Cabot Microelectronics Corporation Reports Results for Second Quarter of Fiscal 2019


  • Record Revenue of $265.4 Million, $122.4 Million or 85.6% Higher Than Last Year; Adjusted Pro Forma Revenue Increased $6.0 Million or 2.3%1
     
  • Net Income of $27.1 Million, $2.6 Million or 8.7% Lower Than Last Year; Adjusted Pro Forma Net Income of $45.8 Million, $5.1 Million or 12.7% Higher Than Last Year1
     
  • Diluted Earnings Per Share of $0.92, $0.22 or 19.3% Lower Than Last Year; Adjusted Pro Forma Diluted Earnings Per Share of $1.55, $0.17 or 12.3% Higher Than Last Year1
     
  • Adjusted Pro Forma EBITDA of $85.5 Million, $11.5 Million or 15.5% Higher Than Last Year1

AURORA, Ill., May 08, 2019 (GLOBE NEWSWIRE) -- Cabot Microelectronics Corporation (Nasdaq: CCMP), a leading global supplier of consumable materials to semiconductor manufacturers and pipeline operators, today reported financial results for its second quarter of fiscal 2019, which ended March 31, 2019.

Key Quarter Highlights

During the second fiscal quarter, the company delivered total revenue of $265.4 million, 2.3% higher than the adjusted pro forma revenue in the same quarter last year. The growth was driven by CMP pads, electronic chemicals and pipeline performance products.  Adjusted pro forma gross margin, which excludes acquisition-related amortization and inventory write-up, was 46.3%, and adjusted pro forma EBITDA was $85.5 million or 32.2% of revenue in the quarter. Cash flow from operations was $39.8 million.  The company ended the quarter with $192.3 million in cash on hand and total debt of $1,000.6 million.

“Despite softer semiconductor industry demand conditions, we are proud of our results this quarter, which represent a new record level of revenue for the company, driven primarily by the acquisition of KMG,” said David Li, President and CEO of Cabot Microelectronics.  “Looking ahead, we are encouraged by our near-term sales trends, which indicate a stabilization in demand for our products in the fiscal third quarter. We remain excited about the long-term growth opportunities for the company as we support our global customers with our enabling, best-in-class solutions.”

Key Financial Information for Second Quarter of Fiscal 2019

  • Revenue was $265.4 million, which is $122.4 million, or 85.6%, higher than the revenue reported in the same quarter last year. Adjusted pro forma revenue was $6.0 million, or 2.3%, higher compared to the same quarter last year.  Year-over-year results benefited from revenue growth in CMP pads, electronic chemicals and pipeline performance products.  CMP slurries revenue declined due to a difficult industry environment that led to reduced demand for the company’s products, primarily from memory and foundry customers.
     
  • Net income for the quarter was $27.1 million, which is $2.6 million, or 8.7%, lower than the net income reported in the same quarter last year.  Excluding the impact of acquisition and integration-related expenses, adjusted pro forma net income was $45.8 million, which is $5.1 million, or 12.7%, higher than the prior year.
     
  • Diluted EPS was $0.92 this quarter, which is $0.22, or 19.3%, lower than in the second quarter of fiscal 2018.  Adjusted pro forma EPS was $1.55, which is $0.17, or 12.3%, higher than the same quarter last year.
     
  • Adjusted pro forma EBITDA was $85.5 million, which is $11.5 million, or 15.5%, higher than in the prior year.  Adjusted pro forma EBITDA margin for the quarter was 32.2%, compared to 28.5% in the same quarter last year.

Segment Results for Second Quarter of Fiscal 2019

Electronic Materials – Revenue was $212.8 million, which is $2.0 million, or 1.0%, higher than pro forma revenue in the same quarter last year.  CMP pads delivered another quarter of strong revenue, which was 14.2% higher than in the same quarter last year. Electronic chemicals revenue increased 5.2% over the prior year’s quarter, driven by higher demand for products for advanced logic applications.  CMP slurries revenue declined 4.2% due primarily to softer industry conditions that resulted in lower demand for the company’s products from memory and foundry customers.  Electronic Materials segment adjusted EBITDA was $74.9 million, or 35.2% of revenue.

Performance Materials – Revenue was $52.5 million for the quarter, which is $3.9 million, or 8.1%, higher than pro forma revenue in the prior year’s quarter.  The increase was driven by higher revenue in the company’s pipeline performance products.  Performance Materials segment adjusted EBITDA was $22.7 million, or 43.1% of revenue.

Guidance Update

For the third quarter of fiscal 2019, the company currently expects total revenue to be approximately flat to up low single digits on a percentage basis compared to the company’s revenue for the second quarter of fiscal 2019. Electronic Materials revenue is expected to be approximately flat sequentially, and Performance Materials revenue is expected to be up mid-single digits sequentially, on a percentage basis.

Due to the company’s performance to date and uncertainty in industry conditions for the second half of fiscal 2019, the company has lowered the upper limit of its previously stated full year adjusted EBITDA range, and currently expects full fiscal year 2019 adjusted EBITDA to be between $325 million and $345 million. Due to recent debt prepayment, fiscal 2019 interest expense is now expected to be between $45 million and $47 million. Additional current expectations are provided on slide 9 in the related slide presentation.

[1] Adjusted pro forma results, including adjusted pro forma gross margin, adjusted pro forma net income, adjusted pro forma EBITDA and adjusted pro forma diluted EPS, are considered as non-GAAP financial measures by the U.S. Securities and Exchange Commission (SEC).  These adjusted pro forma results are presented as if the KMG acquisition had been consummated on October 1, 2017 and exclude the impact of non-recurring acquisition and integration related costs, acquisition related amortization expenses, and the effect of the enactment of the Tax Cuts and Jobs Act in December 2017 in the United States (“tax act”). See “Use of Certain GAAP and Non-GAAP Adjusted Pro Forma Financial Information” below for more information about these measures.  In addition, reconciliations of these non-GAAP measures to their most comparable GAAP measures and reconciliations of pro forma financial information to adjusted pro forma financial information are included in the financial statements portion of this press release.

RELATED SLIDE PRESENTATION
A slide presentation related to this press release will be available at ir.cabotcmp.com in the Quarterly Results section of the Investor Relations center at approximately the same time that this press release is issued.

CONFERENCE CALL
Cabot Microelectronics Corporation’s quarterly earnings conference call will be held at 10:00 a.m. Eastern Time (9:00 a.m. Central Time) on Thursday, May 9.  The conference call will be available via live webcast and replay from the company’s website, www.cabotcmp.com, or by phone at (844) 825-4410.  Callers outside the U.S. may dial (973) 638-3236. The conference code for the call is 5465817.  A transcript of the formal comments made during the conference call will also be available in the Investor Relations section of the company’s website. 

ABOUT CABOT MICROELECTRONICS CORPORATION
Cabot Microelectronics Corporation, headquartered in Aurora, Illinois, is a leading global supplier of consumable materials to semiconductor manufacturers and pipeline operators.  The company’s products play a critical role in the production of advanced semiconductor devices, helping to enable the manufacture of smaller, faster and more complex devices by its customers.  Cabot Microelectronics Corporation is also a leading provider of performance materials to pipeline operators.  The company's mission is to create value by delivering high-performing and innovative solutions that solve its customers’ challenges.  The company has approximately 1,900 employees globally.  For more information about Cabot Microelectronics Corporation, visit www.cabotcmp.com, or contact Colleen Mumford, Director of Investor Relations, at 630-499-2600.

USE OF CERTAIN GAAP AND NON-GAAP ADJUSTED PRO FORMA FINANCIAL INFORMATION
The company presented the following measures considered as non-GAAP by the SEC: adjusted pro forma EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted pro forma EBITDA margin, adjusted pro forma net income and adjusted pro forma diluted earnings per share. These adjusted pro forma results are presented as if the KMG acquisition had been consummated on October 1, 2017 and exclude the impact of non-recurring acquisition and integration related costs, acquisition related amortization expenses, and the effect of the enactment of the Tax Cuts and Jobs Act in December 2017 in the United States (“tax act).  The non-GAAP adjusted pro forma financial information provided in this press release is a supplement to, and not a substitute for, the company’s financial results presented in accordance with U.S. GAAP.  These non-GAAP adjusted pro forma financial measures are provided to enhance the investor's understanding about the company's ongoing operations.  Specifically, the company believes the impact of the tax act, KMG acquisition and integration-related expenses and acquisition related amortization expenses are not indicative of its core operating results, and thus presents these certain metrics excluding these effects.  The presentation of non-GAAP adjusted pro forma financial information is not meant to be considered in isolation or as a substitute for results prepared and presented in accordance with U.S. GAAP.   Reconciliations of non-GAAP measures to their most comparable GAAP measures and reconciliations of pro forma financial information to adjusted pro forma financial information are included in the financial statements portion of this press release.

The company has not quantitatively reconciled its guidance for adjusted EBITDA to its most comparable GAAP measure because the company does not provide specific guidance for the various reconciling items as certain items that impact this measure have not occurred, are out of the company’s control, or cannot be reasonably predicted.  Accordingly, a reconciliation to the nearest GAAP financial metric is not available without unreasonable effort.  Please note that the unavailable reconciling items could significantly impact the company’s results.

Adjusted EBITDA for the Electronic Materials and Performance Materials segments is presented in conformity with Accounting Standards Codification Topic 280, Segment Reporting. This measure is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For these reasons, this measure is excluded from the definition of non-GAAP financial measures under the SEC Regulation G and Item 10(e) of Regulation S-K.

FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements, which address a variety of subjects including, for example, future sales and operating results; growth or contraction, and trends in the industry and markets in which the Company participates; the acquisition of, investment in, or collaboration with other entities, including the Company’s acquisition of KMG Chemicals, Inc. (“KMG”), and the expected benefits and synergies of such acquisition; new product introductions; development of new products, technologies and markets; product performance; the financial conditions of the Company's customers; competitive landscape; the Company's supply chain; natural disasters; various economic or political factors and international or national events, including related to the enactment of trade sanctions, tariffs, or other similar matters; the generation, protection and acquisition of intellectual property, and litigation related to such intellectual property or third party intellectual property; environmental laws and regulations; the operation of facilities by Cabot Microelectronics; the Company's management; foreign exchange fluctuation; the Company's current or future tax rate, including the effects of the Tax Cuts and Jobs Act in the United States (“tax act”); cybersecurity threats; financing facilities and related debt, pay off or payment of principal and interest, and compliance with covenants and other terms; and, uses and investment of the Company's cash balance, including dividends and share repurchases, which may be suspended, terminated or modified at any time for any reason by the Company, based on a variety of factors. Statements that are not historical facts, including statements about Cabot Microelectronics’ beliefs, plans and expectations, are forward-looking statements. Such statements are based on current expectations of Cabot Microelectronics’ management and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. For information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to Cabot Microelectronics’ filings with the Securities and Exchange Commission (“SEC”), including the risk factors contained in Cabot Microelectronics’ Annual Report on Form 10-K and its Quarterly Report on Form 10-Q for the quarter ended December 31, 2018.  Except as required by law, Cabot Microelectronics undertakes no obligation to update forward-looking statements made by it to reflect new information, subsequent events or circumstances.

Contact:
Colleen Mumford
Director of Investor Relations
Cabot Microelectronics Corporation
(630) 499-2600 


    
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and amounts in thousands, except per share amounts) 
       
  Quarter Ended Six Months Ended
  March 31,
2019
 December 31,
2018
 March 31,
2018
 March 31,
2019
 March 31,
2018
           
Revenue $265,391  $221,778  $142,978  $487,169  $282,957 
           
Cost of sales  150,571   122,445   67,933   273,016   133,898 
           
Gross profit  114,820   99,333   75,045   214,153   149,059 
           
Operating expenses:          
           
Research, development & technical  12,778   14,040   13,368   26,818   25,519 
           
Selling, general & administrative  50,328   61,128   24,589   111,456   49,340 
           
           
Total operating expenses  63,106   75,168   37,957   138,274   74,859 
           
Operating income  51,714   24,165   37,088   75,879   74,200 
           
Interest expense  13,331   6,890   1,158   20,221   2,290 
           
Interest income  568   1,019   1,156   1,587   2,107 
           
Other income (expense), net  (1,014)  (1,411)  (94)  (2,425)  (373)
           
Income before income taxes  37,937   16,883   36,992   54,820   73,644 
           
Provision for income taxes  10,800   3,440   7,255   14,240   46,990 
           
Net income $27,137  $13,443  $29,737  $40,580  $26,654 
           
           
Basic earnings per share $0.94  $0.50  $1.16  $1.45  $1.05 
           
Weighted average basic shares outstanding  28,998   27,157   25,593   28,066   25,474 
           
Diluted earnings per share $0.92  $0.48  $1.14  $1.42  $1.02 
           
Weighted average diluted shares outstanding  29,479   27,762   26,161   28,607   26,076 
           

 

      
CABOT MICROELECTRONICS CORPORATION 
CONSOLIDATED CONDENSED BALANCE SHEETS 
(Unaudited and amounts in thousands)  
      
  March 31,
2019
 September 30,
2018
 
      ASSETS:     
      
Current assets:     
Cash and cash equivalents $192,260 $352,921 
Accounts receivable, net  131,880  75,886 
Inventories, net  147,324  71,926 
Other current assets  30,551  22,048 
Total current assets  502,015  522,781 
      
Property, plant and equipment, net  263,556  111,403 
Other long-term assets  1,571,517  146,789 
Total assets $2,337,088 $780,973 
      
      
     LIABILITIES AND STOCKHOLDERS' EQUITY:     
      
Current liabilities:     
Accounts payable $47,330 $18,171 
Current portion of long-term debt  13,313  - 
Accrued expenses, income taxes payable and other current liabilities  86,913  82,983 
Total current liabilities  147,556  101,154 
      
Long-term debt, net of current portion  987,276  - 
Other long-term liabilities  176,389  13,127 
Total liabilities  1,311,221  114,281 
      
Stockholders' equity  1,025,867  666,692 
Total liabilities and stockholders' equity $2,337,088 $780,973 
      

 

         
CABOT MICROELECTRONICS CORPORATION
Reconciliation of GAAP Net income to Non-GAAP Adjusted EBITDA
(Unaudited and amounts in thousands, except per share and percentage amounts) 
          
          
    Quarter Ended   Six Months Ended
    March 31,
2019
 
  March 31,
2018 
  March 31,
2019
 
  March 31,
2018 
          
Net income $27,137  $29,737  $40,580  $26,654 
 Interest expense  13,331   1,158   20,221   2,290 
 Interest income  (568)  (1,156)  (1,587)  (2,107)
 Income taxes  10,800   7,255   14,240   46,990 
 Depreciation & amortization  27,348   6,638   43,889   13,138 
EBITDA* $78,048  $43,632  $117,343  $86,965 
 Acquisition and integration-related expenses  2,904   -   30,198   - 
 Charge for fair value write-up of acquired inventory sold  4,566   -   14,827   - 
Adjusted EBITDA** $85,518  $43,632  $162,368  $86,965 
Adjusted EBITDA margin  32.2%  30.5%  33.3%  30.7%
          
*  EBITDA represents earnings before interest, taxes, depreciation and amortization.      
** Adjusted EBITDA is calculated by excluding items from EBITDA that are believed to be infrequent or not indicative   
 of the company's continuing operating performance. 
  


SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following Unaudited Pro Forma Condensed Combined Financial Information is presented to illustrate the estimated effects of the company’s acquisition of KMG (the “Acquisition”), which was consummated on November 15, 2018 (the “Acquisition Date”), based on the historical results of operations of Cabot Microelectronics and KMG. The following Unaudited Pro Forma Condensed Combined Statements of Income for the three and six month periods ended March 31, 2019 and March 31, 2018 are based on the historical financial statements of Cabot Microelectronics and KMG after giving effect to the Acquisition, and the assumptions and adjustments described in the accompanying notes to these Unaudited Pro Forma Condensed Combined Statements of Income.

The historical Cabot Microelectronics Consolidated Statements of Income for the three and six months ended March 31, 2019 and March 31, 2018 were derived from the consolidated financial statements included in this press release. The historical KMG Consolidated Statements of Income for the six months ended March 31, 2019, as well as the historical KMG Consolidated Statements of Income for the three and six months ended March 31, 2018 includes information derived from KMG’s books and records. Prior to the Acquisition, KMG was on a July 31st fiscal year end reporting cycle. These pro forma financials include actual KMG’s pre-acquisition results with the months aligned to Cabot Microelectronics’ fiscal periods, and therefore, they do not align with consolidated financial statements included in KMG’s Quarterly Reports on Form 10-Q.

The Unaudited Pro Forma Condensed Combined Statements of Income are presented as if the Acquisition had been consummated on October 1, 2017, the first business day of our 2018 fiscal year, and combine the historical results of Cabot Microelectronics and KMG, which is consistent with internal management reporting, after primarily giving effect to the following assumptions and adjustments:

  • Application of the acquisition method of accounting;
  • Elimination of transaction costs incurred in connection with the Acquisition;
  • Adjustments to reflect the new financing arrangements entered into and legacy financing arrangements retired in connection with the Acquisition;
  • The exchange of 0.2000 share(s) of Cabot Microelectronics common stock for each share of KMG common stock; and
  • Conformance of accounting policies.

The Unaudited Pro Forma Condensed Combined Financial Information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized estimated fair values at the Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. This allocation was initially completed as of November 15, 2018.  The allocation may be adjusted for up to one-year post closing.

The Unaudited Pro Forma Condensed Combined financial information has been prepared in accordance with SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying Unaudited Pro Forma Condensed Combined Statements of Income do not reflect any additional anticipated synergies, operating efficiencies, cost savings, or any integration costs that may result from the Acquisition.

The historical consolidated financial information has been adjusted in the accompanying Unaudited Pro Forma Condensed Combined Statements of Income to give effect to unaudited pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of the combined company. As a result, under SEC Regulation S-X Article 11, certain non-recurring expenses such as deal costs and compensation expenses related to severance or accelerated stock compensation and certain recurring historical KMG expenses related to depreciation, amortization, financing costs and costs of sales have been adjusted as if the Acquisition had occurred on October 1, 2017. Certain non-cash costs related to the fair value step-up of inventory are eliminated from pro forma results in the periods presented.

The Unaudited Pro Forma Condensed Combined Financial Information, including the related notes included herein, should be read in conjunction with Cabot Microelectronics’ Current Report on Form 8-K/A filed on January 30, 2019 and the historical consolidated financial statements and related notes of Cabot Microelectronics and KMG, which are available to the public at the SEC’s website at www.sec.gov.


        
CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Three and Six Months Ended March 31, 2019 and March 31, 2018
(in thousands, except per share data)
        
 Three Months
Ended March 31,
2019
 Three Months
Ended March 31,
2018
 Six Months
Ended March 31,
2019
 Six Months
Ended March 31,
2018
        
Revenue$265,391  $259,372  $549,147  $512,105 
Cost of sales 145,995   147,727   301,223   290,645 
Gross profit 119,396   111,645   247,924   221,460 
Operating expenses:       
Research, development and technical  12,778   13,368   26,818   25,519 
Selling, general and administrative expenses 53,653   50,584   110,116   100,969 
Total operating expenses 66,431   63,952   136,934   126,488 
Operating income 52,965   47,693   110,990   94,972 
Interest expense 13,409   14,651   26,852   29,293 
Interest income 568   1,157   1,638   2,110 
Other income (expense), net (1,014)  (688)  (2,683)  (1,286)
Income before income taxes 39,110   33,511   83,093   66,503 
Provision for income taxes  11,054   5,562   15,406   31,522 
Net income$28,056  $27,949  $67,687  $34,981 
Basic earnings per share $0.97  $0.97  $2.34  $1.22 
Weighted average basic shares outstanding  28,998   28,830   28,884   28,711 
Diluted earnings per share $0.95  $0.95  $2.30  $1.19 
Weighted average diluted shares outstanding 29,479   29,398   29,425   29,313 
        

 

      
CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Three Months Ended March 31, 2019
(in thousands, except per share data)
 
 Cabot
Microelectronics
    
 Three Months
Ended March 31,
2019
 Pro Forma
Adjustments 1
 
Pro Forma
Combined
      
Revenue$265,391   $-  $265,391 
Cost of sales 150,571   (4,576)  145,995 
Gross profit 114,820   4,576   119,396 
Operating expenses:     
Research, development and technical  12,778   -   12,778 
Selling, general and administrative expenses 50,328   3,325   53,653 
Total operating expenses 63,106   3,325   66,431 
Operating income 51,714   1,251   52,965 
Interest expense 13,331   78   13,409 
Interest income 568   -   568 
Other income (expense), net (1,014)  -   (1,014)
Income before income taxes 37,937   1,173   39,110 
Provision for income taxes 10,800   254   11,054 
Net income$27,137  $919  $28,056 
Basic earnings per share $0.94    $0.97 
Weighted average basic shares outstanding  28,998     28,998 
Diluted earnings per share $0.92    $0.95 
Weighted average diluted shares outstanding 29,479     29,479 
      
1 Pro forma adjustments are related to non-recurring items directly attributable to the transaction as well as recurring differences related to depreciation, amortization or financing costs that were included as if the companies were combined as of October 1, 2017.
 

 

          
CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Six Months Ended March 31, 2019
(in thousands, except per share data)
 
 Cabot
Microelectronics
1
 KMG
Chemicals
2
      
 Six Months
Ended March 31,
2019
 October 1,
2018 to
November 14,
2018
 Presentation
Reclassification
3
 Pro Forma
Adjustments 4
 
Pro Forma
Combined
          
Revenue$487,169  $61,978   $-   $-  $549,147 
Cost of sales 273,016   36,534   4,741   (13,068)  301,223 
Gross profit 214,153   25,444   (4,741)  13,068   247,924 
Operating expenses:         
Distribution expenses -   4,741   (4,741)  -   - 
Research, development and technical  26,818   -   -   -   26,818 
Selling, general and administrative expenses 111,456   40,504   -   (41,844)  110,116 
Amortization of intangibles -   1,943   -   (1,943)  - 
Total operating expenses 138,274   47,188   (4,741)  (43,787)  136,934 
Operating income 75,879   (21,744)  -   56,855   110,990 
Interest expense 20,221   8,537   -   (1,906)  26,852 
Interest income 1,587   51   -   -   1,638 
Derivative fair value gain -   567   -   (567)  - 
Other income (expense), net (2,425)  (258)  -   -   (2,683)
Income before income taxes 54,820   (29,921)  -   58,194   83,093 
Provision for income taxes (benefit) 14,240   (5,522)  -   6,688   15,406 
Net income$40,580  $(24,399)  $-  $51,506  $67,687 
Basic earnings per share $1.45          $2.34 
Weighted average basic shares outstanding  28,066           28,884 
Diluted earnings per share $1.42          $2.30 
Weighted average diluted shares outstanding 28,607           29,425 
          
1 Includes heritage Cabot Microelectronics from October 1, 2018 to March 31, 2019 and heritage KMG from November 15, 2018 to March 31, 2019. On November 15, 2018 the Acquisition was completed and actual combined company results are included. 
2 Heritage KMG results that occurred prior to the Acquisition on  November 15, 2018
3 Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot Microelectronics’ accounting policies. 
4 Certain pro forma adjustments related to depreciation, amortization, financing costs and costs of sales have been made for the October 1, 2018 to March 31, 2019 period assuming that the Acquisition occurred on October 1, 2017. Additionally, nonrecurring pro forma adjustments have been made for deal costs, compensation expenses related to severance or accelerated stock compensation, and the fair value step-up of inventory directly attributable throughout the six month period. 
 

 

          
CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Three Months Ended March 31, 2018
(in thousands, except per share data)
 
 Cabot
Microelectronics
 KMG
Chemicals
      
 Three Months
Ended March 31,
2018
 Three Months
Ended March 31,
2018
 Presentation
Reclassification
1
 Pro Forma
Adjustments 2
 
Pro Forma
Combined
          
Revenue$142,978  $116,394   $-   $-  $259,372 
Cost of sales 67,933   67,496   8,932   3,366   147,727 
Gross profit 75,045   48,898   (8,932)  (3,366)  111,645 
Operating expenses:         
Distribution expenses -   8,932   (8,932)  -   - 
Research, development and technical  13,368   -   -   -   13,368 
Selling, general and administrative expenses 24,589   14,620     11,375   50,584 
Amortization of intangibles -   3,870   -   (3,870)  - 
Total operating expenses 37,957   27,422   (8,932)  7,505   63,952 
Operating income 37,088   21,476   -   (10,871)  47,693 
Interest expense 1,158   4,236   -   9,257   14,651 
Interest income 1,156   1   -   -   1,157 
Loss on the extinguishment of debt -   1,984   -   (1,984)  - 
Derivative fair value gain -   3,024   -   (3,024)  - 
Other income (expense), net (94)  (594)  -   -   (688)
Income before income taxes 36,992   17,687   -   (21,168)  33,511 
Provision for income taxes (benefit) 7,255   3,264   -   (4,957)  5,562 
Net income$29,737  $14,423   $-  $(16,211) $27,949 
Basic earnings per share $1.16  $0.93      $0.97 
Weighted average basic shares outstanding  25,593   15,495       28,830 
Diluted earnings per share $1.14  $0.91      $0.95 
Weighted average diluted shares outstanding 26,161   15,903       29,398 
          
1 Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot Microelectronics’ accounting policies. 
2 Pro forma adjustments are related to non-recurring items directly attributable to the transaction as well as recurring differences related to depreciation, amortization or financing costs that were included as if the companies were combined as of October 1, 2017. 
          

 

          
CABOT MICROELECTRONICS CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Income
For the Six Months Ended March 31, 2018
(in thousands, except per share data)
 
 Cabot
Microelectronics
 KMG
Chemicals
      
 Six Months
Ended March 31,
2018
 Six Months
Ended March 31,
2018
 Presentation
Reclassification
1
 Pro Forma
Adjustments 2
 
Pro Forma
Combined
          
Revenue$282,957  $229,148  $-  $-  $512,105 
Cost of sales133,898  132,218  17,675  6,854  290,645 
Gross profit149,059  96,930  (17,675) (6,854) 221,460 
Operating expenses:         
Distribution expenses-  17,675  (17,675) -  - 
Research, development and technical 25,519  -  -  -  25,519 
Selling, general and administrative expenses49,340  28,780    22,849  100,969 
Amortization of intangibles-  6,972  -  (6,972) - 
Total operating expenses74,859  53,427  (17,675) 15,877  126,488 
Operating income74,200  43,503  -  (22,731) 94,972 
Interest expense2,290  10,537  -  16,466  29,293 
Interest income2,107  3  -  -  2,110 
Loss on the extinguishment of debt-  6,309  -  (6,309) - 
Derivative fair value gain-  3,882  -  (3,882) - 
Other income (expense), net(373) (913) -  -  (1,286)
Income before income taxes73,644  29,629  -  (36,770) 66,503 
Provision for income taxes (benefit)46,990  (6,858) -  (8,610) 31,522 
Net income$26,654  $36,487  $-  $(28,160) $34,981 
Basic earnings per share $1.05  $2.62      $1.22 
Weighted average basic shares outstanding 25,474  13,923      28,711 
Diluted earnings per share $1.02  $2.55      $1.19 
Weighted average diluted shares outstanding26,076  14,285      29,313 
          
1 Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot Microelectronics’ accounting policies. 
2 Pro forma adjustments are related to non-recurring items directly attributable to the transaction as well as recurring differences related to depreciation, amortization or financing costs that were included as if the companies were combined as of October 1, 2017.
 

 

        
CABOT MICROELECTRONICS CORPORATION
Summary of Pro Forma Adjustments
(in thousands, except per share data)
        
 Three Months
Ended March 31,
2019
 Three Months
Ended March 31,
2018
 Six Months
Ended March 31,
2019
 Six Months
Ended March 31,
2018
        
Impact to cost of sales:       
Depreciation and amortization, net(a) $(10) $3,366  $1,759  $6,854 
Inventory step-up(b) (4,566) -  (14,827) - 
Impact to cost of sales$(4,576) $3,366  $(13,068) $6,854 
        
Impact to operating expense:       
Depreciation and amortization, net(a) $5,469  $13,268  $17,582  $26,564 
Compensation expense(c) (935) (1,893) (36,640) (3,715)
Deal costs(d) (1,209) -  (22,786) - 
Historical KMG amortization in other operating expenses removal(a) -  (3,870) (1,943) (6,972)
Impact to operating expense$3,325  $7,505  $(43,787) $15,877 
        
Impact to other expense:       
Loss on the extinguishment of debt(e)$-  $(1,984) $-  $(6,309)
Derivative fair value gain(e)-  3,024  567  3,882 
Impact to other expense$-  $1,040  $567  $(2,427)
        
Impact to interest, net:       
Interest expense(f)$78  $9,257  $(1,906) $16,466 
Interest income(f)-  -  -  - 
Impact to interest$78  $9,257  $(1,906) $16,466 
        


Adjustments included in the accompanying Unaudited Pro Forma Condensed Combined Statements of Income are as follows:

(a) Depreciation and amortization expense are adjusted by removing depreciation and amortization associated with legacy KMG assets and assigning a pro forma expense based on the fair value of the assets on the date of the Acquisition. Depreciation costs are allocated to costs of sales and selling, general and administrative expenses based on historical KMG allocations. Amortization costs are allocated to costs of sales or selling, general and administrative expense based on the use of the asset, where applicable.

(b) Cost of sales is impacted by increased inventory balance caused by the non-cash impact of the step up to fair value of the inventory. The incremental costs of sales driven by the inventory step-up during the period have been removed.

(c) Directly attributable and non-recurring compensation expense related to the fair value remeasurement of certain equity awards, non-recurring retention expenses and stock award vesting directly attributable to the Acquisition are removed for pro forma purposes. All historical KMG stock-based compensation is removed and the proper vesting schedule for on-going service added as a pro forma adjustment.

(d) The elimination of non-recurring deal costs incurred in connection with the Acquisition.

(e) As a result of the Acquisition, there were non-recurring costs incurred by KMG as a result of retiring old debt. The costs associated with retiring the old debt facility and other financial instruments are removed for pro forma purposes. These instruments were retired as a result of the Acquisition and are not included in the pro forma results, which are presented as if the Acquisition had occurred on October 1, 2017.

(f) Changes in interest expense as a result of financing associated with the Acquisition. The adjustments remove legacy KMG interest costs, including unused revolver fees and adds the costs associated with the new financing facilities as if the Acquisition occurred on October 1, 2017.

We calculated the income tax effect of the pro forma adjustments using a 21.6% and 23.4% tax rate, which represent the weighted average statutory tax rate for six-month period ended March 31, 2019 and year-ended September 30, 2018, respectively.

Additionally, for the 2018 periods presented, we calculated the unaudited pro forma weighted average number of basic shares outstanding by adding the Cabot Microelectronics weighted average number of basic shares outstanding from the share amounts disclosed in the historical Quarterly Report on Form 10-Q to the amount of shares issued in connection with the Acquisition, as if the shares were held for the entire period.

We calculated the unaudited pro forma weighted average number of diluted shares outstanding by adding the number of shares issued in the Acquisition to the amount disclosed in the historical Cabot Microelectronics Quarterly Report on Form 10-Q.

The basic and diluted EPS calculation takes pro forma net income divided by the applicable number of shares outstanding.


Cabot Microelectronics Corporation
Reconciliation of Pro Forma and Non-GAAP Adjusted Pro Forma Information 

The company reports its financial results in accordance with U.S. GAAP.  However, management believes that certain non-GAAP financial measures that reflect the way that management evaluates the business may provide investors with additional information regarding the company’s results, trends and ongoing performance on a comparable basis.  We refer to these measures “Adjusted Pro Forma”, which begin with Pro Forma results that are prepared in accordance with SEC Regulation S-X Article 11 and are included above.  These results are then adjusted for the following additional items:

  • Removal of amortization of acquisition related intangibles, since management believes that these costs are not indicative of the company’s core operating performance.
  • Removes the difference between reported GAAP interest expense and Article 11 pro forma interest expense, which is prepared as if the acquisition occurred on October 1, 2017.  This adjustment is made for periods when Cabot Microelectronics owned KMG for the full reporting period. 
  • Removal of integration expenses, as they are non-recurring in nature.
  • Adjustment for U.S. Tax Reform, which represents a significant non-recurring item affecting comparability among periods.

Reconciliations for these items are provided in the tables below.

Cabot Microelectronics Corporation
Reconciliation of Pro Forma Condensed Combined Statement of Income to Non-GAAP Adjusted Pro Forma Condensed Combined Statement of Income
For the Three Months Ended March 31, 2019
(Unaudited and in thousands, except per share data)
           
    Non-GAAP ADJUSTMENTS
  
  Pro Forma Amortization of
Acquisition
Related
Intangibles
 Interest Exp
Adjustment
 Integration
Expenses
 Adjusted
Pro forma
Revenue $265,391  $-  $-  $-  $265,391 
Cost of sales 145,995  (3,470) -  -  142,526 
Gross profit 119,396  3,470  -  -  122,866 
Gross profit, % of revenue 45.0% 1.6% 0.0% 0.0% 46.3%
           
Operating expenses          
Research, development and technical 12,778  -  -  -  12,778 
Selling, general and administrative 53,653  (18,947) -  (760) 33,947 
Total operating expenses 66,431  (18,947) -  (760) 46,725 
           
Operating income 52,965  22,416  -  760  76,141 
           
Interest Expense 13,409  -  (78) -  13,331 
Interest Income 568  -  -  -  568 
Other income (Expense), net (1,014) -  -  -  (1,014)
Income before income taxes 39,110  22,416  78  760  62,364 
           
Provision for income taxes 11,054  5,337  19  182  16,591 
Net income $28,056  $17,079  $59  $578  $45,773 
           
Diluted earnings per share $0.95  $0.58  $-  $0.02  $1.55 
Weighted average diluted shares outstanding 29,479  29,479  29,479  29,479  29,479 
           
Depreciation & amortization $32,807  $(22,416) $-  $-  $10,391 
EBITDA $84,758  -  -  $760  $85,518 
EBITDA Margin 31.9% -  -  -  32.2%
           

 

 
Cabot Microelectronics Corporation
Reconciliation of Pro Forma Condensed Combined Statement of Income to Non-GAAP Adjusted Pro Forma Condensed Combined Statement of Income
For the Six Months Ended March 31, 2019
(Unaudited and in thousands, except per share data)
           
    Non-GAAP ADJUSTMENTS
  
  Pro Forma Amortization of
Acquisition
Related
Intangibles
 Integration
Expenses
 U.S. Tax
Reform
 
 Adjusted
Pro forma
Revenue $549,147  $-  $-  $-  $549,147 
Cost of sales 301,223  (6,940)     294,283 
Gross profit 247,924  6,940  -  -  254,864 
Gross profit, % of revenue 45.1% 3.1% 0.0% 0.0% 46.4%
           
Operating expenses          
Research, development and technical 26,818  -  -  -  26,818 
Selling, general and administrative 110,116  (37,894) (2,091) -  70,131 
Total operating expenses 136,934  (37,894) (2,091) -  96,949 
           
Operating income 110,990  44,834  2,091  -  157,915 
           
Interest Expense 26,852  -  -  -  26,852 
Interest Income  1,638  -  -  -  1,638 
Other income (Expense), net (2,683) -  -  -  (2,683)
Income before income taxes 83,093  44,834  2,091  -  130,018 
           
Provision for income taxes 15,406  10,673  502  259  26,840 
Net income $67,687  $34,161  $1,589  $(259) $103,178 
           
Diluted earnings per share  $2.30  $1.16  $0.05  $(0.01) $3.51 
Weighted average diluted shares outstanding 29,425  29,425  29,425  29,425  29,425 
           
Depreciation & amortization $65,035  $(44,834) $-  $-  $20,201 
EBITDA $173,342  -  $2,091  -  $175,433 
EBITDA Margin 31.6% -  -  -  31.9%
                

 

 
Cabot Microelectronics Corporation
Reconciliation of Pro Forma Condensed Combined Statement of Income to Non-GAAP Adjusted Pro Forma Condensed Combined Statement of Income
For the Three Months Ended March 31, 2018
(Unaudited and in thousands, except per share data)
         
    Non-GAAP ADJUSTMENTS
  
  Pro Forma Amortization of
Acquisition
Related
Intangibles
 U.S. Tax
Reform
 Adjusted
Pro forma
Revenue $259,372  $-  $-  $259,372 
Cost of sales 147,727  (3,469) -  144,258 
Gross profit 111,645  3,469  -  115,114 
Gross profit, % of revenue 43.0% 1.6% 0.0% 44.4%
         
Operating expenses        
Research, development and technical 13,368  -  -  13,368 
Selling, general and administrative 50,584  (13,453) -  37,131 
Total operating expenses 63,952  (13,453) -  50,499 
         
Operating income 47,693  16,922  -  64,615 
         
Interest Expense 14,651  -  -  14,651 
Interest Income  1,157  -  -  1,157 
Other income (Expense), net (688) -  -  (688)
Income before income taxes 33,511  16,922  -  50,433 
         
Provision for income taxes 5,562  4,029  212  9,803 
Net income $27,949  $12,893  $(212) $40,630 
         
Diluted earnings per share  $0.95  $0.44  $(0.01) $1.38 
Weighted average diluted shares outstanding 29,398  29,398  29,398  29,398 
         
Depreciation & amortization $27,032  $(16,922) $-  $10,110 
EBITDA $74,037  -  -  $74,037 
EBITDA Margin 28.5%   -     -   28.5%
         

 

 
Cabot Microelectronics Corporation
Reconciliation of Pro Forma Condensed Combined Statement of Income to Non-GAAP Adjusted Pro Forma Condensed Combined Statement of Income
For the Six Months Ended March 31, 2018
(Unaudited and in thousands, except per share data)
         
    Non-GAAP ADJUSTMENTS
  
  Pro Forma Amortization of
Acquisition
Related
Intangibles
 U.S. Tax
Reform
 Adjusted
Pro forma
Revenue $512,105  $-  $-  $512,105 
Cost of sales 290,645  (6,866) -  283,779 
Gross profit 221,460  6,866  -  228,326 
Gross profit, % of revenue 43.2% 3.1% 0.0% 44.6%
         
Operating expenses        
Research, development and technical 25,519  -  -  25,519 
Selling, general and administrative 100,969  (26,905) -  74,064 
Total operating expenses 126,488  (26,905) -  99,583 
         
Operating income 94,972  33,771  -  128,743 
         
Interest Expense 29,293  -  -  29,293 
Interest Income  2,110  -  -  2,110 
Other income (Expense), net (1,286) -  -  (1,286)
Income before income taxes 66,503  33,771  -  100,274 
         
Provision for income taxes 31,522  8,040  (20,766) 18,796 
Net income $34,981  $25,731  $20,766  $81,479 
         
Diluted earnings per share  $1.19  $0.88  $0.71  $2.78 
Weighted average diluted shares outstanding29,313  29,313  29,313  29,313 
         
Depreciation & amortization $53,925  $(33,771) $-  $20,154 
EBITDA $147,611  -  -  $147,611 
EBITDA Margin 28.8% -  -  28.8%