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Cabot Microelectronics Corporation Reports Results for Second Quarter of Fiscal 2019

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  • 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 sales 133,898     132,218     17,675     6,854     290,645  
Gross profit 149,059     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 expenses 49,340     28,780         22,849     100,969  
Amortization of intangibles -     6,972     -     (6,972 )   -  
Total operating expenses 74,859     53,427     (17,675 )   15,877     126,488  
Operating income 74,200     43,503     -     (22,731 )   94,972  
Interest expense 2,290     10,537     -     16,466     29,293  
Interest income 2,107     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 taxes 73,644     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 outstanding 26,076     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 outstanding 29,313     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 %
                 


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