UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 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
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36-4324765
|
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
|
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870
NORTH COMMONS DRIVE
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60504
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AURORA,
ILLINOIS
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(Zip
Code)
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(Address
of principal executive offices)
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Registrant's
telephone number, including area code:
(630) 375-6631
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, $0.001 par value
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act
.
Yes
[ X ] No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act
.
Yes
[ ] No [ X
]
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes
[ X ]
No
[ ]
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
|
Large
accelerated filer
|
[ X
]
|
Accelerated
filer
|
[ ]
|
Non-accelerated
filer
|
[ ]
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes [ ]
No
[ X
]
The
aggregate market value of the registrant’s Common Stock held beneficially or of
record by stockholders who are not affiliates of the registrant, based upon the
closing price of the Common Stock on March 31, 2008, as reported by the NASDAQ
Global Select Market, was approximately $745,993,700. For the
purposes hereof, "affiliates" include all executive officers and directors of
the registrant.
As of
October 31, 2008, the Company had 23,223,147 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on March 3, 2009, are incorporated by reference in Part
III of this Form 10-K to the extent stated herein.
This Form
10-K includes statements that constitute “forward-looking statements” within the
meaning of federal securities regulations. For more detail regarding
“forward-looking statements” see Item 7 of Part II of this Form
10-K.
FORM
10-K
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2008
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PART
I
OUR
COMPANY
Cabot Microelectronics Corporation
("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our''), which was
incorporated in the state of Delaware in 1999, is the leading supplier of
high-performance polishing slurries used in the manufacture of advanced
integrated circuit (IC) devices within the semiconductor industry, in a process
called chemical mechanical planarization (CMP). CMP is a polishing
process used by IC device manufacturers to planarize or flatten many of the
multiple layers of material that are deposited upon silicon wafers in the
production of advanced ICs. CMP enables IC device manufacturers to
produce smaller, faster and more complex IC devices with fewer
defects.
We currently operate predominantly in
one industry segment – the development, manufacture and sale of CMP
consumables. We develop, produce and sell CMP slurries for polishing
many of the conducting and insulating materials used in IC devices, and also for
polishing the disk substrates and magnetic heads used in hard disk
drives. We also develop, manufacture and sell CMP polishing pads,
which are used in conjunction with slurries in the CMP process.
In addition to strengthening and
growing our core CMP business, through our Engineered Surface Finishes (ESF)
business we seek to leverage our expertise in CMP formulation, materials and
polishing techniques for the semiconductor industry to address other demanding
market applications requiring nanoscale control of surface shape and finish, and
gain access to a variety of markets that we do not currently
serve. We are pursuing a number of surface modification applications
in which we believe our technical ability to shape, enable and enhance the
performance of surfaces at an atomic level can add value to our
customers.
CMP
PROCESS WITHIN IC DEVICE MANUFACTURING
The multi-step manufacturing process
for IC devices is referred to as a “wafer start”, and typically begins with a
circular wafer of pure silicon. A large number of identical IC
devices, or dies, are manufactured on each wafer at the same
time. The first steps in the manufacturing process build transistors
and other electronic components on the silicon wafer. These are
isolated from each other using a layer of insulating material, most often
silicon dioxide, to prevent electrical signals from bridging from one transistor
to another. These components are then wired together using conducting
materials such as aluminum or copper in a particular sequence to produce a
functional IC device with specific characteristics. When the
conducting wiring on one layer of the IC device is completed, another layer of
insulating material is added. The process of alternating insulating
and conducting layers is repeated until the desired wiring within the IC device
is achieved. At the end of the process, the wafer is cut into the
individual dies, which are then packaged to form individual chips.
Demand for CMP products for IC devices
is primarily based on the number of wafer starts by semiconductor manufacturers
and the complexity of the IC devices. To enhance the performance of
IC devices, IC device manufacturers have progressively increased the number and
density of electronic components and wiring in each IC device. As a
result, the number of wires and the number of discrete wiring layers have
increased. As the complexity of the IC devices increases, the demand
for CMP products also increases. As semiconductor technology has
advanced and performance requirements of IC devices have increased, the
percentage of IC devices that utilize CMP in the manufacturing process has
increased steadily over time. We believe that CMP is used in the
majority of all IC devices made today, and we expect that the use of CMP will
continue to increase in the future.
In the CMP polishing process, CMP
consumables are used to level, smooth and remove excess material from the
surfaces of the layers of IC devices via a combination of chemical reactions and
mechanical abrasion, leaving minimal residue or defects on the surface, and
leaving only the material necessary for circuit integrity. CMP
slurries are liquid solutions generally composed of high-purity deionized water
and a proprietary mix of chemical additives and engineered abrasives that
chemically and mechanically interact with the surface material of the IC device
at an atomic level. CMP pads are engineered polymeric materials
designed to distribute and transport the slurry to the surface of the wafer and
distribute it evenly across the wafer. During the CMP process the
wafer is typically held on a rotating carrier, which is pressed down against a
rotating polishing table and spun in a circular motion. The portion
of the table that comes in contact with the wafer is covered by a textured
polishing pad. A CMP slurry is continuously applied to the polishing
pad to facilitate and enhance the polishing process. Hard disk drive
manufacturers use similar processes to smooth the surface of substrate disks
before depositing magnetic media onto the disk.
An effective CMP process is achieved
through technical optimization of the CMP consumables in conjunction with an
appropriately designed CMP process. Prior to introducing new or
different CMP slurries or pads into its manufacturing process, an IC device
manufacturer generally requires the product to be qualified in its processes
through an extensive series of tests and evaluations. These
qualifications are intended to ensure that the CMP consumable product will
function properly within the customer’s overall manufacturing
process. These tests may require minor changes to the CMP process or
the CMP slurry or pad. While this qualification process varies
depending on numerous factors, it is generally quite costly and may take six
months or longer to complete. IC device manufacturers usually take
into account the cost, time required and impact on production when they consider
implementing or switching to a new CMP slurry or pad.
CMP enables IC device manufacturers to
produce smaller, faster and more complex IC devices with a greater density of
transistors and other electronic components than is possible without
CMP. By enabling IC device manufacturers to make smaller IC devices,
CMP also allows them to increase the number of IC devices that fit on a
wafer. This increase in the number of IC devices per wafer in turn
increases the throughput, or the number of IC devices that can be manufactured
in a given time period, and thereby reduces the cost per device. CMP
also helps reduce the number of defective or substandard IC devices produced,
which increases the device yield. Improvements in throughput and
yield reduce an IC device manufacturer's unit production costs, and reducing
costs is one of the highest priorities of a semiconductor manufacturer as the
return on its significant investment in manufacturing capacity can be enhanced
by lower unit costs. More broadly, sustained growth in the
semiconductor industry traditionally has been fueled by lower unit costs, making
IC devices more affordable in an expanding range of applications.
PRECISION
POLISHING
Through our ESF business, we are
applying our technical expertise in CMP consumables and polishing techniques
developed for the semiconductor industry to demanding applications in other
industries where shaping, enabling and enhancing the performance of surfaces is
critical to success. We believe we can deliver improvements in
production efficiencies, figure precision and surface finish for a variety of
difficult-to-polish materials.
In addition, many of the production
processes currently used in precision machining and polishing have been based on
traditional, labor-intensive techniques, which are being replaced by
computer-controlled, deterministic processes. Our fiscal 2006
acquisition of QED Technologies, Inc. (QED) allowed us to become a
leading provider of deterministic finishing technology for the precision optics
industry. We believe precision optics are pervasive, serving several
existing large and growing markets such as semiconductor equipment, aerospace,
defense, security and telecommunications, and also offer growth potential in new
applications.
OUR
PRODUCTS
CMP
CONSUMABLES FOR IC DEVICES
We develop, produce and sell CMP
slurries for a wide range of polishing applications of materials that conduct
electrical signals, including tungsten, copper and tantalum (commonly referred
to as “copper barrier” or “barrier”). Slurries for polishing tungsten
are used heavily in the production of memory devices and older generation logic
devices such as for MP3 players, cellphones, gaming devices and digital video
recorders. Our next generation slurries for tungsten polishing are
designed to be tunable, such that customers have greater flexibility, improved
performance and a reduced cost of ownership. Our slurries for
polishing copper and barrier materials are used primarily in the production of
advanced IC logic devices such as microprocessors for computers, and devices for
graphic systems, gaming systems and communication devices. These
products include different slurries for polishing the copper film and the thin
barrier layer used to separate copper from the adjacent insulating
material. We offer multiple products for each technology node to
enable different integration schemes depending on specific customer
needs.
We also develop, manufacture and sell
slurry products used to polish the dielectric insulating materials that separate
conductive layers within logic and memory semiconductor chips. Our
core slurry products for these materials are used for a wide variety of high
volume applications. Our advanced dielectrics products are designed
to be more customized than our core dielectrics products to meet the more
stringent and complex performance requirements of specialized polishing
applications at advanced technology nodes.
We develop, produce and sell CMP
polishing pads, which are consumable materials that work in conjunction with CMP
slurries in the CMP polishing process. We believe that CMP polishing
pads represent a natural adjacency to our CMP slurry business, since the
technologies are closely related and utilize the same technical and sales
infrastructure. We believe our unique pad material and our continuous
pad manufacturing process enable us to produce a pad with a longer pad life,
greater consistency from pad-to-pad, and enhanced performance, resulting in
lower cost of ownership for our customers. We are producing and
selling pads that can be used on a variety of polishing tools, over a broad
range of applications including tungsten, copper and dielectrics, over a wide
range of technology nodes, and on both 200mm and 300mm wafers.
CMP
CONSUMABLES FOR THE DATA STORAGE INDUSTRY
We develop and produce CMP slurries for
polishing the materials that coat rigid disks and magnetic heads used in hard
disk drives for computer and other data storage applications, which represent an
extension of our core CMP slurry technology and manufacturing capabilities
established for the semiconductor industry. We believe CMP
significantly improves the surface finish of these coatings, resulting in
greater storage capacity of the hard disk drive systems, and also improves the
production efficiency of manufacturers of hard disk drives by helping them
increase their throughput and yield.
PRECISION
OPTICS PRODUCTS
Through our QED subsidiary, we design
and produce precision polishing and metrology systems for advanced optic
applications that allow customers to attain near-perfect shape and surface
finish on a range of optical components such as mirrors, lenses and
prisms. Historically, advanced optics have been produced using
labor-intensive artisan processes, and variability has been
common. QED has created an automated polishing system that enables
rapid, deterministic and repeatable surface correction to the most demanding
levels of precision in dramatically less time than with traditional
means. QED’s polishing systems use Magneto-Rheological Finishing
(MRF), a proprietary surface figuring and finishing technology, which employs
magnetic fluids and sophisticated computer technology to polish a variety of
shapes and materials.
Fabrication of high quality, advanced
optics is often hampered by the lack of accurate and affordable
metrology. For example, interferometers, metrology tools that measure
the surface of an optic, traditionally are limited by the size and precision of
the reference optic used. QED’s Subaperture Stitching Interferometry
(SSI) workstation enables the automatic capture of precise metrology data for
large and/or strongly curved optical parts and gives the user a complete map of
the optical surface. The SSI workstation measures portions of large
optical parts, and digitally “stitches” these portions together into a single
complete surface map. This map is needed to produce high precision
optics to exacting tolerances. QED’s SSI technology for Aspheres
(SSI-A) is designed to extend the capability of the SSI platform to measure
increasingly complex shapes.
STRATEGY
We believe our core competencies lie in
our abilities to shape, enable and enhance the performance of surfaces at an
atomic level, as well as to consistently and reliably deliver and support
products around the world that meet our customers’ demanding
specifications. We continue to pursue two strategic goals intended to
utilize these capabilities: 1) strengthen and grow our core CMP consumables
business within the semiconductor and hard disk drive industries, and 2)
leverage our expertise in CMP process and slurry formulation to expand our ESF
business into new markets.
STRENGTHEN
AND GROW OUR CORE CMP CONSUMABLES BUSINESS
As the leader in the CMP slurry
industry, we intend to grow our core CMP consumables business through
implementation of our three strategic initiatives – maintaining our
technological leadership, achieving operations excellence and connecting with
our customers. We believe our strong financial performance and
financial position allow us to fund growth opportunities in our core CMP
consumables business through internally developed technologies as well as
potential acquisitions of technologies and businesses.
Technology Leadership: We
believe that technology is vital to success in our CMP consumables business and
we devote significant resources to research and development. We
continue to develop and produce new CMP products to address existing or new CMP
applications. We need to stay ahead of the rapid technological
advances in the semiconductor and data storage industries in order to deliver a
broad line of CMP consumables products that meet or exceed our customers'
evolving needs. We have established research and development
facilities in the United States, Japan, Taiwan and Singapore in order to meet
our customers’ technology needs on a global basis.
Operations Excellence: Our
customers demand increasing performance of our products in terms of product
quality and consistency. We strive to drive out variation in our
products and processes in order to increase quality, productivity and
efficiency, and improve the uniformity and consistency of performance of our CMP
consumable products. To support our operations excellence initiative,
we have adopted the concepts of Six Sigma across our Company. Six
Sigma is a systematic, data-driven approach and methodology for improving
quality by reducing variability. We believe our Six Sigma initiatives
have contributed to a cumulative 23% gain in productivity in our operations over
the past four fiscal years. We also have extended our Six Sigma
initiative to include joint projects with customers and vendors. We
continue to make improvements to our supply chain to improve the quality and
consistency of our products, processes and raw materials, as well as to expand
our production capacity.
Connecting With Our
Customers: We believe that building close relationships with our
customers is a key to achieving long-term success in our business. We
work closely with our customers to identify and develop new and better CMP
consumables, to integrate our products into their manufacturing processes, and
to assist them with supply, warehousing and inventory management. Our
customers demand a highly reliable supply source, and we believe we have a
competitive advantage because of our ability to timely deliver high-quality
products and service from the early stages of product development through the
commercialized use of our products. We have devoted significant
resources to enhance our close customer relationships and we are committed to
continuing this effort. We strategically locate our research
facilities, manufacturing operations and the related technical and customer
support teams to be responsive to our customers’ needs.
The following are some examples of the
successful execution of our strategic initiatives during fiscal
2008.
|
·
|
We
significantly increased sales of our differentiated pad product in fiscal
2008 as sales increased to $15.1 million from $0.5 million in fiscal
2007. We were also able to expand our pad customer base from
eight customers at the beginning of the fiscal year to 15 by the end of
the year.
|
|
·
|
We
completed the installation of our new 300-millimeter polishing tool and
related metrology equipment at our Asia Pacific technology center in
Geino, Japan. This equipment is being used in the development
of next-generation products for copper, barrier and other applications as
well as for customer demonstrations in the Asia Pacific
region.
|
|
·
|
We
entered into a long-term agreement with International Business Machine
Corporation (IBM) to jointly develop CMP solutions for a variety of new
applications and new materials.
|
|
·
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We
announced that we have signed an agreement to establish on-site pad
finishing capability at one of our customer’s wafer fabrication
facilities.
|
LEVERAGE
OUR EXPERTISE INTO NEW MARKETS – ENGINEERED SURFACE FINISHES
In addition to strengthening and
growing our core CMP business, we are expanding our Company through our ESF
business. We believe we can leverage our expertise in CMP consumables
for the semiconductor industry to develop an array of products for demanding
polishing applications in other industries that are synergistic to our CMP
consumables business. One area of focus in our ESF business is on the
electronic materials market, including the polishing of electronic substrates
such as silicon and silicon-carbide wafers.
Similar to our core CMP business, our
ESF business is technology driven. For example, we believe our QED
subsidiary is the technology leader in deterministic finishing for the precision
optics industry. In fiscal 2008, QED was awarded a prestigious
“R&D 100 award” by R&D Magazine that was granted for QED’s development
of its SSI-A system. SSI-A is a precision metrology system that is
capable of measuring complex optical surfaces, including those that are
non-spherical. Fiscal 2008 was the second consecutive year in which
QED has been honored with an R&D 100 award.
QED has expanded its marketing efforts
beyond its traditional emphasis on the largest precision optics producers to now
also appeal to hundreds of smaller optics manufacturers throughout the world
that continue to rely on traditional, manual artisan labor to produce optical
components. These marketing efforts translated into a number of
shipments during fiscal 2008 that represented new customers for our QED
business. During fiscal 2008, we equipped our Asia Pacific technology
center with QED capabilities to offer product demonstrations to our customers in
this region. These initiatives demonstrate our ability to serve our
ESF customers on a global scale, much like we do in our CMP consumables
business.
INDUSTRY
TRENDS
SEMICONDUCTOR
INDUSTRY
We believe the semiconductor industry
has demonstrated several clear trends: semiconductor demand is increasingly
driven by demand for consumer electronic devices that have a high memory
content; there is constant pressure to reduce costs; the number of logic
development centers continues to shrink as does the number of semiconductor
manufacturers; and business is cyclical.
Consumer electronic devices now
represent a strong driver for semiconductor demand, in addition to the
traditional driver of personal computers. Competition in the industry
continues to grow as the complexity of devices increases, so customers look for
suppliers who can provide innovative and cost-effective solutions. As
we enter fiscal 2009, demand in the semiconductor industry appears to be
softening in conjunction with broad economic weakness in the global
economy. Recent analyst reports have forecasted that semiconductor
foundries are expected to reduce their utilization rates by 20-30% and a number
of memory manufacturers have announced that they will reduce production as
well. We believe, however, that growth in demand for consumer devices
as well as continued growth in computing applications will be key growth drivers
in the industry over the long term.
As the growth in consumer electronic
devices continues, there is increased pressure on IC device manufacturers to
reduce their costs since end users of consumer electronic devices are very price
sensitive. Manufacturers are seeking ways to optimize their
production yield while minimizing their production costs. One way
they can control unit cost is by maximizing their production capacity, thereby
spreading their fixed production costs over a large number of
units. Manufacturers also seek ways to improve their production yield
through the use of CMP consumables products with improved product quality and
performance. Our customers also actively seek price reductions to
lower their production costs. This pressure on manufacturers to
reduce costs has also led to an increase in the use of foundries where
semiconductor companies can outsource some or all of their manufacturing and
reduce their fixed costs.
Although cost control is critical,
rapid advancement in technology increases the development and production costs
of IC devices. However, technology development can be
cost-prohibitive to many manufacturers, so there has been a significant decline
in the number of technology development centers in the industry, particularly
logic chip design centers. We believe that our customers are forming
consortia and research and development alliances to better manage their
development costs. The number of semiconductor manufacturers has been
declining as well, since the smaller manufacturers do not have the resources to
compete with the large manufacturers on the global basis needed in today’s
market.
The cyclical nature of the
semiconductor industry is closely tied to the global economy. In our
fiscal year 2008, we saw a continued weakening of the U.S. and global economy,
which now appears to be affecting end user demand for both logic and memory
devices. Semiconductor manufacturers now must pay closer attention to
both the cost and volume of production of IC devices. Although it is
not possible to predict how long the current downturn will last, it will likely
adversely affect our business well into fiscal 2009. However, we
believe that wafer starts will grow in the long term.
CMP
CONSUMABLES INDUSTRY
Demand for CMP consumables is primarily
driven by wafer starts, so the CMP consumables industry reflects the cyclicality
of the semiconductor industry. Our financial results for fiscal 2008
also demonstrated this cyclicality. During the first three quarters
of the fiscal year, our revenue grew to record levels as wafer starts in the
semiconductor industry continued to grow. However, we saw a downturn
in our fourth quarter revenue as semiconductor unit production
declined. Although wafer starts may fluctuate in the short-term, we
anticipate the worldwide market for CMP consumables used by IC device
manufacturers will grow in the future as a result of expected long term growth
in wafer starts, growth in the percentage of IC devices produced that require
CMP, an increase in the number of CMP polishing steps required to produce these
devices and the introduction of new materials in the manufacture of
semiconductor devices. We expect the anticipated volume growth will
be somewhat mitigated by increased efficiencies in CMP consumable usage as
customers seek to reduce their costs, such as through the transition to larger
wafers, slurry dilution and decreased slurry flow rates.
As semiconductor technology continues
to advance, we believe that CMP technical solutions are becoming more complex,
and leading-edge technologies almost always require some customization by
customer, tool set and process integration approach. Leading-edge
device designs are introducing more materials and processes into next generation
chips, and these new materials and processes must be considered in developing
CMP solutions. As a result, customers are selecting suppliers earlier in
their development processes and are maintaining preferred supplier relationships
through production. We believe that close collaboration between
customers and suppliers offers the best opportunity for optimal CMP
solutions. We also believe that research and development programs are
critically important as we invest in new product development and more
cost-effective CMP solutions.
COMPETITION
We compete in the CMP consumables
industry, which is characterized by rapid advances in technology and demanding
product quality and consistency requirements. We face competition
from other CMP consumables suppliers, and we also may face competition in the
future from significant changes in technology or emerging
technologies. However, we believe we are well positioned to continue
our leadership in the CMP slurry industry. We believe we have the
scale, capabilities and infrastructure that are required for success, and we
work closely with the largest customers in the semiconductor industry to meet
their growing expectations.
Our CMP slurry competitors range from
small companies that compete with a single product and/or in a single geographic
region to divisions of global companies with multiple lines of IC manufacturing
products. However, we believe we have more CMP slurry business than
any other competitor. In our view, we are the only CMP slurry
supplier today which serves a broad range of customers by offering and
supporting a full line of CMP slurry products for all major applications over a
range of technologies, and that has a proven track record of supplying these
products globally in high volumes with the attendant required high level of
technical support services.
The CMP polishing pad market has been
dominated by a single entity that has held this position for a number of
years. A number of other companies are attempting to enter this
market, providing potentially viable product alternatives. We believe
our pad materials and our continuous pad manufacturing process have enabled us
to produce a pad with a longer pad life with more consistency for our customers,
thus reducing their total pad cost. We believe this has fueled
significant growth in sales of our pad products.
Our QED subsidiary operates in the
precision optics industry. There are few direct competitors of QED
because its technology is relatively new and unique. We believe QED’s
technology provides a competitive advantage to customers in the precision optics
industry which still relies heavily on traditional artisan-based methods of
fabrication.
CUSTOMERS,
SALES AND MARKETING
Within the semiconductor industry, our
customers are primarily producers of logic IC devices, producers of memory IC
devices and IC foundries. Often, logic and memory companies outsource
some or all of the production of physical devices to foundries, which provide
contract manufacturing services, in order to avoid the high cost of constructing
and operating a fab or in cases where they need additional
capacity.
Based upon our own observations and
customer satisfaction survey results, we believe the following factors influence
our customers’ CMP buying decisions: overall cost of ownership, which represents
the cost to purchase, use and maintain a product; product quality and
consistency; product yield and performance; and delivery/supply
assurance. We believe that greater customer sophistication in the CMP
process, more demanding integration schemes, additional and unique polishing
materials and cost pressures will add further demands on CMP consumable
suppliers. When these factors are combined with our customers’ desires to gain
purchasing leverage and lower their cost of ownership, we believe that only the
most innovative, cost effective, service driven CMP suppliers will
thrive.
We use an interactive approach to build
close relationships with our customers in a variety of areas. Our
sales process begins long before the actual sale of our products and occurs on a
number of levels. Due to the long lead times from research and
development to product commercialization and sales, we have research teams that
collaborate with customers on emerging applications years before the products
are required by the market. We also have development teams that
coordinate with our customers, using our research and development facilities and
capabilities to design CMP products tailored to their precise
needs. Next, our applications engineers work with customers to
integrate our products into their manufacturing processes. Finally,
as part of our sales process, our logistics and sales personnel provide supply,
warehousing and inventory management for our customers. In response
to significant growth in the IC device manufacturing industry in Asia, we
continue to increase our sales and marketing, technical and customer support
resources in the Asia Pacific region.
We market our products primarily
through direct sales to our customers, although we use distributors in certain
countries. We believe this strategy is one way we can achieve our
goal of staying connected with our customers.
Our QED subsidiary supports customers
in the semiconductor equipment, aerospace, defense, security and
telecommunications markets. QED counts among its worldwide customers leading
precision optics manufacturers, major semiconductor original equipment
manufacturers, the United States government and its contractors.
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. For additional information on concentration of
customers, refer to Note 2 of “Notes to the Consolidated Financial Statements”
included in Item 8 of Part II of this Form 10-K.
RESEARCH,
DEVELOPMENT AND TECHNICAL SUPPORT
We believe that technology is vital to
success in our CMP business as well as in our ESF business, and we plan to
continue to devote significant resources to research and development, and
balance our efforts between the shorter-term market needs and the longer-term
investments required of us as a technology leader. We develop and
formulate new and enhanced CMP consumables and new CMP processes tailored to our
customers' needs. We work closely with our customers at their
facilities to identify their specific technology and manufacturing challenges
and to translate these challenges into viable CMP process
solutions.
Our technology efforts are currently
focused on five main areas that span the very early conceptual stage of product
development involving new materials, processes and designs several years in
advance of commercialization, through to continuous improvement of already
commercialized products in daily use in our customers’ manufacturing
facilities:
|
·
|
Research
related to fundamental CMP
technology;
|
|
·
|
Development
and formulation of new and enhanced CMP consumables
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.
|
Our research in CMP slurries and pads
addresses a breadth of complex and interrelated performance criteria that relate
to the functional performance of the chip, our customers’ manufacturing yield,
and their overall cost of ownership. We design slurries and
pads that are capable of polishing one or more materials, sometimes at the same
time, that make up the semiconductor circuitry. Additionally, our
products must achieve the desired surface at high polishing rates, high
processing yields and low consumables costs in order to earn acceptable system
economics for our customers. As dimensions become smaller and as
materials and designs increase in complexity, these challenges require
significant investments in research and development.
Beyond CMP for the semiconductor and
data storage industries, we also commit internal research and development
resources to our ESF business. We believe that a number of
application areas we are currently developing represent natural adjacencies to
our core CMP business and technology, and include uses in a number of different
fields. These fields include the development of CMP consumables for
the electronic materials market. One of the areas on which we are
focusing is the development of products used to polish silicon and
silicon-carbide wafers to improve the surface quality of the wafer and reduce
the customers’ total cost of ownership.
We believe that competitive advantage
lies in technology leadership, and that our investments in research and
development provide us with leading-edge polishing and metrology capabilities to
support the most advanced and challenging customer technology requirements on a
global basis. In fiscal 2008, 2007 and 2006, we incurred
approximately $49.2 million, $50.0 million and $48.1 million, respectively, in
research and development expenses. We believe our Six Sigma
initiatives in our research and development efforts realized over $4.0 million
in cost savings in fiscal 2008, allowing us to do more research at a lesser
cost. Investments in property, plant and equipment to support our
research and development efforts are capitalized and depreciated over their
useful lives. We operate a research and development facility in
Aurora, Illinois, that is staffed by a team that includes experts from the
semiconductor industry and scientists from key disciplines required for the
development of high-performance CMP consumable products. This
facility features a Class 1 clean room and advanced equipment for product
development, including 300 mm polishing and metrology capabilities, the
experimental results from which we believe correlate closely with what our
customers experience when using our products in their factories. In
addition, we operate a technology center in Japan that we believe enhances our
ability to provide optimized CMP solutions to our customers in the Asia Pacific
region. We added new 300 mm polishing, metrology and slurry
development capability to our Asia Pacific technology center in fiscal
2008. These facilities underscore our commitment both to continuing
to invest in our technology infrastructure to maintain our technology
leadership, and to becoming even more responsive to the needs of our
customers. Other examples of this commitment include our technical
service center in Taiwan, our QED research facility in Rochester, New York, as
well as our laboratory in Singapore that provides additional slurry formulation
capability to support the data storage industry.
RAW
MATERIALS SUPPLY
Fumed metal oxides, such as fumed
silica and fumed alumina, are significant raw materials we use in many of our
CMP slurries. In the interest of supply assurance, our strategy is to
secure multiple sources of raw materials and qualify those sources as necessary
to ensure our supply of raw materials remains uninterrupted. Also, we
have entered into multi-year supply agreements with a number of suppliers for
the purchase of raw materials, including agreements with Cabot Corporation for
the purchase of certain amounts and types of fumed silica and fumed
alumina. For additional information regarding these agreements, refer
to “Tabular Disclosure of Contractual Obligations”, included in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, in
Item 7 of Part II of this Form 10-K.
INTELLECTUAL
PROPERTY
Our intellectual property is important
to our success and ability to compete. As of October 31, 2008, we had
173 active U.S. patents and 92 pending U.S. patent applications. In
most cases we file counterpart foreign patent applications. Many of
these patents are important to our continued development of new and innovative
products for CMP and related processes, as well as for new
businesses. Our patents have a range of duration and we do not expect
to lose any material patent through expiration in the next five
years. We attempt to protect our intellectual property rights through
a combination of patent, trademark, copyright and trade secret laws, as well as
employee and third party nondisclosure and assignment agreements. We
vigorously and proactively pursue any parties that attempt to compromise our
investments in research and development by infringing our intellectual
property. For example, in January 2007, we filed a legal action
against DuPont Air Products NanoMaterials LLC (DA Nano), a competitor of ours,
charging that DA Nano’s manufacture and marketing of certain CMP slurries
infringe five CMP slurry patents that we own, and that litigation is
ongoing. In addition, in the third quarter of fiscal 2006, we were
successful in an action we brought before the United States International Trade
Commission (ITC) concerning Cheil Industries, Inc. (Cheil) which resulted in the
prohibition of the importation and sale within the United States of certain CMP
slurries that infringe certain of our patents, and we have litigation currently
ongoing in Korea against Cheil regarding the same patent family.
We also may acquire intellectual
property from others to enhance our intellectual property
portfolio. For example, in December 2006, we acquired a license for
the non-exclusive use of a broad portfolio of CMP consumable technology and
processes from a third party. In addition, in June 2006, we entered
into a patent assignment agreement with IBM to acquire a number of patents and
associated rights relating to CMP slurry technology from IBM, including various
applications such as copper, barrier, tungsten, and dielectrics, among
others. We also acquired certain proprietary technology and
intellectual property as part of our fiscal 2006 acquisitions of QED and Surface
Finishes Co. We believe these technology rights continue to enhance
our competitive advantage by providing us with future product development
opportunities and expanding our already substantial intellectual property
portfolio.
ENVIRONMENTAL
MATTERS
Our facilities are subject to various
environmental laws and regulations, including those relating to air emissions,
wastewater discharges, the handling and disposal of solid and hazardous wastes,
and occupational safety and health. We believe that our facilities
are in substantial compliance with applicable environmental laws and
regulations. By utilizing Six Sigma in our environmental management
system process, we believe we have improved operating efficiencies while
protecting the environment. Our operations in the United States and
Japan are ISO 14001 Certified, which requires that we implement and operate
according to various procedures that demonstrate our dedication to waste
reduction, energy conservation and other environmental concerns. We
are committed to maintaining these certifications and are actively pursuing ISO
14001 certification for our operations in Taiwan and Singapore. We
will also obtain additional certifications, as applicable, in the areas in which
we do business. We have incurred, and will continue to incur, capital
and operating expenditures and other costs in complying with these laws and
regulations in both the United States and abroad. However, we
currently do not anticipate that the future costs of environmental compliance
will have a material adverse effect on our business, financial condition or
results of operations.
EMPLOYEES
We believe we have a world-class team
of scientists, technologists, engineers and other employees who make our Company
successful. As of October 31, 2008, we employed 818 individuals,
including 420 in operations, 211 in research and development and technical, 89
in sales and marketing and 98 in administration. None of our
employees are covered by collective bargaining agreements. We have
not experienced any work stoppages and in general consider our relations with
our employees to be good.
FINANCIAL
INFORMATION ABOUT GEOGRAPHIC AREAS
We sell our products
worldwide. Our geographic coverage allows us to utilize our business
and technical expertise from a worldwide workforce, provides stability to our
operations and revenue streams to offset geography-specific economic trends, and
offers us an opportunity to take advantage of new markets for
products.
For more financial information about
geographic areas, see Note 18 of “Notes to the Consolidated Financial
Statements” included in Item 8 of Part II of this Form 10-K.
AVAILABLE
INFORMATION
Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, definitive proxy statements on Form 14A, current
reports on Form 8-K, and any amendments to those reports are made available free
of charge on our Company website, www.cabotcmp.com, as soon as reasonably
practicable after such reports are filed with the Securities and Exchange
Commission (SEC). Statements of changes in beneficial ownership
of our securities on Form 4 by our executive officers and directors are made
available on our Company website by the end of the business day following the
submission to the SEC of such filings. In addition, the SEC’s website
(http://www.sec.gov) contains reports, proxy statements, and other information
that we file electronically with the SEC.
We do not believe there have been any
material changes in our risk factors since the filing of our Annual Report of
Form 10-K for the fiscal year ended September 30, 2007 other than the
description of risks related to worldwide economic and industry conditions,
including tightening of credit markets, and a description of the risk associated
with our investment in auction rate securities (ARS) that we introduced in our
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2008. 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. From time to time, the semiconductor industry has
experienced significant downturns, which may be characterized by decreases in
product demand, excess customer inventories, and accelerated erosion of
prices. The continued weakening of the U.S. and global economy and
the recent turmoil in the worldwide financial markets appear to have led to such
a downturn. As end user demand for electronic devices declines,
semiconductor manufacturers reduce their production of these devices, which
reduces the need for our CMP consumables products. If global economic
conditions remain uncertain or deteriorate further, we may experience material
adverse impacts on our results of operations and financial
condition. 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, to continue in the future. Potential
technology developments in the semiconductor industry, as well as our customers’
efforts to reduce consumption of CMP slurries and pads, could render our
products less important to the IC device manufacturing process.
A
SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THESE CUSTOMERS
Our customer base is concentrated among
a limited number of large customers. One or more of these principal
customers could stop buying CMP 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. In fiscal 2007, our five largest customers accounted for
approximately 43% of our revenue; with TSMC accounting for approximately 17% of
our revenue.
OUR
BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS DEVELOP
SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE, OR OBTAIN
CERTAIN INTELLECTUAL PROPERTY RIGHTS
Competition from current CMP slurry
manufacturers or new entrants to the CMP slurry market could seriously harm our
business and results of operations. Competition from other existing
providers of CMP slurries could continue to increase, and opportunities exist
for other companies with sufficient financial or technological resources to
emerge as potential competitors by developing their own CMP slurry
products. Increased competition has and may continue to impact the
prices we are able to charge for our slurry products as well as our overall
business. In addition, our competitors could have or obtain
intellectual property rights which could restrict our ability to market our
existing products and/or to innovate and develop new products.
ANY
PROBLEM OR DISRUPTION IN OUR SUPPLY CHAIN, INCLUDING SUPPLY OF OUR MOST
IMPORTANT RAW MATERIALS, OR IN OUR ABILITY TO MANUFACTURE AND DELIVER OUR
PRODUCTS TO OUR CUSTOMERS, COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
We depend on our supply chain to enable
us to meet the demands of our customers. Our supply chain includes
the raw materials we use to manufacture our products, our production operations,
and the means by which we deliver our products to our customers. Our
business could be adversely affected by any problem or interruption in our
supply of the key raw materials we use in our CMP slurries and pads, including
fumed metal oxides such as fumed alumina and fumed silica, 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%,
79% and 79% of our revenue was generated by sales to customers outside of the
United States for fiscal 2008, 2007 and 2006, respectively. We
encounter risks in doing business in certain foreign countries, including, but
not limited to, adverse changes in economic and political conditions,
fluctuation in exchange rates, compliance with a variety of foreign laws and
regulations, as well as difficulty in enforcing business and customer contracts
and agreements, including protection of intellectual property
rights.
BECAUSE
WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF CMP SLURRIES, EXPANSION
OF OUR BUSINESS INTO NEW PRODUCTS AND APPLICATIONS MAY NOT BE
SUCCESSFUL
An element of our strategy has been to
leverage our current customer relationships and technological expertise to
expand our CMP business from CMP slurries into other areas, such as CMP
polishing pads. Additionally, pursuant to our Engineered Surface
Finishes business, we are actively pursuing a variety of surface modification
applications, such as high precision optics. Expanding our business
into new product areas could involve technologies, production processes and
business models in which we have limited experience, and we may not be able to
develop and produce products or provide services that satisfy customers’ needs
or we may be unable to keep pace with technological or other
developments. Also, our competitors may have or obtain intellectual
property rights which could restrict our ability to market our existing products
and/or to innovate and develop new products.
BECAUSE
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY OBTAIN
OR PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS
Protection of intellectual property is
particularly important in our industry because we develop complex technical
formulas for CMP products that are proprietary in nature and differentiate our
products from those of 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 or maintain 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
above in Part I, Item 1 under the heading “Intellectual Property” and in Part I,
Item 3 under the heading “Legal Proceedings”, could seriously harm our
business. In addition, the costs of obtaining or protecting our
intellectual property could negatively affect our operating
results.
WE
MAY PURSUE ACQUISITIONS OF, INVESTMENTS IN, AND STRATEGIC ALLIANCES WITH OTHER
ENTITIES, WHICH COULD DISRUPT OUR OPERATIONS AND HARM OUR OPERATING RESULTS IF
THEY ARE UNSUCCESSFUL
We expect to continue to make
investments in companies, either through acquisitions, investments or alliances,
in order to supplement our internal growth and development
efforts. Acquisitions and investments involve numerous risks,
including the following: difficulties in integrating the operations,
technologies, products and personnel of acquired companies; diversion of
management’s attention from normal daily operations of the business; potential
difficulties in entering markets in which we have limited or no direct prior
experience and where competitors in such markets have stronger market positions;
potential difficulties in operating new businesses with different business
models; potential difficulties with regulatory or contract compliance in areas
in which we have limited experience; initial dependence on unfamiliar supply
chains or relatively small supply partners; insufficient revenues to offset
increased expenses associated with acquisitions; potential loss of key employees
of the acquired companies; or inability to effectively cooperate and collaborate
with our alliance partners.
Further, we may never realize the
perceived or anticipated benefits of a business combination or investments in
other entities. Acquisitions by us could have negative effects on our
results of operations, in areas such as contingent liabilities, gross profit
margins, amortization charges related to intangible assets and other effects of
accounting for the purchases of other business entities. Investments
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.
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 ARS with an estimated fair
value of $8.2 million ($8.4 million par value) at September 30,
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 September 30, 2008. If auctions involving our ARS
continue to fail, if issuers of our ARS are unable to refinance the underlying
securities, if underlying municipalities 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. Competition for qualified personnel, particularly those with
significant experience in the semiconductor industry, is intense. The
loss of services of key employees could harm our business and results of
operations.
RISKS
RELATING TO THE MARKET FOR OUR COMMON STOCK
THE
MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
The market price of our common stock
has fluctuated and could continue to fluctuate significantly as a result of
factors such as: economic and stock market conditions generally and specifically
as they may impact participants in the semiconductor and related industries;
changes in financial estimates and recommendations by securities analysts who
follow our stock; earnings and other announcements by, and changes in market
evaluations of, us or participants in the semiconductor and related industries;
changes in business or regulatory conditions affecting us or participants in the
semiconductor and related industries; announcements or implementation by us, our
competitors, or our customers of technological innovations, new products or
different business strategies; and trading volume of our common
stock.
ANTI-TAKEOVER
PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND OUR RIGHTS PLAN
MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID FOR OUR
COMPANY
Our certificate of incorporation, our
bylaws, our rights plan and various provisions of the Delaware General
Corporation Law may make it more difficult to effect a change in control of our
Company. For example, our amended and restated certificate of incorporation
authorizes our Board of Directors to issue up to 20 million shares of blank
check preferred stock and to attach special rights and preferences to this
preferred stock, which may make it more difficult or expensive for another
person or entity to acquire control of us without the consent of our Board of
Directors. Also our amended and restated certificate of incorporation
provides for the division of our Board of Directors into three classes as nearly
equal in size as possible with staggered three-year terms.
We have adopted change in control
arrangements covering our executive officers and other key
employees. These arrangements provide for a cash severance payment,
continued medical benefits and other ancillary payments and benefits upon
termination of service of a covered employee’s employment following a change in
control, which may make it more expensive to acquire our Company.
ITEM 1B. UNRESOLVED
STAFF
COMMENTS
None.
Our principal U.S. facilities that we
own consist of:
|
§
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a
global headquarters and research and development facility in Aurora,
Illinois, comprising approximately 200,000 square
feet;
|
|
§
|
a
commercial dispersion plant and distribution center in Aurora, Illinois,
comprising approximately 175,000 square
feet;
|
|
§
|
a
commercial polishing pad manufacturing plant and offices in Aurora,
Illinois, comprising approximately 48,000 square
feet;
|
|
§
|
an
additional 13.2 acres of vacant land in Aurora, Illinois;
and
|
|
§
|
a
facility in Addison, Illinois, comprising approximately 15,000 square
feet.
|
In addition, we lease a facility in
Rochester, New York, comprising approximately 21,000 square feet.
Our principal foreign facilities that
we own consist of:
|
§
|
a
commercial dispersion plant and distribution center in Geino, Japan,
comprising approximately 113,000 square
feet;
|
|
§
|
a
research and development facility in Geino, Japan, comprising
approximately 20,000 square feet.
|
Our
principal foreign facilities that we lease consist of:
|
§
|
an
office, research and development laboratory, polishing pad manufacturing
and pilot plant in Hsin-Chu, Taiwan, comprising approximately 31,000
square feet;
|
|
§
|
a
commercial manufacturing plant, research and development facility and
business office in Singapore, comprising approximately 24,000 square
feet.
|
We believe that our facilities are
suitable and adequate for their intended purpose and provide us with sufficient
capacity and capacity expansion opportunities and technological capability to
meet our current and expected demand in the foreseeable future. We
completed the closing of our smallest slurry manufacturing facility located in
Barry, Wales during our third quarter of fiscal 2008. We believe this
action will improve our operational efficiency and competitiveness in the
cost-sensitive environment in which we operate.
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 recently issued 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. Although
no trial date has been set, we currently expect trial in this matter to occur
sometime in the summer of 2009. 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.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None.
EXECUTIVE OFFICERS
OF THE REGISTRANT
Set forth below is information
concerning our executive officers and their ages as of October 31,
2008.
|
NAME
|
AGE
|
POSITION
|
||
|
William
P. Noglows
|
50
|
Chairman
of the Board, President and Chief Executive Officer
|
||
|
H.
Carol Bernstein
|
48
|
Vice
President, Secretary and General Counsel
|
||
|
Yumiko
Damashek
|
52
|
Vice
President, Japan and Operations Asia
|
||
|
William
S. Johnson
|
51
|
Vice
President and Chief Financial Officer
|
||
|
David
H. Li
|
35
|
Vice
President, Asia Pacific Region
|
||
|
Daniel
J. Pike
|
45
|
Vice
President, Corporate Development
|
||
|
Stephen
R. Smith
|
49
|
Vice
President, Marketing
|
||
|
Clifford
L. Spiro
|
54
|
Vice
President, Research and Development
|
||
|
Adam
F. Weisman
|
46
|
Vice
President, Business Operations
|
||
|
Daniel
S. Wobby
|
45
|
Vice
President, Global Sales
|
||
|
Thomas
S. Roman
|
47
|
Principal
Accounting Officer and Corporate
Controller
|
WILLIAM P. NOGLOWS
has served
as our Chairman, President and Chief Executive Officer since November
2003. Mr. Noglows had previously served as a director of our Company
from January 2000 until April 2002. Prior to joining us, Mr. Noglows
served as an Executive Vice President of Cabot Corporation from 1998 to June
2003. Prior to that, Mr. Noglows held various management positions at
Cabot Corporation including General Manager of Cabot Corporation’s Cab-O-Sil
Division, where he was one of the primary founders of our Company when our
business was a division of Cabot Corporation, and was responsible for
identifying and encouraging the development of the CMP
application. Mr. Noglows received his B.S. in Chemical Engineering
from the Georgia Institute of Technology. Mr. Noglows is also a
director of Littlefuse, Inc.
H. CAROL BERNSTEIN
has served
as our Vice President, Secretary and General Counsel since August
2000. From January 1998 until joining us, Ms. Bernstein served as the
General Counsel and Director of Industrial Technology Development of Argonne
National Laboratory, which is operated by the University of Chicago for the
United States Department of Energy. From May 1985 until December
1997, she served in various positions with the IBM Corporation, culminating in
serving as an Associate General Counsel, and was the Vice President, Secretary
and General Counsel of Advantis Corporation, an IBM joint
venture. Ms. Bernstein received her B.A. from Colgate University and
her J.D. from Northwestern University; she is a member of the Bar of the states
of Illinois and New York.
WILLIAM S. JOHNSON
has served
as our Vice President and Chief Financial Officer since April
2003. Prior to joining us, Mr. Johnson served as Executive Vice
President and Chief Financial Officer for Budget Group, Inc. from August 2000 to
March 2003. Before that, Mr. Johnson spent 16 years at BP Amoco in
various senior finance and management positions, the most recent of which was
President of Amoco Fabrics and Fibers Company. Mr. Johnson received
his B.S. in Mechanical Engineering from the University of Oklahoma and his
M.B.A. from the Harvard Business School.
DAVID H. LI
has served as our
Vice President, Asia Pacific Region since June 2008. Prior to that,
Mr. Li served as Managing Director of Korea and China since February
2007. Previously, Mr. Li served as our Global Business Director for
Tungsten and Advanced Dielectrics from 2005 to February 2007. Mr. Li
held a variety of leadership positions for us in operations, sourcing and
investor relations between 1998 and 2005. Prior to joining us, Mr. Li
worked for UOP in marketing and process engineering. Mr. Li received
a B.S. in Chemical Engineering from Purdue University and an M.B.A. from
Northwestern University - Kellogg School of Management.
DANIEL J. PIKE
has served as
our Vice President of Corporate Development since January 2004 and prior to that
was our Vice President of Operations from December 1999. Mr. Pike
served as Cabot Corporation’s Director of Global Operations from 1996 to
1999. Prior to that, Mr. Pike worked for FMC Corporation in various
marketing and finance positions. Mr. Pike received his B.S. in
Chemical Engineering from the University of Buffalo and his M.B.A. from the
Wharton School of Business of the University of Pennsylvania.
STEPHEN R. SMITH
has served as
our Vice President of Marketing since September 2006, and previously was our
Vice President of Marketing and Business Management since April 2005 and our
Vice President of Sales and Marketing from October 2001. Prior to
joining us, Mr. Smith served as Vice President, Sales & Business Development
for Buildpoint Corporation from 2000 to October 2001. Prior to that,
Mr. Smith spent 17 years at Tyco Electronics Group, formerly known as AMP
Incorporated, in various management positions. Mr. Smith earned a
B.S. in Industrial Engineering from Grove City College and an M.B.A. from Wake
Forest University.
CLIFFORD L. SPIRO
has served
as Vice President of Research and Development since December
2003. Prior to joining us, Dr. Spiro served as Vice President of
Research and Development at Ondeo-Nalco from 2001 through November
2003. Prior to that, Dr. Spiro held research and development
management and senior technology positions at the General Electric Company from
1980 through 2001, the most recent of which was Global Manager – Technology for
Business Development. Dr. Spiro received his B.S. in Chemistry from
Stanford University and his Ph.D. in Chemistry from the California Institute of
Technology.
DANIEL S. WOBBY
has served as
our Vice President of Global Sales since June 2008. Prior to that,
Mr. Wobby served as Vice President, Asia Pacific Region since September
2005. Previously, Mr. Wobby served as Vice President, Greater China
and Southeast Asia starting in February 2004 and as Corporate Controller and
Principal Accounting Officer from 2000 to 2004. From 1989 to 2000,
Mr. Wobby held various accounting and operations positions with Cabot
Corporation culminating in serving as Director of Finance. Mr. Wobby
earned a B.S. in Accounting from St. Michael’s College and an M.B.A. from the
University of Chicago’s Graduate School of Business.
THOMAS S. ROMAN
has served as
our Corporate Controller and Principal Accounting Officer since February 2004
and previously served as our North American Controller. Prior to
joining us in April 2000, Mr. Roman was employed by FMC Corporation in various
financial reporting, tax and audit positions. Before that, Mr. Roman
worked for Gould Electronics and Arthur Andersen LLP. Mr. Roman is a
C.P.A. and earned a B.S. in Accounting from the University of Illinois and an
M.B.A. from DePaul University’s Kellstadt Graduate School of
Business.
PART
II
Our common stock has traded publicly
under the symbol "CCMP" since our initial public offering in April 2000,
currently on the NASDAQ Global Select Market, and formerly the NASDAQ National
Market. The following table sets forth the range of quarterly high
and low closing sales prices for our common stock.
As of October 31, 2008, there were
approximately 1,058 holders of record of our common stock. No
dividends were declared or paid in either fiscal 2008 or fiscal 2007 and we have
no current plans to pay cash dividends in the future.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs (in thousands)
|
||||
|
Jul.
1 through
Jul.
31, 2008
|
--
|
$ --
|
--
|
$55,003
|
||||
|
Aug.
1 through
Aug.
31, 2008
|
121,166
|
$41.27
|
121,166
|
$50,003
|
||||
|
Sep.
1 through
Sep.
30, 2008
|
--
|
$ --
|
--
|
$50,003
|
||||
|
Total
|
121,166
|
$41.27
|
121,166
|
$50,003
|
On October 27, 2005, we announced that
our Board of Directors had authorized a share repurchase program for up to $40.0
million of our outstanding common stock. We completed this share
repurchase authorization during the quarter ended December 31,
2007. In January 2008, we announced that our Board of Directors had
authorized a new share repurchase program for up to $75.0 million of our
outstanding common stock. The shares we repurchased during the
second, third and fourth quarters of fiscal 2008 were repurchased under this new
program. 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 shareholders.
EQUITY
COMPENSATION PLAN INFORMATION
See Part
II, Item 12 of this Form 10-K for information regarding shares of common stock
that may be issued under the Company’s existing equity compensation
plans.
STOCK
PERFORMANCE GRAPH
The following graph illustrates the
cumulative total stockholder return on our common stock during the period from
September 30, 2003 through September 30, 2008 and compares it with the
cumulative total return on the NASDAQ Composite Index and the Philadelphia
Semiconductor Index. The comparison assumes $100 was invested on
September 30, 2003 in our common stock and in each of the foregoing indices and
assumes reinvestment of dividends, if any. The performance shown is
not necessarily indicative of future performance. See “Risk Factors”
in Part I, Item 1A above.
|
9/03
|
12/03
|
3/04
|
6/04
|
9/04
|
12/04
|
3/05
|
6/05
|
9/05
|
12/05
|
3/06
|
|
|
Cabot
Microelectronics Corporation
|
100.00
|
88.08
|
75.73
|
55.02
|
65.16
|
72.03
|
56.41
|
52.11
|
52.81
|
52.65
|
66.69
|
|
NASDAQ
Composite
|
100.00
|
111.66
|
111.85
|
115.23
|
107.74
|
123.02
|
113.34
|
116.49
|
123.03
|
126.63
|
135.42
|
|
Philadelphia
Semiconductor
|
100.00
|
115.86
|
106.94
|
103.46
|
81.61
|
93.67
|
91.89
|
98.50
|
103.48
|
107.41
|
101.17
|
|
6/06
|
9/06
|
12/06
|
3/07
|
6/07
|
9/07
|
12/07
|
3/08
|
6/08
|
9/08
|
|
|
Cabot
Microelectronics Corporation
|
54.48
|
51.81
|
61.01
|
60.24
|
63.80
|
76.85
|
64.55
|
57.79
|
59.59
|
57.67
|
|
NASDAQ
Composite
|
126.13
|
131.60
|
141.64
|
142.17
|
152.34
|
158.88
|
154.89
|
132.97
|
134.65
|
119.05
|
|
Philadelphia
Semiconductor
|
93.47
|
99.05
|
98.95
|
97.01
|
110.67
|
112.63
|
103.30
|
88.64
|
93.01
|
78.45
|
The following selected financial data
for each year of the five-year period ended September 30, 2008, has been derived
from the audited consolidated financial statements.
The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the consolidated financial statements and notes to
those statements included in Items 7 and 8 of Part II of this Form 10-K, as well
as Risk Factors included in Item 1A of Part I of this Form 10-K.
|
CABOT
MICROELECTRONICS CORPORATION
|
||||||||||||||||||||
|
SELECTED
FINANCIAL DATA - FIVE YEAR SUMMARY
|
||||||||||||||||||||
|
(Amounts
in thousands, except per share amounts)
|
||||||||||||||||||||
|
Year
Ended September 30,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005* | 2004* | ||||||||||||||||
|
Consolidated
Statement of Income Data:
|
||||||||||||||||||||
|
Revenue
|
$ | 375,069 | $ | 338,205 | $ | 320,795 | $ | 270,484 | $ | 309,433 | ||||||||||
|
Cost of goods sold
|
200,596 | 178,224 | 171,758 | 141,282 | 156,805 | |||||||||||||||
|
Gross
profit
|
174,473 | 159,981 | 149,037 | 129,202 | 152,628 | |||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
Research, development and technical
|
49,155 | 49,970 | 48,070 | 43,010 | 44,003 | |||||||||||||||
|
Selling
and marketing
|
28,281 | 24,310 | 21,115 | 16,989 | 16,225 | |||||||||||||||
|
General and administrative
|
47,595 | 39,933 | 34,319 | 25,427 | 22,691 | |||||||||||||||
|
Purchased
in-process research and development
|
- | - | 1,120 | - | - | |||||||||||||||
|
Total operating expenses
|
125,031 | 114,213 | 104,624 | 85,426 | 82,919 | |||||||||||||||
|
Operating income
|
49,442 | 45,768 | 44,413 | 43,776 | 69,709 | |||||||||||||||
|
Other income, net
|
5,448 | 3,606 | 4,111 | 2,747 | 139 | |||||||||||||||
|
Income before income taxes
|
54,890 | 49,374 | 48,524 | 46,523 | 69,848 | |||||||||||||||
|
Provision for income taxes
|
16,552 | 15,538 | 15,576 | 14,050 | 23,120 | |||||||||||||||
|
Net
income
|
$ | 38,338 | $ | 33,836 | $ | 32,948 | $ | 32,473 | $ | 46,728 | ||||||||||
|
Basic
earnings per share
|
$ | 1.64 | $ | 1.42 | $ | 1.36 | $ | 1.32 | $ | 1.89 | ||||||||||
|
Weighted
average basic shares outstanding
|
23,315 | 23,748 | 24,228 | 24,563 | 24,750 | |||||||||||||||
|
Diluted
earnings per share
|
$ | 1.64 | $ | 1.42 | $ | 1.36 | $ | 1.32 | $ | 1.88 | ||||||||||
|
Weighted
average diluted shares outstanding
|
23,348 | 23,754 | 24,228 | 24,612 | 24,882 | |||||||||||||||
|
Cash
dividends per share
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
*
We adopted the provisons of Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment",
effective
|
||||||||||||||||
|
October
1, 2005. Consequently, fiscal years ended September 30, 2005
and 2004 had no share-based compensation
expense.
|
||||||||||||||||
|
As
of September 30,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||
|
Current assets
|
$ | 330,592 | $ | 310,754 | $ | 261,505 | $ | 245,807 | $ | 229,681 | ||||||||||
|
Property, plant and equipment, net
|
115,843 | 118,454 | 130,176 | 135,784 | 127,794 | |||||||||||||||
|
Other assets
|
31,002 | 25,921 | 20,452 | 5,172 | 5,816 | |||||||||||||||
|
Total assets
|
$ | 477,437 | $ | 455,129 | $ | 412,133 | $ | 386,763 | $ | 363,291 | ||||||||||
|
Current liabilities
|
$ | 37,801 | $ | 36,563 | $ | 38,833 | $ | 35,622 | $ | 32,375 | ||||||||||
|
Other long-term liabilities
|
5,403 | 5,362 | 5,529 | 12,057 | 15,294 | |||||||||||||||
|
Total liabilities
|
43,204 | 41,925 | 44,362 | 47,679 | 47,669 | |||||||||||||||
|
Stockholders' equity
|
434,233 | 413,204 | 367,771 | 339,084 | 315,622 | |||||||||||||||
|
Total liabilities and stockholders' equity
|
$ | 477,437 | $ | 455,129 | $ | 412,133 | $ | 386,763 | $ | 363,291 | ||||||||||
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management's Discussion
and Analysis of Financial Condition and Results of Operations", as well as
disclosures included elsewhere in this Form 10-K, include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a safe harbor for forward-looking
statements to encourage companies to provide prospective information about
themselves so long as they identify these statements as forward-looking and
provide meaningful cautionary statements identifying important factors that
could cause actual results to differ from the projected results. All
statements other than statements of historical fact we make in this Form 10-K
are forward-looking. In particular, the statements herein regarding
future sales and operating results; Company and industry growth and trends;
growth of the markets in which the Company participates; international events or
various economic factors; product performance; the generation, protection and
acquisition of intellectual property, and litigation and the outcome of
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 new or refurbishment of existing facilities by the Company;
and statements preceded by, followed by or that include the words "intends",
"estimates", "plans", "believes", "expects", "anticipates", "should", "could" or
similar expressions, are forward-looking statements. Forward-looking
statements reflect our current expectations and are inherently
uncertain. Our actual results may differ significantly from our
expectations. We assume no obligation to update this forward-looking
information. The section entitled "Risk Factors" describes some, but
not all, of the factors that could cause these differences.
The following discussion and analysis
should be read in conjunction with our historical financial statements and the
notes to those financial statements which are included in Item 8 of Part II of
this Form 10-K.
OVERVIEW
Cabot Microelectronics Corporation
("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our'') is the
leading supplier of high-performance polishing slurries used in the manufacture
of advanced integrated circuit (IC) devices within the semiconductor industry,
in a process called chemical mechanical planarization (CMP). CMP is a
polishing process used by IC device manufacturers to planarize or flatten many
of the multiple layers of material that are deposited upon silicon wafers in the
production of advanced ICs. Demand for our CMP products is primarily
driven by the number of wafers produced by semiconductor manufacturers, referred
to as “wafer starts”.
We operate predominantly in one
industry segment – the development, manufacture and sale of CMP
consumables. We develop, produce and sell CMP slurries for polishing
many of the conducting and insulating materials used in IC devices, and also for
polishing the disk substrates and magnetic heads used in hard disk
drives. We also develop, manufacture and sell CMP polishing pads,
which are used in conjunction with slurries in the CMP process.
We remain focused on the consistent and
successful execution of our three strategic initiatives within our core CMP
business: maintaining our technological leadership, achieving operations
excellence and connecting with our customers. In fiscal 2008, we
significantly increased sales of our polishing pad product, which we believe is
differentiated from other pad offerings. We completed the
installation of our new 300-millimeter polishing tool and the related metrology
equipment at our Asia Pacific technology center in Geino, Japan. We
also entered into a long-term agreement with International Business Machine
Corporation to jointly develop CMP solutions for a variety of new applications
and new materials.
The continued weakening of the U.S. and
global economy and the recent volatility in the capital and credit markets
appear to have begun to affect end user demand for IC devices. This
reduction in end user demand, in turn, has caused our semiconductor customers to
reduce their production. Recent analyst reports have forecasted that
semiconductor foundries are expected to reduce their utilization rates by 20-30%
and a number of memory manufacturers have announced that they will reduce
production as well. Since the primary driver of revenue for our CMP
consumable products is wafer starts, this economic slowdown has affected us, and
we believe will continue to adversely affect us in the near
term. However, we believe that growth opportunities in polishing
pads, ESF and slurry products for advanced dielectric and barrier applications
may be able to partially offset a reduction in demand due to the economic
downturn. There are many other factors that make it difficult for us
to predict future revenue trends for our CMP business, including the cyclical
nature of the semiconductor industry; potential future acquisitions; short order
to delivery time for our products and the associated lack of visibility to
future customer orders; and quarter to quarter changes in our revenue regardless
of industry strength.
In addition to strengthening and
growing our core CMP business, through our Engineered Surface Finishes (ESF)
business we seek to leverage our expertise in CMP formulation, materials and
polishing techniques for the semiconductor industry to address other demanding
market applications requiring nanoscale control of surface shape and finish, and
gain access to a variety of markets that we do not currently
serve. We are pursuing a number of surface modification applications
where we believe our technical ability to shape, enable and enhance the
performance of surfaces at an atomic level can add value to our
customers.
Revenue for fiscal 2008 was $375.1
million, which was an increase of 10.9% from the $338.2 million reported for
fiscal 2007. This increase reflected solid demand for our CMP slurry
products for the semiconductor industry during the first nine months of our
fiscal year. However, we began to feel the effects of a reduction in
semiconductor wafer starts, which we believe was due to the overall worldwide
economic slowdown, during our fourth quarter of fiscal 2008 as we experienced a
decline in the demand for our CMP slurry products. The overall
revenue increase in fiscal 2008 from the prior year also reflected significant
growth in sales of our polishing pad product as we generated $15.1 million in
pad revenue in fiscal 2008 compared to only $0.5 million in fiscal
2007. The increase in revenue from these CMP consumable products was
partially offset by lower revenue from our ESF products and our CMP slurries for
data storage applications.
Gross profit expressed as a percentage
of revenue for fiscal 2008 was 46.5%, which represents a decrease from the 47.3%
reported for fiscal 2007. The decrease was primarily driven by higher
fixed production costs and lower manufacturing yields, both primarily associated
with our developing pad business, and higher manufacturing variances, partially
offset by a favorable product mix and higher utilization of our manufacturing
capacity on a higher volume of sales. We believe the low
manufacturing yields in our pad business are common during a new product
production ramp. We made improvements to our pad manufacturing
process through our Six Sigma efforts that enabled us to improve our pad margins
in the second half of the fiscal year. We expect to maintain our
gross profit as a percentage of revenue in the range of 46% to 48% for the full
fiscal year 2009. We may experience quarterly gross profit above or
below this annual guidance range due to a number of factors including
fluctuations in our product mix and the extent to which we utilize our
manufacturing capacity.
Operating expenses of $125.0 million,
which include research, development, technical, selling, marketing, general and
administrative expenses, increased 9.5%, or $10.8 million, from the $114.2
million reported for fiscal 2007. The increase was primarily due to
higher professional fees, including fees related to the enforcement of our
intellectual property, and higher staffing related costs. In fiscal
2009, we expect our full year operating expenses to be in the range of $120
million to $125 million.
Diluted earnings per share of $1.64 in
fiscal 2008 increased 15.3%, or $0.22, from $1.42 reported in fiscal 2007 as a
result of the factors discussed above. Diluted earnings per share in
fiscal 2008 reflects the absence of a $2.1 million pre-tax ($1.3 million net of
tax) write-off of our minority equity investment in NanoProducts Corporation
(NPC) that reduced fiscal 2007 diluted earnings per share by approximately
$0.06.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
This "Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as
disclosures included elsewhere in this Form 10-K, are based upon our audited
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingencies. On an ongoing
basis, we evaluate the estimates used, including those related to bad debt
expense, warranty obligations, inventory valuation, valuation and classification
of auction rate securities, impairment of long-lived assets and investments,
business combinations, goodwill, other intangible assets, share-based
compensation, income taxes and contingencies. We base our estimates
on historical experience, current conditions and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources, as well as for
identifying and assessing our accounting treatment with respect to commitments
and contingencies. Actual results may differ from these estimates
under different assumptions or conditions. We believe the following
critical accounting policies involve significant judgments and estimates used in
the preparation of our consolidated financial statements.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful
accounts for estimated losses resulting from the potential inability of our
customers to make required payments. Our allowance for doubtful
accounts is based on historical collection experience, adjusted for any specific
known conditions or circumstances. While historical experience may
provide a reasonable estimate of uncollectible accounts, actual results may
differ from what was recorded. As of September 30, 2008, our
allowance for doubtful accounts represented 1.0% of gross accounts
receivable. If we had increased our estimate of bad debts to 2.0% of
gross accounts receivable, our general and administrative expenses would have
increased by $0.4 million.
WARRANTY
RESERVE
We maintain a warranty reserve that
reflects management’s best estimate of the cost to replace product that does not
meet customers’ specifications and performance requirements, and costs related
to such replacement. The warranty reserve is based upon a historical
product replacement rate, adjusted for any specific known conditions or
circumstances. Should actual warranty costs differ substantially from
our estimates, revisions to the estimated warranty liability may be
required. As of September 30, 2008, our warranty reserve represented
1.0% of the current quarter revenue. If we had increased our warranty
reserve estimate to 2.0% of the current quarter revenue, our cost of goods sold
would have increased by $0.9 million.
INVENTORY
VALUATION
We value inventory at the lower of cost
or market and write down the value of inventory for estimated obsolescence or if
inventory is deemed unmarketable. An inventory reserve is maintained
based upon a historical percentage of actual inventories written off applied
against the inventory value at the end of the period, adjusted for known
conditions and circumstances. We exercise judgment in estimating the
amount of inventory that is obsolete. Should actual product
marketability and fitness for use be affected by conditions that are different
from those projected by management, revisions to the estimated inventory reserve
may be required. If we had increased our general reserve for obsolete
inventory at September 30, 2008 by 10%, our cost of goods sold would have
increased by $0.1 million.
VALUATION
AND CLASSIFICATION OF AUCTION RATE SECURITIES
As of September 30, 2008, we owned
two auction rate securities (ARS) with an 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. In general, ARS investments are
securities with long-term nominal maturities for which interest rates are reset
through a Dutch auction every seven to 35 days. Historically, these
periodic auctions provided a liquid market for these
securities. General uncertainties in the global credit markets during
2008 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.
As discussed in Notes 3 and 8 of the
Notes to the Consolidated Financial Statements, we have recorded a temporary
impairment of $0.2 million, net of tax, in the value of one of our ARS in other
comprehensive income and we have classified $3.2 million of ARS in other
long-term assets. The calculation of fair value and the balance sheet
classification for our ARS requires critical judgments and estimates by
management including an appropriate discount rate and the probability that a
security may be monetized through a future successful auction or refinancing of
the underlying debt. We performed a discounted cash flow analysis
using a discount rate based on a market index comprised of tax exempt variable
rate demand obligations, and we applied a risk factor to reflect current
liquidity issues in the ARS market. We then assigned probabilities of
holding each security for less than or equal to one year, five years, and to
maturity to calculate a fair value for each security. We also
considered that we successfully monetized at par value all but two of the 15 ARS
we owned as of February 2008, the time we experienced our first failed auction,
as some of the subsequent auctions were successfully completed and some of the
issuing municipalities refinanced their debt. If auctions involving
our remaining ARS continue to fail, if issuers of our ARS are unable to
refinance the underlying securities, if underlying municipalities are unable to
pay their 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 our remaining 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.
IMPAIRMENT
OF LONG-LIVED ASSETS AND INVESTMENTS
SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (SFAS 144), requires us to assess
the recoverability of the carrying value of long-lived assets whenever events or
changes in circumstances indicate that the assets may be impaired. We
must exercise judgment in assessing whether an event of impairment has
occurred. For purposes of recognition and measurement of an
impairment loss, long-lived assets are grouped with other assets and liabilities
at the lowest level for which identifiable cash flows are largely independent of
the cash flows of other assets and liabilities. We must exercise
judgment in this grouping. SFAS 144 requires that when the sum of the
undiscounted future cash flows expected to result from the identified asset
group is less than the carrying value of the asset group, an impairment
provision may be required. The amount of the impairment to be
recognized is calculated by subtracting the fair value of the asset group from
the net book value of the asset group. Determining future cash flows
and estimating fair values require significant judgment and are highly
susceptible to change from period to period because they require management to
make assumptions about future sales and cost of sales generally over a long-term
period.
We evaluate the estimated fair value of
investments annually or more frequently if indicators of potential impairment
exist, to determine if an other-than-temporary impairment in the value of the
investment has taken place.
BUSINESS
COMBINATIONS
In accordance with SFAS No. 141,
“Business Combinations”, we allocate the purchase price of acquired entities to
the tangible and intangible assets acquired, liabilities assumed, and in-process
research and development (IPR&D) based on their estimated fair values. We
engage independent third-party appraisal firms to assist us in determining the
fair values of assets and liabilities acquired. This valuation requires
management to make significant estimates and assumptions, especially with
respect to long-lived and intangible assets.
Critical estimates in valuing certain
of the intangible assets include but are not limited to: future expected cash
flows related to acquired developed technologies and patents and assumptions
about the period of time the technologies will continue to be used in the
Company’s product portfolio; expected costs to develop the IPR&D into
commercially viable products and estimated cash flows from the products when
completed; and discount rates. Management’s estimates of value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable. Assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances may occur which may cause actual realized
values to be different from management’s estimates.
GOODWILL
AND OTHER INTANGIBLE ASSETS
Purchased intangible assets with finite
lives are amortized over their estimated useful lives. Goodwill and
indefinite lived intangible assets are tested annually in the fourth fiscal
quarter or more frequently if indicators of potential impairment exist, using a
fair-value-based approach. 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”. We determined that
goodwill and other intangible assets were not impaired as of September 30,
2008.
SHARE-BASED
COMPENSATION
Effective October 1, 2005, we adopted
SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which requires
all share-based payments, including stock option grants, restricted stock and
restricted stock unit awards and discounts provided to employees on employee
stock purchases, to be recognized in the income statement based on their fair
values. Under SFAS 123R, we calculate share-based compensation
expense using the straight-line approach based on awards expected to ultimately
vest, which requires the use of an estimated forfeiture rate. Our
estimated forfeiture rate is primarily based on historical experience, but may
be revised in future periods if actual forfeitures differ from the
estimate. We use the Black-Scholes option-pricing model
(“Black-Scholes model”) to estimate grant date fair value, which requires the
input of highly subjective assumptions, including the option’s expected term,
the price volatility of the underlying stock and risk-free interest
rate. A small change in the underlying assumptions can have a
relatively large effect on the estimated valuation. Under SFAS 123R,
we estimate expected volatility based on a combination of our stock’s historical
volatility and the implied volatilities from actively-traded options on our
stock. We use the simplified method to calculate the expected term 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 the expected term for employees who would meet the
definition of retirement pursuant to terms of their grant agreements during the
contractual term. The simplified method uses an average of the
vesting term and the contractual term of the option to calculate the expected
term. The risk-free rate is derived from the U.S. Treasury yield
curve in effect at the time of grant.
Prior to December 1, 2006, awards and
grants made as part of our annual equity incentive award programs consisted
solely of non-qualified stock option grants. In fiscal 2007, the
compensation committee of our Board of Directors decided to begin to award a
blend of non-qualified stock options and shares of restricted stock to employees
and non-employee directors as part of our annual equity incentive
program. This decision was made to address the financial impact of
expensing equity-based compensation under the rules of SFAS 123R, as well as to
provide a more competitive balance of equity incentives for employees and
non-employee directors.
ACCOUNTING
FOR INCOME TAXES
We account for income taxes in
accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), which
requires that deferred tax assets and liabilities be recognized using enacted
tax rates for the effect of temporary differences between the book and tax bases
of recorded assets and liabilities. SFAS 109 also requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that a portion of the deferred tax asset will not be
realized. We have determined that it is more likely than not that our
future taxable income will be sufficient to realize our deferred tax
assets. Significant changes to the estimates and judgments that
support the calculation of deferred tax assets and liabilities may result in an
increase or decrease to our tax provision in a subsequent period.
On October 1, 2007, we adopted the
provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement 109” (FIN 48). Among
other things, FIN 48 provides a “more-likely-than-not” threshold for the
recognition and derecognition of uncertain tax positions, provides guidance on
the accounting for interest and penalties relating to tax positions and requires
the cumulative effect of applying the provisions of FIN 48 to be reported as an
adjustment to the opening balance of retained earnings or other appropriate
components of equity or net assets in the statement of financial
position. The evaluation of uncertain tax positions is based on
factors including, but not limited to, changes in tax law, effectively settled
issues under audit, new audit activity and changes in facts or circumstances
surrounding a tax position. We evaluate these tax positions on a
quarterly basis.
COMMITMENTS
AND CONTINGENCIES
We have entered into certain
unconditional purchase obligations, which include noncancelable purchase
commitments and take-or-pay arrangements with suppliers. We review
our agreements on a quarterly basis and make an assessment of the likelihood of
a shortfall in purchases and determine if it is necessary to record a
liability. In addition, we are subject to the possibility of various
loss contingencies arising in the ordinary course of business such as a legal
proceeding or claim. An estimated loss contingency is accrued when it
is probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether such accruals
should be adjusted and whether new accruals are required.
EFFECTS
OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated
Financial Statements for a description of recent accounting pronouncements
including the expected dates of adoption and effects on our results of
operations, financial position and cash flows.
RESULTS
OF OPERATIONS
The following table sets forth, for the
periods indicated, the percentage of revenue of certain line items included in
our historical statements of income:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of goods sold
|
53.5 | 52.7 | 53.5 | |||||||||
|
Gross
profit
|
46.5 | 47.3 | 46.5 | |||||||||
|
Research,
development and technical
|
13.1 | 14.8 | 15.0 | |||||||||
|
Selling
and marketing
|
7.5 | 7.2 | 6.6 | |||||||||
|
General
and administrative
|
12.7 | 11.8 | 10.7 | |||||||||
|
Purchased
in-process research and development
|
- | - | 0.3 | |||||||||
|
Operating
income
|
13.2 | 13.5 | 13.8 | |||||||||
|
Other
income, net
|
1.4 | 1.1 | 1.3 | |||||||||
|
Income
before income taxes
|
14.6 | 14.6 | 15.1 | |||||||||
|
Provision
for income taxes
|
4.4 | 4.6 | 4.9 | |||||||||
|
Net
income
|
10.2 | % | 10.0 | % | 10.3 | % | ||||||
YEAR
ENDED SEPTEMBER 30, 2008, VERSUS YEAR ENDED SEPTEMBER 30, 2007
REVENUE
Revenue was $375.1 million in fiscal
2008, which represented an increase of 10.9%, or $36.9 million, from fiscal
2007. Of this increase, $17.2 million was due to increased sales
volume including increased contribution from our polishing pad business, $15.2
million was due to a higher weighted average selling price for our CMP
consumable products, resulting from a higher-priced product mix, and $4.5
million was due to the effect of foreign exchange rate changes. Our
polishing pad business represented $14.6 million of the revenue growth in fiscal
2008 as we won new business by gaining additional customer adoptions of our
pads.
The continued weakening of the U.S. and
global economy and the recent volatility in the capital and credit markets
appears to have negatively impacted end user demand for IC devices, which, in
turn, has led to a reduction in the number of wafer starts in the semiconductor
industry. We believe the reduction in wafer starts will negatively
impact the demand and revenue associated with our traditional CMP slurry
products in fiscal 2009. However, we believe that growth
opportunities in polishing pads, ESF and slurry products for advanced dielectric
and barrier applications may be able to partially offset a reduction in demand
due to the economic downturn.
COST
OF GOODS SOLD
Total cost of goods sold was $200.6
million in fiscal 2008, which represented an increase of 12.6%, or $22.4
million, from fiscal 2007. Of this increase, $9.1 million was due to
increased sales volume, $9.0 million was due to increased fixed manufacturing
costs, primarily in our pad business, $5.3 million was due to lower
manufacturing yields, particularly in our pad business, $5.1 million was due to
the effects of foreign exchange rate changes, $2.2 million was due to certain
other manufacturing variances and $1.5 million was due to increased freight,
packaging and other costs. These increases were partially offset by a
$7.5 million benefit of higher utilization of our manufacturing capacity on the
increased sales volume and by a $2.3 million benefit of a lower-cost product
mix.
Fumed metal oxides, such as fumed
silica and fumed alumina, are significant raw materials that we use in many of
our CMP slurries. In an effort to mitigate our risk to rising raw
material costs and to increase supply assurance and quality performance
requirements, we have entered into multi-year supply agreements with a number of
suppliers. For more financial information about our supply contracts,
see “Tabular Disclosure of Contractual Obligations” included in Item 7 of Part
II of this Form 10-K.
Our need for additional quantities or
different kinds of key raw materials in the future has required, and will
continue to require, that we enter into new supply arrangements with third
parties. Future arrangements may result in costs which are different
from those in the existing agreements. In addition, rising energy
costs and general inflation 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 46.5% in fiscal 2008 as compared to 47.3% for fiscal
2007. The decrease in gross profit expressed as a percentage of
revenue was primarily due to higher fixed production costs and lower
manufacturing yields, both primarily associated with our pad business, and
higher manufacturing variances partially offset by a favorable product mix and
higher utilization of our manufacturing capacity on the increased volume of
sales in fiscal 2008. The manufacturing yields in our pad business
improved over the course of fiscal 2008, but we expect the yields in this
business may continue to fluctuate as we optimize our manufacturing
process. We expect to maintain our gross profit as a percentage of
revenue in the range of 46% to 48% for full fiscal year
2009. Quarterly gross profit may be above or below this range due to
fluctuations in our product mix or other factors.
RESEARCH,
DEVELOPMENT AND TECHNICAL
Total research, development and
technical expenses were $49.2 million in fiscal 2008, which represented a
decrease of 1.6%, or $0.8 million, from fiscal 2007. The decrease was
primarily due to $0.7 million in lower clean room materials and laboratory
supplies and $0.5 million in lower professional fees partially offset by $0.2
million in higher staffing related costs and $0.2 million in increased
depreciation expense.
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
$28.3 million in fiscal 2008, which represented an increase of 16.3%, or $4.0
million, from fiscal 2007. The increase was primarily due to $2.3
million in higher staffing related costs, including employee separation costs,
$0.6 million in increased professional fees, $0.3 million in higher travel
related costs and $0.3 million in higher depreciation expense.
GENERAL
AND ADMINISTRATIVE
General and administrative expenses
were $47.6 million in fiscal 2008, which represented an increase of 19.2%, or
$7.7 million, from fiscal 2007.
The increase resulted
primarily from $5.3 million in higher professional fees, including costs to
enforce our intellectual property, and $2.3 million in higher staffing related
costs. See Part I, Item 3 entitled “Legal Proceedings” and Note 16 of
the Notes to the Consolidated Financial Statements for more information on the
enforcement of our intellectual property.
OTHER
INCOME, NET
Other income was $5.4 million in fiscal
2008 compared to $3.6 million in fiscal 2007. The increase was
primarily due to the absence of a $2.1 million pre-tax impairment of our equity
investment in NPC and the absence of $0.4 million of other expense related to
our investment in NPC. This increase was partially offset by a $0.6
million decrease in interest income as we monetized the majority of our
short-term investments in ARS during fiscal 2008 and reinvested these funds into
money market investments which earn interest at lower rates. See Note
3 of the Notes to the Consolidated Financial Statements for more information on
our short-term investments.
PROVISION
FOR INCOME TAXES
Our effective income tax rate was 30.2%
in fiscal 2008 compared to 31.5% in fiscal 2007. The decrease in the
effective tax rate in fiscal 2008 was primarily due to increased research and
experimentation tax credits and reduced tax expense related to share-based
compensation, partially offset by lower tax-exempt interest
income. We expect our effective tax rate in fiscal 2009 to be
approximately 32 percent.
NET
INCOME
Net income was $38.3 million in fiscal
2008, which represented an increase of 13.3%, or $4.5 million, from fiscal 2007
as a result of the factors discussed above.
YEAR
ENDED SEPTEMBER 30, 2007, VERSUS YEAR ENDED SEPTEMBER 30, 2006
REVENUE
Revenue was $338.2 million in fiscal
2007, which represented an increase of 5.4%, or $17.4 million, from fiscal
2006. Of this increase, $12.6 million was contributed by our QED
Technologies, Inc. (QED) subsidiary, as fiscal 2007 was the first full year we
owned QED, and $6.2 million was due to a higher average selling price for our
slurry products. These increases were partially offset by a $1.4
million decrease due to reduced sales volume in our core CMP
business. The higher average selling price for our slurry products
resulted primarily from a higher-priced product mix.
COST
OF GOODS SOLD
Total cost of goods sold was $178.2
million in fiscal 2007, which represented an increase of 3.8%, or $6.5 million,
from fiscal 2006. Of this increase, $6.2 million was related to QED
and $1.0 million was due to an increase in the average cost per unit of our
slurry products. These increases were partially offset by a $0.7
million decrease due to reduced sales volume in our core CMP
business. The higher average unit cost resulted primarily from lower
utilization of our manufacturing capacity due to the lower level of sales,
primarily during the first half of the fiscal year, and higher fixed costs,
partially offset by improvements in productivity and quality as well as benefits
of a lower-cost product mix.
GROSS
PROFIT
Our gross profit as a percentage of
revenue was 47.3% in fiscal 2007 and improved 80 basis points from the level
achieved in fiscal 2006. The increase in gross profit expressed as a
percentage of revenue resulted primarily from a higher-valued product mix and
improvements in productivity and quality. This was partially offset
by lower utilization of our manufacturing capacity due to the lower level of
sales of our core CMP products, primarily in the first half of the fiscal year,
as well as higher fixed costs.
RESEARCH,
DEVELOPMENT AND TECHNICAL
Total research, development and
technical expenses were $50.0 million in fiscal 2007, which represented an
increase of 4.0%, or $1.9 million, from fiscal 2006. The increase was
primarily due to increased staffing related costs of $1.8 million, largely
resulting from the inclusion of QED for a full year in fiscal 2007, increased
depreciation and amortization costs of $0.6 million, principally related to our
data storage laboratory in Singapore and our Asia Pacific technology center in
Japan, and increased professional fees of $0.3 million. These
increases were partially offset by a decrease in spending on wafers and
laboratory supplies of $0.9 million.
SELLING
AND MARKETING
Selling and marketing expenses were
$24.3 million in fiscal 2007, which represented an increase of 15.1%, or $3.2
million, from fiscal 2006. The increase resulted primarily from
higher staffing costs of $2.4 million, largely resulting from the inclusion of
QED as well as expanding our presence in Asia. There were also
smaller increases in costs for travel, professional fees and depreciation and
amortization.
GENERAL
AND ADMINISTRATIVE
General and administrative expenses
were $39.9 million in fiscal 2007, which represented an increase of 16.4%, or
$5.6 million, from fiscal 2006.
The increase resulted
primarily from $3.3 million in higher staffing costs, including $1.8 million in
share-based compensation expense, and a $2.8 million increase in professional
fees, including costs to enforce our intellectual property.
PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT
We incurred no IPR&D expenses in
fiscal 2007 compared to $1.1 million in fiscal 2006, since we did not make any
acquisitions in fiscal 2007.
OTHER
INCOME, NET
Other income was $3.6 million in fiscal
2007 compared to $4.1 million in fiscal 2006. The decrease was
primarily due to a $2.1 million impairment of our equity investment in NPC,
following a decision to not renew a collaboration agreement. This
decrease was partially offset by an increase of $0.7 million in interest income
on our cash and short-term investments, mostly due to higher interest rates, a
decrease in interest expense of $0.2 million related to capital leases, and the
absence of $0.6 million of expenses related to our investment in NPC that we
recognized in fiscal 2006 that did not recur in fiscal 2007.
PROVISION
FOR INCOME TAXES
Our effective income tax rate was 31.5%
in fiscal 2007 compared to 32.1% in fiscal 2006. The decrease in the
effective tax rate in fiscal 2007 was primarily due to higher tax-exempt
interest income and increased research and experimentation tax
credits.
NET
INCOME
Net income was $33.8 million in fiscal
2007, which represented an increase of 2.7%, or $0.9 million, from fiscal 2006
as a result of the factors discussed above.
LIQUIDITY
AND CAPITAL RESOURCES
We had cash flows from operating
activities of $70.8 million in fiscal 2008, $64.6 million in fiscal 2007 and
$58.7 million in fiscal 2006. Our cash provided by operating
activities in fiscal 2008 originated from $38.3 million in net income and $33.9
million in non-cash items, partially offset by a $1.4 million decrease in cash
flow due to a net increase in working capital. Cash provided by
operating activities in fiscal 2008 increased $6.2 million from fiscal 2007
primarily due to increased net income in fiscal 2008, higher non-cash expenses
related to depreciation and share-based compensation and improved collections of
accounts receivable, partially offset by a general increase in our inventory
levels and the absence of a $2.1 million non-cash write-off of our investment in
NPC that occurred in fiscal 2007.
Fiscal 2008 cash flows provided by
investing activities were $130.3 million. Net sales of short-term
investments were $149.5 million as we monetized the majority of our ARS during
fiscal 2008 (as discussed below). This cash inflow was partially
offset by $19.2 million in cash used for purchases of property, plant and
equipment primarily for the purchase and installation of a 300-millimeter
polishing tool and related metrology equipment for our Asia Pacific technology
center and building improvements and equipment to increase our pad production
capabilities. In fiscal 2007, cash used in investing activities was
$62.3 million. We used $47.0 million for net purchases of short-term
investments. Purchases of property, plant and equipment, including
the expansion of our pad manufacturing capabilities in the U.S. and Taiwan as
well as purchases for QED, were $10.0 million. We also used $3.0
million to acquire a license of patents and we paid $2.5 million for the earnout
payment to the prior owners of QED, related to its revenue performance during
the 12 months following our acquisition. See Note 6 and Note 7 of the
Notes to the Consolidated Financial Statements for more information on business
combinations and intangible assets. In fiscal 2006, cash flows used
in investing activities were $32.4 million, which included $22.2 million for
purchases of property, plant and equipment, primarily for the construction of
our Asia Pacific technology center and for projects in our manufacturing
operations. We also completed two acquisitions during fiscal 2006 for
a total of $20.9 million, net of cash acquired. In addition, we used
$5.0 million to acquire patents and associated rights relating to CMP slurry
technology. Finally, $15.7 million was provided by net sales of
short-term investments. We estimate that our total capital
expenditures in fiscal 2009 will be approximately $13.0 million.
In fiscal 2008, cash flows used in
financing activities were $35.2 million. We used $39.0 million to
repurchase common stock under our share repurchase programs and we made $1.1
million in principal payments under capital lease obligations. These
cash outflows were partially offset by $4.9 million received from the issuance
of common stock related to the exercise of stock options under our Second
Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive
Plan, as amended and restated September 23, 2008, and shares issued under our
Cabot Microelectronics Employee Stock Purchase Plan. In fiscal 2007,
cash flows used in financing activities were $3.2 million. This
resulted from $10.0 million in purchases of common stock under our share
repurchase program and $1.0 million in principal payments under capital lease
obligations, partially offset by $7.8 million in net proceeds from the issuance
of stock, primarily from the exercise of stock options. In fiscal
2006, cash flows used in financing activities were $15.6 million, primarily as a
result of $16.0 million in repurchases of common stock under our share
repurchase program and $0.9 million in principal payments under capital lease
obligations. These outflows were partially offset by $1.4 million
from the issuance of common stock, primarily associated with our Cabot
Microelectronics Corporation Employee Stock Purchase Plan.
During the first quarter of fiscal
2008, we completed a share repurchase program that was authorized by our Board
of Directors in October 2005 for up to $40.0 million. In January
2008, the Board of Directors authorized a new share repurchase program for up to
$75.0 million of our outstanding common stock. Shares are repurchased
from time to time, depending on market conditions, in open market transactions,
at management’s discretion. We fund share repurchases from our
existing cash balance. We view the program as a flexible and
effective means to return cash to stockholders. The program became
effective on the authorization date and may be suspended or terminated at any
time, at the Company’s discretion. There was $50.0 million remaining
on this authorization as of September 30, 2008.
We have an unsecured revolving credit
facility of $50.0 million with an option to increase the facility to $80.0
million. Under this agreement, which was set to terminate in November
2008, 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. In October 2008, we
amended this agreement to extend the termination date until November 2011, with
an option to renew for two additional one-year terms. The 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 and capital
expenditures. The credit agreement also contains various
covenants. No amounts are currently outstanding under this credit
facility and we believe we are currently in compliance with the
covenants.
At September 30, 2008, we owned two ARS
with an 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. Our ARS investments consisted of tax exempt municipal debt
obligations which have experienced failed auctions since February
2008. Despite the failed auctions, there have been no defaults on the
underlying securities and interest income on these holdings continues to be
received on scheduled interest payment dates. As discussed in Notes 3
and 8 in the Notes to the Consolidated Financial Statements, we recorded a $0.2
million pretax and net of tax reduction in stockholders’ equity in accumulated
other comprehensive income to reflect a temporary decline in fair
value. We successfully monetized at par value the majority of ARS we
owned in fiscal 2008 and reinvested these funds in money market
accounts. Based on our $221.5 million cash balance as of September
30, 2008, our positive cash flow and our available debt capacity, we do not have
any immediate needs for additional liquidity and we currently do not plan to
enter any secondary ARS market to monetize our remaining ARS. We
believe it is likely that one of our ARS will be monetized within the next
operating cycle (which for us is generally one year) as the municipal bond
issuer will be motivated to refinance its debt when credit markets improve due
to higher interest rates being paid as auctions fail.
The recent capital and credit market
crisis has adversely affected the U.S. and global economy. Despite
this crisis, we believe that cash generated by our operations and available
borrowings under our revolving credit facility will be sufficient to fund our
operations, expected capital expenditures, including any merger and acquisition
activities, and share repurchases for the foreseeable
future. However, we plan to expand our business and continue to
improve our technology, and to do so may require us to raise additional funds in
the future through equity or debt financing, strategic relationships or other
arrangements. 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 September 30, 2008 and 2007, we did
not have any unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities, which might
have been established for the purpose of facilitating off-balance sheet
arrangements.
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following summarizes our
contractual obligations at September 30, 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
|
|||||||||||||||
|
Capital
lease obligations
|
$ | 3.6 | $ | 1.1 | $ | 2.5 | $ | - | $ | - | ||||||||||
|
Operating
leases
|
2.5 | 1.4 | 1.1 | - | - | |||||||||||||||
|
Purchase
obligations
|
32.4 | 28.2 | 3.9 | 0.3 | - | |||||||||||||||
|
Other
long-term liabilities
|
2.9 | - | - | - | 2.9 | |||||||||||||||
|
Total
contractual obligations
|
$ | 41.4 | $ | 30.7 | $ | 7.5 | $ | 0.3 | $ | 2.9 | ||||||||||
CAPITAL
LEASE OBLIGATIONS
In December 2001, we entered into a
fumed alumina supply agreement with Cabot Corporation under which we agreed to
pay Cabot Corporation for the expansion of a fumed alumina manufacturing
facility in Tuscola, Illinois. The payments for the facility have
been treated as a capital lease for accounting purposes and the present value of
the minimum quarterly payments resulted in an initial $9.8 million lease
obligation and related leased asset. The initial term of the
agreement expired in December 2006, but it was renewed for another five-year
term ending in December 2011.
OPERATING
LEASES
We lease certain vehicles, warehouse
facilities, office space, machinery and equipment under cancelable and
noncancelable operating leases, most of which expire within ten years of their
respective commencement dates and may be renewed by us.
PURCHASE
OBLIGATIONS
We have entered into multi-year supply
agreements with Cabot Corporation for the purchase of fumed metal
oxides. We purchase fumed silica primarily under a fumed silica
supply agreement with Cabot Corporation that became effective in January 2004,
and was amended in September 2006 and in April 2008, the latter of which
extended the termination
date of the agreement from December 2009 to December 2012 and also changed the
pricing and some other non-material terms of the agreement to the benefit of
both parties. The agreement will automatically renew unless either
party gives certain notice of non-renewal. We are generally
obligated to purchase fumed silica for at least 90% of our six-month
volume forecast for certain of our slurry products, to purchase certain
non-material minimum quantities every six months, and to pay for the shortfall
if we purchase less than these amounts. We currently anticipate
meeting all minimum forecasted purchase volume requirements. Since
December 2001, we have purchased fumed alumina primarily under a fumed alumina
supply agreement with Cabot Corporation that has an original term ending in
December 2006 and was renewed for another five-year term ending in December
2011. Prices charged for fumed alumina from Cabot Corporation are
pursuant to the terms of the supply agreement and may fluctuate based upon the
actual costs incurred by Cabot Corporation in the manufacture of fumed
alumina. Under these agreements, Cabot Corporation continues to be
the exclusive supplier of certain quantities and types of fumed silica and fumed
alumina for certain products we produced as of the effective dates of these
agreements. Subject to certain terms, these agreements prohibit Cabot
Corporation from selling certain types of fumed silica and fumed alumina to
third parties for use in CMP applications, as well as engaging itself in CMP
applications. If Cabot Corporation fails to supply us with our
requirements for any reason, including if we require product specification
changes that Cabot Corporation cannot meet, we have the right to purchase
products meeting those specifications from other suppliers. We also
may purchase fumed alumina and fumed silica from other suppliers for certain
products, including those commercialized after certain dates related to these
agreements and their amendments. Purchase obligations include an
aggregate amount of $14.9 million of contractual commitments related to our
Cabot Corporation agreements for fumed silica and fumed alumina.
OTHER
LONG-TERM LIABILITIES
Other long-term liabilities at
September 30, 2008 consist of liabilities related to our Japan retirement
allowance and our liability for uncertain tax positions.
Our contractual obligations at
September 30, 2007 included $2.0 million in contingent payments related to a
possible second earnout payment resulting from our acquisition of substantially
all of the assets of QED Technologies, Inc. (QED) in July 2006. The
QED business has not met the revenue performance required to earn this $2.0
million payment. Consequently, we no longer have any contractual
obligation related to this acquisition.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
EFFECT
OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside
of the United States through our foreign operations. Some of our
foreign operations maintain their accounting records in their local
currencies. Consequently, period to period comparability of results
of operations is affected by fluctuations in exchange rates. The
primary currencies to which we have exposure are the Japanese Yen and, to a
lesser extent, the British Pound and the Euro. From time to time we
enter into forward contracts in an effort to manage foreign currency exchange
exposure. However, we may be unable to hedge these exposures
completely. Approximately 13% of our revenue is transacted in
currencies other than the U.S. dollar. We do not currently enter into
forward exchange contracts or other derivative instruments for speculative or
trading purposes.
MARKET
RISK AND SENSITIVITY ANALYSIS RELATED TO FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity
analysis assuming a hypothetical 10% adverse movement in foreign exchange
rates. As of September 30, 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 September 30, 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. In general, ARS investments are
securities with long-term nominal maturities for which interest rates are reset
through a Dutch auction every seven to 35 days. Historically, these
periodic auctions have provided a liquid market for these
securities. 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 fiscal 2008, we recorded a $0.2
million pre-tax and net of tax reduction 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 of our ARS 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 3 and 8 of the Notes to the
Consolidated Financial Statements and the “Risk Factors” set forth in Part I,
Item 1A of this Annual Report on Form 10-K for more information.
ITEM 8. FINANCIAL
STATEMENTS AND
SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
|
Page
|
||
|
Consolidated
Financial Statements:
|
||
|
Report
of Independent Registered Public Accounting Firm
|
38
|
|
|
Consolidated
Statements of Income for the years ended September 30, 2008, 2007 and
2006
|
39
|
|
|
Consolidated
Balance Sheets at September 30, 2008 and 2007
|
40
|
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2008, 2007 and
2006
|
41
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended
September 30, 2008, 2007 and 2006
|
42
|
|
|
Notes
to the Consolidated Financial Statements
|
43
|
|
|
Selected
Quarterly Operating Results
|
66
|
|
|
Financial
Statement Schedule:
|
||
|
Schedule
II – Valuation and Qualifying Accounts
|
67
|
|
All other schedules are omitted,
because they are not required, are not applicable, or the information is
included in the consolidated financial statements and notes
thereto.
Report
of Independent Registered Public Accounting Firm
To the
Stockholders and Board of Directors of
Cabot
Microelectronics Corporation:
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Cabot
Microelectronics Corporation and its subsidiaries at September 30, 2008 and
2007, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 2008 in conformity with accounting
principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of
September 30, 2008, based on criteria established in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company’s internal
control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements include examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As
discussed in Notes 2 and 15 to the consolidated financial statements, the
Company changed the manner in which it accounts for uncertain tax positions in
accordance with Financial Accounting Standards Board Interpretation (FIN) No.
48, “Accounting for Uncertainty in Income Taxes” on October 1,
2007.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Chicago,
IL
November
25, 2008
CABOT
MICROELECTRONICS CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
|
Year
Ended September 30,
|
|||||||||||||
|
|
|||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||
|
Revenue
|
$ | 375,069 | $ | 338,205 | $ | 320,795 | |||||||
|
Cost
of goods sold
|
200,596 | 178,224 | 171,758 | ||||||||||
|
Gross
profit
|
174,473 | 159,981 | 149,037 | ||||||||||
|
Operating
expenses:
|
|||||||||||||
|
Research,
development and technical
|
49,155 | 49,970 | 48,070 | ||||||||||
|
Selling
and marketing
|
28,281 | 24,310 | 21,115 | ||||||||||
|
General
and administrative
|
47,595 | 39,933 | 34,319 | ||||||||||
|
Purchased
in-process research and development
|
- | - | 1,120 | ||||||||||
|
Total operating expenses
|
125,031 | 114,213 | 104,624 | ||||||||||
|
Operating
income
|
49,442 | 45,768 | 44,413 | ||||||||||
|
Other
income, net
|
5,448 | 3,606 | 4,111 | ||||||||||
|
Income
before income taxes
|
54,890 | 49,374 | 48,524 | ||||||||||
|
Provision
for income taxes
|
16,552 | 15,538 | 15,576 | ||||||||||
|
Net income
|
$ | 38,338 | $ | 33,836 | $ | 32,948 | |||||||
|
Basic
earnings per share
|
$ | 1.64 | $ | 1.42 | $ | 1.36 | |||||||
|
Weighted
average basic shares outstanding
|
23,315 | 23,748 | 24,228 | ||||||||||
|
Diluted
earnings per share
|
$ | 1.64 | $ | 1.42 | $ | 1.36 | |||||||
|
Weighted
average diluted shares outstanding
|
23,348 | 23,754 | 24,228 | ||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 221,467 | $ | 54,557 | ||||
|
Short-term
investments
|
4,950 | 157,915 | ||||||
|
Accounts
receivable, less allowance for doubtful accounts of $403 at September 30,
2008, and $635 at September 30, 2007
|
41,630 | 52,302 | ||||||
|
Inventories
|
47,466 | 37,266 | ||||||
|
Prepaid
expenses and other current assets
|
10,714 | 5,853 | ||||||
|
Deferred
income taxes
|
4,365 | 2,861 | ||||||
|
Total
current assets
|
330,592 | 310,754 | ||||||
|
Property,
plant and equipment, net
|
115,843 | 118,454 | ||||||
|
Goodwill
|
7,069 | 7,069 | ||||||
|
Other
intangible assets, net
|
8,712 | 11,549 | ||||||
|
Deferred
income taxes
|
11,178 | 6,686 | ||||||
|
Other
long-term assets
|
4,043 | 617 | ||||||
|
Total
assets
|
$ | 477,437 | $ | 455,129 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 13,885 | $ | 15,859 | ||||
|
Capital
lease obligations
|
1,129 | 1,066 | ||||||
|
Accrued
expenses and other current liabilities
|
22,787 | 19,638 | ||||||
|
Total
current liabilities
|
37,801 | 36,563 | ||||||
|
Capital
lease obligations, net of current portion
|
2,518 | 3,608 | ||||||
|
Other
long-term liabilities
|
2,885 | 1,754 | ||||||
|
Total
liabilities
|
43,204 | 41,925 | ||||||
|
Commitments
and contingencies (Note 16)
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock:
|
||||||||
|
Authorized:
200,000,000 shares, $0.001 par value
|
||||||||
|
Issued:
25,906,990 shares at September 30, 2008, and 25,635,730 shares at
September 30, 2007
|
26 | 24 | ||||||
|
Capital
in excess of par value of common stock
|
198,022 | 178,068 | ||||||
|
Retained
earnings
|
323,122 | 284,843 | ||||||
|
Accumulated
other comprehensive income
|
3,054 | 1,259 | ||||||
|
Treasury
stock at cost, 2,683,809 shares at September 30, 2008, and 1,627,337
shares at September 30, 2007
|
(89,991 | ) | (50,990 | ) | ||||
|
Total
stockholders’ equity
|
434,233 | 413,204 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 477,437 | $ | 455,129 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Year
Ended September 30,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
| Cash flows from operating activities: | |||||||||||
|
Net
income
|
$ | 38,338 | $ | 33,836 | $ | 32,948 | |||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||
|
Depreciation
and amortization
|
25,951 | 24,170 | 21,174 | ||||||||
|
Purchased
in-process research and development
|
- | - | 1,120 | ||||||||
|
Impairment
of investment
|
- | 2,052 | - | ||||||||
|
Loss
on equity investment
|
- | - | 566 | ||||||||
|
Share-based
compensation expense
|
15,067 | 12,846 | 10,664 | ||||||||
|
Deferred
income tax benefit
|
(5,894 | ) | (5,708 | ) | (5,571 | ) | |||||
|
Non-cash
foreign exchange (gain) loss
|
(2,592 | ) | (539 | ) | 2,606 | ||||||
|
Loss
on disposal of property, plant and equipment
|
598 | 237 | 1,109 | ||||||||
|
Impairment
of property, plant and equipment
|
4 | 52 | 790 | ||||||||
|
Other
|
782 | (482 | ) | (1,081 | ) | ||||||
|
Changes
in operating assets and liabilities:
|
|||||||||||
|
Accounts
receivable
|
11,849 | (3,437 | ) | (8,492 | ) | ||||||
|
Inventories
|
(9,268 | ) | 3,658 | (5,635 | ) | ||||||
|
Prepaid
expenses and other assets
|
(4,921 | ) | (525 | ) | 1,726 | ||||||
|
Accounts
payable
|
(2,472 | ) | 1,170 | 3,031 | |||||||
|
Accrued
expenses, income taxes payable and other liabilities
|
3,397 | (2,696 | ) | 3,713 | |||||||
|
Net
cash provided by operating activities
|
70,839 | 64,634 | 58,668 | ||||||||
|
Cash
flows from investing activities:
|
|||||||||||
|
Additions
to property, plant and equipment
|
(19,232 | ) | (10,013 | ) | (22,230 | ) | |||||
|
Proceeds
from the sale of property, plant and equipment
|
42 | 172 | 19 | ||||||||
|
Acquisitions
of businesses including earnout payment, net of cash
acquired
|
- | (2,500 | ) | (20,919 | ) | ||||||
|
Acquisition
of patent license
|
- | (3,000 | ) | - | |||||||
|
Purchase
of patents
|
- | - | (5,000 | ) | |||||||
|
Purchases
of short-term investments
|
(233,775 | ) | (155,175 | ) | (185,655 | ) | |||||
|
Proceeds from the sale of short-term investments
|
383,290 | 108,225 | 201,392 | ||||||||
|
Net
cash provided by (used in) investing activities
|
130,325 | (62,291 | ) | (32,393 | ) | ||||||
|
Cash
flows from financing activities:
|
|||||||||||
|
Repurchases
of common stock
|
(39,001 | ) | (9,995 | ) | (15,996 | ) | |||||
|
Net
proceeds from issuance of stock
|
4,889 | 7,759 | 1,359 | ||||||||
|
Principal
payments under capital lease obligations
|
(1,072 | ) | (999 | ) | (933 | ) | |||||
|
Net
cash used in financing activities
|
(35,184 | ) | (3,235 | ) | (15,570 | ) | |||||
|
Effect
of exchange rate changes on cash
|
930 | 484 | (176 | ) | |||||||
|
Increase
(decrease) in cash
|
166,910 | (408 | ) | 10,529 | |||||||
|
Cash
and cash equivalents at beginning of year
|
54,557 | 54,965 | 44,436 | ||||||||
|
Cash
and cash equivalents at end of year
|
$ | 221,467 | $ | 54,557 | $ | 54,965 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT MICROELECTRONICS
CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(In
thousands)
|
Common
Stock
|
Capital
In
Excess
Of
Par
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Comprehensive
Income
(net
of tax)
|
Unearned
Compensation
|
Treasury
Stock
|
Total
|
||||||||||||||||||
|
Balance at September 30,
2005
|
$ |
24
|
$ |
145,011
|
$ |
218,059
|
$ |
1,160
|
$ |
(171
|
)
|
$ |
(24,999
|
) | $ |
339,084
|
|||||||||
|
Reclassification
of unearned compensation upon adoption of SFAS 123R
|
(171
|
) | 171 |
-
|
|||||||||||||||||||||
|
Reclassification
of director's deferred compensation upon adoption of SFAS
123R
|
600
|
600
|
|||||||||||||||||||||||
|
Issuance
of Cabot Microelectronics restricted stock under deposit share
plan
|
137
|
|
|
137
|
|||||||||||||||||||||
|
Issuance of
Cabot Microelectronics stock under Employee Stock Purchase
Plan
|
1,222
|
|
|
1,222
|
|||||||||||||||||||||
|
Share-based
compensation expense
|
10,664 |
|
|
10,664
|
|
||||||||||||||||||||
|
Repurchases
of common stock, at cost
|
(15,996
|
)
|
(15,996
|
)
|
|||||||||||||||||||||
|
Net
income
|
32,948
|
$
|
32,948
|
||||||||||||||||||||||
|
Net
unrealized gain on derivative intruments
|
36
|
|
36
|
|
|||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(924
|
) |
(924
|
) | |||||||||||||||||||||
|
Total
comprehensive income
|
$
|
32,060
|
32,060
|
||||||||||||||||||||||
|
Balance at September 30,
2006
|
$
|
24
|
$
|
157,463
|
$
|
251,007
|
$
|
272
|
$
|
-
|
|
$
|
(40,995
|
)
|
$
|
367,771
|
|||||||||
|
Issuance
of Cabot Microelectronics restricted stock under deposit share
plan
|
176
|
|
|
176
|
|||||||||||||||||||||
|
Issuance
of Cabot Microelectronics stock under Employee Stock Purchase
Plan
|
1,459
|
|
|
1,459
|
|||||||||||||||||||||
|
Share-based
compensation expense
|
12,846 |
|
|
12,846
|
|
||||||||||||||||||||
|
Exercise
of stock options
|
6,124
|
6,124
|
|||||||||||||||||||||||
|
Repurchases
of common stock, at cost
|
(9,995 | ) | (9,995 | ) | |||||||||||||||||||||
|
Net
income
|
33,836
|
$
|
33,836
|
||||||||||||||||||||||
|
Net
unrealized gain on derivative intruments
|
35
|
35
|
|||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
1,416
|
|
1,416
|
|
|||||||||||||||||||||
|
Total
comprehensive income
|
$
|
35,287
|
35,287
|
||||||||||||||||||||||
| SFAS 158 transition adjustment | (464 | ) | (464 | ) | |||||||||||||||||||||
|
Balance at September 30,
2007
|
$
|
24
|
$
|
178,068
|
$
|
284,843
|
$
|
1,259
|
$
|
-
|
|
$
|
(50,990
|
)
|
$
|
413,204
|
|||||||||
|
Issuance
of Cabot Microelectronics restricted stock under deposit share
plan
|
165
|
|
|
165
|
|||||||||||||||||||||
|
Issuance
of Cabot Microelectronics stock under Employee Stock Purchase
Plan
|
1,596
|
1,596
|
|||||||||||||||||||||||
|
Share-based
compensation expense
|
15,067
|
15,067
|
|||||||||||||||||||||||
|
Exercise
of stock options
|
2 |
3,126
|
3,128
|
||||||||||||||||||||||
|
Repurchases
of common stock, at cost
|
(39,001
|
)
|
(39,001
|
)
|
|||||||||||||||||||||
|
Net
income
|
38,338
|
$ |
38,338
|
||||||||||||||||||||||
|
Net
unrealized gain on derivative intruments
|
35
|
35
|
|||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
2,306
|
|
2,306
|
|
|||||||||||||||||||||
| Unrealized loss on investments | (151 | ) | (151 | ) | |||||||||||||||||||||
| Minimum pension liability adjustment | (395 | ) | (395 | ) | |||||||||||||||||||||
|
Total
comprehensive income
|
$
|
40,133
|
40,133
|
||||||||||||||||||||||
| Cumulative effct of adoption of FIN 48 | (59 | ) | (59 | ) | |||||||||||||||||||||
|
Balance at September 30,
2008
|
$
|
26
|
$
|
198,022
|
$
|
323,122
|
$
|
3,054
|
$
|
-
|
$
|
(89,991
|
)
|
$
|
434,233
|
||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CABOT
MICROELECTRONICS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
1.
BACKGROUND AND BASIS OF PRESENTATION
Cabot Microelectronics Corporation
("Cabot Microelectronics'', "the Company'', "us'', "we'' or "our'') supplies
high-performance polishing slurries used in the manufacture of advanced
integrated circuit (IC) devices within the semiconductor industry, in a process
called chemical mechanical planarization (CMP). 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 CMP slurries for IC devices. We
also develop, manufacture and sell CMP slurries for polishing certain components
in hard disk drives, specifically rigid disk substrates and magnetic heads, and
we believe we are one of the leading suppliers in this area. In
addition, we develop, produce and sell CMP polishing pads, which are used in
conjunction with slurries in the CMP process. We also pursue a
variety of surface modification applications outside of the semiconductor and
hard disk drive industries for which our capabilities and knowledge may provide
previously unseen surface performance or improved productivity.
The audited consolidated financial
statements have been prepared by us pursuant to the rules of the Securities and
Exchange Commission (SEC) and accounting principles generally accepted in the
United States of America. We operate predominantly in one industry
segment - the development, manufacture, and sale of CMP
consumables. Certain reclassifications of prior fiscal year amounts
have been made to conform to the current period presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
PRINCIPLES
OF CONSOLIDATION
The consolidated financial statements
include the accounts of Cabot Microelectronics and its
subsidiaries. All material intercompany transactions and balances
between the companies have been eliminated as of September 30,
2008.
USE OF
ESTIMATES
The preparation of financial statements
and related disclosures in conformity with accounting principles generally
accepted in the United States of America requires management to make judgments,
assumptions and estimates that affect the amounts reported in the consolidated
financial statements and accompanying notes. The accounting estimates
that require management’s most difficult and subjective judgments include, but
are not limited to, those estimates related to bad debt expense, warranty
obligations, inventory valuation, valuation and classification of auction rate
securities, impairment of long-lived assets and investments, business
combinations, goodwill, other intangible assets, share-based compensation,
income taxes and contingencies. We base our estimates on historical
experience, current conditions and on various other assumptions that we believe
are reasonable under the circumstances. However, future events are
subject to change and estimates and judgments routinely require
adjustment. Actual results may differ from these estimates under
different assumptions or conditions.
CASH,
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We consider investments in all highly
liquid financial instruments with original maturities of three months or less to
be cash equivalents. Short-term investments include securities
generally having maturities of 90 days to one year. As of September
30, 2008, we held $4,950 of short-term investments which are classified as
available-for-sale securities. See Note 3 for a more detailed
discussion of short-term investments.
Notes to
Consolidated Financial Statements -
Continued
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded
at the invoiced amount and do not bear interest. We maintain an
allowance for doubtful accounts for estimated losses resulting from the
potential inability of our customers to make required payments. Our
allowance for doubtful accounts is based on historical collection experience,
adjusted for any specific known conditions or
circumstances. Uncollectable account balances are charged against the
allowance when we believe that it is probable that the receivable will not be
recovered. See Schedule II under Part IV, Item 15 of this Form 10-K
for more information on our allowance for doubtful accounts.
CONCENTRATION
OF CREDIT RISK
Financial instruments that subject us
to concentrations of credit risk consist principally of accounts
receivable. We perform ongoing credit evaluations of our customers'
financial conditions and generally do not require collateral to secure accounts
receivable. Our exposure to credit risk associated with nonpayment is
affected principally by conditions or occurrences within the semiconductor
industry and global economy. We historically have not experienced
material losses relating to accounts receivables from individual customers or
groups of customers.
The portions of revenue from customers
who represented more than 10% of revenue were as follows:
|
Year Ended September 30,
|
|||
|
2008
|
2007
|
2006
|
|
|
Taiwan
Semiconductor Manufacturing Co. (TSMC)
|
17%
|
17%
|
10%
|
|
Marketech
|
7%
|
7%
|
19%
|
In April 2006 we began selling products
directly to customers in Taiwan, rather than through Marketech, an independent
distributor. We continue to use Marketech as a distributor in
China. Prior to April 2006, we sold product to TSMC through
Marketech.
TSMC accounted for 8.0% and 14.3% of
net accounts receivable at September 30, 2008 and 2007,
respectively.
FAIR
VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash,
short-term investments, accounts receivable, and accounts payable approximate
their fair values due to their short-term, highly liquid
characteristics. The fair value of our long-term auction rate
securities (ARS) is determined through a discounted cash flow analysis using a
discount rate based on a market index comprised of tax exempt variable rate
demand obligations, adding a risk factor to reflect current liquidity issues in
the ARS market.
INVENTORIES
Inventories are stated at the lower of
cost, determined on the first-in, first-out (FIFO) basis, or
market. Finished goods and work in process inventories include
material, labor and manufacturing overhead costs. We regularly review
and write down the value of inventory as required for estimated obsolescence or
unmarketability. An inventory reserve is maintained based upon a
historical percentage of actual inventories written off applied against
inventory value at the end of the period, adjusted for known conditions and
circumstances.
Notes to Consolidated Financial
Statements -
Continued
PROPERTY,
PLANT AND EQUIPMENT
Property, plant and equipment are
recorded at cost. Depreciation is based on the following estimated
useful lives of the assets using the straight-line method:
|
Buildings
|
15-25
years
|
|
Machinery
and equipment
|
3-10
years
|
|
Furniture
and fixtures
|
5-10
years
|
|
Information
systems
|
3-5
years
|
|
Assets
under capital leases
|
Term
of lease or estimated useful life
|
Expenditures for repairs and
maintenance are charged to expense as incurred. Expenditures for
major renewals and betterments are capitalized and depreciated over the
remaining useful lives. As assets are retired or sold, the related
cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of
operations. Costs related to internal use software are capitalized in
accordance with American Institute of Certified Public Accountants Statement of
Position No. 98-1, “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use”.
IMPAIRMENT
OF LONG-LIVED ASSETS
Reviews are regularly performed to
determine whether facts and circumstances exist that indicate the carrying
amount of assets may not be recoverable or the useful life is shorter than
originally estimated. Asset recoverability assessment begins by
comparing the projected undiscounted cash flows associated with the related
asset or group of assets over their remaining lives against their respective
carrying amounts. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets. If assets are
determined to be recoverable, but their useful lives are shorter than originally
estimated, the net book value of the asset is depreciated over the newly
determined remaining useful life.
GOODWILL
AND OTHER INTANGIBLE ASSETS
In accordance with Statement of
Financial Accounting Standards (SFAS) No. 141, “Business Combinations” (SFAS
141), and SFAS No. 142, "Goodwill and Other Intangible Assets", intangible
assets with finite lives are amortized over their estimated useful lives, which
range from two to ten years. Goodwill and indefinite lived intangible
assets are tested annually in the fourth fiscal quarter or more frequently if
indicators of potential impairment exist, using a fair-value-based
approach. 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”. Goodwill impairment testing requires
a comparison of the fair value of each reporting unit to the carrying
value. If the carrying value exceeds fair value, goodwill is
considered impaired. The amount of the impairment is the difference
between the carrying value of goodwill and the “implied” fair
value. Impairment testing for intangible assets with indefinite lives
requires a comparison between the fair value and the carrying value of the
assets. Fair values are primarily determined using discounted cash
flow analyses. We determined that goodwill and other intangible
assets were not impaired as of September 30, 2008.
WARRANTY
RESERVE
We maintain a warranty reserve that
reflects management’s best estimate of the cost to replace product that does not
meet customers’ specifications and performance requirements. The
warranty reserve is based upon a historical product return rate, adjusted for
any specific known conditions or circumstances. Adjustments to the
warranty reserve are recorded in cost of goods sold.
FOREIGN
CURRENCY TRANSLATION
Certain operating activities in Asia
and Europe are denominated in local currency, considered to be the functional
currency. Assets and liabilities of these operations are translated
using exchange rates in effect at the end of the year, and revenue and costs are
translated using weighted average exchange rates for the year. The
related translation adjustments are reported in comprehensive income in
stockholders’ equity.
Notes to Consolidated Financial
Statements -
Continued
FOREIGN
EXCHANGE MANAGEMENT
We transact business in various foreign
currencies, primarily the Japanese Yen, British Pound and the
Euro. Our exposure to foreign currency exchange risks has not been
significant because a large portion of our business is denominated in U.S.
dollars. Periodically we enter into forward foreign exchange
contracts in an effort to mitigate the risks associated with currency
fluctuations on certain foreign currency balance sheet exposures. Our
foreign exchange contracts do not qualify for hedge accounting under SFAS No.
133, “Accounting for Derivatives Instruments and Hedging Activities”, as amended
by SFAS No. 149, “Amendment of Statement 133 on Instruments and Hedging
Activities”, and SFAS No. 52, “Foreign Currency Translation” (SFAS 52);
therefore, the gains and losses resulting from the impact of currency exchange
rate movements on our forward foreign exchange contracts are recognized as other
income or expense in the accompanying consolidated income statements in the
period in which the exchange rates change. These gains and losses are
intended to partially offset the foreign currency exchange gains and losses on
the underlying exposures being hedged. Foreign exchange gains
(losses) were $(61), $321 and $265 for fiscal 2008, 2007 and 2006,
respectively.
We do not currently use derivative
financial instruments for trading or speculative purposes. In
addition, all derivatives, whether designated in hedging relationships or not,
are required to be recorded on the balance sheet at fair value. At
September 30, 2008, we had one forward foreign exchange contract selling
Japanese Yen related to an intercompany note with one of our subsidiaries in
Japan and for the purpose of hedging the risk associated with a net
transactional exposure in Japanese Yen (refer to “Intercompany Loan Accounting”
in this section).
INTERCOMPANY
LOAN ACCOUNTING
We maintain intercompany loan
agreements with our wholly-owned subsidiary, Nihon Cabot Microelectronics K.K.
(“the K.K.”), under which we provided funds to the K.K. to finance the purchase
of certain assets from our former Japanese branch at the time of the
establishment of this subsidiary, for the purchase of land adjacent to our
Geino, Japan, facility, for the construction of our Asia Pacific technology
center, and for the purchase of a 300 millimeter polishing tool and related
metrology equipment, all of which are part of the K.K., as well as for general
business purposes. Since settlement of the notes is expected in the
foreseeable future, and our subsidiary has been consistently making timely
payments on the loans, the loans are considered foreign-currency transactions
under SFAS 52. Therefore the associated foreign exchange gains and
losses are recognized as other income or expense rather than being deferred in
the cumulative translation account in other comprehensive income.
PURCHASE
COMMITMENTS
We have entered into unconditional
purchase obligations, which include noncancelable purchase commitments and
take-or-pay arrangements with suppliers. We review our agreements and
make an assessment of the likelihood of a shortfall in purchases and determine
if it is necessary to record a liability.
REVENUE
RECOGNITION
Revenue from CMP consumable products is
recognized when title is transferred to the customer, which usually occurs upon
shipment, but depends on the terms and conditions of the particular customer
arrangement, provided acceptance and collectability are reasonably
assured. Revenue related to inventory held on consignment at a
customer site is recognized as the products are consumed by the
customer.
Within our Engineered Surface Finishes
(ESF) business, sales of equipment are recorded as revenue upon
delivery. Amounts allocated to installation and training are deferred
until those services are provided.
Revenues are reported net of any
value-added tax or other such tax assessed by a governmental authority on our
revenue-producing activities.
SHIPPING
AND HANDLING
Costs related to shipping and handling
are included in cost of goods sold.
Notes to Consolidated Financial
Statements -
Continued
RESEARCH,
DEVELOPMENT AND TECHNICAL
Research, development and technical
costs are expensed as incurred and consist primarily of staffing costs,
materials and supplies, depreciation, utilities and other facilities
costs.
INCOME
TAXES
Current income taxes are determined
based on estimated taxes payable or refundable on tax returns for the current
year. Deferred income taxes are determined using enacted tax rates
for the effect of temporary differences between the book and tax bases of
recorded assets and liabilities. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Provisions are made for both U.S.
and any foreign deferred income tax liability or benefit.
In June 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109” (FIN 48), which prescribes a threshold
for the financial statement recognition and measurement of tax positions taken
or expected to be taken on a tax return. Under FIN 48, we may
recognize the tax benefit of an uncertain tax position only if it is more likely
than not that the tax position will be sustained by the taxing authorities,
based on the technical merits of the position. Upon adoption, we
recognized a $59 reduction to our beginning retained earnings balance and we
reclassified $450 from current income taxes payable to a non-current liability
for unrecognized tax benefits, including interest and penalties. See
Note 15 for additional information on income taxes.
SHARE-BASED
COMPENSATION
Effective October 1, 2005, we adopted
SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which requires
all share-based payments, including stock option grants, restricted stock and
restricted stock unit awards and discounts provided to employees on employee
stock purchases, to be recognized in the income statement based on their fair
values. Under SFAS 123R, we attribute share-based compensation
expense using the straight-line approach based on awards ultimately expected to
vest, which requires the use of an estimated forfeiture rate. Our
estimated forfeiture rate is primarily based on historical experience, but may
be revised in future periods if actual forfeitures differ from the
estimate. We use the Black-Scholes option-pricing model
(“Black-Scholes model”) to estimate grant date fair value, which requires the
input of highly subjective assumptions, including the option’s expected term,
the price volatility of the underlying stock, the risk-free interest rate and
the expected dividend rate, if any. A small change in the underlying
assumptions can have a relatively large effect on the estimated
valuation. Under SFAS 123R, we estimate expected volatility based on
a combination of our stock’s historical volatility and the implied volatilities
from actively-traded options on our stock. We use the simplified
method to calculate the expected term 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 would meet the definition of retirement pursuant to the
terms of their grant agreements during the contractual term of the
grant. This method uses an average of the vesting and contractual
terms. The risk-free rate is derived from the U.S. Treasury yield
curve in effect at the time of grant.
For additional information regarding
our share-based compensation plans, refer to Note 11.
EARNINGS
PER SHARE
Basic earnings per share (EPS) is
calculated by dividing net income available to common stockholders by the
weighted average number of common shares outstanding during the
period. Diluted EPS is calculated by using the weighted average
number of common shares outstanding during the period increased to include the
weighted average dilutive effect of “in-the-money” stock options and unvested
restricted stock shares using the treasury stock method.
COMPREHENSIVE
INCOME
Comprehensive income primarily differs
from net income due to foreign currency translation adjustments.
Notes to Consolidated Financial
Statements -
Continued
EFFECTS
OF RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurement” (SFAS 157). SFAS 157 establishes a
common definition for fair value in generally accepted accounting principles,
establishes a framework for measuring fair value and expands disclosure about
such fair value measurements. In February 2008, the FASB issued FASB
Staff Positions (FSP) 157-1 and 157-2. FSP 157-1 removed leasing
transactions accounted for under Statement 13 and related guidance from the
scope of SFAS 157, and FSP 157-2 deferred the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. SFAS 157 is effective for us beginning October 1,
2008. We do not expect the adoption of SFAS 157 to have a material
impact on our consolidated financial position, results of operations or cash
flows.
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.
Notes to Consolidated Financial
Statements -
Continued
3. SHORT-TERM
INVESTMENTS
Our short-term investments as of
September 30, 2008 and 2007 consisted of ARS which are classified as
available-for-sale securities. The estimated fair value of our
short-term ARS holdings was $4,950 and $157,915 as of September 30, 2008 and
2007, respectively, and equal to par value.
In general, ARS investments are
securities with long-term nominal maturities for which interest rates are reset
through a Dutch auction every seven to 35 days. Historically,
these periodic auctions provided a liquid market for these
securities. General uncertainties in the global credit markets in
2008 have caused widespread failures of ARS auctions 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. As auctions fail, the interest rates on the
ARS investments reset to default levels, which in many cases are higher than the
interest rates issuers would pay through alternative borrowing
mechanisms.
Our ARS investments at September 30,
2008 consisted of two tax exempt municipal debt obligations; we currently do not
own any mortgage-backed, collateralized debt obligations or obligations secured
by student loans. 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 for hospitals,
airports and related projects. As discussed further below, 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.
We performed a fair value assessment at
September 30, 2008, including a discounted cash flow analysis, to calculate the
fair value of each security and determined that one of the securities was
temporarily impaired as its credit rating was downgraded prior to March 31,
2008. This security has been classified as a long-term asset and is
included in Other Long-Term Assets on the Consolidated Balance
Sheet. See Note 8 for more information on this
security. Based on our fair value assessment, we determined the other
ARS was not impaired as of September 30, 2008.
At September 30, 2008, we have
classified the other of our two ARS as a short-term investment. We
assessed the probability of a successful auction or refinancing of the
underlying debt by the issuer for each security owned as of September 30, 2008
to determine if the securities could likely be monetized within the next
operating cycle (which for us is generally one year). This assessment
was based on the current credit rating of the issuers of the securities as well
as our success in monetizing other ARS we previously owned at par value through
successful auctions or debt refinancing during our third and fourth fiscal
quarters. See Note 8 for more information on the ARS. If
auctions involving our ARS continue to fail, if issuers of our ARS are unable to
refinance the underlying securities, if underlying 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.
Notes to Consolidated Financial
Statements -
Continued
4. INVENTORIES
Inventories consisted of the
following:
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 21,378 | $ | 18,011 | ||||
|
Work
in process
|
4,628 | 1,735 | ||||||
|
Finished
goods
|
21,460 | 17,520 | ||||||
|
Total
|
$ | 47,466 | $ | 37,266 | ||||
The increase in inventory from
September 30, 2007 is primarily due to building raw material and finished goods
inventory for our emerging polishing pad business as well as a general increase
in slurry inventory based on the higher level of sales we have experienced in
fiscal 2008.
5. PROPERTY,
PLANT AND EQUIPMENT
Property, plant and equipment consisted
of the following:
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Land
|
$ | 17,661 | $ | 16,905 | ||||
|
Buildings
|
70,602 | 65,110 | ||||||
|
Machinery
and equipment
|
128,311 | 119,549 | ||||||
|
Furniture
and fixtures
|
5,488 | 5,359 | ||||||
|
Information
systems
|
15,348 | 13,817 | ||||||
|
Capital
leases
|
9,820 | 9,890 | ||||||
|
Construction
in progress
|
1,278 | 2,325 | ||||||
|
Total
property, plant and equipment
|
248,508 | 232,955 | ||||||
|
Less:
accumulated depreciation and amortization of assets under capital
lease
|
(132,665 | ) | (114,501 | ) | ||||
|
Net
property, plant and equipment
|
$ | 115,843 | $ | 118,454 | ||||
Depreciation expense, including
amortization of assets recorded under capital leases, was $23,114, $21,365 and
$20,501 for the years ended September 30, 2008, 2007 and 2006,
respectively.
In fiscal 2006, we recorded $790 in
impairment expense primarily related to the decision to no longer use a portion
of a building in Aurora, Illinois, that was previously used for research and
development activities. Of this amount, $133 and $657 was included in
cost of goods sold and research, development and technical expense,
respectively. Impairment expense for fiscal 2007 and 2008 was not
material.
Notes
to Consolidated Financial Statements -
Continued
6. BUSINESS
COMBINATIONS
In accordance with SFAS 141, we account
for all business combinations by the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired
entities are recorded at their estimated fair values at the date of
acquisition. Goodwill represents the excess of the purchase price
over the fair value of net assets and amounts assigned to identifiable
intangible assets. Purchased in-process research and development
(IPR&D), for which technological feasibility has not yet been established
and no future alternative uses exist, is expensed immediately in accordance with
SFAS 141.
In July 2006, we acquired substantially
all of the assets and certain associated proprietary technology and intellectual
property of QED Technologies, Inc. (QED), and assumed certain of its current
liabilities. QED specializes in unique, patented polishing and
metrology systems for shaping and polishing high precision optics. At
the July 2006 closing of the transaction, we paid $19,000 in cash plus $303 of
transaction costs from our available cash balance. In fiscal 2007, we
paid another $2,500 related to the revenue performance of the QED business in
the 12 months following the acquisition. The purchase price was
allocated to tangible assets, liabilities assumed, identified intangible assets
acquired, as well as IPR&D, based on their estimated fair
values. The excess of the purchase price over the aggregate fair
values was recorded as goodwill.
The following table summarizes the
final QED purchase price allocation, which did not change in fiscal
2008:
|
Current
assets
|
$ | 10,610 | ||
|
Long-term
assets
|
2,197 | |||
|
In-process
research and development
|
1,120 | |||
|
Identified
intangible assets
|
6,890 | |||
|
Goodwill
|
5,000 | |||
|
Total
assets acquired
|
25,817 | |||
|
Total
current liabilities assumed
|
4,010 | |||
|
Net
assets acquired
|
$ | 21,807 | ||
Results of QED’s operations since July
7, 2006, are included in our consolidated financial statements.
In October 2005, we purchased
substantially all of the assets and assumed certain liabilities of Surface
Finishes Co., Inc. (“Surface Finishes”), a company that specializes in precision
machining techniques at the sub-nanometer level, as well as associated real
property from a related trust. The total cash purchase price was
approximately $2,282, of which $1,450 was allocated to net tangible assets and
$832 was allocated to intangible assets and goodwill based on estimated fair
values. The acquisition was accounted for as a purchase transaction
with results of operations included in the consolidated financial statements
from the date of acquisition.
Pro forma results of operations for
Surface Finishes and QED, prior to our acquisitions, have not been presented
because the effects of the acquisitions were not material to the Company’s
results.
Notes
to Consolidated Financial Statements -
Continued
7. GOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill was $7,069 as of September 30,
2008 and 2007.
The components of other intangible
assets are as follows:
|
September 30, 2008
|
September 30, 2007
|
|||||||||||||||
|
Gross
Carrying
|
Accumulated
|
Gross
Carrying
|
Accumulated
|
|||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amortization
|
|||||||||||||
|
Other intangible assets subject to
amortization:
|
||||||||||||||||
|
Product
technology
|
$ | 5,380 | $ | 1,210 | $ | 5,380 | $ | 673 | ||||||||
|
Acquired
patents and licenses
|
8,000 | 4,716 | 8,000 | 2,560 | ||||||||||||
|
Trade
secrets and know-how
|
2,550 | 2,550 | 2,550 | 2,550 | ||||||||||||
|
Distribution
rights, customer lists and other
|
1,457 | 1,389 | 1,457 | 1,245 | ||||||||||||
|
Total
other intangible assets subject to amortization
|
17,387 | 9,865 | 17,387 | 7,028 | ||||||||||||
|
Total
other intangible assets not subject to amortization*
|
1,190 | 1,190 | ||||||||||||||
|
Total
other intangible assets
|
$ | 18,577 | $ | 9,865 | $ | 18,577 | $ | 7,028 | ||||||||
* Total
other intangible assets not subject to amortization primarily consist of trade
names.
Amortization expense was $2,837, $2,805
and $673 for fiscal 2008, 2007 and 2006, respectively. Estimated
future amortization expense for the five succeeding fiscal years is as
follows:
|
Fiscal Year
|
Estimated
amortization
expense
|
|
|
2009
|
$1,663
|
|
|
2010
|
854
|
|
|
2011
|
847
|
|
|
2012
|
847
|
|
|
2013
|
847
|
|
Notes to Consolidated Financial Statements - Continued
8. OTHER
LONG-TERM ASSETS
Other long-term assets consisted of the
following:
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Long-term
investments
|
$ | 3,216 | $ | - | ||||
|
Other
long-term assets
|
827 | 617 | ||||||
|
Total
|
$ | 4,043 | $ | 617 | ||||
As discussed in Note 3 of this Form
10-K, one of the two ARS that we owned as of September 30, 2008 is classified as
an other long-term asset. Although the underlying security was
investment grade when purchased, its credit rating declined during our second
quarter of fiscal 2008. The security is credit enhanced with bond
insurance to a AAA rating and all interest payments have been received on a
timely basis. Although we believe this security will ultimately be
collected in full, we believe it is not likely that we will be able to monetize
the security in our next business cycle. We performed a fair value
assessment including a discounted cash flow analysis to calculate the fair value
of this security and determined that the security is temporarily
impaired. We have established a $234 pretax reduction ($151 net of
tax) in fair value on this security. We assessed this decline in fair
value to be temporary based on our current cash position, our 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.
9. ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current
liabilities consisted of the following:
|
September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Accrued
compensation
|
$ | 16,206 | $ | 13,965 | ||||
|
Goods
and services received, not yet
invoiced
|
2,060 | 2,365 | ||||||
|
Warranty
accrual
|
863 | 527 | ||||||
|
Taxes,
other than income taxes
|
998 | 911 | ||||||
|
Other
|
2,660 | 1,870 | ||||||
|
Total
|
$ | 22,787 | $ | 19,638 | ||||
10.
REVOLVING CREDIT
FACILITY
We have an unsecured revolving credit
facility of $50,000 with an option to increase the facility up to
$80,000. Under this agreement, which was set to terminate in November
2008, 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. In October 2008, we
amended this agreement to extend the termination date until November 2011, with
an option to renew for two additional one-year terms. The 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 and capital
expenditures. The credit agreement also contains various
covenants. No amounts are currently outstanding under this credit
facility and we believe we are currently in compliance with its
covenants.
Notes
to Consolidated Financial Statements -
Continued
11. SHARE-BASED
COMPENSATION PLANS
EQUITY
INCENTIVE PLAN
In March 2004, our stockholders
approved our Second Amended and Restated Cabot Microelectronics Corporation 2000
Equity Incentive Plan (the “Plan”), as amended and restated September 23, 2008,
which is administered by the Compensation Committee of the Board of Directors
and is intended to provide enough shares to give us ongoing flexibility to
attract, retain and reward our employees, directors, consultants and
advisors. The Plan allows for the granting of four types of equity
incentive awards: stock options, restricted stock, restricted stock units and
substitute awards. Substitute awards are those awards that, in
connection with an acquisition, may be granted to employees, directors,
consultants or advisors of the acquired company, in substitution for equity
incentives held by them in the seller or the acquired company. No
substitute awards have been granted to date. The Plan authorizes up
to 9,500,000 shares of stock to be granted thereunder, including up to 1,900,000
shares in the aggregate of restricted stock or restricted stock units and up to
1,750,000 incentive stock options (ISO). Shares issued under our
share-based compensation plans are issued from new shares rather than from
treasury shares.
Non-qualified stock options issued
under the Plan are generally time-based and provide for a ten-year term, with
options generally vesting equally over a four-year period, with first vesting on
the first anniversary of the award date. Compensation expense related
to our stock option awards was $12,381, $11,141 and $9,826 in fiscal 2008, 2007
and 2006, respectively. For additional information on our accounting
for share-based compensation, see Note 2 to the consolidated financial
statements. Under the Plan, employees and non-employees may also be
granted ISOs to purchase common stock at not less than the fair value on the
date of the grant, of which none have been granted to date.
Under the
Plan, employees and non-employees may be awarded shares of restricted stock or
restricted stock units, which generally vest over a four-year period, with first
vesting on the anniversary of the grant date. In general, shares of
restricted stock and restricted stock units may not be sold, assigned,
transferred, pledged, disposed of or otherwise encumbered. Holders of
restricted stock, and restricted stock units, if specified in the award
agreements, have all the rights of stockholders, including voting and dividend
rights, subject to the above restrictions, although the current holders of
restricted stock units do not have such rights. Restricted shares
under the Plan also may be purchased and placed “on deposit” by executive
officers pursuant to the 2001 Deposit Share Plan. Shares purchased
under this Deposit Share Plan receive a 50% match in restricted shares (“Award
Shares”). These Award Shares vest at the end of a three-year period,
and are subject to forfeiture upon early withdrawal of the deposit
shares. Compensation expense related to our restricted stock and
restricted stock unit awards and restricted shares matched at 50% pursuant to
the Deposit Share Plan was $2,022, $954 and $127 for fiscal 2008, 2007 and 2006,
respectively.
Our
historical approach to long-term incentives primarily had been the granting of
non-qualified stock options. Prior to fiscal 2007, under the Plan,
awards and grants made to employees as part of our annual equity incentive award
program and to non-employee directors for initial and annual grants as part of
our non-employee directors’ compensation program consisted solely of
non-qualified stock option grants. Since fiscal 2007, as permitted by
the Plan, the Compensation Committee of our Board of Directors has awarded a
blend of non-qualified stock option grants and restricted stock awards
(restricted stock units for our non-United States employees) to eligible
employees and non-employee directors according to an approximate three-to-one
ratio of non-qualified stock options granted to shares of restricted stock or
restricted stock units awarded. Our Compensation Committee made these
decisions primarily to address the financial impact of the expensing of
equity-based compensation now required pursuant to SFAS 123R, as well as to
provide a more competitive balance of equity incentives being awarded to our
employees and non-employee directors under the 2000 Equity Incentive
Plan.
EMPLOYEE
STOCK PURCHASE PLAN
In March 2008, our stockholders
approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the “ESPP
Plan”), which amended the ESPP Plan for the primary purpose of increasing the
authorized shares of common stock to be purchased under the ESPP Plan from
475,000 designated shares to 975,000 shares. The ESPP allows all full
and certain part-time employees of Cabot Microelectronics and its subsidiaries
to purchase shares of our common stock through payroll
deductions. Employees can elect to have up to 10% of their annual
earnings withheld to purchase our stock, subject to a maximum number of shares
that a participant may purchase and a maximum dollar expenditure in any
six-month offering period, and certain other criteria. The shares are
purchased at a price equal to the lower of 85% of the closing price at the
beginning or end of each semi-annual stock purchase period. A total
of 54,625, 54,180, and 49,319 shares were issued under the ESPP during fiscal
2008, 2007 and 2006, respectively. Compensation expense related to
the ESPP was $508, $446 and $344 in fiscal 2008, 2007 and 2006,
respectively.
Notes to Consolidated Financial
Statements -
Continued
DIRECTORS’
DEFERRED COMPENSATION PLAN
The Directors’ Deferred Compensation
Plan, as amended and restated September 23, 2008, became effective in March 2001
and applies only to our non-employee directors. The cumulative number
of shares deferred under the plan was 40,092 and 35,525 as of September 30, 2008
and 2007, respectively. Compensation expense related to our
Directors’ Deferred Compensation Plan was $156, $305 and $367 for fiscal
2008, 2007 and 2006, respectively.
ACCOUNTING
FOR SHARE-BASED COMPENSATION
We record share-based compensation
expense under the provisions of SFAS 123R using the straight-line
approach. We use the Black-Scholes model to estimate grant date fair
value, which requires the input of highly subjective assumptions, including the
price volatility of the underlying stock and the expected term of our stock
options. Under SFAS 123R, we estimate the expected volatility of our
stock options based on a combination of our stock’s historical volatility and
the implied volatilities from actively-traded options on our
stock. We believe that implied volatility is more reflective of
market conditions; however, due to the shorter length in term of the
actively-traded options on our stock, we believe it to be appropriate to use a
blended assumption for our stock options. We calculate the expected
term of our stock option 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 simplified method uses
an average of the vesting term and the contractual term of the option to
calculate the expected term. In addition, another highly subjective
assumption is the estimated forfeiture rate, which is necessary because our
share-based compensation expense is based only on the awards and grants that are
ultimately expected to vest. Our estimated forfeiture rate is
primarily based on historical experience, but may be revised in future periods
if actual forfeitures differ from the estimate. The risk-free rate is
derived from the U.S. Treasury yield curve in effect at the time of
grant.
The fair value of our share-based
awards was estimated using the Black-Scholes model with the following
weighted-average assumptions:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Stock Options
|
||||||||||||
|
Weighted–average
grant date fair value
|
$ | 17.74 | $ | 18.12 | $ | 17.85 | ||||||
|
Expected
term (in years)
|
6.51 | 6.56 | 6.25 | |||||||||
|
Expected
volatility
|
43 | % | 52 | % | 56 | % | ||||||
|
Risk-free
rate of return
|
3.5 | % | 4.4 | % | 4.5 | % | ||||||
|
Dividend
yield
|
- | - | - | |||||||||
|
ESPP
|
||||||||||||
|
Weighted-average
grant date fair value
|
$ | 8.74 | $ | 8.30 | $ | 7.23 | ||||||
|
Expected
term (in years)
|
0.50 | 0.50 | 0.50 | |||||||||
|
Expected
volatility
|
33 | % | 30 | % | 33 | % | ||||||
|
Risk-free
rate of return
|
3.4 | % | 5.1 | % | 4.9 | % | ||||||
|
Dividend
yield
|
- | - | - | |||||||||
The Black-Scholes model is primarily
used in estimating the fair value of short-lived exchange traded options that
have no vesting restrictions and are fully transferable. Because
employee stock options and employee stock purchases have certain characteristics
that are significantly different from traded options, and because changes in the
subjective assumptions can materially affect the estimated value, our use of the
Black-Scholes model for estimating the fair value of stock options and employee
stock purchases may not provide an accurate measure. Although the
value of our stock options and employee stock purchases are determined in
accordance with SFAS 123R and SAB 107 using an option-pricing model, those
values may not be indicative of the fair values observed in a willing
buyer/willing seller market transaction.
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 restricted stock and restricted stock unit awards is recorded net of expected
forfeitures.
Notes to Consolidated Financial
Statements -
Continued
SHARE-BASED
COMPENSATION EXPENSE
Total share-based compensation expense
for the year ended September 30, 2008, 2007 and 2006, is as
follows:
|
Year
Ended September 30,
|
||||||||||||
|
Income
statement classifications:
|
2008
|
2007
|
2006
|
|||||||||
|
Cost
of goods sold
|
$ | 1,119 | $ | 775 | $ | 648 | ||||||
|
Research,
development and technical
|
1,226 | 1,131 | 959 | |||||||||
|
Selling
and marketing
|
1,492 | 1,293 | 1,037 | |||||||||
|
General
and administrative
|
11,230 | 9,647 | 8,020 | |||||||||
|
Tax
benefit
|
(5,367 | ) | (4,588 | ) | (3,809 | ) | ||||||
|
Total
share-based compensation expense, net of tax
|
$ | 9,700 | $ | 8,258 | $ | 6,855 | ||||||
The costs presented in the preceding
table for share-based compensation expense may not be representative of the
total effects on reported income for future years. Factors that may
impact future years include, but are not limited to, changes to our historical
approaches to long-term incentives such as described above, the timing and
number of future grants of share-based awards, the vesting period and
contractual term of share-based awards and types of equity awards
granted. Further, share-based compensation may be impacted by changes
in the fair value of future awards through variables such as fluctuations in and
volatility of our stock price, as well as changes in employee exercise behavior
and forfeiture rates.
STOCK
OPTION ACTIVITY
A summary of stock option activity
under the Plan as of September 30, 2008, and changes during the fiscal 2008 are
presented below:
|
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
Aggregate
|
||||||||||||||
|
Average
|
Remaining
|
Intrinsic
|
||||||||||||||
|
Stock
|
Exercise
|
Contractual
|
Value
|
|||||||||||||
|
Options
|
Price
|
Term
(in years)
|
(in
thousands)
|
|||||||||||||
|
Outstanding
at September 30, 2007
|
4,334,381 | $ | 43.31 | |||||||||||||
|
Granted
|
380,410 | 36.71 | ||||||||||||||
|
Exercised
|
(99,159 | ) | 31.54 | |||||||||||||
|
Forfeited
or canceled
|
(523,237 | ) | 60.78 | |||||||||||||
|
Outstanding
at September 30, 2008
|
4,092,395 | $ | 40.74 | 6.2 | $ | 1,365 | ||||||||||
|
Exercisable
at September 30, 2008
|
2,737,095 | $ | 44.20 | 5.4 | $ | 541 | ||||||||||
|
Expected
to vest at September 30, 2008
|
1,190,760 | $ | 33.71 | 7.8 | $ | 739 | ||||||||||
The aggregate intrinsic value in the
table above represents the total pretax intrinsic value (i.e., for all
in-the-money stock options, the difference between our closing stock price of
$32.08 on the last trading day of fiscal 2008 and the exercise price, multiplied
by the number of shares) that would have been received by the option holders had
all option holders exercised their options on the last trading day of fiscal
2008. The total intrinsic value of options exercised was $871, $1,863
and $0 for fiscal 2008, 2007 and 2006, respectively.
Notes to Consolidated Financial
Statements -
Continued
The total cash received from options
exercised was $3,128, $6,124 and $0 for fiscal 2008, 2007 and 2006,
respectively. The actual tax benefit realized for the tax deductions from
options exercised was $310, $665 and $0 for fiscal 2008, 2007 and 2006,
respectively. The total fair value of stock options vested during
fiscal years 2008, 2007 and 2006 was $11,848, $10,204 and $6,594,
respectively. As of September 30, 2008, there was $13,213 of total
unrecognized share-based compensation expense related to unvested stock options
under the Plan. That cost is expected to be recognized over a
weighted-average period of 2.1 years.
RESTRICTED
STOCK
A summary of the status of the
restricted stock awards and restricted stock unit awards outstanding under the
Plan as of September 30, 2008, and changes during fiscal 2008, are presented
below:
|
Restricted
|
Weighted
|
|||||||
|
Stock
|
Average
|
|||||||
|
Awards
and
|
Grant
Date
|
|||||||
|
Units
|
Fair
Value
|
|||||||
|
Nonvested
at September 30, 2007
|
151,152 | $ | 32.21 | |||||
|
Granted
|
131,889 | 36.77 | ||||||
|
Vested
|
(43,789 | ) | 33.09 | |||||
|
Forfeited
|
(4,874 | ) | 32.95 | |||||
|
Nonvested
at September 30, 2008
|
234,378 | $ | 34.60 | |||||
As of September 30, 2008, there was
$5,294 of total unrecognized share-based compensation expense related to
nonvested restricted stock awards and restricted stock units under the
Plan. That cost is expected to be recognized over a weighted-average
period of 2.8 years. The total fair values of restricted stock awards and
restricted stock units vested during fiscal years 2008, 2007 and 2006 were
$1,449, $293 and $203, respectively.
12.
SAVINGS PLAN
Effective in May 2000, we adopted the
Cabot Microelectronics Corporation 401(k) Plan (the “401(k) Plan”), which is a
qualified defined contribution plan, covering all eligible U.S. employees
meeting certain minimum age and eligibility requirements, as defined by the
401(k) Plan. Participants may make elective contributions of up to
60% of their eligible compensation. All amounts contributed by
participants and earnings on these contributions are fully vested at all
times. The 401(k) Plan provides for matching and fixed non-elective
contributions by the Company. Under the 401(k) Plan, the Company will
match 100% of the first four percent of the participant’s eligible compensation
and 50% of the next two percent of the participant’s eligible compensation that
is contributed, subject to limitations required by government
regulations. Under the 401(k) Plan, all U.S. employees, even those
who do not contribute to the 401(k) Plan, receive a contribution by the Company
in an amount equal to four percent of eligible compensation, and thus are
participants in the 401(k) Plan. Participants are 100% vested in all
Company contributions at all times. The Company’s expense for the
401(k) Plan totaled $3,780, $3,643 and $3,170 for the fiscal years ended
September 30, 2008, 2007 and 2006, respectively.
Notes to Consolidated Financial Statements - Continued
13. OTHER
INCOME, NET
Other income, net, consisted of the
following:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income
|
$ | 5,559 | $ | 6,117 | $ | 5,394 | ||||||
|
Interest
expense
|
(395 | ) | (480 | ) | (690 | ) | ||||||
|
Other
income (expense)
|
284 | (2,031 | ) | (593 | ) | |||||||
|
Total
other income, net
|
$ | 5,448 | $ | 3,606 | $ | 4,111 | ||||||
The increase in other income in fiscal
2008 is primarily due to the absence of a $2,052 pretax write-off of our
minority equity investment in NanoProducts Corporation (NPC) recorded during the
third quarter of fiscal 2007. NPC had entered into third-party
funding arrangements that we believed significantly reduced the likelihood that
we would recover the value of our investment. Accordingly, we
recorded an impairment which reduced the carrying value of our investment to
zero.
14. STOCKHOLDERS’
EQUITY
The following is a summary of our
capital stock activity over the past three years:
|
Number of Shares
|
||
|
Common
Stock
|
Treasury
Stock
|
|
|
September
30, 2005
|
25,198,809
|
774,020
|
|
Restricted
stock under Deposit Share Plan, net of forfeitures
|
6,591
|
|
|
Common
stock under ESPP
|
49,319
|
|
|
Repurchases
of common stock
|
523,147
|
|
|
September
30, 2006
|
25,254,719
|
1,297,167
|
|
Exercise
of stock options
|
189,457
|
|
|
Restricted
stock under Equity Incentive Plan, net of forfeitures
|
129,371
|
|
|
Restricted
stock under Deposit Share Plan
|
8,003
|
|
|
Common
stock under ESPP
|
54,180
|
|
|
Repurchases
of common stock
|
330,170
|
|
|
September
30, 2007
|
25,635,730
|
1,627,337
|
|
Exercise
of stock options
|
99,159
|
|
|
Restricted
stock under Equity Incentive Plan, net of forfeitures
|
110,767
|
|
|
Restricted
stock under Deposit Share Plan
|
6,709
|
|
|
Common
stock under ESPP
|
54,625
|
|
|
Repurchases
of common stock
|
1,056,472
|
|
|
September
30, 2008
|
25,906,990
|
2,683,809
|
COMMON
STOCK
Each share of common stock entitles the
holder to one vote on all matters submitted to a vote of Cabot Microelectronics’
stockholders. Common stockholders are entitled to receive ratably the
dividends, if any, as may be declared by the Board of Directors. The
number of authorized shares of common stock is 200,000,000 shares.
Notes to Consolidated Financial
Statements -
Continued
STOCKHOLDER
RIGHTS PLAN
In March 2000 the Board of Directors of
Cabot Microelectronics approved a stock rights agreement and declared a dividend
distribution of one right to purchase one one-thousandth of a share of Series A
Junior Participating Preferred Stock for each outstanding share of common stock
to stockholders of record on April 7, 2000. The rights become
exercisable based upon certain limited conditions related to acquisitions of
stock, tender offers and certain business combination transactions.
SHARE
REPURCHASES
In October 2005 we announced that our
Board of Directors had authorized a share repurchase program for up to $40,000
of our outstanding common stock. We completed this share repurchase
authorization during the quarter ended December 31, 2007. In January
2008, we announced that our Board of Directors had authorized a new share
repurchase program for up to $75,000 of our outstanding common
stock. Shares are repurchased from time to time, depending on market
conditions, in open market transactions, at management’s
discretion. We fund share repurchases from our existing cash
balance. The program, which became effective on the authorization
date, may be suspended or terminated at any time, at the Company’s
discretion. During fiscal 2008, we repurchased a total of
1,056,472 shares of common stock under these programs at a cost of
$39,001. During fiscal 2007, we repurchased 330,170 shares of common
stock at a cost of $9,995. During fiscal 2006, we repurchased 523,147
shares of common stock at a cost of $15,996. For additional
information on share repurchases, see “Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities”.
15. INCOME
TAXES
Income before income taxes was as
follows:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Domestic
|
$ | 44,912 | $ | 36,681 | $ | 39,759 | ||||||
|
Foreign
|
9,978 | 12,693 | 8,765 | |||||||||
|
Total
|
$ | 54,890 | $ | 49,374 | $ | 48,524 | ||||||
Taxes on
income consisted of the following:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
U.S.
federal and state:
|
||||||||||||
|
Current
|
$ | 20,814 | $ | 17,821 | $ | 16,645 | ||||||
|
Deferred
|
(6,874 | ) | (6,176 | ) | (5,714 | ) | ||||||
|
Total
|
$ | 13,940 | $ | 11,645 | $ | 10,931 | ||||||
|
Foreign:
|
||||||||||||
|
Current
|
$ | 2,491 | $ | 4,250 | $ | 4,388 | ||||||
|
Deferred
|
121 | (357 | ) | 257 | ||||||||
|
Total
|
2,612 | 3,893 | 4,645 | |||||||||
|
Total
U.S. and foreign
|
$ | 16,552 | $ | 15,538 | $ | 15,576 | ||||||
Notes to Consolidated Financial
Statements -
Continued
The provision for income taxes at our
effective tax rate differed from the provision for income taxes at the statutory
rate as follows:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
U.S.
benefits from research and
experimentation
activities
|
(2.2 | ) | (0.9 | ) | (0.2 | ) | ||||||
|
State
taxes, net of federal effect
|
0.7 | 0.6 | 0.7 | |||||||||
|
Tax-exempt
interest income
|
(3.2 | ) | (4.1 | ) | (3.7 | ) | ||||||
|
Share-based
compensation
|
0.5 | 1.1 | - | |||||||||
|
Domestic
production deduction
|
(0.5 | ) | (0.2 | ) | (0.4 | ) | ||||||
|
Other,
net
|
(0.1 | ) | - | 0.7 | ||||||||
|
Provision
for income taxes
|
30.2 | % | 31.5 | % | 32.1 | % | ||||||
The decrease in our effective tax rate
in fiscal 2008 was primarily due to higher research and experimentation credits
and a reduction in taxable share-based compensation expense compared to fiscal
2007. These decreases were partially offset by a reduction in our tax
exempt interest income. During fiscal 2008, the U.S. Congress passed
a bill that extended the credit for research and experimentation through
calendar 2009.
On October 1, 2007, we adopted the
provisions of Financial Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), which
prescribes a threshold for the financial statement recognition and measurement
of tax positions taken or expected to be taken on a tax return. Under
FIN 48, we may recognize the tax benefit of an uncertain tax position only if it
is more likely than not that the tax position will be sustained by the taxing
authorities, based on the technical merits of the position. Upon
adoption, we recognized a $59 reduction to our beginning retained earnings
balance and we reclassified $450 from current income taxes payable to a
non-current tax liability for unrecognized tax benefits, including interest and
penalties. We made this reclassification to a non-current liability
because settlement is not expected to occur within one year of the balance sheet
date.
The total amount of gross unrecognized
tax benefits as of October 1, 2007, the date of adoption of FIN 48, was
$464. We recognize interest and penalties related to uncertain tax
positions as income tax expense in our financial statements. The
gross amount of interest and penalties accrued at the date of adoption was
$45. During the fiscal quarter ended June 30, 2008, we reduced our
FIN 48 liability for unrecognized tax benefits by $219 as the federal statute of
limitations relating to our fiscal 2004 tax return had expired, which had a
favorable impact on our effective tax rate. There have been no
material changes to the interest and penalties accrued during the fiscal year
ended September 30, 2008.
We believe the tax periods open to
examination by the U.S. federal government include fiscal years 2005 through
2007. We believe the tax periods open to examination by U.S. state
and local governments include fiscal years 2003 through 2007 and the tax periods
open to examination by foreign jurisdictions include fiscal years 2001 through
2007. We do not anticipate a significant change to the total amount
of unrecognized tax benefits within the next 12 months.
Notes to Consolidated Financial
Statements -
Continued
Significant components of deferred
income taxes were as follows:
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Employee
benefits
|
$ | 2,171 | $ | 1,799 | ||||
|
Inventory
|
2,420 | 1,298 | ||||||
|
Depreciation
and amortization
|
(31 | ) | 162 | |||||
|
Product
warranty
|
353 | 232 | ||||||
|
Bad
debt reserve
|
144 | 226 | ||||||
|
Share-based
compensation expense
|
11,931 | 7,080 | ||||||
|
Other,
net
|
449 | 449 | ||||||
|
Total
deferred tax assets
|
$ | 17,437 | $ | 11,246 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
and amortization
|
$ | (1,613 | ) | $ | 552 | |||
|
Translation
adjustment
|
1,483 | (209 | ) | |||||
|
Other,
net
|
2,024 | 1,356 | ||||||
|
Total
deferred tax liabilities
|
$ | 1,894 | $ | 1,699 | ||||
16. COMMITMENTS
AND CONTINGENCIES
LEGAL
PROCEEDINGS
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 recently issued 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. Although
no trial date has been set, we currently expect trial in this matter to occur
sometime in the summer of 2009. 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.
Notes to Consolidated Financial
Statements -
Continued
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 fiscal 2008 as follows:
|
Balance
as of September 30, 2007
|
$ | 527 | ||
|
Reserve
for product warranty during the r
eporting
period
|
962 | |||
|
Adjustments
to pre-existing warranty reserve
|
- | |||
|
Settlement
of warranty
|
(626 | ) | ||
|
Balance
as of September 30, 2008
|
$ | 863 |
INDEMNIFICATION
In the normal course of business, we
are a party to a variety of agreements pursuant to which we may be obligated to
indemnify the other party with respect to certain matters. Generally,
these obligations arise in the context of agreements entered into by us, under
which we customarily agree to hold the other party harmless against losses
arising from items such as a breach of certain representations and covenants
including title to assets sold, certain intellectual property rights and certain
environmental matters. These terms are common in the industries in
which we conduct business. In each of these circumstances, payment by
us is subject to certain monetary and other limitations and is conditioned on
the other party making an adverse claim pursuant to the procedures specified in
the particular agreement, which typically allow us to challenge the other
party’s claims.
We evaluate estimated losses for such
indemnifications under SFAS No. 5, “Accounting for Contingencies” as interpreted
by FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others”. We consider such factors as the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. To date, we have not experienced material costs as a result
of such obligations and as of September 30, 2008, have not recorded any
liabilities related to such indemnifications in our financial statements as we
do not believe the likelihood of a material obligation is probable.
LEASE
COMMITMENTS
We lease certain vehicles, warehouse
facilities, office space, machinery and equipment under cancelable and
noncancelable leases, all of which expire within four years from now and may be
renewed by us. Rent expense under such arrangements during fiscal
2008, 2007 and 2006 totaled $1,726, $1,612 and $1,221,
respectively.
In December 2001 we entered into a
fumed alumina supply agreement with Cabot Corporation under which we agreed to
pay Cabot Corporation for the expansion of a fumed alumina manufacturing
facility in Tuscola, Illinois. The payments for the facility have
been treated as a capital lease for accounting purposes and the present value of
the minimum quarterly payments resulted in an initial $9,776 lease obligation
and related leased asset. The initial term of the agreement expired
in December 2006, but it was renewed for another five-year term ending in
December 2011.
Notes to Consolidated Financial
Statements -
Continued
Future minimum rental commitments under
noncancelable leases as of September 30, 2008 are as follows:
|
Fiscal
Year
|
Operating
|
Capital
|
||||||
|
2009
|
$ | 1,288 | $ | 1,354 | ||||
|
2010
|
737 | 1,354 | ||||||
|
2011
|
404 | 1,354 | ||||||
|
2012
|
18 | 10 | ||||||
|
2013
|
- | 3 | ||||||
|
Thereafter
|
- | - | ||||||
| $ | 2,447 | 4,075 | ||||||
|
Amount
related to interest
|
(428 | ) | ||||||
|
Capital
lease obligation
|
$ | 3,647 | ||||||
PURCHASE
OBLIGATIONS
Purchase obligations include our
take-or-pay arrangements with suppliers, and purchase orders and other
obligations entered into in the normal course of business regarding the purchase
of goods and services.
We purchase fumed silica primarily
under a fumed silica supply agreement with Cabot Corporation that became
effective in January 2004, and was amended in September 2006 and in April 2008,
the latter of which
extended the termination date of the agreement from December 2009 to December
2012 and also changed the pricing and some other non-material terms of the
agreement to the benefit of both parties.
The agreement will
automatically renew unless either party gives notice of
non-renewal. We are generally obligated to purchase fumed silica for
at least 90% of our six-month volume forecast for certain of our slurry
products, to purchase certain non-material minimum quantities every six months,
and to pay for the shortfall if we purchase less than these
amounts. We currently anticipate meeting minimum forecasted purchase
volume requirements. We also operate under a fumed alumina supply
agreement with Cabot Corporation which runs through December
2011. Purchase obligations include $14,884 of contractual commitments
for fumed silica and fumed alumina under these contracts.
Notes
to Consolidated Financial Statements -
Continued
17. EARNINGS
PER SHARE
SFAS No. 128, “Earnings per Share”,
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computations. Basic and
diluted earnings per share were calculated as follows:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Numerator:
|
||||||||||||
|
Earnings
available to common shares
|
$ | 38,338 | $ | 33,836 | $ | 32,948 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average common shares
|
23,315,072 | 23,748,158 | 24,228,118 | |||||||||
|
(Denominator
for basic calculation)
|
||||||||||||
|
Weighted
average effect of dilutive securities:
|
||||||||||||
|
Share-based
compensation
|
33,195 | 6,044 | 268 | |||||||||
|
Diluted
weighted average common shares
|
23,348,267 | 23,754,202 | 24,228,386 | |||||||||
|
(Denominator
for diluted calculation)
|
||||||||||||
|
Earnings
per share:
|
||||||||||||
|
Basic
|
$ | 1.64 | $ | 1.42 | $ | 1.36 | ||||||
|
Diluted
|
$ | 1.64 | $ | 1.42 | $ | 1.36 | ||||||
For the twelve months ended September
30, 2008, 2007, and 2006, approximately 2.7 million, 3.0 million and 3.4 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.
Notes
to Consolidated Financial Statements -
Continued
18. FINANCIAL
INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
We operate predominantly in one
industry segment – the development, manufacture, and sale of CMP
consumables.
Revenues are attributed to the United
States and foreign regions based upon the customer location and not the
geographic location from which our products were shipped. Financial
information by geographic area was as follows:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue:
|
||||||||||||
|
United
States
|
$ | 71,395 | $ | 70,110 | $ | 65,951 | ||||||
|
Asia
|
276,387 | 239,254 | 226,520 | |||||||||
|
Europe
|
27,287 | 28,841 | 28,324 | |||||||||
|
Total
|
$ | 375,069 | $ | 338,205 | $ | 320,795 | ||||||
|
Property,
plant and equipment, net:
|
||||||||||||
|
United
States
|
$ | 70,972 | $ | 75,618 | $ | 82,855 | ||||||
|
Asia
|
44,864 | 41,786 | 45,609 | |||||||||
|
Europe
|
7 | 1,050 | 1,712 | |||||||||
|
Total
|
$ | 115,843 | $ | 118,454 | $ | 130,176 | ||||||
The following table shows revenue from
customers in foreign countries that accounted for more than ten percent of our
total revenue in fiscal 2008, 2007 and 2006:
|
Year
Ended September 30,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue:
|
||||||||||||
|
Taiwan
|
$ | 109,282 | $ | 97,583 | $ | 87,834 | ||||||
|
Japan
|
47,642 | 44,535 | 43,627 | |||||||||
|
Korea
|
43,653 | * | * | |||||||||
|
* Denotes
less than ten percent of total revenue
|
||||||||||||
More than ten percent of our net
property, plant and equipment is located in Japan, having a net book value of
$42,732, $37,850 and $40,298 at September 30, 2008, 2007 and 2006,
respectively.
SELECTED
QUARTERLY OPERATING RESULTS
The following table presents our
unaudited financial information for the eight quarterly periods ended September
30, 2008. This unaudited financial information has been prepared in
accordance with accounting principles generally accepted in the United States of
America, applied on a basis consistent with the annual audited financial
statements and in the opinion of management, include all necessary adjustments,
which consist only of normal recurring adjustments necessary to present fairly
the financial results for the periods. The results for any quarter
are not necessarily indicative of results for any future period.
|
CABOT
MICROELECTRONICS CORPORATION
|
||||||||||||||||||||||||||||||||
|
SELECTED
QUARTERLY OPERATING RESULTS
|
||||||||||||||||||||||||||||||||
|
(Unaudited
and in thousands, except per share amounts)
|
||||||||||||||||||||||||||||||||
|
Sept.
30,
|
June
30,
|
March
31,
|
Dec.
31,
|
Sept.
30,
|
June
30,
|
March
31,
|
Dec.
31,
|
|||||||||||||||||||||||||
|
2008
|
2008
|
2008
|
2007
|
2007
|
2007
|
2007
|
2006
|
|||||||||||||||||||||||||
|
Revenue
|
$ | 90,156 | $ | 97,047 | $ | 94,488 | $ | 93,378 | $ | 90,379 | $ | 89,023 | $ | 76,987 | $ | 81,816 | ||||||||||||||||
|
Cost
of goods sold
|
48,141 | 51,638 | 52,212 | 48,605 | 45,983 | 46,552 | 43,188 | 42,501 | ||||||||||||||||||||||||
|
Gross
profit
|
42,015 | 45,409 | 42,276 | 44,773 | 44,396 | 42,471 | 33,799 | 39,315 | ||||||||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||||||||||
|
Research,
development and technical
|
12,572 | 12,730 | 12,432 | 11,421 | 12,209 | 12,033 | 13,481 | 12,247 | ||||||||||||||||||||||||
|
Selling
and marketing
|
7,914 | 7,176 | 6,907 | 6,284 | 6,518 | 6,469 | 5,847 | 5,476 | ||||||||||||||||||||||||
|
General
and administrative
|
11,258 | 12,642 | 12,856 | 10,839 | 11,584 | 9,387 | 9,537 | 9,425 | ||||||||||||||||||||||||
|
Total
operating expenses
|
31,744 | 32,548 | 32,195 | 28,544 | 30,311 | 27,889 | 28,865 | 27,148 | ||||||||||||||||||||||||
|
Operating
income
|
10,271 | 12,861 | 10,081 | 16,229 | 14,085 | 14,582 | 4,934 | 12,167 | ||||||||||||||||||||||||
|
Other
income (expense), net
|
885 | 1,239 | 1,689 | 1,635 | 1,320 | (148 | ) | 1,260 | 1,174 | |||||||||||||||||||||||
|
Income
before income taxes
|
11,156 | 14,100 | 11,770 | 17,864 | 15,405 | 14,434 | 6,194 | 13,341 | ||||||||||||||||||||||||
|
Provision
for income taxes
|
2,939 | 4,120 | 3,828 | 5,665 | 5,246 | 4,373 | 1,703 | 4,216 | ||||||||||||||||||||||||
|
Net
income
|
$ | 8,217 | $ | 9,980 | $ | 7,942 | $ | 12,199 | $ | 10,159 | $ | 10,061 | $ | 4,491 | $ | 9,125 | ||||||||||||||||
|
Basic
earnings per share
|
$ | 0.36 | $ | 0.43 | $ | 0.34 | $ | 0.51 | $ | 0.43 | $ | 0.43 | $ | 0.19 | $ | 0.38 | ||||||||||||||||
|
Weighted
average basic shares outstanding
|
23,023 | 23,132 | 23,402 | 23,716 | 23,783 | 23,662 | 23,708 | 23,839 | ||||||||||||||||||||||||
|
Diluted
earnings per share
|
$ | 0.36 | $ | 0.43 | $ | 0.34 | $ | 0.51 | $ | 0.43 | $ | 0.42 | $ | 0.19 | $ | 0.38 | ||||||||||||||||
|
Weighted
average diluted shares outstanding
|
23,085 | 23,163 | 23,416 | 23,768 | 23,847 | 23,687 | 23,718 | 23,841 | ||||||||||||||||||||||||
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth
activities in our allowance for doubtful accounts:
|
Allowance
For Doubtful Accounts
|
Balance
At Beginning of Year
|
Additions
Charged To Expenses
|
Deductions
|
Balance
At End Of Year
|
||||||||||||
|
Year
ended:
|
||||||||||||||||
|
September
30, 2008
|
$ | 635 | $ | (99 | ) | $ | (133 | ) | $ | 403 | ||||||
|
September
30, 2007
|
551 | 87 | (3 | ) | 635 | |||||||||||
|
September
30, 2006
|
470 | 92 | (11 | ) | 551 | |||||||||||
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. Charges to expenses and deductions,
shown below, represent the net change required to maintain an appropriate
reserve.
|
Warranty
Reserves
|
Balance
At Beginning of Year
|
Reserve
For Product Warranty During the Reporting Period
|
Adjustments
To Pre-existing Warranty Reserve
|
Settlement
of Warranty
|
Balance
At End Of Year
|
|||||||||||||||
|
Year
ended:
|
||||||||||||||||||||
|
September
30, 2008
|
$ | 527 | $ | 962 | $ | - | $ | (626 | ) | $ | 863 | |||||||||
|
September
30, 2007
|
924 | 106 | (314 | ) | (189 | ) | 527 | |||||||||||||
|
September
30, 2006
|
1,426 | 989 | - | (1,491 | ) | 924 | ||||||||||||||
MANAGEMENT
RESPONSIBILITY
The accompanying consolidated financial
statements were prepared by the Company in conformity with accounting principles
generally accepted in the United States of America. The Company’s
management is responsible for the integrity of these statements and of the
underlying data, estimates and judgments.
The Company’s management establishes
and maintains a system of internal accounting controls designed to provide
reasonable assurance that its assets are safeguarded from loss or unauthorized
use, transactions are properly authorized and recorded, and that financial
records can be relied upon for the preparation of the consolidated financial
statements. This system includes written policies and procedures, a
code of business conduct and an organizational structure that provides for
appropriate division of responsibility and the training of
personnel. This system is monitored and evaluated on an ongoing basis
by management in conjunction with its internal audit function.
The Company’s management assesses the
effectiveness of its internal control over financial reporting on an annual
basis. In making this assessment, management uses the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control – Integrated
Framework
. Management acknowledges, however, that all internal
control systems, no matter how well designed, have inherent limitations and can
provide only reasonable assurance with respect to financial statement
preparation and presentation. In addition, the Company’s independent
registered public accounting firm evaluates the Company’s internal control over
financial reporting and performs such tests and other procedures as it deems
necessary to reach and express an opinion on the fairness of the financial
statements.
In addition, the Audit Committee of the
Board of Directors provides general oversight responsibility for the financial
statements. Composed entirely of Directors who are independent and
not employees of the Company, the Committee meets periodically with the
Company’s management, internal auditors and the independent registered public
accounting firm to review the quality of financial reporting and internal
controls, as well as results of auditing efforts. The internal
auditors and independent registered public accounting firm have full and direct
access to the Audit Committee, with and without management present.
/s/ William P.
Noglows
William
P. Noglows
Chief
Executive Officer
/s/ William S.
Johnson
William
S. Johnson
Chief
Financial Officer
/s/ Thomas S.
Roman
Thomas S.
Roman
Principal
Accounting Officer
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation
of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (“the Exchange Act”)), as of September 30,
2008. Based on that evaluation, our CEO and CFO have concluded that
our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified by the SEC, and that material information relating to the Company is
made known to senior management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.
While we believe the present design of
our disclosure controls and procedures is effective enough to make known to our
senior management in a timely fashion all material information concerning our
business, we intend to continue to improve the design and effectiveness of our
disclosure controls and procedures to the extent necessary in the future to
provide our senior management with timely access to such material information,
and to correct any deficiencies that we may discover in the future, as
appropriate.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. Internal control over financial reporting is defined
in Rule 13a-15(f) or Rule 15d-15(f) promulgated under the Securities Exchange
Act of 1934 as a process designed by, or under the supervision of, the Company’s
CEO and CFO to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America. Internal control over financial reporting
includes policies and procedures that: pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect our transactions and
dispositions of the Company’s assets; provide reasonable assurance that
transactions are recorded as necessary for preparation of our financial
statements in accordance with generally accepted accounting principles; provide
reasonable assurance that receipts and expenditures of Company assets are made
in accordance with management authorization; and provide reasonable assurance
that unauthorized acquisition, use or disposition of Company assets that could
have a material effect on our financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our management evaluated the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, our management concluded that the Company’s internal control over
financial reporting was effective as of September 30, 2008. The
effectiveness of the Company’s internal control over financial reporting as of
September 30, 2008 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their attestation
report which appears under Item 8 of this Annual Report on Form
10-K.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal
control over financial reporting that occurred during our most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
INHERENT
LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because of inherent limitations, our
disclosure controls or our internal control over financial reporting may not
prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the controls. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
ITEM 9B. OTHER
INFORMATION
None.
PART
III
ITEM 10. DIRECTORS
, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information required by Item 10 of
Form 10-K with respect to identification of directors, the existence of a
separately-designated standing audit committee, identification of members of
such committee and identification of an audit committee financial expert is
incorporated by reference from the information contained in the sections
captioned "Election of Directors" and “Board Structure and Compensation” in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held
March 3, 2009 (the "Proxy Statement”). In addition, for information
with respect to the executive officers of our Company, see "Executive Officers"
at the end of Part I of this Form 10-K and the section captioned “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy
Statement. Information required by Item 405 of Regulation S-K is
incorporated by reference from the information contained in the section
captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement.
We have adopted a code of business
conduct for all of our employees and directors, including our principal
executive officer, other executive officers, principal financial officer and
senior financial personnel. A copy of our code of business conduct is
available free of charge on our Company website at
www.cabotcmp.com. We intend to post on our website any material
changes to, or waivers from our code of business conduct, if any, within two
days of any such event.
ITEM 11. EXECUTIVE
COMPENSATION
The information required by Item 11 of
Form 10-K is incorporated by reference from the information contained in the
section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY
COMPENSATION PLAN INFORMATION
Shown
below is information as of September 30, 2008, with respect to the shares of
common stock that may be issued under Cabot Microelectronics’ existing equity
compensation plans.
|
(a)
|
(b)
|
(c)
|
||||
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||
|
Equity
compensation plans approved by security holders
|
4,156,596
(1)
|
$40.74
(1)
|
4,043,117
(2)
|
|||
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||
|
Total
|
4,156,596
(1)
|
$40.74
(1)
|
4,043,117
(2)
|
|
(1)
|
Column
(a) includes 40,092 shares that non-employee directors, who defer their
compensation under our Directors’ Deferred Compensation Plan, have the
right to acquire pursuant thereto, and 24,109 shares that non-U.S.
employees have the right to acquire upon the vesting of the equivalent
restricted stock units that they have been awarded under our equity
incentive plan. Column (b) excludes both of these from the
weighted average exercise price.
|
|
(2)
|
Column
(c) includes 603,087 shares available for future issuance under our
Employee Stock Purchase Plan.
|
The other information required by Item
12 of Form 10-K is incorporated by reference from the information contained in
the section captioned "Stock Ownership" in the Proxy Statement.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
The information required by Item 13 of
Form 10-K is incorporated by reference from the information contained in the
section captioned "Certain Relationships and Related Transactions" in the Proxy
Statement.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
The information required by Item 14 of
Form 10-K is incorporated by reference from the information contained in the
section captioned “Fees of Independent Auditors and Audit Committee Report” in
the Proxy Statement.
PART
IV
ITEM 15. EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
(a) The
following Financial Statements and Financial Statement Schedule are included in
Item 8 herein:
|
1.
|
Financial
Statements:
|
Report
of Independent Registered Public Accounting Firm
Consolidated Statements of Income
for the years ended September 30, 2008, 2007 and 2006
Consolidated Balance Sheets at
September 30, 2008 and 2007
Consolidated Statements of Cash
Flows for the years ended September 30, 2008, 2007 and 2006
Consolidated Statements of Changes in
Stockholders’ Equity for the years ended September 30, 2008, 2007 and
2006
Notes to the Consolidated Financial
Statements
|
2.
|
Financial
Statement Schedule: Schedule II – Valuation and Qualifying
Accounts
|
|
3.
|
Exhibits - The
following exhibits are filed as part of, or incorporated by reference
into, this Report on Form 10-K:
|
Exhibit
Number
Description
|
|
3.2
(16)
|
Amended
and Restated By-Laws of Cabot Microelectronics
Corporation.
|
|
|
3.3
(1)
|
Form
of Amended and Restated Certificate of Incorporation of Cabot
Microelectronics Corporation.
|
|
|
3.4
(2)
|
Form
of Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock.
|
|
|
4.1
(2)
|
Form
of Cabot Microelectronics Corporation Common Stock
Certificate.
|
|
|
4.2
(3)
|
Rights
Agreement.
|
|
|
4.3
(4)
|
Amendment
to Rights Agreement.
|
|
|
10.1
|
Second
Amended and Restated Cabot Microelectronics Corporation 2000 Equity
Incentive Plan, as amended and restated September 23,
2008.*
|
|
|
10.2
|
Form
of Second Amended and Restated Cabot Microelectronics Corporation 2000
Equity Incentive Plan Non-Qualified Stock Option Grant Agreement
(directors).*
|
|
|
10.4
|
Form
of Second Amended and Restated Cabot Microelectronics Corporation 2000
Equity Incentive Plan Non-Qualified Stock Option Grant Agreement (U.S.
employees (including executive
officers)).*
|
|
|
10.5
|
Form
of Second Amended and Restated Cabot Microelectronics Corporation 2000
Equity Incentive Plan Restricted Stock Award Agreement (employees
(including executive officers)).*
|
|
|
10.6
|
Form
of Second Amended and Restated Cabot Microelectronics Corporation 2000
Equity Incentive Plan Restricted Stock Award Agreement for
Directors.*
|
|
|
10.15
(14)
|
Cabot
Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended
and Restated January 18, 2008.*
|
10.22 Cabot
Microelectronics Corporation 401(k) Plan, as amended.*
10.23 Form
of Amended and Restated Change in Control Severance Protection
Agreement.**
10.28 Directors’
Deferred Compensation Plan, as amended September 23, 2008.*
|
|
10.29
(6)
|
Amended
and Restated Credit Agreement dated November 24, 2003 among Cabot
Microelectronics Corporation, Various Financial Institutions and LaSalle
Bank National Association, as Administrative Agent, and National City Bank
of Michigan/Illinois, as Syndication
Agent.
|
|
|
10.30
(5)
|
Form
of Deposit Share Agreement.***
|
|
|
10.31
(5)
|
Amendment
No. 1 to Fumed Metal Oxide Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.+
|
|
|
10.32
(5)
|
Fumed
Alumina Supply Agreement.+
|
|
|
10.33
|
Adoption
Agreement, as amended September 23, 2008, of Cabot Microelectronics
Corporation Supplemental Employee Retirement
Plan.*
|
|
|
10.34
(10)
|
Code
of Business Conduct.
|
|
|
10.36
(6)
|
Directors’
Cash Compensation Umbrella
Program.*
|
|
|
10.37
(7)
|
Employment
and Transition Agreement dated November 3,
2003.*
|
|
|
10.38
(7)
|
Employment
Offer Letter dated November 2,
2003.*
|
|
|
10.39
(7)
|
Employment
Offer Letter dated November 17,
2003.*
|
|
|
10.40
(8)
|
Amendment
No. 2 to Fumed Metal Oxide Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.
|
|
|
10.41
(8)
|
Amendment
No. 3 to Fumed Metal Oxide Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.
|
|
|
10.42
(8)
|
Fumed
Silica Supply Agreement.+
|
|
|
10.43
(8)
|
General
Release, Waiver and Covenant Not to
Sue.*
|
|
|
10.44
(9)
|
Amendment
as of January 17, 2005 to Four Grant Agreements for Non-Qualified Stock
Option Awards with Grant Dates of March 13, 2001, March 12, 2002, March
11, 2003 and March 9, 2004,
respectively.*
|
|
|
10.45
(9)
|
Amendment
as of January 29, 2005 to Three Grant Agreements for Non-Qualified Stock
Option Awards with Grant Dates of March 13, 2001, March 12, 2002 and March
11, 2003, respectively.*
|
|
|
10.46
(13)
|
Non-Employee
Directors’ Compensation Summary as of March,
2007.*
|
|
|
10.47
(11)
|
Asset
Purchase Agreement by and among Cabot Microelectronic Corporation, QED
Technologies International, Inc., QED Technologies, Inc., Don Golini and
Lowell Mintz dated June 15, 2006.
|
|
|
10.48
(11)
|
Technology
Asset Purchase Agreement dated June 15, 2006 by and among Cabot
Microelectronics Corporation, QED Technologies International, Inc., and
Byelocorp Scientific, Inc.
|
|
|
10.49
(12)
|
Amendment
No. 1 to Fumed Silica Supply Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.+
|
|
|
10.50
(15)
|
Amendment
No. 2 to Fumed Silica Supply Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.+
|
|
|
10.51
|
First
Amendment to the Employment Offer Letter dated November 2,
2003.*
|
|
|
10.52
|
First
Amendment to the Employment Offer Letter dated November 23,
2003.*
|
|
|
10.53
|
Cabot
Microelectronics Corporation Supplemental Employee Retirement Plan, as
amended.*
|
|
|
10.54
|
Cabot
Microelectronics Corporation Annual Incentive and Sales Incentive
Programs.*
|
|
|
21.1
|
Subsidiaries
of Cabot Microelectronics
Corporation.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting
Firm.
|
|
|
24.1
|
Power
of Attorney.
|
|
|
31.1
|
Certification
of Chief Executive Officer as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
(1) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Registration Statement on Form S-1 (No. 333-95093) filed with the
Commission on March 27, 2000.
|
|
|
(2) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Registration Statement on Form S-1 (No. 333-95093) filed with the
Commission on April 3, 2000.
|
|
|
(3) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Registration Statement on Form S-1 (No. 333-95093) filed with the
Commission on April 4, 2000.
|
|
|
(4) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Current Report on Form 8-K (No. 000-30205) filed with the Commission on
October 6, 2000.
|
|
|
(5) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on
February 12, 2002.
|
|
|
(6) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Annual Report on Form 10-K (No. 000-30205) filed with the Commission on
December 10, 2003.
|
|
|
(7) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on
February 12, 2004.
|
|
|
(8) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on
May 7, 2004.
|
|
|
(9) Filed
as an exhibit to, and incorporated by reference from the Registrant’s
Quarterly Report on Form 10-Q (No. 000-30205) filed with the Commission on
May 9, 2005.
|
|
|
(10)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Annual Report on Form 10-K (No. 000-30205) filed with the
Commission on December 7, 2005.
|
|
|
(11)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on August 9, 2006.
|
|
|
(12)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Annual Report on Form 10-K (No. 000-30205) filed with the
Commission on November 29, 2006.
|
|
|
(13)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Current Report on Form 8-K (No. 000-30205) filed with the
Commission on March 8, 2007.
|
|
|
(14)
Filed as Appendix A, and incorporated by reference from the Registrant’s
Definitive Proxy Statement (No. 000-30205) filed with the Commission on
January 18, 2008.
|
|
|
(15)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on August 8, 2008.
|
|
|
(16)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Current Report on Form 8-K (No. 000-30205) filed with the
Commission on September 24, 2008.
|
* Management
contract, or compensatory plan or arrangement.
** Substantially
similar change in control severance protection agreements have been entered into
with William P. Noglows, H. Carol Bernstein, William S. Johnson, Daniel J. Pike,
Thomas S. Roman, Stephen R. Smith, Clifford L. Spiro, Adam F. Weisman, Daniel S.
Wobby, Yumiko Damashek and David H. Li, with differences only in the amount of
payments and benefits to be received by such persons.
*** Substantially
similar deposit share agreements have been entered into with William P. Noglows,
H. Carol Bernstein, William S. Johnson, Daniel J. Pike, Thomas S. Roman, Stephen
R. Smith, Clifford L. Spiro, Adam F. Weisman and Daniel S. Wobby with
differences only in the amount of initial deposit made and deposit shares
purchased by such persons.
+ This
Exhibit has been filed separately with the Commission pursuant to the grant of a
confidential treatment request. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
Pursuant to the requirements of
section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized:
CABOT MICROELECTRONICS
CORPORATION
Date:
November 25,
2008
/s/
WILLIAM P.
NOGLOWS
William P. Noglows
Chairman of the Board, President
and Chief Executive Officer
[Principal Executive
Officer]
Date:
November 25,
2008
/s/ WILLIAM S.
JOHNSON
William S. Johnson
Vice President and Chief Financial
Officer
[Principal Financial
Officer]
Date:
November 25,
2008
/s/ THOMAS S.
ROMAN
Thomas S. Roman
Corporate Controller
[Principal Accounting
Officer]
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
Date:
November 25,
2008
/s/ WILLIAM P.
NOGLOWS
William P.
Noglows
Chairman
of the Board, President and Chief Executive Officer
[Director]
Date:
November 25,
2008
/s/ ROBERT J.
BIRGENEAU*
Robert J.
Birgeneau
[Director]
Date:
November 25,
2008
/s/ JOHN P.
FRAZEE, JR.*
John P.
Frazee, Jr.
[Director]
Date:
November 25,
2008
/s/ H. LAURANCE
FULLER*
H.
Laurance Fuller
[Director]
Date: November 25, 2008 /s/ BARBARA A. KLEIN*
Barbara
A. Klein
[Director]
Date:
November 25,
2008
/s/ EDWARD J.
MOONEY*
Edward J.
Mooney
[Director]
Date:
November 25,
2008
/s/ STEVEN V.
WILKINSON*
Steven V.
Wilkinson
[Director]
Date:
November 25,
2008
/s/ BAILING
XIA*
Bailing
Xia
[Director]
* by H.
Carol Bernstein as Attorney-in-fact pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934.
75