory relief and alleges non-infringement, invalidity and
unenforceability regarding some of the patents at issue in our complaint against
DA Nano. DA Nano filed its complaint following our refusal of its
request that we license to it our patents raised in its complaint. DA
Nano’s complaint does not allege any infringement by our products of
intellectual property owned by DA Nano. While the outcome of this and
any legal matter cannot be predicted with certainty, we believe that our claims
and defenses in the pending action are meritorious, and we intend to pursue
and
defend them vigorously.
We
do not believe there have been any
material changes in our risk factors since the filing of our Annual Report
on
Form 10-K for the fiscal year ended September 30, 2007. However, we
may update our risk factors in our SEC filings from time to time for
clarification purposes or to include additional information, at management's
discretion, even when there have been no material changes.
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. We are also developing our business in
CMP pads. 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
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 and pads. We expect these technological
changes and advances, and this drive toward lower costs, to continue in the
future. Potential technology developments in the semiconductor
industry, as well as our customers’ efforts to reduce consumption of CMP
slurries and pads, 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 THESE CUSTOMERS
Our
customer base is concentrated among
a limited number of large customers. One or more of these principal
customers could stop buying CMP slurries from us or could substantially reduce
the quantity of CMP slurries they purchase from us. Our principal
customers also hold considerable purchasing power, which can impact the pricing
and terms of sale of our products. Any 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.
In
fiscal 2007, our five largest
customers accounted for approximately 43% of our revenue; with Taiwan
Semiconductor Manufacturing Company (TSMC) accounting for approximately 17%
of
our revenue. During the three months ended December 31, 2007 and
2006, our five largest customers accounted for approximately 42% and 43% of
our
revenue; respectively. TSMC was our largest customer during each of
these periods, accounting for approximately 17% of our revenue.
OUR
BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS DEVELOP
SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE, OR OBTAIN
CERTAIN INTELLECTUAL PROPERTY RIGHTS
Competition
from current CMP slurry
manufacturers or new entrants to the CMP slurry market could seriously harm
our
business and results of operations. Competition from other existing providers
of
CMP slurries could continue to increase, 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 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.
ANY
PROBLEM OR DISRUPTION IN OUR SUPPLY CHAIN, INCLUDING SUPPLY OF OUR MOST
IMPORTANT RAW MATERIALS, OR IN OUR ABILITY TO MANUFACTURE AND DELIVER OUR
PRODUCTS TO OUR CUSTOMERS, COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
We
depend on our supply chain to enable
us to meet the demands of our customers. Our supply chain includes
the raw materials we use to manufacture our products, our production operations,
and the means by which we deliver our products to our customers. Our
business could be adversely affected by any problem or interruption in our
supply of the key raw materials we use in our CMP slurries and pads, including
fumed metal oxides such as fumed alumina and fumed silica, or any problem or
interruption that may occur during production or delivery of our products,
such
as weather-related problems or natural disasters.
For
example, 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
promptly secure alternative sources of key raw materials, including fumed metal
oxides, in the event one of our suppliers becomes unable to supply us with
sufficient quantities of raw materials that meet the quality and technical
specifications required by our customers. In addition, contractual
amendments to the existing agreements with, or non-performance by, our suppliers
could adversely affect us. Also, if we change the supplier or type of
key raw materials we use to make our CMP slurries and pads, or are required
to
purchase them from a different manufacturer or manufacturing facility or
otherwise modify our products, in certain circumstances our customers might
have
to requalify our CMP slurries and pads for their manufacturing processes and
products. The requalification process could take a significant amount
of time and expense to complete and could motivate our customers to consider
purchasing products from our competitors, possibly interrupting or reducing
our
sales of CMP consumables to these customers.
WE
ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN
OPERATIONS
We
currently have operations and a
large customer base outside of the United States. Approximately 79%
and 80% of our revenue was generated by sales to customers outside of the United
States for the fiscal year ended September 30, 2007, and the three months ended
December 31, 2007, respectively. We encounter risks in doing business
in certain foreign countries, including, but not limited to, adverse changes
in
economic and political conditions, fluctuation in exchange rates, compliance
with a variety of foreign laws and regulations, as well as difficulty in
enforcing business and customer contracts and agreements, including protection
of intellectual property rights.
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 CMP business from CMP slurries into other areas, such as CMP
polishing pads. Additionally, pursuant to our engineered surface
finishes business, we are actively pursuing a variety of surface modification
applications, such as high precision optics. Expanding our business into new
product areas could involve technologies, production processes and business
models in which we have limited experience, and we may not be able to develop
and produce products or provide services that satisfy 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.
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 we develop complex technical
formulas for CMP products that are proprietary in nature and differentiate
our
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. Due to our international
operations, we pursue protection in different jurisdictions, which may require
varying degrees of protection, and we cannot provide assurance that we can
obtain adequate protection in each such jurisdiction. Our failure to
obtain or maintain adequate protection of our intellectual property rights
for
any reason, including through the patent prosecution process or in the event
of
litigation related to such intellectual property, such as the current litigation
between us and DA Nano described in “Legal Proceedings” in this Form 10-Q, could
seriously harm our business. In addition, the costs of obtaining or
protecting our intellectual property could negatively affect our operating
results.
WE
MAY PURSUE ACQUISITIONS OF, INVESTMENTS IN, AND STRATEGIC ALLIANCES WITH OTHER
ENTITIES, WHICH COULD DISRUPT OUR OPERATIONS AND HARM OUR OPERATING RESULTS
IF
THEY ARE UNSUCCESSFUL
We
expect to continue to make
investments in companies, either through acquisitions, investments or alliances,
in order to supplement our internal growth and development
efforts. Acquisitions and investments involve numerous risks,
including the following: difficulties in integrating the operations,
technologies, products and personnel of acquired companies; diversion of
management’s attention from normal daily operations of the business; potential
difficulties in entering markets in which we have limited or no direct prior
experience and where competitors in such markets have stronger market positions;
potential difficulties in operating new businesses with different business
models; potential difficulties with regulatory or contract compliance in areas
in which we have limited experience; initial dependence on unfamiliar supply
chains or relatively small supply partners; insufficient revenues to offset
increased expenses associated with acquisitions; potential loss of key employees
of the acquired companies; or inability to effectively cooperate and collaborate
with our alliance partners.
Further,
we may never realize the
perceived or anticipated benefits of a business combination or investments
in
other entities. Acquisitions by us could have negative effects on our
results of operations, in areas such as contingent liabilities, gross profit
margins, amortization charges related to intangible assets and other effects
of
accounting for the purchases of other business entities. Investments
and acquisitions of technology and development stage companies are inherently
risky because these businesses may never develop, and we may incur losses
related to these investments. In addition, we may be required to
write down the carrying value of these investments to reflect other than
temporary declines in their value, which 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 economic
and industry conditions and our revenue is dependent on demand for semiconductor
products. Semiconductor demand, in turn, is impacted by semiconductor
industry cycles, and these cycles can dramatically affect our
business. There is concern that current economic conditions may lead
to slower U.S. economic growth and the possibility of a recession that could
also impact the global economy. A recession could adversely affect
the demand for semiconductor devices and, in turn, demand for our
products. Some additional factors that affect demand for our products
include: our customers’ production of logic versus memory devices, their
transition from 200 mm to 300 mm wafers, customers’ specific integration
schemes, share gains and losses and pricing changes by us and our
competitors.
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 semiconductor industry, 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 fluctuated 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 and related 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 and restated 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, which 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. Also our amended and restated 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.
We
have adopted change in control
arrangements covering our executive officers and other key
employees. These arrangements provide for a cash severance payment,
continued medical benefits and other ancillary payments and benefits upon
termination of service of a covered employee’s employment following a change in
control, which may make it more expensive to acquire our Company.
ISSUER
PURCHASES OF EQUITY SECURITIES
Period
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid Per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs (in thousands)
|
Oct.
1 through
Oct.
31, 2007
|
|
15,637
|
|
$39.35
|
|
15,637
|
|
$13,388
|
Nov.
1 through
Nov.
30, 2007
|
|
250,438
|
|
$38.45
|
|
250,438
|
|
$ 3,760
|
Dec.
1 through
Dec.
31, 2007
|
|
99,650
|
|
$37.73
|
|
99,650
|
|
$ --
|
Total
|
|
365,725
|
|
$38.29
|
|
365,725
|
|
$ --
|
In
October 2005, we announced that our
Board of Directors had authorized a share repurchase program for up to $40.0
million of our outstanding common stock. We completed this
share purchase authorization during the quarter ended December 31,
2007. In January 2008, we announced that the Board of Directors has
authorized a new share repurchase program for up to $75.0 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, which became effective on the
authorization date, may be suspended or terminated at any time, at the Company’s
discretion. We view the program as a flexible and effective means to
return cash to stockholders.
|
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.
|
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.
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CABOT
MICROELECTRONICS CORPORATION
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|
|
|
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Date:
February 8, 2008
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/s/
WILLIAM S. JOHNSON
|
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William
S. Johnson
|
|
Vice
President and Chief Financial Officer
|
|
[Principal
Financial Officer]
|
|
|
|
|
Date:
February 8, 2008
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/s/
THOMAS S. ROMAN
|
|
Thomas
S. Roman
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|
Corporate
Controller
|
|
[Principal
Accounting Officer]
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26