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, 2007
or
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ________ to ________
COMMISSION
FILE NUMBER 000-30205
CABOT
MICROELECTRONICS CORPORATION
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
36-4324765
|
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
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870
NORTH COMMONS DRIVE
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60504
|
|
AURORA,
ILLINOIS
|
(Zip
Code)
|
|
(Address
of principal executive offices)
|
Registrant's
telephone number, including area code: (630)
375-6631
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
|
Common
Stock, $0.001 par value
|
The
NASDAQ Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
[ X ] No [ ]
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, 2007, as reported by the NASDAQ
Global Select Market, was approximately $790,248,600. For the
purposes hereof, "affiliates" include all executive officers and directors
of
the registrant.
As
of
October 31, 2007, the Company had 24,009,958 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 4, 2008, 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.
1
FORM
10-K
FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 2007
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PART
I
ITEM
1. BUSINESS
OUR
COMPANY
Cabot
Microelectronics Corporation
("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our''), which
was
incorporated in the state of Delaware in 2000, is the leading supplier of
high-performance polishing slurries used in the manufacture of advanced
integrated circuit (IC) devices within the semiconductor industry, in a process
called chemical mechanical planarization (CMP). CMP is a polishing
process used by IC device manufacturers to planarize or flatten many of the
multiple layers of material that are built upon silicon wafers in the production
of advanced ICs.
We
operate predominantly in one
industry segment – the development, manufacture and sale of CMP
consumables. We develop, produce and sell CMP slurries for polishing
materials such as copper, tungsten and dielectric in IC devices, and also for
polishing the materials coated on disks during the manufacture of hard disk
drives and magnetic heads. In addition, we develop, produce 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 are exploring a variety of surface modification applications where
we believe our technical ability to shape, enable and enhance the performance
of
surfaces at an atomic level may provide previously unseen surface performance
or
improved productivity. By supplementing our internal development
efforts with externally acquired technologies and businesses, 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.
CMP
PROCESS WITHIN IC DEVICE MANUFACTURING
The
percentage of IC devices that
utilize CMP in the manufacturing process has increased steadily over time as
semiconductor technology has advanced and performance requirements of IC devices
have increased. We believe that CMP is used in the majority of all IC
devices made today, and we expect that the use of CMP will continue to increase
in the future.
The
multi-step manufacturing process
for IC devices typically begins with a circular wafer of pure
silicon. A large number of identical IC devices, or dies, are
manufactured on each wafer at the same time. The first 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 either aluminum or copper wire in a particular
sequence to produce a functional IC device with specific
characteristics. When the wiring on one layer of the IC device is
completed, another layer of insulating material is added. The process
of alternating insulating and wiring layers is repeated until the desired wiring
within the IC device is finished. At the end of the process, the
wafer is cut into the individual dies, which are then packaged to form
individual chips. To enhance performance, IC device manufacturers
have progressively increased the number and density of transistors and other
electronic components in each IC device. As a result, the number of
wires and the number of discrete wiring layers have also increased.
IC
devices can generally be categorized
as either logic or memory devices. Logic devices include chips such
as microprocessors, digital signal processors, microcomponents and
microcontrollers. These are normally computing-intensive devices that
need to perform large numbers of processing steps every
second. Advanced logic chips use copper wiring to provide increased
processing speed because copper wiring has lower electrical resistance than
aluminum wiring. Aluminum wiring is generally used in chips that do
not require this speed, such as logic devices using mature technology, because
it is generally more cost-effective than using copper wiring. Memory
devices, which include flash, DRAM and SRAM chips, function by reading, writing
and storing data. Traditionally this sector has been highly cost
sensitive and processing speed is not as critical as in logic
devices. Therefore, memory devices tend to use aluminum wiring,
although copper wiring is beginning to be introduced for some
devices.
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, proprietary chemical additives and engineered
abrasives that chemically and mechanically interact with the surface material
of
the IC device at an atomic level. CMP pads are engineered polymeric
materials designed to distribute and transport the slurry to the surface of
the
wafer and distribute it evenly across the wafer. During the CMP
process the wafer is typically held on a rotating carrier, which is pressed
down
against a rotating polishing table and spun in a circular motion. The
portion of the table that comes in contact with the wafer is covered by a
textured polishing pad. A CMP slurry is continuously applied to the
polishing pad to facilitate and enhance the polishing process. Hard
disk drive manufacturers use similar processes to smooth the surface of
substrate disks before depositing magnetic media onto the disk.
The
characteristics that are important
for an effective CMP process include:
|
§
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High
polishing removal rates, which increase productivity and
throughput;
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§
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Selectivity,
which is the ability to enhance the polishing of specific materials
while
at the same time inhibiting the polishing of other
materials;
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§
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Uniform
planarity across a wafer, which minimizes unevenness as different
layers
are built on the wafer;
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|
§
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Uniformity
of polishing, which means that different surface materials can be
polished
to the same degree at the same time across the wafer, leading to
uniformity of all dies on the
wafer;
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§
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Low
defectivity, which means that the devices have few imperfections
resulting
in a high yield for the IC device manufacturer;
and
|
|
§
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Cost,
because it is important for users to minimize their cost of
manufacturing.
|
These
attributes are 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
product will function properly within the 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
or
more months to complete. IC device manufacturers usually take into
account the cost, time delay 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 was previously
possible. By enabling IC device manufacturers to make smaller IC
devices, CMP also allows them to increase the number of IC devices that fit
on a
wafer. This increase in the number of IC devices per wafer in turn
increases the throughput, or the number of IC devices that can be manufactured
in a given time period, and reduces the cost per 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, potentially enabling the use of these materials
in higher-value applications.
In
addition, many of the production
processes currently used in precision machining and polishing have been based
on
traditional, labor-intensive techniques, which are being replaced by
computer-controlled, deterministic processes. Our CMP technology may
help to accelerate this transition to automated processes in several areas
by
providing high-quality consumable products that deliver consistent performance
required for deterministic finishing. Our fiscal 2006
acquisition of QED Technologies, Inc. (QED) provided us with a strong position
as a 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.
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 have two strategic goals intended to utilize these
capabilities: 1) strengthen and grow our core CMP 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 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.
Technology
Leadership: We
believe that technology is vital to success in our CMP consumables business
and
we devote significant resources to research and development. In
fiscal 2007, we announced major improvements in our copper barrier and tungsten
slurries, offering products that we believe provide our customers greater
flexibility in use, and result in fewer defects. We also
commercialized our new polishing pad product that incorporates technology that
we believe offers performance advantages compared to competing
products. We need to stay ahead of the rapid technological advances
in the semiconductor industry in order to deliver a broad line of CMP consumable
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 intend to continue to advance our strict
quality systems in order to improve the uniformity and consistency of
performance of our CMP products. To support our operations excellence
initiative, we have adopted the concepts of Six Sigma across our
Company. Six Sigma is a systematic, data-driven approach and
methodology for improving quality by reducing variability in
processes. We have made productivity and efficiency gains through
this program since its introduction in fiscal 2005. 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 that
improve the quality and consistency of our products, processes and raw
materials, as well as to expand our production capacity. For example,
during fiscal 2007 we installed new pad manufacturing capabilities in the U.S.
and Taiwan.
Connecting
With Our
Customers: We believe that building close relationships with our
customers is another cornerstone for long-term success in our
business. We work closely with our customers to identify and develop
new and better CMP consumables, to integrate our products into their
manufacturing processes, and to assist them with supply, warehousing and
inventory management. 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 enhancing 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. Since a majority of our
business is in the Asia Pacific region, we have increased our presence there
over recent years by building an Asia Pacific technology center in Geino, Japan,
and a technical service center in Taiwan for slurry formulation
capabilities. In fiscal 2006, we moved the portion of our business
that serves the hard disk drive market to Singapore, because Southeast Asia
is
an important manufacturing region for a number of participants in this
industry. In addition, in fiscal 2007, we began manufacturing
polishing pads in Taiwan. Further, in fiscal 2008 we intend to
upgrade our polishing and metrology capability in the Asia Pacific region with
the planned addition of a 300mm polishing tool at our Asia Pacific technology
center in Japan. All of these initiatives represent our
belief that by working closely with customers at a local level we can leverage
our global knowledge to meet and exceed our customers’
expectations.
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 a wide array of polishing applications
for other demanding industries that are synergistic to our CMP consumables
business. We expect to supplement our internal development efforts
with externally acquired technologies and businesses. We believe our
ESF product offerings are unique and we are targeting new opportunities in
optics, optoelectronics, flat panel display, metal finishing and other market
areas.
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 and, in fiscal 2007, we developed and sold new polishing and
metrology equipment that enables the production of more advanced optics, as
well
as improved accuracy in their measurement.
We
are expanding our ESF sales and
marketing resources to better serve our current and future
customers. We plan to equip our Asia Pacific technology center with
QED capabilities to offer product demonstrations to our customers in this
region. These initiatives demonstrate our intent to serve our ESF
customers on a global scale, much like we do in the CMP consumables
business.
We
believe our strong financial
position offers many opportunities for growth in both our core CMP consumables
business and for our ESF business. As of September 30, 2007, we had
$212.5 million in cash and short-term investments and no outstanding
debt. Our financial position allows us to fund growth through
either internally developed technologies or potential acquisitions of
technologies or businesses.
OUR
PRODUCTS
CMP
CONSUMABLES FOR IC DEVICES
We
develop, produce and sell CMP
slurries for a wide range of polishing applications including tungsten and
dielectric materials, which currently represent the most common use of CMP
in IC
device manufacturing. Slurries for polishing tungsten and dielectrics
are the primary slurries used in the production of memory devices and older
generation logic devices such as for MP3 players, cellphones, gaming devices
and
digital video recorders.
We
also develop, manufacture and sell
slurry products for copper polishing applications; copper is used primarily
in
the wiring of advanced IC logic devices such as microprocessors for computers,
and devices for graphic systems, gaming systems and communication
devices. These slurries enable the IC device to provide increased
processing speed since copper wiring has lower electrical resistance than
aluminum wiring. These products include different slurries for
polishing the copper film, as well as the thin barrier metal layer used to
separate copper from the adjacent insulating material. On a lesser
scale, we develop and manufacture slurry products for polishing copper in IC
memory devices, which represents an emerging application. We offer
multiple products for each technology node to enable different integration
schemes depending on specific customer needs.
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
technology is closely related and we can utilize the same technical and sales
infrastructure. We believe our continuous pad manufacturing process
enables a high level of product consistency from pad-to-pad, and we also believe
our pad materials offer enhanced performance and a longer pad life, resulting
in
lower cost of ownership for our customers.
CMP
CONSUMABLES FOR THE DATA STORAGE INDUSTRY
We
develop and produce CMP slurries for polishing the materials coated onto rigid
disks and magnetic heads used in hard disk drives for computer and other data
storage applications, representing an extension of our core CMP slurry
technology and manufacturing capabilities established for the semiconductor
industry. We believe CMP significantly improves the surface finish of
these coatings, resulting in greater storage capacity of the substrates, and
also improves the production efficiency of manufacturers of hard disk drives
by
helping them increase their throughput and yield.
PRECISION
OPTICS PRODUCTS
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 optics such as mirrors, lenses and
prisms. Historically, advanced optics have been produced using
labor-intensive processes, so 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.
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.
INDUSTRY
TRENDS
SEMICONDUCTOR
INDUSTRY
The
semiconductor industry has
experienced rapid growth over the past three decades, but this growth has been
cyclical. Our financial results for fiscal 2007 demonstrated the
cyclical nature of this industry. During the first half of the fiscal
year, our revenue was adversely impacted as a number of customers reduced
production in response to excess inventories of semiconductor devices, thus
reducing demand for our products. The semiconductor industry
experienced improved conditions in the third and fourth quarters of our fiscal
year, which contributed to our stronger financial results in the second half
of
the year.
In
recent
years, the semiconductor industry has seen increased demand for memory devices
and the incorporation of advanced logic and memory products into digital
consumer devices. This represents a departure from the industry’s
traditional emphasis on microprocessors for computing
applications. We believe 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. At the same time, rapid advancement in technology
increases the development and production costs of IC devices. These
trends appear to be driving our customers to partner with each other in next
generation research and development to pool their resources in an effort to
reduce their overall costs. This cost pressure has also lead to an
increase in the use of foundries where semiconductor companies can outsource
portions of their manufacturing and reduce their fixed
costs. Semiconductor manufacturers also attempt to reduce their
costs in a number of ways, including putting pressure on their suppliers to
reduce prices. We believe these trends will continue, so it is
critical that we continue to innovate to achieve lower costs in our products
as
well as to increase our production efficiencies.
On
a
geographic basis, the Asia Pacific region continues to be the fastest growing
region for IC manufacturing, as well as for our business, and we expect this
trend to continue.
CMP
CONSUMABLES INDUSTRY
Demand
for our CMP products for IC
devices is primarily based on the number of wafers produced by semiconductor
manufacturers, or “wafer starts”. 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 now often require some customization by customer,
tool set and process integration approach. Leading-edge device
designs are introducing more materials and processes into next generation chips,
and these new materials and processes must be considered in developing CMP
solutions. As a result, customers are selecting suppliers early in their
development processes and are maintaining preferred supplier relationships
through production. We believe that the partnership between customers
and suppliers offers the best opportunity for a successful outcome for both
our
customers and our company.
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.
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 that serves a broad range of customers by offering and supporting
a full line of CMP slurry products for all major applications over a range
of
technologies, and that has a proven track record of supplying these products
globally in high volumes with the attendant required high level of technical
support services.
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 options. We believe our
pad materials and our continuous pad manufacturing process enables us to produce
a more consistent pad for our customers with a longer pad life, thus reducing
the total pad cost.
Our
QED subsidiary operates in the
precision optics industry. There are few direct competitors for QED’s
technologies because they are relatively new and unique. We believe
the main alternative to QED’s technology is non-adoption and continued reliance
on traditional artisan-based methods of precision optics
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 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 fundamental 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 to our customers. In response to
significant growth in the IC device manufacturing industry in Asia, we continue
to increase the number of sales and marketing, technical and customer support
personnel 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 U.S. government and contractors to the U.S. government.
In
fiscal 2007, our five largest
customers accounted for approximately 43% 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 the 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 the technology leader.
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 manufacturing facilities:
|
·
|
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.
|
We
invest in fundamental CMP technology
and materials research in order to be prepared to meet the dynamic needs of
advanced technology, investing well in advance of the market need because there
are long lead times from research and development to commercialization and
sales. We focus on such areas as: engineered polymers and particles,
polishing processes, wafer/chip design, advanced metrology, mechanistic
understanding and emerging applications. As a result of our
investment in research and development, we have a fundamental understanding
of
the CMP process, chemistry, and mechanics that we believe allows us to quickly
and efficiently tailor our applications to meet the needs of our leading-edge
customers.
We
also develop and formulate new and
enhanced CMP consumables and new CMP processes. We believe our
leadership in these areas depends in part on our ability to develop CMP
solutions tailored to our customers' needs. We have assembled
development teams that work closely with customers to identify their specific
technology and manufacturing challenges and to translate these challenges into
viable CMP process solutions. We also remain focused on supporting
our customers in the use of our products in their processes, so we have
application engineers dedicated to working with our customers daily at their
facilities.
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. Our unique
chemistries, particles, and processes are designed to polish each material
with
a single slurry at independently tunable rates such that the final surface
will
be flat and free of defects. At the same time, our products must
achieve the desired surface at high polishing rates and low consumable 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 fields such as optics,
optoelectronics, flat panel displays, metal finishing and other market
areas.
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 2007, 2006 and 2005, we incurred
approximately $50.0 million, $48.1 million and $43.0 million, respectively,
in
research and development expenses. 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
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 plan to add 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 where we house a slurry, pad and ESF
development center, 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, 2007, we had
156 active U.S. patents and 100 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. which resulted in the
prohibition of the importation and sale within the United States of certain
CMP
slurries that infringe certain of our patents.
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 the International Business Machine
Corporation (IBM) to acquire a number of patents and associated rights relating
to CMP slurry technology from IBM, including various applications such as
copper, copper barrier, tungsten, and dielectrics, among others. We
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 have improved operating efficiencies while protecting the
environment. Our operations in the United States, Japan and Wales 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
maintain these certifications and obtain additional certifications 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 human resources who make
our
Company successful. As of October 31, 2007, we employed 742
individuals, including 359 in operations, 195 in research and development and
technical, 95 in sales and marketing and 93 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 17 of “Notes to the Consolidated Financial
Statements” included in Item 8 of Part II of this Form 10-K.
AVAILABLE
INFORMATION
Our
annual reports on Form 10-K,
quarterly reports on Form 10-Q, definitive proxy statements on Form 14a, current
reports on Form 8-K, and any amendments to those reports are made available
free
of charge on our Company website, www.cabotcmp.com, as soon as reasonably
practicable after such reports are filed with the Securities and Exchange
Commission (SEC). Statements of changes in beneficial ownership
of our securities on Form 4 by our executive officers and directors are made
available on our Company website by the end of the business day following the
submission to the SEC of such filings. In addition, the SEC’s
website, www.sec.gov, contains reports, proxy statements, and other information
regarding reports that we file electronically with the SEC.
ITEM
1A. RISK FACTORS
We
do not believe there have been any
material changes in our risk factors since the filing of our Annual Report
on
Form 10-K for the fiscal year ended September 30, 2006. However, we
may update our risk factors in our SEC filings from time to time for
clarification purposes or to include additional information, at management's
discretion, even when there have been no material changes.
RISKS
RELATING TO OUR BUSINESS
WE
HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR
TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN CMP
CONSUMPTION
Our
business is substantially dependent
on a single class of products, CMP slurries, which historically has accounted
for almost all of our revenue. 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 slurries from us or could substantially reduce
the quantity of CMP slurries they purchase from us. Our principal
customers also hold considerable purchasing power, which can impact the pricing
and terms of sale of our products. Any deferral or significant
reduction in CMP slurries sold to these principal customers, or a significant
number of smaller customers, could seriously harm our business, financial
condition and results of operations.
In
fiscal 2007, our five largest
customers accounted for approximately 43% of our revenue, with TSMC accounting
for approximately 17% of our revenue. In fiscal 2006, our five
largest customers accounted for approximately 44% of our revenue; Marketech,
a
distributor, was our largest customer at that time. Effective April
2006, with our transition to direct sales in Taiwan, we began selling directly
to TSMC and other customers in Taiwan rather than through
Marketech. Due to the timing of this transition, TSMC accounted for
approximately 10% of our revenue for the full fiscal year 2006.
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, including fumed
metal oxides such as fumed alumina and fumed silica, 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 metal
oxides, in the event one of our suppliers becomes unable to supply us with
sufficient quantities of raw materials that meet the quality and technical
specifications required by our customers. In addition, contractual
amendments to the existing agreements with, or non-performance by, our suppliers
could adversely affect us. Also, if we
change the supplier or type of key raw materials we use to make our CMP
slurries, or are required to purchase them from a different manufacturer or
manufacturing facility or otherwise modify our products, in certain
circumstances our customers might have to requalify our CMP slurries for their
manufacturing processes and products. The requalification process
could take a significant amount of time and expense to complete and could
motivate our customers to consider purchasing products from our competitors,
possibly interrupting or reducing our sales of CMP slurries to these
customers.
WE
ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN
OPERATIONS
We
currently have operations and a
large customer base outside of the United States. Approximately 79%,
79% and 78% of our revenue was generated by sales to customers outside of the
United States for fiscal 2007, 2006 and 2005, respectively. We
encounter risks in doing business in certain foreign countries, including,
but
not limited to, adverse changes in economic and political conditions,
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 require
varying degrees of protection, and we cannot provide assurance that we can
obtain adequate protection in each such jurisdiction. Our failure to
obtain or maintain adequate protection of our intellectual property rights
for
any reason, 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 DA Nano described above in Item 1 under the heading “Intellectual
Property”, 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
and acquisitions of technology and development stage companies are inherently
risky because these businesses may never develop, and we may incur losses
related to these investments. In addition, we may be required to
write down the carrying value of these investments to reflect other than
temporary declines in their value, which could harm our business and results
of
operations.
DEMAND
FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY WORLDWIDE
ECONOMIC AND INDUSTRY CONDITIONS
Our
business is affected by economic
and industry conditions and our revenue is dependent on semiconductor
demand. Semiconductor demand, in turn, is impacted by semiconductor
industry cycles, and these cycles can dramatically affect our
business. During the first half of fiscal 2007, for example, the
apparent softening of demand for our products due to excess inventory of
semiconductor devices caused our CMP slurry revenue to decrease during the
inventory correction. 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.
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.
ITEM
2. PROPERTIES
Our
principal U.S. facilities that we
own consist of:
|
§
|
a
global headquarters and research and development facility in Aurora,
Illinois, comprising approximately 200,000 square
feet;
|
|
§
|
a
commercial dispersion plant and distribution center in Aurora, Illinois,
comprising approximately 175,000 square
feet;
|
|
§
|
a
commercial 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;
and
|
|
§
|
a
commercial dispersion plant in Barry, Wales, comprising approximately
22,000 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. In
our ongoing efforts to optimize our manufacturing capacity, we have decided
to
close our manufacturing facility in Barry, Wales, our smallest manufacturing
plant, in fiscal 2008 as it has been underutilized in the past several
years.
ITEM
3. LEGAL
PROCEEDINGS
While
we are not involved in any legal
proceedings that we currently 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 competitor of ours,
in the United States District Court for the District of Arizona, charging that
DA Nano’s manufacturing and marketing of certain CMP slurries infringe five CMP
slurry patents that we own. The affected DA Nano products include
those 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. 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.
Set
forth below is information
concerning our executive officers and their ages as of October 31,
2007.
|
NAME
|
AGE
|
POSITION
|
||
|
William
P. Noglows
|
49
|
Chairman
of the Board, President and Chief Executive Officer
|
||
|
H.
Carol Bernstein
|
47
|
Vice
President, Secretary and General Counsel
|
||
|
Jean
Pol Delrue
|
60
|
Vice
President of Global Sales
|
||
|
William
S. Johnson
|
50
|
Vice
President and Chief Financial Officer
|
||
|
Daniel
J. Pike
|
44
|
Vice
President of Corporate Development
|
||
|
Stephen
R. Smith
|
48
|
Vice
President of Marketing
|
||
|
Clifford
L. Spiro
|
53
|
Vice
President of Research and Development
|
||
|
Adam
F. Weisman
|
45
|
Vice
President of Business Operations
|
||
|
Daniel
S. Wobby
|
44
|
Vice
President, Asia Pacific Region
|
||
|
Thomas
S. Roman
|
46
|
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.
H.
CAROL BERNSTEIN has served as our Vice President, Secretary and General
Counsel since August 2000. From January 1998 until joining us, Ms.
Bernstein served as the General Counsel and Director of Industrial Technology
Development of Argonne National Laboratory, which is operated by the University
of Chicago for the United States Department of Energy. From May 1985
until December 1997, she served in various positions with the IBM Corporation,
culminating in serving as an Associate General Counsel, and was the Vice
President, Secretary and General Counsel of Advantis Corporation, an IBM joint
venture. Ms. Bernstein received her B.A. from Colgate University and
her J.D. from Northwestern University; she is a member of the Bar of the states
of Illinois and New York.
WILLIAM
S. JOHNSON has served as our Vice President and Chief Financial Officer
since April 2003. Prior to joining us, Mr. Johnson served as
Executive Vice President and Chief Financial Officer for Budget Group, Inc.
from
August 2000 to March 2003. Before that, Mr. Johnson spent 16 years at
BP Amoco in various senior finance and management positions, the most recent
of
which was President of Amoco Fabrics and Fibers Company. Mr. Johnson
received his B.S. in Mechanical Engineering from the University of Oklahoma
and
his M.B.A. from the Harvard Business School.
DANIEL
J. PIKE has served as our Vice President of Corporate Development since
January 2004 and prior to that was our Vice President of Operations from
December 1999. Mr. Pike served as Cabot Corporation’s Director of
Global Operations from 1996 to 1999. Prior to that, Mr. Pike worked
for FMC Corporation 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, Asia Pacific Region since
September 2005. Prior to that, Mr. Wobby served as Vice President of
Greater China and Southeast Asia starting in February 2004. Mr. Wobby
previously was our Corporate Controller and Principal Accounting Officer from
2000 to 2004. From 1989 to 2000, Mr. Wobby held various accounting
and operations positions with Cabot Corporation culminating in serving as
Director of Finance. Mr. Wobby earned a B.S. in Accounting from St.
Michael’s College and an M.B.A. from the University of Chicago’s Graduate School
of Business.
THOMAS
S. ROMAN has served as our Corporate Controller and Principal
Accounting Officer since February 2004 and previously served as our North
American Controller. Prior to joining us in April 2000, Mr. Roman was
employed by FMC Corporation in various financial reporting, tax and audit
positions. Before that, Mr. Roman worked for Gould Electronics and
Arthur Andersen LLP. Mr. Roman is a C.P.A. and earned a B.S. in
Accounting from the University of Illinois and an M.B.A. from DePaul
University’s Kellstadt Graduate School of Business.
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.
|
HIGH
|
LOW
|
||
|
Fiscal
2006
|
|||
|
First
Quarter
|
32.33
|
28.26
|
|
|
Second
Quarter
|
37.14
|
28.82
|
|
|
Third
Quarter
|
38.25
|
25.84
|
|
|
Fourth
Quarter
|
32.34
|
26.21
|
|
|
Fiscal
2007
|
|||
|
First
Quarter
|
34.47
|
28.24
|
|
|
Second
Quarter
|
34.37
|
30.11
|
|
|
Third
Quarter
|
37.19
|
32.01
|
|
|
Fourth
Quarter
|
44.56
|
35.53
|
|
|
Fiscal
2008 First Quarter (through October 31, 2007)
|
46.44
|
38.62
|
|
As
of October 31, 2007, there were
approximately 984 holders of record of our common stock. No dividends
were declared or paid in either fiscal 2007 or fiscal 2006 and we have no
current plans to pay cash dividends in the future.
ISSUER
PURCHASES OF EQUITY SECURITIES
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. 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. There were no shares repurchased during
the fourth quarter of fiscal 2007.
STOCK
PERFORMANCE GRAPH
The
following graph illustrates the
cumulative total stockholder return on our common stock during the period from
September 30, 2002 through September 30, 2007 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, 2002 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.
|
|
9/02
|
12/02
|
3/03
|
6/03
|
9/03
|
12/03
|
3/04
|
6/04
|
9/04
|
12/04
|
3/05
|
|
Cabot
Microelectronics Corporation
|
100.00
|
126.75
|
112.62
|
135.42
|
149.38
|
131.58
|
113.13
|
82.20
|
97.34
|
107.60
|
84.26
|
|
NASDAQ
Composite
|
100.00
|
113.67
|
112.10
|
135.43
|
150.59
|
168.82
|
169.79
|
174.35
|
162.89
|
185.99
|
171.39
|
|
Philadelphia
Semiconductor
|
100.00
|
115.31
|
118.60
|
148.73
|
186.79
|
217.01
|
200.48
|
195.01
|
153.97
|
175.82
|
172.40
|
|
|
6/05
|
9/05
|
12/05
|
3/06
|
6/06
|
9/06
|
12/06
|
3/07
|
6/07
|
9/07
|
|
Cabot
Microelectronics Corporation
|
77.85
|
78.89
|
78.65
|
99.62
|
81.39
|
77.39
|
91.14
|
89.98
|
95.30
|
114.80
|
|
NASDAQ
Composite
|
175.64
|
185.48
|
190.07
|
202.68
|
188.78
|
196.37
|
211.06
|
212.14
|
227.62
|
236.60
|
|
Philadelphia
Semiconductor
|
184.02
|
193.70
|
199.88
|
188.81
|
175.48
|
185.07
|
185.37
|
181.66
|
207.17
|
210.02
|
The
following selected financial data
for each year of the five-year period ended September 30, 2007, 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,
|
||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||
| Consolidated Statement of Income Data: | ||||||||||||||||||||||
| Revenue | $ |
338,205
|
$ |
320,795
|
$ |
270,484
|
$ |
309,433
|
$ |
251,665
|
||||||||||||
| Cost of goods sold |
178,224
|
171,758
|
141,282
|
156,805
|
124,269
|
|||||||||||||||||
| Gross profit |
159,981
|
149,037
|
129,202
|
152,628
|
127,396
|
|||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||
| Research, development and technical |
49,970
|
48,070
|
43,010
|
44,003
|
41,516
|
|||||||||||||||||
| Selling and marketing |
24,310
|
21,115
|
16,989
|
16,225
|
11,221
|
|||||||||||||||||
| General and administrative |
39,933
|
34,319
|
25,427
|
22,691
|
18,565
|
|||||||||||||||||
| Purchased in-process research and development |
-
|
1,120
|
-
|
-
|
-
|
|||||||||||||||||
| Total operating expenses |
114,213
|
104,624
|
85,426
|
82,919
|
71,302
|
|||||||||||||||||
| Operating income |
45,768
|
44,413
|
43,776
|
69,709
|
56,094
|
|||||||||||||||||
| Other income (expense), net |
3,606
|
4,111
|
2,747
|
139
|
(27 | ) | ||||||||||||||||
| Income before income taxes |
49,374
|
48,524
|
46,523
|
69,848
|
56,067
|
|||||||||||||||||
| Provision for income taxes |
15,538
|
15,576
|
14,050
|
23,120
|
18,334
|
|||||||||||||||||
| Net income | $ |
33,836
|
$ |
32,948
|
$ |
32,473
|
$ |
46,728
|
$ |
37,733
|
||||||||||||
| Basic earnings per share | $ |
1.42
|
$ |
1.36
|
$ |
1.32
|
$ |
1.89
|
$ |
1.55
|
||||||||||||
| Weighted average basic shares outstanding |
23,748
|
24,228
|
24,563
|
24,750
|
24,401
|
|||||||||||||||||
| Diluted earnings per share | $ |
1.42
|
$ |
1.36
|
$ |
1.32
|
$ |
1.88
|
$ |
1.53
|
||||||||||||
| Weighted average diluted shares outstanding |
23,754
|
24,228
|
24,612
|
24,882
|
24,665
|
|||||||||||||||||
| Cash dividends per share | $ |
-
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
-
|
||||||||||||
|
As
of September 30,
|
||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||
| Consolidated Balance Sheet Data: | ||||||||||||||||||||||
| Current assets | $ |
310,754
|
$ |
261,505
|
$ |
245,807
|
$ |
229,681
|
$ |
179,112
|
||||||||||||
| Property, plant and equipment, net |
118,454
|
130,176
|
135,784
|
127,794
|
133,695
|
|||||||||||||||||
| Other assets |
25,921
|
20,452
|
5,172
|
5,816
|
2,810
|
|||||||||||||||||
| Total assets | $ |
455,129
|
$ |
412,133
|
$ |
386,763
|
$ |
363,291
|
$ |
315,617
|
||||||||||||
| Current liabilities | $ |
36,563
|
$ |
38,833
|
$ |
35,622
|
$ |
32,375
|
$ |
28,916
|
||||||||||||
| Other long-term liabilities |
5,362
|
5,529
|
12,057
|
15,294
|
14,928
|
|||||||||||||||||
| Total liabilities |
41,925
|
44,362
|
47,679
|
47,669
|
43,844
|
|||||||||||||||||
| Stockholders' equity |
413,204
|
367,771
|
339,084
|
315,622
|
271,773
|
|||||||||||||||||
| Total liabilities and stockholders' equity | $ |
455,129
|
$ |
412,133
|
$ |
386,763
|
$ |
363,291
|
$ |
315,617
|
||||||||||||
The
following “Management's Discussion
and Analysis of Financial Condition and Results of Operations", as well as
disclosures included elsewhere in this Form 10-K, include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act
of 1995. This Act provides a safe harbor for forward-looking
statements to encourage companies to provide prospective information about
themselves so long as they identify these statements as forward-looking and
provide meaningful cautionary statements identifying important factors that
could cause actual results to differ from the projected results. All
statements other than statements of historical fact we make in this Form 10-K
are forward-looking. In particular, the statements herein regarding
future sales and operating results; Company and industry growth and trends;
growth of the markets in which the Company participates; international events;
product performance; the generation, protection and acquisition of intellectual
property, and litigation related to such intellectual property; new product
introductions; development of new products, technologies and markets; the
acquisition of or investment in other entities; 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 built upon silicon wafers in the
production of advanced ICs. Demand for our CMP products is primarily
based on the number of wafers produced by semiconductor manufacturers, or “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
materials such as copper, tungsten and dielectric in IC devices, and also for
polishing the coatings on disks in hard disk drives and magnetic
heads. In addition, we develop, produce and sell CMP polishing pads,
which are used in conjunction with slurries in the CMP process.
We
continue to focus on our three
strategic initiatives within our core CMP business: maintaining our
technological leadership, achieving operations excellence and connecting with
our customers. In fiscal 2007, we introduced major improvements in
several slurry products and we commercialized our new polishing pad
product. We continued to make productivity and efficiency gains
through our Six Sigma program and we advanced our quality systems to improve
the
uniformity and consistency of performance of our CMP products. We
further expanded our presence in Asia with the introduction of pad manufacturing
in Taiwan, as well as additions to our research and development facilities
in
order to improve our responsiveness to customers.
We
believe that the semiconductor
industry and the CMP consumables industry will continue to grow over the long
term. We expect this growth to be fueled by increased demand for IC
devices, including microprocessors and memory for computing applications and
the
incorporation of advanced logic and memory products into digital consumer
devices. We also believe there is increased pressure on IC device
manufacturers to reduce their costs, particularly the cost of developing and
producing IC devices for consumer electronic products. In turn, this
puts pressure on suppliers to the IC device manufacturers to offer lower cost
solutions. As demand grows, we see numerous opportunities for our
existing slurry products as well as demand for new slurry product
development. We also see numerous opportunities for our polishing
pads in all major CMP application areas, and across a wide range of technology
nodes. There are many factors, however, that make it difficult for us
to predict future revenue trends for our CMP business, including the cyclical
nature of the semiconductor industry; timing of 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 are exploring a variety of surface modification applications where
we believe our technical ability to shape, enable and enhance the performance
of
surfaces at an atomic level may provide previously unseen surface performance
or
improved productivity. In pursuit of our ESF business, in fiscal
2006, we acquired substantially all of the assets and assumed certain current
liabilities of QED Technologies, Inc. (QED), which was a privately-held company
specializing in unique, patented polishing and metrology systems for shaping
and
polishing high precision optics. We successfully integrated QED into
our company in fiscal 2007.
Revenue
for fiscal 2007 was $338.2
million, which was an increase of 5.4% from the $320.8 million reported for
fiscal 2006. This increase was largely due to a full year of revenue
from QED. Our fiscal 2007 financial results also reflected the
cyclical nature of the semiconductor industry. We believe our revenue
in the first half of the fiscal year was adversely impacted as a number of
our
customers reduced production in response to excess inventories of certain
semiconductor devices. The industry experienced improved conditions
in the second half of the fiscal year when there was an upturn in business
for
the major foundries in Asia, from which a significant part of our revenue is
derived, which contributed to our stronger financial performance.
Gross
profit expressed as a percentage
of revenue for fiscal 2007 was 47.3%, which represents an increase from the
46.5% reported for fiscal 2006. The increase was primarily driven by
a higher-valued product mix and improvements in productivity and
quality. This was partially offset by lower utilization of our
manufacturing capacity due to lower volume of sales, primarily in the first
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 fiscal
2008. This guidance applies to our full fiscal year results rather
than specific quarterly results; we may experience quarterly gross profit above
or below this range due to fluctuations in our product mix or other
factors.
Operating
expenses of $114.2 million,
which include research, development, technical, selling, marketing, general
and
administrative expenses, increased 9.2%, or $9.6 million, from the $104.6
million reported for fiscal 2006. The increase was primarily due to
higher staffing costs associated with the acquisition of the QED business and
increased share-based compensation expenses, as well as higher professional
and
legal fees. The increase in operating expenses was partially offset
by the absence of $1.8 million of one-time write-offs in research and
development incurred in the fourth quarter of fiscal 2006. In fiscal
2008, we expect our operating expenses to be in the range of approximately
$27
million to $30 million per quarter, unchanged from the guidance we provided
for
fiscal 2007.
Diluted
earnings per share of $1.42 in
fiscal 2007 increased 4.7%, or $0.06, from fiscal 2006. Diluted
earnings per share in fiscal 2007 was adversely impacted by approximately $0.06
due to a write-down of our minority equity investment in NanoProducts
Corporation (NPC), due to our decision to not renew our collaboration
arrangement with NPC and NPC’s entering into funding arrangements that we
believe significantly reduced the likelihood that we would recover the value
of
our investment.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
This
"Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as
disclosures included elsewhere in this Form 10-K, are based upon our audited
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of contingencies. On an ongoing
basis, we evaluate the estimates used, including those related to bad debt
expense, warranty obligations, inventory valuation, impairment of long-lived
assets and investments, business combinations, goodwill, other intangible
assets, share-based compensation, income taxes and contingencies. We
base our estimates on historical experience, current conditions and on various
other assumptions that we believe to be reasonable under the circumstances,
the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources,
as
well as 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, 2007, our
allowance for doubtful accounts represented 1.2% of gross accounts
receivable. If we had increased our estimate of bad debts to 2.2% of
gross accounts receivable, our general and administrative expense would have
increased by $0.5 million.
WARRANTY
RESERVE
We
maintain a warranty reserve that
reflects management’s best estimate of the cost to replace product that does not
meet customers’ specifications and performance requirements, and costs related
to such replacement. The warranty reserve is based upon a historical
product replacement rate, adjusted for any specific known conditions or
circumstances. Should actual warranty costs differ substantially from
our estimates, revisions to the estimated warranty liability may be
required. As of September 30, 2007, our warranty reserve represented
0.6% of the current quarter revenue. If we had increased our warranty
reserve estimate to 1.6% 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.
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
requires significant judgment and is highly susceptible to change from period
to
period because it requires management to make assumptions about future sales
and
cost of sales generally over a long-term period.
We
evaluate the estimated fair value of
investments annually or more frequently if indicators of potential impairment
exist, to determine if an other-than-temporary impairment in the value of the
investment has taken place.
BUSINESS
COMBINATIONS
In
accordance with SFAS No. 141,
“Business Combinations”, we allocate the purchase price of acquired entities to
the tangible and intangible assets acquired, liabilities assumed, as well as
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
combined 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
other 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. We determined that goodwill and other intangible assets
were not impaired as of September 30, 2007.
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 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 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 continue to use the
Black-Scholes option-pricing model (“Black-Scholes model”) to estimate grant
date fair value, which requires the input of highly subjective assumptions,
including the option’s expected 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 defined under Staff Accounting Bulletin
(SAB) No. 107, “Share-Based Payments” (SAB 107), 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. 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.
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 award a blend of
non-qualified stock options and shares of restricted stock to employees and
non-employee directors. 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.
COMMITMENTS
AND CONTINGENCIES
We
have entered into unconditional
purchase obligations, which include noncancelable purchase commitments and
take-or-pay arrangements with suppliers. We review our agreements 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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenue
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of goods sold
|
52.7
|
53.5
|
52.2
|
|||||||||
|
Gross
profit
|
47.3
|
46.5
|
47.8
|
|||||||||
|
Research,
development and technical
|
14.8
|
15.0
|
15.9
|
|||||||||
|
Selling
and marketing
|
7.2
|
6.6
|
6.3
|
|||||||||
|
General
and administrative
|
11.8
|
10.7
|
9.4
|
|||||||||
|
Purchased
in-process research and development
|
-
|
0.3
|
-
|
|||||||||
|
Operating
income
|
13.5
|
13.8
|
16.2
|
|||||||||
|
Other
income, net
|
1.1
|
1.3
|
1.0
|
|||||||||
|
Income
before income taxes
|
14.6
|
15.1
|
17.2
|
|||||||||
|
Provision
for income taxes
|
4.6
|
4.9
|
5.2
|
|||||||||
|
Net
income
|
10.0 | % | 10.3 | % | 12.0 | % | ||||||
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 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 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.
Fumed
metal oxides, such as fumed
silica and fumed alumina, are significant raw materials that we use in many
of
our CMP slurries. In an effort to mitigate our risk to rising raw
material costs and to increase supply assurance and quality performance
requirements, we have entered into multi-year supply agreements with a number
of
suppliers. For more financial information about our supply contracts,
see “Tabular Disclosure of Contractual Obligations” included in Item 7 of Part
II of this Form 10-K.
Our
need for additional quantities or
different kinds of key raw materials in the future has required, and will
continue to require, that we enter into new supply arrangements with third
parties. Future arrangements may result in costs which are different
from those in the existing agreements. In addition, rising energy
costs may also impact the cost of raw materials, packaging and freight
costs. We also expect to continue to invest in our operations
excellence initiative to improve product quality, reduce variability and improve
product yields in our manufacturing process.
GROSS
PROFIT
Our
gross profit as a percentage of
revenue was 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. We expect to maintain our gross profit
as a percentage of revenue in the range of 46% to 48% for full fiscal year
2008. 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 $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.
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
$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. We may make future acquisitions and may
record additional expenses for IPR&D in connection with those
acquisitions.
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. We expect our effective tax rate in fiscal 2008 to be
approximately 32 percent.
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.
YEAR
ENDED SEPTEMBER 30, 2006, VERSUS YEAR ENDED SEPTEMBER 30,
2005
REVENUE
Revenue
was $320.8 million in 2006,
which represented an 18.6%, or $50.3 million, increase from 2005. Of this
increase, $48.7 million was due to an increase in sales volume and $5.1 million
was related to our July 2006 acquisition of QED; these increases were partially
offset by a net $3.5 million decrease due to the change in weighted average
selling price. The decrease in weighted average selling price
primarily resulted from selected price reductions largely offset by a
higher-priced product mix. Selling prices were also affected by
changes in foreign currency exchange rates. Revenue for fiscal 2006
would have been $3.7 million higher had the average exchange rates for the
Japanese Yen and Euro during the year held constant with the prior year’s
average rates.
Revenue
increased in fiscal 2006
despite our transition to selling directly to customers in Taiwan rather than
through a distributor, which caused a short-term interruption in our normal
sales pattern during our second quarter of fiscal 2006 between $10 million
and
$11 million. However, after this transition period, we believe we
were able to gain a portion of the markup that our distributor previously
charged its end customers, which partially offset the adverse revenue impact
from the transition.
COST
OF GOODS SOLD
Total
cost of goods sold was $171.8
million in 2006, which represented an increase of 21.6%, or $30.5 million,
from
2005. Of this increase, $25.4 million was due to higher sales
volume, $3.5 million was related to our acquisition of QED and $1.5 million
was
due to higher average costs per unit. The average cost per unit
increased primarily due to a higher cost product mix, higher fixed costs,
including amortization of our CMP technology patents from IBM, and greater
logistics costs as a result of our transition to direct sales in
Taiwan. These costs were partially offset by higher utilization of
our manufacturing capacity due to the higher level of sales.
GROSS
PROFIT
Our
gross profit as a percentage of
revenue was 46.5% in 2006 as compared to 47.8% in 2005. The 130 basis
point decrease in gross profit margin resulted primarily from selected price
reductions and higher costs including those associated with commercializing
our
pad product line and the transition of our data storage business to
Singapore. These adverse effects were partially offset by higher
utilization of our manufacturing capacity due to the higher level of
sales.
RESEARCH,
DEVELOPMENT AND TECHNICAL
Total
research, development and
technical expenses were $48.1 million in 2006, which represented an increase
of
11.8% or $5.1 million, from 2005. The increase was primarily related
to $3.5 million in increased staffing costs, $1.5 million in increased
depreciation and $0.7 million in impairment expense. The increased
staffing costs included $1.2 million in higher expenses for our annual incentive
program related to our research, development and technical staff as well as
$1.0
million in share-based compensation expense. The increased
depreciation expense was primarily related to the October 2005 opening of our
Asia Pacific technology center in Geino, Japan. The impairment
expense was attributable to the decision to no longer use the portion of a
building in Aurora, Illinois, that was previously used for research and
development activities. These increases were partially offset by $0.8
million in decreased costs for clean room materials and laboratory
supplies.
SELLING
AND MARKETING
Selling
and marketing expenses were
$21.1 million in 2006, which represented an increase of 24.3%, or $4.1 million,
over 2005. The increase resulted primarily from higher staffing costs
of $3.0 million, including $1.0 million in share-based compensation expense
and
$0.4 million in higher expense for our annual incentive program related to
our
sales and marketing staff. Another $0.4 million of the increase was
due to increased travel to the Asia Pacific region as we implemented a number
of
projects in support of our strategic initiative to stay connected with our
customers, such as transitioning to direct sales in Taiwan and moving our data
storage business to Singapore. Selling and marketing expenses also
increased $0.2 million due to higher office rental fees and $0.2 million related
to increased product sample costs.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses
were $34.3 million in 2006, which represented an increase of 35.0%, or $8.9
million, from 2005. The increase resulted primarily from
$9.5 million in higher staffing costs, including $8.0 million in share-based
compensation expense and $0.9 million in higher expense for our annual incentive
program.
PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased
IPR&D expense was $1.1
million in 2006, resulting from the acquisition of substantially all of the
assets and assumption of certain liabilities of QED.
OTHER
INCOME, NET
Other
income was $4.1 million in 2006,
compared to $2.7 million in 2005. The increase in other income was
primarily due to $2.0 million greater interest income from higher interest
rates
and our larger average balance of cash and short-term investments, partially
offset by $0.6 million of expense associated with our investment in NanoProducts
Corporation.
PROVISION
FOR INCOME TAXES
Our
effective income tax rate was 32.1%
in 2006 and 30.2% in 2005. The increase in the effective tax rate was
primarily due to reduced research and experimentation tax credits. In
addition, we recognized reduced extraterritorial income tax deductions related
to export sales of our products from North America due to the phase-out of
this
tax benefit.
NET
INCOME
Net
income was $32.9 million in 2006,
which represented an increase of 1.5%, or $0.5 million, from 2005 as a result
of
the factors discussed above.
LIQUIDITY
AND CAPITAL RESOURCES
We
had cash flows from operating
activities of $64.6 million in fiscal 2007, $58.7 million in fiscal 2006 and
$48.0 million in fiscal 2005. Our cash provided by operating
activities in fiscal 2007 originated primarily from results of operations
adjusted for non-cash items, partially offset by a net increase in working
capital of $1.8 million. The increase in cash provided by operating
activities during fiscal 2007 was primarily due to higher depreciation expense
and increased share-based compensation expenses. The increase in
depreciation expense was primarily due to capital expenditures related to our
Asia Pacific technology center, which opened in fiscal 2006.
Fiscal
2007 cash flows used in
investing activities were $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 first of two potential earnout payments to
the
previous owners of QED, related to its revenue performance during the 12 months
following our acquisition. See Note 5 and Note 6 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. Fiscal 2005 cash flows used in investing
activities were $35.7 million. Purchases of property, plant and
equipment, primarily for the construction of our Asia Pacific technology center
and other manufacturing projects, were made with $21.1 million in cash and
$8.2
million in accrued liabilities. In addition, $12.6 million was used
for net purchases of short-term investments and $1.9 million was used for the
final payment for our acquisition of a minority ownership interest in
NanoProducts Corporation. We estimate that our total capital
expenditures in fiscal 2008 will be approximately $20.0 million.
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 under our Second Amended and Restated Cabot
Microelectronics Corporation 2000 Equity Incentive Plan, as amended and restated
September 26, 2006. 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. In fiscal 2005, cash flows used in financing
activities were $10.9 million, primarily resulting from $17.0 million in
repurchases of common stock under our share repurchase program and $0.9 million
in principal payments under capital lease obligations, partially offset by
$7.0
million from the issuance of common stock associated with the exercise of stock
options under our equity incentive plan and purchases under our employee stock
purchase plan.
In
the fourth quarter of fiscal 2005,
we completed our initial $25.0 million share repurchase program, which was
authorized in July 2004. In October 2005, our Board of Directors
authorized another share repurchase program for up to $40.0 million of our
outstanding common stock. Shares are repurchased from time to time,
depending on market conditions, in open market transactions, at management’s
discretion. We fund share repurchases from our existing cash
balance. We view the program as 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 $14.0 million remaining on this
authorization as of September 30, 2007.
We
have an unsecured revolving credit
facility of $50.0 million with an option to increase the facility up to $80.0
million. This agreement runs through November 2008, but we expect to
have a new agreement in place prior to its expiration in fiscal
2009. 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. Loans under this
facility are intended to be used primarily for general corporate purposes,
including working capital and capital expenditures. The credit
agreement also contains various covenants. No amounts are currently
outstanding under this credit facility and we believe we are currently in
compliance with the covenants.
We
believe that cash generated by our
operations and available borrowings under our revolving credit facility will
be
sufficient to fund our operations, expected capital expenditures, including
merger and acquisition activities, and share repurchases for the foreseeable
future. However, we plan to expand our business and continue to
improve our technology, and to do so may require us to raise additional funds
in
the future through equity or debt financing, strategic relationships or other
arrangements.
OFF-BALANCE
SHEET ARRANGEMENTS
At
September 30, 2007 and 2006, 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, 2007, 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
|
$ |
4.7
|
$ |
1.1
|
$ |
2.3
|
$ |
1.3
|
$ |
-
|
||||||||||
|
Operating
leases
|
1.7
|
1.2
|
0.5
|
-
|
-
|
|||||||||||||||
|
Purchase
obligations
|
30.6
|
25.1
|
3.9
|
1.6
|
-
|
|||||||||||||||
|
Other
long-term liabilities
|
1.8
|
-
|
-
|
-
|
1.8
|
|||||||||||||||
|
Total
contractual obligations
|
$ |
38.8
|
$ |
27.4
|
$ |
6.7
|
$ |
2.9
|
$ |
1.8
|
||||||||||
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. The agreement has an initial
six-year term that runs through December 2009 and will automatically renew
unless either party gives certain notice of non-renewal. We are
obligated
to purchase fumed silica for at least 90% of our six-month
volume forecast for certain of our slurry products, to purchase certain
non-material minimum quantities every six months, and to pay for the shortfall
if we purchase less than these amounts. We currently anticipate
meeting 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 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 the effective dates of these
agreements. Purchase obligations include an aggregate amount of $10.5
million of contractual commitments related to our Cabot Corporation agreements
for fumed silica and fumed alumina.
In
addition to the $19.0 million in
cash we paid at closing related to our July 2006 QED acquisition, we paid
another $2.5 million based on the revenue performance of the QED business in
the
12 months following its acquisition, and we may be obligated to pay up to an
additional $2.0 million depending upon the revenue performance of the QED
business in the second 12 month period following the
acquisition. Contractual obligations at September 30, 2007, include
$2.0 million in contingent payments related to this agreement, with the
assumption that we will pay the maximum amount.
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, 2007, 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.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
|
Page
|
||
|
Consolidated
Financial Statements:
|
||
|
Report
of Independent Registered Public Accounting Firm
|
36
|
|
|
Consolidated
Statements of Income for the years ended September 30, 2007, 2006
and
2005
|
38
|
|
|
Consolidated
Balance Sheets at September 30, 2007 and 2006
|
39
|
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2007,
2006 and
2005
|
40
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended
September 30, 2007, 2006 and 2005
|
41 | |
|
Notes
to the Consolidated Financial Statements
|
42
|
|
|
Selected
Quarterly Operating Results
|
62
|
|
|
Financial
Statement Schedule:
|
||
|
Schedule
II – Valuation and Qualifying Accounts
|
63
|
|
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, 2007 and
2006, and the results of their operations and their cash flows for each of
the
three years in the period ended September 30, 2007 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, 2007, 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 the accompanying report. 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
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 10 to the consolidated financial statements, the
Company began recording share-based compensation expense in accordance with
Statement of Financial Accounting Standards No. 123(R) “Share-Based
Payment” on October 1, 2005.
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
26, 2007
CABOT
MICROELECTRONICS CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
|
Year
Ended September 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenue
|
$ |
338,205
|
$ |
320,795
|
$ |
270,484
|
||||||
|
Cost
of goods sold
|
178,224
|
171,758
|
141,282
|
|||||||||
|
Gross
profit
|
159,981
|
149,037
|
129,202
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
Research,
development and technical
|
49,970
|
48,070
|
43,010
|
|||||||||
|
Selling
and marketing
|
24,310
|
21,115
|
16,989
|
|||||||||
|
General
and administrative
|
39,933
|
34,319
|
25,427
|
|||||||||
|
Purchased
in-process research and development
|
-
|
1,120
|
-
|
|||||||||
|
Total
operating expenses
|
114,213
|
104,624
|
85,426
|
|||||||||
|
Operating
income
|
45,768
|
44,413
|
43,776
|
|||||||||
|
Other
income, net
|
3,606
|
4,111
|
2,747
|
|||||||||
|
Income
before income taxes
|
49,374
|
48,524
|
46,523
|
|||||||||
|
Provision
for income taxes
|
15,538
|
15,576
|
14,050
|
|||||||||
|
Net
income
|
$ |
33,836
|
$ |
32,948
|
$ |
32,473
|
||||||
|
Basic
earnings per share
|
$ |
1.42
|
$ |
1.36
|
$ |
1.32
|
||||||
|
Weighted
average basic shares outstanding
|
23,748
|
24,228
|
24,563
|
|||||||||
|
Diluted
earnings per share
|
$ |
1.42
|
$ |
1.36
|
$ |
1.32
|
||||||
|
Weighted
average diluted shares outstanding
|
23,754
|
24,228
|
24,612
|
|||||||||
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,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ |
54,557
|
$ |
54,965
|
||||
|
Short-term
investments
|
157,915
|
110,965
|
||||||
|
Accounts
receivable, less allowance for doubtful accounts of $635 at September
30,
2007, and $551 at September 30, 2006
|
52,302 |
48,028
|
||||||
|
Inventories
|
37,266
|
40,326
|
||||||
|
Prepaid
expenses and other current assets
|
5,853
|
4,785
|
||||||
|
Deferred
income taxes
|
2,861
|
2,436
|
||||||
|
Total
current assets
|
310,754
|
261,505
|
||||||
|
Property,
plant and equipment, net
|
118,454
|
130,176
|
||||||
|
Goodwill
|
7,069
|
4,565
|
||||||
|
Other
intangible assets, net
|
11,549
|
11,447
|
||||||
|
Deferred
income taxes
|
6,686
|
1,365
|
||||||
|
Other
long-term assets
|
617
|
3,075
|
||||||
|
Total
assets
|
$ |
455,129
|
$ |
412,133
|
||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ |
15,859
|
$ |
15,104
|
||||
|
Capital
lease obligations
|
1,066
|
1,254
|
||||||
|
Accrued
expenses, income taxes payable and other current
liabilities
|
19,638
|
22,475
|
||||||
|
Total
current liabilities
|
36,563
|
38,833
|
||||||
|
Capital
lease obligations
|
3,608
|
4,420
|
||||||
|
Other
long-term liabilities
|
1,754
|
1,109
|
||||||
|
Total
liabilities
|
41,925
|
44,362
|
||||||
|
Commitments
and contingencies (Note 15)
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock:
|
||||||||
|
Authorized:
200,000,000 shares, $0.001 par value
|
||||||||
|
Issued:
25,635,730 shares at September 30, 2007, and 25,254,719 shares at
September 30, 2006
|
24 | 24 | ||||||
|
Capital
in excess of par value of common stock
|
178,068
|
157,463
|
||||||
|
Retained
earnings
|
284,843
|
251,007
|
||||||
|
Accumulated
other comprehensive income
|
1,259
|
272
|
||||||
|
Treasury
stock at cost, 1,627,337 shares at September 30, 2007, and 1,297,167
shares at September 30, 2006
|
(50,990 | ) | (40,995 | ) | ||||
|
Total
stockholders’ equity
|
413,204
|
367,771
|
||||||
|
Total
liabilities and stockholders’ equity
|
$ |
455,129
|
$ |
412,133
|
||||
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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ |
33,836
|
$ |
32,948
|
$ |
32,473
|
||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
24,170
|
21,174
|
19,072
|
|||||||||
|
Purchased
in-process research and development
|
-
|
1,120
|
-
|
|||||||||
|
Impairment
of investment
|
2,052
|
-
|
-
|
|||||||||
|
Loss
on equity investment
|
-
|
566
|
330
|
|||||||||
|
Share-based
compensation expense
|
12,846
|
10,664
|
312
|
|||||||||
|
Income
tax benefit on exercises of stock options
|
-
|
-
|
1,288
|
|||||||||
|
Deferred
income tax benefit
|
(5,708 | ) | (5,571 | ) | (2,417 | ) | ||||||
|
Non-cash
foreign exchange (gain) loss
|
(539 | ) |
2,606
|
1,079
|
||||||||
|
Loss
on disposal of property, plant and equipment
|
237
|
1,109
|
363
|
|||||||||
|
Impairment
of property, plant and equipment
|
52
|
790
|
657
|
|||||||||
|
Other
|
(482 | ) | (1,081 | ) |
299
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(3,437 | ) | (8,492 | ) |
3,902
|
|||||||
|
Inventories
|
3,658
|
(5,635 | ) | (4,760 | ) | |||||||
|
Prepaid
expenses and other assets
|
(525 | ) |
1,726
|
(2,824 | ) | |||||||
|
Accounts
payable
|
1,170
|
3,031
|
(2,703 | ) | ||||||||
|
Accrued
expenses, income taxes payable and other liabilities
|
(2,696 | ) |
3,713
|
891
|
||||||||
|
Net
cash provided by operating activities
|
64,634
|
58,668
|
47,962
|
|||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Additions
to property, plant and equipment
|
(10,013 | ) | (22,230 | ) | (21,137 | ) | ||||||
|
Proceeds
from the sale of property, plant and equipment
|
172
|
19
|
6
|
|||||||||
|
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 equity investments
|
-
|
-
|
(1,930 | ) | ||||||||
|
Purchases
of short-term investments
|
(155,175 | ) | (185,655 | ) | (141,570 | ) | ||||||
|
Proceeds from the sale of short-term investments
|
108,225
|
201,392
|
128,975
|
|||||||||
|
Net
cash used in investing activities
|
(62,291 | ) | (32,393 | ) | (35,656 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Repurchases
of common stock
|
(9,995 | ) | (15,996 | ) | (16,999 | ) | ||||||
|
Net
proceeds from issuance of stock
|
7,759
|
1,359
|
6,983
|
|||||||||
|
Principal
payments under capital lease obligations
|
(999 | ) | (933 | ) | (869 | ) | ||||||
|
Net
cash used in financing activities
|
(3,235 | ) | (15,570 | ) | (10,885 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
484
|
(176 | ) | (293 | ) | |||||||
|
Increase
(decrease) in cash
|
(408 | ) |
10,529
|
1,128
|
||||||||
|
Cash
and cash equivalents at beginning of year
|
54,965
|
44,436
|
43,308
|
|||||||||
|
Cash
and cash equivalents at end of year
|
$ |
54,557
|
$ |
54,965
|
$ |
44,436
|
||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid for income taxes
|
$ |
22,657
|
$ |
21,745
|
$ |
14,014
|
||||||
|
Cash
paid for interest
|
$ |
468
|
$ |
658
|
$ |
596
|
||||||
|
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||||||
|
Purchases
of property, plant and equipment in accrued liabilities
and accounts payable at the end of period
|
$ |
419
|
$ |
968
|
$ |
8,204
|
||||||
|
Issuance
of restricted stock
|
$ |
4,792
|
$ |
63
|
$ |
125
|
||||||
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
|
Unearned
Compensation
|
Treasury
Stock
|
Total
|
||||||||||||||||||
|
Balance
at September 30, 2004
|
$ |
25
|
$ |
136,259
|
$ |
185,586
|
$ |
1,905
|
$ |
(153
|
)
|
$ |
(8,000
|
) | $ |
315,622
|
|||||||||
|
Exercise
of stock options
|
5,655
|
5,655
|
|||||||||||||||||||||||
|
Tax
benefit on stock options exercised
|
1,288
|
1,288
|
|||||||||||||||||||||||
|
Amortization
of unearned compensation on restricted stock
|
106
|
106
|
|||||||||||||||||||||||
|
Issuance
of Cabot Microelectronics restricted stock under deposit share
plan
|
376
|
(125
|
)
|
251
|
|||||||||||||||||||||
|
Forfeiture
of Cabot Microelectronics restricted stock
|
(5
|
)
|
5
|
-
|
|||||||||||||||||||||
|
Reverse
amortization related to restricted stock forfeited
|
(4
|
)
|
(4
|
)
|
|||||||||||||||||||||
|
Issuance
of Cabot Microelectronics stock under directors' deferred
compensation plan
|
374
|
374
|
|||||||||||||||||||||||
| Issuance of Cabot Microelectronics stock under Employee Stock Purchase Plan | 1,064 | 1,064 | |||||||||||||||||||||||
|
Repurchases
of common stock, at cost
|
(1 | ) |
(16,999
|
)
|
(17,000
|
)
|
|||||||||||||||||||
|
Net
income
|
32,473
|
$
|
32,473
|
||||||||||||||||||||||
|
Net
unrealized gain on derivative intruments
|
35
|
|
35
|
|
|||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(780
|
) |
(780
|
) | |||||||||||||||||||||
|
Total
comprehensive income
|
$
|
31,728
|
31,728
|
||||||||||||||||||||||
|
Balance
at September 30, 2005
|
$
|
24
|
$
|
145,011
|
$
|
218,059
|
$
|
1,160
|
$
|
(171
|
)
|
$
|
(24,999
|
)
|
$
|
339,084
|
|||||||||
|
Reclassification
of unearned compensation upon adoption of SFAS 123R
|
(171
|
) |
171
|
|
-
|
||||||||||||||||||||
|
Reclassification
of 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
|
||||||||||
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.
USE
OF
ESTIMATES
The
preparation of financial statements
and related disclosures in conformity with accounting principles generally
accepted in the United States of America requires management to make judgments,
assumptions and estimates that affect the amounts reported in the consolidated
financial statements and accompanying notes. The accounting estimates
that require management’s most difficult and subjective judgments include, but
are not limited to, those estimates related to bad debt expense, warranty
obligations, inventory valuation, impairment of long-lived assets and
investments, business combinations, goodwill, other intangible assets,
share-based compensation, income taxes and contingencies. We base our
estimates on historical experience, current conditions and on various other
assumptions that 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, 2007, we held $157,915 of short-term investments which are classified as
available-for-sale securities. Our investment in these auction rate
securities is recorded at cost, which approximates fair market value due to
their variable interest rates, which typically reset every seven to 35 days,
and
despite the long-term nature of their stated contractual maturities, we have
the
ability to quickly liquidate these securities.
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.
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,
|
|||
|
2007
|
2006
|
2005
|
|
|
Taiwan
Semiconductor Manufacturing Co. (TSMC)
|
17%
|
10%
|
-
|
|
Marketech
|
7%
|
19%
|
35%
|
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 14.3% and 11.0% of
net accounts receivable at September 30, 2007 and 2006,
respectively.
FAIR
VALUES OF FINANCIAL INSTRUMENTS
The
recorded amounts of cash,
short-term investments, accounts receivable and accounts payable approximate
their fair values.
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. We determined that goodwill and other intangible assets
were not impaired as of September 30, 2007.
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.
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 sales are denominated in U.S.
dollars. Periodically we enter into forward foreign exchange
contracts in an effort to mitigate the risks associated with currency
fluctuations on certain foreign currency balance sheet exposures. Our
foreign exchange contracts do not qualify for hedge accounting under SFAS No.
133, “Accounting for Derivatives Instruments and Hedging Activities”, as amended
by SFAS No. 149, “Amendment of Statement 133 on Instruments and Hedging
Activities”, and SFAS No. 52, “Foreign Currency Translation” (SFAS 52);
therefore, the gains and losses resulting from the impact of currency exchange
rate movements on our forward foreign exchange contracts are recognized as
other
income or expense in the accompanying consolidated income statements in the
period in which the exchange rates change. These gains and losses are
intended to partially offset the foreign currency exchange gains and losses
on
the underlying exposures being hedged. Foreign exchange gains were
$321, $265 and $359 for fiscal 2007, 2006 and 2005, respectively.
Notes
to Consolidated Financial Statements - Continued
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, 2007, we had one forward foreign exchange
contract selling Japanese Yen related to an intercompany note with one of our
subsidiaries in Japan and for the purpose of hedging the risk associated with
a
net transactional exposure in Japanese Yen (refer to “Intercompany Loan
Accounting” in this section).
INTERCOMPANY
LOAN ACCOUNTING
We
maintain intercompany loan
agreements with our wholly-owned subsidiary, Nihon Cabot Microelectronics K.K.
(“the K.K.”), under which we provided funds to the K.K. to finance the purchase
of certain assets from our former Japanese branch at the time of the
establishment of this subsidiary, for the purchase of land adjacent to our
Geino, Japan, facility and for the construction of our Asia Pacific technology
center, all of which are part of the K.K., as well as for general business
purposes. Since settlement of the notes is expected in the
foreseeable future, and our subsidiary has been consistently making timely
payments on the loans, the loans are considered foreign-currency transactions
under SFAS 52. Therefore the associated foreign exchange gains and
losses are recognized as other income or expense rather than being deferred
in
the cumulative translation account in other comprehensive income.
PURCHASE
COMMITMENTS
We
have entered into unconditional
purchase obligations, which include noncancelable purchase commitments and
take-or-pay arrangements with suppliers. We review our agreements and
make an assessment of the likelihood of a shortfall in purchases and determine
if it is necessary to record a liability.
REVENUE
RECOGNITION
Revenue
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.
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.
Notes
to Consolidated Financial Statements -
Continued
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. Provisions are made for both U.S.
and any foreign deferred income tax liability or benefit.
SHARE-BASED
COMPENSATION
Effective
October 1, 2005, we adopted
SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which requires
all share-based payments, including stock option grants, restricted stock and
restricted stock unit awards and employee stock purchases, to be recognized
in
the income statement based on their fair values. We adopted SFAS 123R
using the modified prospective transition method; therefore, we have not
restated our financial results for prior periods. Under this
transition method, share-based compensation expense includes all share-based
compensation awards granted prior to, but not yet vested as of September 30,
2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123. Share-based compensation expense for
all share-based awards granted subsequent to September 30, 2005, was based
on
the grant date fair value estimated in accordance with the provisions of SFAS
123R.
Under
SFAS 123R, we continue to
attribute share-based compensation expense using the straight-line approach
based on awards ultimately expected to vest, which requires the use of an
estimated forfeiture rate. 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 continue to use the
Black-Scholes option-pricing model (“Black-Scholes model”) to estimate grant
date fair value, which requires the input of highly subjective assumptions,
including the option’s expected 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 defined under Staff Accounting Bulletin
(SAB) No. 107, “Share-Based Payments” (SAB 107), 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 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 10.
EARNINGS
PER SHARE
Basic
earnings per share (EPS) is
calculated by dividing net income available to common stockholders by the
weighted average number of common shares outstanding during the
period. Diluted EPS is calculated by using the weighted average
number of common shares outstanding during the period increased to include
the
weighted average dilutive effect of “in-the-money” stock options 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 and net
unrealized gains and losses on derivative instruments.
Notes
to Consolidated Financial Statements - Continued
EFFECTS
OF RECENT ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an Amendment of FASB Statement No. 115” (SFAS 159). SFAS
159 allows measurement at fair value of eligible financial assets and
liabilities that are not otherwise measured at fair value. If the
fair value option for an eligible item is elected, unrealized gains and losses
for that item shall be reported in current earnings at each subsequent reporting
date. This pronouncement is effective for fiscal years beginning
after November 15, 2007. We do not expect the adoption of SFAS 159 to
have a material impact on our consolidated financial position, results of
operations or cash flows.
In
September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurement” (SFAS 157). SFAS 157 establishes a
common definition for fair value in generally accepted accounting principles,
establishes a framework for measuring fair value and expands disclosure about
such fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the
impact of adopting SFAS 157 on our consolidated financial position, results
of
operations or cash flows.
In
September 2006, the FASB issued SFAS
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)” (SFAS 158). SFAS 158 requires an employer that sponsors one
or more single-employer defined benefit plans to: a) recognize the overfunded
or
underfunded status of a benefit plan in its statement of financial position;
b)
recognize as a component of other comprehensive income, net of tax, any
remaining unamortized transition obligation upon adoption as well as the gains
or losses and prior service costs or credits that have not yet been recognized
as components of net periodic benefit cost; c) measure defined benefit plan
assets and obligations as of the date of the employer’s fiscal year-end; and d)
certain enhanced disclosures in the notes to financial
statements. This statement is effective for fiscal years ending after
December 15, 2006. The adoption of SFAS 158 had no material impact on
our consolidated financial position, results of operations or cash
flows.
In
July 2006, the FASB issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement 109” (FIN 48), which clarifies the accounting
for uncertainty in tax positions. This interpretation sets forth a
recognition threshold and measurement element for the recognition and
measurement of a tax position taken or expected to be taken on a tax
return. This interpretation is effective for fiscal years beginning
after December 15, 2006. We are currently evaluating the impact of
adopting FIN 48 in fiscal 2008 on our consolidated financial position, results
of operations or cash flows.
3. INVENTORIES
Inventories
consisted of the
following:
|
September
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Raw
materials
|
$ |
18,011
|
$ |
18,623
|
||||
|
Work
in process
|
1,735
|
1,805
|
||||||
|
Finished
goods
|
17,520
|
19,898
|
||||||
|
Total
|
$ |
37,266
|
$ |
40,326
|
||||
Notes
to Consolidated Financial Statements - Continued
4. PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment consisted
of the following:
|
September
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Land
|
$ |
16,905
|
$ |
16,675
|
||||
|
Buildings
|
65,110
|
62,465
|
||||||
|
Machinery
and equipment
|
119,549
|
112,117
|
||||||
|
Furniture
and fixtures
|
5,359
|
5,146
|
||||||
|
Information
systems
|
13,817
|
12,742
|
||||||
|
Capital
leases
|
9,890
|
9,890
|
||||||
|
Construction
in progress
|
2,325
|
4,809
|
||||||
|
Total
property, plant and equipment
|
232,955
|
223,844
|
||||||
|
Less:
accumulated depreciation and amortization of assets under capital
leases
|
(114,501 | ) | (93,668 | ) | ||||
|
Net
property, plant and equipment
|
$ |
118,454
|
$ |
130,176
|
||||
Depreciation
expense, including
amortization of assets recorded under capital leases, was $21,365, $20,501
and
$18,817 for the years ended September 30, 2007, 2006 and 2005,
respectively.
In
fiscal 2006, we recorded $790 in
impairment expense primarily related to the decision to no longer use a portion
of a building in Aurora, Illinois, that was previously used for research and
development activities. Of this amount, $133 and $657 is included in
cost of goods sold and research, development and technical expense,
respectively. Impairment expense for fiscal 2007 was not
material.
5. BUSINESS
COMBINATIONS
In
accordance with SFAS 141, we account
for all business combinations by the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired
entities are recorded at their estimated fair values at the date of
acquisition. Goodwill represents the excess of the purchase price
over the fair value of net assets and amounts assigned to identifiable
intangible assets. Purchased in-process research and development
(IPR&D), for which technological feasibility has not yet been established
and no future alternative uses exist, is expensed immediately in accordance
with
SFAS 141.
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, and we may pay up to an additional
$2,000 depending upon the revenue performance of the QED business in the second
12 month period 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.
Notes
to Consolidated Financial Statements -
Continued
The
following table summarizes the QED
purchase price allocation updated to reflect the earnout payment made in fiscal
2007 mentioned above which increased goodwill:
|
At
September 30, 2007
|
|||||
|
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
6. GOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill
was $7,069 and $4,565 as of
September 30, 2007 and 2006, respectively. The increase in goodwill
primarily relates to the $2,500 we paid in fiscal 2007 based on the revenue
performance of QED as explained in Note 5.
The
components of other intangible
assets are as follows:
|
September
30, 2007
|
September
30, 2006
|
|||||||||||||||
|
Gross
Carrying
|
Accumulated
|
Gross
Carrying
|
Accumulated
|
|||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amortization
|
|||||||||||||
|
Other
intangible assets subject to amortization:
|
||||||||||||||||
|
Product
technology
|
$ |
5,380
|
$ |
673
|
$ |
5,380
|
$ |
135
|
||||||||
|
Acquired
patents and licenses
|
8,000
|
2,560
|
5,000
|
479
|
||||||||||||
|
Trade
secrets and know-how
|
2,550
|
2,550
|
2,550
|
2,550
|
||||||||||||
|
Distribution
rights, customer lists and other
|
1,457
|
1,245
|
1,457
|
1,059
|
||||||||||||
|
Total
other intangible assets subject to amortization
|
17,387
|
7,028
|
14,387
|
4,223
|
||||||||||||
|
Total
other intangible assets not subject to amortization*
|
1,190
|
1,283
|
||||||||||||||
|
Total
other intangible assets
|
$ |
18,577
|
$ |
7,028
|
$ |
15,670
|
$ |
4,223
|
||||||||
*
Total
other intangible assets not subject to amortization primarily consist of trade
names.
Other
intangible assets increased in
fiscal 2007 due to the acquisition of patent licenses for
$3,000. Additions to other intangible assets in fiscal 2006 were
primarily attributable to the acquisitions of substantially all of the assets
and certain liabilities of QED and Surface Finishes. In connection
with our acquisition of QED, we purchased $1,120 of IPR&D related to one
project. The amount allocated to IPR&D was determined through
established valuation techniques in the high-technology industry and was
expensed upon acquisition because technological feasibility had not yet been
established and no future alternative uses exist. Research and
development costs to bring the product to technological feasibility were not
material to our results of operations or cash flows.
In
June 2006 we purchased nine CMP
slurry patents from the International Business Machines Corporation (IBM) for
a
cost of $5,000, which is being amortized over approximately 2.7
years.
Amortization
expense was $2,805 and
$673 for fiscal 2007 and 2006, respectively. Estimated future
amortization expense for the five succeeding fiscal years is as
follows:
|
Fiscal
Year
|
Estimated
amortization
expense
|
||||
|
2008
|
$ |
2,838
|
|||
|
2009
|
1,663
|
||||
|
2010
|
854
|
||||
|
2011
|
847
|
||||
|
2012
|
847
|
||||
Notes
to Consolidated Financial Statements - Continued
7. OTHER
LONG-TERM ASSETS
Other
long-term assets consisted of the
following:
|
September
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Investment
in NanoProducts Corporation
|
$ |
-
|
$ |
2,446
|
||||
|
Other
long-term assets
|
617
|
629
|
||||||
|
Total
|
$ |
617
|
$ |
3,075
|
||||
In
fiscal
2004 and 2005, we invested a total of $3,750 to acquire a minority equity
interest in NanoProducts Corporation (NPC) and entered into a technology
collaboration agreement with NPC. In the third quarter of fiscal
2007, the Company chose to not renew the collaboration
agreement. Additionally, during the third quarter of fiscal 2007, NPC
entered into funding arrangements that we believe significantly reduced the
likelihood that we would recover the value of our minority
investment. Accordingly, we recorded a $2,052 impairment of our
investment, which reduced the carrying value to zero. This impairment
loss is included in other income and expense in the consolidated statement
of
operations. No write down was recorded in fiscal 2006.
8. ACCRUED
EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT
LIABILITIES
Accrued
expenses, income taxes payable
and other current liabilities consisted of the following:
|
September
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Accrued
compensation
|
$ |
13,965
|
$ |
12,948
|
||||
|
Goods
and services received, not yet invoiced
|
2,365
|
3,088
|
||||||
|
Warranty
accrual
|
527
|
924
|
||||||
|
Income
taxes payable
|
-
|
764
|
||||||
|
Taxes,
other than income taxes
|
911
|
2,270
|
||||||
|
Other
|
1,870
|
2,481
|
||||||
|
Total
|
$ |
19,638
|
$ |
22,475
|
||||
9.
REVOLVING CREDIT FACILITY
We
have an unsecured revolving credit
facility of $50,000 with an option to increase the facility up to
$80,000. Under this agreement, which terminates in November 2008,
interest accrues on any outstanding balance at either the lending institution’s
base rate or the Eurodollar rate plus an applicable margin. We also
pay a non-use fee. Loans under this facility are intended to be used
primarily for general corporate purposes, including working capital and capital
expenditures. The credit agreement also contains various
covenants. No amounts are currently outstanding under this credit
facility and we believe we are currently in compliance with its
covenants.
Notes
to Consolidated Financial Statements - Continued
10. SHARE-BASED
COMPENSATION PLANS
EQUITY
INCENTIVE PLAN
In
March 2004, our stockholders
approved our Second Amended and Restated Cabot Microelectronics Corporation
2000
Equity Incentive Plan (the “Plan”), as amended and restated September 26, 2006,
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.
Non-qualified
stock options issued
under the Plan are generally time-based and provide for a ten-year term, with
options generally vesting equally over a four-year period, with first vesting
on
the first anniversary of the grant date. Compensation expense related
to our stock option awards was $11,141 and $9,826 in fiscal 2007 and 2006,
respectively. Prior to fiscal 2006 we accounted for share-based
compensation under APB 25, which prescribed an intrinsic value method for
valuing stock options. In fiscal 2005, no compensation expense was
recorded with respect to stock options as all options granted had an exercise
price equal to the market value of the underlying common stock on the date
of
the grant. For additional information on our accounting for
share-based compensation, see Note 2 to 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 $954, $127 and $106 for fiscal 2007, 2006 and 2005,
respectively.
Our
historical approach to long-term incentives primarily has 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. As permitted by the Plan, in
fiscal 2007, the Compensation Committee of our Board of Directors decided to
begin to award 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 2000, Cabot Microelectronics
adopted an employee stock purchase plan (ESPP) and authorized up to 475,000
shares of common stock to be purchased under the plan. The ESPP
allows all full and certain part-time employees of Cabot Microelectronics and
its subsidiaries to purchase shares of our common stock through payroll
deductions. Employees can elect to have up to 10% of their annual
earnings withheld to purchase our stock, subject to a maximum number of shares
that a participant may purchase and a maximum dollar expenditure in any
six-month offering period, and certain other criteria. The shares are
purchased at a price equal to the lower of 85% of the closing price at the
beginning or end of each semi-annual stock purchase period. A total
of 54,180, 49,319, and 42,879 shares were issued under the ESPP during fiscal
2007, 2006 and 2005, respectively. Compensation expense related to
the ESPP was $446 and $344 in fiscal 2007 and 2006,
respectively. Prior to fiscal 2006, no compensation expense was
recorded under the ESPP, in accordance with APB 25.
Notes
to Consolidated Financial Statements - Continued
DIRECTORS’
DEFERRED COMPENSATION PLAN
The
Directors’ Deferred Compensation
Plan, as amended and restated September 26, 2006, became effective in March
2001
and applies only to our non-employee directors. The cumulative number
of shares deferred under the plan was 35,525 and 26,436 as of September 30,
2007
and 2006, respectively. Compensation expense related to our
Directors’ Deferred Compensation Plan was $305, $367 and $224 for fiscal
2007, 2006 and 2005, respectively.
ACCOUNTING
FOR SHARE-BASED COMPENSATION
In
conjunction with the adoption of
SFAS 123R, effective October 1, 2005, we applied the provisions of SAB No.
107,
“Share-Based Payments” (SAB 107), in developing our methodology to estimate our
Black-Scholes model inputs. A number of these inputs are highly
subjective, including the 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. Prior to the adoption of SFAS 123R, we estimated
expected volatility based only on our stock’s historical volatility in
accordance with SFAS 123 for purposes of our pro forma disclosure. We
believe that implied volatility is more reflective of market conditions;
however, due to the shorter length in term of the actively-traded options on
our
stock, we believe it to be appropriate to use a blended assumption for our
stock
options. In addition, we have updated our stock option expected term
assumption by adopting SAB 107’s simplified method, due to our limited amount of
historical option exercise data, 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. This method uses an average of
the vesting and contractual terms. 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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Stock
Options
|
||||||||||||
|
Weighted–average
fair value
|
$18.12
|
$17.85
|
$22.30
|
|||||||||
|
Expected
term (in years)
|
6.56
|
6.25
|
5.00
|
|||||||||
|
Expected
volatility
|
52 | % | 56 | % | 70 | % | ||||||
|
Risk-free
rate of return
|
4.4 | % | 4.5 | % | 3.6 | % | ||||||
|
Dividend
yield
|
-
|
-
|
-
|
|||||||||
|
ESPP
|
||||||||||||
|
Weighted-average
fair value
|
$8.30
|
$7.23
|
$7.95
|
|||||||||
|
Expected
term (in years)
|
0.50
|
0.50
|
0.50
|
|||||||||
|
Expected
volatility
|
30 | % | 33 | % | 30 | % | ||||||
|
Risk-free
rate of return
|
5.1 | % | 4.9 | % | 3.25 | % | ||||||
|
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.
Notes
to Consolidated Financial Statements - Continued
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.
PRO
FORMA
INFORMATION UNDER SFAS 123 FOR PERIODS PRIOR TO FISCAL 2006
The
table below reflects net income and
earnings per share for fiscal 2005 as if the Company had applied the fair value
recognition provision of SFAS 123 to share-based compensation
awards:
|
Year
Ended September 30,
2005
|
|||||
|
Net
income, as reported, prior to adoption of SFAS 123R
|
$ |
32,473
|
|||
|
Add:
Share-based compensation expense included in reported net income,
net of
related tax effects
|
230
|
||||
|
Less:
Share-based compensation expense determined under fair value method
for
all awards, net of related tax effects
|
(37,262 | ) | |||
|
Pro
forma net income
|
$ | (4,559 | ) | ||
|
Earnings
(loss) per share:
|
|||||
|
Basic
– as reported
|
$ |
1.32
|
|||
|
Basic
– pro forma
|
$ | (0.19 | ) | ||
|
Diluted
– as reported
|
$ |
1.32
|
|||
|
Diluted
– pro forma
|
$ | (0.19 | ) | ||
Pro-forma
share-based compensation
expense in fiscal 2005 includes the effect of accelerating the vesting of
approximately 1.3 million options to September 1, 2005, that had option prices
greater than $34.65 as of September 27, 2004. The acceleration
enabled us to eliminate the recognition of share-based compensation expense
associated with these “out-of-the-money” options in our consolidated financial
statements upon the adoption of SFAS 123R in October 2005, contributing to
the
reduction of share-based compensation expense from fiscal 2005 to fiscal
2006.
SHARE-BASED
COMPENSATION EXPENSE
Total
share-based compensation expense
for the year ended September 30, 2007 and 2006, is as follows:
|
Year
Ended September 30,
|
|||||||||
|
Income
statement classifications:
|
2007
|
2006
|
|||||||
|
Cost
of goods sold
|
$ |
775
|
$ |
648
|
|||||
|
Research,
development and technical
|
1,131
|
959
|
|||||||
|
Selling
and marketing
|
1,293
|
1,037
|
|||||||
|
General
and administrative
|
9,647
|
8,020
|
|||||||
|
Tax
benefit
|
(4,588 | ) | (3,809 | ) | |||||
|
Total
share-based compensation expense, net of tax
|
$ |
8,258
|
$ |
6,855
|
|||||
The
costs presented in the preceding
tables for pro forma and actual 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.
Notes
to Consolidated Financial Statements - Continued
STOCK
OPTION ACTIVITY
A
summary of stock option activity
under the Plan as of September 30, 2007, and changes during the fiscal 2007
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, 2006
|
4,367,659
|
$ |
44.40
|
|||||||||||||
|
Granted
|
440,020
|
31.98
|
||||||||||||||
|
Exercised
|
(189,457 | ) |
32.32
|
|||||||||||||
|
Forfeited
or canceled
|
(283,841 | ) |
49.93
|
|||||||||||||
|
Outstanding
at September 30, 2007
|
4,334,381
|
$ |
43.31
|
6.3
|
$ |
20,400
|
||||||||||
|
Exercisable
at September 30, 2007
|
2,714,404
|
$ |
49.48
|
5.2
|
$ |
4,543
|
||||||||||
|
Expected
to vest at September 30, 2007
|
1,454,489
|
$ |
33.00
|
8.2
|
$ |
14,176
|
||||||||||
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
on
the last trading day of fiscal 2007 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
2007. The total intrinsic value of options exercised was $1,863, $0
and $4,462 for fiscal 2007, 2006 and 2005, respectively.
The
total cash received from options
exercised was $6,124, $0 and $5,655 for fiscal 2007, 2006 and 2005,
respectively. The actual tax benefit realized for the tax deductions from
options exercised was $665, $0 and $1,651 for fiscal 2007, 2006 and 2005,
respectively. The total fair value of stock options vested during
fiscal years 2007, 2006 and 2005 was $10,204, $6,594 and $66,365,
respectively. As of September 30, 2007, there was $19,586 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 1.9 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, 2007, and changes during fiscal 2007, are presented
below:
|
Restricted
|
Weighted
|
|||||||
|
Stock
|
Average
|
|||||||
|
Awards
and
|
Grant
Date
|
|||||||
|
Units
|
Fair
Value
|
|||||||
|
Nonvested
at September 30, 2006
|
6,783
|
$ |
39.87
|
|||||
|
Granted
|
154,353
|
32.18
|
||||||
|
Vested
|
(7,574 | ) |
38.69
|
|||||
|
Forfeited
|
(2,410 | ) |
31.57
|
|||||
|
Nonvested
at September 30, 2007
|
151,152
|
$ |
32.21
|
|||||
As
of September 30, 2007, there was
$3,174 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 3.2 years. The total fair values of restricted stock awards and
restricted stock units vested during fiscal years 2007, 2006 and 2005 were
$293,
$203 and $589, respectively.
Notes
to Consolidated Financial Statements - Continued
11. SAVINGS
PLAN
Effective
in May 2000, we adopted the
Cabot Microelectronics Corporation 401(k) Plan (the “401(k) Plan”), which is a
qualified defined contribution plan, covering all eligible U.S. employees
meeting certain minimum age and eligibility requirements, as defined by the
401(k) Plan. Participants may make elective contributions 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 $3,643, $3,170 and $2,907 for the fiscal years ended
September 30, 2007, 2006 and 2005, respectively.
12. OTHER
INCOME, NET
Other
income, net, consisted of the
following:
|
Year
Ended September 30,
|
|||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||
|
Interest
income
|
$ |
6,117
|
$ |
5,394
|
$ |
3,438
|
|||||||
|
Interest
expense
|
(480 | ) | (690 | ) | (619 | ) | |||||||
|
Other
expense
|
(2,031 | ) | (593 | ) | (72 | ) | |||||||
|
Total
other income, net
|
$ |
3,606
|
$ |
4,111
|
$ |
2,747
|
|||||||
Other
expense in fiscal 2007 includes
$2,052 for the impairment of our investment in NPC, which is described in Note
7
above.
Notes
to Consolidated Financial Statements - Continued
13. 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, 2004
|
24,855,495
|
241,865
|
|||||||
|
Exercise
of stock options
|
282,764
|
||||||||
|
Restricted
stock under Equity Incentive Plan
|
2,369
|
||||||||
|
Restricted
stock under Deposit Share Plan, net of forfeitures
|
9,653
|
||||||||
|
Common
stock under Directors’ Deferred Compensation Plan
|
5,649
|
||||||||
|
Common
stock under ESPP
|
42,879
|
||||||||
|
Repurchases
of common stock
|
532,155
|
||||||||
|
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
|
|||||||
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.
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 authorized a share repurchase program for up to $40,000
of
our outstanding common stock. Shares are repurchased from time to
time, depending on market conditions, in open market transactions, at
management’s discretion. We fund share repurchases from our existing
cash balance. The program, which became effective on the
authorization date, may be suspended or terminated at any time, at the Company’s
discretion. 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”.
Notes
to Consolidated Financial Statements - Continued
14. INCOME
TAXES
Income
before income taxes was as
follows:
|
Year
Ended September 30,
|
|||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||
|
Domestic
|
$ |
36,681
|
$ |
39,759
|
$ |
42,333
|
|||||||
|
Foreign
|
12,693
|
8,765
|
4,190
|
||||||||||
|
Total
|
$ |
49,374
|
$ |
48,524
|
$ |
46,523
|
|||||||
Taxes
on
income consisted of the following:
|
Year
Ended September 30,
|
|||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||
|
U.S.
federal and state:
|
|||||||||||||
|
Current
|
$ |
17,821
|
$ |
16,645
|
$ |
13,220
|
|||||||
|
Deferred
|
(6,176 | ) | (5,714 | ) | (1,353 | ) | |||||||
|
Total
|
$ |
11,645
|
$ |
10,931
|
$ |
11,867
|
|||||||
|
Foreign:
|
|||||||||||||
|
Current
|
$ |
4,250
|
$ |
4,388
|
$ |
2,529
|
|||||||
|
Deferred
|
(357 | ) |
257
|
(346 | ) | ||||||||
|
Total
|
3,893
|
4,645
|
2,183
|
||||||||||
|
Total
U.S. and foreign
|
$ |
15,538
|
$ |
15,576
|
$ |
14,050
|
|||||||
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,
|
||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||
|
Federal
statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||||
|
U.S.
benefits from research and experimentation activities
|
(0.9 | ) | (0.2 | ) | (1.2 | ) | ||||||||
|
State
taxes, net of federal effect
|
0.6
|
0.7
|
0.7
|
|||||||||||
|
U.S.
benefits from foreign sales
|
-
|
-
|
(2.1 | ) | ||||||||||
|
Tax-exempt
interest income
|
(4.1 | ) | (3.7 | ) | (2.4 | ) | ||||||||
|
Share-based
compensation
|
1.1
|
-
|
-
|
|||||||||||
|
Domestic
production deduction
|
(0.2 | ) | (0.4 | ) |
-
|
|||||||||
|
Other,
net
|
-
|
0.7
|
0.2
|
|||||||||||
|
Provision
for income taxes
|
31.5 | % | 32.1 | % | 30.2 | % | ||||||||
Notes
to Consolidated Financial Statements -
Continued
Significant
components of deferred
income taxes were as follows:
|
September
30,
|
|||||||||
|
2007
|
2006
|
||||||||
|
Deferred
tax assets:
|
|||||||||
|
Employee
benefits
|
$ |
1,799
|
$ |
1,410
|
|||||
|
Inventory
|
1,298
|
1,111
|
|||||||
|
Depreciation
and amortization
|
162
|
305
|
|||||||
|
Product
warranty
|
232
|
368
|
|||||||
|
Bad
debt reserve
|
226
|
193
|
|||||||
|
State
and local taxes
|
-
|
146
|
|||||||
|
Share-based
compensation expense
|
7,080
|
3,559
|
|||||||
|
Other,
net
|
449
|
373
|
|||||||
|
Total
deferred tax assets
|
$ |
11,246
|
$ |
7,465
|
|||||
|
Deferred
tax liabilities:
|
|||||||||
|
Depreciation
and amortization
|
$ |
552
|
$ |
2,630
|
|||||
|
Translation
adjustment
|
(209 | ) |
72
|
||||||
|
State
and local taxes
|
-
|
76
|
|||||||
|
Other,
net
|
1,356
|
886
|
|||||||
|
Total
deferred tax liabilities
|
$ |
1,699
|
$ |
3,664
|
|||||
15. COMMITMENTS
AND CONTINGENCIES
LEGAL
PROCEEDINGS
While
we are not involved in any legal
proceedings that we currently 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 competitor of ours,
in the United States District Court for the District of Arizona, charging that
DA Nano’s manufacturing and marketing of certain CMP slurries infringe five CMP
slurry patents that we own. The affected DA Nano products include
those 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. 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.
PRODUCT
WARRANTIES
We
maintain a warranty reserve that
reflects management’s best estimate of the cost to replace product that does not
meet customers’ specifications and performance requirements, and costs related
to such replacement. The warranty reserve is based upon a historical
product replacement rate, adjusted for any specific known conditions or
circumstances. Adjustments to the warranty reserve are recorded in
cost of goods sold. Our warranty reserve requirements changed during
fiscal 2007 as follows:
|
Balance
as of September 30, 2006
|
$ |
924
|
|||
|
Additions
charged to expense
|
92
|
||||
|
Deductions
|
(489 | ) | |||
|
Balance
as of September 30, 2007
|
$ |
527
|
Notes
to Consolidated Financial Statements - Continued
INDEMNIFICATION
In
the normal course of business, we
are a party to a variety of agreements pursuant to which we may be obligated
to
indemnify the other party with respect to certain matters. Generally,
these obligations arise in the context of agreements entered into by us, under
which we customarily agree to hold the other party harmless against losses
arising from items such as a breach of certain representations and covenants
including title to assets sold, certain intellectual property rights and certain
environmental matters. These terms are common in the industries in
which we conduct business. In each of these circumstances, payment by
us is subject to certain monetary and other limitations and is conditioned
on
the other party making an adverse claim pursuant to the procedures specified
in
the particular agreement, which typically allow us to challenge the other
party’s claims.
We
evaluate estimated losses for such
indemnifications under SFAS No. 5, “Accounting for Contingencies” as interpreted
by FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others”. We consider such factors as the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. To date, we have not experienced material costs as a result
of such obligations and as of September 30, 2007, have not recorded any
liabilities related to such indemnifications in our financial statements as
we
do not believe the likelihood of a material obligation is probable.
LEASE
COMMITMENTS
We
lease certain vehicles, warehouse
facilities, office space, machinery and equipment under cancelable and
noncancelable leases, most of which expire within five years from now and may
be
renewed by us. Rent expense under such arrangements during fiscal
2007, 2006 and 2005 totaled $1,612, $1,221 and $637, 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.
Future
minimum rental commitments under
noncancelable leases as of September 30, 2007 are as follows:
|
Fiscal
Year
|
Operating
|
Capital
|
|||||||
|
2008
|
$ |
1,190
|
$ |
1,365
|
|||||
|
2009
|
419
|
1,344
|
|||||||
|
2010
|
96
|
1,344
|
|||||||
|
2011
|
35
|
1,344
|
|||||||
|
2012
|
18
|
-
|
|||||||
|
Thereafter
|
-
|
-
|
|||||||
| $ |
1,758
|
5,397
|
|||||||
|
Amount
related to interest
|
(723 | ) | |||||||
|
Capital
lease obligation
|
$ |
4,674
|
|||||||
PURCHASE
OBLIGATIONS
Purchase
obligations include our
take-or-pay arrangements with suppliers, and purchase orders and other
obligations entered into in the normal course of business regarding the purchase
of goods and services.
We
operate under a fumed silica supply
agreement with Cabot Corporation under which we are obligated to purchase fumed
silica for at least 90% of our six-month volume forecast for certain of our
slurry products, and to purchase certain non-material minimum quantities every
six months. We are required to pay for the shortfall if we purchase
less than these amounts. This agreement has an initial six-year term,
which expires in December 2009 and will automatically renew unless either party
gives certain notice of non-renewal. We currently anticipate meeting
minimum forecasted purchase volume requirements. We also operate
under a fumed alumina supply agreement with Cabot Corporation which runs through
December 2011. Purchase obligations include $10,537 of contractual
commitments for fumed silica and fumed alumina under these
contracts.
Notes
to Consolidated Financial Statements - Continued
16. EARNINGS
PER SHARE
SFAS
No. 128, “Earnings per Share”,
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computations. Basic and
diluted earnings per share were calculated as follows:
|
Year
Ended September 30,
|
|||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||
|
Numerator:
|
|||||||||||||
|
Earnings
available to common shares
|
$ |
33,836
|
$ |
32,948
|
$ |
32,473
|
|||||||
|
Denominator:
|
|||||||||||||
|
Weighted
average common shares (denominator for basic calculation)
|
23,748,158
|
24,228,118
|
24,562,581
|
||||||||||
|
Weighted
average effect of dilutive securities:
|
|||||||||||||
|
Share-based
compensation
|
6,044
|
268
|
49,881
|
||||||||||
|
Diluted
weighted average common shares (denominator for diluted
calculation)
|
23,754,202
|
24,228,386
|
24,612,462
|
||||||||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
|
$ |
1.42
|
$ |
1.36
|
$ |
1.32
|
|||||||
|
Diluted
|
$ |
1.42
|
$ |
1.36
|
$ |
1.32
|
|||||||
For
the twelve months ended September
30, 2007, 2006, and 2005, approximately 3.0 million, 4.2 million and 3.8 million
shares, respectively, attributable to outstanding stock options were excluded
from the calculation of diluted earnings per share because their inclusion
would
have been antidilutive.
17. 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,
|
|||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||
|
Revenue:
|
|||||||||||||
|
United
States
|
$ |
70,110
|
$ |
65,951
|
$ |
60,089
|
|||||||
|
Asia
|
239,254
|
226,520
|
186,054
|
||||||||||
|
Europe
|
28,841
|
28,324
|
24,341
|
||||||||||
|
Total
|
$ |
338,205
|
$ |
320,795
|
$ |
270,484
|
|||||||
|
Property,
plant and equipment, net:
|
|||||||||||||
|
United
States
|
$ |
75,618
|
$ |
82,855
|
$ |
87,378
|
|||||||
|
Asia
|
41,786
|
45,609
|
46,385
|
||||||||||
|
Europe
|
1,050
|
1,712
|
2,021
|
||||||||||
|
Total
|
$ |
118,454
|
$ |
130,176
|
$ |
135,784
|
|||||||
Revenue
from Taiwan and Japan each
accounted for more than ten percent of our total revenue. Our revenue
from customers in Taiwan totaled $97,583, $87,834 and $77,373 for fiscal 2007,
2006 and 2005, respectively. Our revenue from customers in Japan
totaled $44,535, $43,627 and $38,605 for fiscal 2007, 2006 and 2005,
respectively.
More
than ten percent of our net
property, plant and equipment is located in Japan, having a net book value
of
$37,850, $40,298 and $44,333 at September 30, 2007, 2006 and 2005,
respectively.
SELECTED
QUARTERLY OPERATING RESULTS
The
following table presents our
unaudited financial information for the eight quarters ended September 30,
2007. 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,
|
|||||||||||||||||||||||||
|
2007
|
2007
|
2007
|
2006
|
2006
|
2006
|
2006
|
2005
|
|||||||||||||||||||||||||
|
Revenue
|
$ |
90,379
|
$ |
89,023
|
$ |
76,987
|
$ |
81,816
|
$ |
86,982
|
$ |
84,936
|
$ |
67,389
|
$ |
81,488
|
||||||||||||||||
|
Cost
of goods sold
|
45,983
|
46,552
|
43,188
|
42,501
|
48,328
|
44,524
|
35,855
|
43,051
|
||||||||||||||||||||||||
|
Gross
profit
|
44,396
|
42,471
|
33,799
|
39,315
|
38,654
|
40,412
|
31,534
|
38,437
|
||||||||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||||||||||
|
Research,
development and technical
|
12,209
|
12,033
|
13,481
|
12,247
|
13,030
|
12,060
|
11,321
|
11,659
|
||||||||||||||||||||||||
|
Selling
and marketing
|
6,518
|
6,469
|
5,847
|
5,476
|
5,528
|
5,486
|
5,075
|
5,026
|
||||||||||||||||||||||||
|
General
and administrative
|
11,584
|
9,387
|
9,537
|
9,425
|
8,556
|
9,105
|
8,244
|
8,414
|
||||||||||||||||||||||||
|
Purchased
in-process research and development
|
-
|
-
|
-
|
-
|
1,120
|
-
|
-
|
-
|
||||||||||||||||||||||||
|
Total
operating expenses
|
30,311
|
27,889
|
28,865
|
27,148
|
28,234
|
26,651
|
24,640
|
25,099
|
||||||||||||||||||||||||
|
Operating
income
|
14,085
|
14,582
|
4,934
|
12,167
|
10,420
|
13,761
|
6,894
|
13,338
|
||||||||||||||||||||||||
|
Other
income (expense), net
|
1,320
|
(148 | ) |
1,260
|
1,174
|
1,541
|
764
|
1,090
|
716
|
|||||||||||||||||||||||
|
Income
before income taxes
|
15,405
|
14,434
|
6,194
|
13,341
|
11,961
|
14,525
|
7,984
|
14,054
|
||||||||||||||||||||||||
|
Provision
for income taxes
|
5,246
|
4,373
|
1,703
|
4,216
|
3,803
|
4,743
|
2,547
|
4,483
|
||||||||||||||||||||||||
|
Net
income
|
$ |
10,159
|
$ |
10,061
|
$ |
4,491
|
$ |
9,125
|
$ |
8,158
|
$ |
9,782
|
$ |
5,437
|
$ |
9,571
|
||||||||||||||||
|
Basic
earnings per share
|
$ |
0.43
|
$ |
0.43
|
$ |
0.19
|
$ |
0.38
|
$ |
0.34
|
$ |
0.40
|
$ |
0.22
|
$ |
0.39
|
||||||||||||||||
|
Weighted
average basic shares outstanding
|
23,783
|
23,662
|
23,708
|
23,839
|
24,087
|
24,205
|
24,233
|
24,363
|
||||||||||||||||||||||||
|
Diluted
earnings per share
|
$ |
0.43
|
$ |
0.42
|
$ |
0.19
|
$ |
0.38
|
$ |
0.34
|
$ |
0.40
|
$ |
0.22
|
$ |
0.39
|
||||||||||||||||
|
Weighted
average diluted shares outstanding
|
23,847
|
23,687
|
23,718
|
23,841
|
24,087
|
24,205
|
24,233
|
24,363
|
||||||||||||||||||||||||
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
The
following table sets forth
activities in our allowance for doubtful accounts:
|
Allowance
For Doubtful Accounts
|
Balance
At Beginning of Year
|
Additions
(Deductions)Charged To Expenses
|
Deductions
|
Balance
At End Of Year
|
|||||||||||||
|
Year
ended:
|
|||||||||||||||||
|
September
30, 2007
|
$ |
551
|
$ |
87
|
$ | (3 | ) | $ |
635
|
||||||||
|
September
30, 2006
|
470
|
92
|
(11 | ) |
551
|
||||||||||||
|
September
30, 2005
|
598
|
(65 | ) | (63 | ) |
470
|
|||||||||||
We
maintain a warranty reserve that
reflects management’s best estimate of the cost to replace product that does not
meet customers’ specifications and performance requirements, and costs related
to such replacement. The warranty reserve is based upon a historical
product replacement rate, adjusted for any specific known conditions or
circumstances. Adjustments to the warranty reserve are recorded in
cost of goods sold. Charges to expenses and deductions, shown below,
represent the net change required to maintain an appropriate
reserve.
|
Warranty
Reserves
|
Balance
At Beginning of Year
|
Additions
Charged To Expenses
|
Additions
Due To Acquisitions
|
Deductions
|
Balance
At End Of Year
|
||||||||||||||||
|
Year
ended:
|
|||||||||||||||||||||
|
September
30, 2007
|
$ |
924
|
$ |
92
|
$ |
-
|
$ | (489 | ) | $ |
527
|
||||||||||
|
September
30, 2006
|
1,426
|
415
|
32
|
(949 | ) |
924
|
|||||||||||||||
|
September
30, 2005
|
952
|
687
|
-
|
(213 | ) |
1,426
|
|||||||||||||||
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 the auditing efforts. The internal
auditors and independent registered public accounting firm have full and
direct
access to the Audit Committee, with and without management present.
/s/
William P. Noglows
William
P. Noglows
Chief
Executive Officer
/s/
William S. Johnson
William
S. Johnson
Chief
Financial Officer
/s/
Thomas S. Roman
Thomas
S.
Roman
Principal
Accounting Officer
None.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, with the participation
of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (“the Exchange Act”)), as of September 30,
2007. 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, 2007. The
effectiveness of the Company’s internal control over financial reporting as of
September 30, 2007 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.
None.
PART
III
The
information required by Item 10 of Form 10-K with respect to identification
of
directors, the existence of a separately-designated standing audit committee,
identification of members of such committee and identification of an audit
committee financial expert is incorporated by reference from the information
contained in the sections captioned "Election of Directors" and “Board Structure
and Compensation” in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held March 4, 2008 (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.
The
information required by Item 11
of Form 10-K is incorporated by reference from the information contained
in the
section captioned "Executive Compensation" in the Proxy Statement.
EQUITY
COMPENSATION PLAN INFORMATION
Shown
below is information as of September 30, 2007, 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
|
4,384,476 | (1) | $ | 43.31 | (1) | 3,581,110 | (2) | |||||
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||||||||
|
Total
|
4,384,476 | (1) | $ | 43.31 | (1) | 3,581,110 | (2) | |||||
|
(1)
|
Column
(a) includes 35,525 shares that non-employee directors, who defer
their
compensation under our Directors’ Deferred Compensation Plan, have the
right to acquire pursuant thereto, and 14,570 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 157,712 shares available for future issuance under
our
Employee Stock Purchase Plan.
|
The
other information required by Item 12 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Stock Ownership"
in the
Proxy Statement.
The
information required by Item 13 of Form 10-K is incorporated by reference
from
the information contained in the section captioned "Certain Relationships
and
Related Transactions" in the Proxy Statement.
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
(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, 2007, 2006 and 2005
Consolidated
Balance Sheets at
September 30, 2007 and 2006
Consolidated
Statements of Cash
Flows for the years ended September 30, 2007, 2006 and 2005
Consolidated
Statements of Changes in
Stockholders’ Equity for the years ended September 30, 2007, 2006 and
2005
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
|
|
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
(16)
|
Second
Amended and Restated Cabot Microelectronics Corporation 2000
Equity
Incentive Plan, as amended and restated September 26,
2006.*
|
|
|
10.2
(12)
|
Form
of Second Amended and Restated Cabot Microelectronics Corporation
2000
Equity Incentive Plan Non-Qualified Stock Option Grant Agreement
(directors).*
|
|
|
10.4
(16)
|
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
(16)
|
Form
of Second Amended and Restated Cabot Microelectronics Corporation
2000
Equity Incentive Plan Restricted Stock Award Agreement (employees
(including executive officers)).*
|
|
|
10.6
(18)
|
Form
of Second Amended and Restated Cabot Microelectronics Corporation
2000
Equity Incentive Plan Restricted Stock Award Agreement for
Directors.*
|
|
|
10.15
|
Cabot
Microelectronics Corporation Employee Stock Purchase Plan, as
Amended and
Restated September 17, 2007.*
|
10.22
(8) Cabot
Microelectronics Corporation 401(k) Plan, as amended.*
10.23
(5) Form
of Change in Control Severance Protection Agreement.**
10.28
(16) Directors’
Deferred Compensation Plan, as amended September 26, 2006.*
|
|
10.29
(9)
|
Amended
and Restated Credit Agreement dated November 24, 2003 among Cabot
Microelectronics Corporation, Various Financial Institutions
and LaSalle
Bank National Association, as Administrative Agent, and National
City Bank
of Michigan/Illinois, as Syndication
Agent.
|
|
|
10.30
(6)
|
Form
of Deposit Share Agreement.***
|
|
|
10.31
(6)
|
Amendment
No. 1 to Fumed Metal Oxide Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.+
|
|
|
10.32
(6)
|
Fumed
Alumina Supply Agreement.+
|
|
|
10.33
(7)
|
Adoption
Agreement, as amended, of Cabot Microelectronics Corporation
Supplemental
Employee Retirement Plan.*
|
|
|
10.34
(14)
|
Code
of Business Conduct.
|
|
|
10.36
(9)
|
Directors’
Cash Compensation Umbrella
Program.*
|
|
|
10.37
(10)
|
Employment
and Transition Agreement dated November 3,
2003.*
|
|
|
10.38
(10)
|
Employment
Offer Letter dated November 2,
2003.*
|
|
|
10.39
(10)
|
Employment
Offer Letter dated November 17,
2003.*
|
|
|
10.40
(11)
|
Amendment
No. 2 to Fumed Metal Oxide Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.
|
|
|
10.41
(11)
|
Amendment
No. 3 to Fumed Metal Oxide Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.
|
|
|
10.42
(11)
|
Fumed
Silica Supply Agreement.+
|
|
|
10.43
(11)
|
General
Release, Waiver and Covenant Not to
Sue.*
|
|
|
10.44
(13)
|
Amendment
as of January 17, 2005 to Four Grant Agreements for Non-Qualified
Stock
Option Awards with Grant Dates of March 13, 2001, March 12, 2002,
March
11, 2003 and March 9, 2004,
respectively.*
|
|
|
10.45
(13)
|
Amendment
as of January 29, 2005 to Three Grant Agreements for Non-Qualified
Stock
Option Awards with Grant Dates of March 13, 2001, March 12, 2002
and March
11, 2003, respectively.*
|
|
|
10.46
(17)
|
Non-Employee
Directors’ Compensation Summary as of March,
2007.*
|
|
|
10.47
(15)
|
Asset
Purchase Agreement by and among Cabot Microelectronic Corporation,
QED
Technologies International, Inc., QED Technologies, Inc., Don
Golini and
Lowell Mintz dated June 15, 2006.
|
|
|
10.48
(15)
|
Technology
Asset Purchase Agreement dated June 15, 2006 by and among Cabot
Microelectronics Corporation, QED Technologies International,
Inc., and
Byelocorp Scientific, Inc.
|
|
|
10.49
(16)
|
Amendment
No. 1 to Fumed Silica Supply Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.+
|
|
|
21.1
|
Subsidiaries
of Cabot Microelectronics
Corporation.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting
Firm.
|
|
|
24.1
|
Power
of Attorney.
|
|
|
31.1
|
Certification
of Chief Executive Officer as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
(1)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Registration Statement on Form S-1 (No. 333-95093) filed with
the Commission on March 27, 2000.
|
|
|
(2)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Registration Statement on Form S-1 (No. 333-95093) filed with
the Commission on April 3, 2000.
|
|
|
(3)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Registration Statement on Form S-1 (No. 333-95093) filed with
the Commission on April 4, 2000.
|
|
|
(4)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Current Report on Form 8-K (No. 000-30205) filed with the
Commission on October 6, 2000.
|
|
|
(5)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Annual Report on Form 10-K (No. 000-30205) filed with the
Commission on December 28, 2000.
|
|
|
(6)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on February 12, 2002.
|
|
|
(7)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on May 13, 2002.
|
|
|
(8)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on February 12, 2003.
|
|
|
(9)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Annual Report on Form 10-K (No. 000-30205) filed with the
Commission on December 10, 2003.
|
|
|
(10)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on February 12, 2004.
|
|
|
(11)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on May 7, 2004.
|
|
|
(12)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Annual Report on Form 10-K (No. 000-30205) filed with the
Commission on December 8, 2004.
|
|
|
(13)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on May 9, 2005.
|
|
|
(14)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Annual Report on Form 10-K (No. 000-30205) filed with the
Commission on December 7, 2005.
|
|
|
(15)
Filed as an exhibit to, and incorporated by reference from the
Registrant’s Quarterly Report on Form 10-Q (No. 000-30205) filed with the
Commission on August 9, 2006.
|
|
|
(16)
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.
|
|
|
(17)
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.
|
|
|
(18)
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, 2007.
|
* Management
contract, or compensatory plan or arrangement.
** Substantially
similar change in control severance protection agreements have been
entered into
with William P. Noglows, H. Carol Bernstein, Jean Pol Delrue, William
S.
Johnson, Daniel J. Pike, Thomas S. Roman, Stephen R. Smith, Clifford
L. Spiro,
Adam F. Weisman and Daniel S. Wobby, with differences only in the amount
of
payments and benefits to be received by such persons.
*** Substantially
similar deposit share agreements have been entered into with William
P. Noglows,
H. Carol Bernstein, William S. Johnson, Jean Pol Delrue, 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 27,
2007 /s/
WILLIAM P.
NOGLOWS
William
P. Noglows
Chairman
of the Board, President
and Chief Executive Officer
[Principal
Executive
Officer]
Date:
November 27,
2007 /s/
WILLIAM S.
JOHNSON
William
S. Johnson
Vice
President and Chief Financial
Officer
[Principal
Financial
Officer]
Date:
November 27,
2007 /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 27,
2007 /s/
WILLIAM P.
NOGLOWS
William
P.
Noglows
Chairman
of the Board, President and Chief Executive Officer
[Director]
Date:
November 27,
2007 /s/
ROBERT J. BIRGENEAU*
Robert
J.
Birgeneau
[Director]
Date:
November 27,
2007 /s/
JOHN P. FRAZEE, JR.*
John
P. Frazee, Jr.
[Director]
Date:
November 27,
2007 /s/
H. LAURANCE FULLER*
H.
Laurance Fuller
[Director]
Date:
November 27,
2007 /s/
EDWARD J. MOONEY*
Edward
J.
Mooney
[Director]
Date:
November 27,
2007 /s/
STEVEN V. WILKINSON*
Steven
V. Wilkinson
[Director]
Date:
November 27,
2007 /s/
BAILING XIA*
Bailing
Xia
[Director]
Date:
November 27,
2007 /s/
ALBERT Y. C. YU*
Albert
Y. C.
Yu
[Director]
*
by H.
Carol Bernstein as Attorney-in-fact pursuant to the requirements of Section
13
or 15(d) of the Securities Exchange Act of 1934.
72