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| CCMP > SEC Filings for CCMP > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
The following "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as disclosures included elsewhere in this Form 10-Q, include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this Form 10-Q are forward-looking. In particular, the statements herein regarding future sales and operating results; Company and industry growth, contraction or trends; growth or contraction of the markets in which the Company participates; international events or various economic factors; product performance; the generation, protection and acquisition of intellectual property, and litigation related to such intellectual property; new product introductions; development of new products, technologies and markets; the acquisition of or investment in other entities; uses and investment of the Company's cash balance; the construction of facilities by the Company; and statements preceded by, followed by or that include the words "intends", "estimates", "plans", "believes", "expects", "anticipates", "should", "could" or similar expressions, are forward-looking statements. Forward-looking statements reflect our current expectations and are inherently uncertain. Our actual results may differ significantly from our expectations. We assume no obligation to update this forward-looking information. The section entitled "Risk Factors" describes some, but not all, of the factors that could cause these differences.
This section, "Management's Discussion and Analysis of Financial Condition and Results of Operations", should be read in conjunction with Cabot Microelectronics' annual report on Form 10-K for the fiscal year ended September 30, 2008, including the consolidated financial statements and related notes thereto.
SECOND QUARTER OF FISCAL 2009 OVERVIEW
We continued to see the adverse effects of the ongoing global recession during the second quarter of fiscal 2009. Based on several semiconductor industry reports, it appears that semiconductor manufacturers decreased their production to reduce excess inventories of semiconductor devices in response to a global decline in demand for electronic goods. This, in turn, has caused an unprecedented reduction in the demand for our CMP consumable products. We believe our financial results for the second quarter of fiscal 2009 reflect the continued soft demand for our products driven by the global economic downturn. We also believe the decline in our revenue generally was consistent with the decrease in overall semiconductor industry demand. Since the primary driver of revenue for our CMP consumable products is wafer starts, the decreased production by our customers has adversely affected us, and will continue to adversely affect us until the semiconductor industry recovers. However, we experienced a recent upturn in the demand for our products in March as demand for our products increased significantly from the levels we experienced in January and February. There are many factors that make it difficult for us to predict future revenue trends for our business, including: the duration of the global economic downturn; the cyclical nature of the semiconductor industry; potential future acquisitions by us; the short order to delivery time for our products and the associated lack of visibility to future customer orders; and quarter to quarter changes in customer orders regardless of industry strength.
Revenue for our second quarter of fiscal 2009 was $45.4 million, which represented a decrease of 52.0%, or $49.1 million, from the second quarter of fiscal 2008 and a decrease of 28.0%, or $17.6 million, from the previous fiscal quarter. We believe the significant decrease in revenue reflects the adverse impacts of the global economic recession noted above, as well as a traditional seasonal weakness experienced during the first quarter of the calendar year.
The unprecedented reduction in demand for our products has had a significant adverse affect on our gross profit margins as we experienced significant underutilization of our manufacturing capacity as we decreased our production to match the decrease in demand for our CMP consumable products. Gross profit expressed as a percentage of revenue for our second quarter of fiscal 2009 was 28.0% and gross profit was 38.2% on a year-to-date basis. Gross profit decreased from both the 44.7% reported in the second quarter of fiscal 2008 and the 45.6% reported in the previous fiscal quarter. Based on our fiscal year-to-date performance, we no longer expect to achieve gross profit within what had been our previous full year gross profit guidance range of 46% to 48% for fiscal 2009. We may continue to experience fluctuations in our quarterly gross profit due to a number of factors, including the extent to which we utilize our manufacturing capacity and fluctuations in our product mix.
During the second quarter of fiscal 2009, we took actions to improve and optimize our operating effectiveness and reduce our costs. For example, we shortened work schedules in our global CMP consumables manufacturing operations, we implemented a modest work force reduction and we also suspended certain employee benefits. These initiatives were in addition to several cost saving steps we took earlier in the fiscal year to reduce discretionary spending, such as reduced annual, merit-based salary increases, travel expenses and the implementation of a hiring freeze. While these cost reduction efforts helped us to achieve cost savings across our business, they were more than offset by the significant decline in demand for our products during the quarter.
Operating expenses were $30.0 million in our second quarter of fiscal 2009, compared to $32.2 million in the second quarter of fiscal 2008 and $29.4 million in the previous fiscal quarter. Operating expenses in the second quarter of fiscal 2009 were adversely affected by $3.6 million of specific, pre-tax expenses including a $1.5 million write-off of in-process research and development expenses related our acquisition of Epoch, a $1.1 million impairment of certain research and development equipment, and a $1.0 million increase in our reserve for bad debt expense due to the impact of the global economic conditions on customer collections. We currently expect operating expenses will be in the range of $115 million to $120 million for full year fiscal 2009, including the operating expenses of Epoch.
Diluted loss per share for our second fiscal quarter was $0.44, a decrease from diluted earnings per share of $0.34 reported in the second quarter of fiscal 2008 and $0.01 per share reported in the previous fiscal quarter as a result of the factors discussed above.
We completed our acquisition of Epoch Material Co., Ltd. (Epoch), a consolidated subsidiary of Eternal Chemical Co., Ltd. (Eternal). Epoch is a Taiwan-based company specializing in the development, manufacture and sale of copper CMP slurries and CMP cleaning solutions to the semiconductor industry, and color filter slurries to the liquid crystal display (LCD) industry. Epoch has a strong presence in Taiwan, which we believe is the largest geographic market for CMP consumables, strong customer relationships in the Asia Pacific region, a significant fixed asset base and strong technical capabilities. Now that the acquisition has closed, we are working effectively to integrate our two businesses and leverage the natural synergies. Under the share purchase agreement, we paid $59.4 million on the closing date of February 27, 2009 to obtain 90% of Epoch's stock and we paid $0.7 million in transaction costs. We expect to pay an additional $6.6 million to Eternal in August 2010 to acquire the remaining 10% ownership interest. During this interim period, Eternal will continue to hold the remaining 10% ownership interest in Epoch. See Note 2 of the Notes to the Consolidated Financial Statements for a complete discussion of the acquisition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
We discuss our critical accounting estimates and effects of recent accounting pronouncements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2008. We believe there have been no material changes in our critical accounting estimates during the first six months of fiscal 2009 except for the following discussion of our allowance for doubtful accounts and the discussion of goodwill and intangible assets. See Note 3, Note 8 and Note 15 of the Notes to the Consolidated Financial Statements for a discussion of new accounting pronouncements.
Our allowance for doubtful accounts is based on historical collection experience, adjusted for any known conditions or circumstances. The global economic recession has had adverse effects on our ability to collect accounts receivable from some of our customers. The recession has also caused two of our customers to file for bankruptcy or insolvency. We recorded a $1.0 million increase in our allowance for doubtful accounts during the quarter ended March 31, 2009 to account for the increased uncertainty in customer collections. We will continue to closely monitor the financial solvency of our customers and, if the global economic recession continues, we may have to record additional increases to our allowance for doubtful accounts.
In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), goodwill and indefinite lived intangible assets are tested for impairment annually in the fourth fiscal quarter or more frequently if indicators of potential impairment exist, using a fair-value-based approach. The recoverability of goodwill and other intangible assets with indefinite lives is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment. We have consistently determined the fair value of our reporting units using a discounted cash flow analysis of our projected future results. The use of discounted projected future results is based on assumptions that are consistent with our estimates of future growth and the strategic plan used to manage the underlying business. Factors requiring significant judgment include assumptions related to future growth rates, discount factors and tax rates, among others. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis that impact these assumptions may result in future impairment charges.
We completed our annual impairment test during our fourth quarter of fiscal 2008 and we performed an interim impairment test at the end of our first quarter of fiscal 2009. We determined that no impairment existed as of either time period. However, based upon the continued deterioration of the global economy and continued softening of demand for our products driven by the global economic recession, we concluded that sufficient indicators existed to perform another interim impairment analysis at March 31, 2009 for one of our reporting units that has a $5,000 carrying value of goodwill. Our impairment analysis at March 31, 2009 included revised estimates of future revenue and income projections. These projections are based on management's view of market and economic data that we use to create future scenarios. Management combines this market data with estimates of our mix of products sold, production costs and the level at which we use our manufacturing capacity. We discounted the resulting projected cash flows over a range of discount rates between 11% and 15%, using discount rates comprised of the published cost of capital for our peer companies. We determined our goodwill and intangible assets with indefinite lives were not impaired as of March 31, 2009.
Due to the ongoing uncertainty in market and economic conditions, which may continue to negatively impact the Company's operating results and overall market value, management will continue to monitor and evaluate the carrying value of goodwill and intangible assets with indefinite lives. If market and economic conditions deteriorate further and cost-cutting measures do not improve the profitability, and our estimates of future operating results are not met, we may have to reassess the impairment of goodwill prior to the fourth quarter of fiscal 2009. A 10% decline in our cash flow projections would have resulted in the calculated fair value of one of our reporting units being less than its carrying value under our projection of a slow economic recovery. This would require us to complete additional goodwill impairment testing as defined in SFAS 142.
Intangible assets with finite lives are reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". As a result of the impairment indicators described above, we tested our intangible assets with finite lives for impairment during our fiscal quarter ended March 31, 2009 and determined there was no impairment.
THREE MONTHS ENDED MARCH 31, 2009, VERSUS THREE MONTHS ENDED MARCH 31, 2008
REVENUE
Revenue was $45.4 million for the three months ended March 31, 2009, which represented a 52.0%, or $49.1 million, decrease from the three months ended March 31, 2008. Of this decrease, $51.0 million was due to decreased sales volume driven by the significant weakening of demand for our products due to the global economic recession which has negatively impacted end user demand for IC devices, a correction of excess semiconductor device inventories by semiconductor manufacturers and seasonal industry weakness which normally occurs during the first quarter of the calendar year. This decrease in demand was partially offset by a $1.3 million benefit due to the effect of foreign exchange rate changes. We have experienced a recent upturn in our business due to significantly higher demand for our products in March from the low levels we experienced in January and February 2009. However, it is uncertain whether this upturn will continue.
COST OF GOODS SOLD
Total cost of goods sold was $32.7 million for the three months ended March 31, 2009, which represented a decrease of 37.4%, or $19.5 million, from the three months ended March 31, 2008. The decrease in cost of goods sold was primarily due to $28.2 million from decreased sales volume due to the global economic recession, $4.3 million in lower fixed manufacturing costs and $2.1 million in higher manufacturing yields in our CMP slurry and pad production, partially offset by an $8.9 million cost increase due to lower utilization of our manufacturing capacity on the decreased level of sales, $4.2 million due to a higher-cost product mix and $1.5 million in higher freight and packaging costs.
The significant decrease in demand for our products due to the global economic recession has caused us to implement a number of cost saving initiatives. We shortened work schedules in our manufacturing operations on a global basis to more closely match production with demand for our products while also maintaining the flexibility to increase or decrease production levels in the future to meet customer demand for our products. We have also taken a number of other cost reduction measures including a reduction in annual, merit-based salary increases, a modest work force reduction, a restriction on travel and the suspension of certain employee benefits, among others. These actions are intended to improve our operating effectiveness during the current economic recession. We are prepared to further adjust our costs as needed if the soft economic environment continues or worsens.
Fumed metal oxides, such as fumed silica and fumed alumina, are significant raw materials that we use in many of our CMP slurries. In an effort to mitigate our risk to rising raw material costs and to increase supply assurance and quality performance requirements, we have entered into multi-year supply agreements with a number of suppliers. For more financial information about our supply contracts, see "Tabular Disclosure of Contractual Obligations" in this filing as well as in Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2008.
Our need for additional quantities or different kinds of key raw materials in the future has required, and will continue to require, that we enter into new supply arrangements with third parties. Future arrangements may result in costs which are different from those in the existing agreements. In addition, energy costs may also impact the cost of raw materials, packaging, freight and labor costs. We also expect to continue to invest in our operations excellence initiative to improve product quality, reduce variability and improve product yields in our manufacturing process.
GROSS PROFIT
Our gross profit as a percentage of revenue was 28.0% for the three months ended March 31, 2009, as compared to 44.7% for the three months ended March 31, 2008. The decrease was primarily due to the unprecedented underutilization of our manufacturing capacity on the significantly lower level of sales partially offset by lower fixed manufacturing costs and favorable production yields. Although current economic conditions make it difficult to predict full year results, based on actual financial results achieved during the first half of our fiscal year, we no longer expect to achieve gross profit within what had been our previous gross profit guidance of 46% to 48% for full fiscal year 2009. We may continue to experience fluctuations in our quarterly gross profit due to a number of factors, including the extent to which we utilize our manufacturing capacity and fluctuations in our product mix.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $12.6 million for the three months ended March 31, 2009, which represented an increase of 1.5%, or $0.2 million, from the three months ended March 31, 2008. The increase was primarily related to a $1.1 million pre-tax impairment recorded on certain research and development equipment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This impairment was partially offset by $0.5 million in lower staffing-related costs, $0.3 million in lower depreciation and amortization, and $0.2 million in lower travel-related costs. The cost reduction initiatives we instituted during the second quarter of fiscal 2009 helped us achieve these cost savings.
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 $5.3 million for the three months ended March 31, 2009, which represented a decrease of 23.8%, or $1.6 million, from the three months ended March 31, 2008. The decrease was primarily due to $0.5 million in lower staffing-related costs, $0.4 million in lower professional fees, $0.4 million in lower travel related costs, and $0.2 million in lower advertising and trade show costs. Our cost reduction measures that we implemented in the second quarter of fiscal 2009 helped us achieve these cost savings.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $10.6 million for the three months ended March 31, 2009, which represented a decrease of 17.6%, or $2.3 million, from the three months ended March 31, 2008. The decrease resulted primarily from $2.0 million in lower staffing-related costs, primarily due to reduced expenses related to our annual bonus plan, and $1.2 million in lower professional fees, including costs to enforce our intellectual property. These cost savings were partially offset by a $1.0 million increase in our reserve for bad debt expense due to the impact of adverse economic conditions on customer collections, including customer bankruptcies.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development (IPR&D) expense was $1.5 million for the three months ended March 31, 2009, resulting from the acquisition of Epoch.
OTHER INCOME, NET
Other income was $0.5 million for the three months ended March 31, 2009, compared to $1.7 million in the three months ended March 31, 2008. The decrease in other income was primarily due to $1.4 million lower interest income resulting from lower interest rates on our balances of cash and short-term investments, partially offset by $0.2 million in foreign exchange gains. We monetized the majority of our short-term investments in auction rate securities (ARS) during fiscal 2008 and reinvested these funds into money market investments which earn interest at lower rates. See Note 3 of the Notes to the Consolidated Financial Statements for more information on our ARS.
PROVISION FOR INCOME TAXES
Our effective income tax benefit rate of 39.7% for the three months ended March 31, 2009 compared to a 32.5% effective income tax rate for the three months ended March 31, 2008. The change in the effective tax rate was primarily due to the significant decrease in taxable income, which resulted in the Company being in a net loss position as of March 31, 2009, due to the significant decrease in demand discussed above, and the reinstatement of the research and experimentation credit in the fourth quarter of fiscal 2008, partially offset by a decrease in tax-exempt interest income.
NET INCOME (LOSS)
Net loss was $10.1 million for the three months ended March 31, 2009 compared to net income of $7.9 million for the three months ended March 31, 2008. As a result of the factors discussed above, we incurred a significant net loss in the second quarter of fiscal 2009.
SIX MONTHS ENDED MARCH 31, 2009, VERSUS SIX MONTHS ENDED MARCH 31, 2008
REVENUE
Revenue was $108.4 million for the six months ended March 31, 2009, which represented a 42.3%, or $79.5 million, decrease from the six months ended March 31, 2008. Of this decrease, $87.1 million was due to decreased sales volume driven by the significant weakening of demand for our products due to the global economic recession which has negatively impacted end user demand for IC devices, as well as a correction of excess semiconductor device inventories by semiconductor manufacturers. This decrease in demand was partially offset by a $5.9 million benefit of a favorably priced product mix and a $2.4 million benefit due to the effect of foreign exchange rate changes.
COST OF GOODS SOLD
Total cost of goods sold was $67.0 million for the six months ended March 31, 2009, which represented a decrease of 33.5%, or $33.8 million, from the six months ended March 31, 2008. Of this decrease, $46.8 million was due to decreased sales volume due to the global economic recession, $5.0 million was due to lower fixed manufacturing costs and $3.8 million was due to higher manufacturing yields in our CMP slurry and pad production. These cost decreases were partially offset by a $12.7 million cost increase due to lower utilization of our manufacturing capacity on the decreased level of sales and $8.0 million due to a higher-cost product mix.
As discussed above, in response to the significant decrease in demand for our products due to the global economic recession, we implemented a number of cost reduction initiatives. These actions are intended to improve our operating effectiveness during the current economic recession. We are prepared to further adjust our costs as needed if the soft economic environment continues or worsens.
GROSS PROFIT
Our gross profit as a percentage of revenue was 38.2% for the six months ended March 31, 2009, compared to 46.3% for the six months ended March 31, 2008. The decrease was primarily due to the unprecedented underutilization of our manufacturing capacity on the significantly lower level of sales, partially offset by lower fixed manufacturing costs and favorable production yields. Although current economic conditions make it difficult to predict full year results, based on actual financial results achieved during the first half of our fiscal year, we no longer expect to achieve gross profit within what had been our gross profit guidance of 46% to 48% for full fiscal year 2009.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $24.7 million for the six months ended March 31, 2009, which represented an increase of 3.7%, or $0.9 million, from the six months ended March 31, 2008. The increase was primarily related to $1.2 million in pre-tax impairments recorded on certain research and development equipment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", including $1.1 million recorded in the second quarter of fiscal 2009, and $0.4 million in higher laboratory supplies. These increases were partially offset by $0.7 million in lower staffing-related costs.
SELLING AND MARKETING
Selling and marketing expenses were $11.2 million for the six months ended March 31, 2009, which represented a decrease of 14.8%, or $2.0 million, from the six months ended March 31, 2008. The decrease was primarily due to $0.8 million in lower staffing-related costs, $0.3 million in lower travel-related costs, $0.2 million in lower professional fees and $0.2 million in lower advertising and trade show costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $21.9 million for the six months ended March 31, 2009, which represented a decrease of 7.5%, or $1.8 million, from the six months ended March 31, 2008. The decrease resulted primarily from $2.0 million in lower staffing-related costs, primarily due to reduced expenses related to our annual bonus plan, and $0.9 million in lower professional fees, including costs to enforce our intellectual property. These cost savings were partially offset by a $1.0 million increase in our reserve for bad debt expense due to the impact of adverse economic conditions on customer collections, including customer bankruptcies, which we recorded during our second quarter of fiscal 2009.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development (IPR&D) expense was $1.5 million for the six months ended March 31, 2009, resulting from the acquisition of Epoch in the second quarter of fiscal 2009.
OTHER INCOME, NET
Other income was $1.4 million for the six months ended March 31, 2009, compared to $3.3 million in the six months ended March 31, 2008. The decrease in other . . .
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