2006 Annual Report On the cover— Our researchers test a new slurry by polishing wafers in our state-of-the-art cleanroom. Our vision— To be the world leader in shaping, enabling and enhancing the performance of surfaces. About the company— Cabot Microelectronics Corporation, headquartered in Aurora, Illinois, is the world’s leading supplier of chemical mechanical planarization (CMP) slurries used in semiconductor and data storage manu- facturing. Our products play a critical role in the production of the most advanced semiconductor devices, enabling the manufacture of smaller, faster and more complex devices by our customers. Since becoming an independent public company in 2000, we have grown to nearly 750 employees who work at research and development labs, sales and business offices, manufacturing facilities and customer service centers in China, France, Germany, Japan, Singapore, South Korea, Taiwan, the United Kingdom and the United States. Selected financial data In millions, except per share amounts Years ended September 30, 2006 2005 Change Revenue Operating income Net income Diluted earnings per share Total assets Stockholders’ equity Cash and short-term investments Cash provided by operations After tax return on invested capital $320.8 $270.5 18.6% 44.4 32.9 1.36 412.1 367.8 165.9 58.7 15% 1.5 1.5 3.0 6.6 8.5 -3.0 22.3 43.8 32.5 1.32 386.8 339.1 171.0 48.0 17% Revenue Operating income Diluted earnings per share Cash provided by operations 1 2 3 $ 9 0 3 $ 0 7 2 $ 2 5 2 $ 5 3 2 $ 0 7 $ 0 6 $ 6 5 $ 4 4 $ 4 4 $ 8 8 . 1 $ 6 6 . 1 $ 3 5 . 1 $ 6 3 . 1 $ 2 3 . 1 $ 4 6 $ 9 5 $ 4 5 $ 8 4 $ 8 4 $ 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 To our shareholders, customers, suppliers and employees: FISCAL 2006 WAS A STRONG YEAR of financial and operational perform- ance for Cabot Microelectronics Corporation. In addition to reporting record revenue of $321 million, we made several significant investments and executed a number of initiatives to strengthen our leadership in CMP consumables, and to position our com- pany for growth in adjacent markets. We’re beginning to see results from our work over the past few years, and we enter the new year with the satis- faction, optimism and confidence that comes from success. Our goal is con- tinued, sustainable growth in the years ahead and we are confident we can achieve it. In addition to reporting record revenue of $321 million, we made several significant investments and executed a number of initiatives. From our perspective, our leader- ship in CMP slurries for the semicon- ductor industry is clear. In fiscal 2006, we enhanced that position by bringing new products to market and strength- ening our technology and support capability. We launched a new CMP pad technology that we believe offers customers both enhanced performance and cost advantages over current tech- nologies. We introduced exciting new slurry products in each major CMP application area— copper and barrier, tungsten, dielectrics and advanced dielectrics—as well as for data storage applications. And we opened our Asia Pacific Technology Center in Japan, added our Technical Service Center in Taiwan and moved our data storage William P. Noglows (left), Chairman, President and CEO, and William S. Johnson, Vice President and CFO business to Singapore. Each of these accomplishments will support ongoing growth of our business. by an emphasis on speed. We know we can execute faster, and in the coming years, we will. Our new product introductions and facility additions are visible and meas- urable achievements, and I’m proud of what we’ve accomplished. But I am even prouder of an emerging enthu- siasm within the company, something not easily seen by the outside world. Our teams around the globe have all played a significant role in developing and executing our strategies. The excitement of our achievements in fiscal 2006 has renewed their energy, sense of urgency and appetite for even greater success in the coming years. Our teams around the globe have all played a significant role in developing and executing our strategies. The excitement of our achievements in fiscal 2006 has renewed their energy, sense of urgency and appetite for even greater success. To achieve that success, we will continue to execute the strategic initia- tives we have been pursuing within our core CMP consumables business: technology leadership, operations excellence, and connecting with customers. Our work will be guided Our initiative of technology leader- ship is key to achieving our goals because technology drives our custom- ers’ businesses. CMP materials and integration schemes are becoming much more complex. The customiza- tion required by this increasing com- plexity, along with rigorous demands for quality, are causing semiconductor manufacturers to seek suppliers with the capability, resources and scale to meet their needs. Recognizing Cabot Microelectronics’ technical capability, experience, scope and breadth as the best in our industry, customers are seeking to form deeper and closer tech- nical and developmental relationships with us. We believe this clearly demon- strates that our efforts to strengthen technology leadership—our company’s legacy—are providing value for cus- tomers and future growth opportunities for the company. To build on our technology leader- ship, we have developed a robust new product pipeline. In doing so, we have also created a significantly more effi- cient cross-functional commercializa- tion process that encompasses emerg- ing technologies and materials, process development and product development. We are pleased with our technical achievements in the past year, and we will continue to change and evolve as our customers require. 2006 CMC 1 Our core CMP business is solid and vibrant, and we believe our business development activities promise an exciting future. We begin fiscal 2007 with momen- tum and optimism. Our core CMP business is solid and vibrant, and we believe our business development activities promise an exciting future. Our three-year business plan targets revenue of $500 million in fiscal 2009, with net income growing to 12 percent of revenue during this period. We intend to achieve these targets by growing our core CMP slurry business faster than the market, building our CMP pad business, and successfully implementing our ESF initiative. I am optimistic that the strong foundation we have built, along with our emerging culture that thrives on winning, will allow us to achieve our targets. This is an exciting time in our industry. Technology is reaching new levels of complexity. Customers require increasingly intricate solutions to their design needs, while at the same time they demand more exacting standards for quality and consistency. We are proud of our achievements in the last year to enhance our leadership in CMP consumables and we will continue to work for sustainable, long- term growth. We thank you for your support of our company. Sincerely, William P. Noglows Chairman, President and CEO Succeeding in today’s environment We have been making other changes means suppliers of technology to the semiconductor industry must provide highly predictable solutions to increas- ingly complex customer needs. We believe the quality, reliability and con- sistency of our products are recognized competitive advantages and contribute value to our customers. Thus, we have set very high goals as we continue to focus on reducing variation under our operations excellence initiative. A few years ago, we embraced the concepts of Six Sigma, hiring leaders with extensive experience in the process and its tools, and training our employees. At Cabot Microelectronics, the Six Sigma culture is real, it is powerful, and it is changing our company. We believe the quality, reliability and consistency of our products are recognized competitive advantages and contribute value to our customers. The third initiative within our core CMP business is connecting with customers. We took several critical steps in fiscal 2006 to bring our capa- bilities physically closer to our cus- tomers, particularly in the Asia Pacific region. We now have new laboratories in Japan, Taiwan and Singapore that provide the capability to support our customers more rapidly and reliably. In addition, we began selling directly to customers in Taiwan, our largest regional market. Even though the tran- sition had a short-term adverse finan- cial impact in our second fiscal quarter, it was important in fulfilling our goal to be close to our customers. Along the way, we strengthened local teams of highly capable and energetic employees dedicated to serving our customers. 2 CMC 2006 to meet the demands of our customers as well. We adjusted our operating model to give far more autonomy and accountability to our regional organiza- tions, and are reshaping our headquar- ters in Illinois to concentrate on core platform technology research, develop- ment and support. Our goal is to have very strong local teams deployed to address specific customer opportuni- ties, supported by the global breadth and experience of all of Cabot Microelectronics. We believe our ability to leverage global experience and knowledge of all technology nodes and applications and apply this locally is unique, and we intend to use this ability to its fullest potential. Most of our focus is on our core CMP business, both slurries and pads, for the semiconductor industry. But we also seek growth by leveraging our expertise in CMP formulation, materials and polishing techniques for the semi- conductor industry to address other demanding market applications requir- ing sub-nanometer control of surface and finish. Our objective is to improve performance and productivity by enhancing the finishing process. We see possibilities in areas ranging from optics to healthcare, and from aero- space to compound semiconductors, to name just a few. This year, we made two important steps under our Engineered Surface Finishes (ESF) growth initiative by successfully completing two acquisitions: Surface Finishes Company, a small company that specializes in precision machining and polishing techniques at the sub-nanometer level, and QED Tech- nologies, a precision optics technology company. These acquisitions comple- ment our ongoing internal business and technology development efforts, and are introducing us to new tech- nologies and new industries, with channels to new markets. We look for- ward to building on their capabilities as well as looking for other acquisitions in pursuit of our ESF initiative. ˛ Cabot Microelectronics is the world’s leading supplier of chemical mechanical planarization (CMP) polishing slurries to the semiconductor industry. That sentence is part of the general language we use to explain who we are and what we do. We are the world’s leading supplier, whether measured by slurry revenue or manufacturing capacity. But we believe we lead our indus- try for reasons far beyond sales volume and plant size. Leadership means blazing the trail in technology and product innovation. It means setting the standards of quality for an industry. It means having strong relation- ships with customers. It means being the “go to” source when customers have problems. And it means always looking for ways to grow. Using those criteria, we believe Cabot Microelectronics is the undisputed leader in CMP slurries. 3 CMC 2006 ˛ Particle scientists develop new metrologies for improving slurry quality. Product innovation The semiconductor industry follows the International Technology Roadmap for Semi- conductors (ITRS), a timeline that forecasts technological innovation. These innovations mean semiconductor devices will run faster, do more and perform more efficiently. They also put chip designers under enormous pressure to deliver those technology advancements. We offer customers more than just CMP slurries and pads. We provide the bene- fit of our technological expertise and experience. In each of the last four years, we have invested more than $40 million to further our extensive knowledge of perfecting surfaces at the sub-nanometer level. That’s more than a number of our competitors generate in annual CMP slurry revenue. Our product development process begins with our enabling team, whose mission is to determine what customers are going to need and want in future generations of semiconductor and data storage devices. Guided by the ITRS (which our people help develop) and a fundamental understanding of polishing mechanics and the interaction of tool, slurry, pad and pad conditioner, the enabling team operates in the world of “What if . . . ?” and “How can we . . . ?” As a new technology progresses from theory to “drawing board”, chip designers look for partners and suppliers to help produce the new design. In the competi- tion among suppliers, we believe we are ahead of the game. Our enabling team gives us a headstart by discovering what works (and what doesn’t), so our product development teams can devote their time and resources to refining that discovery for practical application. Cabot Microelectronics: The industry leader 4 CMC 2006 ˛ We develop and evaluate slurries and pads in cleanroom labs that replicate customer facilities. This dedication to R&D has allowed Cabot Microelectronics to develop a robust product portfolio. Our tungsten slurries are the industry standard and we enjoy a very strong position in that business today. To be able to meet cus- tomers’ future needs as well, we continue enhancing our tungsten product line. We commercialized two new tungsten products in fiscal 2006, one of which is tunable. This means we can adjust its formula to precisely meet a customer’s specifications for selectivity and polish- ing rate. This is becoming increasingly important as the industry moves away from “one size fits all” CMP processes. In our copper slurry business, our first and second generation products have made us the number one supplier. Although several competitors participate in this segment, we believe there is no clear number two. Designs for chips using copper wiring are introducing a 5 CMC 2006 variety of materials for the barrier layer, and these also require more design- specific solutions. Our research team is working extensively with these new materials and we see great opportunities for growth in barrier applications. In our third fiscal quarter, we reported commercial sales of our new barrier product for a not-yet-commercial 45nm application. Additionally, we recently launched our next-generation copper solution which incorporates new particle technology and improved performance. Our dielectric business is built on both legacy products and new technol- ogy. Our next-generation tunable dielec- tric products incorporate new technology and novel chemistries to reduce scratch- ing and improve planarity. We are work- ing jointly with several customers to develop more advanced applications. One of our most recent product innovations is our CMP polishing pad, which we believe represents a major technological breakthrough. Currently used in high volume manufacturing by semiconductor manufacturers, the pad is the result of extensive research to deliver a step change improvement in CMP pad life and pad-to-pad consistency. Our new pad is designed to offer enhanced performance, longer pad life and thus less down time, and lower cost to the end user. Our long-term goal is to develop slurry and pad consumable sets which we believe can enable significant improvements in CMP polishing performance and create synergies for customers. We are excited about our extensive new product pipeline. And we are equally excited about the interest our customers are showing in our plans for meeting their future needs. We are working with several key customers to ˛ Product development begins in the lab, with new chemistries, particles and dispersions. help them develop technology two and three nodes into the future. These lead- ing edge producers came to us because they recognize the strength of our resources . . . the strength of a leader. Standards of quality Manufacturing an advanced chip can require up to 500 processing steps, of which 10 to 25 steps involve CMP. Many of these CMP steps occur late in the manufacturing process after much of the value has been added to the device, so any CMP quality issues can be very costly to our customers. And because customer processes are extremely sensitive to the CMP slurry, even minor variations can interrupt processing. We engineer quality into our product design and insure that finished product performance is validated before it goes into commercialization and high volume manufacturing. We test from all angles, which means our development cycles may be relatively long. While we are seeking ways to shorten our develop- ment process, we know that rushing a product to market without adequate testing can compromise performance in a customer’s fab. Making even the smallest change in a commercial semi- conductor process costs the customer time and money, so the product must be right from the start. We believe our reputation for quality and performance gives us a clear competitive advantage. Our manufacturing process is the second way in which we address quality. Through Six Sigma principles, we deter- mine where we can reduce product variability and improve consistency and productivity. We captured a 12 percent productivity improvement over the first two years of our Six Sigma effort and we have set aggressive improvement targets for the future. The scale of our manufacturing capa- bility also allows us to provide our cus- tomers with a high quality product. Our factory in Japan is the world’s largest CMP slurry plant, and our plant in Illinois is almost as large. These facili- ties, along with our other manufacturing sites, allow us to quickly and efficiently supply customers around the world. They also offer supply assurance to our customers in the event of a regional supply disruption. We believe our man- ufacturing capability is unique among our competitors . . . the capability of a leader. Connecting with customers Semiconductor devices are extremely complex, requiring supplier collaboration from design concept through high volume manufacturing. Our goal is to be the source customers turn to for help with their CMP processing. 2006 CMC 6 ˛ Customer service advocates provide a full range of customer support. Because of our extensive investment in technology, we can respond quickly to requests during a customer’s design phase. For example, one major manufac- turer was in process development with one of our new tunable slurries. When a design change required a modification, the customer was delighted when we were able to send a new slurry product in only three days. While this was an unusual situation, it highlights how we are able to serve our customers. Our support doesn’t end when the sale is complete. The CMP process is extremely complex. Problems can arise, seemingly out of nowhere. Customers want problems solved quickly, and with our global resources, we can respond immediately, deploying our applications engineers around the world. These experts draw on all our resources to help our customers get their manufac- turing yields back up as soon as possible. In fact, even when our slurry is not the root cause, our customers know they can depend on us to help them solve a problem. Some of our largest customers are in Taiwan, and we took an important step forward in our relationships with them when we began selling direct there last April. Our previous model, selling our products through a distributor, worked well when we entered the business and as we grew. But the scale of our busi- ness in Taiwan today means selling directly to customers makes sense. The transition went smoothly, and our cus- tomers can now take full advantage of the technical and support services we offer. We believe partnerships between customer and supplier are becoming even more significant to the customer as technologies become more sophisticated. Many semiconductor manufacturers find they can’t or don’t want to solve CMP process design challenges by themselves. And, as many manufactur- ers are scaling back their technical resources, they may not be able to devote sufficient resources to a special- ized field like CMP. Thus, customers are making partnership decisions earlier in the design process, based on the techni- cal capability of the supplier. As the technology leader, we see this as a great opportunity. By offering quality products backed by superior service and an eagerness to do what it takes to make our customers’ lives easier, we believe we offer partner- ships that satisfy many needs from design through implementation . . . part- nerships with a leader. 2006 CMC 7 ˛ Continuous process manufacturing of pads yields cost, performance and quality advantages. Growing the business In addition to growing our core CMP business, we are exploring how we can use our expertise in perfecting surfaces at a sub-nanometer level to improve performance or increase productivity in areas adjacent to the semiconductor industry through our Engineered Surfaces Finishes (ESF) growth initiative. In fiscal 2006, we purchased Surface Finishes, a small, state-of-the-art mechanical finishing company that provides a window into new market opportunities and customers with demanding finishing needs. We also made a larger acquisition when we purchased QED Technologies, whose unique and proprietary technology for finishing high-precision optics is help- ing to automate that industry. These acquisitions complement our ongoing internal development efforts. Success in our ESF initiative will require technical expertise, business acumen and strategic thinking. We’re excited by the prospects because we have those skills . . . the skills of a leader. 8 CMC 2006 Our product lines tungsten copper Our tungsten slurries are used to polish tungsten in semicon- ductor chips used mainly in mature logic applications such as for automotive uses and in chipsets, and in memory, includ- ing MP3 players, cellphones, gaming devices and digital video recorders. Our next gener- ation slurries are tunable, allow- ing customers greater flexibility, improved performance and a reduced cost of ownership. dielectrics These products are used to pol- ish the oxide layers of a semi- conductor chip. These layers insulate the wiring layers in both logic and memory chips. Our Semi-Sperse ® product line was a pioneer solution for polishing oxide at 250nm, and, with our updated technology, continues to be used at advanced nodes. The SiLECT ® product line, which uses an innovative abrasive, was devel- oped to meet the needs of 90nm and 65nm technologies. Our newest line, iDIEL ®, is used for advanced applications and can provide significant advantages in reducing defects. The iCUE ® line of copper and barrier slurries are used for pol- ishing the most advanced logic chips, such as microprocessors used in computers, graphic sys- tems, gaming systems and com- munication devices. We supply slurries that polish the copper films, as well as those that pol- ish the barrier and advanced low K dielectric materials that separate the individual copper lines. Our iCUE products are used across the globe in advanced integrated circuit manufacturing for technology nodes from 180nm to 45nm. data storage Used in polishing magnetic heads and hard disks, our slur- ries are designed to significantly improve the surface finish and planarity of hard disk drive components, enabling greater storage capacity. polishing pads Our Epic ® D100 pad is used to polish semiconductor devices during CMP processing. Able to polish either 200mm or 300mm wafers, and for use on copper, tungsten and dielectric applica- tions, the properties of the pad material offer enhanced perform- ance and longer pad life. Our continuous pad manufacturing process offers improved consis- tency across an individual pad and from pad to pad. The end result offers lower cost of own- ership to the customer. engineered surface finishes (ESF) ® growth initiative Through ESF, the company is leveraging its expertise in CMP formulation, materials and pol- ishing techniques for the semi- conductor industry to address other demanding market appli- cations requiring sub-nanometer control of surface shape and finish. The Surface Finishes ® business offers highly specialized optical polishing, low-stress grinding, lapping and other custom fabri- cation services for applications requiring extremely fine finishes to meet the most challenging specifications. QED Technologies ® polishes optics for high precision appli- cations using these tools: Magneto-Rheological Finishing (MRF) ® This system has the unique ability to predictively improve both shape and surface finish simultaneously. MRF is widely acknowledged as the best-in- class technology for final figuring of the highest precision optics. Subaperture Stitching Interferometry (SSI) ® Interferometers measure the sur- face of an optic and traditionally are limited by the size and pre- cision of the reference optic used. SSI is designed to remove those barriers, giving the user an accurate, complete map of the optical surface. This map is needed to produce the highest precision optics to the most exacting tolerances. In combina- tion with MRF, SSI enables the transition from time-consuming, costly, labor-intensive processes to repeatable, efficient automa- tion in producing precision optical surfaces. 9 CMC 2006 Leadership team and officers Board of directors Corporate information William P. Noglows Chairman President and Chief Executive Officer, Cabot Microelectronics Corporation Robert J. Birgeneau Chancellor, University of California, Berkeley John P. Frazee, Jr. Former Chairman and Chief Executive Officer, Centel Corporation H. Laurance Fuller Former Co-Chairman, BP Amoco PLC Edward J. Mooney Former Chairman and Chief Executive Officer, Nalco Chemical Company Steven V. Wilkinson Former Partner, Arthur Andersen LLP Albert Y.C. Yu Chairman, OneAngstrom LLC; Former Senior Vice President, Intel Corporation William P. Noglows Chairman, President and Chief Executive Officer H. Carol Bernstein Vice President, Secretary and General Counsel Yumiko Damashek Managing Director, Japan James DeHoniesto Chief Information Officer Jean Pol Delrue Vice President, Global Sales William S. Johnson Vice President and Chief Financial Officer Daniel J. Pike Vice President, Corporate Development Thomas S. Roman Corporate Controller Stephen R. Smith Vice President, Marketing Clifford L. Spiro Vice President, Research and Development Carmelina M. Stoklosa Treasurer and Director, Finance Adam F. Weisman Vice President, Business Operations Daniel S. Wobby Vice President, Asia Pacific Region Corporate headquarters Cabot Microelectronics Corporation 870 N. Commons Drive Aurora IL 60504 1.630.375.6631 phone 1.800.811.2756 toll free 1.630.499.2666 fax www.cabotcmp.com Investor information Contact our offices by mail at the address above, by telephone at 1.630.499.2600 or at www.cabotcmp.com. Stock information Cabot Microelectronics is traded on NASDAQ under the symbol CCMP. Stock transfer agent and registrar Computershare Trust Company, N.A. P.O. Box 43078 Providence RI 02940.3078 1.781.575.3400 www.computershare.com Independent auditors PricewaterhouseCoopers LLP Chicago IL Shareholder meeting The Annual Meeting of Shareholders will be held at 8 a.m. Central Time on March 6, 2007, at Cabot Microelectronics Corporation, 870 N. Commons Drive, Aurora IL. Form 10-K A copy of the Cabot Microelectronics Annual Report on Form 10-K for the fiscal year ended September 30, 2006, filed with the Securities and Exchange Commission, is enclosed and also available without charge at www.cabotcmp.com. s s e r P s u g r A e h T : r e t n i r P / i n w d o o G y d n A : t o o h P t n e m e g a n a M / n o h a M c M k r a M : n o i t a r t s u l l I / d e t a r o p r o c n I l d o b o K & z t r e b o R i : n g s e D Cabot Microelectronics 870 N. Commons Drive Aurora IL 60504 www.cabotcmp.com 1995–AR–07