cmc10qfiled020509.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended
DECEMBER
31, 2008
or
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
________ to ________
Commission
File Number 000-30205
CABOT
MICROELECTRONICS CORPORATION
(Exact
name of registrant as specified in its charter)
DELAWARE
|
36-4324765
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
870
NORTH COMMONS DRIVE
|
60504
|
AURORA,
ILLINOIS
|
(Zip
Code)
|
(Address
of principal executive offices)
|
|
Registrant's telephone number,
including area code: (630)
375-6631
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
|
X
|
Accelerated
filer
|
|
Non-accelerated
filer
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As of
January 30, 2009, the Company had 23,397,407 shares of Common Stock, par value
$0.001 per share, outstanding.
CABOT
MICROELECTRONICS CORPORATION
Part
I. Financial Information
|
Page
|
|
|
|
Item
1.
|
|
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|
|
|
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|
3 |
|
|
|
|
|
4 |
|
|
|
|
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5 |
|
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|
6
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|
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Item
2.
|
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16 |
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|
|
Item
3.
|
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23
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|
Item
4.
|
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24
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|
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|
Part
II. Other Information
|
|
|
|
|
Item
1.
|
|
25
|
|
|
|
Item
1A.
|
|
25
|
|
|
|
Item
2.
|
|
30
|
|
|
|
Item
6.
|
|
30
|
|
|
31
|
ITEM
1.
CABOT
MICROELECTRONICS CORPORATION
(Unaudited
and in thousands, except per share amounts)
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
63,017 |
|
|
$ |
93,378 |
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
34,311 |
|
|
|
48,605 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
28,706 |
|
|
|
44,773 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research,
development and technical
|
|
|
12,114 |
|
|
|
11,421 |
|
Selling
and marketing
|
|
|
5,973 |
|
|
|
6,284 |
|
General
and administrative
|
|
|
11,326 |
|
|
|
10,839 |
|
Total
operating expenses
|
|
|
29,413 |
|
|
|
28,544 |
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(707 |
) |
|
|
16,229 |
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
876 |
|
|
|
1,635 |
|
Income
before income taxes
|
|
|
169 |
|
|
|
17,864 |
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
53 |
|
|
|
5,665 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
116 |
|
|
$ |
12,199 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.01 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
23,020 |
|
|
|
23,716 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.01 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
Weighted
average diluted shares outstanding
|
|
|
23,026 |
|
|
|
23,768 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
(Unaudited
and in thousands, except share amounts)
|
|
|
|
|
|
December 31,
2008
|
|
|
September 30, 2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
218,148 |
|
|
$ |
221,467 |
|
Short-term
investments
|
|
|
4,950 |
|
|
|
4,950 |
|
Accounts
receivable, less allowance for doubtful accounts of $337 at December 31,
2008,
|
|
|
|
|
|
|
|
|
and
$403 at September 30, 2008
|
|
|
33,488 |
|
|
|
41,630 |
|
Inventories
|
|
|
57,700 |
|
|
|
47,466 |
|
Prepaid
expenses and other current assets
|
|
|
10,270 |
|
|
|
10,714 |
|
Deferred
income taxes
|
|
|
4,319 |
|
|
|
4,365 |
|
Total
current assets
|
|
|
328,875 |
|
|
|
330,592 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
119,861 |
|
|
|
115,843 |
|
Goodwill
|
|
|
7,069 |
|
|
|
7,069 |
|
Other
intangible assets, net
|
|
|
8,034 |
|
|
|
8,712 |
|
Deferred
income taxes
|
|
|
9,957 |
|
|
|
11,178 |
|
Other
long-term assets
|
|
|
4,083 |
|
|
|
4,043 |
|
Total
assets
|
|
$ |
477,879 |
|
|
$ |
477,437 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
11,857 |
|
|
$ |
13,885 |
|
Capital
lease obligations
|
|
|
1,148 |
|
|
|
1,129 |
|
Accrued
expenses, income taxes payable and other current
liabilities
|
|
|
15,283 |
|
|
|
22,787 |
|
Total
current liabilities
|
|
|
28,288 |
|
|
|
37,801 |
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
|
2,223 |
|
|
|
2,518 |
|
Other
long-term liabilities
|
|
|
3,498 |
|
|
|
2,885 |
|
Total
liabilities
|
|
|
34,009 |
|
|
|
43,204 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Authorized:
200,000,000 shares, $0.001 par value
|
|
|
|
|
|
|
|
|
Issued:
26,054,004 shares at December 31, 2008, and 25,906,990 shares at September
30, 2008
|
|
|
26 |
|
|
|
26 |
|
Capital
in excess of par value of common stock
|
|
|
202,426 |
|
|
|
198,022 |
|
Retained
earnings
|
|
|
323,238 |
|
|
|
323,122 |
|
Accumulated
other comprehensive income
|
|
|
8,505 |
|
|
|
3,054 |
|
Treasury
stock at cost, 2,698,160 shares at December 31, 2008, and 2,683,809 shares
at September 30, 2008
|
|
|
(90,325 |
) |
|
|
(89,991 |
) |
Total
stockholders’ equity
|
|
|
443,870 |
|
|
|
434,233 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
477,879 |
|
|
$ |
477,437 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
(Unaudited
and amounts in thousands)
|
|
|
|
|
|
Three
Months Ended
December
31,
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
116 |
|
|
$ |
12,199 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,166 |
|
|
|
6,359 |
|
Share-based
compensation expense
|
|
|
4,234 |
|
|
|
3,494 |
|
Deferred
income tax expense (benefit)
|
|
|
1,468 |
|
|
|
(1,733 |
) |
Non-cash
foreign exchange gain
|
|
|
(4,847 |
) |
|
|
(1,290 |
) |
(Gain)/loss
on disposal of property, plant and equipment
|
|
|
81 |
|
|
|
(12 |
) |
Impairment
of property, plant and equipment
|
|
|
81 |
|
|
|
- |
|
Other
|
|
|
(2,245 |
) |
|
|
730 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
10,547 |
|
|
|
2,737 |
|
Inventories
|
|
|
(7,920 |
) |
|
|
(3,609 |
) |
Prepaid
expenses and other assets
|
|
|
1,150 |
|
|
|
(492 |
) |
Accounts
payable
|
|
|
(2,956 |
) |
|
|
(2,602 |
) |
Accrued
expenses, income taxes payable and other liabilities
|
|
|
(8,488 |
) |
|
|
237 |
|
Net
cash provided by (used in) operating activities
|
|
|
(2,613 |
) |
|
|
16,018 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(2,341 |
) |
|
|
(5,599 |
) |
Purchases
of short-term investments
|
|
|
- |
|
|
|
(139,875 |
) |
Proceeds
from the sale of short-term investments
|
|
|
- |
|
|
|
142,980 |
|
Net
cash used in investing activities
|
|
|
(2,341 |
) |
|
|
(2,494 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repurchases
of common stock
|
|
|
(334 |
) |
|
|
(14,004 |
) |
Net
proceeds from issuance of stock
|
|
|
169 |
|
|
|
418 |
|
Principal
payments under capital lease obligations
|
|
|
(276 |
) |
|
|
(261 |
) |
Net
cash used in financing activities
|
|
|
(441 |
) |
|
|
(13,847 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
2,076 |
|
|
|
383 |
|
Increase
(decrease) in cash
|
|
|
(3,319 |
) |
|
|
60 |
|
Cash
and cash equivalents at beginning of period
|
|
|
221,467 |
|
|
|
54,557 |
|
Cash
and cash equivalents at end of period
|
|
$ |
218,148 |
|
|
$ |
54,617 |
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Purchases
of property, plant and equipment in accrued liabilities and accounts
payable at the end of the period
|
|
$ |
574 |
|
|
$ |
2,699 |
|
Issuance
of restricted stock
|
|
|
3,727 |
|
|
|
4,281 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
(Unaudited
and in thousands, except share and per share amounts)
1.
BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation
("Cabot Microelectronics'', "the Company'', "us'', "we'' or "our'') supplies
high-performance polishing slurries and pads used in the manufacture of advanced
integrated circuit (IC) devices within the semiconductor industry, in a process
called chemical mechanical planarization (CMP). CMP polishes surfaces
at an atomic level, thereby enabling IC device manufacturers to produce smaller,
faster and more complex IC devices with fewer defects. We believe we
are the world’s leading supplier of slurries for IC devices. We also
develop, manufacture and sell CMP slurries for polishing certain components in
hard disk drives, specifically rigid disk substrates and magnetic heads, and we
believe we are one of the leading suppliers in this area. In
addition, we develop, produce and sell CMP polishing pads, which are used in
conjunction with slurries in the CMP process. We also pursue a
variety of other demanding surface modification applications outside of the
semiconductor and hard disk drive industries for which our capabilities and
knowledge may provide value in improved surface performance or
productivity. For additional information, refer to Part 1, Item 1,
“Business”, in our annual report on Form 10-K for the fiscal year ended
September 30, 2008.
The unaudited consolidated financial
statements have been prepared by Cabot Microelectronics Corporation pursuant to
the rules of the Securities and Exchange Commission (SEC) and accounting
principles generally accepted in the United States of America. In the
opinion of management, these unaudited consolidated financial statements include
all normal recurring adjustments necessary for the fair presentation of Cabot
Microelectronics’ financial position as of December 31, 2008, cash flows for the
three months ended December 31, 2008, and December 31, 2007, and results of
operations for the three months ended December 31, 2008, and December 31,
2007. The results of operations for the three months ended December
31, 2008, may not be indicative of the results to be expected for future
periods, including the fiscal year ending September 30, 2009. 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, 2008. We currently operate predominantly in one
industry segment - the development, manufacture and sale of CMP
consumables.
The consolidated financial statements
include the accounts of Cabot Microelectronics and its
subsidiaries. All intercompany transactions and balances between the
companies have been eliminated as of December 31, 2008.
2.
FAIR VALUE OF FINANCIAL INSTRUMENTS
On October 1, 2008, we adopted the
provisions of Statement of Financial Accounting Standards No. 157, “Fair Value
Measurement” (SFAS 157) for all financial assets and financial
liabilities. 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. On October 1, 2008, we also adopted FASB Staff Position
157-3, “Determining the Fair Value of a Financial Asset When the Market for that
Asset is Not Active” (FSP 157-3), which clarifies the application of SFAS 157 in
an inactive market and illustrates how an entity would determine fair value when
the market for a financial asset is not active. In accordance with
FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” (FSP
157-2), we have not yet adopted the provisions of SFAS 157 that relate to
non-financial assets and non-financial liabilities.
On October 1, 2008, we adopted the
provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of FASB Statement No. 115” (SFAS
159). SFAS 159 allows measurement at fair value of eligible financial
assets and financial liabilities that are not otherwise measured at fair value
on an instrument-by-instrument basis (the “fair value option”). We
did not elect the fair value option for any financial assets or financial
liabilities that were not previously required to be measured at fair
value.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
SFAS 157 defines fair value as the
price that would be received from the sale of an asset or paid to transfer a
liability (an exit price) in the principle or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 establishes a three-level hierarchy for
disclosure based on the extent and level of judgment used to estimate fair
value. Level 1 inputs consist of valuations based on quoted market
prices in active markets for identical assets or liabilities. Level 2
inputs consist of valuations based on quoted prices for similar assets or
liabilities, quoted prices for identical assets or liabilities in an inactive
market, or other observable inputs. Level 3 inputs consist of
valuations based on unobservable inputs that are supported by little or no
market activity.
The following table presents financial
assets that we measured at fair value on a recurring basis at December 31,
2008. As permitted under the relevant pronouncements, we have chosen
to not measure any of our financial liabilities at fair value in accordance with
SFAS 157 and SFAS 159 as we believe our financial liabilities approximate their
fair value due to their short-term, highly liquid characteristics. We
have classified these assets in accordance with the fair value hierarchy set
forth in SFAS 157. In instances where the inputs used to measure the
fair value of an asset fall into more than one level of the hierarchy, we have
classified them based on the lowest level input that is significant to the
determination of the fair value.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Fair Value
|
|
Cash
and cash equivalents
|
|
$ |
218,148 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
218,148 |
|
Auction
rate securities (ARS)
|
|
|
- |
|
|
|
- |
|
|
|
8,166 |
|
|
|
8,166 |
|
Total
|
|
$ |
218,148 |
|
|
$ |
- |
|
|
$ |
8,166 |
|
|
$ |
226,314 |
|
Our cash and cash equivalents consist
of various bank accounts used to support our operations and investments in
institutional money-market funds which are traded in active
markets.
Our ARS investments at December 31,
2008 consisted of two tax exempt municipal debt obligations. We
experienced our first failed auction in February 2008, and since that time the
auctions of two of our ARS have continued to fail. Despite the failed
auctions, there have been no defaults of the underlying securities and interest
income on these holdings continues to be received on scheduled interest payment
dates. Our ARS, when purchased, were generally issued by A-rated
municipalities. However, the credit rating of one security (with a par value of
$3,450) was downgraded during our second quarter of fiscal 2008. Both
of our ARS (including the downgraded security) were insured at the time of
purchase to obtain a credit rating of AAA.
Since an active market for ARS does not
currently exist, we determine the fair value of these investments using a Level
3 discounted cash flow analysis and also consider other factors such as the
reduced liquidity in the ARS market and nature of the insurance
backing. Key inputs to our discounted cash flow model included
projected cash flows from interest and principle payments and the weighted
probabilities of future successful auctions or debt refinancing. We
also incorporate certain Level 2 market indices into the discounted cash flow
analysis, including published rates such as the LIBOR rate and a municipal swap
index published by the Securities Industry and Financial Markets
Association.
Based on our fair value assessment, we
determined that one ARS continues to be temporarily impaired as of December 31,
2008. This security has a fair value of $3,216 (par value $3,450) and
has been classified as a long-term asset in Other Long-Term Assets on the
Consolidated Balance Sheet. See Note 5 for more information on this
investment. We believe that this ARS is not permanently impaired
because in the event of default by the municipality, the insurance provider
would pay interest and principle following the original repayment schedule and
we have the intent and ability to hold this investment until the value recovers,
which may be at maturity. We determined that the fair value of the
other ARS was not impaired as of December 31, 2008.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
3.
INVENTORIES
Inventories consisted of the
following:
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
30,543 |
|
|
$ |
21,378 |
|
Work
in process
|
|
|
4,502 |
|
|
|
4,628 |
|
Finished
goods
|
|
|
22,655 |
|
|
|
21,460 |
|
Total
|
|
$ |
57,700 |
|
|
$ |
47,466 |
|
The increase in inventories during the
three months ended December 31, 2008 is primarily due to raw materials that have
been purchased under our supply agreements which have minimum volume purchase
requirements based on a six-month forecast. The decrease in demand
for our products and our corresponding reduction in production occurred faster
than we were able to reduce the forecast of raw materials, causing an increase
in raw material inventory levels.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
4.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $7,069 as of December 31,
2008, and September 30, 2008.
The
components of other intangible assets are as follows:
|
|
December 31, 2008
|
|
|
September 30, 2008
|
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Other intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
technology
|
|
$ |
5,380 |
|
|
$ |
1,345 |
|
|
$ |
5,380 |
|
|
$ |
1,210 |
|
Acquired
patents and licenses
|
|
|
8,000 |
|
|
|
5,255 |
|
|
|
8,000 |
|
|
|
4,716 |
|
Trade
secrets and know-how
|
|
|
2,550 |
|
|
|
2,550 |
|
|
|
2,550 |
|
|
|
2,550 |
|
Distribution
rights, customer lists and other
|
|
|
1,457 |
|
|
|
1,393 |
|
|
|
1,457 |
|
|
|
1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets subject to amortization
|
|
|
17,387 |
|
|
|
10,543 |
|
|
|
17,387 |
|
|
|
9,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets not subject to amortization*
|
|
|
1,190 |
|
|
|
|
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other intangible assets
|
|
$ |
18,577 |
|
|
$ |
10,543 |
|
|
$ |
18,577 |
|
|
$ |
9,865 |
|
* Total
other intangible assets not subject to amortization primarily consist of trade
names.
Amortization expense was $678 and $720
for the three months ended December 31, 2008 and 2007,
respectively. Estimated future amortization expense for the five
succeeding fiscal years is as follows:
Fiscal Year
|
|
Estimated
amortization expense
|
Remainder
of 2009
|
|
$986
|
2010
|
|
854
|
2011
|
|
847
|
2012
|
|
847
|
2013
|
|
847
|
|
|
|
In accordance with Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
(SFAS 142), goodwill and indefinite lived intangible assets are tested for
impairment annually in the fourth fiscal quarter or more frequently if
indicators of potential impairment exist, using a fair-value-based
approach. The recoverability of goodwill and indefinite lived
intangible assets is measured at the reporting unit level, which is defined as
either an operating segment or one level below an operating
segment. We have consistently determined the fair value of our
reporting units using a discounted cash flow analysis of our projected future
results. The use of discounted projected future results is based on
assumptions that are consistent with our estimates of future growth and the
strategic plan used to manage the underlying business. Factors
requiring significant judgment include assumptions related to future growth
rates, discount factors and tax rates, among others. Changes in economic and
operating conditions that occur after the annual impairment analysis or an
interim impairment analysis that impact these assumptions may result in future
impairment charges.
We completed our annual impairment test
during our fourth quarter of fiscal 2008 and determined that no impairment
existed as of that time period. Based upon the continued
deterioration of the global economy and acceleration of a softening of demand
for our products driven by the global economic downturn, we concluded that
sufficient indicators existed to have us perform an interim impairment analysis
at December 31, 2008. Our impairment analysis at December 31, 2008
included revised estimates of future revenue and income projections given the
current economic environment and revised discount rates given the current
instability in the credit markets. Our impairment analysis also
included a sensitivity analysis using a hypothetical 10% decrease in expected
future cash flows and a hypothetical 10% increase in the discount
rate. We determined our goodwill and indefinite lived intangible
assets were not impaired under any of these circumstances.
Intangible assets with finite lives are
reviewed for impairment in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”. As a result of the
impairment indicators described above, we tested our intangible assets with
finite lives for impairment during our fiscal quarter ended December 31, 2008
and determined there was no impairment.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
5.
OTHER LONG-TERM ASSETS
Other long-term assets consisted of the
following:
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments
|
|
$ |
3,216 |
|
|
$ |
3,216 |
|
Other
long-term assets
|
|
|
867 |
|
|
|
827 |
|
Total
|
|
$ |
4,083 |
|
|
$ |
4,043 |
|
As
discussed in Note 2 of this Form 10-Q, one of the two ARS that we owned as of
December 31, 2008 is classified as a long-term asset. The security is
credit enhanced with bond insurance to a AAA rating and all interest payments
continue to be received on a timely basis. Although we believe this
security will ultimately be collected in full, we believe that it is not likely
that we will be able to monetize the security in our next business cycle (which
for us is generally one year). We maintained a $234 pretax reduction
($151 net of tax) in fair value on this security, which is consistent with the
fair value reduction as of September 30, 2008. We continue to believe this
decline in fair value is temporary based on our current cash position, our
expected future cash flow, our unused debt capacity, the nature of the
underlying debt, the presence of AAA-rated insurance, our expectation that the
issuer may refinance its debt, the fact that all interest payments have been
received, and our intention and ability to hold the security until the value
recovers, which may be at maturity.
6.
ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT
LIABILITIES
Accrued expenses, income taxes payable
and other current liabilities consisted of the following:
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation
|
|
$ |
7,655 |
|
|
$ |
16,206 |
|
Goods
and services received, not yet invoiced
|
|
|
1,532 |
|
|
|
2,060 |
|
Warranty
accrual
|
|
|
265 |
|
|
|
863 |
|
Taxes,
other than income taxes
|
|
|
1,188 |
|
|
|
998 |
|
Other
|
|
|
4,643 |
|
|
|
2,660 |
|
Total
|
|
$ |
15,283 |
|
|
$ |
22,787 |
|
The decrease in accrued compensation
resulted primarily from the payment of our annual bonus related to fiscal year
ended September 30, 2008.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
7.
CONTINGENCIES
While we are not involved in any legal
proceedings that we believe will have a material impact on our consolidated
financial position, results of operations or cash flows, we periodically become
a party to legal proceedings in the ordinary course of business. For
example, in January 2007, we filed a legal action against DuPont Air Products
NanoMaterials LLC (DA Nano), a CMP slurry competitor, in the United States
District Court for the District of Arizona, charging that DA Nano’s
manufacturing and marketing of CMP slurries infringe five CMP slurry patents
that we own. The affected DA Nano products include certain products
used for tungsten CMP. We filed our infringement complaint as a
counterclaim in response to an action filed by DA Nano in the same court in
December 2006 that seeks declaratory relief and alleges non-infringement,
invalidity and unenforceability regarding some of the patents at issue in our
complaint against DA Nano. DA Nano filed its complaint following our
refusal of its request that we license to it our patents raised in its
complaint. DA Nano’s complaint does not allege any infringement by
our products of intellectual property owned by DA Nano. On July 25,
2008, the District Court issued its patent claim construction, or “Markman”
Order (“Markman Order”) in the litigation. In a Markman ruling, a
district court hearing a patent infringement case interprets and rules on the
scope and meaning of disputed patent claim language regarding the patents in
suit. We believe that a Markman decision is often a significant
factor in the progress and outcome of patent infringement
litigation. In the Markman Order, the District Court adopted
interpretations that we believe are favorable to Cabot Microelectronics on all
claim terms that were in dispute in the litigation. On January 27,
2009, we filed a motion for summary judgment on DA Nano’s infringement of
certain of the patents at issue in the suit, because we believe the evidence
demonstrates that there is no dispute of material fact as to DA Nano’s
infringement of all of these patents with DA Nano’s accused products used for
tungsten CMP. On the same date, DA Nano filed a motion for summary
judgment on non-infringement and invalidity of certain of the patents at issue
in the suit. Although no trial date has been set, prior to the
parties’ filing of their respective motions, we had expected trial in this
matter to occur sometime during calendar 2009. However, the existence
of the respective motions for summary judgment may cause a later trial
schedule. While the outcome of this and any legal matter cannot be
predicted with certainty, we believe that our claims and defenses in the pending
action are meritorious, and we intend to pursue and defend them
vigorously.
Refer to Note 16 of “Notes to the
Consolidated Financial Statements” in Item 8 of Part II of our annual report on
Form 10-K for the fiscal year ended September 30, 2008, for additional
information regarding commitments and contingencies.
PRODUCT
WARRANTIES
We maintain a warranty reserve that
reflects management’s best estimate of the cost to replace product that does not
meet customers’ specifications and performance requirements, and costs related
to such replacement. The warranty reserve is based upon a historical
product replacement rate, adjusted for any specific known conditions or
circumstances. Additions and deductions to the warranty reserve are
recorded in cost of goods sold. Our warranty reserve requirements
changed during our first quarter of fiscal 2009 as follows:
Balance
as of September 30, 2008
|
|
$ |
863 |
|
Reserve
for product warranty during the reporting period
|
|
|
227 |
|
Adjustments
to pre-existing warranty reserve
|
|
|
(461 |
) |
Settlement
of warranty
|
|
|
(364 |
) |
Balance
as of December 31, 2008
|
|
$ |
265 |
|
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
8. SHARE-BASED COMPENSATION
PLANS
We record share-based compensation
expense under the provisions of Statement of Financial Accounting Standards No.
123 (revised 2004), “Share-Based Payment” (SFAS 123R) using the straight-line
approach. We currently issue share-based payments under the following
programs: our Second Amended and Restated Cabot Microelectronics Corporation
2000 Equity Incentive Plan, as amended and restated September 26, 2006 (“2000
Equity Incentive Plan”); our Cabot Microelectronics Corporation Employee Stock
Purchase Plan, which was amended to become the Cabot Microelectronics
Corporation 2007 Employee Stock Purchase Plan and approved by our shareholders
on March 4, 2008; and, pursuant to our 2000 Equity Incentive Plan, our
Directors’ Deferred Compensation Plan, as amended September 26, 2006 and our
2001 Executive Officer Deposit Share Program. For additional
information regarding these programs, refer to Note 11 of “Notes to the
Consolidated Financial Statements” included in Item 8 of Part II of our annual
report on Form 10-K for the fiscal year ended September 30, 2008.
We record share-based compensation
expense for all of our share-based awards including stock options, restricted
stock, restricted stock units and employee stock purchases. We use
the Black-Scholes model to estimate the grant date fair value of our stock
options and employee stock purchases. This model requires the input
of highly subjective assumptions, including the price volatility of the
underlying stock and the expected term of our stock options. We
estimate the expected volatility of our stock based on a combination of our
stock’s historical volatility and the implied volatilities from actively-traded
options on our stock. We calculate the expected term of our stock
options using the simplified method as discussed in Topic 14 of the Staff
Accounting Bulletin Series, “Share-Based Payment”, due to our limited amount of
historical option exercise data, and we add a slight premium to this expected
term for employees who meet the definition of retirement pursuant to their
grants during the contractual term. The fair value of our restricted
stock and restricted stock unit awards represents the closing price of our
common stock on the date of grant. Share-based compensation expense
related to stock option grants, restricted stock and restricted stock unit
awards is recorded net of expected forfeitures. Our estimated
forfeiture rate is primarily based on historical experience, but may be revised
in future periods if actual forfeitures differ from the estimate.
Share-based compensation expense under
SFAS 123R for the three months ended December 31, 2008, and 2007, was as
follows:
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
$ |
346 |
|
|
$ |
249 |
|
Research,
development and technical
|
|
|
388 |
|
|
|
301 |
|
Selling
and marketing
|
|
|
419 |
|
|
|
352 |
|
General
and administrative
|
|
|
3,081 |
|
|
|
2,592 |
|
Total
share-based compensation expense
|
|
|
4,234 |
|
|
|
3,494 |
|
Tax
benefit
|
|
|
1,513 |
|
|
|
1,244 |
|
Total
share-based compensation expense, net of tax
|
|
$ |
2,721 |
|
|
$ |
2,250 |
|
For additional information regarding
the estimation of fair value, refer to Note 11 of “Notes to the Consolidated
Financial Statements” included in Item 8 of Part II of our annual report on Form
10-K for the fiscal year ended September 30, 2008.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
9.
OTHER INCOME, NET
Other income, net, consisted of the
following:
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
734 |
|
|
$ |
1,942 |
|
Interest
expense
|
|
|
(101 |
) |
|
|
(105 |
) |
Other
income (expense)
|
|
|
243 |
|
|
|
(202 |
) |
Total
other income, net
|
|
$ |
876 |
|
|
$ |
1,635 |
|
The decrease in interest income during
the three months ended December 31, 2008 was primarily due to lower interest
rates earned on our cash and short-term investments compared to the same quarter
in fiscal 2008.
10.
COMPREHENSIVE INCOME
The components of comprehensive
income were as follows:
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
116 |
|
|
$ |
12,199 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Net
unrealized gain on derivative instruments
|
|
|
9 |
|
|
|
9 |
|
Foreign
currency translation adjustment
|
|
|
5,441 |
|
|
|
1,338 |
|
Minimum
pension liability adjustment
|
|
|
1 |
|
|
|
4 |
|
Total
comprehensive income
|
|
$ |
5,567 |
|
|
$ |
13,550 |
|
The $5,441 foreign currency translation
adjustment, net of taxes of $2,558, resulted primarily from the general
weakening of the U.S. dollar relative to the Japanese Yen.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
11.
INCOME TAXES
Our effective income tax rate of 31.4%
for the three months ended December 31, 2008 was slightly less than the 31.7%
for the three months ended December 31, 2007. The decrease in the
effective tax rate was primarily due to the reinstatement of the research and
experimentation tax credit, partially offset by a decrease in tax-exempt
interest income.
There were no material changes to our
liability for uncertain tax positions, as defined by Financial Interpretation
No. 48, or for tax periods open to examination during the three months ended
December 31, 2008.
12.
EARNINGS PER SHARE
SFAS No. 128, “Earnings per Share”,
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computations. Basic and
diluted earnings per share were calculated as follows:
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Earnings
available to common shares
|
|
$ |
116 |
|
|
$ |
12,199 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23,019,620 |
|
|
|
23,716,490 |
|
(Denominator
for basic calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
6,469 |
|
|
|
51,586 |
|
Diluted
weighted average common shares
|
|
|
23,026,089 |
|
|
|
23,768,076 |
|
(Denominator
for diluted calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.01 |
|
|
$ |
0.51 |
|
For the three months ended December 31,
2008 and 2007, approximately 4.1 million and 2.0 million shares, respectively,
attributable to outstanding stock options were excluded from the calculation of
diluted earnings per share because the exercise price of the options was greater
than the average market price of our common stock and, therefore, their
inclusion would have been anti-dilutive.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited
and in thousands, except share and per share amounts)
13.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations” (SFAS 141R), which replaces SFAS
No. 141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires acquisition-related costs to be charged
to expense as incurred. SFAS 141R is effective for us October 1, 2009
and will apply prospectively to business combinations completed on or after that
date.
In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an
Amendment of ARB 51” (SFAS 160), which changes the accounting and reporting for
minority equity interests in subsidiaries. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity separate from the parent’s equity, and purchases or sales of equity
interests that do not result in a change of control will be accounted for as
equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the statement of operations and, upon loss of control, the interest sold, as
well as any interest retained, will be recorded at fair value with any gain or
loss recognized in earnings. SFAS 160 is effective for us beginning
October 1, 2009 and will apply prospectively, except for the presentation and
disclosure requirements, which will apply retrospectively. We are
currently assessing the potential impact that the adoption of this pronouncement
would have on our results of operations, financial position or cash
flows. Currently, there are no minority interests in any of our
subsidiaries.
In March 2008, the FASB issued SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS
161), which requires enhanced disclosures about an entity’s derivatives and
hedging activities. Entities will be required to provide enhanced
disclosures about (a) how and why derivative instruments are used, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” and related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows. SFAS 161 is effective for us beginning January 1,
2009. We are currently assessing the potential impact that the
adoption of this pronouncement will have on our financial
disclosures.
In March 2008, the FASB issued SFAS No.
162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162),
which identifies a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS
162 is consistent with that previously defined in the AICPA Statement on
Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”. SFAS 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to U. S. Auditing Standards Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles”. We do not believe the adoption of this pronouncement
will have a material impact on our results of operations, financial position or
cash flows.
The following "Management's Discussion
and Analysis of Financial Condition and Results of Operations", as well as
disclosures included elsewhere in this Form 10-Q, include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a safe harbor for forward-looking
statements to encourage companies to provide prospective information about
themselves so long as they identify these statements as forward-looking and
provide meaningful cautionary statements identifying important factors that
could cause actual results to differ from the projected results. All
statements other than statements of historical fact we make in this Form 10-Q
are forward-looking. In particular, the statements herein regarding
future sales and operating results; Company and industry growth, contraction or
trends; growth or contraction of the markets in which the Company participates;
international events or various economic factors; product performance; the
generation, protection and acquisition of intellectual property, and litigation
related to such intellectual property; new product introductions; development of
new products, technologies and markets; the acquisition of or investment in
other entities; uses and investment of the Company’s cash balance; the
construction of facilities by the Company; and statements preceded by, followed
by or that include the words "intends", "estimates", "plans", "believes",
"expects", "anticipates", "should", "could" or similar expressions, are
forward-looking statements. Forward-looking statements reflect our
current expectations and are inherently uncertain. Our actual results
may differ significantly from our expectations. We assume no
obligation to update this forward-looking information. The section entitled
"Risk Factors" describes some, but not all, of the factors that could cause
these differences.
This section, "Management's Discussion
and Analysis of Financial Condition and Results of Operations”, should be read
in conjunction with Cabot Microelectronics’ annual report on Form 10-K for the
fiscal year ended September 30, 2008, including the consolidated financial
statements and related notes thereto.
FIRST
QUARTER OF FISCAL 2009 OVERVIEW
The global economy is in recession and
we first began to see significant adverse effects of this in our fourth quarter
of fiscal 2008 as the reduction in end user demand for IC devices caused
semiconductor manufacturers to reduce their production, which reduced the demand
for our CMP consumable products. We believe our financial results for
the first quarter of fiscal 2009 reflect the continuation and acceleration of a
softening of demand for our products driven by the global economic downturn. We
believe the decline in our revenue generally was consistent with the decrease in
overall semiconductor industry demand. Since the primary driver of
revenue for our CMP consumable products is wafer starts, the decreased
production by our customers has adversely affected us, and we believe will
continue to adversely affect us for the foreseeable future. There are
many factors that make it difficult for us to predict future revenue trends for
our business, including: the duration of the global economic downturn; the
cyclical nature of the semiconductor industry; potential future acquisitions by
us; the short order to delivery time for our products and the associated lack of
visibility to future customer orders; and quarter to quarter changes in customer
orders regardless of industry strength.
To address the impact of the economic
downturn on our business, we have taken actions intended to improve and optimize
our operating effectiveness and reduce our costs. For example, we
have shortened work schedules in our global CMP consumables operations to more
closely match production of our products with demand from our
customers. With this approach, we retain the flexibility to ramp our
production up or down to meet customer demand while managing our production
costs. In addition, we have instituted certain other cost reduction
initiatives. Since we believe the skills and expertise of our
employees are key to our Company’s success, our initial cost management actions
have been directed at minimizing expenses without incurring an extensive
workforce reduction, but we are prepared to take more severe actions in the
future if appropriate.
Revenue for our first quarter of fiscal
2009 was $63.0 million, which represented a decrease of 32.5%, or $30.4 million,
from the first quarter of fiscal 2008 and a decrease of 30.1%, or $27.1 million,
from the previous fiscal quarter. The largest reduction in demand
came from the foundry segment of the semiconductor industry, which represents a
significant portion of our business. We experienced substantial
declines in demand from memory and logic device customers as well. We believe
the significant decrease in revenue is primarily due to the worldwide economic
slowdown and is generally consistent with the overall decrease in demand in the
semiconductor industry. Based on continued economic uncertainty,
planned plant shutdowns by some of our customers, and normal seasonal softness,
we believe that it is likely that our revenue will decline further during our
second quarter of fiscal 2009.
Gross profit expressed as a percentage
of revenue for our first quarter of fiscal 2009 was 45.6%. Gross
profit decreased from both the 47.9% reported in the first quarter of fiscal
2008 and the 46.6% reported in the previous fiscal quarter primarily due to
lower utilization of our manufacturing capacity on the significantly lower level
of sales, partially offset by higher manufacturing yields for both CMP slurries
and pads. Our gross profit percentage guidance remains in the range
of 46% to 48% for the full fiscal year 2009. We may experience
quarterly gross profit above or below our annual guidance range, as we
experienced in our first quarter of fiscal 2009, due to a number of factors,
including the extent to which we utilize our manufacturing capacity and
fluctuations in our product mix.
Operating expenses were $29.4 million
in our first quarter of fiscal 2009, compared to $28.5 million in the first
quarter of fiscal 2008 and $31.7 million in the previous fiscal
quarter. The increase in operating expenses from the same quarter in
the prior year was mainly due to increased costs for clean room materials and
higher professional fees, partially offset by lower staffing related
costs. The decrease from the previous fiscal quarter was primarily
driven by lower staffing related costs. Reflecting our cost reduction
efforts, we currently expect operating expenses will be in the range of $110
million to $115 million for full year fiscal 2009, excluding the effects of our
pending acquisition of Epoch Material Co., Ltd. (Epoch), which is lower than our
prior guidance of $120 million to $125 million.
Diluted earnings per share for our
first fiscal quarter was $0.01, a decrease from the $0.51 per share reported in
the first quarter of fiscal 2008 and from the $0.36 per share reported in the
previous fiscal quarter as a result of the factors discussed
above. Although we have instituted cost reduction initiatives, the
continued economic uncertainty and potential further decline in our revenue
could cause us to operate in a net loss position during our second quarter of
fiscal 2009.
In support of our strategy to
strengthen and grow our core CMP consumables business, in December 2008, we
announced that we had entered into a definitive agreement to acquire the shares
of Epoch, a consolidated subsidiary of Eternal Chemical Co., Ltd.
(Eternal). Epoch is a Taiwan-based company specializing in the
development, manufacture and sale of copper CMP slurries and CMP cleaning
solutions to the semiconductor industry, and color filter slurries to the liquid
crystal display (LCD) industry. Epoch has a strong presence in
Taiwan, which we believe is the largest geographic region for CMP slurry
demand. The total purchase price of the acquisition is $66 million,
subject to certain adjustments, which we intend to pay in cash from our
available cash. Under the share purchase
agreement, we expect to initially pay $59.4 million and obtain 90% of Epoch’s
stock upon closing, with the remaining $6.6 million to be paid to Eternal
eighteen months later. During this interim period, Eternal will hold
the remaining 10% interest in Epoch. The completion of the transaction is
subject to customary closing conditions and regulatory approvals and we expect
the transaction will close in our second quarter of fiscal 2009.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING
PRONOUNCEMENTS
We discuss our critical accounting
estimates and effects of recent accounting pronouncements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7 of Part II of our annual report on Form 10-K for the fiscal
year ended September 30, 2008. We believe there have been no material
changes in our critical accounting estimates during the first fiscal quarter of
2009 except for the following discussion of goodwill and intangible
assets. See Note 2 and Note 13 of the Notes to the Consolidated
Financial Statements for a discussion of new accounting
pronouncements.
In accordance with Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
(SFAS 142), goodwill and indefinite lived intangible assets are tested for
impairment annually in the fourth fiscal quarter or more frequently if
indicators of potential impairment exist, using a fair-value-based
approach. The recoverability of goodwill and indefinite lived
intangible assets is measured at the reporting unit level, which is defined as
either an operating segment or one level below an operating
segment. We have consistently determined the fair value of our
reporting units using a discounted cash flow analysis of our projected future
results. The use of discounted projected future results is based on
assumptions that are consistent with our estimates of future growth and the
strategic plan used to manage the underlying business. Factors
requiring significant judgment include assumptions related to future growth
rates, discount factors and tax rates, among others. Changes in economic and
operating conditions that occur after the annual impairment analysis or an
interim impairment analysis that impact these assumptions may result in future
impairment charges.
We completed our annual impairment test
during our fourth quarter of fiscal 2008 and determined that no impairment
existed as of that time period. Based upon the continued
deterioration of the global economy and acceleration of a softening of demand
for our products driven by the global economic downturn, we concluded that
sufficient indicators existed to have us perform an interim impairment analysis
at December 31, 2008. Our impairment analysis at December 31, 2008
included revised estimates of future revenue and income projections given the
current economic environment and revised discount rates given the current
instability in the credit markets. We determined our goodwill and
indefinite lived intangible assets were not impaired as of December 31,
2008.
Intangible assets with finite lives are
reviewed for impairment in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”. As a result of the
impairment indicators described above, we tested our intangible assets with
finite lives for impairment during our fiscal quarter ended December 31, 2008
and determined there was no impairment.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED DECEMBER 31, 2008, VERSUS THREE MONTHS ENDED DECEMBER 31,
2007
REVENUE
Revenue was $63.0 million for the three
months ended December 31, 2008, which represented a 32.5%, or $30.4 million,
decrease from the three months ended December 31, 2007. Of this
decrease, $36.5 million was due to decreased sales volume driven by the
significant weakening of demand for our products by our customers due to the
global economic downturn which has negatively impacted end user demand for IC
devices. This decrease in demand was partially offset by $5.0 million
due to a higher weighted average selling price for our slurry products primarily
resulting from a higher-priced product mix and $1.1 million due to the effect of
foreign exchange rate changes. We believe this reduction in demand
for our products will continue for some time. Consequently, based on
continued economic uncertainty, planned plant shutdowns by some of our
customers, and normal seasonal softness, we believe it is likely that our
revenue will decline further during the second quarter of fiscal
2009.
COST
OF GOODS SOLD
Total cost of goods sold was $34.3
million for the three months ended December 31, 2008, which represented a
decrease of 29.4%, or $14.3 million, from the three months ended December 31,
2007. Of this decrease, $19.0 million was due to decreased sales
volume due to the global economic downturn and $1.9 million was due to higher
manufacturing yields in our CMP slurry and pad production. These cost
decreases were partially offset by a $3.8 million cost increase due to lower
utilization of our manufacturing capacity on the decreased level of sales and
$2.6 million due to a higher-cost product mix.
The significant decrease in demand for
our products due to the global economic downturn has caused us to take actions
to reduce costs. We have shortened work schedules in our
manufacturing operations on a global basis to reduce production costs while
maintaining the flexibility to increase or decrease production levels in the
future to meet customer demand for our products. We have also reduced
annual, merit-based salary increases, restricted travel and taken other steps to
reduce or eliminate certain discretionary expenses. These actions are
intended to improve our operating effectiveness during the current economic
downturn. We are prepared to take additional actions as needed if
this soft economic environment continues or worsens.
Fumed metal oxides, such as fumed
silica and fumed alumina, are significant raw materials that we use in many of
our CMP slurries. In an effort to mitigate our risk to rising raw
material costs and to increase supply assurance and quality performance
requirements, we have entered into multi-year supply agreements with a number of
suppliers. For more financial information about our supply contracts,
see “Tabular Disclosure of Contractual Obligations” in this filing as well as in
Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended
September 30, 2008.
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, energy costs may
also impact the cost of raw materials, packaging, freight and labor
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 45.6% for the three months ended December 31, 2008, as compared to
47.9% for the three months ended December 31, 2007. The decrease was
primarily due to lower utilization of our manufacturing capacity on the
significantly lower level of sales partially offset by favorable production
yields and a favorable product mix. Although current economic
conditions make it difficult to predict full year results, we continue to
believe that our gross profit as a percentage of revenue will be in the range of
46% to 48% for full fiscal year 2009. Quarterly gross profit may be
above or below this range, as it was during the first quarter of fiscal 2009,
due to fluctuations in our product mix, the extent to which we utilize our
manufacturing capacity or other factors.
RESEARCH,
DEVELOPMENT AND TECHNICAL
Total research, development and
technical expenses were $12.1 million for the three months ended December 31,
2008, which represented an increase of 6.1%, or $0.7 million, from the three
months ended December 31, 2007. The increase was primarily related to
higher expenses 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 consumable
products;
|
·
|
Process
development to support rapid and effective commercialization of new
products;
|
·
|
Technical
support of CMP products in our customers’ manufacturing facilities;
and
|
·
|
Evaluation
of new polishing applications outside of the semiconductor
industry.
|
SELLING
AND MARKETING
Selling and marketing expenses were
$6.0 million for the three months ended December 31, 2008, which represented a
decrease of 4.9%, or $0.3 million, from the three months ended December 31,
2007. The decrease was primarily due to $0.4 million in lower
staffing related costs, partially offset by $0.2 million in higher professional
fees.
GENERAL
AND ADMINISTRATIVE
General and administrative expenses
were $11.3 million for the three months ended December 31, 2008, which
represented an increase of 4.5%, or $0.5 million, from the three months ended
December 31, 2007.
The increase resulted primarily from higher professional fees.
OTHER
INCOME, NET
Other income was $0.9 million for the
three months ended December 31, 2008, compared to $1.6 million in the three
months ended December 31, 2007. The decrease in other income was
primarily due to $1.2 million lower interest income resulting from lower
interest rates on our balances of cash and short-term investments, partially
offset by $0.5 million in foreign exchange gains. We monetized the
majority of our short-term investments in auction rate securities (ARS) during
fiscal 2008 and reinvested these funds into money market investments which earn
interest at lower rates. See Note 2 of the Notes to the Consolidated
Financial Statements for more information on our ARS.
PROVISION
FOR INCOME TAXES
Our effective income tax rate of 31.4%
for the three months ended December 31, 2008 was slightly less than the 31.7%
for the three months ended December 31, 2007. The decrease in the
effective tax rate was primarily due to the reinstatement of the research and
experimentation tax credit, partially offset by a decrease in tax-exempt
interest income, both in light of an expected decrease in taxable income due to
the economic uncertainty and decrease in demand discussed above.
NET
INCOME
Net income was $0.1 million for the
three months ended December 31, 2008, which represented a decrease of 99.0%, or
$12.1 million, from the three months ended December 31, 2007, as a result of the
factors discussed above. Although we have instituted cost reduction
initiatives, the continued economic uncertainty and potential further decline in
our revenue could cause us to operate in a net loss position during our second
quarter of fiscal 2009.
LIQUIDITY
AND CAPITAL RESOURCES
We used $2.6 million in cash from
operating activities in the first quarter of fiscal 2009, compared to generating
$16.0 million in cash from operating activities in the first quarter of fiscal
2008. Our cash used in operating activities in the first quarter of
fiscal 2009 originated from a $7.6 million decrease in cash flow due to a net
increase in working capital, partially offset by $0.1 million in net income and
$4.9 million in non-cash items. The decrease in cash from operations
compared to the first quarter of fiscal 2008 was primarily due to decreased net
income in the quarter, the timing of accrued liability payments, including the
payment of our annual bonus related to fiscal 2008, and higher inventory levels,
partially offset by decreased accounts receivable balances on the decreased
level of sales.
In the first quarter of fiscal 2009,
cash flows used in investing activities were $2.3 million representing purchases
of property, plant and equipment. In the first quarter of fiscal
2008, cash flows used in investing activities were $2.5 million representing
$5.6 million for purchases of property, plant and equipment, primarily for the
purchase and installation of a 300-millimeter polishing tool and related
metrology equipment at our Asia Pacific technology center, partially offset by
$3.1 million provided by net sales of short-term investments. We
estimate that our total capital expenditures in fiscal 2009 will be
approximately $10 million, which is down from our previous estimate of $13
million.
In the first quarter of fiscal 2009,
cash flows used in financing activities were $0.4 million, representing $0.3
million in repurchases of common stock pursuant to the terms of our Second
Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan as shares withheld to cover payroll taxes on the vesting of shares of
restricted stock under the Equity Incentive Plan and $0.3 million in principal
payments on our capital leases, partially offset by $0.2 million received from
the issuance of common stock under our Equity Incentive Plan. We did
not repurchase any shares under our share repurchase program during the fiscal
quarter ended December 31, 2008. In the first quarter of fiscal 2008,
cash flows used in financing activities were $13.8 million, primarily as a
result of $14.0 million in repurchases of common stock under our share
repurchase program. In January 2008, the Board of Directors
authorized a share repurchase program for up to $75.0 million of our outstanding
common stock. Share repurchases are made from time-to time, depending
on market conditions, at management’s discretion. As of December 31,
2008, we have $50.0 million remaining on this share repurchase
program. We fund share purchases under this program from our
available cash balance. We view this program as a flexible and
effective means to return cash to stockholders.
We have an unsecured revolving credit
facility of $50.0 million with an option to increase the facility up to $80.0
million, which pursuant to an amendment we entered into in October 2008, extends
the agreement to November 2011, with an option to renew for two additional
one-year terms. Under this agreement, interest accrues on any outstanding
balance at either the lending institution’s base rate or the Eurodollar rate
plus an applicable margin. We also pay a non-use fee. This amendment
did not include any other material changes to the terms of the credit
agreement. Loans under this facility are intended primarily for
general corporate purposes, including financing working capital, capital
expenditures and acquisitions. 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.
Despite the ongoing capital and credit
market crisis, we believe that our current balance of cash and short-term
investments, 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. Our pending acquisition of
Epoch for $66.0 million, subject to certain adjustments, will be funded through
our existing available cash. However, as we plan to further expand
our business and continue to improve our technology, we may be required to raise
additional funds in the future through equity or debt financing, strategic
relationships or other arrangements. The uncertainty in the capital and credit
markets may hinder the ability to generate additional financing in the type or
amount necessary to pursue such objectives.
OFF-BALANCE
SHEET ARRANGEMENTS
At December 31, 2008, and September 30,
2008, we did not have any unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which might have been established for the purpose of facilitating
off-balance sheet arrangements.
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our
contractual obligations at December 31, 2008, and the effect such obligations
are expected to have on our liquidity and cash flow in future
periods.
CONTRACTUAL
OBLIGATIONS
|
|
|
|
|
Less
Than
|
|
|
|
1-3 |
|
|
|
3-5 |
|
|
After
5
|
|
(In
millions)
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
obligations
|
|
$ |
37.5 |
|
|
$ |
33.8 |
|
|
$ |
3.7 |
|
|
$ |
- |
|
|
$ |
- |
|
Pending
acquisition
|
|
|
66.0 |
|
|
|
59.4 |
|
|
|
6.6 |
|
|
|
- |
|
|
|
- |
|
Capital
lease obligations
|
|
|
3.4 |
|
|
|
1.2 |
|
|
|
2.2 |
|
|
|
- |
|
|
|
- |
|
Operating
leases
|
|
|
2.1 |
|
|
|
1.1 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
- |
|
Other
long-term liabilities
|
|
|
3.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.5 |
|
Total
contractual obligations
|
|
$ |
112.5 |
|
|
$ |
95.5 |
|
|
$ |
13.5 |
|
|
$ |
- |
|
|
$ |
3.5 |
|
We operate under a fumed silica supply
agreement with Cabot Corporation under which we are generally obligated to
purchase 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. This agreement was amended in April 2008 to extend the
termination date to December 2012 and to change the pricing and some other
non-material terms of the agreement. The agreement will automatically
renew unless either party gives certain notice of non-renewal. We
currently anticipate we will not have to pay any shortfall under this
agreement. We also operate under a fumed alumina supply agreement
with Cabot Corporation that runs through December 2011, under which we are
obligated to pay certain fixed, capital and variable costs. Purchase
obligations include an aggregate amount of $18.3 million of contractual
commitments for fumed silica and fumed alumina under these
contracts.
In December 2008, we announced that we
had entered into a definitive agreement to acquire the shares of Epoch, a
consolidated subsidiary of Eternal for a total purchase price of $66.0 million,
subject to certain adjustments. Under the share purchase agreement,
we expect to initially pay $59.4 million and obtain 90% of Epoch’s stock upon
closing, with the remaining $6.6 million to be transferred into an escrow
account in Taiwan at closing and paid to Eternal eighteen months
later. During this interim period, Eternal will hold the remaining
10% interest in Epoch. The completion of the
transaction is subject to customary closing conditions and regulatory approvals
and we expect the transaction will close in our second quarter of fiscal
2009. Consequently, we have included the $66.0 million in the
contractual obligations table above.
Refer to Item 7
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations” of
Part II of our annual report on Form 10-K for the fiscal year ended
September 30, 2008, for additional information regarding our contractual
obligations.
EFFECT
OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside
of the United States through our foreign operations. Some of our
foreign operations maintain their accounting records in their local
currencies. Consequently, period to period comparability of results
of operations is affected by fluctuations in exchange rates. The
primary currencies to which we have exposure are the Japanese Yen and, to a
lesser extent, the British Pound and the Euro. From time to time we
enter into forward contracts in an effort to manage foreign currency exchange
exposure. However, we may be unable to hedge these exposures
completely. During the three months ended December 31, 2008, we
recorded $0.2 million in foreign currency translation gains that are included in
other income on our Consolidated Statement of Income. We also
recorded $5.4 million in currency translation gains, net of tax, that are
included in other comprehensive income on our Consolidated Balance
Sheet. These gains primarily are the result of general weakening of
the U.S. dollar relative to the Japanese Yen. Approximately 16% of
our revenue is transacted in currencies other than the U.S. dollar. We do not
currently enter into forward exchange contracts or other derivative instruments
for speculative or trading purposes.
MARKET
RISK AND SENSITIVITY ANALYSIS RELATED TO FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity
analysis assuming a hypothetical 10% adverse movement in foreign exchange
rates. As of December 31, 2008, 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.
MARKET
RISK RELATED TO INVESTMENTS IN AUCTION RATE SECURITIES
At December 31, 2008, we owned two
auction rate securities (ARS) with a total estimated fair value of $8.2 million
($8.4 million par value) of which $5.0 million was classified as short-term
investments and $3.2 million was classified as other long-term assets on our
Consolidated Balance Sheet. General uncertainties in the global
credit markets caused widespread ARS auction failures as the number of
securities submitted for sale exceeded the number of securities buyers were
willing to purchase. As a result, the short-term liquidity of the ARS
market has been adversely affected.
In the first quarter of fiscal 2009, we
maintained the $0.2 million pre-tax and net of tax reduction that we had
recorded in fiscal 2008 in stockholders’ equity in accumulated other
comprehensive income to reflect a decline in fair value of our ARS which we
believed was temporary. We believe that we will be able to monetize
the remaining two securities at par, either through successful auctions,
refinancing of the underlying debt by the issuers, or holding the securities to
maturity. However, if auctions involving our ARS continue to fail, if
issuers are unable to refinance the underlying securities, if the issuing
municipalities are unable to pay debt obligations and the bond insurance fails,
or if credit ratings decline or other adverse developments occur in the credit
markets, then we may not be able to monetize these securities in the short term
and we may also be required to further adjust the carrying value of these
instruments through an impairment charge that may be deemed
other-than-temporary. See Notes 2 and 5 of the Notes to the
Consolidated Financial Statements and the “Risk Factors” set forth in Part II,
Item 1A of this Quarterly Report on Form 10-Q for more information.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, has conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of December 31, 2008.
While we believe the present design of
our disclosure controls and procedures is effective enough to make known to our
senior management in a timely fashion all material information concerning our
business, we intend to continue to improve the design and effectiveness of our
disclosure controls and procedures to the extent we believe necessary in the
future to provide our senior management with timely access to such material
information, and to correct deficiencies that we may discover in the future, as
appropriate.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal
control over financial reporting that occurred during our most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
INHERENT
LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because of inherent limitations, our
disclosure controls or our internal control over financial reporting may not
prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further,
the design of a control system must take into account the benefits of controls
relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include possible faulty judgment
in decision making and breakdowns due to a simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the controls. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with policies or procedures may deteriorate. Because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
PART
II. OTHER INFORMATION
While we are not involved in any legal
proceedings that we believe will have a material impact on our consolidated
financial position, results of operations or cash flows, we periodically become
a party to legal proceedings in the ordinary course of business. For
example, in January 2007, we filed a legal action against DuPont Air Products
NanoMaterials LLC (DA Nano), a CMP slurry competitor, in the United States
District Court for the District of Arizona, charging that DA Nano’s
manufacturing and marketing of CMP slurries infringe five CMP slurry patents
that we own. The affected DA Nano products include certain products
used for tungsten CMP. We filed our infringement complaint as a
counterclaim in response to an action filed by DA Nano in the same court in
December 2006 that seeks declaratory relief and alleges non-infringement,
invalidity and unenforceability regarding some of the patents at issue in our
complaint against DA Nano. DA Nano filed its complaint following our
refusal of its request that we license to it our patents raised in its
complaint. DA Nano’s complaint does not allege any infringement by
our products of intellectual property owned by DA Nano. On July 25,
2008, the District Court issued its patent claim construction, or “Markman”
Order (“Markman Order”) in the litigation. In a Markman ruling, a
district court hearing a patent infringement case interprets and rules on the
scope and meaning of disputed patent claim language regarding the patents in
suit. We believe that a Markman decision is often a significant
factor in the progress and outcome of patent infringement
litigation. In the Markman Order, the District Court adopted
interpretations that we believe are favorable to Cabot Microelectronics on all
claim terms that were in dispute in the litigation. On January 27,
2009, we filed a motion for summary judgment on DA Nano’s infringement of
certain of the patents at issue in the suit, because we believe the evidence
demonstrates that there is no dispute of material fact as to DA Nano’s
infringement of all of these patents with DA Nano’s accused products used for
tungsten CMP. On the same date, DA Nano filed a motion for summary
judgment on non-infringement and invalidity of certain of the patents at issue
in the suit. Although no trial date has been set, prior to the
parties’ filing of their respective motions of summary judgment, we had expected
trial in this matter to occur sometime during calendar 2009. However,
the existence of the respective motions for summary judgment may cause a later
trial schedule. While the outcome of this and any legal matter cannot
be predicted with certainty, we believe that our claims and defenses in the
pending action are meritorious, and we intend to pursue and defend them
vigorously.
We do not believe there have been any
material changes in our risk factors since the filing of our Annual Report on
Form 10-K for the fiscal year ended September 30, 2008 other than the
description of risks related to worldwide economic and industry
conditions. 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
DEMAND
FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY WORLDWIDE
ECONOMIC AND INDUSTRY CONDITIONS
Our business is affected by economic
and industry conditions and our revenue is dependent upon semiconductor
demand. Semiconductor demand, in turn, is impacted by semiconductor
industry cycles, and these cycles can dramatically affect our
business. These cycles may be characterized by decreases in product
demand, excess customer inventories, and accelerated erosion of
prices. The global economy is currently in recession and we first
began to see significant adverse effects of this in our fourth quarter of fiscal
2008 as the reduction in end user demand for IC devices caused semiconductor
manufacturers to reduce their production, which reduced the demand for our CMP
consumable products. We believe the further weakening of the U.S. and
global economy and the continued stress in the financial markets has deepened
the current economic downturn and caused a significant decrease in demand for
our products during the first quarter of fiscal 2009 as our revenue decreased
over 30% from the previous fiscal quarter. If global economic
conditions remain uncertain or deteriorate further, we may experience additional
material adverse impacts on our results of operations and financial
condition.
A prolonged global recession may have
other adverse effects on our Company such as:
·
|
The
ability of our customers to pay their obligations to us may be adversely
affected causing a negative impact on our cash flows and our results of
operations.
|
·
|
The
carrying value of our goodwill and other intangible assets may decline in
value, which could harm our financial position and results of
operations.
|
·
|
Our
suppliers may not be able to fulfill their obligations to us, which could
harm our production process and our
business.
|
Some additional factors that affect
demand for our products include customers’ production of logic versus memory
devices, their transition from 200 mm to 300 mm wafers, customers’ specific
integration schemes, share gains and losses and pricing changes by us and our
competitors.
WE
HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR
TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN THE CONSUMPTION OF CMP
SLURRIES AND PADS
Our business is substantially dependent
on a single class of products, CMP slurries, which account for the majority of
our revenue. We are also developing our business in CMP pads. Our
business would suffer if these products became obsolete or if consumption of
these products decreased. Our success depends on our ability to keep
pace with technological changes and advances in the semiconductor industry and
to adapt, improve and customize our products for advanced IC applications in
response to evolving customer needs and industry trends. Since its
inception, the semiconductor industry has experienced rapid technological
changes and advances in the design, manufacture, performance and application of
IC devices, and our customers continually pursue lower cost of ownership of
materials consumed in their manufacturing processes, including CMP slurries and
pads. We expect these technological changes and advances, and this
drive toward lower costs, will continue in the future. Potential
technology developments in the semiconductor industry, as well as our customers’
efforts to reduce consumption of CMP slurries and pads, could render our
products less important to the IC device manufacturing process.
A
SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THESE CUSTOMERS
Our customer base is concentrated among
a limited number of large customers. One or more of these principal
customers could stop buying CMP consumables from us or could substantially
reduce the quantity of CMP consumables 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 consumables 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 2008, our five largest
customers accounted for approximately 44% of our revenue; with Taiwan
Semiconductor Manufacturing Company (TSMC) accounting for approximately 17% of
our revenue. During the three months ended December 31, 2008 and
2007, our five largest customers accounted for approximately 38% and 42% of our
revenue; respectively. TSMC was our largest customer during each of
these periods, accounting for approximately 15% and 17% of our revenue for the
three months ended December 31, 2008 and 2007, respectively.
OUR
BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS DEVELOP
SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE, OR OBTAIN
CERTAIN INTELLECTUAL PROPERTY RIGHTS
Competition from current CMP slurry
manufacturers or new entrants to the CMP slurry market could seriously harm our
business and results of operations. Competition from other existing
providers of CMP slurries could continue to increase, and opportunities exist
for other companies with sufficient financial or technological resources to
emerge as potential competitors by developing their own CMP slurry
products. Increased competition has and may continue to impact the
prices we are able to charge for our slurry products as well as our overall
business. In addition, our competitors could have or obtain
intellectual property rights which could restrict our ability to market our
existing products and/or to innovate and develop new products.
ANY
PROBLEM OR DISRUPTION IN OUR SUPPLY CHAIN, INCLUDING SUPPLY OF OUR MOST
IMPORTANT RAW MATERIALS, OR IN OUR ABILITY TO MANUFACTURE AND DELIVER OUR
PRODUCTS TO OUR CUSTOMERS, COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
We depend on our supply chain to enable
us to meet the demands of our customers. Our supply chain includes
the raw materials we use to manufacture our products, our production operations,
and the means by which we deliver our products to our customers. Our
business could be adversely affected by any problem or interruption in our
supply of the key raw materials we use in our CMP slurries and pads, including
fumed metal oxides such as fumed alumina and fumed silica, which we use for
certain of our slurries, or any problem or interruption that may occur during
production or delivery of our products, such as weather-related problems or
natural disasters.
For example, Cabot Corporation
continues to be our primary supplier of particular amounts and types of fumed
alumina and fumed silica. We believe it would be difficult to
promptly secure alternative sources of key raw materials, including fumed
alumina and fumed silica, in the event one of our suppliers becomes unable to
supply us with sufficient quantities of raw materials that meet the quality and
technical specifications required by our customers. In addition,
contractual amendments to the existing agreements with, or non-performance by,
our suppliers could adversely affect us. Also, if we
change the supplier or type of key raw materials we use to make our CMP slurries
or pads, or are required to purchase them from a different manufacturer or
manufacturing facility or otherwise modify our products, in certain
circumstances our customers might have to requalify our CMP slurries and pads
for their manufacturing processes and products. The requalification
process could take a significant amount of time and expense to complete and
could motivate our customers to consider purchasing products from our
competitors, possibly interrupting or reducing our sales of CMP consumables to
these customers.
WE
ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We currently have operations and a
large customer base outside of the United States. Approximately 81%
and 80% of our revenue was generated by sales to customers outside of the United
States for the fiscal year ended September 30, 2008, and the three months ended
December 31, 2008, respectively. We encounter risks in doing business
in certain foreign countries, including, but not limited to, adverse changes in
economic and political conditions, fluctuation in exchange rates, compliance
with a variety of foreign laws and regulations, as well as difficulty in
enforcing business and customer contracts and agreements, including protection
of intellectual property rights.
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, including our pending
acquisition of Epoch Material Co., Ltd., a Taiwan-based company, 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; increased risk associated with foreign operations; potential
difficulties in entering markets in which we have limited or no direct prior
experience and where competitors in such markets have stronger market positions;
potential difficulties in operating new businesses with different business
models; potential difficulties with regulatory or contract compliance in areas
in which we have limited experience; initial dependence on unfamiliar supply
chains or relatively small supply partners; insufficient revenues to offset
increased expenses associated with acquisitions; potential loss of key employees
of the acquired companies; or inability to effectively cooperate and collaborate
with our alliance partners.
Further, we may never realize the
perceived or anticipated benefits of a business combination or investments in
other entities. Acquisitions by us could have negative effects on our
results of operations, in areas such as contingent liabilities, gross profit
margins, amortization charges related to intangible assets and other effects of
accounting for the purchases of other business entities. Investments
in 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.
BECAUSE
WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF CMP SLURRIES, EXPANSION
OF OUR BUSINESS INTO NEW PRODUCTS AND APPLICATIONS MAY NOT BE
SUCCESSFUL
An element of our strategy has been to
leverage our current customer relationships and technological expertise to
expand our CMP business from CMP slurries into other areas, such as CMP
polishing pads. Additionally, pursuant to our Engineered Surface
Finishes business, we are actively pursuing a variety of surface modification
applications, such as high precision optics. Expanding our business
into new product areas could involve technologies, production processes and
business models in which we have limited experience, and we may not be able to
develop and produce products or provide services that satisfy customers’ needs
or we may be unable to keep pace with technological or other
developments. Also, our competitors may have or obtain intellectual
property rights which could restrict our ability to market our existing products
and/or to innovate and develop new products.
BECAUSE
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY OBTAIN
OR PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS
Protection of intellectual property is
particularly important in our industry because we develop complex technical
formulas for CMP products that are proprietary in nature and differentiate our
products from those of our 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 provide
varying degrees of protection, and we cannot provide assurance that we can
obtain adequate protection in each such jurisdiction. Our failure to
obtain or maintain adequate protection of our intellectual property rights for
any reason, including through the patent prosecution process or in the event of
litigation related to such intellectual property, such as the current litigation
between us and DuPont Air Products Nanomaterials described in “Legal
Proceedings” in this Form 10-Q, could seriously harm our business. In
addition, the costs of obtaining or protecting our intellectual property could
negatively affect our operating results.
WE
MAY NOT BE ABLE TO MONETIZE OUR INVESTMENTS IN AUCTION RATE SECURITIES IN THE
SHORT TERM AND WE COULD EXPERIENCE A DECLINE IN THEIR MARKET VALUE, WHICH COULD
ADVERSELY AFFECT OUR FINANCIAL RESULTS
We owned auction rate securities (ARS)
with an estimated fair value of $8.2 million ($8.4 million par value) at
December 31, 2008. We classified $5.0 million of fair value as
Short-Term Investments and $3.2 million as Other Long-Term Assets on our
Consolidated Balance Sheet as of December 31, 2008. If auctions
involving our ARS continue to fail, if issuers of our ARS are unable to
refinance the underlying securities, if issuers are unable to pay debt
obligations and related bond insurance fails, or if credit ratings decline or
other adverse developments occur in the credit markets, then we may not be able
to monetize these securities in the short term. We may also be
required to further adjust the carrying value of these instruments through an
impairment charge that may be deemed other-than-temporary which would adversely
affect our financial results.
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. We
compete with other industry participants for qualified personnel, particularly
those with significant experience in the semiconductor industry. The
loss of services of key employees could harm our business and results of
operations.
RISKS
RELATING TO THE MARKET FOR OUR COMMON STOCK
THE
MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
The market price of our common stock
has fluctuated and could continue to fluctuate significantly as a result of
factors such as: economic and stock market conditions generally and specifically
as they may impact participants in the semiconductor and related industries;
changes in financial estimates and recommendations by securities analysts who
follow our stock; earnings and other announcements by, and changes in market
evaluations of, us or participants in the semiconductor and related industries;
changes in business or regulatory conditions affecting us or participants in the
semiconductor and related industries; announcements or implementation by us, our
competitors, or our customers of technological innovations, new products or
different business strategies; and trading volume of our common
stock.
ANTI-TAKEOVER
PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND OUR RIGHTS PLAN
MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID FOR OUR
COMPANY
Our certificate of incorporation, our
bylaws, our rights plan and various provisions of the Delaware General
Corporation Law may make it more difficult to effect a change in control of our
Company. For example, our amended and restated certificate of
incorporation authorizes our Board of Directors to issue up to 20 million shares
of blank check preferred stock and to attach special rights and preferences to
this preferred stock, which may make it more difficult or expensive for another
person or entity to acquire control of us without the consent of our Board of
Directors. Also our amended and restated certificate of incorporation
provides for the division of our Board of Directors into three classes as nearly
equal in size as possible with staggered three-year terms.
We have adopted change in control
arrangements covering our executive officers and other key
employees. These arrangements provide for a cash severance payment,
continued medical benefits and other ancillary payments and benefits upon
termination of service of a covered employee’s employment following a change in
control, which may make it more expensive to acquire our Company.
ISSUER
PURCHASES OF EQUITY SECURITIES
Period
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid Per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs (in thousands)
|
Oct.
1 through
Oct.
31, 2008
|
|
-
|
|
-
|
|
-
|
|
$50,003
|
Nov.
1 through
Nov.
30, 2008
|
|
-
|
|
-
|
|
-
|
|
$50,003
|
Dec.
1 through
Dec.
31, 2008
|
|
14,351
|
|
$23.29
|
|
-
|
|
$50,003
|
Total
|
|
14,351
|
|
$23.29
|
|
-
|
|
$50,003
|
In January 2008, we announced that the
Board of Directors had authorized a share repurchase program for up to $75.0
million of our outstanding common stock. Shares are repurchased from
time to time, depending on market conditions, in open market transactions, at
management’s discretion. We fund share repurchases from our existing
cash balance. The program, which became effective on the
authorization date, may be suspended or terminated at any time, at the Company’s
discretion. We view the program as a flexible and effective means to
return cash to stockholders.
Separate from this share repurchase
program, the shares purchased during the first quarter of fiscal 2009 were
purchased pursuant to the terms of our Second Amended and Restated Cabot
Microelectronics Corporation 2000 Equity Incentive Plan as shares withheld to
cover payroll taxes on the vesting of shares of restricted stock granted under
the Equity Incentive Plan.
|
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
|
10.55
|
Share
Purchase Agreement dated December 19, 2008 among Cabot Microelectronics
Global Corporation, Eternal Chemical Co., Ltd., Major Co-Sellers, and
Epoch Material Co. Ltd. *
|
|
|
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.
|
*This
Exhibit has been filed separately with the Securities and Exchange 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 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 5, 2009
|
/s/ WILLIAM S. JOHNSON
|
|
William
S. Johnson
|
|
Vice
President and Chief Financial Officer
|
|
[Principal
Financial Officer]
|
|
|
|
|
Date:
February 5, 2009
|
/s/ THOMAS S. ROMAN
|
|
Thomas
S. Roman
|
|
Corporate
Controller
|
|
[Principal
Accounting Officer]
|
31