Cabot Microelectronics 10-K 9-30-2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2006
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.)
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870
NORTH COMMONS DRIVE
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60504
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AURORA,
ILLINOIS
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(Zip
Code)
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(Address
of principal executive offices)
|
|
Registrant's
telephone number, including area code: (630)
375-6631
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
Common
Stock, $0.001 par value
|
The
NASDAQ Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
x No
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o No
x
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. Yes
x No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
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 o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act ). Yes
o No
x
The
aggregate market value of the registrant’s Common Stock held beneficially or of
record by stockholders who are not affiliates of the registrant, based upon
the
closing price of the Common Stock on March 31, 2006, as reported by the NASDAQ
Global Select Market, was approximately $897,990,000. For the purposes hereof,
"affiliates"
include all executive officers and directors of the registrant.
As
of
October 31, 2006, the Company had 23,957,552 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement for the Annual Meeting of
Stockholders
to be held on March 6, 2007, are incorporated by reference in Part III of this
Form 10-K to the extent stated herein.
This
Form
10-K includes statements that constitute “forward-looking statements” within the
meaning of federal securities regulations. For more detail regarding
“forward-looking statements” see Item 7 of Part II of this Form
10-K.
CABOT
MICROELECTRONICS CORPORATION
FORM
10-K
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2006
PART
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Item
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13
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Item
1B.
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Item
2.
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PART
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Item
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Item
9.
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69
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9A.
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9B.
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70
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PART
III.
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Item
10.
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70
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Item
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Item
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Item
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PART
IV.
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Item
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75
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ITEM
1. BUSINESS
OUR
COMPANY
Cabot
Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'',
"we'', or "our''), which was incorporated in the state of Delaware in 2000,
is
the 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
process that polishes surfaces at an atomic level, thereby enabling IC device
manufacturers to produce smaller, faster and more complex IC devices with fewer
defects.
We
operate predominantly in one industry segment - the development, manufacture
and
sale of CMP slurries. Our CMP products are used for a number of applications,
such as polishing insulating dielectric layers, tungsten that is used to connect
the multiple wiring layers of IC devices through these insulating layers, and
copper wiring, including the associated barrier film. In addition, we are
developing and commercializing CMP polishing pads, which are used in conjunction
with slurries in the CMP process.
In
addition to expanding our core business in the semiconductor industry, we also
are beginning to grow our business through our engineered surface finishes
(ESF)
initiative. We believe we can leverage our expertise in CMP slurry formulation,
materials and polishing techniques and apply it to demanding surface
modification and fine finish polishing applications in other industries where
shaping, enabling and enhancing performance is critical to success. For example,
we develop, manufacture and sell CMP slurries for polishing certain components
in the hard disk drive industry, specifically rigid disk substrates and magnetic
heads, and we believe we are one of the leading suppliers in this area. In
addition to growing internally, we also are expanding through acquisitions
such
as our July 2006 acquisition of substantially all of the assets and assumption
of certain liabilities of QED Technologies, Inc. (QED), a privately-held company
that specializes in unique, patented polishing and metrology systems for
fabricating high precision optics. Metrology systems measure surface
finish, shape and performance of the optic. Further, in October 2005 we
acquired substantially all of the assets and assumed certain liabilities of
Surface Finishes Co., Inc. (“Surface Finishes”), a privately-held company that
specializes in precision machining techniques at the sub-nanometer level on
prototype or production components such as mirrors for optical imaging and
scanning, air bearings, optical disc molds, large area reference surfaces and
custom gauging.
IC
DEVICE
MANUFACTURING
An
advanced IC device is composed of millions of transistors and other electronic
components connected by miles of wiring. The wiring, composed primarily of
either aluminum or copper, carries electrical signals through the multiple
layers of the IC device. Insulating material is used throughout the IC device
to
electrically isolate the electronic components and the wiring. To enhance
performance, IC device manufacturers have progressively increased the number
and
density of transistors and other electronic components in each IC device.
Consequently, the number of wires and the number of discrete layers have also
increased.
The
multi-step manufacturing process for IC devices typically begins with a circular
wafer of pure silicon. A large number of identical IC devices, or dies, are
manufactured on each wafer at the same time. The first step in the manufacturing
process builds transistors and other electronic components on the silicon wafer.
These are isolated from each other using a layer of insulating material, most
often silicon dioxide, to prevent electrical signals from bridging from one
transistor to another. These components are then wired together using either
aluminum or copper in a particular sequence to produce a functional IC device
with specific characteristics. When the wiring on one layer of the IC device
is
completed, another layer of insulating material is added. The process of
alternating insulating and wiring layers is repeated until the desired wiring
within the IC device is finished. At the end of the process, the wafer is cut
into the individual dies, which are then packaged to form individual
chips.
The
percentage of IC devices that utilize CMP in the manufacturing process has
increased steadily over time as semiconductor technology has advanced and
performance requirements of IC devices have increased. We believe that CMP
is
used in just over half of all IC devices made today, and we expect that CMP
will
be used more extensively in the future as manufacturers continue to shrink
the
size of devices.
IC
devices can generally be segmented into either logic or memory devices. Logic
devices include chips such as microprocessors, digital signal processors,
microcomponents and microcontrollers. These are normally computing-intensive
devices that need to perform large numbers of processing steps every second.
Advanced logic chips use copper wiring to provide increased processing speed
because copper wiring has lower electrical resistance than aluminum wiring;
aluminum wiring is generally used in chips that do not require this speed,
such
as logic devices of older technology, because it is more cost-effective than
using copper wiring. Memory devices, which include flash, DRAM and SRAM chips,
function by reading, storing and writing data. Traditionally this segment has
been highly cost sensitive and processing speed is not as critical as in logic
devices. Therefore, memory devices tend to use aluminum wiring.
CMP
PROCESS AND BENEFITS
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 IC devices. In this polishing process, CMP slurries
and
pads are used to level, smooth and remove excess material from the surfaces
of
these layers via a combination of chemical reactions and mechanical abrasion,
while leaving minimal residue or defects on the surface and leaving only the
material necessary for circuit integrity. 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
engineered polymeric materials designed to distribute and transport the slurry
to the surface of the wafer and distribute it evenly across the wafer. During
the CMP process the wafer is typically held on a rotating carrier, which is
pressed down against a rotating polishing table and spun in a circular motion.
The portion of the table that comes in contact with the wafer is covered by
a
textured polishing pad. A CMP slurry is continuously applied to the polishing
pad to facilitate and enhance the polishing process. Hard disk drive
manufacturers use a process similar to this IC CMP process to smooth the surface
of substrate disks before depositing magnetic media.
The
characteristics that are important for an effective CMP process
include:
|
§
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High
polishing rates, which increase productivity and
throughput;
|
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§
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Selectivity,
which is the ability to enhance the polishing of specific materials
while
at the same time inhibiting the polishing of other materials;
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§
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Uniform
planarity, which minimizes unevenness as different layers are built
on the
wafer;
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§
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Uniformity
of polishing, which means that different surface materials can be
polished
to the same degree at the same time across the wafer, leading to
uniformity of all dies on the
wafer;
|
|
§
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Low
defectivity, which means that the devices have fewer imperfections
and
therefore produce higher yield; and
|
|
§
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Cost,
because it is important for users to minimize their cost of
manufacturing.
|
These
attributes may be achieved through technical optimization of the CMP slurry
and
pad in conjunction with an appropriately designed CMP process. Prior to
introducing new or different CMP slurries into its manufacturing process, an
IC
device manufacturer generally requires the product to be qualified in its
processes through an extensive series of tests and evaluations. These
qualifications are intended to ensure that the product will function properly
in
the manufacturing process, as well as to optimize its application. These tests
may require changes to the CMP process or the CMP slurry. While this
qualification process varies depending on numerous factors, it is generally
quite costly and may take six or more months to complete. IC device
manufacturers usually take the cost, time delay and impact on production into
account when they consider implementing or switching to a new CMP slurry or
supplier.
CMP
enables IC device manufacturers to produce smaller, faster and more complex
IC
devices with fewer defects and a greater density of transistors and other
electronic components than was previously possible. CMP provides the near
perfectly smooth and flat surface required to create the associated intricate
wiring patterns. By enabling IC device manufacturers to make smaller IC devices,
CMP also allows them to increase the number of IC devices that fit on a wafer.
This increase in the number of IC devices per wafer in turn increases the
throughput, or the number of IC devices that can be manufactured in a given
time
period, and reduces the cost per chip. CMP also helps reduce the number of
defective or substandard IC devices produced, which increases the device yield.
Improvements in throughput and yield reduce an IC device manufacturer's unit
production costs, and reducing costs is one of the highest priorities of a
semiconductor manufacturer because return on its significant investment in
manufacturing capacity can be enhanced by lower unit costs. More broadly,
sustained growth in the semiconductor industry traditionally has been fueled
by
lower unit costs that have made IC devices more affordable in an expanding
range
of applications.
PRECISION
POLISHING PROCESSES AND BENEFITS
Through
our ESF initiative, we are applying our technical expertise in CMP slurry
formulation, materials and polishing techniques to demanding surface
modification and fine finish polishing applications in other industries where
shaping, enabling and enhancing performance of surfaces is critical to success.
We believe we can deliver improvements in production economics, figure precision
and surface finish (smoothness and texture) for a variety of difficult-to-polish
materials, potentially enabling the use of these materials in higher-value
applications.
In
addition, many of the production processes currently used in precision machining
and polishing have been based on traditional, labor-intensive techniques, which
are being replaced by computer-controlled, deterministic processes. Our CMP
technology may help to accelerate this transition to automated processes in
several areas by providing consistent, rapid results.
OUR
PRODUCTS
CMP
SLURRIES AND POLISHING PADS FOR IC DEVICES
We
develop and produce CMP slurries of various formulations for a wide range of
polishing applications including tungsten and dielectric materials, which
currently represent the most common use of CMP in IC device manufacturing.
Slurries for polishing tungsten and dielectrics are used primarily in memory
devices and older generation logic devices. Dielectric slurries are used in
inter layer dielectric (ILD) applications, which represent the more mature
and
cost-sensitive part of the CMP business, as well as in advanced dielectric
applications, which require higher performing solutions such as those used
for
pre-metal dielectric and direct shallow trench isolation applications.
We
also
develop and manufacture slurry products for polishing copper, which is used
primarily in the wiring of advanced IC logic devices to provide increased
processing speed because copper wiring has lower electrical resistance than
aluminum wiring. These products include different slurries for polishing the
copper film, as well as for the thin barrier metal layer used to separate copper
from the adjacent insulating material. We have multiple products to enable
different integration schemes depending on specific customer needs and for
a
range of technology nodes.
We
are
currently developing and commercializing CMP polishing pads utilizing our own
and licensed technology. CMP polishing pads are consumable materials used in
the
CMP process that work in conjunction with CMP slurries to facilitate the
polishing process, as described above. We believe that CMP polishing pads
represent a natural adjacency to our CMP slurry business, and that there is
value in co-developing slurries and pads to achieve technically optimized CMP
solutions.
CMP
SLURRIES FOR THE DATA STORAGE INDUSTRY
We
develop and produce CMP slurries for polishing the coating on rigid disks as
well as magnetic heads in hard disk drives, which represents an extension of
our
core CMP slurry technology and manufacturing capabilities established for the
semiconductor industry. We believe CMP significantly improves the surface finish
of these coatings, resulting in greater storage capacity of the substrates,
and
also improves the production efficiency of manufacturers of hard disk drives
by
helping them increase their throughput and yield.
PRECISION
OPTICS PRODUCTS AND SERVICES
Through
our wholly-owned subsidiary, QED, we design and produce precision polishing
equipment for advanced optics applications that allows customers to attain
near-perfect shape (figure) and surface (finish) on a range of optical devices
such as mirrors, lenses and prisms. Historically, advanced optics have been
produced using labor-intensive processes so variability is common. QED has
created an automated polishing system that enables rapid, deterministic and
repeatable surface correction to the most demanding levels of precision and
surface finish in dramatically less time than with traditional means. The
machine uses Magneto-Rheological Finishing, QED’s proprietary surface figuring
and finishing technology, which employs magnetic fluids and sophisticated
computer technology to polish a variety of shapes.
Fabrication
of high quality, advanced optics is often hampered by the lack of accurate
and
affordable metrology. For example, interferometers, which measure the surface
of
an optic, traditionally are limited by the size and precision of the reference
optic used. QED has developed a Subaperture Stitching Interferometry (SSI)
workstation that enables the automatic capture of precise metrology data for
large and/or strongly curved optical parts and gives the user a complete map
of
the optical surface. The SSI workstation measures portions of large optical
parts, and digitally “stitches” these portions together into a single complete
surface map. This map is needed to produce high precision optics to exacting
tolerances.
INDUSTRY
TRENDS
The
semiconductor industry has experienced rapid growth over the past three decades,
but it has also been cyclical. In our early history as an independent entity,
our revenue grew despite the protracted semiconductor industry downturn from
2001 to 2003, primarily because CMP was used in only the most advanced IC
devices and the most advanced technology continued to grow even though the
overall semiconductor industry contracted. Since CMP has become more broadly
used within the IC industry, the semiconductor industry downturn in fiscal
2005
affected us, and we believe this downturn contributed to our revenue decline
in
that year. The semiconductor industry recovered moderately in fiscal 2006.
As
we
enter fiscal 2007, and semiconductor technology continues to advance, we believe
that CMP technical solutions are becoming more complex, and leading-edge
technologies now often require some customization by customer, tool set and
process integration approach. Leading-edge device designs are introducing more
materials and processes into next generation chips. Further, as CMP technology
has matured, we believe that semiconductor manufacturers’ processes have become
highly sensitive to CMP slurries, and customers now demand a high level of
consistency and quality in CMP slurry products. Also, as CMP technology
advances, customers are selecting suppliers much earlier in their development
processes.
On
a
geographic basis, the Asia Pacific region continues to be the fastest growing
region for IC manufacturing, as well as for our business, and we expect this
trend to continue. We anticipate the worldwide market for CMP consumables used
by IC device manufacturers will grow in the future as a result of expected
increases in the number of IC devices produced, the percentage of IC devices
produced that require CMP, the number of CMP polishing steps used to produce
these devices and new materials used in semiconductor devices. We believe that
the increased emphasis on memory technology and the incorporation of advanced
logic and memory products into digital consumer devices will continue to be
a
key growth driver in the industry over the long term and will parallel the
industry’s traditional emphasis on microprocessors for computing applications.
We
expect
this anticipated growth will be somewhat mitigated by increased efficiencies
in
CMP slurry usage, driven by pressure on IC manufacturers to reduce costs,
including the costs of the CMP process. For example, historically the
semiconductor industry has migrated to increasingly larger wafers to manufacture
chips. The predominant wafer size used for volume production today is 200 mm,
or
eight-inch, wafers, but a substantial number of new semiconductor manufacturing
facilities (“fabs”) being built use 300 mm, or 12-inch, wafers to gain the
economic advantages of a larger surface area. IC manufacturers use more CMP
slurry on a 300 mm wafer, but use less slurry per device produced. However,
we
believe that the lower cost of the devices due to the economies of 300 mm
manufacturing will spur additional growth of these devices due to greater
affordability, consistent with past industry transitions to larger wafer sizes.
Our
recent QED acquisition introduces us to the precision optics industry. We
believe precision optics are pervasive, have new application growth potential
and serve several existing large and growing markets such as semiconductor
equipment, aerospace, defense, security and telecommunications. The precision
optics industry appears to be transitioning from labor-intensive, artisan
production methods for optical components to computer-controlled, deterministic
production of high precision optics. The industry is also characterized by
the
need for higher precision in surface figure and finish, as well as a historical
lack of significant advancements in state-of-the-art polishing methods.
STRATEGY
We
believe our core competencies lie in our ability to shape, enable and enhance
the performance of surfaces at an atomic level, as well as our ability to
consistently and reliably deliver and support products around the world that
meet our customers’ specifications. We intend to utilize these capabilities to
strengthen and grow our core CMP business within the semiconductor and hard
disk
drive industries, and also to leverage our expertise in CMP process and slurry
formulation into other technically demanding polishing applications that are
synergistic to our core CMP slurry and pads businesses.
As
we
strengthen and grow our business, we intend to continue to implement the
following strategic initiatives:
TECHNOLOGY
LEADERSHIP
We
believe that technology is vital to success in our CMP consumables and ESF
businesses and we plan to continue to devote significant resources to research
and development. We need to keep pace with the rapid technological advances
in
the semiconductor industry so we can continue to deliver a full line of CMP
slurry products, over a range of technologies, that meet or exceed our
customers' evolving needs. In October 2005 we opened our Asia Pacific technology
center in Geino, Japan, which includes a clean room and provides polishing,
metrology and product development capability to support our customers in the
Asia Pacific region. Also, we built a technical service center in Taiwan with
slurry formulation capability to provide expertise to our customers there;
this
technical service center acts as an extension of our Asia Pacific technology
center. In addition, we moved our data storage laboratory to
Singapore.
OPERATIONS
EXCELLENCE
Our
customers demand increasing performance of our products in terms of product
quality and consistency and expect a highly reliable supply source. We believe
the capacity and the location of our production facilities in the United States,
Asia and Europe give us a competitive advantage in providing a dependable and
predictable supply chain to meet our customers' CMP slurry and pad requirements
in a consistent and timely manner. We believe that this ability to support
a
number of leading-edge customers with assurance of supply for business
continuity is unique. We intend to continue to advance our strict quality
systems in order to improve the uniformity and consistency of performance of
our
CMP products. To support our operations excellence initiative, we have adopted
the concepts of Six Sigma across our Company; Six Sigma is a systematic,
data-driven approach and methodology for improving quality by reducing
variability in processes. We have made productivity and efficiency gains through
this program in fiscal 2005 and 2006, and expect more in fiscal 2007. We also
have extended our Six Sigma initiative to include joint projects with
customers.
CONNECTING
WITH CUSTOMERS
We
believe that building close relationships with our customers is another
cornerstone for long-term success in our business. We work closely with our
customers to identify and develop new and better CMP consumables, to integrate
our products into their manufacturing processes, and to assist them with supply,
warehousing and inventory management. We have devoted significant resources
to
enhancing our close customer relationships and we are committed to continuing
this effort. We believe that we are unique in our ability to support a number
of
leading-edge customers through business scale in CMP consumables.
We
also
believe in locating our employees in the same geographies as our customers.
As
more of our business shifts to the Asia Pacific region, we have reinforced
our
customer commitment with our Asia Pacific technology center in Geino, Japan,
which we believe enhances our ability to provide optimized CMP solutions to
our
customers in this region. We built a technical service center in Taiwan for
slurry formulation capability for our customers there. In April 2006 we began
selling directly to customers in Taiwan, rather than through a distributor,
in
order to better serve them. In addition, we moved the portion of our business
that serves the hard disk drive market to Singapore, because Southeast Asia
is
an important manufacturing region for a number of participants in this industry.
By next year, we plan to add additional pad manufacturing capability in Taiwan
and are exploring alternatives to add slurry manufacturing capabilities there
as
well. All
of
these initiatives represent our belief that by working closely with customers
at
a local level we can leverage our global knowledge to their benefit.
ENGINEERED
SURFACE FINISHES INITIATIVE
In
addition to strengthening and growing our core CMP business, we also are
leveraging our CMP experience and technology developed for the semiconductor
industry to explore new applications and products to diversify and grow our
business in other demanding applications in which we believe our technical
ability to shape, enable and enhance the performance of surfaces at an atomic
level may provide improved productivity or previously unseen surface
performance. Our slurries for data storage polishing applications represent
one
example, and we are also pursuing opportunities in optics, optoelectronics,
flat
panel displays and metal finishing.
In
pursuit of this initiative, we are supplementing our internal development
efforts with some externally acquired technologies and businesses. For example,
in October 2005 we acquired substantially all of the assets and assumed certain
current liabilities of Surface Finishes, which was a privately-held company
established in 1949 that specializes in precision machining techniques at the
sub-nanometer level. This acquisition provides us with commercial finishing
capabilities that we expect will present opportunities to facilitate the
introduction of our internally developed technology to customers beyond the
semiconductor industry, and afford access to a variety of markets that benefit
from precision surface finish, but that we do not currently serve.
In
July
2006 we acquired substantially all of the assets, including certain associated
proprietary technology and intellectual property, and assumed certain current
liabilities of QED. QED was a privately-held company that specializes in unique,
patented polishing and metrology systems for shaping and polishing high
precision optics. The optics industry shares a number of attributes with the
semiconductor market: the value of precise surface finish; employing some of
the
same materials like silicon and aluminum; and some overlap in customer base
because photolithography equipment and optical inspection equipment for
semiconductor and flat panel displays rely on the kind of precision optics
enabled by QED’s technology.
CUSTOMERS,
SALES AND MARKETING
Within
the semiconductor industry, our customers are primarily producers of logic
IC
devices, producers of memory IC devices and IC foundries. Often, logic and
memory companies outsource all or a portion of the production of physical
devices to foundries, which provide contract manufacturing services, in order
to
avoid the high cost of constructing and operating a fab or in cases where they
need additional capacity.
Our
sales
process begins long before the actual sale of our products and occurs on a
number of levels. Due to the long lead times from research and development
to
product commercialization and sales, we have fundamental research teams who
collaborate with customers on emerging applications years before the products
are required by
the
market. We
also
have development teams who coordinate with our customers, using our research
and
development facilities and capabilities to design CMP products tailored to
their
precise needs. Next, our applications support teams work with customers to
integrate our products into their manufacturing processes. Finally, as part
of
our sales process, our logistics and sales personnel provide supply, warehousing
and inventory management to our customers. Through our interactive approach,
we
are able to build close relationships with our customers in a variety of areas.
We
market
our products primarily through direct sales to our customers. In the past,
we
also have relied to varying degrees on distributors. However, over the last
few
years we have reduced the number of resellers that distribute our products
in
situations where we have had sufficient business scale to support direct sales
and where we have seen strategic benefit. For example, in April 2006 we began
selling our products directly to customers in Taiwan rather than through
Marketech, an independent distributor, although we still use Marketech to
distribute our products in China. We believe this strategy is one way we can
achieve our goal of staying connected with our customers.
In
response to significant growth in the IC device manufacturing industry in Asia,
we have implemented the following initiatives:
|
·
|
Increased
the number of sales and marketing, technical and customer support
personnel in the Asia Pacific
region;
|
|
·
|
Transitioned
to selling directly to customers in Taiwan, rather than through a
distributor, as discussed above;
|
|
·
|
Opened
our Asia Pacific technology center,
which
includes a clean room and provides polishing, metrology and product
development capability to support our customers in this region;
|
|
·
|
Built
a technical service center in Taiwan for slurry formulation capability
for
our customers there, as an extension of our Asia Pacific technology
center; and
|
|
·
|
Relocated
the portion of our business that serves the hard disk drive market
to
Singapore, because Southeast Asia is an important manufacturing region
for
a number of participants in this industry.
|
Our
QED
subsidiary supports customers in the semiconductor
equipment, aerospace, defense, security and telecommunications
markets,
and counts among its worldwide customers leading precision optics manufacturers
and the United States government. QED has strived to maintain a sustainable
and
loyal customer base.
In
fiscal
2006, our five largest customers accounted for approximately 44% of our revenue,
with Marketech and Taiwan Semiconductor Manufacturing Company (TSMC) accounting
for approximately 19% and 10% of our revenue, respectively. Effective April
2006, with our transition to direct sales in Taiwan, we began selling directly
to TSMC, our largest end customer, and other customers in Taiwan rather than
through Marketech. For
additional information on concentration of customers, refer to Note 2 of
“Notes
to
the Consolidated Financial Statements” included in Item 8 of Part II of this
Form 10-K.
COMPETITION
We
compete in the CMP consumables industry, which is characterized by rapid
advances in technology and demanding product quality and consistency
requirements. We face competition from other CMP consumables suppliers, and
we
also may face competition in the future from significant changes in technology
or emerging technologies.
We
believe that customers make supplier decisions based on three factors, in this
order of priority: first, product performance; second, supply assurance,
including the ability to reliably deliver a high level of consistency and
quality in CMP slurry products; and third, product price. We believe that rapid
incorporation of CMP technology and growth of the CMP industry, combined with
our customers’ desires to gain purchasing leverage and lower their cost of
ownership, have led to greater competitive activity among, and pricing pressure
on, CMP slurry suppliers.
Our
competitors range from small companies that compete with a single product and/or
in a single geographic region to divisions of global companies with multiple
lines of IC manufacturing products. However, we believe we have more CMP slurry
business than each of our competitors. In our view, we are the only CMP slurry
supplier today that serves a broad range of customers by offering and supporting
a full line of CMP slurry products for all major applications over a range
of
technologies, and that has a proven track record of supplying these products
globally in high volumes with the attendant required high level of technical
support services. We intend to continue to invest in our extensive manufacturing
and technological infrastructures, which we believe give us a competitive
advantage and allow us to deliver the supply assurance that is important to
our
customers.
Our
QED
subsidiary operates in the precision optics industry. There are few direct
competitors for QED’s technologies because they are relatively new and unique.
We believe the main alternative to QED’s technology is non-adoption and
continued reliance on traditional artisan-based methods of surface
finishing.
RAW
MATERIALS SUPPLY
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
raw
materials supply risks, we have entered into multi-year supply agreements with
a
number of suppliers for the purchase of raw materials, including agreements
with
Cabot Corporation for the purchase of certain amounts and types of fumed silica
and fumed alumina. For additional information regarding these agreements, refer
to “Tabular Disclosure of Contractual Obligations”, included in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”,
in
Item 7
of Part II of this Form 10-K. In the interest of supply assurance, our strategy
is to secure multiple sources of raw materials and qualify those sources as
necessary to ensure our supply of raw materials remains
uninterrupted.
RESEARCH,
DEVELOPMENT AND TECHNICAL SUPPORT
We
believe that technology is vital to success in the CMP business as well as
in
our other initiatives, and we plan to continue to devote significant resources
to research and development, and balance our efforts between the shorter-term
market needs and the longer-term investments required of us as the technology
leader.
Our
technology efforts are currently focused on four main areas:
|
·
|
Research
related to fundamental CMP
technology;
|
|
·
|
Development
and formulation of new and enhanced CMP slurry and pad products;
|
|
·
|
Process
development to support rapid and effective commercialization of new
products; and
|
|
·
|
Evaluation
of new polishing applications outside of the semiconductor
industry.
|
We
invest
in fundamental CMP technology and materials research, in order to be prepared
to
meet the dynamic needs of advanced technology, investing well in advance of
the
market need because there are long lead times from research and development
to
commercialization and sales. We focus on such areas as: engineered polymer
and
particles; advanced metrology; and mechanistic understanding and emerging
applications. As a result of our investment in research and development, we
have
a fundamental understanding of the CMP process, chemistry, and mechanics that
we
believe allows us to quickly and efficiently tailor our applications to meet
the
needs of our leading-edge customers.
We
also
develop and formulate new and enhanced CMP consumables and new CMP processes.
We
believe our leadership in this area depends in part on our ability to develop
CMP applications tailored to our customers' needs, so we have assembled
dedicated development teams that work closely with customers to identify their
specific technology and manufacturing challenges and to translate these
challenges into viable CMP process solutions. We also remain focused on
supporting our customers in the use of our products in their processes, so
we
have technical teams dedicated to problem-solving and working with our customers
daily at their facilities.
Beyond
CMP for the semiconductor and data storage industries, we are also increasing
internal research and development efforts related to our ESF initiative. We
are
leveraging our technical expertise in CMP formulation, materials and polishing
techniques and applying it to demanding surface modification and fine finish
polishing applications in other industries where shaping, enabling and enhancing
performance is critical to success. We believe that a number of application
areas we are currently developing represent natural adjacencies to our core
CMP
business and technology, and include uses in fields such as optics,
optoelectronics, flat panel displays and metal finishing.
We
believe competitive advantage lies in technology leadership, and that our
investments in research and development provide us with leading-edge polishing
and metrology capabilities to support the most advanced and challenging customer
technology requirements on a global basis. In fiscal 2006, 2005 and 2004
we
incurred approximately $48.1 million, $43.0 million and $44.0 million,
respectively, in research and development expenses. Investments in research
and
development property, plant and equipment are capitalized and depreciated over
their useful lives. We
operate a research and development facility in Aurora, Illinois, which
is
staffed by a team that includes experts from the semiconductor industry and
scientists from key disciplines required for the development of high-performance
CMP products. This facility features
a state-of-the-art Class 1 clean room and advanced equipment for product
development. We also have invested in 300 mm polishing and metrology
capabilities to remain aligned with our leading-edge customers and to provide
us
with the ability to replicate their CMP activities in our clean room. In
addition, we operate a technology
center in
Japan
that we believe enhances our ability to provide optimized CMP solutions to
our
customers in the Asia Pacific region, and underscores our commitment both to
continuing to invest in our technology infrastructure to maintain our technology
leadership, and to becoming even more responsive to the needs of our customers.
Other examples of this commitment include our technical service center in Taiwan
and our data storage laboratory in Singapore that provide additional slurry
formulation capability.
INTELLECTUAL
PROPERTY
Our
intellectual property is important to our success and ability to compete. As
of
October 31, 2006, we had 137 active U.S. patents and 103 pending U.S. patent
applications. In most cases we file counterpart foreign patent applications.
Many of these patents are important to our continued development of new and
innovative products for CMP and related processes, as well as for new business
initiatives, such as ESF. Our patents have a range of duration and we do not
expect to lose any material patent through expiration in the next five years.
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. We vigorously and
proactively pursue any parties that attempt to compromise our investments in
research and development by infringing our intellectual property. For example,
we recently were successful in an action we brought before the United States
International Trade Commission (ITC) concerning Cheil Industries, Inc. and
its
importation and sale within the United States of certain CMP slurries that
infringe certain of our patents. The ITC’s actions served to grant our request
to prevent this competitor from, among other things, importing any infringing
products into the U.S.
We
also
may acquire intellectual property from others to enhance our intellectual
property portfolio. For example, in June 2006 we entered into a patent
assignment agreement with the International Business Machines Corporation (IBM).
Under the terms of the agreement, we acquired a number of patents and associated
rights relating to CMP slurry technology from IBM, including various
applications such as copper, copper barrier, tungsten, and dielectrics, among
others. We believe these technology rights will enhance our competitive
advantage by providing us with future product development opportunities and
expanding our already substantial intellectual property portfolio. Furthermore,
with our QED and Surface Finishes acquisitions we acquired certain associated
proprietary technology and intellectual property.
ENVIRONMENTAL
MATTERS
Our
facilities are subject to various environmental laws and regulations, including
those relating to air emissions, wastewater discharges, the handling and
disposal of solid and hazardous wastes, and occupational safety and health.
We
believe that our facilities are in substantial compliance with applicable
environmental laws and regulations. We have incurred, and will continue to
incur, capital and operating expenditures and other costs in complying with
these laws and regulations in both the United States and abroad. However, we
currently do not anticipate that the future costs of environmental compliance
will have a material adverse effect on our business, financial condition or
results of operations.
EMPLOYEES
We
believe we have a world-class team of scientists, technologists, engineers
and
other human resources who make our Company successful. As of October 31, 2006,
we employed 742 individuals, including 357 in operations, 208 in research and
development, 85 in sales and marketing and 92 in administration. None of our
employees are covered by collective bargaining agreements. We have not
experienced any work stoppages and in general consider our relations with our
employees to be good.
FINANCIAL
INFORMATION ABOUT GEOGRAPHIC AREAS
We
sell
our products worldwide. Our geographic coverage allows us to draw on business
and technical expertise from a worldwide workforce, provides stability to our
operations and revenue streams to offset geography-specific economic trends,
and
offers us an opportunity to take advantage of new markets for products.
For
more
financial information about geographic areas, see Note 17 of “Notes to the
Consolidated Financial Statements” included in Item 8 of Part II of this Form
10-K.
AVAILABLE
INFORMATION
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy
statements on Form 14a, current reports on Form 8-K, and any amendments to
those
reports are made available free of charge on our Company website,
www.cabotcmp.com, as soon as reasonably practicable after such reports are
filed
with the Securities and Exchange Commission (SEC). Statements of changes in
beneficial ownership of our securities on Form 4 by our executive officers
and
directors are made available on our Company website by the end of the business
day following the submission to the SEC of such filings. In addition, the SEC’s
website, www.sec.gov, contains reports, proxy statements, and other information
regarding reports that we file electronically with the SEC.
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,
2005. 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. 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. We expect these
technological changes and advances, and this drive toward lower costs, to
continue in the future. Emerging technologies in the semiconductor industry,
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. 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
2006, our five largest customers accounted for approximately 44% of our revenue,
with Marketech, a distributor, and TSMC accounting for approximately 19% and
10%
of our revenue, respectively. Effective April 2006, with our transition to
direct sales in Taiwan, we began selling directly to TSMC, our largest end
customer, and our other customers in Taiwan rather than through Marketech.
In
fiscal 2005, our five largest customers accounted for approximately 53% of
our
revenue, with Marketech accounting for approximately 35% 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 INTERRUPTION IN SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS, INCLUDING
FUMED METAL OXIDES, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY AFFECT
OUR
SALES
Our
business would suffer from any problem or interruption in our supply of the
key
raw materials we use in our CMP slurries, including fumed alumina and fumed
silica. 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, such as fumed metal oxides,
we use to make our CMP slurries, 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 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 slurries 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
78% of our revenue was generated by sales to customers outside of the United
States for fiscal 2006 and 2005, respectively. 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 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 polishing pads. Additionally, under our engineered surface
finishes initiative 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
CMP
slurry and pad manufacturers develop complex technical formulas for CMP products
which are proprietary in nature and differentiate their products from those
of
competitors. Our intellectual property is important to our success and ability
to compete. We attempt to protect our intellectual property rights through
a
combination of patent, trademark, copyright and trade secret laws, as well
as
employee and third-party nondisclosure and assignment agreements. 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 could seriously harm our business.
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, 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 it is extremely
difficult to predict sales of our products given uncertainties in these factors.
There are several factors that make it difficult for us to predict future
revenue trends for our business, including: the cyclical nature of the
semiconductor industry; short order to delivery time for our products and the
associated lack of visibility to future customer orders; and quarter to quarter
changes in our revenue regardless of industry strength. Some factors that affect
demand for our products are driven by variables such as our customer’s
production of logic versus memory devices, customer 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 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 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. 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.
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.
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.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None
Our
principal U.S. facilities that we own consist of:
|
§
|
a
global headquarters and research and development facility in Aurora,
Illinois, comprising approximately 200,000 square
feet;
|
|
§
|
a
commercial dispersion plant and distribution center in Aurora, Illinois,
comprising approximately 175,000 square feet;
|
|
§
|
a
commercial manufacturing plant in Aurora, Illinois, comprising
approximately 48,000 square feet;
|
|
§
|
an
additional 13.2 acres of vacant land in Aurora, Illinois, to accommodate
the possibility of future growth;
and
|
|
§
|
a
facility in Addison, Illinois, comprising approximately 15,000 square
feet.
|
In
addition, we lease a facility in Rochester, New York, comprising approximately
21,000 square feet.
Our
principal foreign facilities that we own consist of:
|
§
|
a
commercial dispersion plant and distribution center in Geino, Japan,
comprising approximately 113,000 square feet;
|
|
§
|
a
research and development facility in Geino, Japan, comprising
approximately 20,000 square feet.
|
Our
principal foreign facilities that we lease consist of:
|
§
|
a
commercial manufacturing plant, research and development facility
and
business office in Singapore, comprising approximately 24,000 square
feet;
|
|
§
|
a
commercial dispersion plant in Barry, Wales, comprising approximately
22,000 square feet; and
|
|
§
|
an
office, laboratory and pilot plant in Hsin-Chu, Taiwan, comprising
approximately 20,000 square feet.
|
We
believe that our current facilities are suitable and adequate for their intended
purpose and provide us with sufficient capacity and capacity expansion
opportunities and technological capability to meet our current and expected
demand in the foreseeable future.
ITEM
3. LEGAL PROCEEDINGS
We
are
not currently involved in any material legal proceedings.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Set
forth
below is information concerning our executive officers and their ages as of
October 31, 2006.
NAME
|
|
AGE
|
|
POSITION
|
|
|
|
|
|
William
P. Noglows
|
|
48
|
|
Chairman
of the Board, President and Chief Executive Officer
|
H.
Carol Bernstein
|
|
46
|
|
Vice
President, Secretary and General Counsel
|
Jean
Pol Delrue
|
|
59
|
|
Vice
President of Global Sales
|
William
S. Johnson
|
|
49
|
|
Vice
President and Chief Financial Officer
|
Daniel
J. Pike
|
|
43
|
|
Vice
President of Corporate Development
|
Stephen
R. Smith
|
|
47
|
|
Vice
President of Marketing
|
Clifford
L. Spiro
|
|
52
|
|
Vice
President of Research and Development
|
Adam
F. Weisman
|
|
44
|
|
Vice
President of Business Operations
|
Daniel
S. Wobby
|
|
43
|
|
Vice
President of Asia Pacific Region
|
Thomas
S. Roman
|
|
45
|
|
Principal
Accounting Officer and Corporate
Controller
|
WILLIAM
P. NOGLOWS
has
served as our Chairman, President and Chief Executive Officer since November
2003. Mr. Noglows had previously served as a director of our Company from
January 2000 until April 2002. Prior to joining us, Mr. Noglows served as an
Executive Vice President of Cabot Corporation from 1998 to June 2003. Prior
to
that, Mr. Noglows held various management positions at Cabot Corporation
including General Manager of Cabot Corporation’s Cab-O-Sil Division, where he
was one of the primary founders of Cabot Microelectronics when its business
was
a division of Cabot Corporation, and was responsible for identifying and
encouraging the development of the CMP application. Mr. Noglows received his
B.S. in Chemical Engineering from the Georgia Institute of
Technology.
H.
CAROL BERNSTEIN
has
served as our Vice President, Secretary and General Counsel since August 2000.
From January 1998 until joining us, Ms. Bernstein served as the General Counsel
and Director of Industrial Technology Development of Argonne National
Laboratory, which is operated by the University of Chicago for the United States
Department of Energy. From May 1985 until December 1997, she served in various
positions with the IBM Corporation, culminating in serving as an Associate
General Counsel, and was the Vice President, Secretary and General Counsel
of
Advantis Corporation, an IBM joint venture. Ms. Bernstein received her B.A.
from
Colgate University and her J.D. from Northwestern University; she is a member
of
the Bar of the states of Illinois and New York.
WILLIAM
S. JOHNSON
has
served as our Vice President and Chief Financial Officer since April 2003.
Prior
to joining us, Mr. Johnson served as Executive Vice President and Chief
Financial Officer for Budget Group, Inc. from August 2000 to March 2003. Before
that, Mr. Johnson spent 16 years at BP Amoco in various senior finance and
management positions, the most recent of which was President of Amoco Fabrics
and Fibers Company. Mr. Johnson received his B.S. in Mechanical Engineering
from
the University of Oklahoma and his M.B.A. from the Harvard Business
School.
DANIEL
J. PIKE
has
served as our Vice President of Corporate Development since January 2004 and
prior to that was our Vice President of Operations from December 1999. Mr.
Pike
served as Cabot Corporation’s Director of Global Operations from 1996 to 1999.
Prior to that, Mr. Pike worked for FMC Corporation. Mr. Pike received his B.S.
in Chemical Engineering from the University of Buffalo and his M.B.A. from
the
Wharton School of Business of the University of Pennsylvania.
STEPHEN
R. SMITH has
served as our Vice President of Marketing since September 2006, and previously
was our Vice President of Marketing and Business Management since April 2005
and
our Vice President of Marketing and Sales from October 2001. Prior to joining
us, Mr. Smith served as Vice President, Sales & Business Development for
Buildpoint Corporation from 2000 to October 2001. Prior to that, Mr. Smith
spent
17 years at Tyco Electronics Group, formerly known as AMP Incorporated, in
various management positions. Mr. Smith earned a B.S. in Industrial Engineering
from Grove City College and an M.B.A. from Wake Forest University.
CLIFFORD
L. SPIRO
has
served as Vice President of Research and Development since December 2003. Prior
to joining us, Dr. Spiro served as Vice President of Research and Development
at
Ondeo-Nalco from 2001 through November 2003. Prior to that, Dr. Spiro held
research and development management and senior technology positions at the
General Electric Company from 1980 through 2001, the most recent of which was
Global Manager - Technology for Business Development. Dr. Spiro received his
B.S. in Chemistry from Stanford University and his Ph.D. in Chemistry from
the
California Institute of Technology.
DANIEL
S. WOBBY
has
served as our Vice President of Asia Pacific Region since September 2005. Prior
to that, Mr. Wobby served as Vice President of Greater China and Southeast
Asia
starting in February 2004. Mr. Wobby previously was our Corporate Controller
and
Principal Accounting Officer from 2000 to 2004. From 1989 to 2000, Mr. Wobby
held various accounting and operations positions with Cabot Corporation
culminating in serving as Director of Finance. Mr. Wobby earned a B.S. in
Accounting from St. Michael’s College and an M.B.A. from the University of
Chicago’s Graduate School of Business.
THOMAS
S. ROMAN
has
served as our Corporate Controller and Principal Accounting Officer since
February 2004 and previously served as our North American Controller. Prior
to
joining us in April 2000, Mr. Roman was employed by FMC Corporation in various
financial reporting, tax and audit positions. Before that, Mr. Roman worked
for
Gould Electronics and Arthur
Andersen LLP. Mr. Roman is a C.P.A. and earned a B.S. in Accounting from the
University of Illinois and an M.B.A. from DePaul University’s Kellstadt Graduate
School of Business.
Our
common stock has traded publicly on the NASDAQ Global Select Market (formerly
the NASDAQ National Market) under the symbol "CCMP" since our initial public
offering in April 2000. The following table sets forth the range of quarterly
high and low closing sales prices for our common stock on the NASDAQ Global
Select Market.
|
|
HIGH
|
|
LOW
|
Fiscal
2005
|
|
|
|
|
First
Quarter
|
40.80
|
|
30.58
|
|
Second
Quarter
|
38.37
|
|
30.43
|
|
Third
Quarter
|
31.77
|
|
27.39
|
|
Fourth
Quarter
|
33.10
|
|
27.74
|
Fiscal
2006
|
|
|
|
|
First
Quarter
|
32.33
|
|
28.26
|
|
Second
Quarter
|
37.14
|
|
28.82
|
|
Third
Quarter
|
38.25
|
|
25.84
|
|
Fourth
Quarter
|
32.34
|
|
26.21
|
Fiscal
2007 First Quarter (through October 31, 2006)
|
31.25
|
|
28.36
|
As
of
October 31, 2006, there were approximately 1,025 holders of record of our common
stock. No dividends were declared or paid in either fiscal 2006 or fiscal 2005
and we have no current plans to pay cash dividends in the future.
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)
|
|
July
1 through
July
31, 2006
|
|
|
−
|
|
|
−
|
|
|
−
|
|
$
|
32,005
|
|
Aug.
1 through
Aug.
31, 2006
|
|
|
269,363
|
|
$
|
29.70
|
|
|
269,363
|
|
|
24,004
|
|
Sept.
1 through
Sept.
30, 2006
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
24,004
|
|
Total
|
|
|
269,363
|
|
$
|
29.70
|
|
|
269,363
|
|
$
|
24,004
|
|
In
the
fourth quarter of fiscal 2005, we completed our initial $25.0 million share
repurchase program, which was authorized in July 2004. On October 27, 2005,
we
announced that our Board of Directors had authorized a new share repurchase
program for up to $40.0 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 an effective means to return cash to shareholders.
ITEM
6.
SELECTED FINANCIAL DATA
The
following selected financial data for each year of the five-year period ended
September 30, 2006, has been derived from the audited consolidated financial
statements. Certain reclassifications of prior fiscal year amounts have been
made to conform to the current period presentation.
The
information set forth below is not necessarily indicative of results of future
operations and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and notes to those statements included in Items 7 and
8 of
Part II of this Form 10-K, as well as Risk Factors included in Item 1A of Part
I
of this Form 10-K.
CABOT
MICROELECTRONICS CORPORATION
SELECTED
FINANCIAL DATA - FIVE YEAR SUMMARY
(Amounts
in thousands, except per share amounts)
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Consolidated
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
320,795
|
|
$
|
270,484
|
|
$
|
309,433
|
|
$
|
251,665
|
|
$
|
235,165
|
|
Cost
of goods sold
|
|
|
171,758
|
|
|
141,282
|
|
|
156,805
|
|
|
124,269
|
|
|
113,067
|
|
Gross
profit
|
|
|
149,037
|
|
|
129,202
|
|
|
152,628
|
|
|
127,396
|
|
|
122,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research,
development and technical
|
|
|
48,070
|
|
|
43,010
|
|
|
44,003
|
|
|
41,516
|
|
|
33,668
|
|
Selling
and marketing
|
|
|
21,115
|
|
|
16,989
|
|
|
16,225
|
|
|
11,221
|
|
|
9,667
|
|
General
and administrative
|
|
|
34,319
|
|
|
25,427
|
|
|
22,691
|
|
|
18,565
|
|
|
17,803
|
|
Litigation
settlement
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
Purchased
in-process research and development
|
|
|
1,120
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
operating expenses
|
|
|
104,624
|
|
|
85,426
|
|
|
82,919
|
|
|
71,302
|
|
|
62,138
|
|
Operating
income
|
|
|
44,413
|
|
|
43,776
|
|
|
69,709
|
|
|
56,094
|
|
|
59,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
4,111
|
|
|
2,747
|
|
|
139
|
|
|
(27
|
)
|
|
763
|
|
Income
before income taxes
|
|
|
48,524
|
|
|
46,523
|
|
|
69,848
|
|
|
56,067
|
|
|
60,723
|
|
Provision
for income taxes
|
|
|
15,576
|
|
|
14,050
|
|
|
23,120
|
|
|
18,334
|
|
|
20,038
|
|
Net
income
|
|
$
|
32,948
|
|
$
|
32,473
|
|
$
|
46,728
|
|
$
|
37,733
|
|
$
|
40,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.36
|
|
$
|
1.32
|
|
$
|
1.89
|
|
$
|
1.55
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
24,228
|
|
|
24,563
|
|
|
24,750
|
|
|
24,401
|
|
|
24,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.36
|
|
$
|
1.32
|
|
$
|
1.88
|
|
$
|
1.53
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average diluted shares outstanding
|
|
|
24,228
|
|
|
24,612
|
|
|
24,882
|
|
|
24,665
|
|
|
24,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
261,505
|
|
$
|
245,807
|
|
$
|
229,681
|
|
$
|
179,112
|
|
$
|
123,283
|
|
Property,
plant and equipment, net
|
|
|
130,176
|
|
|
135,784
|
|
|
127,794
|
|
|
133,695
|
|
|
132,264
|
|
Other
assets
|
|
|
20,452
|
|
|
5,172
|
|
|
5,816
|
|
|
2,810
|
|
|
2,838
|
|
Total
assets
|
|
$
|
412,133
|
|
$
|
386,763
|
|
$
|
363,291
|
|
$
|
315,617
|
|
$
|
258,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
38,833
|
|
$
|
35,622
|
|
$
|
32,375
|
|
$
|
28,916
|
|
$
|
30,571
|
|
Long-term
debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,500
|
|
Other
long-term liabilities
|
|
|
5,529
|
|
|
12,057
|
|
|
15,294
|
|
|
14,928
|
|
|
10,808
|
|
Total
liabilities
|
|
|
44,362
|
|
|
47,679
|
|
|
47,669
|
|
|
43,844
|
|
|
44,879
|
|
Stockholders'
equity
|
|
|
367,771
|
|
|
339,084
|
|
|
315,622
|
|
|
271,773
|
|
|
213,506
|
|
Total
liabilities and stockholders' equity
|
|
$
|
412,133
|
|
$
|
386,763
|
|
$
|
363,291
|
|
$
|
315,617
|
|
$
|
258,385
|
|
ITEM
7.
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-K, 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-K 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; new product introductions; development of new products, technologies
and markets; the acquisition of or investment in other entities; 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.
The
following discussion and analysis should be read in conjunction with our
historical financial statements and the notes to those financial statements
which are included in Item 8 of Part II of this Form 10-K.
OVERVIEW
Cabot
Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'',
"we'', or "our'') is the 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 process that 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 that demand for our products is primarily based on the number of wafers,
or “wafer starts”, of advanced devices produced by semiconductor manufacturers.
We
operate predominantly in one industry segment - the development, manufacture
and
sale of CMP slurries. Our CMP products are used for a number of applications,
such as polishing insulating dielectric layers, tungsten that is used to connect
the multiple wiring layers of IC devices through these insulating layers, and
copper wiring, including the associated barrier film. 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 are developing
and commercializing CMP polishing pads, which are used in conjunction with
slurries in the CMP process.
In
addition to strengthening and growing our core CMP business, through our
Engineered Surface Finishes (ESF) initiative 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 improved productivity or previously unseen surface performance. By
supplementing our internal development efforts with some externally acquired
technologies and businesses, we seek to leverage our expertise in CMP slurry
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.
In
pursuit of our ESF initiative, we completed two acquisitions in fiscal 2006.
In
October 2005, we acquired substantially all of the assets and assumed certain
current liabilities of Surface Finishes Co., Inc., a privately-held company
that
specializes in precision machining techniques at the sub-nanometer level, as
well as associated real property from a related trust. The total purchase price,
was approximately $2.3 million. In July 2006 we acquired substantially all
of
the assets and assumed certain current liabilities of QED Technologies, Inc.
(QED), a privately-held company that specializes in unique, patented polishing
and metrology systems for shaping and polishing of high precision optics. The
purchase price was approximately $19 million, which we paid in cash from our
available balance and we may pay up to an additional $4.5 million depending
upon
the performance of the QED business over the two years following the purchase.
On
a
geographic basis, the Asia Pacific region continues to be the fastest growing
region for IC manufacturing as well as for our business, and we expect this
trend to continue in the future. In furtherance of our strategic initiatives
to
advance our technology leadership and to stay connected with our customers,
we
opened our Asia Pacific technology center, located adjacent to our existing
manufacturing facility in Geino, Japan, which includes a clean room and provides
polishing, metrology and product development capability to support our customers
in the region. In addition, we moved the portion of our business that serves
the
rigid disk market to Singapore, since a number of important industry
participants are located in Southeast Asia. Another example of our commitment
to
staying connected with customers is our transition to direct sales in Taiwan.
In
August 2005 we announced plans to sell our products directly to customers in
Taiwan, rather than through Marketech, an independent distributor, effective
April 2006. We executed this orderly transition in our second fiscal quarter
of
2006. Our distributor sold its remaining inventory of our products to our
customers and we built inventory required to service these customers directly;
this caused a short-term adverse effect to our normal sales pattern of
approximately $10 million to $11 million during our second fiscal quarter.
However, following the transition period, our sales volumes rebounded and our
revenue increased slightly to the extent we were able to gain a portion of
our
distributor’s markup.
This
year, we added to our portfolio of intellectual property for CMP slurries by
acquiring from International Business Machines Corporation (IBM) a number of
patents and associated rights relating to CMP slurry technology for $5.0
million. These patents and associated rights cover a wide range of CMP slurry
applications, and we believe they represent a valuable complement to our
existing technology and build on the overall strength of our intellectual
property. Additionally, we were successful in an action we brought before the
United States International Trade Commission (ITC) concerning Cheil Industries,
Inc. and its importation and sale within the United States of certain CMP
slurries that infringe certain of our patents. The ITC’s actions served to grant
our request to prevent this competitor from, among other things, importing
any
infringing products into the U.S.
In
October 2005 we announced that our Board of Directors authorized a new share
repurchase program for up to $40.0 million of our outstanding common stock.
Shares were repurchased from time to time, depending on market conditions,
in
open market transactions, at management’s discretion. We intend to continue
funding share repurchases from our existing cash balance. We view the program
as
an effective means to return cash to shareholders. The program, which became
effective on the authorization date, may be suspended or terminated at any
time,
at the Company’s discretion. In fiscal 2006 we repurchased 523,147 shares of
stock for a total price of $16.0 million, leaving $24.0 million remaining under
the program at the beginning of fiscal 2007.
Revenue
for fiscal 2006 was $320.8 million, which was an increase of 18.6% from the
$270.5 million reported for fiscal 2005, due largely to an increase in sales
volume. This increase in revenue reflects a modest semiconductor industry
recovery in 2006 following a downturn in 2005. Our long-term goal is to grow
our
revenue by 15% per year, which would allow us to achieve annual revenue of
approximately $500 million in three years. However, 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 our
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 our revenue regardless of industry strength.
Gross
profit expressed as a percentage of revenue for fiscal 2006 was 46.5%, which
represents a decrease from the 47.8% reported for fiscal 2005. The decrease
was
primarily driven by selected price reductions and higher costs including those
associated with commercializing our pad product line and the transition of
our
data storage business to Singapore. These adverse effects were partially offset
by higher
utilization of our manufacturing capacity due to the higher level of sales.
We
expect to
be
able to maintain our gross profit as a percentage of revenue in the range of
46%
to 48% for fiscal year 2007. This guidance applies to our full fiscal year
results rather than specific quarterly results; we may experience quarterly
gross profit above or below this range due to fluctuations in our product mix
or
other factors.
Operating
expenses, which include research, development, technical, selling, marketing,
general and administrative expenses, increased 22.5%, or $19.2 million, from
the
$85.4 million reported for fiscal 2005. One of the primary reasons for this
increase is the adoption of Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R) effective October
2005. Share-based compensation expense is now recognized in our income statement
rather than just disclosed in our footnotes, which was previously allowed.
Pre-tax share-based compensation expense for fiscal 2006 was $10.7 million,
of
which $10.0 million was classified in operating expenses. Another reason for
the
increase in operating expenses was higher staffing costs, including costs to
support our initiatives in the Asia Pacific region. Operating expenses also
increased due to our acquisitions described above, including for the expensing
of purchased in-process research and development (IPR&D) associated with our
QED acquisition. In fiscal 2007, we expect our operating expenses to be in
the
range of approximately $27 million to $30 million per quarter, trending up
slightly within this range during the year.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
This
"Management's
Discussion and Analysis of Financial Condition and Results of Operations",
as
well as disclosures included elsewhere in this Form 10-K, are
based
upon our audited consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of contingencies. On an ongoing basis, we
evaluate the estimates used, including those related to bad debt expense,
warranty obligations, inventory valuation, impairment of long-lived assets
and
investments, business combinations, goodwill, other intangible assets,
share-based compensation, income taxes and contingencies. We base our estimates
on historical experience, current conditions and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources, as well as
identifying and assessing our accounting treatment with respect to commitments
and contingencies. Actual results may differ from these estimates under
different assumptions or conditions. We believe the following critical
accounting policies involve significant judgments and estimates used in the
preparation of our consolidated financial statements.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
We
maintain an allowance for doubtful accounts for estimated losses resulting
from
the potential inability of our customers to make required payments. Our
allowance for doubtful accounts is based on historical collection experience,
adjusted for any specific known conditions or circumstances. While historical
experience may provide a reasonable estimate of uncollectible accounts, actual
results may differ from what was recorded. As of September 30, 2006, our
allowance for doubtful accounts represented 1.1% of gross accounts receivable.
If we had increased our estimate of bad debts by 1.0%, to 2.1% of gross accounts
receivable, our general and administrative expense would have increased by
$0.5
million.
WARRANTY
RESERVE
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. Should actual warranty costs differ
substantially from our estimates, revisions to the estimated warranty liability
may be required. As of September 30, 2006, our warranty reserve represented
1.1%
of the current quarter revenue. If we had increased our warranty reserve
estimate by 1.0%, to 2.1% of the current quarter revenue, our cost of goods
sold
would have increased by $0.9 million.
INVENTORY
VALUATION
We
value
inventory at the lower of cost or market and write down the value of inventory
for estimated obsolescence or if inventory is deemed unmarketable. An inventory
reserve is maintained based upon a historical percentage of actual inventory
written off applied against inventory at the end of the period, adjusted for
known conditions and circumstances. We exercise judgment in estimating the
amount of inventory that is obsolete. Should actual product marketability and
raw material fitness for use be affected by conditions that are different from
those projected by management, revisions to the estimated inventory reserve
may
be required.
IMPAIRMENT
OF LONG-LIVED ASSETS AND INVESTMENTS
SFAS
No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS
144), requires us to assess the recoverability of the carrying value of
long-lived assets whenever events or changes in circumstances indicate that
the
assets may be impaired. We must exercise judgment in assessing whether an event
of impairment has occurred. For purposes of recognition and measurement of
an
impairment loss, long-lived assets are grouped with other assets and liabilities
at the lowest level for which identifiable cash flows are largely independent
of
the cash flows of other assets and liabilities. We must exercise judgment in
this grouping. SFAS 144 requires that if the sum of the undiscounted future
cash
flows expected to result from the identified asset group is less than the
carrying value of the asset group, then an impairment must be recognized in
the
financial statements. The amount of the impairment to be recognized is
calculated by subtracting the fair value of the asset group from the reported
value of the asset group. Determining future cash flows and estimating fair
values requires significant judgments and is highly susceptible to change from
period to period because it requires management to make assumptions about future
sales and cost of sales generally over a long-term period.
We
evaluate the estimated fair value of investments annually or more frequently
if
indicators of potential impairment exist, to determine if an
other-than-temporary impairment in the value of the investment has taken place.
BUSINESS
COMBINATIONS
In
accordance with SFAS No. 141, “Business Combinations”, we allocate the purchase
price of acquired entities to the tangible and intangible assets acquired,
liabilities assumed, as well as IPR&D based on their estimated fair values.
We engage independent third-party appraisal firms to assist us in determining
the fair values of assets and liabilities acquired. This valuation requires
management to make significant estimates and assumptions, especially with
respect to long-lived and intangible assets.
Critical
estimates in valuing certain of the intangible assets include but are not
limited to: future expected cash flows related to acquired developed
technologies and patents and assumptions about the period of time the
technologies will continue to be used in the combined Company’s product
portfolio; expected costs to develop the IPR&D into commercially viable
products and estimating cash flows from the projects when completed; and
discount rates. Management’s estimates of value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances may occur.
GOODWILL
AND OTHER INTANGIBLE ASSETS
Purchased
intangible assets with finite lives are amortized over their estimated useful
lives. Goodwill and other intangible assets are tested annually or more
frequently if indicators of potential impairment exist, using a fair-value-based
approach. We determined that goodwill and other intangible assets were not
impaired as of September 30, 2006.
SHARE-BASED
COMPENSATION
Effective
October 1, 2005, we adopted SFAS 123R, which requires all share-based payments,
including stock option grants, restricted stock and employee stock purchases,
to
be recognized in the income statement based on their fair values. SFAS 123R
supersedes our previous accounting for share-based compensation under Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees”, and related interpretations, as allowed under SFAS No. 123,
“Accounting for Stock-Based Compensation” (SFAS 123) and SFAS No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS
148). Under SFAS 123R, the pro forma disclosure alternative permitted under
SFAS
123 and SFAS 148 is no longer allowable. We adopted SFAS 123R using the modified
prospective transition method as permitted by SFAS 123R; therefore, we have
not
restated our financial results for prior periods. Under SFAS 123R, we continue
to attribute share-based compensation expense using the straight-line approach
based on awards ultimately expected to vest, which requires the use of an
estimated forfeiture rate. Forfeitures were estimated based on historical
experience. In addition, we continue to use the Black-Scholes option-pricing
model (“Black-Scholes model”) to estimate grant date fair value, which requires
the input of highly subjective assumptions, including the option’s expected life
and the price volatility of the underlying stock. A small change in the
underlying assumptions can have a relatively large effect on the estimated
valuation. Under SFAS 123R, we estimate expected volatility based on a
combination of our stock’s historical volatility and the implied volatilities
from actively-traded options on our stock. Prior to the adoption of SFAS 123R,
we estimated expected volatility based only on our stock’s historical volatility
in accordance with SFAS 123 for purposes of our pro forma disclosure. We believe
that implied volatility is more reflective of market conditions; however, due
to
the shorter length in term of the actively-traded options, we believe it to
be
appropriate to use a blended assumption. In addition, we have updated our
expected term assumption by adopting the simplified method as defined under
Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payments” (SAB 107), due
to our limited amount of historical option exercise data. This method uses
an
average of the vesting and contractual terms.
Through
an amendment made and effective as of September 27, 2004, the vesting of
approximately 1.3 million options, that had option prices greater than $34.65
on
the amendment date, was accelerated to September 1, 2005. The acceleration
enabled us to eliminate the recognition of share-based compensation expense
associated with these "out-of-the-money" options in our consolidated financial
statements upon the adoption of SFAS 123R in October 2005. Because expected
share-based compensation expense for fiscal 2006 would have been higher if
the
vesting of these “out-of-the-money” stock options had not been accelerated, it
may not be representative of share-based compensation expense for future years.
In addition, factors that may impact share-based compensation expense in future
years include, but are not limited to, changes to our historical approaches
to
long-term incentives, such as the timing and number of additional grants of
stock option awards, the vesting period and contractual term of stock option
awards and types of equity awards granted. Further, share-based compensation
may
be impacted by changes in the fair value of future awards through variables
such
as fluctuations in and volatility of our stock price, as well as changes in
employee exercise behavior and forfeiture rates. As of September 30, 2006,
there
was $23.9 million of total unrecognized share-based compensation expense related
to nonvested stock options granted under the Plan. That cost is expected to
be
recognized over a weighted-average period of 2.6 years.
Our
historical approach to long-term incentives has been primarily through the
issuance of stock options. However, beginning in fiscal 2007, we anticipate
moving to a blend of equity grants, under which a combination of stock option
awards and restricted stock or restricted stock units are anticipated being
granted. We anticipate that both the stock options and the restricted stock
or
restricted stock units will vest equally over a four-year period, with first
vesting on the anniversary of the grant date, and with stock options continuing
to have a ten-year contractual term.
ACCOUNTING
FOR INCOME TAXES
We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes” (SFAS 109), which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences
between the book and tax bases of recorded assets and liabilities. SFAS 109
also
requires that deferred tax assets be reduced by a valuation allowance if it
is
more likely than not that a portion of the deferred tax asset will not be
realized. We have determined that it is more likely than not that our future
taxable income will be sufficient to realize our deferred tax assets.
COMMITMENTS
AND CONTINGENCIES
We
have
entered into unconditional purchase obligations, which include noncancelable
purchase commitments and take-or-pay arrangements with suppliers. We review
our
agreements and make an assessment of the likelihood of a shortfall in purchases
and determine if it is necessary to record a liability. In addition, we are
subject to the possibility of various loss contingencies arising in the ordinary
course of business such as a legal proceeding or claim. An estimated loss
contingency is accrued when it is probable that an asset has been impaired
or a
liability has been incurred and the amount of the loss can be reasonably
estimated. We regularly evaluate current information available to us to
determine whether such accruals should be adjusted and whether new accruals
are
required.
EFFECTS
OF RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (SAB 108). SAB 108 provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be considered
in
quantifying a current year misstatement. The SEC staff believes that registrants
should quantify errors using both a balance sheet and an income statement
approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective for fiscal years ending after
November 15, 2007. We do not expect the adoption of SAB 108 to have a material
impact on our consolidated financial position, results of operations or cash
flows.
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 157 is effective
for fiscal years beginning after November 15, 2007. We are currently evaluating
the impact of adopting SFAS 157 on our consolidated financial position, results
of operations and cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (SFAS 158). SFAS 158 requires an employer that
sponsors one or more single-employer defined benefit plans to: a) recognize
the
overfunded or underfunded status of a benefit plan in its statement of financial
position; b) recognize as a component of other comprehensive income, net of
tax,
any remaining unamortized transition obligation upon adoption as well as the
gains or losses and prior service costs or credits that have not yet been
recognized as components of net periodic benefit cost pursuant to SFAS No.
87,
“Employers’ Accounting for Pensions”, or SFAS No. 106, “Employers’ Accounting
for Postretirement Benefits Other Than Pensions”; c) measure defined benefit
plan assets and obligations as of the date of the employer’s fiscal year-end;
and d) disclose in the notes to financial statements additional information
about certain effects on net periodic benefit cost for the next fiscal year
that
arise from delayed recognition of the gains or losses, prior service costs
or
credits and transition asset or obligation. This statement is effective for
fiscal years ending after December 15, 2006. We are currently evaluating the
impact of adopting SFAS 158 on our consolidated financial position, results
of
operations and cash flows.
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement 109” (FIN 48), which
clarifies the accounting for uncertainty in tax positions. This interpretation
sets forth a recognition threshold and measurement element for the recognition
and measurement of a tax position taken or expected to be taken on a tax return.
This interpretation is effective for fiscal years beginning after December
15,
2006. We are currently evaluating the impact of adopting FIN 48 on our
consolidated financial position, results of operations and cash
flows.
In
June
2006, the FASB ratified the consensus reached by the Emerging Issues Task Force
(EITF) in Issue No. 06-3, “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That
Is,
Gross versus Net Presentation)” (EITF 06-3). The scope of this issue includes
any tax assessed by a governmental authority that is directly imposed on a
revenue-producing activity between a seller and a customer and may include,
but
is not limited to, sales, use, value-added, and some excise taxes. EITF 06-3
indicates that the income statement presentation of these taxes on a gross
or
net basis is an accounting policy decision that should be disclosed in a
company’s financial statements. EITF 06-3 is effective for interim and annual
reporting periods beginning after December 15, 2006. We do not expect the
adoption of EITF 06-3 to have an impact on our consolidated financial position,
results of operations or cash flows.
In
November 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and
FAS
124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments” (FSP FAS 115-1 and 124-1). This FSP addresses the
determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss.
It also includes accounting considerations subsequent to the recognition of
other-than-temporary impairments. The FSP applies to reporting periods beginning
after December 15, 2005. The adoption of FSP FAS 115-1 and 124-1 did not impact
our consolidated financial position, results of operations or cash
flows.
In
September 2005, the FASB issued EITF Issue No. 04-13, “Accounting for Purchases
and Sales of Inventory with the Same Counterparty” (EITF 04-13). The EITF
concludes that two or more legally separate exchange transactions with the
same
counterparty should be combined and considered as a single arrangement for
purposes of applying Accounting Principles Board (APB) Opinion No. 29,
“Accounting for Nonmonetary Transactions”, when the transactions are entered
into in contemplation of one another. Furthermore, when two transactions are
considered a single arrangement, the assets exchanged should be accounted for
at
fair value. The EITF is effective for transactions completed in reporting
periods beginning after March 15, 2006. The adoption of EITF 04-13 did not
impact our consolidated financial position, results of operations or cash
flows.
RESULTS
OF OPERATIONS
The
following table sets forth, for the periods indicated, the percentage of revenue
of certain line items included in our historical statements of
income:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of goods sold
|
|
|
53.5
|
|
|
52.2
|
|
|
50.7
|
|
Gross
profit
|
|
|
46.5
|
|
|
47.8
|
|
|
49.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Research,
development and technical
|
|
|
15.0
|
|
|
15.9
|
|
|
14.2
|
|
Selling
and marketing
|
|
|
6.6
|
|
|
6.3
|
|
|
5.2
|
|
General
and administrative
|
|
|
10.7
|
|
|
9.4
|
|
|
7.3
|
|
Purchased
in-process research and development
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
13.8
|
|
|
16.2
|
|
|
22.6
|
|
Other
income, net
|
|
|
1.3
|
|
|
1.0
|
|
|
-
|
|
Income
before income taxes
|
|
|
15.1
|
|
|
17.2
|
|
|
22.6
|
|
Provision
for income taxes
|
|
|
4.9
|
|
|
5.2
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
10.3
|
%
|
|
12.0
|
%
|
|
15.1
|
%
|
YEAR
ENDED SEPTEMBER 30, 2006, VERSUS YEAR ENDED SEPTEMBER 30,
2005
REVENUE
Revenue
was $320.8 million in 2006, which represented an 18.6%, or $50.3 million,
increase from 2005. Of
this
increase, $48.7 million was due to an increase in sales volume and $5.1 million
was related to our July 2006 acquisition of QED; these increases were partially
offset by a net $3.5 million decrease due to the change in weighted average
selling price. The decrease in weighted average selling price primarily resulted
from selected price reductions largely offset by a higher-priced product mix.
Selling prices are also affected by changes in foreign currency exchange rates.
Revenue for fiscal 2006 would have been $3.7 million higher had the average
exchange rates for the Japanese Yen and Euro during the year held constant
with
the prior year’s average rates.
Revenue
increased in fiscal 2006 despite our transition to selling directly to our
customers in Taiwan rather than through a distributor, which
caused a
short-term interruption in our normal sales pattern during our second quarter
of
fiscal 2006 of approximately $10 million to $11 million. However, after this
transition period, we believe we were able to gain a portion of the markup
that
our distributor previously charged its end customers, which partially offset
the
adverse revenue impact from the transition.
Our
long-term goal is to grow our revenue by 15% per year,
which
would allow us to achieve annual revenue of approximately $500 million in three
years. However, there are several factors that make it difficult for us to
predict future revenue trends, as discussed in the “Overview” section of
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”.
COST
OF GOODS SOLD
Total
cost of goods sold was $171.8 million in 2006, which represented an increase
of
21.6%, or $30.5 million, from 2005. Of this
increase, $25.4 million was due to higher sales volume, $3.5 million was related
to our acquisition of QED and $1.5 million was due to higher average costs
per
gallon. The average cost per gallon increased primarily due to a higher-cost
product mix, higher fixed costs, including amortization of our CMP technology
patents from IBM, and greater logistics costs as a result of our transition
to
direct sales in Taiwan. These costs were partially offset by higher utilization
of our manufacturing capacity due to 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” included in Item
7 of Part II of this Form 10-K.
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 46.5% in 2006 as compared to 47.8% in
2005. The 1.3 percentage point decrease in gross profit margin resulted
primarily from selected
price reductions and higher costs including those associated with
commercializing our pad product line and the transition of our data storage
business to Singapore. These adverse effects were partially offset
by higher
utilization of our manufacturing capacity due to the higher level of sales.
We
expect to
be
able to maintain our gross profit as a percentage of revenue in the range of
46%
to 48% for full fiscal year 2007. Quarterly gross profit may be above or below
this range due to fluctuations in our product mix or other factors.
RESEARCH,
DEVELOPMENT AND TECHNICAL
Total
research, development and technical expenses were $48.1 million in 2006, which
represented an increase of 11.8% or $5.1 million, from 2005. The increase was
primarily related to $3.5 million in increased staffing costs, $1.5 million
in
increased depreciation and $0.7 million in impairment expense. The increased
staffing costs included $1.2 million in
higher
expenses for our annual incentive program related to our research, development
and technical staff as well as $1.0 million in share-based compensation expense.
The increased depreciation expense was primarily related
to the October 2005 opening of our
Asia
Pacific technology center in Geino, Japan.
The
impairment expense was attributable to the decision to no longer use the portion
of a building in Aurora, Illinois, that was previously used for research and
development activities. These increases were partially offset by $0.8 million
in
decreased costs for 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 slurry and pad products;
|
|
·
|
Process
development to support rapid and effective commercialization of new
products;
|
|
·
|
Evaluation
of new polishing applications outside of the semiconductor industry;
and
|
SELLING
AND MARKETING
Selling
and marketing expenses were $21.1 million in 2006, which represented an increase
of 24.3%, or $4.1 million, over 2005. The increase resulted primarily from
higher staffing costs of $3.0 million, including $1.0 million in share-based
compensation expense and $0.4 million in higher
expense for our annual incentive program related to our sales and marketing
staff. Another $0.4
million of the increase was due
to
increased travel to the Asia Pacific region as we implemented a number of
projects in support of our strategic initiative to stay connected with our
customers, such as transitioning to direct sales in Taiwan and moving our data
storage business to Singapore. Selling and marketing expenses also increased
$0.2 million due to higher
office
rental fees and $0.2 million related to increased product sample costs.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses were $34.3 million in 2006, which represented an
increase of 35.0%, or $8.9 million, from 2005.
The
increase resulted primarily from $9.5 million in higher staffing costs,
including $8.0 million in share-based compensation expense and $0.9 million
in
higher
expense for our annual incentive program.
PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased
IPR&D expense was $1.1 million in 2006, resulting from the acquisition of
substantially
all of the assets and assumption of certain liabilities of QED.
We
may make future acquisitions and may record additional expenses for IPR&D in
connection with those acquisitions.
OTHER
INCOME, NET
Other
income was $4.1 million
in 2006,
compared to $2.7 million in 2005. The increase in other income was primarily
due
to $2.0 million greater interest income from higher interest rates and our
larger average balance of cash and short-term investments, partially offset
by
$0.6 million of expense associated with our investment in NanoProducts
Corporation.
PROVISION
FOR INCOME TAXES
Our
effective income tax rate was 32.1% in 2006 and 30.2% in 2005. The increase
in
the effective tax rate was primarily due to reduced research and experimentation
tax credits due to the expiration of the credit effective December 31, 2005.
In
addition, we recognized reduced extraterritorial income tax deductions related
to export sales of our products from North America due to the phase-out of
this
tax benefit. We expect our effective tax rate in fiscal 2007 to be between
32
and 33 percent.
NET
INCOME
Net
income was $32.9 million in 2006, which represented an increase of 1.5%, or
$0.5
million, from 2005 as a result of the factors discussed above.
YEAR
ENDED SEPTEMBER 30, 2005, VERSUS YEAR ENDED SEPTEMBER 30,
2004
REVENUE
Revenue
was $270.5 million in 2005, which represented a 12.6%, or $38.9 million,
decrease from 2004. Of this decrease, $23.3 million was due to a decrease in
sales volume and $15.7 million was due to a decrease in weighted average selling
price, primarily resulting from selected price reductions partially offset
by a
higher valued product mix. Revenue for fiscal 2005 would have been $0.7 million
lower had the average exchange rates for the Japanese Yen and Euro during the
period held constant with the prior year’s average rates.
Following
a period of strong semiconductor demand in the second half of fiscal 2004,
our
revenue during the first three quarters of fiscal 2005 was adversely impacted
in
part by a downturn in the semiconductor industry, which we believe was partially
driven by a reduction in wafer starts by some semiconductor manufacturers to
reduce excess inventories of certain semiconductor devices. Another factor
that
adversely affected our fiscal 2005 revenue was the remaining impact of one
large
customer transitioning to another supplier of CMP slurry for polishing copper
interconnects at 130 nanometer technology.
COST
OF GOODS SOLD
Total
cost of goods sold was $141.3 million in 2005, which represented a decrease
of
9.9%, or $15.5 million, from 2004. Of this decrease, $11.8 million was due
to
lower sales volume and $3.7 million was due to lower average costs per gallon,
primarily due to improved manufacturing yields partially offset by higher fixed
costs.
GROSS
PROFIT
Our
gross
profit as a percentage of revenue was 47.8% in 2005 as compared to 49.3% in
2004. The 1.5 percentage point decrease in gross profit margin resulted
primarily from selected
price reductions and lower utilization of our manufacturing capacity due to
the
lower level of sales, partially offset by a higher valued product mix.
RESEARCH,
DEVELOPMENT AND TECHNICAL
Total
research, development and technical expenses were $43.0 million in 2005, which
represented a decrease of 2.3% or $1.0 million, from 2004. The decrease is
primarily related to $1.1 million in lower expenses for clean room materials
and
laboratory supplies, $0.8 million in lower technical service and analysis fees
and $0.5 million in lower facilities costs. These decreases were partially
offset by $0.6 million in higher depreciation expense related to equipment
purchased in 2004 for our CMP polishing and metrology clean room in Aurora,
Illinois, and $0.4 million in higher staffing costs.
SELLING
AND MARKETING
Selling
and marketing expenses were $17.0 million in 2005, which represented an increase
of 4.7%, or $0.8 million, over 2004. The increase resulted primarily from higher
staffing costs of $0.9 million and higher facility costs of $0.5 million. These
increases were partially offset by decreased consulting fees of $0.4 million
and
lower product sample costs of $0.4 million.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses were $25.4 million in 2005, which represented an
increase of 12.1%, or $2.7 million, from 2004.
The
increase resulted primarily from $1.7 million in higher staffing costs and
$1.0
million of increased professional fees primarily related to meeting the
requirements of Sarbanes-Oxley Section 404.
OTHER
INCOME, NET
Other
income was $2.7 million
in 2005,
compared to $0.1 million in 2004. The increase in other income was primarily
due
to $2.0 million greater interest income from higher interest rates and our
larger average balance of cash and short-term investments, as well as a $0.7
million increase in foreign exchange gains.
PROVISION
FOR INCOME TAXES
Our
effective income tax rate was 30.2% in 2005 and 33.1% in 2004. The decrease
in
the effective tax rate was primarily due to higher tax-exempt interest income
and the increased effect of extraterritorial income tax credits related to
export sales from North America.
NET
INCOME
Net
income was $32.5 million in 2005, which represented a decrease of 30.5%, or
$14.3 million, from 2004 as a result of the factors discussed
above.
LIQUIDITY
AND CAPITAL RESOURCES
We
had
cash flows from operating activities of $58.7 million in fiscal 2006, $48.0
million in fiscal 2005 and $64.2 million in fiscal 2004. Our
cash
provided by operating activities in fiscal 2006 originated from net income
from
operations of $32.9 million and noncash items of $31.4 million, which were
partially offset by a net increase in working capital of $5.7
million.
In
fiscal
2006 cash flows used in investing activities were $32.4 million. Purchases
of
property, plant and equipment, primarily for the construction of our Asia
Pacific technology center and for projects in our manufacturing operations,
were
made with $22.2 million in cash and $1.0 million in accrued liabilities and
accounts payable. We
also
completed two acquisitions during the fiscal year for a total of $20.9 million,
net of cash acquired. In addition, we used $5.0 million to acquire patents
and
associated rights relating to CMP slurry technology. Finally, $15.7 million
was
provided by net sales of short-term auction rate securities. Fiscal 2005
cash
flows used in investing activities were $35.7 million. Purchases of property,
plant and equipment, primarily for the construction of our Asia Pacific
technology center and other manufacturing projects, were made with $21.1 million
in cash and $8.2 million in accrued liabilities. In
addition, $12.6 million was used for net purchases of short-term auction rate
securities in fiscal 2005 and $1.9 million was used for the final payment for
our acquisition of a minority ownership interest in NanoProducts Corporation.
In
fiscal
2004 cash flows used in investing activities were $126.8 million, of which
$114.0 million was used for net purchases of auction rate securities. Also
in
that year, $11.0 million was used for purchases of property, plant and
equipment, including purchases of land in Geino, Japan, manufacturing equipment
and research and development equipment. Finally,
we invested $1.8 million as partial payment for a minority ownership interest
in
NanoProducts Corporation in fiscal 2004. We estimate that our total capital
expenditures in fiscal 2007 will be approximately $17.0 million; however, we
are
exploring options for providing CMP slurry manufacturing capability in Taiwan,
and depending on how we fulfill this initiative, our capital spending could
be
much higher.
In
fiscal 2006 cash flows used in financing activities were $15.6 million,
primarily as a result of $16.0 million in repurchases of common stock under
our
share repurchase program and $0.9 million in principal payments under capital
lease obligations. These outflows were partially offset by the issuance of
common stock of $1.4 million primarily from purchases under our employee stock
purchase plan. In fiscal 2005 cash flows used in financing activities were
$10.9
million, primarily as a result of $17.0 million in repurchases of common stock
under our share repurchase program and $0.9 million in principal payments under
capital lease obligations. These outflows were partially offset by the issuance
of common stock of $7.0 million from the exercise of stock options under our
equity incentive plan and purchases under our employee stock purchase plan.
In
fiscal 2004 cash flows used in financing activities of $5.4 million were largely
a result of repurchasing $8.0 million of common stock under our share repurchase
program and paying $0.8 million in principal payments under capital lease
obligations. These outflows were partially offset by the issuance of common
stock of $3.4 million from
the
exercise of stock options under our equity incentive plan and purchases under
our employee stock purchase plan.
In
the
fourth quarter of fiscal 2005, we completed our initial $25.0 million share
repurchase program, which was authorized in July 2004. In October 2005, our
Board of Directors authorized a new share repurchase program for up to $40.0
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. We view the program as an effective means to return cash to
stockholders. The program became effective on the authorization date and may
be
suspended or terminated at any time, at the Company’s discretion.
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. Interest accrues on any outstanding balance at either the 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 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 public or private equity or debt
financing, strategic relationships or other arrangements.
OFF-BALANCE
SHEET ARRANGEMENTS
At
September 30, 2006 and 2005, we did not have any unconsolidated entities or
financial partnerships, which might have been established for the purpose of
facilitating off-balance sheet arrangements, such as entities often referred
to
as structured finance or special purpose entities.
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The
following
summarizes our contractual obligations at September 30, 2006, and the effect
such obligations are expected to have on our liquidity and cash flow in future
periods.
CONTRACTUAL
OBLIGATIONS
(In
millions)
|
|
Total
|
|
Less
Than
1
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
After
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
$
|
5.7
|
|
$
|
1.3
|
|
$
|
2.2
|
|
$
|
2.2
|
|
$
|
-
|
|
Operating
leases
|
|
|
2.6
|
|
|
1.3
|
|
|
1.2
|
|
|
0.1
|
|
|
-
|
|
Purchase
obligations
|
|
|
42.5
|
|
|
32.0
|
|
|
7.3
|
|
|
2.9
|
|
|
0.3
|
|
Other
long-term liabilities
|
|
|
1.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.1
|
|
Total
contractual obligations
|
|
$
|
51.9
|
|
$
|
34.6
|
|
$
|
10.7
|
|
$
|
5.2
|
|
$
|
1.4
|
|
CAPITAL
LEASE OBLIGATIONS
In
December 2001, we entered into a fumed alumina supply agreement with Cabot
Corporation under which we agreed to pay Cabot Corporation for the expansion
of
a fumed alumina manufacturing facility in Tuscola, Illinois. The payments for
the facility have been treated as a capital lease for accounting purposes and
the present value of the minimum quarterly payments resulted in an initial
$9.8
million lease obligation and related leased asset. The agreement’s first term
runs through December 2006 and it has been renewed for another five-year term
ending in December 2011.
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 of their respective commencement dates and may be renewed by
us.
PURCHASE
OBLIGATIONS
We
have
entered into multi-year supply agreements with Cabot Corporation for the
purchase of fumed metal oxides. We
purchase fumed silica primarily under a fumed silica supply agreement with
Cabot
Corporation that became effective in January 2004, and was amended in September
2006. The agreement has an initial six-year term that runs through December
2009
and will automatically renew unless either party gives certain notice of
non-renewal.
We are
obligated
to purchase fumed silica for at least 90% of our six-month volume forecast
for
certain of our slurry products, to purchase certain non-material minimum
quantities every six months, and to pay for the shortfall if we purchase less
than these amounts. We currently anticipate meeting minimum forecasted purchase
volume requirements. Since December 2001, we have purchased fumed alumina
primarily under a fumed alumina supply agreement with Cabot Corporation that
has
an original term ending in December 2006 and has been renewed for another
five-year term ending in December 2011. Prices charged for fumed alumina from
Cabot Corporation are pursuant to the terms of the supply agreement and may
fluctuate based upon the actual costs incurred by Cabot Corporation in the
manufacture of fumed alumina. Under these agreements, Cabot Corporation
continues to be the exclusive supplier of certain quantities and types of fumed
silica and fumed alumina for products we produced as of the effective dates
of
these agreements. Subject to certain terms, these agreements prohibit Cabot
Corporation from selling fumed silica and fumed alumina to third parties for
use
in CMP applications, as well as engaging itself in CMP applications. If Cabot
Corporation fails to supply us with our requirements for any reason, including
if we require product specification changes that Cabot Corporation cannot meet,
we have the right to purchase products meeting those specifications from other
suppliers. We also may purchase raw materials from other suppliers for products
we have produced since the effective date of these agreements. Purchase
obligations include an aggregate amount of $22.0 million of contractual
commitments related to our Cabot Corporation agreements for fumed silica and
fumed alumina.
We
paid
$19.0 million in cash related to our July 2006 QED acquisition, and we are
obligated to pay up to an additional $4.5 million depending upon the performance
of the QED business over the two years following the purchase. Contractual
obligations at September 30, 2006, include $4.5 million in contingent payments
related to this agreement.
ITEM
7A. 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. 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 14% 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 September 30, 2006, 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
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
|
|
Page
|
Consolidated
Financial Statements:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
39
|
|
Consolidated
Statements of Income for the years ended September 30, 2006, 2005
and
2004
|
41
|
|
Consolidated
Balance Sheets at September 30, 2006 and 2005
|
42
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2006,
2005 and
2004
|
43
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended
September 30, 2006, 2005 and 2004
|
44
|
|
Notes
to the Consolidated Financial Statements
|
45
|
|
Selected
Quarterly Operating Results
|
65
|
|
|
Financial
Statement Schedule:
|
|
|
Schedule
II - Valuation and Qualifying Accounts
|
67
|
All
other
schedules are omitted, because they are not required, are not applicable, or
the
information is included in the consolidated financial statements and notes
thereto.
Report
of Independent Registered Public Accounting Firm
To
the
Stockholders and Board of Directors of
Cabot
Microelectronics Corporation:
We
have
completed integrated audits of Cabot Microelectronics Corporation’s 2006 and
2005 consolidated financial statements and of its internal control over
financial reporting as of September 30, 2006, and an audit of its 2004
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on
our
audits, are presented below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Cabot
Microelectronics Corporation and its subsidiaries at September 30, 2006 and
2005, and the results of their operations and their cash flows for each of
the
three years in the period ended September 30, 2006 in conformity with accounting
principles generally accepted in the United States of America. In addition,
in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based
on
our audits. We conducted our audits of these statements in accordance with
the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
As
discussed in Notes 2 and 10 to the consolidated financial statements, the
Company began recording share-based compensation expense in accordance with
Statement of Financial Accounting Standards No. 123(R) “Share-Based
Payment” on October 1, 2005.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management's Report on
Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
September 30, 2006 based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2006,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Chicago,
IL
November
28, 2006
CABOT
MICROELECTRONICS CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
320,795
|
|
$
|
270,484
|
|
$
|
309,433
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold *
|
|
|
171,758
|
|
|
141,282
|
|
|
156,805
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
149,037
|
|
|
129,202
|
|
|
152,628
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research,
development and technical *
|
|
|
48,070
|
|
|
43,010
|
|
|
44,003
|
|
Selling
and marketing *
|
|
|
21,115
|
|
|
16,989
|
|
|
16,225
|
|
General
and administrative *
|
|
|
34,319
|
|
|
25,427
|
|
|
22,691
|
|
Purchased
in-process research and development
|
|
|
1,120
|
|
|
-
|
|
|
-
|
|
Total
operating expenses
|
|
|
104,624
|
|
|
85,426
|
|
|
82,919
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
44,413
|
|
|
43,776
|
|
|
69,709
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
4,111
|
|
|
2,747
|
|
|
139
|
|
Income
before income taxes
|
|
|
48,524
|
|
|
46,523
|
|
|
69,848
|
|
Provision
for income taxes *
|
|
|
15,576
|
|
|
14,050
|
|
|
23,120
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
32,948
|
|
$
|
32,473
|
|
$
|
46,728
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.36
|
|
$
|
1.32
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
24,228
|
|
|
24,563
|
|
|
24,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.36
|
|
$
|
1.32
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average diluted shares outstanding
|
|
|
24,228
|
|
|
24,612
|
|
|
24,882
|
|
*
Includes the following amounts related to share-based compensation
expense:
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
$
|
648
|
|
$
|
-
|
|
$
|
-
|
|
Research,
development and technical
|
|
|
959
|
|
|
-
|
|
|
-
|
|
Selling
and marketing
|
|
|
1,037
|
|
|
-
|
|
|
-
|
|
General
and administrative
|
|
|
8,020
|
|
|
-
|
|
|
-
|
|
Tax
benefit
|
|
|
(3,809
|
)
|
|
-
|
|
|
-
|
|
Total
share-based compensation expense, net of tax
|
|
$
|
6,855
|
|
$
|
-
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
54,965
|
|
$
|
44,436
|
|
Short-term
investments
|
|
|
110,965
|
|
|
126,605
|
|
Accounts
receivable, less allowance for doubtful accounts of $551 at September
30,
2006, and $470 at September 30, 2005
|
|
|
48,028
|
|
|
36,759
|
|
Inventories
|
|
|
40,326
|
|
|
28,797
|
|
Prepaid
expenses and other current assets
|
|
|
4,785
|
|
|
5,970
|
|
Deferred
income taxes
|
|
|
2,436
|
|
|
3,240
|
|
Total
current assets
|
|
|
261,505
|
|
|
245,807
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
130,176
|
|
|
135,784
|
|
Goodwill
|
|
|
4,565
|
|
|
1,373
|
|
Other
intangible assets, net
|
|
|
11,447
|
|
|
-
|
|
Other
long-term assets
|
|
|
4,440
|
|
|
3,799
|
|
Total
assets
|
|
$
|
412,133
|
|
$
|
386,763
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
15,104
|
|
$
|
10,236
|
|
Capital
lease obligations
|
|
|
1,254
|
|
|
1,170
|
|
Accrued
expenses, income taxes payable and other current
liabilities
|
|
|
22,475
|
|
|
24,216
|
|
Total
current liabilities
|
|
|
38,833
|
|
|
35,622
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
|
4,420
|
|
|
5,436
|
|
Deferred
income taxes
|
|
|
-
|
|
|
4,967
|
|
Other
long-term liabilities
|
|
|
1,109
|
|
|
1,654
|
|
Total
liabilities
|
|
|
44,362
|
|
|
47,679
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
Authorized:
200,000,000 shares, $0.001 par value
|
|
|
|
|
|
|
|
Issued:
25,254,719 shares at September 30, 2006, and 25,198,809 shares at
September 30, 2005
|
|
|
24
|
|
|
24
|
|
Capital
in excess of par value of common stock
|
|
|
157,463
|
|
|
145,011
|
|
Retained
earnings
|
|
|
251,007
|
|
|
218,059
|
|
Accumulated
other comprehensive income
|
|
|
272
|
|
|
1,160
|
|
Unearned
compensation
|
|
|
-
|
|
|
(171
|
)
|
Treasury
stock at cost, 1,297,167 shares at September 30, 2006, and 774,020
shares
at September 30, 2005
|
|
|
(40,995
|
)
|
|
(24,999
|
)
|
Total
stockholders’ equity
|
|
|
367,771
|
|
|
339,084
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
412,133
|
|
$
|
386,763
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
32,948
|
|
$
|
32,473
|
|
$
|
46,728
|
|
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
21,174
|
|
|
19,072
|
|
|
17,611
|
|
Purchased
in-process research and development
|
|
|
1,120
|
|
|
-
|
|
|
-
|
|
Loss
on equity investment
|
|
|
566
|
|
|
330
|
|
|
73
|
|
Share-based
compensation expense
|
|
|
10,664
|
|
|
312
|
|
|
67
|
|
Income
tax benefit on exercises of stock options
|
|
|
-
|
|
|
1,288
|
|
|
967
|
|
Deferred
income tax expense (benefit)
|
|
|
(5,571
|
)
|
|
(2,417
|
)
|
|
1,119
|
|
Non-cash
foreign exchange (gain)/loss
|
|
|
2,606
|
|
|
1,079
|
|
|
(3
|
)
|
Loss
on disposal of property, plant and equipment
|
|
|
1,109
|
|
|
363
|
|
|
58
|
|
Impairment
of property, plant and equipment
|
|
|
790
|
|
|
657
|
|
|
-
|
|
Other
|
|
|
(1,081
|
)
|
|
299
|
|
|
(471
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(8,492
|
)
|
|
3,902
|
|
|
(3,166
|
)
|
Inventories
|
|
|
(5,635
|
)
|
|
(4,760
|
)
|
|
(326
|
)
|
Prepaid
expenses and other assets
|
|
|
1,726
|
|
|
(2,824
|
)
|
|
(308
|
)
|
Accounts
payable, accrued liabilities and other current liabilities
|
|
|
7,166
|
|
|
(2,847
|
)
|
|
567
|
|
Income
taxes payable, deferred compensation and other noncurrent
liabilities
|
|
|
(422
|
)
|
|
1,035
|
|
|
1,294
|
|
Net
cash provided by operating activities
|
|
|
58,668
|
|
|
47,962
|
|
|
64,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(22,230
|
)
|
|
(21,137
|
)
|
|
(10,968
|
)
|
Proceeds
from the sale of property, plant and equipment
|
|
|
19
|
|
|
6
|
|
|
15
|
|
Acquisitions
of businesses, net of cash acquired
|
|
|
(20,919
|
)
|
|
-
|
|
|
-
|
|
Purchase
of patents
|
|
|
(5,000
|
)
|
|
-
|
|
|
-
|
|
Purchases
of equity investments
|
|
|
-
|
|
|
(1,930
|
)
|
|
(1,820
|
)
|
Purchases
of short-term investments
|
|
|
(185,655
|
)
|
|
(141,570
|
)
|
|
(184,040
|
)
|
Proceeds
from the sale of short-term investments
|
|
|
201,392
|
|
|
128,975
|
|
|
70,030
|
|
Net
cash used in investing activities
|
|
|
(32,393
|
)
|
|
(35,656
|
)
|
|
(126,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repurchases
of common stock
|
|
|
(15,996
|
)
|
|
(16,999
|
)
|
|
(8,000
|
)
|
Net
proceeds from issuance of stock
|
|
|
1,359
|
|
|
6,983
|
|
|
3,385
|
|
Principal
payments under capital lease obligations
|
|
|
(933
|
)
|
|
(869
|
)
|
|
(815
|
)
|
Net
cash used in financing activities
|
|
|
(15,570
|
)
|
|
(10,885
|
)
|
|
(5,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(176
|
)
|
|
(293
|
)
|
|
(7
|
)
|
Increase
(decrease) in cash
|
|
|
10,529
|
|
|
1,128
|
|
|
(68,010
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
44,436
|
|
|
43,308
|
|
|
111,318
|
|
Cash
and cash equivalents at end of year
|
|
$
|
54,965
|
|
$
|
44,436
|
|
$
|
43,308
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
21,745
|
|
$
|
14,014
|
|
$
|
19,554
|
|
Cash
paid for interest
|
|
$
|
658
|
|
$
|
596
|
|
$
|
688
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment in accrued liabilities and accounts
payable at the end of period
|
|
$
|
968
|
|
$
|
8,204
|
|
$
|
-
|
|
Issuance
of restricted stock
|
|
$
|
63
|
|
$
|
125
|
|
$
|
25
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In
thousands)
|
|
Common
Stock
|
|
Capital
In
Excess
Of
Par
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income
|
|
Comprehensive
Income
|
|
Unearned
Compensation
|
|
Treasury
Stock
|
|
Total
|
|
Balance
at September 30, 2003
|
|
$ |
25
|
|
$ |
131,913
|
|
$ |
138,858
|
|
$ |
1,187
|
|
|
|
|
$ |
(210
|
)
|
$ |
-
|
|
$ |
271,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
2,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,232
|
|
Tax
benefit on stock options exercised
|
|
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
967
|
|
Amortization
of unearned compensation on restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
76
|
|
Issuance
of Cabot Microelectronics restricted stock under deposit share
plan
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
50
|
|
Forfeiture
of Cabot Microelectronics restricted stock
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
-
|
|
Reverse
amortization related to restricted stock forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
(9
|
)
|
Issuance
of Cabot Microelectronics stock under Employee Stock Purchase
Plan
|
|
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,087
|
|
Purchase
of treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,000
|
)
|
|
(8,000
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
46,728
|
|
|
|
|
$
|
46,728
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on derivative intruments
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
728
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,446
|
|
|
|
|
|
|
|
|
47,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2004
|
|
$
|
25
|
|
$
|
136,259
|
|
$
|
185,586
|
|
$
|
1,905
|
|
|
|
|
$
|
(153
|
)
|
$
|
(8,000
|
)
|
$
|
315,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
5,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,655
|
|
Tax
benefit on stock options exercised
|
|
|
|
|
|
1,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,288
|
|
Amortization
of unearned compensation on restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
106
|
|
Issuance
of Cabot Microelectronics restricted stock under deposit share
plan
|
|
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
251
|
|
Forfeiture
of Cabot Microelectronics restricted stock
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
-
|
|
Reverse
amortization related to restricted stock forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
(4
|
)
|
Issuance
of Cabot Microelectronics stock under directors' deferred compensation
plan
|
|
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374
|
|
Issuance
of Cabot Microelectronics stock under Employee Stock Purchase
Plan
|
|
|
|
|
|
1,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,064 |
|
Purchase
of treasury stock, at cost
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,999
|
)
|
|
(17,000
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
32,473
|
|
|
|
|
$
|
32,473
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on derivative intruments
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(780
|
)
|
|
(780
|
)
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,728
|
|
|
|
|
|
|
|
|
31,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2005
|
|
$
|
24
|
|
$
|
145,011
|
|
$
|
218,059
|
|
$
|
1,160
|
|
|
|
|
$
|
(171
|
)
|
$
|
(24,999
|
)
|
$
|
339,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of unearned compensation upon adoption of SFAS 123R
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
-
|
|
Reclassification
of directors' deferred compensation upon adoption of SFAS
123R
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
Issuance
of Cabot Microelectronics restricted stock under deposit share
plan
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
Issuance
of Cabot Microelectronics stock under Employee Stock Purchase
Plan
|
|
|
|
|
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,222
|
|
Share-based
compensation expense
|
|
|
|
|
|
10,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,664
|
|
Purchase
of treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,996
|
)
|
|
(15,996
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
32,948
|
|
|
|
|
$ |
32,948
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on derivative intruments
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(924
|
)
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,060
|
|
|
|
|
|
|
|
|
32,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
$
|
24
|
|
$
|
157,463
|
|
$
|
251,007
|
|
$
|
272
|
|
|
|
|
$
|
-
|
|
$
|
(40,995
|
)
|
$
|
367,771
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(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). We
believe we are the world’s leading supplier of these slurries. 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 are developing
and commercializing 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 improved productivity or
previously unseen surface performance.
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. In this polishing process, CMP slurries and pads
are
used 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 enables IC device manufacturers to produce smaller, faster and more
complex IC devices with fewer defects. We believe CMP will continue to be
important in the future as manufacturers continue to shrink the size of these
devices and to improve their performance.
The
audited consolidated financial statements have been prepared by Cabot
Microelectronics pursuant to the rules of the Securities and Exchange Commission
(SEC) and accounting principles generally accepted in the United States of
America. We operate predominantly in one industry segment - the development,
manufacture, and sale of CMP slurries. Certain reclassifications of prior fiscal
year amounts have been made to conform to the current period
presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Cabot Microelectronics
and its subsidiaries. All intercompany transactions and balances between the
companies have been eliminated.
USE
OF
ESTIMATES
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the
amounts reported in the consolidated financial statements and accompanying
notes. The accounting estimates that require management’s most difficult and
subjective judgments include, but are not limited to, those estimates related
to bad
debt
expense, warranty obligations, inventory valuation, impairment of long-lived
assets and investments, business combinations, goodwill, other intangible
assets, share-based compensation, income taxes and contingencies. We
base
our estimates on historical experience, current conditions and on various other
assumptions that are believed to be reasonable under the circumstances. However,
future events are subject to change and the best estimates and judgments
routinely require adjustment. Actual results may differ from these estimates
under different assumptions or conditions.
Notes
to Consolidated Financial Statements - Continued
CASH,
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We
consider investments in all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents. Short-term
investments include securities generally having maturities of 90 days to one
year. As of September 30, 2006, we held approximately $110,965 of short-term
investments which consisted of auction rate securities classified as
available-for-sale securities. Our investment in these securities is recorded
at
cost, which approximates fair market value due to their variable interest rates,
which typically reset every seven to 28 days, and despite the long-term nature
of their stated contractual maturities, we have the ability to quickly liquidate
these securities. As a result, there were no cumulative gross unrealized holding
gains (losses) or gross realized gains (losses) from these short-term
investments, and all income generated from these short-term investments was
recorded as interest income.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. We maintain an allowance for doubtful accounts for estimated losses
resulting from the potential inability of our customers to make required
payments. Our allowance for doubtful accounts is based on historical collection
experience, adjusted for any specific known conditions or circumstances. Account
balances are recorded against the allowance when we believe that it is probable
that the receivable will not be recovered.
CONCENTRATION
OF CREDIT RISK
Financial
instruments that subject us to concentrations of credit risk consist principally
of accounts receivable. We perform ongoing credit evaluations of our customers'
financial conditions and generally do not require collateral to secure accounts
receivable. Our exposure to credit risk associated with nonpayment is affected
principally by conditions or occurrences within the semiconductor industry
and
global economy. We historically have not experienced material losses relating
to
accounts receivables from individual customers or groups of customers and
maintain an allowance for doubtful accounts based on an assessment of the
collectibility of such accounts.
The
portions of revenue from customers who represented more than 10% of revenue
were
as follows:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Marketech
|
|
|
19
|
%
|
|
35
|
%
|
|
32
|
%
|
Taiwan
Semiconductor Manufacturing Co. (TSMC)
|
|
|
10
|
%
|
|
-
|
|
|
-
|
|
In
April
2006 we began selling our products directly to customers in Taiwan, rather
than
through Marketech, an independent distributor. We continue to use Marketech
as
our
distributor in China. Prior to April 2006, we sold product to TSMC through
Marketech.
The
two
customers above accounted for 16.2% and 10.7% of net accounts receivable at
September 30, 2006 and 2005, respectively.
FAIR
VALUES OF FINANCIAL INSTRUMENTS
The
recorded amounts of cash, accounts receivable and accounts payable approximate
their fair values.
Notes
to Consolidated Financial Statements - Continued
INVENTORIES
Inventories
are stated at the lower of cost, determined on the first-in, first-out (FIFO)
basis, or market. Finished goods and work in process inventories include
material, labor and manufacturing overhead costs. We regularly review and write
down the value of inventory for estimated obsolescence or unmarketability.
An
inventory reserve is maintained based upon a historical percentage of actual
inventory written off applied against inventory at the end of the period,
adjusted for known conditions and circumstances.
PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment are recorded at cost. Depreciation is generally based on
the
following estimated useful lives of the assets using the straight-line
method:
Buildings
|
15-25
years
|
Machinery
and equipment
|
3-10
years
|
Furniture
and fixtures
|
5-10
years
|
Information
systems
|
3-5
years
|
Assets
under capital leases
|
Term
of lease or estimated useful life
|
Expenditures
for repairs and maintenance are charged to expense as incurred. Expenditures
for
major renewals and betterments are capitalized and depreciated over the
remaining useful lives. As assets are retired or sold, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain
or
loss is included in the results of operations. Costs related to internal use
software are capitalized in accordance with American Institute of Certified
Public Accountants Statement of Position No. 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”.
IMPAIRMENT
OF LONG-LIVED ASSETS
Reviews
are regularly performed to determine whether facts and circumstances
exist that indicate the carrying amount of assets may not be recoverable
or the useful life is shorter than originally estimated. Asset
recoverability is assessed by comparing the projected undiscounted cash flows
associated with the related asset or group of assets over their remaining lives
against their respective carrying amounts. Impairment, if any, is based on
the
excess of the carrying amount over the fair value of those assets. If assets
are
determined to be recoverable, but their useful lives are shorter than originally
estimated, the net book value of the asset is depreciated over the newly
determined remaining useful life.
GOODWILL
AND OTHER INTANGIBLE ASSETS
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
“Business Combinations” (SFAS 141), and SFAS No. 142, "Goodwill and Other
Intangible Assets", intangible assets with finite lives are amortized over
their
estimated useful lives, which range from two to ten years for our Company.
Goodwill and indefinite lived intangible assets are tested annually or more
frequently if indicators of potential impairment exist, using a fair-value-based
approach. We determined that goodwill and other intangible assets were not
impaired as of September 30, 2006.
WARRANTY
RESERVE
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 return rate, adjusted for any specific known
conditions or circumstances. Adjustments to the warranty reserve are recorded
in
cost of goods sold.
Notes
to Consolidated Financial Statements - Continued
FOREIGN
CURRENCY TRANSLATION
Certain
operating activities in Europe and Asia are denominated in local currency.
Accordingly, assets and liabilities of these operations are translated using
exchange rates in effect at the end of the year, and revenue and costs are
translated using weighted average exchange rates for the year. The related
translation adjustments are reported in comprehensive income in stockholders’
equity.
FOREIGN
EXCHANGE MANAGEMENT
We
transact business in various foreign currencies, primarily the Japanese Yen,
British Pound and the Euro. Our exposure to foreign currency exchange risks
has
not been significant because most of our sales are denominated in U.S. dollars.
Periodically we enter into forward foreign exchange contracts in an effort
to
mitigate the risks associated with currency fluctuations on certain foreign
currency balance sheet exposures.
Our
foreign exchange contracts do not qualify for hedge accounting under SFAS No.
133, “Accounting for Derivatives Instruments and Hedging Activities”, as amended
by SFAS No. 149, “Amendment of Statement 133 on Instruments and Hedging
Activities”, and SFAS No. 52, “Foreign Currency Translation” (SFAS 52);
therefore, the gains and losses resulting from the impact of currency exchange
rate movements on our forward foreign exchange contracts are recognized as
other
income or expense in the accompanying consolidated income statements in the
period in which the exchange rates change. These gains and losses are intended
to partially offset the foreign currency exchange gains and losses on the
underlying exposures being hedged. Foreign exchange gains and losses were a
gain
of $265, a gain of $359 and a loss of $337 for
fiscal 2006, 2005 and 2004, respectively.
We
do not
currently use derivative financial instruments for trading or speculative
purposes. In addition, all derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at fair
value. At September 30, 2006, we had one forward foreign exchange contract
selling Japanese Yen related to an intercompany note with one of our
subsidiaries in Japan and for the purpose of hedging the risk associated with
a
net transactional exposure in Japanese Yen (refer to “Intercompany Loan
Accounting” in this section).
INTERCOMPANY
LOAN ACCOUNTING
We
maintain intercompany loan agreements with our wholly-owned subsidiary, Nihon
Cabot Microelectronics K.K. (“the K.K.”), under which we provided funds to the
K.K. to finance the purchase of certain assets from our former Japanese branch
at the time of the establishment of this subsidiary, for the purchase of land
adjacent to our Geino, Japan, facility and for the construction of our Asia
Pacific technology center, all of which are part of the K.K., as well as for
general business purposes. Since settlement of the notes is expected in the
foreseeable future, and our subsidiary has been consistently making timely
payments on the loans, the loans are considered foreign-currency transactions
under SFAS 52. Therefore the associated foreign exchange gains and losses are
recognized as other income or expense rather than being deferred in the
cumulative translation account in other comprehensive income.
PURCHASE
COMMITMENTS
We
have
entered into unconditional purchase obligations, which include noncancelable
purchase commitments and take-or-pay arrangements with suppliers. We review
our
agreements and make an assessment of the likelihood of a shortfall in purchases
and determine if it is necessary to record a liability.
REVENUE
RECOGNITION
Revenue
for CMP consumable products is recognized when title is transferred to the
customer, which usually occurs upon shipment, but depends on the terms and
conditions of the particular customer arrangement, provided acceptance and
collectibility are reasonably assured. For example, revenue related to inventory
held on consignment at a customer site is recognized as the products are
consumed by the customer. A provision for the estimated warranty cost is
recorded at the time revenue is recognized based on our historical experience.
Notes
to Consolidated Financial Statements - Continued
In
our
income statement, we report revenues net of any value-added tax or other such
tax assessed by a governmental authority on our revenue-producing
activities.
SHIPPING
AND HANDLING
Costs
related to shipping and handling are included in cost of goods
sold.
RESEARCH,
DEVELOPMENT AND TECHNICAL
Research,
development and technical costs are expensed as incurred and consist primarily
of staffing costs, materials and supplies, depreciation, utilities and other
facilities costs.
INCOME
TAXES
Current
income taxes are determined based on estimated taxes payable or refundable
on
tax returns for the current year. Deferred income taxes are determined based
on
the estimated future tax effects of differences between financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Provisions are made for the U.S. and any non-U.S. deferred income tax liability
or benefit.
SHARE-BASED
COMPENSATION
Effective
October 1, 2005, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(SFAS 123R), which requires all share-based payments, including stock option
grants, restricted stock and employee stock purchases, to be recognized in
the
income statement based on their fair values. SFAS 123R supersedes our previous
accounting for share-based compensation under Accounting Principles Board (APB)
Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related
interpretations, as allowed under SFAS No. 123, “Accounting for Stock-Based
Compensation” (SFAS 123), and SFAS No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure” (SFAS 148). Under SFAS 123R, the pro
forma disclosure alternative permitted under SFAS 123 and SFAS 148 is no longer
allowable. We adopted SFAS 123R using the modified prospective transition method
as permitted by SFAS 123R; therefore, we have not restated our financial results
for prior periods. Under this transition method, share-based compensation
expense for fiscal 2006 includes compensation expense for all share-based
compensation awards granted prior to, but not yet vested as of September 30,
2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123. Share-based compensation expense for all
share-based awards granted subsequent to September 30, 2005, was based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Under SFAS 123R, we continue to attribute share-based compensation expense
using
the straight-line approach based on awards ultimately expected to vest, which
requires the use of an estimated forfeiture rate. Forfeitures were estimated
based on historical experience. In addition, we continue to use the
Black-Scholes option-pricing model (“Black-Scholes model”) to estimate grant
date fair value, which requires the input of highly subjective assumptions,
including the option’s expected life and the price volatility of the underlying
stock. A small change in the underlying assumptions can have a relatively large
effect on the estimated valuation and resulting expense recorded in the income
statement.
For
additional information regarding our stock-based compensation plans, refer
to
Note 10.
EARNINGS
PER SHARE
Basic
earnings per share (EPS) is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is calculated by using the weighted average
number of common shares outstanding during the period increased to include
the
weighted average dilutive effect of “in-the-money” stock options using the
treasury stock method.
Notes
to Consolidated Financial Statements - Continued
COMPREHENSIVE
INCOME
Comprehensive
income differs from net income due to foreign currency translation adjustments
and net unrealized gains and losses on derivative instruments.
EFFECTS
OF RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify errors
using both a balance sheet and an income statement approach and evaluate whether
either approach results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. SAB 108 is
effective for fiscal years ending after November 15, 2007. We do not expect
the
adoption of SAB 108 to have a material impact on our consolidated financial
position, results of operations or cash flows.
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 157 is effective
for fiscal years beginning after November 15, 2007. We are currently evaluating
the impact of adopting SFAS 157 on our consolidated financial position, results
of operations and cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (SFAS 158). SFAS 158 requires an employer that
sponsors one or more single-employer defined benefit plans to: a) recognize
the
overfunded or underfunded status of a benefit plan in its statement of financial
position; b) recognize as a component of other comprehensive income, net of
tax,
any remaining unamortized transition obligation upon adoption as well as the
gains or losses and prior service costs or credits that have not yet been
recognized as components of net periodic benefit cost pursuant to SFAS No.
87,
“Employers’ Accounting for Pensions”, or SFAS No. 106, “Employers’ Accounting
for Postretirement Benefits Other Than Pensions”; c) measure defined benefit
plan assets and obligations as of the date of the employer’s fiscal year-end;
and d) disclose in the notes to financial statements additional information
about certain effects on net periodic benefit cost for the next fiscal year
that
arise from delayed recognition of the gains or losses, prior service costs
or
credits and transition asset or obligation. This statement is effective for
fiscal years ending after December 15, 2006. We are currently evaluating the
impact of adopting SFAS 158 on our consolidated financial position, results
of
operations and cash flows.
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement 109” (FIN 48), which
clarifies the accounting for uncertainty in tax positions. This interpretation
sets forth a recognition threshold and measurement element for the recognition
and measurement of a tax position taken or expected to be taken on a tax return.
This interpretation is effective for fiscal years beginning after December
15,
2006. We are currently evaluating the impact of adopting FIN 48 on our
consolidated financial position, results of operations and cash
flows.
Notes
to Consolidated Financial Statements - Continued
In
June
2006, the FASB ratified the consensus reached by the Emerging Issues Task Force
(EITF) in Issue No. 06-3, “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That
Is,
Gross versus Net Presentation)” (EITF 06-3). The scope of this issue includes
any tax assessed by a governmental authority that is directly imposed on a
revenue-producing activity between a seller and a customer and may include,
but
is not limited to, sales, use, value-added, and some excise taxes. EITF 06-3
indicates that the income statement presentation of these taxes on a gross
or
net basis is an accounting policy decision that should be disclosed in a
company’s financial statements. EITF 06-3 is effective for interim and annual
reporting periods beginning after December 15, 2006. We do not expect the
adoption of EITF 06-3 to have an impact on our consolidated financial position,
results of operations or cash flows.
In
November 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and
FAS
124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments” (FSP FAS 115-1 and 124-1). This FSP addresses the
determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss.
It also includes accounting considerations subsequent to the recognition of
other-than-temporary impairments. The FSP applies to reporting periods beginning
after December 15, 2005. The adoption of FSP FAS 115-1 and 124-1 did not impact
our consolidated financial position, results of operations or cash
flows.
In
September 2005, the FASB issued EITF Issue No. 04-13, “Accounting for Purchases
and Sales of Inventory with the Same Counterparty” (EITF 04-13). The EITF
concludes that two or more legally separate exchange transactions with the
same
counterparty should be combined and considered as a single arrangement for
purposes of applying Accounting Principles Board (APB) Opinion No. 29,
“Accounting for Nonmonetary Transactions”, when the transactions are entered
into in contemplation of one another. Furthermore, when two transactions are
considered a single arrangement, the assets exchanged should be accounted for
at
fair value. The EITF is effective for transactions completed in reporting
periods beginning after March 15, 2006. The adoption of EITF 04-13 did not
impact our consolidated financial position, results of operations or cash
flows.
3.
INVENTORIES
Inventories
consisted of the following:
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
18,623
|
|
$
|
17,923
|
|
Work
in process
|
|
|
1,805
|
|
|
562
|
|
Finished
goods
|
|
|
19,898
|
|
|
10,312
|
|
Total
|
|
$
|
40,326
|
|
$
|
28,797
|
|
Notes
to Consolidated Financial Statements - Continued
4.
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Land
|
|
$
|
16,675
|
|
$
|
16,623
|
|
Buildings
|
|
|
62,465
|
|
|
61,321
|
|
Machinery
and equipment
|
|
|
112,117
|
|
|
93,114
|
|
Furniture
and fixtures
|
|
|
5,146
|
|
|
4,757
|
|
Information
systems
|
|
|
12,742
|
|
|
11,354
|
|
Capital
leases
|
|
|
9,890
|
|
|
9,890
|
|
Construction
in progress
|
|
|
4,809
|
|
|
14,642
|
|
Total
property, plant and equipment
|
|
|
223,844
|
|
|
211,701
|
|
Less:
accumulated depreciation and amortization of assets under capital
leases
|
|
|
(93,668
|
)
|
|
(75,917
|
)
|
Net
property, plant and equipment
|
|
$
|
130,176
|
|
$
|
135,784
|
|
Depreciation
expense, including amortization of assets recorded under capital leases, was
$20,501, $18,817 and $17,271 for the years ended September 30, 2006, 2005 and
2004, respectively.
In
fiscal
2006, we recorded $790 in impairment expense primarily related
to the decision to no longer use a portion of a building in Aurora, Illinois,
that was previously used for research and development activities.
Of this
amount, $133 and $657 is included in cost of goods sold and research and
development expense, respectively. In
fiscal
2005, we recorded $657 in impairment expense primarily related to certain pieces
of equipment that became obsolete before the end of the assets’ estimated useful
life. Of this amount, $444, $112 and $101 is included in cost of goods sold,
selling and marketing expense and research and development expense,
respectively.
5.
BUSINESS COMBINATIONS
In
accordance with SFAS 141, we account for all business combinations by the
purchase method of accounting. Accordingly, the assets and liabilities of the
acquired entities are recorded at their estimated fair values at the date of
acquisition. Goodwill represents the excess of the purchase price over the
fair
value of net assets and amounts assigned to identifiable intangible assets.
Purchased in-process research and development (IPR&D), for which
technological feasibility has not yet been established and no future alternative
uses exist, is expensed immediately in accordance with SFAS 141.
Through
our Engineered Surface Finishes (ESF) initiative, 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 improved productivity or previously unseen surface performance. By
supplementing our internal development efforts with some externally acquired
technologies and businesses, we seek to leverage our expertise in CMP slurry
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.
Notes
to Consolidated Financial Statements - Continued
In
October 2005, we purchased substantially all of the assets and assumed certain
liabilities of Surface Finishes Co., Inc. (“Surface Finishes”), a privately-held
company that specializes in precision machining techniques at the sub-nanometer
level, as well as associated real property from a related trust. The total
cash
purchase price, subject to certain terms and conditions, was approximately
$2,282, of which $1,450 was allocated to net tangible assets and $832 was
allocated to intangible assets and goodwill based on estimated fair values.
The
acquisition was accounted for as a purchase transaction with results of
operations included in the consolidated financial statements from the date
of
acquisition.
In
July
2006, we acquired substantially all of the assets and certain associated
proprietary technology and intellectual property of QED Technologies, Inc.
(QED), and assumed certain of its current liabilities. QED, which had been
a
privately-held company, specializes in unique, patented polishing and metrology
systems for shaping and polishing high precision optics. At the July 2006
closing of the transaction, we paid $19,000 in cash plus $303 of transaction
costs from our available cash balance, and we may pay up to an additional
$4,500 depending upon the performance of the QED business over the two years
following the purchase. The purchase price was allocated to tangible assets,
liabilities assumed, identified intangible assets acquired, as well as
IPR&D, based on their estimated fair values. The excess of the purchase
price over the aggregate fair values was recorded as goodwill.
The
following table summarizes the total purchase price allocation.
|
|
At
July 7,
2006
|
|
|
|
|
|
Current
assets
|
|
$
|
10,610
|
|
Long-term
assets
|
|
|
2,197
|
|
In-process
research and development
|
|
|
1,120
|
|
Identified
intangible assets
|
|
|
6,890
|
|
Goodwill
|
|
|
2,496
|
|
Total
assets acquired
|
|
|
23,313
|
|
Total
current liabilities assumed
|
|
|
4,010
|
|
Net
assets acquired
|
|
$ |
19,303
|
|
Results
of QED’s operations from July 7, 2006, through the end of our fiscal year are
included in our consolidated financial statements. Pro forma results of
operations for Surface Finishes and QED have not been presented because the
effects of the acquisitions were not material to the Company’s
results.
Notes
to Consolidated Financial Statements - Continued
6.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
was $4,565 and $1,373 as of September 30, 2006 and 2005, respectively. The
increase in goodwill relates to our QED and Surface Finishes acquisitions during
fiscal 2006.
The
components of other intangible assets are as follows:
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Other
intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
Product
technology
|
|
$
|
5,380
|
|
$
|
135
|
|
$
|
-
|
|
$
|
-
|
|
Acquired
patents
|
|
|
5,000
|
|
|
479
|
|
|
-
|
|
|
-
|
|
Trade
secrets and know-how
|
|
|
2,550
|
|
|
2,550
|
|
|
2,550
|
|
|
2,550
|
|
Distribution
rights, customer lists and other
|
|
|
1,457
|
|
|
1,059
|
|
|
1,000 |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets subject to amortization
|
|
|
14,387
|
|
|
4,223
|
|
|
3,550
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets not subject to amortization*
|
|
|
1,283
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets
|
|
$
|
15,670
|
|
$
|
4,223
|
|
$
|
3,550
|
|
$
|
3,550
|
|
*
Total
other intangible assets not subject to amortization primarily consist of trade
names.
Additions
to other intangible assets were primarily attributable to our acquisitions
of
substantially all of the assets and certain liabilities of QED and Surface
Finishes in fiscal 2006. In connection with our acquisition of QED, we purchased
$1,120 of IPR&D related to one project. The amount allocated to IPR&D
was determined through established valuation techniques in the high-technology
industry and was expensed upon acquisition because technological feasibility
had
not yet been established and no future alternative uses exist. Research and
development costs to bring the product to technological feasibility are not
expected to have a material impact on our future results of operations or cash
flows.
In
June
2006 we purchased nine CMP slurry patents from the International Business
Machines Corporation (IBM) for a cost of $5,000, which is being amortized over
approximately 2.7 years.
Amortization
expense was $673 and $255 for fiscal 2006 and 2005, respectively. Estimated
future amortization expense for the five succeeding fiscal years is as
follows:
Fiscal
Year
|
|
Estimated
Amortization
expense
|
|
|
|
|
|
2007
|
|
$
|
2,580
|
|
2008
|
|
|
2,538
|
|
2009
|
|
|
1,363
|
|
2010
|
|
|
554
|
|
2011
|
|
|
547
|
|
Notes
to Consolidated Financial Statements - Continued
7.
OTHER LONG-TERM ASSETS
Other
long-term assets consisted of the following:
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Investment
in NanoProducts Corporation
|
|
$
|
2,446
|
|
$
|
3,347
|
|
Non-current
deferred income tax asset
|
|
|
1,365
|
|
|
-
|
|
Other
long-term assets
|
|
|
629
|
|
|
452
|
|
Total
|
|
$
|
4,440
|
|
$
|
3,799
|
|
During
the second quarter of fiscal 2006, and following a recapitalization of the
ownership of NanoProducts Corporation (NPC), we changed our method of accounting
for our investment in NPC from the equity method to the cost method, since
we
concluded that we no longer had the ability to significantly influence the
operating and financial policies of NPC. We evaluate annually or more
frequently if indicators of potential impairment exist, the estimated fair
value
of our investment to determine if an other-than-temporary impairment in the
value of our investment has taken place. No write down was recorded in fiscal
2006.
8.
ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT
LIABILITIES
Accrued
expenses, income taxes payable and other current liabilities consisted of the
following:
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Accrued
compensation
|
|
$
|
12,948
|
|
$
|
9,569
|
|
Raw
materials accrual
|
|
|
3,088
|
|
|
1,939
|
|
Warranty
accrual
|
|
|
924
|
|
|
1,426
|
|
Fixed
asset accrual
|
|
|
60
|
|
|
8,204
|
|
Income
taxes payable
|
|
|
764
|
|
|
1,290
|
|
Other
|
|
|
4,691
|
|
|
1,788
|
|
Total
|
|
$
|
22,475
|
|
$
|
24,216
|
|
9. REVOLVING
CREDIT FACILITY
We
have
an unsecured revolving credit facility of $50,000 with an option to increase
the
facility up to $80,000. Under this agreement, which terminates in November
2008,
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 its covenants.
Notes
to Consolidated Financial Statements - Continued
10.
SHARE-BASED COMPENSATION PLANS
EQUITY
INCENTIVE PLAN
In
March
2004, our stockholders approved our Second Amended and Restated Cabot
Microelectronics Corporation 2000 Equity Incentive Plan (the “Plan”), which is
administered by the Compensation Committee of the Board of Directors and is
intended to provide enough shares to give us ongoing flexibility to attract,
retain and reward our employees, directors, consultants and advisors. The Plan
allows for the granting of four types of equity incentive awards: stock options,
restricted stock, restricted stock units and substitute awards. Substitute
awards are those awards that, in connection with an acquisition by us, may
be
granted to employees, directors, consultants or advisors of the acquired
company, in substitution for equity incentives held by them in the seller or
the
acquired company. No substitute awards have been granted to date. The Plan
authorizes up to 9,500,000 shares of stock to be granted thereunder, including
up to 1,900,000 shares in aggregate of restricted stock or restricted stock
units and up to 1,750,000 incentive stock options (ISO).
Non-qualified
stock options issued under the Plan are generally time-based and provide for
a
ten-year term, with options generally vesting equally over a four-year period,
with first vesting on the first anniversary of the grant date. Compensation
expense related to our stock option awards was $9,826 in fiscal 2006. Prior
to
fiscal 2006 we accounted for share-based compensation under APB 25, which
prescribed an intrinsic value method for valuing stock options. In fiscal 2005
and 2004 no compensation expense was recorded with respect to stock options
as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. For additional information
on
our accounting for share-based compensation, see Note 2 to consolidated
financial statements. Under the Plan, employees and non-employees may also
be
granted ISOs to purchase common stock at not less than the fair value on the
date of the grant, of which none have been granted to date.
Under
the
Plan, employees and non-employees may be granted shares of restricted stock
or
restricted stock units at the discretion of the Compensation Committee. In
general, shares of restricted stock and restricted stock units may not be sold,
assigned, transferred, pledged, disposed of or otherwise encumbered. Holders
of
restricted stock, and restricted stock units if specified in the award
agreements, have all the rights of stockholders, including voting and dividend
rights, subject to the above restrictions. Restricted shares under the Plan
may
be purchased and placed “on deposit” by executive officers pursuant to the 2001
Deposit Share Plan. Shares purchased under this Deposit Share Plan receive
a 50%
match in restricted shares, which vest at the end of a three-year period, and
are subject to forfeiture upon early withdrawal of the deposit shares.
Compensation expense related to our restricted stock grants and deposit share
purchases was $127, $106 and $76 for fiscal 2006, 2005 and 2004, respectively.
Our
historical approach to long-term incentives has been primarily through the
issuance of stock options. However, beginning in fiscal 2007, we anticipate
moving to a blend of equity grants, under which a combination of stock option
awards and restricted stock or restricted stock units are anticipated being
granted. We anticipate that both the stock options and the restricted stock
or
restricted stock units will vest equally over a four-year period, with first
vesting on the anniversary of the grant date, and with stock options continuing
to have a ten-year contractual term.
EMPLOYEE
STOCK PURCHASE PLAN
In
March
2000, Cabot Microelectronics adopted an employee stock purchase plan (ESPP)
and
authorized up to 475,000 shares of common stock to be purchased under the plan.
The ESPP allows all full and certain part-time employees of Cabot
Microelectronics and its subsidiaries to purchase shares of our common stock
through payroll deductions. Employees can elect to have up to 10% of their
annual earnings withheld to purchase our stock, subject to a maximum number
of
shares that a participant may purchase and a maximum dollar expenditure in
any
six-month offering period, and certain other criteria. The shares are purchased
at a price equal to the lower of 85% of the closing price at the beginning
or
end of each semi-annual stock purchase period. A total of 49,319, 42,879, and
32,740 shares were issued under the ESPP during fiscal 2006, 2005 and 2004,
respectively. Compensation expense related to the ESPP was $344 in fiscal 2006.
Prior to fiscal 2006, no compensation expense was recorded under the ESPP,
in
accordance with APB 25.
Notes
to Consolidated Financial
Statements - Continued
DIRECTORS’
DEFERRED COMPENSATION PLAN
The
Directors’ Deferred Compensation Plan became effective in March 2001 and applies
only to our non-employee directors. In June 2003, this plan was amended to
require that payment of deferred amounts be made only in the form of Cabot
Microelectronics common shares, rather than cash. The
cumulative number of shares deferred under the plan was 26,436 and 17,161 as
of
September 30, 2006 and 2005, respectively. Compensation expense related to
our
Directors’ Deferred Compensation Plan was $367, $224 and $270 for fiscal 2006,
2005 and 2004, respectively.
ACCOUNTING
FOR SHARE-BASED COMPENSATION
In
conjunction with the adoption of SFAS 123R, effective October 1, 2005, we
applied the provisions of SAB No. 107, “Share-Based Payments” (SAB 107), in
developing our methodology to estimate our Black-Scholes model inputs. A number
of these inputs are highly subjective, including the expected term of our stock
options and the price volatility of the underlying stock. Under SFAS 123R,
we
estimate the expected volatility of our stock options based on a combination
of
our stock’s historical volatility and the implied volatilities from
actively-traded options on our stock. Prior to the adoption of SFAS 123R, we
estimated expected volatility based only on our stock’s historical volatility in
accordance with SFAS 123 for purposes of our pro forma disclosure. We believe
that implied volatility is more reflective of market conditions; however, due
to
the shorter length in term of the actively-traded options on our stock, we
believe it to be appropriate to use a blended assumption for our stock options.
In addition, we have updated our stock option expected term assumption by
adopting SAB 107’s simplified method, due to our limited amount of historical
option exercise data. This method uses an average of the vesting and contractual
terms.
The
fair
value of our share-based awards was estimated, assuming no expected dividends,
using the Black-Scholes model with the following weighted-average
assumptions:
|
Year
Ended September 30,
|
|
2006
|
|
2005
|
|
2004
|
Stock
Options
|
|
|
|
|
|
Expected
term (in years)
|
6.25
|
|
5
|
|
5
|
Expected
volatility
|
56%
|
|
70%
|
|
71%
|
Risk-free
rate of return
|
4.5%
|
|
3.6%
|
|
3.3%
|
|
|
|
|
|
|
ESPP |
|
|
|
|
|
Expected
term (in years) |
0.5
|
|
0.5
|
|
0.5
|
Expected
volatility |
33%
|
|
30%
|
|
58%
|
Risk-free
rate of return |
4.9%
|
|
3.25%
|
|
2.0%
|
The
Black-Scholes model is primarily used in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and
are
fully transferable. Because employee stock options and employee stock purchases
have certain characteristics that are significantly different from traded
options, and because changes in the subjective assumptions can materially
affect
the estimated value, our use of the Black-Scholes model for estimating the
fair
value of stock options and employee stock purchases may not provide an accurate
measure. Although the value of our stock options and employee stock purchases
are determined in accordance with SFAS 123R and SAB 107 using an option-pricing
model, those values may not be indicative of the fair values observed in
a
willing buyer/willing seller market transaction.
Notes
to Consolidated Financial Statements - Continued
The
table
below reflects net income and earnings per share for fiscal 2006, compared
with
the pro forma information for fiscal 2005 and 2004, as follows:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
(*)
|
|
2004
(*)
|
|
|
|
|
|
|
|
|
|
Net
income prior to adoption of SFAS 123R
|
|
|
N/A
|
|
$
|
32,473
|
|
$
|
46,728
|
|
Share-based
compensation expense
|
|
$
|
10,664
|
|
|
53,054
|
|
|
27,130
|
|
Tax
benefit
|
|
|
(3,809
|
)
|
|
(16,022
|
)
|
|
(8,980
|
)
|
Share-based
compensation expense, net of tax
|
|
|
6,855
|
|
|
37,032
|
|
|
18,150
|
|
Net
income (loss), including the effect of share-based compensation expense
|
|
$
|
32,948
|
|
$
|
(4,559
|
)
|
$
|
28,578
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported for the prior period
|
|
|
N/A
|
|
$
|
1.32
|
|
$
|
1.89
|
|
Basic
- including the effect of share-based compensation expense
|
|
$
|
1.36
|
|
$
|
(0.19
|
)
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported for the prior period
|
|
|
N/A
|
|
$
|
1.32
|
|
$
|
1.88
|
|
Diluted
- including the effect of share-based compensation expense
|
|
$
|
1.36
|
|
$
|
(0.19
|
)
|
$
|
1.15
|
|
|
* |
Net
income and earnings per share prior to fiscal 2006 did not include
share-based compensation expense associated with employee stock options
and employee stock purchases under SFAS 123 because we did not adopt
the
recognition provisions of SFAS 123. Accordingly, share-based compensation
expense prior to fiscal 2006 is calculated based on the pro forma
application of SFAS 123.
|
Pro-forma
share-based compensation expense in fiscal 2005 includes the effect of
accelerating the vesting of approximately 1.3 million options to September
1,
2005, that had option prices greater than $34.65 as of September 27, 2004.
The
acceleration enabled us to eliminate the recognition of share-based compensation
expense associated with these "out-of-the-money" options in our consolidated
financial statements upon the adoption of SFAS 123R in October 2005,
contributing to the reduction of share-based compensation expense in fiscal
2006. The costs presented in the preceding table may not be representative
of
the total effects on reported income for future years. Factors that may impact
future years include, but are not limited to, changes to our historical
approaches to long-term incentives such as described above, the timing and
number of additional grants of stock option awards, the vesting period and
contractual term of stock option awards and types of equity awards granted.
Further, share-based compensation may be impacted by changes in the fair value
of future awards through variables such as fluctuations in and volatility of
our
stock price, as well as changes in employee exercise behavior and forfeiture
rates.
Notes
to Consolidated Financial Statements - Continued
STOCK
OPTION ACTIVITY
A
summary
of stock option activity under the Plan as of September 30, 2006, and changes
during the fiscal 2006 is presented below:
|
|
Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding
at September 30, 2005
|
|
|
4,181,529
|
|
$
|
48.84
|
|
|
|
|
|
|
|
Granted
|
|
|
984,090
|
|
|
30.60
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
or canceled
|
|
|
(797,960
|
)
|
|
50.67
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
4,367,659
|
|
$
|
44.40
|
|
|
6.9
|
|
$
|
2
|
|
Exercisable
at September 30, 2006
|
|
|
2,625,410
|
|
$
|
51.60
|
|
|
5.7
|
|
$
|
1
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (i.e., the difference between our closing stock price on the
last trading day of fiscal 2006 and the exercise price, multiplied by the number
of shares) that would have been received by the option holders had all option
holders exercised their options on the last trading day of fiscal 2006. The
total intrinsic value of options exercised was $0, $4,462 and $2,651 for fiscal
2006, 2005 and 2004, respectively.
The
total
cash received from options exercised was $0, $5,655 and $2,232 for fiscal 2006,
2005 and 2004, respectively. The actual tax benefit realized for the tax
deductions from options exercised was $0, $1,651 and $981 for fiscal 2006,
2005
and 2004, respectively. Using the Black-Scholes model, the weighted-average
fair
value of stock options granted was $17.85, $22.30 and $29.60 per share for
fiscal 2006, 2005 and 2004, respectively.
A
summary
of the status of the nonvested stock options outstanding under the Plan as
of
September 30, 2006, and changes during fiscal 2006 is presented
below:
|
|
Stock
Options
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2005
|
|
|
1,194,850
|
|
$
|
22.19
|
|
Granted
|
|
|
984,090
|
|
|
17.85
|
|
Vested
|
|
|
(297,950
|
)
|
|
22.13
|
|
Forfeited
|
|
|
(138,741
|
)
|
|
20.24
|
|
Nonvested
at September
30, 2006
|
|
|
1,742,249
|
|
$
|
19.90
|
|
As
of
September 30, 2006, there was $23,886 of total unrecognized share-based
compensation expense related to nonvested stock options granted under the Plan.
That cost is expected to be recognized over a weighted-average period of 2.6
years. The total fair values of shares vested during fiscal years 2006, 2005
and
2004 were $6,594, $66,365 and $23,746, respectively. Shares issued under
our share-based compensation plans are issued from new shares.
Notes
to Consolidated Financial Statements - Continued
11.
SAVINGS PLAN
Effective
in May 2000, we adopted the Cabot Microelectronics Corporation 401(k) Plan
(the
“401(k) Plan”), which is a qualified defined contribution plan, covering all
eligible U.S. employees meeting certain minimum age and eligibility
requirements, as defined by the 401(k) Plan. Participants may make elective
contributions up to 60% of their eligible compensation. All amounts contributed
by participants and earnings on these contributions are fully vested at all
times. The 401(k) Plan provides for matching and fixed nonelective contributions
by the Company. Under the 401(k) Plan, the Company will match 100% of the first
four percent of the participant’s eligible compensation and 50% of the next two
percent of the participant’s eligible compensation that is contributed, subject
to limitations required by government regulations. Under the 401(k) Plan, all
U.S. employees, even those who do not contribute to the 401(k) Plan, will
receive a contribution by the Company in an amount equal to four percent of
eligible compensation, and thus are participants in the 401(k) Plan.
Participants are 100% vested in all Company contributions at all times. The
Company’s expense for the 401(k) Plan totaled $3,170, $2,907 and $2,696 for the
fiscal years ended September 30, 2006, 2005 and 2004, respectively.
12.
OTHER INCOME, NET
Other
income, net, consisted of the following:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
5,394
|
|
$
|
3,438
|
|
$
|
1,405
|
|
Interest
expense
|
|
|
(690
|
)
|
|
(619
|
)
|
|
(743
|
)
|
Other
expense
|
|
|
(593
|
)
|
|
(72
|
)
|
|
(523
|
)
|
Total
other income, net
|
|
$
|
4,111
|
|
$
|
2,747
|
|
$
|
139
|
|
13.
STOCKHOLDERS’ EQUITY
COMMON
STOCK
Each
share of common stock entitles the holder to one vote on all matters submitted
to a vote of Cabot Microelectronics’ stockholders. Common stockholders are
entitled to receive ratably the dividends, if any, as may be declared by the
Board of Directors. Upon liquidation, dissolution or winding up of Cabot
Microelectronics, the common stockholders will be entitled to share, pro
ratably, in the distribution of assets available after satisfaction of all
liabilities and liquidation preferences of preferred stockholders, if any.
The
number of authorized shares of common stock is 200,000,000 shares.
STOCKHOLDER
RIGHTS PLAN
In
March
2000 the Board of Directors of Cabot Microelectronics approved a stock rights
agreement and declared a dividend distribution of one right to purchase one
one-thousandth of a share of Series A Junior Participating Preferred Stock
for
each outstanding share of common stock to stockholders of record on April 7,
2000. The rights become exercisable based upon certain limited conditions
related to acquisitions of stock, tender offers and certain business combination
transactions.
Notes
to Consolidated Financial Statements - Continued
SHARE
REPURCHASES
In
the
fourth quarter of fiscal 2005, we completed our $25,000 share repurchase
program, which was announced in July 2004. In October 2005 we announced that
our
Board of Directors authorized a new share repurchase program for up to $40,000
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. We view
the program as an effective means by which to return cash to shareholders.
The
program, which became effective on the authorization date, may be suspended
or
terminated at any time, at the Company’s discretion. During fiscal 2006, we
repurchased 523,147 shares of common stock at a cost of $15,996. For additional
information on share repurchases, see “Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities”.
14.
INCOME TAXES
Income
before income taxes was as follows:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
39,759
|
|
$
|
42,333
|
|
$
|
63,707
|
|
Foreign
|
|
|
8,765
|
|
|
4,190
|
|
|
6,141
|
|
Total
|
|
$
|
48,524
|
|
$
|
46,523
|
|
$
|
69,848
|
|
Taxes
on
income consisted of the following:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
U.S.
federal and state:
|
|
|
|
|
|
|
|
Current
|
|
$
|
16,645
|
|
$
|
13,220
|
|
$
|
19,564
|
|
Deferred
|
|
|
(5,714
|
)
|
|
(1,353
|
)
|
|
649
|
|
Total
|
|
$
|
10,931
|
|
$
|
11,867
|
|
$
|
20,213
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
4,388
|
|
$
|
2,529
|
|
$
|
2,790
|
|
Deferred
|
|
|
257
|
|
|
(346
|
)
|
|
117
|
|
Total
|
|
|
4,645
|
|
|
2,183
|
|
|
2,907
|
|
Total
U.S. and foreign
|
|
$
|
15,576
|
|
$
|
14,050
|
|
$
|
23,120
|
|
The
provision for income taxes at our effective tax rate differed from the provision
for income taxes at the statutory rate as follows:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
U.S.
benefits from research and experimentation activities
|
|
|
(0.2
|
)
|
|
(1.2
|
)
|
|
(1.2
|
)
|
State
taxes, net of federal effect
|
|
|
0.7
|
|
|
0.7
|
|
|
1.1
|
|
U.S.
benefits from foreign sales
|
|
|
-
|
|
|
(2.1
|
)
|
|
(1.4
|
)
|
Tax-exempt
interest income
|
|
|
(3.7
|
)
|
|
(2.4
|
)
|
|
-
|
|
Domestic
production deduction
|
|
|
(0.4
|
)
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
0.7
|
|
|
0.2
|
|
|
(0.4
|
)
|
Provision
for income taxes
|
|
|
32.1
|
%
|
|
30.2
|
%
|
|
33.1
|
%
|
Notes
to Consolidated Financial Statements - Continued
Significant
components of deferred income taxes were as follows:
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Employee
benefits
|
|
$
|
1,410
|
|
$
|
1,318
|
|
Inventory
|
|
|
1,111
|
|
|
1,884
|
|
Depreciation
and amortization
|
|
|
305
|
|
|
128
|
|
Product
warranty
|
|
|
368
|
|
|
543
|
|
Bad
debt reserve
|
|
|
193
|
|
|
164
|
|
State
and local taxes
|
|
|
146
|
|
|
93
|
|
Share-based
compensation expense
|
|
|
3,559
|
|
|
-
|
|
Other,
net
|
|
|
373
|
|
|
330
|
|
Total
deferred tax assets
|
|
$
|
7,465
|
|
$
|
4,460
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
2,630
|
|
$
|
5,118
|
|
Translation
adjustment
|
|
|
72
|
|
|
539
|
|
State
and local taxes
|
|
|
76
|
|
|
133
|
|
Other,
net
|
|
|
886
|
|
|
396
|
|
Total
deferred tax liabilities
|
|
$
|
3,664
|
|
$
|
6,186
|
|
15.
COMMITMENTS AND 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 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
fiscal 2006 as follows:
Balance
as of September 30, 2005
|
|
$
|
1,426
|
|
Additions
charged to expense
|
|
|
415
|
|
Additions
due to acquisitions
|
|
|
32
|
|
Deductions
|
|
|
(949
|
)
|
Balance
as of September 30, 2006
|
|
$
|
924
|
|
Notes
to Consolidated Financial Statements - Continued
INDEMNIFICATION
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
industries 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 FIN No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others”. We consider such factors as the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. To date, we have not experienced material costs
as a result of such obligations and as of September 30, 2006, 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.
LEASE
COMMITMENTS
We
lease
certain vehicles, warehouse facilities, office space, machinery and equipment
under cancelable and noncancelable leases, most of which expire within five
years from now and may be renewed by us. Rent expense under such arrangements
during fiscal 2006, 2005 and 2004 totaled $1,221, $637 and $624,
respectively.
In
December 2001 we entered into a fumed alumina supply agreement with Cabot
Corporation under which we agreed to pay Cabot Corporation for the expansion
of
a fumed alumina manufacturing facility in Tuscola, Illinois. The payments for
the facility have been treated as a capital lease for accounting purposes and
the present value of the minimum quarterly payments resulted in an initial
$9,776 lease obligation and related leased asset. The agreement has an initial
five-year term, which expires in December 2006, and has been renewed for another
five-year term ending in December 2011.
Future
minimum rental commitments under noncancelable leases as of September 30, 2006
are as follows:
Fiscal
Year
|
|
Operating
|
|
Capital
|
|
|
|
|
|
|
|
2007
|
|
$
|
1,328
|
|
$
|
1,705
|
|
2008
|
|
|
916
|
|
|
1,365
|
|
2009
|
|
|
269
|
|
|
1,344
|
|
2010
|
|
|
64
|
|
|
1,344
|
|
2011
|
|
|
11
|
|
|
1,008
|
|
Thereafter
|
|
|
-
|
|
|
-
|
|
|
|
$
|
2,588
|
|
|
6,766
|
|
Amount
related to interest
|
|
|
|
|
|
(1,092
|
)
|
Capital
lease obligation
|
|
|
|
|
$
|
5,674
|
|
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.
Notes
to Consolidated Financial Statements - Continued
We
operate
under a
fumed silica supply agreement with Cabot Corporation under which we are
obligated to purchase fumed silica for at least 90% of our six-month
volume
forecast for certain of our slurry products, and to purchase certain
non-material minimum quantities every six months. We are required to
pay for the
shortfall if we purchase less than these amounts. 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 which runs through
December 2011. Purchase obligations include $22,003 of contractual commitments
for fumed silica and fumed alumina under these contracts.
16.
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:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Numerator:
|
|
|
|
|
|
|
|
Earnings
available to common shares
|
|
$
|
32,948
|
|
$
|
32,473
|
|
$
|
46,728
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
24,228,118
|
|
|
24,562,581
|
|
|
24,749,531
|
|
(Denominator
for basic calculation)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
268
|
|
|
49,881
|
|
|
132,909
|
|
Diluted
weighted average common shares
|
|
|
24,228,386
|
|
|
24,612,462
|
|
|
24,882,440
|
|
(Denominator
for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.36
|
|
$
|
1.32
|
|
$
|
1.89
|
|
Diluted
|
|
$
|
1.36
|
|
$
|
1.32
|
|
$
|
1.88
|
|
For
the twelve
months ended September 30, 2006, 2005, and 2004, approximately 4.2 million,
3.8
million and 3.0 million shares,
respectively, attributable to outstanding stock options were excluded from
the
calculation of diluted earnings per share because their inclusion would have
been antidilutive.
Notes
to Consolidated Financial Statements - Continued
17.
FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC
AREA
We
operate predominantly in one industry segment - the development, manufacture,
and sale of CMP slurries.
Revenues
are attributed to the United States and foreign regions based upon the customer
location and not the geographic location from which our products were shipped.
Financial information by geographic area was as follows:
|
|
Year
Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Revenue:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
65,951
|
|
$
|
60,089
|
|
$
|
78,093
|
|
Asia
|
|
|
226,520
|
|
|
186,054
|
|
|
200,356
|
|
Europe
|
|
|
28,324
|
|
|
24,341
|
|
|
30,984
|
|
Total
|
|
$
|
320,795
|
|
$
|
270,484
|
|
$
|
309,433
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
82,855
|
|
$
|
87,378
|
|
$
|
94,802
|
|
Asia
|
|
|
45,609
|
|
|
46,385
|
|
|
30,684
|
|
Europe
|
|
|
1,712
|
|
|
2,021
|
|
|
2,308
|
|
Total
|
|
$
|
130,176
|
|
$
|
135,784
|
|
$
|
127,794
|
|
Revenue
from Taiwan and Japan each accounted for more than ten percent of our total
revenue. Our revenue from customers in Taiwan totaled $87,834, $77,373 and
$86,283 for fiscal 2006, 2005 and 2004, respectively. Our revenue from customers
in Japan totaled $43,627, $38,605 and $44,872 for fiscal 2006, 2005 and 2004,
respectively.
More
than
ten percent of our net property, plant and equipment is located in Japan, having
a net book value of $40,298, $44,333 and $30,243 at September 30, 2006, 2005
and
2004, respectively.
SELECTED
QUARTERLY OPERATING RESULTS
The
following table presents our unaudited financial information for the eight
quarters ended September 30, 2006. This unaudited financial information has
been
prepared in accordance with accounting principles generally accepted in the
United States of America, applied on a basis consistent with the annual audited
financial statements and in the opinion of management, include all necessary
adjustments, which consist only of normal recurring adjustments necessary to
present fairly the financial results for the periods. The results for any
quarter are not necessarily indicative of results for any future period. Certain
reclassifications of prior fiscal quarter amounts have been made to conform
to
the current period presentation.
CABOT
MICROELECTRONICS CORPORATION
SELECTED
QUARTERLY OPERATING RESULTS
(Unaudited
and in thousands, except per share amounts)
|
|
Sept.
30,
2006
|
|
June
30,
2006
|
|
March
31,
2006
|
|
Dec.
31,
2005
|
|
Sept.
30,
2005
|
|
June
30,
2005
|
|
March
31,
2005
|
|
Dec
31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
86,982
|
|
$
|
84,936
|
|
$
|
67,389
|
|
$
|
81,488
|
|
$
|
73,861
|
|
$
|
65,037
|
|
$
|
64,502
|
|
$
|
67,084
|
|
Cost
of goods sold
|
|
|
48,328
|
|
|
44,524
|
|
|
35,855
|
|
|
43,051
|
|
|
39,234
|
|
|
33,843
|
|
|
34,733
|
|
|
33,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
38,654
|
|
|
40,412
|
|
|
31,534
|
|
|
38,437
|
|
|
34,627
|
|
|
31,194
|
|
|
29,769
|
|
|
33,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research,
development and technical
|
|
|
13,030
|
|
|
12,060
|
|
|
11,321
|
|
|
11,659
|
|
|
12,147
|
|
|
10,462
|
|
|
10,857
|
|
|
9,544
|
|
Selling
and marketing
|
|
|
5,528
|
|
|
5,486
|
|
|
5,075
|
|
|
5,026
|
|
|
4,863
|
|
|
3,938
|
|
|
4,012
|
|
|
4,176
|
|
General
and administrative
|
|
|
8,556
|
|
|
9,105
|
|
|
8,244
|
|
|
8,414
|
|
|
7,029
|
|
|
6,191
|
|
|
6,542
|
|
|
5,665
|
|
Purchased
in-process research and development
|
|
|
1,120
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
operating expenses
|
|
|
28,234
|
|
|
26,651
|
|
|
24,640
|
|
|
25,099
|
|
|
24,039
|
|
|
20,591
|
|
|
21,411
|
|
|
19,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
10,420
|
|
|
13,761
|
|
|
6,894
|
|
|
13,338
|
|
|
10,588
|
|
|
10,603
|
|
|
8,358
|
|
|
14,227
|
|
Other
income, net
|
|
|
1,541
|
|
|
764
|
|
|
1,090
|
|
|
716
|
|
|
833
|
|
|
969
|
|
|
458
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
11,961
|
|
|
14,525
|
|
|
7,984
|
|
|
14,054
|
|
|
11,421
|
|
|
11,572
|
|
|
8,816
|
|
|
14,714
|
|
Provision
for income taxes
|
|
|
3,803
|
|
|
4,743
|
|
|
2,547
|
|
|
4,483
|
|
|
3,169
|
|
|
3,234
|
|
|
2,762
|
|
|
4,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,158
|
|
$
|
9,782
|
|
$
|
5,437
|
|
$
|
9,571
|
|
$
|
8,252
|
|
$
|
8,338
|
|
$
|
6,054
|
|
$
|
9,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.34
|
|
$
|
0.40
|
|
$
|
0.22
|
|
$
|
0.39
|
|
$
|
0.34
|
|
$
|
0.34
|
|
$
|
0.25
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
24,087
|
|
|
24,205
|
|
|
24,233
|
|
|
24,363
|
|
|
24,459
|
|
|
24,609
|
|
|
24,642
|
|
|
24,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.34
|
|
$
|
0.40
|
|
$
|
0.22
|
|
$
|
0.39
|
|
$
|
0.34
|
|
$
|
0.34
|
|
$
|
0.25
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average diluted shares outstanding
|
|
|
24,087
|
|
|
24,205
|
|
|
24,233
|
|
|
24,363
|
|
|
24,460
|
|
|
24,610
|
|
|
24,685
|
|
|
24,721
|
|
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
The
following table sets forth activities in our allowance for doubtful
accounts:
Allowance
For
Doubtful
Accounts
|
|
Balance
At
Beginning
of
Year
|
|
Additions
(Deductions)
Charged
To
Expenses
|
|
Deductions
|
|
Balance
At
End
Of Year
|
|
Year
ended:
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
$
|
470
|
|
$
|
92
|
|
$
|
(11
|
)
|
$
|
551
|
|
September
30, 2005
|
|
|
598
|
|
|
(65
|
)
|
|
(63
|
)
|
|
470
|
|
September
30, 2004
|
|
|
585
|
|
|
44
|
|
|
(31
|
)
|
|
598
|
|
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. Charges to expenses and deductions, shown below,
represent the net change required to maintain an appropriate reserve. Prior
years have been revised to conform to current year presentation.
Warranty
Reserves
|
|
Balance
At
Beginning
of
Year
|
|
Additions
Charged
To
Expenses
|
|
Additions
Due
To
Acquisitions
|
|
Deductions
|
|
Balance
At
End
Of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended:
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
$
|
1,426
|
|
$
|
415
|
|
$
|
32
|
|
$
|
(949
|
)
|
$
|
924
|
|
September
30, 2005
|
|
|
952
|
|
|
687
|
|
|
-
|
|
|
(213
|
)
|
|
1,426
|
|
September
30, 2004
|
|
|
836
|
|
|
747
|
|
|
-
|
|
|
(631
|
)
|
|
952
|
|
MANAGEMENT
RESPONSIBILITY
The
accompanying consolidated financial statements were prepared by the Company
in
conformity with accounting principles generally accepted in the United States
of
America. The Company’s management is responsible for the integrity of these
statements and of the underlying data, estimates and judgments.
The
Company’s management establishes and maintains a system of internal accounting
controls designed to provide reasonable assurance that its assets are
safeguarded from loss or unauthorized use, that transactions are properly
authorized and recorded, and that financial records can be relied upon for
the
preparation of the consolidated financial statements. This system includes
written policies and procedures, a code of business conduct and an
organizational structure that provides for appropriate division of
responsibility and the training of personnel. This system is monitored and
evaluated on an ongoing basis by management in conjunction with its internal
audit function.
The
Company’s management assesses the effectiveness of its internal control over
financial reporting on an annual basis. In making this assessment, management
uses the criteria set forth by the Committee of Sponsoring Organizations of
the
Treadway Commission in Internal
Control - Integrated Framework.
Management acknowledges, however, that all internal control systems, no matter
how well designed, have inherent limitations and can provide only reasonable
assurance with respect to financial statement preparation and
presentation.
In
addition, the Company’s independent registered public accounting firm conducts
an objective assessment of the degree to which management meets its
responsibility for fairness of financial reporting and issues an attestation
report on the adequacy of management’s assessment. It evaluates the Company’s
internal control over financial reporting and performs such tests and other
procedures as it deems necessary to reach and express an opinion on the fairness
of the financial statements.
In
addition, the Audit Committee of the Board of Directors provides general
oversight responsibility for the financial statements. Composed entirely of
Directors who are independent and not employees of the Company, the Committee
meets periodically with the Company’s management, internal auditors and the
independent registered public accounting firm to review the quality of financial
reporting and internal controls, as well as results of the auditing efforts.
The
internal auditors and independent registered public accounting firm have full
and direct access to the Audit Committee, with and without management
present.
/s/
William P. Noglows
William
P. Noglows
Chief
Executive Officer
/s/
William S. Johnson
William
S. Johnson
Chief
Financial Officer
/s/
Thomas S. Roman
Thomas
S.
Roman
Principal
Accounting Officer
ITEM
9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, with the participation of our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), has evaluated 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 (“the Exchange
Act”)), as of September 30, 2006. Based on that evaluation, our CEO and CFO have
concluded that our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified by the SEC, and that material information relating to the
Company is made known to senior management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure.
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 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, as appropriate.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is defined in Rule 13a-15(f) or Rule 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under
the
supervision of, the Company’s CEO and CFO to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America. Internal control over
financial reporting includes policies and procedures that: pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect
our transactions and dispositions of the Company’s assets; provide reasonable
assurance that transactions are recorded as necessary for preparation of our
financial statements in accordance with generally accepted accounting
principles; provide reasonable assurance that receipts and expenditures of
Company assets are made in accordance with management authorization; and provide
reasonable assurance that unauthorized acquisition, use or disposition of
Company assets that could have a material effect on our financial statements
would be prevented or detected on a timely basis. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because
of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our
management evaluated the effectiveness of our internal control over financial
reporting based on the framework in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation, our management concluded that the Company’s internal control
over financial reporting was effective as of September 30, 2006.
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
has audited this assessment of the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2006, as stated in their
report which is included at the beginning of Item 8 of Part II of this Form
10-K.
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 reflect the fact that there are resource
constraints, and the benefits of controls must be considered 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 the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of 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.
None.
PART
III
The
information required by Item 10 of Form 10-K with respect to identification
of
directors, the existence of a separately-designated standing audit committee,
identification of members of such committee and identification of an audit
committee financial expert is incorporated by reference from the information
contained in the sections captioned "Election of Directors" and “Board Structure
and Compensation” in Cabot Microelectronics’ definitive Proxy Statement for the
Annual Meeting of Stockholders to be held March 6, 2007 (the "Proxy Statement”).
In addition, for information with respect to the executive officers of Cabot
Microelectronics, see "Executive Officers" at the end of Part I of this Form
10-K and the section captioned “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement. Information required by Item 405 of
Regulation S-K is incorporated by reference from the information contained
in
the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance”
in the Proxy Statement.
We
have
adopted a code of business conduct for all of our employees and directors,
including our principal executive officer, other executive officers, principal
financial officer and senior financial personnel. A copy of our code of business
conduct is available free of charge on our Company website at www.cabotcmp.com.
We intend to post on our website any material changes to, or waivers from our
code of business conduct, if any, within two days of any such event.
The
information required by Item 11 of Form 10-K is incorporated by reference from
the information contained in the section captioned "Executive Compensation"
in
the Proxy Statement.
EQUITY
COMPENSATION PLAN INFORMATION
Shown
below is information as of September 30, 2006, with respect to the shares of
common stock that may be issued under Cabot Microelectronics’ existing equity
compensation plans.
Plan
category
|
|
(a)
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
|
(b)
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
|
(c)
Number
of securities remaining
available
for future issuance under
equity
compensation plans (excluding
securities
reflected in column (a))
|
|
Equity
compensation plans approved by security holders
|
|
|
4,373,397
|
|
$
|
44.40
|
|
|
3,943,412
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,373,397
|
|
$
|
44.40
|
|
|
3,943,412
|
|
|
(1)
|
Includes
211,892 shares available for future issuance under our Employee Stock
Purchase Plan.
|
The
other
information required by Item 12 of Form 10-K is incorporated by reference from
the information contained in the section captioned "Stock Ownership" in the
Proxy Statement.
The
information required by Item 13 of Form 10-K is incorporated by reference from
the information contained in the section captioned "Certain Relationships and
Related Transactions" in the Proxy Statement.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by Item 14 of Form 10-K is incorporated by reference from
the information contained in the section captioned “Fees of Independent Auditors
and Audit Committee Report” in the Proxy Statement.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The
following Financial Statements and Financial Statement Schedule are included
in
Item 8 herein:
Report
of
Independent Registered Public Accounting Firm
Consolidated
Statements of Income for the years ended September 30, 2006, 2005 and
2004
Consolidated
Balance Sheets at September 30, 2006 and 2005
Consolidated
Statements of Cash Flows for the years ended September 30, 2006, 2005 and
2004
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended September 30,
2006, 2005 and 2004
Notes
to
the Consolidated Financial Statements
2.
|
Financial
Statement Schedule: Schedule II - Valuation and Qualifying
Accounts
|
3.
|
Exhibits
- The following exhibits are filed as part of, or incorporated by
reference into, this Report on Form
10-K:
|
|
|
|
Number
|
|
Description
|
|
|
|
3.2
(1)
|
|
Amended
and Restated By-Laws of Cabot Microelectronics
Corporation.
|
3.3
(1)
|
|
Form
of Amended and Restated Certificate of Incorporation of Cabot
Microelectronics Corporation.
|
3.4
(2)
|
|
Form
of Certificate of Designation, Preferences and Rights of Series A
Junior
Participating Preferred Stock.
|
4.1
(2)
|
|
Form
of Cabot Microelectronics Corporation Common Stock
Certificate.
|
4.2
(3)
|
|
Rights
Agreement.
|
4.3
(4)
|
|
Amendment
to Rights Agreement.
|
10.1
|
|
Second
Amended and Restated Cabot Microelectronics Corporation 2000 Equity
Incentive Plan, as amended and restated September 26,
2006.*
|
10.2
(12) |
|
Form
of Cabot Microelectronics Corporation Second Amended and Restated
2000
Equity Incentive Plan Non-Qualified Stock Option Grant Agreement
(directors).*
|
10.4 |
|
Form
of Cabot Microelectronics Corporation Second Amended and Restated
2000
Equity Incentive Plan Non-Qualified Stock Option Grant Agreement
(U.S.
employees (including executive officers)).*
|
10.5
|
|
Form
of Cabot Microelectronics Corporation Second Amended and Restated
2000
Equity Incentive Plan Restricted Stock Grant Agreement (employees
(including executive officers)).*
|
10.15
(7)
|
|
Cabot
Microelectronics Corporation Employee Stock Purchase Plan, as
amended.*
|
10.22
(8)
|
|
Cabot
Microelectronics Corporation 401(k) Plan, as amended.*
|
10.23
(5)
|
|
Form
of Change in Control Severance Protection Agreement.**
|
10.28
|
|
Directors’
Deferred Compensation Plan, as amended September 26, 2006.*
|
10.29
(9) |
|
Amended
and Restated Credit
Agreement dated November 24, 2003 among Cabot Microelectronics
Corporation, Various Financial Institutions and LaSalle Bank National
Association, as Administrative Agent, and National City Bank of
Michigan/Illinois, as Syndication Agent. |
10.30
(6) |
|
Form
of Deposit Share Agreement.*** |
10.31
(6)
|
|
Amendment
No. 1 to Fumed Metal Oxide Agreement,
between Cabot Microelectronics Corporation and Cabot
Corporation.+
|
10.32
(6)
|
|
Fumed
Alumina Supply Agreement.+
|
10.33
(7)
|
|
Adoption
Agreement, as amended, of Cabot Microelectronics Corporation Supplemental
Employee Retirement Plan.*
|
10.34
(14)
|
|
Code
of Business Conduct.
|
10.36
(9)
|
|
Directors’
Cash Compensation Umbrella Program.*
|
10.37
(10)
|
|
Employment
and Transition Agreement dated November 3, 2003.*
|
10.38
(10)
|
|
Employment
Offer Letter dated November 2, 2003.*
|
10.39
(10)
|
|
Employment
Offer Letter dated November 17, 2003.*
|
10.40
(11)
|
|
Amendment
No. 2 to Fumed Metal Oxide Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.
|
10.41
(11)
|
|
Amendment
No. 3 to Fumed Metal Oxide Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.
|
10.42
(11)
|
|
Fumed
Silica Supply Agreement.+
|
10.43
(11)
|
|
General
Release, Waiver and Covenant Not to Sue.*
|
10.44
(13)
|
|
Amendment
as of January 17, 2005 to Four Grant Agreements for Non-Qualified
Stock
Option Awards with Grant Dates of March 13, 2001, March 12, 2002,
March
11, 2003 and March 9, 2004, respectively.*
|
10.45
(13)
|
|
Amendment
as of January 29, 2005 to Three Grant Agreements for Non-Qualified
Stock
Option Awards with Grant Dates of March 13, 2001, March 12, 2002
and March
11, 2003, respectively.*
|
10.46
(13)
|
|
Non-Employee
Directors’ Compensation Summary as of March, 2005.*
|
10.47
(15)
|
|
Asset
Purchase Agreement by and among Cabot Microelectronic Corporation,
QED
Technologies International, Inc., QED Technologies, Inc., Don Golini
and
Lowell Mintz dated June 15, 2006.
|
10.48
(15)
|
|
Technology
Asset
Purchase Agreement dated June 15, 2006 by and among Cabot Microelectronics
Corporation, QED Technologies International, Inc., and Byelocorp
Scientific, Inc.
|
10.49
|
|
Amendment
No. 1 to Fumed Silica Supply Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.++
|
21.1
|
|
Subsidiaries
of Cabot Microelectronics Corporation.
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm.
|
24.1
|
|
Power
of Attorney.
|
31.1
|
|
Certification
of Chief Executive Officer as adopted pursuant to Section 302 of
the
Sarbanes- Oxley Act of 2002.
|
31.2
|
|
Certification
of Chief Financial Officer 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.
|
|
(1) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Registration Statement on Form S-1 (No. 333-95093) filed with the
Commission on March 27, 2000.
|
|
(2) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Registration Statement on Form S-1 (No. 333-95093) filed with the
Commission on April 3, 2000.
|
|
(3)
|
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Registration Statement on Form S-1 (No. 333-95093) filed with the
Commission on April 4, 2000.
|
|
(4) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Current Report on Form 8-K (No. 000-30205) filed with the Commission
on
October 6, 2000.
|
|
(5) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Annual Report on Form 10-K (No. 000-30205) filed with the Commission
on
December 28, 2000.
|
|
(6) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission
on
February 12, 2002.
|
|
(7) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission
on
May 13, 2002.
|
|
(8) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission
on
February 12, 2003.
|
|
(9) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Annual Report on Form 10-K (No. 000-30205) filed with the Commission
on
December 10, 2003.
|
|
(10) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission
on
February 12, 2004.
|
|
(11) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission
on
May 7, 2004.
|
|
(12) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Annual
Report on Form 10-K (No. 000-30205) filed with the Commission on
December
8, 2004.
|
|
(13) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission
on
May 9, 2005.
|
|
(14) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Annual Report on Form 10-K (No. 000-30205) filed with the Commission
on
December 7, 2005.
|
|
(15) |
Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission
on
August 9, 2006.
|
*
Management contract, or compensatory plan or arrangement.
**
Substantially similar change in control severance protection agreements have
been entered into with William P. Noglows, H. Carol Bernstein, Jean Pol Delrue,
William S. Johnson, Daniel J. Pike, Thomas S. Roman, Stephen R. Smith, Clifford
L. Spiro, Adam F. Weisman and Daniel S. Wobby, with differences only in the
amount of payments and benefits to be received by such persons.
***
Substantially similar deposit share agreements have been entered into with
H.
Carol Bernstein, William S. Johnson, William P. Noglows, Daniel J. Pike,
Clifford L. Spiro and Daniel S. Wobby with differences only in the amount of
initial deposit made and deposit shares purchased by such persons.
+
This
Exhibit has been filed separately with the Commission pursuant to the grant
of a
confidential treatment request. The confidential portions of this Exhibit have
been omitted and are marked by an asterisk.
++
This
Exhibit has been filed separately with the Commission pursuant to the submission
of a confidential treatment request. The confidential portions of this Exhibit
have been omitted and are marked by an asterisk.
Pursuant
to the requirements of section 13 or 15(d) 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:
November 29, 2006
|
|
/s/
WILLIAM
P. NOGLOWS
|
|
|
William
P. Noglows
|
|
|
Chairman
of the Board, President and Chief Executive Officer
|
|
|
[Principal
Executive Officer]
|
|
|
|
Date:
November 29, 2006
|
|
/s/
WILLIAM S. JOHNSON
|
|
|
William
S. Johnson
|
|
|
Vice
President and Chief Financial Officer
|
|
|
[Principal
Financial Officer]
|
|
|
|
Date:
November 29, 2006
|
|
/s/
THOMAS S. ROMAN
|
|
|
Thomas
S. Roman
|
|
|
Corporate
Controller
|
|
|
[Principal
Accounting Officer]
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
|
|
Date:
November 29, 2006
|
|
/s/
WILLIAM P. NOGLOWS
|
|
|
William
P. Noglows
|
|
|
Chairman
of the Board,
President and Chief Executive Officer
|
|
|
[Director]
|
|
|
|
Date:
November 29, 2006
|
|
/s/
ROBERT J. BIRGENEAU*
|
|
|
Robert
J. Birgeneau
|
|
|
[Director]
|
|
|
|
Date:
November 29, 2006
|
|
/s/
JOHN P. FRAZEE, JR.*
|
|
|
John
P. Frazee, Jr.
|
|
|
[Director]
|
|
|
|
Date:
November 29, 2006
|
|
/s/
H. LAURANCE FULLER*
|
|
|
H.
Laurance Fuller
|
|
|
[Director]
|
|
|
|
Date:
November 29, 2006
|
|
/s/
EDWARD J. MOONEY*
|
|
|
Edward
J. Mooney
|
|
|
[Director]
|
|
|
|
Date:
November 29, 2006
|
|
/s/
STEVEN V. WILKINSON*
|
|
|
Steven
V. Wilkinson
|
|
|
[Director]
|
|
|
|
Date:
November 29, 2006
|
|
/s/
ALBERT Y. C. YU*
|
|
|
Albert
Y. C. Yu
|
|
|
[Director]
|
*
|
by
H. Carol Bernstein as Attorney-in-fact pursuant to the requirements
of
Section 13 or 15(d) of the Securities Exchange Act of
1934.
|