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| CCMP > SEC Filings for CCMP > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-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.
THIRD QUARTER OF FISCAL 2009 OVERVIEW
While the global economic recession continued in our third quarter of fiscal
2009, we believe a combination of improved underlying demand and inventory
replenishment within the semiconductor industry positively impacted demand for
our products during the quarter. Industry analysts have suggested that this
inventory replenishment is expected to be largely completed by the end of
September 2009. We are uncertain as to whether or how long this upturn may
continue as we do not yet have clear evidence of broad-based improvement in end
user demand for electronic goods, which is necessary for sustained long-term
growth for the industry and for our Company. 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 and the timing and pace of a
recovery; the cyclical nature of the semiconductor industry; the short order to
delivery time for our products and the associated lack of visibility to future
customer orders; quarter to quarter changes in customer orders regardless of
industry strength; and potential future acquisitions by us.
Revenue for our third quarter of fiscal 2009 was $86.4 million, which represented a decrease of 10.9%, or $10.6 million, from the third quarter of fiscal 2008 and an increase of 90.4%, or $41.0 million, from the previous fiscal quarter. We believe the decrease in revenue from fiscal 2008 reflects the adverse impact of the global economic recession, while the significant increase from last quarter is primarily due to the improvement in underlying demand and inventory replenishment noted above, as well as traditional seasonal industry strength.
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Gross profit expressed as a percentage of revenue for our third quarter of fiscal 2009 was 46.6%, and 41.9% on a year-to-date basis. Gross profit decreased slightly from 46.8% reported in the third quarter of fiscal 2008 primarily due to a lower-valued product mix, partially offset by lower fixed manufacturing costs. Gross profit increased from 28.0% reported in our prior fiscal quarter primarily due to a significant increase in the utilization of our manufacturing capacity based on the significant increase in sales from the prior quarter. Our year-to-date gross profit continues to reflect the negative impact of the global economic recession and the reduction in demand for our products that we experienced during the first half of the fiscal year. 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.
Operating expenses were $25.1 million in our third quarter of fiscal 2009, compared to $32.5 million in the third quarter of fiscal 2008 and $30.0 million in the previous fiscal quarter. The decrease in operating expenses in the third quarter of fiscal 2009 from the comparable period of fiscal 2008 was primarily due to lower staffing related costs and decreased professional fees, including costs to enforce our intellectual property. The decrease in operating expenses from the prior quarter was primarily due to the absence of $3.6 million of specific, pre-tax expenses recorded in our second fiscal quarter, including a $1.5 million write-off of in-process research and development expenses related our acquisition of Epoch Material Co., Ltd. (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. To a lesser extent, the decrease in operating expenses from the prior quarter was due to lower staffing-related costs and lower professional fees. The reduction in operating expenses was also positively impacted by our ongoing cost reduction actions that we implemented during the first half of fiscal 2009. We currently expect operating expenses will be at the low end of our previous guidance range of $115 million to $120 million for full year fiscal 2009, including the operating expenses of Epoch.
Diluted earnings per share for our third fiscal quarter was $0.39, a decrease from diluted earnings per share of $0.43 reported in the third quarter of fiscal 2008, and an increase from the diluted loss per share of $(0.44) reported in the previous fiscal quarter as a result of the factors discussed above.
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 nine months of fiscal 2009 except for the determination of our allowance for doubtful accounts and our analysis of potential impairment of goodwill and intangible assets. See Notes 3, 8 and 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.
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As discussed in Note 3 of the Notes to the Consolidated Financial Statements, effective April 1, 2009, we adopted the provisions of FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" (FSP 115-2), and we adopted the provisions of FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP 157-4). FSP 115-2 requires an entity to record an other-than-temporary impairment when a credit loss exists; that is when the present value of the expected cash flows from a debt security is less than the amortized cost basis of the security. Any impairments related to a credit loss are recorded currently in earnings. FSP 157-4 provides guidance for estimating fair value when market activity has significantly decreased as is the case in the current auction rate securities (ARS) market. We have recorded a temporary impairment of $0.2 million, net of tax, in the value of one of our ARS in other comprehensive income and we have classified $8.1 million of ARS in other long-term assets on our Consolidated Balance Sheet as of June 30, 2009. The calculation of fair value and the balance sheet classification for our ARS requires critical judgments and estimates by management, including the appropriate discount rate and the probability that a security may be monetized through a future successful auction or refinancing of the underlying debt. We performed a discounted cash flow analysis using a discount rate based on a market index comprised of tax exempt variable rate demand obligations, and we applied a risk factor to reflect current loss of liquidity in the ARS market. We then assigned probabilities of holding each security for less than or equal to one year, five years, and to maturity to calculate a fair value for each security. The impairment we have maintained is considered temporary as it relates to the loss of liquidity in the ARS market.
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 within 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 concluded that no impairment existed. However, based upon the continued uncertainty in the global economy, we concluded that sufficient indicators existed to perform another interim impairment analysis at June 30, 2009 for one of our reporting units that has a $6.2 million carrying value of goodwill and other intangible assets with indefinite lives. Our impairment analysis at June 30, 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 operating expenses. We discounted the resulting projected cash flows over a range of discount rates between 11% and 15%, including our weighted average cost of capital as well as the published cost of capital for a number of our peer companies. We determined our goodwill and intangible assets with indefinite lives were not impaired as of June 30, 2009. A hypothetical 10% decline in our cash flow projections would have resulted in the calculated fair value of this reporting unit being less than its carrying value under our projection of a slow economic recovery scenario. This would have required us to complete additional goodwill impairment testing as defined in SFAS 142. Due to the ongoing uncertainty in market and economic conditions, management will continue to monitor and evaluate the carrying value of goodwill and intangible assets with indefinite lives.
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THREE MONTHS ENDED JUNE 30, 2009, VERSUS THREE MONTHS ENDED JUNE 30, 2008
REVENUE
Revenue was $86.4 million for the three months ended June 30, 2009, which represented a 10.9%, or $10.6 million, decrease from the three months ended June 30, 2008. Of this decrease, $7.1 million was due to a lower priced product mix and $4.8 million was due to decreased sales volume. These decreases were partially offset by a $0.9 million benefit due to the effect of foreign exchange rate changes. We believe the decrease in revenue from fiscal 2008 reflects the continued impact of the global economic downturn. However, we experienced an upturn in our business during the third quarter of fiscal 2009 that we believe reflects an improvement in underlying demand as well as a replenishment of inventory within the semiconductor industry. We are uncertain as to whether or how long this upturn may continue, as long-term growth is largely dependent on sustained improvement in the end user demand for electronic goods, into which we have limited visibility.
COST OF GOODS SOLD
Total cost of goods sold was $46.1 million for the three months ended June 30, 2009, which represented a decrease of 10.6%, or $5.5 million, from the three months ended June 30, 2008. The decrease in cost of goods sold was primarily due to $6.2 million from decreased sales volume due to the global economic recession, $3.8 million in lower fixed manufacturing costs and $1.5 million in higher manufacturing yields, partially offset by a $6.6 million increase due to a higher-cost product mix.
We implemented a number of cost savings initiatives during the first half of fiscal 2009. For example, we shortened work schedules in our manufacturing operations on a global basis to more closely match production with demand, but we maintained the flexibility to increase our production levels to meet the increased customer demand for our products that we experienced during the third quarter of fiscal 2009. A number of other cost savings initiatives remain in effect including: reduced annual, merit-based salary increases, a modest work force reduction, a restriction on travel and the suspension of certain employee benefits, among others. These cost-saving actions are intended to improve our operating effectiveness during the current economic recession. We will consider additional cost containment measures 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 46.6% for the three months ended June 30, 2009, as compared to 46.8% for the three months ended June 30, 2008. The slight decrease was primarily due to a lower-valued product mix, partially offset by lower fixed manufacturing costs. We may continue to experience fluctuations in our quarterly gross profit due to a number of factors, including the factors mentioned above as well as the extent to which we utilize our manufacturing capacity.
RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $10.9 million for the three months ended June 30, 2009, which represented a decrease of 14.4%, or $1.8 million, from the three months ended June 30, 2008. The decrease was primarily due to $1.1 million in lower staffing-related costs, $0.4 million in lower depreciation and amortization, and $0.2 million in lower travel-related costs. The cost reduction initiatives we instituted during the first half 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 $5.2 million for the three months ended June 30, 2009, which represented a decrease of 27.4%, or $2.0 million, from the three months ended June 30, 2008. The decrease was primarily due to $1.1 million in lower staffing-related costs, $0.4 million in lower travel-related costs, $0.1 million in lower professional fees and $0.1 million in lower advertising and trade show costs. Our cost reduction measures that we implemented in the first half of fiscal 2009 helped us achieve these cost savings.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9.0 million for the three months ended June 30, 2009, which represented a decrease of 28.5%, or $3.6 million, from the three months ended June 30, 2008. The decrease resulted primarily from $1.7 million in lower staffing-related costs, primarily due to reduced expenses related to our annual bonus plan and share-based compensation expenses, $1.7 million in lower professional fees, including costs to enforce our intellectual property, and $0.2 million in lower travel-related costs.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development (IPR&D) expense was a credit of $0.1 million for the three months ended June 30, 2009, resulting from an adjustment to the estimated fair value of the IPR&D upon completion of the purchase accounting related to the acquisition of Epoch.
OTHER INCOME (EXPENSE), NET
Other expense was $0.1 million for the three months ended June 30, 2009 compared to $1.2 million of other income in the three months ended June 30, 2008. The decrease in other income was primarily due to $0.9 million of lower interest income resulting from lower interest rates on our lower balances of cash and short-term investments, and $0.4 million in foreign exchange losses. We monetized the majority of our short-term investments in ARS during fiscal 2008 and reinvested these funds into money market investments which earn interest at lower rates. See Note 3 of the Notes to the Consolidated Financial Statements for more information on our ARS.
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PROVISION FOR INCOME TAXES
Our effective income tax rate was 40.7% for the three months ended June 30, 2009 compared to a 29.2% effective income tax rate for the three months ended June 30, 2008. The effective tax rate during the quarter ended June 30, 2009 reflects additional tax expense recognition due to the Company moving from a net loss or tax benefit position for the quarter ended March 31, 2009 to a net income or tax expense position for the quarter ended June 30, 2009. The increase in the effective rate in fiscal 2009 also reflects a decrease in tax-exempt interest income from fiscal 2008 and tax adjustments recorded on the fiscal 2008 tax return filed during the quarter ended June 30, 2009.
NET INCOME (LOSS)
Net income was $9.0 million for the three months ended June 30, 2009, which represented a decrease of 9.7%, or $1.0 million from the three months ended June 30, 2008, as result of the factors discussed above.
NINE MONTHS ENDED JUNE 30, 2009, VERSUS NINE MONTHS ENDED JUNE 30, 2008
REVENUE
Revenue was $194.9 million for the nine months ended June 30, 2009, which represented a 31.6%, or $90.1 million, decrease from the nine months ended June 30, 2008. Of this decrease, $92.4 million was due to decreased sales volume driven by the significant weakening of demand for our products due to the global economic recession that we experienced during the first half of fiscal 2009, and $1.3 million due to a lower-priced product mix. These decreases were partially offset by a $3.4 million increase in revenue due to the effect of foreign exchange rate changes.
COST OF GOODS SOLD
Total cost of goods sold was $113.1 million for the nine months ended June 30, 2009, which represented a decrease of 25.8%, or $39.3 million, from the nine months ended June 30, 2008. Of this decrease, $53.0 million was due to decreased sales volume due to the global economic recession, $8.6 million was due to lower fixed manufacturing costs and $4.5 million was due to higher manufacturing yields in our CMP slurry and pad production. These cost decreases were partially offset by a $12.8 million increase due to a higher-cost product mix, $12.0 million cost increase due to lower utilization of our manufacturing capacity on the decreased level of sales and a $2.7 million increase due to the effect of foreign exchange rate changes.
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. A number of these initiatives remain in effect and are intended to improve our operating effectiveness during the current economic recession. We will consider additional cost containment measures as needed if the soft economic environment continues or worsens.
GROSS PROFIT
Our gross profit as a percentage of revenue was 41.9% for the nine months ended June 30, 2009, compared to 46.5% for the nine months ended June 30, 2008. The decrease was primarily due to the underutilization of our manufacturing capacity on the significantly lower level of sales and a higher-cost product mix, partially offset by lower fixed manufacturing costs and favorable production yields.
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RESEARCH, DEVELOPMENT AND TECHNICAL
Total research, development and technical expenses were $35.6 million for the nine months ended June 30, 2009, which represented a decrease of 2.6%, or $0.9 million, from the nine months ended June 30, 2008. The decrease was primarily related to $1.7 million in lower staffing-related costs, $0.4 million in lower depreciation expense and $0.3 million in lower travel-related costs. These cost decreases were partially offset by $1.1 million in pre-tax impairments recorded during our second quarter of fiscal 2009 on certain research and development equipment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and $0.4 million in higher expenses for laboratory supplies.
SELLING AND MARKETING
Selling and marketing expenses were $16.4 million for the nine months ended June 30, 2009, which represented a decrease of 19.3%, or $3.9 million, from the nine months ended June 30, 2008. The decrease was primarily due to $2.0 million in lower staffing-related costs, $0.8 million in lower travel-related costs, $0.3 million in lower professional fees and $0.3 million in lower advertising and trade show costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $31.0 million for the nine months ended June 30, 2009, which represented a decrease of 14.8%, or $5.4 million, from the nine months ended June 30, 2008. The decrease resulted primarily from $3.6 million in lower staffing-related costs, primarily due to reduced expenses related to our annual bonus plan and lower share-based compensation expense, and $2.6 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 $1.4 million for the nine months ended June 30, 2009, resulting from the acquisition of Epoch in the second quarter of fiscal 2009.
OTHER INCOME (EXPENSE), NET
Other income was $1.3 million for the nine months ended June 30, 2009, compared to $4.6 million in the nine months ended June 30, 2008. The decrease in other income was primarily due to $3.5 million in lower interest income resulting from lower interest rates on our lower 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 ARS during fiscal 2008 and reinvested these funds into money market investments which generally 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 was 30.7% for the nine months ended June 30, 2009 compared to a 31.1% effective tax rate for the nine months ended June 30, 2008. The change in the effective tax rate from fiscal 2008 was primarily due to 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 $1.0 million for the nine months ended June 30, 2009 compared to net income of $30.1 million for the nine months ended June 30, 2008, as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We generated $16.2 million in cash flows from operating activities in the first nine months of fiscal 2009, compared to $42.7 million in cash from operating . . .
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