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
JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 000-30205
CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4324765
(State of Incorporation) (I.R.S. Employer Identification No.)
870 NORTH COMMONS DRIVE 60504
AURORA, ILLINOIS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (630) 375-6631
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----------- -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 ).
YES X NO
----------- -------------
As of July 31, 2003 the Company had 24,592,616 shares of Common Stock, par value
$0.001 per share, outstanding.
CABOT MICROELECTRONICS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Income
Three and Nine Months Ended June 30, 2003 and 2002................................... 3
Consolidated Balance Sheets
June 30, 2003 and September 30, 2002................................................. 4
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2003 and 2002............................................. 5
Notes to Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 19
Item 4. Controls and Procedures.................................................................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 20
Item 5. Other Information........................................................................ 20
Item 6. Exhibits and Reports on Form 8-K......................................................... 20
Signatures............................................................................... 21
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Revenue ................................................... $ 64,288 $ 68,377 $ 183,762 $ 169,901
Cost of goods sold ......................................... 31,360 32,113 90,811 81,121
------------- ------------ ----------- -----------
Gross profit....................................... 32,928 36,264 92,951 88,780
Operating expenses:
Research and development................................. 10,803 10,190 29,047 23,566
Selling and marketing.................................... 2,751 2,470 7,883 7,198
General and administrative............................... 4,655 4,260 13,618 13,541
Litigation settlement.................................... - - - 1,000
Amortization of intangibles.............................. 85 90 255 271
------------- ------------ ----------- -----------
Total operating expenses.............................. 18,294 17,010 50,803 45,576
------------- ------------ ----------- -----------
Operating income............................................ 14,634 19,254 42,148 43,204
Other income, net........................................... 46 1,160 84 692
------------- ------------ ----------- -----------
Income before income taxes.................................. 14,680 20,414 42,232 43,896
Provision for income taxes.................................. 4,918 7,147 14,148 14,661
------------- ------------ ----------- -----------
Net income............................................ $ 9,762 $ 13,267 $ 28,084 $ 29,235
============= ============ =========== ===========
Basic earnings per share.................................... $ 0.40 $ 0.55 $ 1.15 $ 1.21
============= ============ =========== ===========
Weighted average basic shares outstanding................... 24,389 24,193 24,341 24,140
============= ============ =========== ===========
Diluted earnings per share.................................. $ 0.40 $ 0.54 $ 1.14 $ 1.19
============= ============ =========== ===========
Weighted average diluted shares outstanding................. 24,639 24,521 24,600 24,565
============= ============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, SEPTEMBER 30,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 99,268 $ 69,605
Accounts receivable, less allowance for doubtful
accounts of $647 at June 30, 2003
and $667 at September 30, 2002.............................................. 30,501 26,082
Inventories.................................................................... 22,439 21,959
Prepaid expenses and other current assets...................................... 4,519 2,654
Deferred income taxes.......................................................... 3,009 2,983
---------------- --------------
Total current assets..................................................... 159,736 123,283
Property, plant and equipment, net................................................ 127,581 132,264
Goodwill ......................................................................... 1,373 1,373
Other intangible assets, net...................................................... 680 935
Other long term assets............................................................ 415 530
---------------- --------------
Total assets............................................................. $ 289,785 $ 258,385
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 11,490 $ 11,748
Capital lease obligations...................................................... 1,667 1,585
Accrued expenses, income taxes payable and other current liabilities........... 15,058 17,238
---------------- --------------
Total current liabilities................................................ 28,215 30,571
Long-term debt.................................................................... - 3,500
Capital lease obligations......................................................... 7,747 8,865
Deferred income taxes............................................................. 3,820 1,514
Deferred compensation and other long term liabilities............................. 865 429
---------------- --------------
Total liabilities........................................................ 40,647 44,879
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock:
Authorized: 200,000,000 shares, $0.001 par value
Issued and outstanding: 24,424,284 shares at June 30, 2003 and
24,254,819 at September 30, 2002 ........................................... $ 24 $ 24
Capital in excess of par value of common stock................................. 119,697 114,116
Retained earnings.............................................................. 129,209 101,125
Accumulated other comprehensive gain (loss).................................... 221 (1,688)
Unearned compensation.......................................................... (13) (71)
---------------- --------------
Total stockholders' equity............................................... 249,138 213,506
---------------- --------------
Total liabilities and stockholders' equity............................... $ 289,785 $ 258,385
================ ==============
The accompanying notes are an integral part of these
consolidated financial statements.
4
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
-----------------
2003 2002
---- ----
Cash flows from operating activities:
Net income .................................................................... $ 28,084 $ 29,235
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................................. 11,488 8,202
Noncash compensation expense and non-employee stock options ................ (15) 407
Provision for inventory writedown .......................................... 953 596
Provision for doubtful accounts ............................................ 41 (133)
Stock option income tax benefits ........................................... 1,622 1,873
Deferred income taxes ...................................................... 2,281 1,171
Unrealized foreign exchange gain ........................................... (176) (1,906)
Loss on disposal of property, plant and equipment .......................... 21 47
Other noncash expenses, net ................................................ 329 129
Changes in operating assets and liabilities:
Accounts receivable ........................................................ (3,328) (1,172)
Inventories ................................................................ (1,438) (1,235)
Prepaid expenses and other assets .......................................... (1,731) (1,153)
Accounts payable, accrued liabilities and other current liabilities ........ (860) 2,277
Income taxes payable, deferred compensation and other noncurrent liabilities (1,381) 2,787
-------- --------
Net cash provided by operating activities ........................................ 35,890 41,125
Cash flows from investing activities:
Additions to property, plant and equipment .................................... (8,061) (31,885)
Proceeds from the sale of property, plant and equipment ....................... 1,849 -
-------- --------
Net cash used in investing activities ............................................ (6,212) (31,885)
-------- --------
Cash flows from financing activities:
Prepayment of long-term debt .................................................. (3,500) -
Net proceeds from issuance of stock ........................................... 4,021 3,325
Principal payments under capital lease obligations ............................ (549) (681)
-------- --------
Net cash provided by (used in) financing activities .............................. (28) 2,644
-------- --------
Effect of exchange rate changes on cash .......................................... 13 61
-------- --------
Increase in cash ................................................................. 29,663 11,945
Cash and cash equivalents at beginning of period ................................. 69,605 47,677
-------- --------
Cash and cash equivalents at end of period ....................................... $ 99,268 $ 59,622
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
1. BACKGROUND AND BASIS OF PRESENTATION
We believe we are the leading supplier of high performance polishing
slurries used in the manufacture of the most advanced integrated circuit ("IC")
devices, within a process called chemical mechanical planarization ("CMP"). CMP
is a polishing process used by IC device manufacturers to planarize many of the
multiple layers of material that are built upon silicon wafers to produce
advanced devices.
Cabot Microelectronics, which was incorporated in October 1999 and formed
from the assets of Cabot Corporation's Microelectronics Materials Division,
completed its initial public offering in April 2000. As of September 29, 2000,
we became a wholly independent entity upon Cabot Corporation's spin-off of its
remaining ownership ("spin-off") in us by its distribution of 0.280473721 shares
of Cabot Microelectronics common stock as a dividend on each share of Cabot
Corporation common stock.
The unaudited consolidated financial statements have been prepared by Cabot
Microelectronics Corporation ("Cabot Microelectronics", "the Company", "us",
"we", or "our"), pursuant to the rules of the Securities and Exchange Commission
("SEC") and accounting principles generally accepted in the United States of
America. In the opinion of management, these unaudited consolidated financial
statements include all adjustments necessary for the fair presentation of Cabot
Microelectronics' financial position as of June 30, 2003, cash flows for the
nine months ended June 30, 2003 and June 30, 2002 and results of operations for
the three and nine months ended June 30, 2003 and June 30, 2002. The results of
operations for the three and nine months ended June 30, 2003 may not be
indicative of the results to be expected for the fiscal year ending September
30, 2003. 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, 2002. We operate predominantly in one industry segment
- -- the development, manufacture, and sale of CMP slurries.
The consolidated financial statements include the accounts of Cabot
Microelectronics and its subsidiaries. All intercompany transactions and
balances between the companies have been eliminated.
2. STOCK-BASED COMPENSATION
We have adopted the disclosure requirements of SFAS No. 148, "Accounting
for Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148")
effective December 2002. SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation and also amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the methods of accounting for stock-based employee compensation
and the effect of the method used on reported results. As permitted by SFAS 148
and SFAS 123, we continue to apply the accounting provisions of Accounting
Principles Board ("APB") Opinion Number 25, "Accounting for Stock Issued to
Employees", and related interpretations, with regard to the measurement of
compensation cost for options granted under the Cabot Microelectronics
Corporation Amended and Restated 2000 Equity Incentive Plan ("Equity Incentive
Plan") and shares issued under our Employee Stock Purchase Plan. All options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant and no employee compensation expense has been
recorded.
6
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Had expense been recognized using the fair value method described in SFAS 123,
using the Black-Scholes option-pricing model, we would have reported the
following results of operations:
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported ...................... $ 9,762 $ 13,267 $ 28,084 $ 29,235
Deduct: total stock-based compensation expense
determined under the fair value method,
net of tax .............................. (4,373) (3,062) (12,369) (8,939)
------------ ---------- ---------- ----------
Pro forma net income ......................... $ 5,389 $ 10,205 $ 15,715 $ 20,296
============ ========== ========== ==========
Earnings per share:
Basic -- as reported .................... $ 0.40 $ 0.55 $ 1.15 $ 1.21
============ ========== ========== ==========
Basic -- pro forma ...................... $ 0.22 $ 0.42 $ 0.65 $ 0.84
============ ========== ========== ==========
Diluted -- as reported .................. $ 0.40 $ 0.54 $ 1.14 $ 1.19
============ ========== ========== ==========
Diluted -- pro forma .................... $ 0.22 $ 0.42 $ 0.64 $ 0.83
============ ========== ========== ==========
3. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share",
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computations. Basic and diluted
earnings per share were calculated as follows:
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Earnings available to common shares.............. $ 9,762 $ 13,267 $ 28,084 $ 29,235
=========== =========== =========== ===========
Denominator:
Weighted average common shares................... 24,389,395 24,193,188 24,341,482 24,139,852
(Denominator for basic calculation)
Weighted average effect of dilutive securities:
Stock-based compensation ................... 249,781 327,430 258,900 425,290
----------- ----------- ----------- -----------
Diluted weighted average common shares........... 24,639,176 24,520,618 24,600,382 24,565,142
=========== =========== =========== ===========
(Denominator for diluted calculation)
Earnings per share:
Basic............................................ $ 0.40 $ 0.55 $ 1.15 $ 1.21
=========== =========== =========== ===========
Diluted.......................................... $ 0.40 $ 0.54 $ 1.14 $ 1.19
=========== =========== =========== ===========
7
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Income ................................. $ 9,762 $ 13,267 $ 28,084 $ 29,235
Other comprehensive income:
Net unrealized gain on derivative
instruments .................... 9 9 26 23
Foreign currency translation adjustment 570 2,937 1,883 (271)
-------- -------- -------- --------
Total comprehensive income ................. $ 10,341 $ 16,213 $ 29,993 $ 28,987
======== ======== ======== ========
5. INVENTORIES
Inventories consisted of the following:
JUNE 30, SEPTEMBER 30,
2003 2002
---- ----
Raw materials........................... $ 13,578 $ 13,779
Work in process......................... 1,113 1,173
Finished goods.......................... 7,748 7,007
----------- -----------
Total................................... $ 22,439 $ 21,959
=========== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,373, as of June 30, 2003, was unchanged from our fiscal year
ended September 30, 2002.
The components of intangible assets are as follows:
JUNE 30, 2003 SEPTEMBER 30, 2002
------------------------------ ----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------------------------ ----------------------------
Trade secrets and know-how............................... $ 2,550 $ 2,040 $ 2,550 $ 1,850
Distribution rights, customer lists and other............ 1,000 830 1,000 765
------------ ----------- ------------ -----------
Total intangible assets............................... $ 3,550 $ 2,870 $ 3,550 $ 2,615
============ =========== ============ ===========
Amortization expense of intangible assets was $85 and $255 for the three
and nine months ended June 30, 2003, respectively. Estimated future amortization
expense for the remaining three months of fiscal year 2003, fiscal 2004 and
fiscal 2005 are $85, $340, and $255, respectively.
8
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities
consisted of the following:
JUNE 30, SEPTEMBER 30,
2003 2002
---- ----
Raw material accruals................... $ 1,730 $ 851
Accrued compensation.................... 7,925 8,302
Warranty reserve........................ 1,043 858
Fixed asset accrual..................... 179 1,375
Income taxes payable.................... 916 2,662
Other................................... 3,265 3,190
------------ ----------
Total................................... $ 15,058 $ 17,238
============ ==========
With respect to our warranty reserve shown above, we provide for the
estimated cost of product returns based upon historical experience and any known
conditions or circumstances. Our warranty obligation is affected primarily by
product that does not meet specifications and performance requirements and any
related costs of addressing such matters. Revisions to the estimated warranty
liability are made when actual incidences of product not meeting specifications
and performance requirements differ from our estimates.
We have historically not recorded warranty claims directly against warranty
reserves, but rather provided for them in the period in which they occurred. As
such, charges to and reductions in expenses represent the net change required to
maintain an appropriate reserve.
The changes in the warranty reserve for the nine months ended June 30, 2003
are as follows:
Balance as of September 30, 2002........ $ 858
Charges to (reductions in) expenses, net 185
----------
Balance as of June 30, 2003............. $ 1,043
==========
8. LONG-TERM DEBT
On February 6, 2003, we prepaid the entire $3,500 unsecured term loan that
had been funded on the basis of the Illinois State Treasurer's Economic Program
which had been due on April 3, 2005 and had incurred interest at an annual rate
of 4.68%. No gain or loss was recognized with respect to the prepayment. As a
result of this prepayment, we have no outstanding long term debt.
On July 10, 2001 we entered into a $75,000 unsecured revolving credit and
term loan facility with a group of commercial banks. On February 5, 2002 and on
August 1, 2003, this agreement was amended with no material changes in terms.
Under this agreement, which terminates July 10, 2004, interest accrues on any
outstanding balance at either the institution's base rate or the eurodollar rate
plus an applicable margin. A non-use fee also accrues. Loans under this facility
are anticipated to be used primarily for general corporate purposes, including
working capital and capital expenditures. The credit agreement also contains
various covenants. No amounts are currently outstanding under this credit
facility and we are currently in compliance with the covenants.
9
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. CONTINGENCIES
We periodically become subject to legal proceedings in the ordinary course
of business. We are not currently involved in any legal proceedings which we
believe will have a material impact on our consolidated financial position,
results of operations, or cash flows.
10. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149") which applies to
contracts entered into or modified after June 30, 2003. SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." We do not
expect the adoption of SFAS 149 will have a material impact on our consolidated
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150") which improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. Examples of
such financial instruments include mandatorily redeemable shares, put options
and forward purchase contracts that may require the issuer to buy back some of
its shares in exchange for cash or other assets and obligations that can be
settled with shares. We currently do not hold these types of financial
instruments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations", as well as statements included elsewhere in this
Form 10-Q, includes "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 industry or general economic prospects or trends, our future results
of operations or financial position and statements preceded by, followed by or
that include the words "intends", "estimates", "plans", "believes", "expects",
"anticipates", "should", "could", or similar expressions, are forward-looking
statements. Forward-looking statements reflect our current expectations and are
inherently uncertain. Our actual results may differ significantly from our
expectations. We assume no obligation to update this forward-looking
information. The section entitled "Factors Affecting Future Operating Results"
describes some, but not all, of the factors that could cause these differences.
This section, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", should be read in conjunction with 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, 2002.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 VERSUS THREE MONTHS ENDED JUNE 30, 2002
REVENUE
Total revenue was $64.3 million for the three months ended June 30, 2003,
which represented a 6.0%, or $4.1 million, decrease from the three months ended
June 30, 2002. Revenue declined $5.9 million due to a decrease in sales volume
and price reductions granted to certain customers in a few select instances in
consideration of broader strategic relationships, which were partially offset by
a $1.8 million increase due to an increase in weighted average selling prices
resulting from improvements in product sales mix and foreign exchange rates. Our
improved sales mix was driven primarily by a 20.8% increase in copper product
revenue versus the comparable prior year quarter. Revenue would have been $0.8
million lower in the quarter had the Japanese Yen average exchange rate for the
quarter held constant with the prior year's third fiscal quarter average; we
currently do not transact sales in foreign currencies other than the Japanese
Yen. During the comparable prior year quarter we experienced a significant
sequential sales increase as the industry and our customers ramped production in
anticipation of a strong recovery in the second half of 2002 that did not
materialize and resulted in an over-build of IC device inventory.
In June 2003, we began selling directly to customers in Europe, Singapore
and Malaysia. These customers previously had been serviced through Metron, a
third party distributor. During the transition period we discontinued sales to
the distributor while they drew down its inventory of our products, resulting in
an estimated adverse revenue impact of $3.7 million for the fiscal third
quarter.
COST OF GOODS SOLD
Total cost of goods sold was $31.4 million for the three months ended June
30, 2003, which represented a decrease of 2.3% or $0.8 million from the three
months ended June 30, 2002. Cost of goods sold decreased by approximately $2.8
million due to lower sales volume, partially offset by a $2.0 million increase
in average costs associated with meeting our customers' more stringent product
quality requirements. The increase in costs were partially offset by the absence
of the Rippey royalty payments which ended in August 2002.
With respect to the key raw materials used to make our products, we expect
that the cost of fumed silica we purchase from Cabot Corporation used in the
manufacture of CMP slurries will continue to increase according to the terms of
our existing fumed metal oxide agreement with Cabot Corporation, which provides
for a fixed annual increase in the price of silica of 2.0% of the initial price
and additional price adjustments corresponding to Cabot Corporation's raw
material cost increases or decreases. Also, under the fumed alumina supply
agreement with Cabot Corporation, the overall price of fumed alumina fluctuates
since it is based on all of Cabot Corporation's fixed and variable costs for
producing the fumed alumina, plus its capital costs for expanding its capacity,
plus an agreed upon rate of return on investment, plus incentive payments if
more than a certain amount of fumed alumina per year is produced that meets our
specifications.
GROSS PROFIT
Our gross profit as a percentage of net revenue was 51.2% for the three
months ended June 30, 2003 as compared to 53.0% for the three months ended June
30, 2002. The 1.8% decrease in gross profit percentage resulted primarily from
lower sales volume, the pricing accommodations mentioned above and an increase
in fixed manufacturing costs, which was partially offset by the absence of the
Rippey royalty payment. In the near term, we expect gross profit will be in the
50% range, plus or minus 2%, as we add staffing and make improvements in
manufacturing.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $10.8 million in the three
months ended June 30, 2003, which represented an increase of 6.0%, or $0.6
million, from the three months ended June 30, 2002. The increase was primarily
due to increased depreciation of $0.4 million associated with our R&D facility,
consumable supply purchases of $0.3 million and staff related costs
11
of $0.4 million. These costs were partially offset by the absence of $0.5
million in expenses associated with the use of a third party's cleanroom tool in
the prior year. Development efforts were mainly related to new and enhanced
slurry products including products for copper applications, new CMP polishing
pad technology and advanced chemistry and particle technology.
SELLING AND MARKETING
Selling and marketing expenses were $2.8 million in the three months ended
June 30, 2003, which represented an increase of 11.4%, or $0.3 million, from the
three months ended June 30, 2002. The increase was primarily due to increased
staffing related to our transition to selling directly to customers in Europe,
Singapore and Malaysia, rather than through a distributor.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $4.7 million in the three months
ended June 30, 2003, which represented an increase of 9.3%, or $0.4 million,
from the three months ended June 30, 2002. This increase resulted primarily from
higher insurance premiums.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of intangibles was $0.1 million for both the three months
ended June 30, 2003 and June 30, 2002.
OTHER INCOME, NET
Other income was negligible for the three months ended June 30, 2003,
compared to $1.2 million, for the three months ended June 30, 2002. Other income
decreased primarily due to the absence of net foreign exchange gains associated
with the strengthening of the Japanese Yen. We now mitigate such foreign
exchange risk by entering into forward exchange contracts.
PROVISION FOR INCOME TAXES
The effective income tax rate was 33.5% for the three months ended June 30,
2003 and 35.0% for the three months ended June 30, 2002. The decrease in the
effective tax rate was mainly driven by the increased impact of research and
experimentation credits in relation to a lower taxable income base as compared
to the prior year.
NET INCOME
Net income was $9.8 million for the three months ended June 30, 2003, which
represented a decrease of 26.4%, or $3.5 million, from the three months ended
June 30, 2002 as a result of the factors discussed above.
NINE MONTHS ENDED JUNE 30, 2003 VERSUS NINE MONTHS ENDED JUNE 30, 2002
REVENUE
Total revenue was $183.8 million for the nine months ended June 30, 2003,
which represented an 8.2%, or $13.9 million, increase from the nine months ended
June 30, 2002. Of this increase, $6.5 million was due to an increase in sales
volume and $7.4 million was due to an increase in weighted average selling
prices from an improved sales mix and changes in foreign exchange rates with
respect to the Japanese Yen. Revenue related to copper slurries increased 37.5%
over the year ago period. Total revenue would have been $1.6 million lower had
the Japanese Yen average exchange rate for the nine month period held constant
with the prior year's nine month average. These effects were partially offset by
price reductions granted to certain customers in a few select instances in
consideration of broader strategic relationships.
12
COST OF GOODS SOLD
Total cost of goods sold was $90.8 million for the nine months ended June
30, 2003, which represented an increase of 11.9% or $9.7 million from the nine
months ended June 30, 2002. Approximately $3.1 million of this increase was due
to higher sales volume and $6.6 million was associated with higher average costs
due to product mix, higher fixed manufacturing costs and higher costs from lower
yields associated with meeting increased customer performance requirements for
our products. These increases were partially offset by the absence of the Rippey
royalty payments, which ended in August 2002.
GROSS PROFIT
Our gross profit as a percentage of net revenue was 50.6% for the nine
months ended June 30, 2003 as compared to 52.3% for the nine months ended June
30, 2002. The decrease in gross profit is primarily due to increased costs
associated with meeting increased customer performance requirements and to a
lesser extent, the pricing accommodations mentioned above.
RESEARCH AND DEVELOPMENT
Total research and development expenses were $29.0 million in the nine
months ended June 30, 2003, which represented an increase of 23.3% or $5.5
million, from the nine months ended June 30, 2002. Research and development
expense increased $0.7 million due to increased staffing, $0.9 million due to
wafer purchases and $2.3 million due to depreciation and operating costs of our
R&D facility and other new equipment. An additional $1.1 million increase
resulted from allocating certain common facility operating costs to R&D. These
costs had previously been treated as general and administrative expense prior to
the R&D facility addition to our existing office building. Development efforts
were mainly related to new and enhanced slurry products including products for
copper applications, new CMP polishing pad technology and advanced chemistry and
particle technology.
SELLING AND MARKETING
Selling and marketing expenses were $7.9 million in the nine months ended
June 30, 2003, which represented an increase of 9.5%, or $0.7 million, from the
nine months ended June 30, 2002. The increase resulted primarily from higher
costs associated with our customer support initiatives including our transition
to selling directly to customers in Europe, Singapore and Malaysia, rather than
through a distributor.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $13.6 million in the nine months
ended June 30, 2003 compared to $13.5 million in the nine months ended June 30,
2002. Increases include $1.0 million of allocated depreciation associated with
administrative areas of the R&D facility addition, depreciation of our business
information systems, higher insurance premiums of $0.9 million and increased
staffing costs of $0.5 million. These increases were almost entirely offset by a
decrease of $1.5 million in facilities charges due to the change in allocation
described in Research and Development above, a $0.7 million reduction in legal
and professional expenses, primarily due to the absence of legal fees associated
with the Rodel litigation, and the absence of a $0.2 million non-cash charge
related to the modification of a former director's stock option agreement.
LITIGATION SETTLEMENT
During the second fiscal quarter of 2002, we settled all pending patent
infringement litigation with Rodel, which resulted in a one-time payment to them
of $1.0 million. Under the settlement agreement, we received a fully paid-up,
worldwide royalty-free license to all technology that was the subject of the
litigation and their foreign equivalents, and we have no further financial
obligation with respect to this matter.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of intangibles was $0.3 million for both the nine months ended
June 30, 2003 and June 30, 2002.
13
OTHER INCOME, NET
Other income was $0.1 million for the nine months ended June 30, 2003,
compared to $0.7 million, for the nine months ended June 30, 2002. The decrease
in other income in 2003 is due to the absence of unrealized foreign exchange
gains recorded in the prior year resulting from the strengthening of the
Japanese Yen, which were partially offset by a payment made to Cabot Corporation
in 2002 as reimbursement for certain capital improvements made to equipment used
to supply us with raw materials which is no longer in service.
PROVISION FOR INCOME TAXES
The effective income tax rate was 33.5% in the nine months ended June 30,
2003 and 33.4% for the nine months ended June 30, 2002.
NET INCOME
Net income was $28.1 million in the nine months ended June 30, 2003, which
represented a decrease of 3.9%, or $1.2 million, from the nine months ended June
30, 2002 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $35.9 million in the nine
months ended June 30, 2003 and $41.1 million in the nine months ended June 30,
2002. Our cash provided by operating activities for the nine months ended June
30, 2003 originated from net income from operations of $28.1 million, non-cash
items of $16.5 million, which were partially offset by a net increase in working
capital of $8.7 million due to increases in customer receivables, inventory and
prepaid insurance and decreases in accounts payable, accrued liabilities and
taxes payable.
In the nine months ended June 30, 2003, capital spending was $8.1 million,
primarily due to the purchase of additional production-related equipment and for
metrology tools to support increased polishing capacity in our Class 1 clean
room. Full fiscal year 2003 capital spending is anticipated to be approximately
$17.0 million, down $5.0 million from our previous planned spending level of
$22.0 million. We received cash of approximately $1.8 million from the January
2003 sale of our distribution center and land in Ansung, South Korea. The
proceeds approximated the net book value of the assets sold. In the nine months
ended June 30, 2002, capital spending was $31.9 million, primarily due to the
construction of our research and development facility in Aurora, Illinois, and
equipping the facility with additional research and development equipment. We
also purchased additional production-related equipment for use in Aurora,
Illinois and invested in the development and implementation of our stand-alone
business information system.
Cash flows from financing activities were negligible in the nine months
ended June 30, 2003 and $2.6 million in the nine months ended June 30, 2002. On
February 6, 2003, we prepaid the entire $3.5 million unsecured term loan that
had been funded on the basis of the Illinois State Treasurer's Economic Program
which had been due on April 3, 2005 and had incurred interest at an annual rate
of 4.68%. We also made principal payments under capital lease obligations. Cash
used for these purposes was offset by funds received from the issuance of common
stock for the exercise of stock options and the Employee Stock Purchase Plan.
Cash provided from financing activities for the nine months ended June 30, 2002
resulted from the issuance of common stock for the exercise of stock options and
the Employee Stock Purchase Plan and were partially offset by principal payments
made under capital lease obligations.
We believe that cash generated by our operations and available borrowings
under our revolving credit facility will be sufficient to fund our operations
and expected capital expenditures for the foreseeable future. However, we plan
to expand our business and continue to improve our technology and, to do so, we
may be required to raise additional funds in the future through public or
private equity, debt financing or other arrangements.
14
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
At June 30, 2003 and September 30, 2002, we did not have any off-balance
sheet arrangements, unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which are sometimes established for the purpose of facilitating off-balance
sheet arrangements.
The following summarizes our contractual obligations at June 30, 2003 and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods.
CONTRACTUAL OBLIGATIONS LESS THAN 1-3 4-5 AFTER 5
(IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS
----- --------- ----- ----- -----
Capital lease obligations......................... $ 9.4 $ 1.6 $ 3.1 $ 2.2 $ 2.5
Operating leases ................................. 1.0 0.5 0.3 0.1 0.1
Unconditional purchase obligations ............... 38.5 22.4 8.7 3.4 4.0
Other long-term obligations....................... 1.4 0.3 1.1 0.0 0.0
------- --------- -------- -------- --------
Total contractual cash obligations................ $ 50.3 $ 24.8 $ 13.2 $ 5.7 $ 6.6
======= ========= ======== ======== ========
CAPITAL LEASE OBLIGATIONS
On December 12, 2001 we entered into a fumed alumina supply agreement
with Cabot Corporation. Under this agreement, Cabot Corporation expanded its
capacity in Tuscola, Illinois for the manufacture of fumed alumina. Payments
by us with respect to capital costs for the facility have been treated as a
capital lease for accounting purposes and the present value of the minimum
quarterly payments of approximately $0.3 million resulted in a $9.8 million
lease obligation and $9.8 million related leased asset. The agreement has an
initial five year term, which expires in 2006, but we can choose to renew
the agreement for another five year term, which would expire in 2011. We
also can choose to not renew the agreement subject to certain terms and
conditions and the payment of certain costs, after the initial five year
term. Capital lease payments to Cabot Corporation commenced in the second
quarter of fiscal 2002.
On January 11, 2002 we entered into a CMP tool and polishing
consumables transfer agreement with a third party under which we agreed to
transfer polishing consumables to them in return for a CMP polishing tool.
The polishing tool has been treated as a capital lease and the aggregate
fair market value of the polishing consumables resulted in a $2.0 million
lease obligation. The term of the agreement is approximately three years,
expiring in November 2004.
OPERATING LEASES
We lease certain vehicles, warehouse facilities, office space,
machinery and equipment under cancelable and noncancelable operating leases,
most of which expire within ten years and may be renewed by us.
UNCONDITIONAL PURCHASE OBLIGATIONS
Unconditional purchase obligations include our noncancelable purchase
commitments and take-or-pay arrangements with suppliers. We operate under an
amended fumed metal oxide agreement with Cabot Corporation for the purchase
of two key raw materials, fumed silica and fumed alumina. We are obligated
to purchase at least 90% of our six-month volume forecast of fumed silica
from Cabot Corporation and must pay for the shortfall if we purchase less
than that amount. We currently anticipate meeting minimum forecasted
purchase volume requirements. Also, under our fumed alumina supply agreement
with Cabot Corporation we are obligated to pay certain fixed, capital and
variable costs through December of 2006. This agreement has an initial five
year term, but we can choose to renew the agreement for another five year
term, which would expire in December 2011. If we do not renew the agreement,
we will become subject to certain terms and conditions and the payment of
certain costs. Unconditional purchase obligations include $24.2 million of
contractual commitments based upon our anticipated renewal of the agreement
through December 2011.
15
We have a long-term agreement with a supplier to purchase materials for
use in a product that is not currently in commercial production. As of June
30, 2003, we are obligated to purchase, subject to the supplier's ability to
deliver, $3.2 million of materials over the remaining term of the agreement,
which expires in June, 2005. We may not require the entire amount of
material provided for under the agreement, but we would still be obligated
to pay for it. We have not recorded a liability for this possible loss as we
are evaluating the production capabilities of this supplier for use in
conjunction with this product strategy. We also are required to reimburse
the supplier for all approved research and development costs related to the
materials. The supplier will repay these research and development
reimbursements if our material purchases from them reach certain levels.
In June 2003 we entered into a technology licensing and co-marketing
agreement with a semiconductor equipment manufacturer under which we plan to
develop, manufacture and sell polishing pads utilizing endpoint detection
window technology licensed from the manufacturer for use on the
manufacturer's equipment. Under this agreement, we are obligated to pay $6.6
million for the purchase of capital equipment, approximately one year of
certain marketing and technical support services, and equipment services. In
addition, we are obligated to supply this manufacturer with free polishing
pads, up to an agreed upon dollar amount, for particular uses over a seven
year period. We currently estimate our total cost associated with these
products will be $2.9 million over the seven year period. We are also
obligated to supply the equipment manufacturer with polishing pads, up to an
agreed upon dollar amount over the seven year period, which the manufacturer
will purchase from us at our cost. We will also pay a royalty to the
equipment manufacturer and, in certain circumstances, to another party to
whom we are a sub-licensee under our agreement, based upon net revenue
earned with respect to commercial sales of polishing pads covered under the
agreement. The agreement's term lasts as long as the patents on the
technology subject to the license agreement remain valid and enforceable.
We also have unconditional purchase obligations with three other
suppliers, which include $1.4 million related to purchases of raw materials
and $0.1 million associated with capital assets to be placed in service at
one of these suppliers.
OTHER LONG-TERM OBLIGATIONS
We have an agreement with a toll manufacturer pursuant to which the
manufacturer performs certain agreed-upon dispersion services. We have
agreed to purchase minimum amounts of services per year and to invest
approximately $0.2 million per year in capital improvements or other
expenditures to maintain capacity at the manufacturer's dispersion facility.
The initial term of the agreement expires in October 2004, with automatic
one-year renewals, and contains a 90-day cancellation clause executable by
either party. We are obligated to make a termination payment if the
agreement is not renewed.
On July 10, 2001 we entered into a $75.0 million unsecured revolving
credit and term facility with a group of commercial banks. Under this
agreement, which terminates on July 10, 2004, we are obligated to pay an
administrative fee and a non-use fee. No amounts are currently outstanding
under this agreement and we are currently in compliance with the covenants.
FACTORS AFFECTING FUTURE OPERATING RESULTS
RISKS RELATING TO OUR BUSINESS
WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR
TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN CMP CONSUMPTION
Our business is substantially dependent on a single class of products, CMP
slurries, which historically has accounted for almost all of our revenue. Our
business would suffer if these products became obsolete or if consumption of
these products decreased. Our success depends on our ability to keep pace with
technological changes and advances in the semiconductor industry and to adapt
and improve our products 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
16
and application of IC devices and these changes and advances are expected to
continue in the future. Developments in the semiconductor industry could render
our products obsolete or less important to the IC device manufacturing process.
A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THEM AS CUSTOMERS
Our customer base is concentrated among a limited number of large
customers. One or more of these principal customers could stop buying CMP
slurries from us or could substantially reduce the quantity of CMP slurries
purchased from us. Any cancellation, deferral or significant reduction in CMP
slurries sold to these principal customers or a significant number of smaller
customers could seriously harm our business, financial condition and results of
operations. Our five largest customers, of which two are distributors, accounted
for approximately 63% and 62% of our revenue for the nine months ended June 30,
2003 and 2002, respectively. In June 2003, we completed our transition to
selling directly to customers in Europe, Singapore and Malaysia who previously
had been serviced through one of these distributors. As a result, we expect this
distributor will no longer be one of our top five customers.
DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY A FURTHER
DECLINE IN WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS
Our business is affected by current economic and industry conditions and it
is extremely difficult to predict sales of our products given uncertainties in
these factors. During fiscal 2001 and the first and second fiscal quarters of
2002 the global economic slowdown and weakening in demand for electronic
systems, coupled with higher than normal chip inventories, affected our
quarterly revenue trends. Sales improved in the second half of fiscal 2002 in
anticipation of an industry recovery which did not materialize. This resulted in
an overbuilding of inventory of IC devices which adversely impacted the first
half of fiscal 2003. We remain cautious regarding the health of the global
economy and semiconductor industry, and further declines or lack of improvement
in current economic and industry conditions could continue to adversely affect
our business.
ANY PROBLEM OR INTERRUPTION IN SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS,
INCLUDING FUMED METAL OXIDES, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY
AFFECT OUR SALES
Fumed metal oxides, both fumed silica and fumed alumina, are significant
raw materials we use in many of our CMP slurries. Our business would suffer from
any problem or interruption in our supply of fumed metal oxides or other key raw
materials. We entered into a fumed metal oxide agreement with Cabot Corporation,
which became effective upon completion of our initial public offering in April,
2000. In December, 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation and an amendment to the fumed metal oxide agreement with
respect to fumed alumina. Under these agreements, Cabot Corporation continues to
be our primary supplier of certain fumed metal oxides for our slurry products
produced as of the date of our initial public offering with respect to fumed
silica and as of the effective date of the fumed alumina supply agreement with
respect to certain amounts of fumed alumina. We face the risk of increases in
the price of fumed metal oxides under these agreements if Cabot Corporation's
cost of production increases. It may be difficult to secure alternative sources
of fumed metal oxides in the event Cabot Corporation or another supplier is
unable to supply us with sufficient quantities of fumed metal oxides which meet
the quality and technical specifications required by our customers. In addition,
contractual amendments to the existing agreements with, or non-performance by,
Cabot Corporation or another supplier, could adversely affect us as well.
In addition, if we change the supplier or type of key raw materials such as
fumed metal oxides we use to make our existing CMP slurries or are required to
purchase them from a different manufacturer or manufacturing facility, whether
Cabot Corporation or another party, or otherwise modify our products, in certain
circumstances our customers might have to requalify our CMP slurries for their
manufacturing processes and products. The requalification process could take a
significant amount of time to complete, possibly interrupting or reducing our
sales of CMP slurries to these customers.
17
OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS
DEVELOP SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE, OBTAIN
CERTAIN INTELLECTUAL PROPERTY RIGHTS OR IF ANY OF OUR MAJOR CUSTOMERS DEVELOP OR
INCREASE IN-HOUSE SLURRY MANUFACTURING CAPABILITY
Competition from current CMP slurry manufacturers, new entrants to the CMP
slurry market or a decision by any of our major customers to produce, or
increase the production of slurry products in-house could seriously harm our
business and results of operations. Competition has increased from other
existing providers of CMP slurries and opportunities exist for other companies
with sufficient financial or technological resources to emerge as potential
competitors by developing their own CMP slurry products. The existence or threat
of increased competition and additional in-house production could impact the
prices we are able to charge for our slurry products. 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.
BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING
PADS, EXPANSION OF OUR BUSINESS INTO THIS AREA MAY NOT BE SUCCESSFUL
An element of our strategy is to leverage our current customer
relationships and technological expertise to expand our business into new
product areas and applications, including manufacturing and distributing CMP
polishing pads. We have had limited experience in developing and marketing these
products, which involve technologies and production processes that are
relatively new to us. We, our suppliers of the raw materials that we use to
develop our polishing pads, or our provider of pads for whom we act as
value-added reseller, may not be able to solve production problems that we or
they may encounter, and may not be able to produce products that satisfy our
customers' needs. In addition, we, our suppliers or pad provider may be unable
to keep pace with technological or other developments in the design and
production of polishing pads. Also, our competitors may have or obtain
intellectual property rights which could restrict our ability to market our
existing products and/or to innovate and develop new products.
BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY
OBTAIN OR PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS
Protection of intellectual property is particularly important in our
industry because CMP slurry and pad manufacturers develop complex and technical
formulas for CMP products which are proprietary in nature and differentiate
their products from those of competitors. Our intellectual property is important
to our success and ability to compete. We attempt to protect our intellectual
property rights through a combination of patent, trademark, copyright and trade
secret laws, as well as employee and third-party nondisclosure and assignment
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could seriously harm our business.
WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We currently have operations and a large customer base outside the United
States. Approximately 66% of our revenue was generated by sales to customers
outside the United States for our fiscal year ended 2002. For the nine months
ended June 30, 2003, approximately 67% of our revenue was generated by sales to
customers outside the United States. We encounter risks in doing business in
certain foreign countries. These risks include, but are not limited to, adverse
changes in economic and political conditions, as well as the difficulty in
enforceability of business and customer contracts and agreements, including
protection of intellectual property rights. In June 2003 we completed our
transition to selling directly to customers in Europe, Singapore and Malaysia
who previously had been serviced through Metron, a third party distributor.
Selling directly may increase our risk of conducting business in foreign
countries.
18
RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK
THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
The market price of our common stock has and could continue to fluctuate
significantly as a result of factors such as: economic and stock market
conditions generally and specifically as they may impact participants in the
semiconductor industry; changes in financial estimates and recommendations by
securities analysts following our stock; earnings and other announcements by,
and changes in market evaluations of, us or participants in the semiconductor
industry; changes in business or regulatory conditions affecting us or
participants in the semiconductor industry; announcements or implementation by
us, our competitors, or our customers of technological innovations or new
products; and trading volume of our common stock.
ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
OUR RIGHTS PLAN MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID FOR
OUR COMPANY
Our certificate of incorporation, our bylaws, our rights plan and various
provisions of the Delaware General Corporation Law may make it more difficult to
effect a change in control of our company. For example, our amended certificate
of incorporation authorizes our board of directors to issue up to 20 million
shares of blank check preferred stock and to attach special rights and
preferences to this preferred stock. Also our amended certificate of
incorporation provides for the division of our board of directors into three
classes as nearly equal in size as possible with staggered three-year terms. In
addition, the rights issued to our stockholders under our rights plan may make
it more difficult or expensive for another person or entity to acquire control
of us without the consent of our board of directors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our
foreign operations and approximately 16% of our revenue is transacted in
currencies other than the U.S. dollar. 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 which we have exposure to are the Japanese Yen
and, to a lesser extent, the British Pound and the Euro. From time to time we
have entered into forward contracts in an effort to manage foreign currency
exchange exposure. We do not currently enter into forward exchange contracts for
speculative or trading purposes.
MARKET RISK AND SENSITIVITY ANALYSIS FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in foreign exchange rates. As of June 30, 2003, 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. We believe that our exposure to foreign
currency exchange rate risk at June 30, 2003 was not material.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and
15d-14 as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to make known to them
in a timely fashion material information related to the Company required to be
filed in this report. There have been no significant changes in the
19
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation.
While we believe the present design of our disclosure controls and
procedures is effective to make known to our senior management in a timely
fashion all material information concerning our business, we will continue to
improve the design and effectiveness of our disclosure controls and procedures
to the extent necessary in the future to provide our senior management with
timely access to such material information, and to correct any deficiencies that
we may discover in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
ITEM 5. OTHER INFORMATION
Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for
disclosing to investors the non-audit services approved by our Audit Committee
to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the law as services other than those provided in
connection with an audit or a review of the financial statements of the Company.
Our Audit Committee has pre-approved the following non-audit services performed
by PricewaterhouseCoopers LLP: (1) tax compliance; (2) tax advice related to our
foreign operations and research and experimentation activities; and (3) advice
with respect to our Equity Incentive Plans and certain other compensation plans.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the
number assigned to such exhibits in the Exhibit Table of Item
601 of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14 Amended and Restated 2000 Equity Incentive Plan, dated June 17, 2003*
10.28 Amendment to Directors' Deferred Compensation Plan*
31.1 Certification of Chief Executive Officer as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
* Management contract, or compensatory plan or arrangement.
20
(b) Reports on Form 8-K
In a report dated April 1, 2003, Cabot Microelectronics
reported under Item 5. "Other Events" and Item 7. "Financial
Statements and Exhibits" that on April 1, 2003 Cabot
Microelectronics announced the appointment of William S.
Johnson to the position of Vice President and Chief Financial
Officer.
In a report dated April 24, 2003, Cabot Microelectronics
reported under Item 7. "Financial Statements and Exhibits" and
Item 9. "Regulation FD Disclosure" (Item 12. "Results of
Operations and Financial Condition") that on April 24, 2003
Cabot Microelectronics reported financial results for its
second fiscal quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABOT MICROELECTRONICS CORPORATION
Date: August 11, 2003 /s/ WILLIAM S. JOHNSON
--------------------------------------------
William S. Johnson
Vice President and Chief Financial Officer
[Principal Financial Officer]
Date: August 11, 2003 /s/ DANIEL S. WOBBY
--------------------------------------------
Daniel S. Wobby
Corporate Controller
[Principal Accounting Officer]
21