-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LzeohYmrzpc/6sCpZGWbH4impCRaxA/9Fm28GZpX4croZKQ4JlHlWZrxlPSIYqf0 9PNqpIb1AqQ3wXJPJ1IWxw== 0000950137-05-001435.txt : 20050209 0000950137-05-001435.hdr.sgml : 20050209 20050209160308 ACCESSION NUMBER: 0000950137-05-001435 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050209 DATE AS OF CHANGE: 20050209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CABOT MICROELECTRONICS CORP CENTRAL INDEX KEY: 0001102934 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 364324765 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30205 FILM NUMBER: 05588770 BUSINESS ADDRESS: STREET 1: 870 NORTH COMMONS DRIVE CITY: AURORA STATE: IL ZIP: 60504 BUSINESS PHONE: 6303755461 MAIL ADDRESS: STREET 1: 870 N COMMONS DR CITY: AURORA STATE: IL ZIP: 60504 10-Q 1 c91962e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 000-30205 CABOT MICROELECTRONICS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-4324765 (State of Incorporation) (I.R.S. Employer Identification No.) 870 NORTH COMMONS DRIVE 60504 AURORA, ILLINOIS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (630) 375-6631 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES [X] NO [ ] As of January 31, 2005 the Company had 24,719,179 shares of Common Stock, par value $0.001 per share, outstanding. CABOT MICROELECTRONICS CORPORATION INDEX
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income Three Months Ended December 31, 2004 and 2003........................................ 3 Consolidated Balance Sheets December 31, 2004 and September 30, 2004............................................. 4 Consolidated Statements of Cash Flows Three Months Ended December 31, 2004 and 2003........................................ 5 Notes to Consolidated Financial Statements............................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 21 Item 4. Controls and Procedures.................................................................. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................................ 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............................. 22 Item 6. Exhibits................................................................................. 22 Signatures............................................................................... 23
PART I. FINANCIAL INFORMATION ITEM 1. CABOT MICROELECTRONICS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED DECEMBER 31, 2004 2003 ------------- ------------ Revenue..................................................... $ 67,084 $ 76,279 Cost of goods sold.......................................... 33,472 39,026 ------------- ------------ Gross profit....................................... 33,612 37,253 Operating expenses: Research and development................................. 9,544 10,723 Selling and marketing.................................... 4,176 3,783 General and administrative............................... 5,580 5,124 Amortization of intangibles.............................. 85 85 ------------- ------------ Total operating expenses.............................. 19,385 19,715 ------------- ------------ Operating income............................................ 14,227 17,538 Other income, net........................................... 487 36 ------------- ------------ Income before income taxes.................................. 14,714 17,574 Provision for income taxes.................................. 4,885 5,976 ------------- ------------ Net income............................................ $ 9,829 $ 11,598 ============= ============ Basic earnings per share.................................... $ 0.40 $ 0.47 ============= ============ Weighted average basic shares outstanding................... 24,638 24,733 ============= ============ Diluted earnings per share.................................. $ 0.40 $ 0.46 ============= ============ Weighted average diluted shares outstanding................. 24,721 24,994 ============= ============
The accompanying notes are an integral part of these consolidated financial statements. 3 CABOT MICROELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30, 2004 2004 ---------------- -------------- ASSETS Current assets: Cash and cash equivalents...................................................... $ 169,796 $ 157,318 Accounts receivable, less allowance for doubtful accounts of $499 at December 31, 2004 and $598 at September 30, 2004............................ 32,596 41,347 Inventories.................................................................... 30,480 24,474 Prepaid expenses and other current assets...................................... 4,360 3,264 Deferred income taxes.......................................................... 3,008 3,278 ---------------- -------------- Total current assets..................................................... 240,240 229,681 Property, plant and equipment, net................................................ 128,526 127,794 Goodwill ......................................................................... 1,373 1,373 Other intangible assets, net...................................................... 272 350 Other long-term assets............................................................ 3,902 4,093 ---------------- -------------- Total assets............................................................. $ 374,313 $ 363,291 ================ ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................................... $ 12,429 $ 13,080 Capital lease obligations...................................................... 1,111 1,272 Accrued expenses, income taxes payable and other current liabilities........... 15,668 18,023 ---------------- -------------- Total current liabilities................................................ 29,208 32,375 Capital lease obligations......................................................... 6,153 6,385 Deferred income taxes............................................................. 7,574 7,374 Deferred compensation and other long-term liabilities............................. 1,517 1,535 ---------------- -------------- Total liabilities........................................................ 44,452 47,669 Commitments and contingencies (Note 8) Stockholders' equity: Common stock: Authorized: 200,000,000 shares, $0.001 par value Issued: 25,020,577 shares at December 31, 2004 and 24,855,495 at September 30, 2004 ......................................................... 25 25 Capital in excess of par value of common stock................................. 140,856 136,259 Retained earnings.............................................................. 195,415 185,586 Accumulated other comprehensive income......................................... 5,556 1,905 Unearned compensation ......................................................... (259) (153) Treasury stock at cost, 336,964 shares at December 31, 2004 and 241,865 shares at September 30, 2004....................................................... (11,732) (8,000) ---------------- -------------- Total stockholders' equity............................................... 329,861 315,622 ---------------- -------------- Total liabilities and stockholders' equity............................... $ 374,313 $ 363,291 ================ ==============
The accompanying notes are an integral part of these consolidated financial statements. 4 CABOT MICROELECTRONICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, -------------------------------- 2004 2003 -------------- --------------- Cash flows from operating activities: Net Income................................................................... $ 9,829 $ 11,598 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................. 4,519 4,165 Loss on equity investment................................................. 88 - Non-cash compensation expense and non-employee stock options.............. 19 18 Provision for inventory writedown......................................... (630) 836 Provision for doubtful accounts........................................... (97) 14 Stock option income tax benefits.......................................... 1,051 505 Deferred income taxes..................................................... 533 (177) Unrealized foreign exchange (gain)........................................ (1,612) (695) Loss (Gain) on disposal of property, plant and equipment.................. 66 (11) Other non-cash expenses, net.............................................. 196 204 Changes in operating assets and liabilities: Accounts receivable....................................................... 10,484 (2,326) Inventories............................................................... (4,310) 774 Prepaid expenses and other assets......................................... (890) (1,302) Accounts payable, accrued liabilities and other current liabilities....... (2,282) (2,204) Income taxes payable, deferred compensation and other noncurrent liabilities............................................................ 674 5,079 -------------- -------------- Net cash provided by operating activities....................................... 17,638 16,478 Cash flows from investing activities: Additions to property, plant and equipment................................... (2,849) (1,301) Purchases of investments..................................................... (1,930) - Proceeds from the sale of property, plant and equipment...................... - 11 -------------- -------------- Net cash used in investing activities........................................... (4,779) (1,290) -------------- -------------- Cash flows from financing activities: Repurchase of common stock................................................... (3,732) - Net proceeds from issuance of stock.......................................... 3,179 972 Principal payments under capital lease obligations........................... (210) (198) -------------- -------------- Net cash provided (used) by financing activities................................ (763) 774 -------------- -------------- Effect of exchange rate changes on cash......................................... 382 79 -------------- -------------- Increase in cash................................................................ 12,478 16,041 Cash and cash equivalents at beginning of period................................ 157,318 111,318 -------------- -------------- Cash and cash equivalents at end of period...................................... $ 169,796 $ 127,359 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 5 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. BACKGROUND AND BASIS OF PRESENTATION We believe we are the leading supplier of high-performance polishing slurries used in the manufacture of the most advanced integrated circuit ("IC") devices within the semiconductor industry, in a process called chemical mechanical planarization ("CMP"). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers in the production of advanced ICs. Planarization is a polishing process that uses CMP slurries and pads to level, smooth and remove excess material from the surfaces of these layers, while leaving minimal residue or defects on the surface. CMP slurries are liquid solutions generally composed of high-purity deionized water, proprietary chemical additives and engineered abrasives that chemically and mechanically interact with the surface material of the IC device at an atomic level. CMP pads are typically flat engineered "disks" that help distribute and transport the slurry to the surface of the wafer and across the wafer. Prior to our initial public offering in April 2000, we operated as a division of Cabot Corporation ("Cabot Corporation"). In September 2000 we became a wholly independent entity upon Cabot Corporation's spin-off of its ownership in us that remained after the initial public offering. The unaudited consolidated financial statements have been prepared by Cabot Microelectronics Corporation ("Cabot Microelectronics", "the Company", "us", "we", or "our"), pursuant to the rules of the Securities and Exchange Commission ("SEC") and accounting principles generally accepted in the United States of America. In the opinion of management, these unaudited consolidated financial statements include all adjustments necessary for the fair presentation of Cabot Microelectronics' financial position as of December 31, 2004, cash flows for the three months ended December 31, 2004 and December 31, 2003 and results of operations for the three months ended December 31, 2004 and December 31, 2003. The results of operations for the three months ended December 31, 2004 may not be indicative of the results to be expected for future periods, including the fiscal year ending September 30, 2005. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2004. We operate predominantly in one industry segment - the development, manufacture, and sale of CMP slurries. The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated. 6 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2. STOCK-BASED COMPENSATION As currently permitted by the Financial Accounting Standards Board (FASB) Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") and FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), we continue to apply the accounting provisions of Accounting Principles Board Opinion Number 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations, with regard to the measurement of compensation cost for options granted under our Equity Incentive Plan (the "Plan") and shares issued under our Employee Stock Purchase Plan. No employee compensation expense has been recorded as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had expense been recognized using the fair value method described in SFAS 123, using the Black-Scholes option-pricing model, we would have reported the following results of operations:
THREE MONTHS ENDED DECEMBER 31, 2004 2003 ---------- ---------- Net income, as reported .................. $ 9,829 $ 11,598 Deduct: total stock-based compensation expense determined under the fair value method, net of tax ............ (11,446) (4,830) ----------- ---------- Pro forma net income ..................... ($ 1,617) $ 6,768 =========== ========== Earnings per share: Basic - as reported ................. $ 0.40 $ 0.47 =========== ========== Basic - pro forma ................... ($ 0.07) $ 0.27 =========== ========== Diluted - as reported ............... $ 0.40 $ 0.46 =========== ========== Diluted - pro forma ................. ($ 0.07) $ 0.27 =========== ==========
In the fourth fiscal quarter of 2004 we revised certain assumptions used in the Black-Scholes option-pricing model and have adjusted the previously reported data for the three months ended December 31, 2003 to conform to this presentation. The data previously reported for that period were as follows: total stock-based compensation expense determined under the fair value method, net of tax was $4,529, pro forma net income was $7,069, pro forma basic earnings per share was $0.29, and pro forma diluted earnings per share was $0.28. On September 27, 2004, to address certain issues arising pursuant to the revision of SFAS 123 (at the time proposed) and as permitted by the Plan, the Compensation Committee of the Board of Directors accelerated to September 1, 2005, the vesting of those stock options granted to employees, officers and directors under the Plan, prior to September 27, 2004 that had an option price equal to or greater than the fair market value of the shares of the Company on September 27, 2004 ($34.65), through amendment made and effective as of September 27, 2004 to the grant agreements for such stock options. Approximately 1.3 million options had option prices of greater than $34.65, and therefore are subject to the acceleration provision, and as a result will become exercisable as of September 1, 2005. Since the revision of SFAS 123 will require us to recognize share-based compensation expense in our income statement for all unvested options as of July 1, 2005, including those options that are out-of-the-money, the Compensation Committee decided to accelerate the vesting of these approximately 1.3 million options in order to mitigate the associated future share-based compensation expense. The Compensation Committee chose to delay the accelerated vesting of these options of September 1, 2005 to preserve, until such time, the employee retention benefit of these stock options. The increase in pro forma stock-based compensation expense for the three months ended December 31, 2004 compared to the three months ended December 31, 2003 is primarily attributable to accelerated vesting of the 1.3 million options. The costs presented in the preceding table may not be representative of the total effects on reported income for future years. Factors that may also impact future years include the attribution of the awards to the service period, the vesting period of stock options, timing of additional grants of stock option awards and number of shares granted for future awards. For additional information regarding share-based compensation, see Note 9 to the consolidated financial statements. 7 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 3. EARNINGS PER SHARE Statement of Financial Accounting Standards No. 128 "Earnings per Share" requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. Basic and diluted earnings per share were calculated as follows:
THREE MONTHS ENDED DECEMBER 31, 2004 2003 ----------- ----------- Numerator: Earnings available to common shares .............. $ 9,829 $ 11,598 =========== =========== Denominator: Weighted average common shares ................... 24,637,520 24,733,440 (Denominator for basic calculation) Weighted average effect of dilutive securities: Stock based compensation .................... 83,112 260,400 ----------- ----------- Diluted weighted average common shares ........... 24,720,632 24,993,840 =========== =========== (Denominator for diluted calculation) Earnings per share: Basic ............................................ $ 0.40 $ 0.47 =========== =========== Diluted .......................................... $ 0.40 $ 0.46 =========== ===========
4. COMPREHENSIVE INCOME The components of comprehensive income are as follows:
THREE MONTHS ENDED DECEMBER 31, 2004 2003 ------- ------- Net income ..................................... $ 9,829 $11,598 Other comprehensive income: Net unrealized gain on derivative instruments ......................... 9 9 Foreign currency translation adjustment.... 3,642 2,221 ------- ------- Total comprehensive income ..................... $13,480 $13,828 ======= =======
8 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 5. INVENTORIES Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30, 2004 2004 ------- ------- Raw materials ....... $19,374 $14,639 Work in process...... 918 1,048 Finished goods ...... 10,188 8,787 ------- ------- Total ............... $30,480 $24,474 ======= =======
6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill of $1,373, as of December 31, 2004, was unchanged from our fiscal year ended September 30, 2004. The components of intangible assets are as follows:
DECEMBER 31, 2004 SEPTEMBER 30, 2004 ---------------------------- ---------------------------- GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------------- ------------ -------------- ------------ Trade secrets and know-how ...................... $2,550 $2,424 $2,550 $2,360 Distribution rights, customer lists and other.... 1,103 957 1,095 935 ------ ------ ------ ------ Total intangible assets ..................... 3,653 3,381 3,645 3,295 ------ ------ ------ ------
Amortization expense of intangible assets was $85 for the three months ended December 31, 2004. Estimated future amortization expense for the remaining nine months of fiscal year 2005 is $170. 7. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES Accrued expenses, income taxes payable and other current liabilities consisted of the following:
DECEMBER 31, SEPTEMBER 30, 2004 2004 ------- ------- Accrued compensation .............. $ 7,733 $10,254 Raw materials accrual ............. 1,635 1,726 Warranty accrual .................. 791 952 Due to equity method investee...... - 1,930 Income taxes payable .............. 1,311 522 Other ............................. 4,198 2,639 ------- ------- Total ............................. $15,668 $18,023 ======= =======
9 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 8. CONTINGENCIES LEGAL PROCEEDINGS We periodically become subject to legal proceedings in the ordinary course of business. We are not currently involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations, or cash flows. PRODUCT WARRANTIES We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet customers' specifications and performance requirements, and related costs. The warranty reserve is based upon a historical product return rate applied against sales made in the current quarterly period, plus an additional amount related to any specific known conditions or circumstances. Adjustments to the warranty reserve are recorded in cost of goods sold. Our warranty reserve requirements decreased during the first fiscal quarter of 2005 as follows: Balance as of September 30, 2004.... $ 952 Net change ......................... (161) ----- Balance as of December 31, 2004 .... $ 791 =====
INDEMNIFICATION DISCLOSURE In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Generally, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the other party harmless against losses arising from items such as a breach of certain representations and covenants including title to assets sold, certain intellectual property rights and certain environmental matters. These terms are common in the industry in which we conduct business. In each of these circumstances, payment by us is subject to certain monetary and other limitations and is conditioned on the other party making an adverse claim pursuant to the procedures specified in the particular agreement, which typically allow us to challenge the other party's claims. We evaluate estimated losses for such indemnifications under SFAS No. 5, "Accounting for Contingencies" as interpreted by FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). We consider such factors as the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not experienced material costs as a result of such obligations and as of December 31, 2004, have not recorded any liabilities related to such indemnifications in our financial statements as we do not believe the likelihood of a material obligation is probable. 10 CABOT MICROELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 9. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values, and the pro forma disclosure alternative is no longer allowable under SFAS 123R. The revised standard is effective for public entities in the first interim or annual reporting period beginning after June 15, 2005, and therefore, will be effective for us beginning with the fourth quarter of fiscal 2005. We are currently evaluating the impact and implementation of SFAS 123R, which we believe will have a material impact on our consolidated results of operations and earnings per share. Using our current fair value methodology, utilizing the Black-Scholes option pricing model, we anticipate recognizing approximately $11,000 of pre-tax share-based compensation expense in our fourth quarter of fiscal 2005. The share-based compensation expense we expect to record for our fourth fiscal quarter of this year is expected to primarily reflect expense related to the approximately 1.3 million options, the vesting of which we accelerated to September 1, 2005, plus a prorated portion of annual expense related to stock option grants made in fiscal 2005, including our normal annual employee stock option grant made in December 2004. The 1.3 million options that are scheduled to vest on September 1, 2005 will not result in any further compensation expense after fiscal 2005. For full fiscal year 2006 we currently anticipate recognizing pre-tax share-based compensation expense of approximately $11,000, assuming we consistently apply our historical approach to long-term incentives and our approach in determining fair value utilizing the Black-Scholes option pricing model. Other factors may also impact future share-based compensation expense including the attribution of the awards to the service period, the vesting period of stock options, timing and number of additional grants of stock option awards, fluctuations in our stock price and volatility, expected term and risk-free rate of interest. In November 2004, the FASB issued FASB Statement No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which adopts wording from the International Accounting Standards Board's ("IASB") IAS 2, "Inventories", in an effort to improve the comparability of cross-border financial reporting. The new standard indicates that abnormal freight, handling costs and wasted materials are required to be treated as current period charges rather than as a portion of inventory costs. Additionally, the standard clarifies that fixed production overhead should be allocated based on the normal capacity of a production facility. SFAS 151 is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 will have a material impact on our consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued FASB Statement No 153, "Exchanges on Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"), as part of its short-term international convergence project with the IASB. Under SFAS 153, nonmonetary exchanges are required to be accounted for at fair value, recognizing any gains or losses, if their fair value is determinable within reasonable limits and the transaction has commercial substance. SFAS 153 is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 153 will have a material impact on our consolidated financial position, results of operations or cash flows. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as disclosures included elsewhere in this Form 10-Q, include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected 11 results. All statements other than statements of historical fact we make in this Form 10-Q are forward-looking. In particular, the statements herein regarding future sales and operating results, company and industry growth and trends, growth of the markets in which the company participates, international events, product performance, new product introductions, development of new products and technologies, the construction of new facilities by the company and statements preceded by, followed by or that include the words "intends," "estimates," "plans," "believes," "expects," "anticipates," "should," "could," or similar expressions, are forward-looking statements. Forward-looking statements reflect our current expectations and are inherently uncertain. Our actual results may differ significantly from our expectations. We assume no obligation to update this forward-looking information. The section entitled "Factors Affecting Future Operating Results" describes some, but not all, of the factors that could cause these differences. This section, "Management's Discussion and Analysis of Financial Condition and Results of Operations", should be read in conjunction with Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2004 including the consolidated financial statements and related notes thereto. FIRST FISCAL QUARTER OVERVIEW We believe we are the leading supplier of high-performance polishing slurries used in the manufacture of the most advanced integrated circuit ("IC") devices within the semiconductor industry, in a process called chemical mechanical planarization ("CMP"). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers in the production of advanced ICs. We develop, produce and sell CMP slurries for polishing copper, tungsten and oxide in IC devices, and also for polishing magnetic heads and the coatings on disks in hard disk drives. In addition, we are developing CMP polishing pads, which are used in conjunction with slurries in the CMP process. Demand for our products is primarily based on the number of wafers, or "wafer starts", of these advanced devices produced by semiconductor manufacturers. Revenue for our first fiscal quarter was $67.1 million, which was down 18.9% from the previous fiscal quarter, and down 12.1% compared to the same quarter in the last fiscal year. We believe that the decline in revenue from the previous quarter was primarily due to the following factors: - Reduced demand for our products which appears to be due to a decrease in production of certain IC devices by our customers in order to reduce their excess finished goods inventories that have built up over the past few quarters, - The remaining impact of one large customer transitioning to another supplier of CMP slurry for polishing copper interconnects at 130 nanometer technology, which we disclosed in our third quarter of fiscal 2004, and - Continued competition and pricing pressure resulting in selected price reductions, including one price reduction we granted to a large semiconductor manufacturer in conjunction with a multi-year supply arrangement to supply the majority of its CMP needs for polishing copper interconnects at 130 nanometer technology. As a percentage of revenue, gross profit increased to 50.1% this quarter from 48.6% last quarter and 48.8% in the same quarter last year. Gross margin as a percentage of revenue benefited this quarter from a higher valued product mix and higher yields in our manufacturing operations, which were partially offset by the impact of selected price reductions and lower capacity utilization due to the lower level of sales. We expect our gross margin as a percentage of revenue to be 48%, plus or minus 2%, for fiscal 2005. Diluted earnings per share was $0.40, which was down from the $0.53 reported in the previous quarter and down from the $0.46 reported in the first quarter of fiscal 2004, primarily as a result of the lower level of revenue described above. While 2004 was a growth year for the semiconductor industry, there are indications that 2005 will be a year of moderating revenue growth and possibly even a contraction, which we would expect to have an impact on our business. Further, build-up of finished goods inventory at our customers has resulted in a reduction of wafer starts across the industry, which has and may continue to impact our revenues over the near term. We also expect continued competition from current CMP slurry manufacturers and new entrants into the CMP slurry market, as well as continued pricing pressure from these competitors and customers' desires to gain purchasing leverage and lower their cost of ownership. The cyclical nature of and continued uncertainty in the semiconductor industry makes it difficult for us to predict future revenue trends. 12 RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2004 VERSUS THREE MONTHS ENDED DECEMBER 31, 2003 REVENUE Revenue was $67.1 million for the three months ended December 31, 2004, which represented a 12.1%, or $9.2 million, decrease from the three months ended December 31, 2003. Of this decrease, $5.0 million was due to a decrease in sales volume and $4.2 million was due to a decrease in weighted average selling price resulting from selective price reductions that were granted to certain customers. These adverse effects were partially offset by a higher valued product mix. Revenue would have been $0.4 million lower had the average exchange rates for the Japanese Yen and Euro during the period held constant with the prior year's first fiscal quarter average rates. COST OF GOODS SOLD Total cost of goods sold was $33.5 million for the three months ended December 31, 2004, which represented a decrease of 14.2% or $5.6 million from the three months ended December 31, 2003. Of this decrease, $2.6 million was due to a decrease in volume and $3.0 million was due to lower average costs per gallon resulting from improved manufacturing yields and a lower cost product mix partially offset by higher fixed costs. Fumed metal oxides, such as fumed silica and fumed alumina, are significant raw materials we use in many of our CMP slurries. In an effort to mitigate our risk to rising raw material costs and to increase supply assurance and quality performance measures, we have entered into multi-year supply agreements with Cabot Corporation, who supplies us with fumed silica and fumed alumina, and other suppliers. We purchase fumed alumina under a fumed metal oxide agreement with Cabot Corporation that will expire in June 2005 and a fumed alumina supply agreement that will expire in December 2006 and may be renewed for another five-year term, which would expire in December 2011. The fumed alumina supply agreement provides that the price Cabot Corporation charges us for fumed alumina is based on all of its fixed and variable costs for producing the fumed alumina, its capital costs for expanding its capacity, an agreed upon rate of return on investment and incentive payments if they produce more than a certain amount of fumed alumina per year that meets our specifications. We purchase fumed silica under a fumed silica supply agreement with Cabot Corporation, which provides for the cost of fumed silica to increase approximately 4% over the initial six-year term of the agreement, and in some circumstances is subject to certain inflation adjustments and certain shared cost savings adjustments resulting from our joint efforts. This agreement runs through December 2009 and will automatically renew unless either party gives certain notice of non-renewal. Our need for additional quantities or different kinds of key raw materials in the future has required, and will continue to require, that we enter into new supply arrangements with third parties. Future arrangements may result in costs which are different from those in the existing agreements. We also expect to continue to invest in our operations excellence initiative to improve our manufacturing capabilities to meet our customers' increasing product performance requirements. GROSS PROFIT Our gross profit as a percentage of revenue was 50.1%, for the three months ended December 31, 2004 as compared to 48.8% for the three months ended December 31, 2003. The 1.3 percentage point increase in gross profit expressed as a percentage of revenue resulted primarily from a higher valued product mix and improved manufacturing yields which were partially offset by selective price reductions and lower capacity utilization due to the lower level of sales. We continue to experience increasing competition and pricing pressure and therefore expect that our gross profit as a percentage of revenue will be in the range of 48%, plus or minus 2%, for fiscal 2005. 13 RESEARCH AND DEVELOPMENT Research and development expenses were $9.5 million in the three months ended December 31, 2004, which represented a decrease of 11.0%, or $1.2 million, from the three months ended December 31, 2003. Research and development expense decreased primarily due to $1.2 million in reduced wafer and laboratory supply costs and a decrease in technical service fees of $0.3 million. These decreases were partially offset by an increase in depreciation expense of $0.3 million related to the purchase of equipment for our CMP polishing and metrology clean room in Aurora, Illinois. Research and development efforts were mainly related to formulation and evaluation of new and enhanced CMP slurry products, commercialization and transfer of new products to our customers and research related to fundamental technology such as advanced chemistry and particle technology. In the fourth fiscal quarter of 2004 we commenced design work on a new Asia Pacific technology center that will be constructed adjacent to our existing manufacturing facility in Geino, Japan. The new 18,000 square foot facility will provide polishing, metrology and product development capabilities and is expected to become operational in October 2005. SELLING AND MARKETING Selling and marketing expenses were $4.2 million in the three months ended December 31, 2004, which represented an increase of 10.4%, or $0.4 million, from the three months ended December 31, 2003. Selling and marketing expense increased primarily due to increased staffing costs of $0.6 million which was partially offset by lower professional fees of $0.2 million. GENERAL AND ADMINISTRATIVE General and administrative expenses were $5.6 million in the three months ended December 31, 2004, which represented an increase of 8.9%, or $0.5 million, from the three months ended December 31, 2003. The increase resulted primarily from an increase in staffing related costs. AMORTIZATION OF INTANGIBLES Amortization of intangibles was $0.1 million for both the three months ended December 31, 2004 and 2003. OTHER INCOME, NET Other income was $0.5 million in 2004, compared to being negligible in 2003. The increase in other income is primarily due to higher interest income which is attributable to higher interest rates and an increased cash balance. PROVISION FOR INCOME TAXES Our effective income tax rate was 33.2% for three months ended December 31, 2004 and 34.0% for three months ended December 31, 2003. The decrease in the effective tax rate was primarily due to increased tax exempt interest income. We expect our income tax rate for full fiscal year 2005 to be 33.2%. NET INCOME Net income was $9.8 million for the three months ended December 31, 2004, which represented a decrease of 15.3%, or $1.8 million, from the three months ended December 31, 2003 as a result of the factors discussed above. 14 LIQUIDITY AND CAPITAL RESOURCES We had cash flows from operating activities of $17.6 million in the three months ended December 31, 2004 and $16.5 million in the three months ended December 31, 2003. Our cash provided by operating activities for the three months ended December 31, 2004 originated from net income from operations of $9.8 million, non-cash items of $4.1 million and a net decrease in working capital of $3.7 million. In the three months ended December 31, 2004, cash flows used in investing activities were $4.8 million, of which $2.9 million was used for purchases of production-related equipment and research and development tools. In addition, in the fourth quarter of fiscal 2004 we acquired a minority equity ownership interest in NanoProducts Corporation in exchange for $3.8 million, of which we made an initial payment of $1.8 million in July 2004 and the final payment of $1.9 million in December 2004. Full fiscal year 2005 capital spending is anticipated to be approximately $33.0 million which includes the construction of our Asia Pacific technology center in Geino, Japan. In the three months ended December 31, 2003, capital spending was $1.3 million, primarily related to the purchase of tools and equipment for our CMP polishing and metrology clean room in Aurora, Illinois. In the three months ended December 31, 2004, cash flows used in financing activities of $0.8 million resulted from the repurchase of $3.7 million of common stock and principal payments of $0.2 million made under capital lease obligations. These outflows were partially offset by the issuance of common stock of $3.2 million primarily related to the exercise of stock options under our Equity Incentive Plan, that were granted at the time of our initial public offering (IPO) that have an option price of $20.00 per share and are scheduled to expire in April 2005. As of December 31, 2004, approximately 0.1 million of these IPO stock options remained outstanding. In the three months ended December 31, 2003, cash flows provided by financing activities of $0.8 million resulted from the issuance of common stock of $1.0 million, primarily related to the exercise of stock options under our equity incentive plan, offset by principal payments of $0.2 million made under capital lease obligations. In July 2004 we announced that our Board of Directors had authorized a share repurchase program for up to $25.0 million of our outstanding common stock. Shares are repurchased from time to time, depending on market conditions, in open market transactions, at management's discretion. We fund share repurchases from our existing cash balance. The plan is primarily intended to diminish earnings dilution from the issuance of stock from the exercise of stock options under our equity incentive plan and purchases under our employee stock purchase plan. The program, which became effective on the announcement date, may be suspended or terminated at any time, at the Company's discretion. In July 2001 we entered into a $75.0 million unsecured revolving credit and term loan facility with a group of commercial banks, and in February 2002 and August 2003, this agreement was amended with no material changes in terms. On November 24, 2003, the then existing agreement was terminated and replaced with an amended and restated unsecured revolving credit facility of $50.0 million with an option to increase the facility by up to $30.0 million. Under this agreement, which terminates in November 2006, but can be renewed for two one-year terms, interest accrues on any outstanding balance at either the institution's base rate or the eurodollar rate plus an applicable margin. A non-use fee also accrues. Loans under this facility are anticipated to be used primarily for general corporate purposes, including working capital and capital expenditures. The credit agreement also contains various covenants. No amounts are currently outstanding under this credit facility and we believe we are currently in compliance with the covenants. We believe that cash generated by our operations and available borrowings under our revolving credit facility will be sufficient to fund our operations, expected capital expenditures and share repurchases for the foreseeable future. However, we plan to expand our business and continue to improve our technology and, to do so, we may be required to raise additional funds in the future through public or private equity or debt financing, strategic relationships or other arrangements. OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2004 and September 30, 2004, we did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements. 15 TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following summarizes our contractual obligations at December 31, 2004 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
CONTRACTUAL OBLIGATIONS LESS THAN 1-3 4-5 AFTER 5 (IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS ------- --------- -------- -------- -------- Capital lease obligations............. $ 7.3 $ 1.1 $ 3.1 $ 2.4 $ 0.7 Operating leases ..................... 1.0 0.5 0.4 0.1 0.0 Purchase obligations ................. 63.0 47.0 11.2 3.2 1.6 Other long-term liabilities .......... 1.5 0.0 0.0 0.0 1.5 ------- --------- -------- -------- -------- Total contractual obligations......... $ 72.8 $ 48.6 $ 14.7 $ 5.7 $ 3.8 ======= ========= ======== ======== ========
CAPITAL LEASE OBLIGATIONS Since December 2001 we have operated under a fumed alumina supply agreement with Cabot Corporation, under which Cabot Corporation expanded its capacity in Tuscola, Illinois for the manufacture of fumed alumina. Payments made by us with respect to capital costs for the facility have been treated as a capital lease for accounting purposes and the present value of the minimum quarterly payments of approximately $0.3 million resulted in a $9.8 million lease obligation and $9.8 million related leased asset. The agreement has an initial five-year term, which expires in 2006, but we can choose to renew the agreement for another five-year term, which would expire in 2011. We also can choose to not renew the agreement subject to certain terms and conditions and the payment of certain costs, after the initial five-year term. OPERATING LEASES We lease certain vehicles, warehouse facilities, office space, machinery and equipment under cancelable and noncancelable operating leases, most of which expire within ten years and may be renewed by us. PURCHASE OBLIGATIONS Purchase obligations include our take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services. In the fourth quarter of fiscal 2003, we recorded a $2.0 million liability for a raw material supply agreement for a polishing pad technology that was previously under development, but is no longer being pursued. Our remaining obligation with respect to this agreement is $1.2 million which is recorded in current liabilities and shown in the preceding table under purchase obligations. We operate under a fumed silica supply agreement with Cabot Corporation under which we are obligated to purchase at least 90% of our six-month volume forecast and to pay for the shortfall if we purchase less than that amount. This agreement has an initial six-year term, which expires in December 2009 and will automatically renew unless either party gives certain notice of non-renewal. We currently anticipate meeting minimum forecasted purchase volume requirements. We also operate under the fumed alumina supply agreement with Cabot Corporation, described above in Capital Lease Obligations, under which we are obligated to pay certain fixed, capital and variable costs through December 2006. This agreement has an initial five-year term, but we can choose to renew the agreement for another five-year term, which would expire in December 2011. If we do not renew the agreement, we will become subject to certain terms and conditions and the payment of certain costs. Purchase obligations include $36.9 million of contractual commitments for fumed silica and fumed alumina under these contracts based upon our anticipated renewal of the fumed alumina agreement through December 2011. We have an agreement with a toll manufacturer pursuant to which the manufacturer performs certain agreed-upon dispersion services. We have agreed to purchase minimum amounts of services per year and to invest approximately $0.2 million per year in capital improvements or other expenditures to maintain capacity at the manufacturer's dispersion 16 facility. The initial term of the agreement expired in October 2004. In November 2004 the agreement was renewed for another year under similar terms and conditions. The contract continues to have automatic one-year renewals and contains a 90-day cancellation clause executable by either party. Purchase obligations related to this agreement are $8.6 million, which include a termination payment if the agreement is not renewed. In June 2003 we entered into a technology licensing and co-marketing agreement with a semiconductor equipment manufacturer under which we may develop, manufacture and sell polishing pads utilizing endpoint detection window technology licensed from the manufacturer for use on the manufacturer's equipment. Under this agreement, we are obligated to supply this manufacturer with certain free commercially available polishing pads, up to an agreed upon dollar amount, for particular uses over a seven-year period. The table above includes estimated total costs associated with these products of $1.2 million over the remaining period. We are also obligated to supply the equipment manufacturer with certain commercially available polishing pads, up to an agreed upon dollar amount over the seven-year period, which the manufacturer will purchase from us at our cost. We will also pay a royalty to the equipment manufacturer and, in certain circumstances, to another party to whom we are a sub-licensee under our agreement, based upon net revenue earned with respect to commercial sales of polishing pads covered under the agreement. The term of the agreement lasts as long as the patents on the technology subject to the license agreement remain valid and enforceable. OTHER LONG-TERM LIABILITIES Other long-term liabilities include $0.8 million for pension liabilities and $0.7 for deferred compensation obligations. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values, and the pro forma footnote disclosure alternative is no longer allowable under SFAS 123R. The revised standard is effective for public entities in the first interim or annual reporting period beginning after June 15, 2005, and therefore, will be effective for us beginning with the fourth quarter of fiscal 2005. We are currently evaluating the impact and implementation of SFAS 123R, which we believe will have a material impact on our consolidated results of operations and earnings per share. Using our current fair value methodology, utilizing the Black-Scholes option pricing model, we anticipate recognizing approximately $11.0 million of pre-tax share-based compensation expense in our fourth quarter of fiscal 2005. The share-based compensation expense we expect to record for our fourth fiscal quarter of this year is expected to primarily reflect expense related to the approximately 1.3 million options, the vesting of which we accelerated to September 1, 2005, plus a prorated portion of annual expense related to stock option grants made in fiscal 2005, including our normal annual employee stock option grant made in December 2004. The 1.3 million options that are scheduled to vest on September 1, 2005 will not result in any further compensation expense after fiscal 2005. For full fiscal year 2006 we currently anticipate recognizing pre-tax share-based compensation expense of approximately $11.0 million, assuming we consistently apply our historical approach to long-term incentives and our approach in determining fair value utilizing the Black-Scholes option pricing model. Other factors may also impact future share-based compensation expense including the attribution of the awards to the service period, the vesting period of stock options, timing and number of additional grants of stock option awards, fluctuations in our stock price and volatility, expected term and risk-free rate of interest. In November 2004, the FASB issued FASB Statement No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which adopts wording from the International Accounting Standards Board's ("IASB") IAS 2, "Inventories", in an effort to improve the comparability of cross-border financial reporting. The new standard indicates that abnormal freight, handling costs and wasted materials are required to be treated as current period charges rather than as a portion of inventory costs. Additionally, the standard clarifies that fixed production overhead should be allocated based on the normal capacity of a production facility. SFAS 151 is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 will have a material impact on our consolidated financial position, results of operations or cash flows. 17 In December 2004, the FASB issued FASB Statement No 153, "Exchanges on Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"), as part of its short-term international convergence project with the IASB. Under SFAS 153, nonmonetary exchanges are required to be accounted for at fair value, recognizing any gains or losses, if their fair value is determinable within reasonable limits and the transaction has commercial substance. SFAS 153 is effective for fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 153 will have a material impact on our consolidated financial position, results of operations or cash flows. FACTORS AFFECTING FUTURE OPERATING RESULTS RISKS RELATING TO OUR BUSINESS WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN CMP CONSUMPTION Our business is substantially dependent on a single class of products, CMP slurries, which historically has accounted for almost all of our revenue. Our business would suffer if these products became obsolete or if consumption of these products decreased. Our success depends on our ability to keep pace with technological changes and advances in the semiconductor industry and to adapt, improve and customize our products for the most advanced IC applications in response to evolving customer needs and industry trends. Since its inception, the semiconductor industry has experienced rapid technological changes and advances in the design, manufacture, performance and application of IC devices, and our customers continually pursue lower cost of ownership of materials consumed in their manufacturing processes, including CMP slurries. We expect these technological changes and advances, and this drive toward lower costs, to continue in the future. Emerging technologies in the semiconductor industry, such as polishing pads containing abrasives and electrochemical mechanical planarization ("eCMP"), as well as our customers' efforts to reduce consumption of CMP slurries, could render our products less important to the IC device manufacturing process. A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE OF THEM AS CUSTOMERS Our customer base is concentrated among a limited number of large customers. One or more of these principal customers may stop buying CMP slurries from us or may substantially reduce the quantity of CMP slurries they purchase from us. For example, results for our fiscal first quarter reflect the remaining impact of one large customer transitioning to another supplier of CMP slurry for polishing copper interconnects at 130 nanometer technology. Our principal customers also hold considerable purchasing power, which can impact the pricing, and terms of sale of our products. Any cancellation, deferral or significant reduction in CMP slurries sold to these principal customers, or a significant number of smaller customers, could seriously harm our business, financial condition and results of operations. Our five largest customers, of which one is a distributor, accounted for approximately 52% and 54% of our revenue for the three months ended December 31, 2004 and 2003, respectively. OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS DEVELOP SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE, OBTAIN CERTAIN INTELLECTUAL PROPERTY RIGHTS OR IF ANY OF OUR MAJOR CUSTOMERS DEVELOP OR INCREASE IN-HOUSE SLURRY MANUFACTURING CAPABILITY Competition from current CMP slurry manufacturers, new entrants to the CMP slurry market or a decision by any of our major customers to produce, or increase the production of slurry products in-house could seriously harm our business and results of operations. Competition has increased from other existing providers of CMP slurries and opportunities exist for other companies with sufficient financial or technological resources to emerge as potential competitors by developing their own CMP slurry products. Increased competition and additional in-house production has and may continue to impact the prices we are able to 18 charge for our slurry products as well as our overall business. In addition, our competitors could have or obtain intellectual property rights which could restrict our ability to market our existing products and/or to innovate and develop new products. ANY PROBLEM OR INTERRUPTION IN SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS, INCLUDING FUMED METAL OXIDES, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY AFFECT OUR SALES Fumed metal oxides, such as fumed silica and fumed alumina, are significant raw materials we use in many of our CMP slurries. Our business would suffer from any problem or interruption in our supply of fumed metal oxides or other key raw materials. We operate under three raw material supply agreements with Cabot Corporation, one of which is for the supply of fumed silica and two of which are for the supply of fumed alumina. Under these agreements, Cabot Corporation continues to be our primary supplier of particular amounts and types of fumed alumina and fumed silica. We believe it would be difficult to secure alternative sources of fumed metal oxides in the event Cabot Corporation or another supplier becomes unable to supply us with sufficient quantities of fumed metal oxides that meet the quality and technical specifications required by our customers. In addition, contractual amendments to the existing agreements with, or non-performance by, Cabot Corporation or another supplier, could adversely affect us as well. Also, if we change the supplier or type of key raw materials such as fumed metal oxides we use to make our existing CMP slurries or are required to purchase them from a different manufacturer or manufacturing facility, whether Cabot Corporation or another party, or otherwise modify our products, in certain circumstances our customers might have to requalify our CMP slurries for their manufacturing processes and products. The requalification process could take a significant amount of time to complete, possibly interrupting or reducing our sales of CMP slurries to these customers. BECAUSE WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF CMP SLURRIES, EXPANSION OF OUR BUSINESS INTO NEW PRODUCTS AND APPLICATIONS MAY NOT BE SUCCESSFUL An element of our strategy has been to leverage our current customer relationships and technological expertise to expand our business into new product areas and applications, including CMP polishing pads. Expanding our business into new product areas involve technologies and production processes in which we have limited experience, and we may not be able to develop and produce products that satisfy our customers' needs or we may be unable to keep pace with technological or other developments. Also, our competitors may have or obtain intellectual property rights which could restrict our ability to market our existing products and/or to innovate and develop new products. WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS We currently have operations and a large customer base outside of the United States. For fiscal 2004, approximately 75% of our revenue was generated by sales to customers outside of the United States. For the three months ended December 31, 2004, approximately 78% of our revenue was generated by sales to customers outside the United States. We encounter risks in doing business in certain foreign countries, including but not limited to, adverse changes in economic and political conditions, as well as difficulty in enforcing business and customer contracts and agreements, including protection of intellectual property rights. BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY OBTAIN OR PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS Protection of intellectual property is particularly important in our industry because CMP slurry and pad manufacturers develop complex technical formulas for CMP products which are proprietary in nature and differentiate their products from those of competitors. Our intellectual property is important to our success and ability to compete. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as employee and third-party 19 nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could seriously harm our business. DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS Our business is affected by current economic and industry conditions and it is extremely difficult to predict sales of our products given uncertainties in these factors. For example, our quarterly revenue in fiscal years 2001 through 2003 was affected by the global economic slowdown and weakening in demand for electronic systems, coupled with higher than normal chip inventories. While the semiconductor industry recovered from this prolonged downturn in fiscal 2004, we believe the outlook for 2005 is for moderating revenue growth for the broad semiconductor industry and possibly even a contraction. Further, the semiconductor industry has been cyclical, and the advent of the next downturn could adversely affect our business. OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER If we fail to attract and retain the necessary managerial, technical and customer support personnel, our business and our ability to maintain existing and obtain new customers, develop new products and provide acceptable levels of customer service could suffer. Competition for qualified personnel, particularly those with significant experience in the CMP and IC device industries, is intense. The loss of services of key employees could harm our business and results of operations. RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY The market price of our common stock has and could continue to fluctuate significantly as a result of factors such as: economic and stock market conditions generally and specifically as they may impact participants in the semiconductor industries; changes in financial estimates and recommendations by securities analysts who follow our stock; earnings and other announcements by, and changes in market evaluations of, us or participants in the semiconductor and related industries; changes in business or regulatory conditions affecting us or participants in the semiconductor and related industries; announcements or implementation by us, our competitors, or our customers of technological innovations, new products or different business strategies; and trading volume of our common stock. ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND OUR RIGHTS PLAN MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID FOR OUR COMPANY Our certificate of incorporation, our bylaws, our rights plan and various provisions of the Delaware General Corporation Law may make it more difficult to effect a change in control of our company. For example, our amended certificate of incorporation authorizes our board of directors to issue up to 20 million shares of blank check preferred stock and to attach special rights and preferences to this preferred stock. Also our amended certificate of incorporation provides for the division of our board of directors into three classes as nearly equal in size as possible with staggered three-year terms. In addition, the rights issued to our stockholders under our rights plan may make it more difficult or expensive for another person or entity to acquire control of us without the consent of our board of directors. 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT We conduct business operations outside of the United States through our foreign operations. Our foreign operations maintain their accounting records in their local currencies. Consequently, period to period comparability of results of operations is affected by fluctuations in exchange rates. The primary currencies to which we have exposure are the Japanese Yen and, to a lesser extent, the British Pound and the Euro. From time to time we enter into forward contracts in an effort to manage foreign currency exchange exposure. However, we may be unable to hedge these exposures completely. Approximately 15% of our revenue is transacted in currencies other than the U.S. dollar. We do not currently enter into forward exchange contracts or other derivative instruments for speculative or trading purposes. MARKET RISK AND SENSITIVITY ANALYSIS OF FOREIGN EXCHANGE RATE RISK We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates. As of December 31, 2004, the analysis demonstrated that such market movements would not have a material adverse effect on our consolidated financial position, results of operations or cash flows over a one-year period. Actual gains and losses in the future may differ materially from this analysis based on changes in the timing and amount of foreign currency rate movements and our actual exposures. ITEM 4. CONTROLS AND PROCEDURES Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2004. While we believe the present design of our disclosure controls and procedures is effective to make known to our senior management in a timely fashion all material information concerning our business, we intend to continue to improve the design and effectiveness of our disclosure controls and procedures to the extent necessary in the future to provide our senior management with timely access to such material information, and to correct any deficiencies that we may discover in the future. There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not currently involved in any material legal proceedings. 21 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ISSUER PURCHASES OF EQUITY SECURITIES
TOTAL NUMBER OF SHARES APPROXIMATE DOLLAR VALUE OF TOTAL NUMBER AVERAGE PURCHASED AS PART OF SHARES THAT MAY YET BE OF SHARES PRICE PAID PUBLICLY ANNOUNCED PLANS PURCHASED UNDER THE PLANS OR PERIOD PURCHASED PER SHARE OR PROGRAMS PROGRAMS (IN THOUSANDS) - -------------- ------------ ---------- ------------------------ ---------------------------- Oct. 1 through Oct. 31, 2004 - - - $17,000 Nov. 1 through Nov. 30, 2004 95,099 $39.24 95,099 $13,268 Dec. 1 through Dec. 31, 2004 - - - $13,268 - -------------- ------------ ---------- ------------------------ ---------------------------- Total 95,099 $39.24 95,099 $13,268
In July 2004 we announced that our Board of Directors had authorized a share repurchase program for up to $25.0 million of our outstanding common stock. Shares are repurchased from time to time, depending on market conditions, in open market transactions, at management's discretion. We fund share repurchases from our existing cash balance. The program is primarily intended to diminish earnings dilution from the issuance of stock from the exercise of stock options under our equity incentive plan and purchases under our employee stock purchase plan. The program, which was effective on the announcement date, may be suspended or terminated at any time, at the Company's discretion. ITEM 6. EXHIBITS The exhibit numbers in the following list correspond to the number assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CABOT MICROELECTRONICS CORPORATION Date: February 9, 2005 /s/ WILLIAM S. JOHNSON ------------------------------------------ William S. Johnson Vice President and Chief Financial Officer [Principal Financial Officer] Date: February 9, 2005 /s/ THOMAS S. ROMAN ------------------------------------------ Thomas S. Roman Corporate Controller [Principal Accounting Officer] 23 EX-31.1 2 c91962exv31w1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, William P. Noglows, Chief Executive Officer of Cabot Microelectronics Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cabot Microelectronics Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986); (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 9, 2005 /s/ WILLIAM P. NOGLOWS ------------------------- William P. Noglows Chief Executive Officer EX-31.2 3 c91962exv31w2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, William S. Johnson, Chief Financial Officer of Cabot Microelectronics Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cabot Microelectronics Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986); (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 9, 2005 /s/ WILLIAM S. JOHNSON --------------------------- William S. Johnson Chief Financial Officer EX-32.1 4 c91962exv32w1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Cabot Microelectronics Corporation (the "Company") on Form 10-Q for the fiscal quarter ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 9, 2005 /s/ WILLIAM P. NOGLOWS ------------------------- William P. Noglows Chief Executive Officer Date: February 9, 2005 /s/ WILLIAM S. JOHNSON ------------------------- William S. Johnson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----