KMG Reports Third Quarter 2018 Financial Results


FORT WORTH, Texas, June 11, 2018 (GLOBE NEWSWIRE) -- KMG (NYSE:KMG), a global provider of specialty chemicals and performance materials, today announced financial results for the fiscal 2018 third quarter ended April 30, 2018.

2018 Third Quarter Financial Highlights

  • Sales increased 45% from the third quarter of last year to a record $118.6 million.
  • GAAP diluted earnings per share doubled to $0.98 from $0.49 per diluted share in the third quarter of fiscal 2017.
  • Adjusted diluted earnings per share1 was a record $1.10 compared to $0.53 per share reported in the third quarter of last year.
  • GAAP net income increased to $15.6 million, compared to $6.1 million in the third quarter of last year.
  • Adjusted EBITDA2 was a record $31.5 million, up 125% from $14.0 million in the third quarter of fiscal 2017.
  • Operating cash flow increased to a record $21.5 million, compared to $7.9 million in the third quarter of fiscal 2017.

“KMG achieved outstanding third quarter results, driven by strong organic growth in both our electronic chemicals and performance materials segments, as well as a significant contribution from the acquisition of Flowchem,” said Chris Fraser, KMG chairman and CEO. “Consolidated sales grew 45% year-over-year and 4% sequentially to $118.6 million, setting another quarterly record for KMG. Adjusted EBITDA and adjusted diluted earnings per share also reached record levels, reflecting product volume growth and continued efficiency improvements across our global operations.”

Mr. Fraser continued, “Third quarter sales in our electronic chemicals segment increased 10% year-over-year to a record $74.7 million, benefiting from product volume growth in each of our major geographic regions. Despite higher freight costs, segment operating income grew 28% year-over-year to $10.9 million, aided by increased product volume, operating efficiencies and a favorable product mix.  

“Our performance materials segment also generated record results, with third quarter sales increasing 10% on a sequential basis and more than tripling year-over-year to $44 million. Supported by our global capabilities and innovative technology, our pipeline performance business generated strong growth, with favorable energy market dynamics contributing to increased demand for our products and solutions that optimize pipeline throughput and maximize performance and safety. We also experienced continued growth in our wood treating chemicals business, which provides products essential to preserve North America’s expansive wood-based utility pole infrastructure. Overall, performance materials segment operating income grew to $16 million, a new quarterly record for this segment.”      

Mr. Fraser concluded, “Considering our strong financial performance through the first nine months of fiscal 2018, as well as our expectations for continued growth in the fourth quarter of our fiscal year, we are increasing our fiscal 2018 sales forecast to $455-465 million, from $445-455 million previously, and increasing our fiscal 2018 adjusted EBITDA guidance to $118-120 million, from $114-118 million.”

Consolidated results

Third quarter
Dollars in thousands, except EPS
Fiscal 2018 Fiscal 2017
 As ReportedAdjustedAs ReportedAdjusted
 (GAAP)(non-GAAP)3(GAAP)(non-GAAP)4
Net sales$118,647 $118,647 $81,616 $81,616 
Operating income 23,953  27,230  9,367    10,001 
Operating margin 20.2% 23.0%   11.5%   12.3%
Net income 15,645  17,459   6,067  6,479 
Diluted earnings per share$0.98 $1.10 $ 0.49 $0.53 


Nine months ended April 30
Dollars in thousands, except EPS
Fiscal 2018 YTD Fiscal 2017 YTD
 As ReportedAdjustedAs ReportedAdjusted
 (GAAP)(non-GAAP)5(GAAP)(non-GAAP)6
Net sales$343,162 $343,162 $237,182 $237,182 
Operating income 65,763  75,749  27,087   28,671  
Operating margin 19.2% 22.1% 11.4%   12.1%
Net income 46,832  45,205  18,293  19,323  
Diluted earnings per share$3.16 $3.05 $  1.50 $  1.58 

Business segment results

Electronic ChemicalsThird QuarterThird Quarter Nine MonthsNine Months
Dollars in thousandsFiscal 2018Fiscal 2017Fiscal 2018Fiscal 2017
 As ReportedAs ReportedAs ReportedAs Reported
 (GAAP)(GAAP)(GAAP)(GAAP)
Net sales$74,669 $68,141 $222,401 $204,829 
Operating income 10,889    8,509    34,877    26,153 
Operating margin 14.6%   12.5%   15.7%   12.8%

For the third fiscal quarter, the Electronic Chemicals segment reported:

  • Sales of $74.7 million, up 10% from the third quarter of fiscal 2017. The gain in sales reflected product volume growth in all geographic regions and a more favorable product mix.  
  • Operating income of $10.9 million, up 28% from $8.5 million in the same period of fiscal 2017. Operating income increased due to product volume growth, operational efficiencies and product mix. Operating margin improved to 14.6% compared to 12.5% in the prior-year period.
  • Adjusted EBITDA7 of $13.7 million, up 19.7% from $11.5 million last year.

Performance Materials
The Performance Materials segment consists of the pipeline performance business and the wood treating chemicals business.

Performance MaterialsThird QuarterThird Quarter Nine MonthsNine Months
Dollars in thousandsFiscal 2018Fiscal 2017Fiscal 2018Fiscal 2017
 As ReportedAs ReportedAs ReportedAs Reported
 (GAAP)(GAAP)(GAAP)(GAAP)
Net sales$43,978 $13,475 $120,761 $32,353 
Operating income   16,041    4,224    40,435    10,927 
Operating margin   36.5%   31.4%   33.5%   33.8%

For the third fiscal quarter, the Performance Materials segment reported:

  • Sales of $44.0 million versus $13.5 million in the same period a year ago. Sales growth reflected the contribution from Flowchem, as well as product volume growth in both industrial lubricants and wood treating chemicals.
  • Operating income of $16.0 million compared to $4.2 million last year. The increase in operating income reflected the contribution from Flowchem, as well as product volume growth in both industrial lubricants and wood treating chemicals. Segment operating margins were 36.5%, compared to 31.4% in the third quarter of 2017, due to the contribution from Flowchem, as well as product volume growth in both industrial lubricants and wood treating chemicals.
  • Adjusted EBITDA8 of $20.2 million versus $4.8 million last year.

Fiscal 2018 Outlook

  • Sales: We increase our fiscal 2018 consolidated net sales forecast to $455-465 million, from our prior guidance of $445-455 million.
  • Adjusted EBITDA: We increase our adjusted EBITDA forecast to $118-120 million, from our prior guidance of $114-118 million, reflecting stronger growth expectations in both our electronic chemicals and performance materials segments. Our revised fiscal 2018 adjusted EBITDA forecast includes approximately $8.0 million in stock-based compensation expense, unchanged from our prior estimate.
  • Depreciation and Amortization: Depreciation and amortization expense is forecast to be approximately $30 million.
  • Capital Expenditures: Capital expenditures are forecast to be approximately $25 million, down from our prior estimate of approximately $29 million.

With respect to the Company’s full year guidance of Adjusted EBITDA, the Company is not able to provide a reconciliation of these fiscal 2018 non-GAAP financial measures to the most comparable GAAP measure without unreasonable efforts; certain items that are included have not yet occurred and cannot be reasonably predicted, and, accordingly, the probable significance of such items cannot be determined at this time. The most comparable GAAP measure and reconciling information that is unavailable, or not reasonably predictable, would include restructuring and realignment charges and acquisition and integration-related expenses.

Conference call
Date: Monday June 11, 2018
Time: 5:00 p.m. ET
Dial in: 844-316-8066 or 703-736-7353
Conference ID: 1685029

The conference call will be webcast live via the “Investors” section of the Company’s website at http://kmgchemicals.com.

If you are unable to listen live, the conference call will be archived on the KMG website. A telephone replay of the call will also be available for one week, starting at 8:00 p.m. ET on June 11, 2018. To access the call, dial 855-859-2056 (domestic) or 404-537-3406 (international) using conference ID 1685029.

About KMG
KMG Chemicals, Inc., through its subsidiaries, produces and distributes specialty chemicals and performance materials for the semiconductor, industrial wood preservation and pipeline and energy markets. For more information, visit the Company's website at http://kmgchemicals.com.

The information in this news release includes certain forward-looking statements that are based upon assumptions that in the future may prove not to have been accurate and are subject to significant risks and uncertainties, including statements as to the future performance of the company. Although the company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Factors that could cause results to differ include, but are not limited to, successful performance of internal plans, product development acceptance, the impact of competitive services and pricing and general economic risks and uncertainties.

1 Non-U.S. GAAP measure. See Table 2 for reconciliation.    

2 Non-U.S. GAAP measure. See Tables 1 and 1A for reconciliation.

3 Non-U.S. GAAP measure. See Tables 2 and 2A for reconciliation.

4 Non-U.S. GAAP measure. See Tables 2 and 2A for reconciliation.

5 Non-U.S. GAAP measure. See Tables 2 and 2A for reconciliation.

6 Non-U.S. GAAP measure. See Tables 2 and 2A for reconciliation.

7 Non-U.S. GAAP measure. See Tables 1 and 1A for reconciliation.

8 Non-U.S. GAAP measure. See Tables 1 and 1A for reconciliation.


 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except for per share amounts)
 
 Three Months Ended Nine Months Ended
 April 30, April 30,
  2018   2017   2018   2017 
Net sales $118,647  $81,616  $343,162  $237,182 
Cost of sales 68,156   49,106   196,936   143,787 
 Gross profit 50,491   32,510   146,226   93,395 
        
Distribution expenses 9,070   9,457   27,192   28,329 
Selling, general and administrative expenses 13,601   13,008   41,939   36,241 
Amortization of intangible assets 3,867   608   11,263   1,668 
Restructuring charges    70   69   70 
 Operating income 23,953   9,367   65,763   27,087 
Other (expense) income       
 Interest expense, net (4,153)    (301)  (17,333)  (650)
 Loss on the extinguishment of debt (277)     (6,368)   
 Derivative fair value gain 1,365      5,238    
 Other, net (200)    144   (977)    88 
 Total other (expense) income, net (3,265)  (157)  (19,440)  (562)
        
Income before income taxes 20,688   9,210   46,323   26,525 
 Provision for income taxes (5,043)  (3,143)  509   (8,232)
Net income$15,645  $6,067  $46,832  $18,293 
Earnings per share:       
 Net income per common share basic$1.01  $0.51  $3.24  $1.54 
 Net income per common share diluted$0.98  $0.49  $3.16  $1.50 
        
Weighted average shares outstanding:       
 Basic 15,505   11,888   14,439   11,884 
 Diluted 15,905   12,303   14,814   12,236 


 
KMG CHEMICALS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except for share and per share amounts)
 
 April 30,July 31,
  2018  2017 
 (Unaudited) 
Assets  
Current assets  
Cash and cash equivalents$21,818 $20,708 
Accounts receivable  
Trade, net of allowances of $235 at April 30, 2018 and $263 at July 31, 2017 59,422   

51,168
 
Other 7,176  6,168 
Inventories, net 54,087  46,482 
Prepaid expenses and other 4,305  8,617 
Total current assets 146,808  133,143 
   
Property, plant and equipment, net 114,640  105,435 
Goodwill 227,797  224,391 
Intangible assets, net 303,318  320,401 
Other assets, net 12,744  9,061 
Total assets$805,307 $792,431 
   
Liabilities & stockholders’ equity  
Current liabilities  
Accounts payable$37,907 $29,570 
Accrued liabilities 10,884  12,456 
Employee incentive accrual 5,574  7,713 
Current portion of long-term debt   3,167 
Total current liabilities 54,365  52,906 
   
Long-term debt 323,550  523,102 
Deferred tax liabilities 23,243  37,944 
Other long-term liabilities 5,446  4,763 
Total liabilities 406,604  618,715 
   
Commitments and contingencies  
   
Stockholders’ equity  
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued    
Common stock, $.01 par value, 40,000,000 shares authorized, 15,505,350 shares issued and outstanding at April 30, 2018 and 11,889,649 shares issued and outstanding at July 31, 2017  

 

155
   

 

119
 
Additional paid-in capital 220,094  42,535 
Accumulated other comprehensive loss (7,864) (9,712)
Retained earnings 186,318  140,774 
Total stockholders’ equity 398,703  173,716 
Total liabilities and stockholders’ equity$805,307 $792,431 


 
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
  Nine Months Ended 
  April 30, 
  2018  2017 
Cash flows from operating activities        
Net income $46,832  $18,293 
Adjustments to reconcile net income to net cash provided by operating activities        
Depreciation and amortization  22,359   10,864 
Loss on extinguishment of debt  6,368    
Stock-based compensation expense  5,687   4,280 
Amortization of debt discounts and financing costs included in interest expense  1,124   125 
Debt repricing transaction costs  607    
Deferred income tax benefit  (9,097)  (1,189)
Derivative fair value gain  (5,238)   
Other  (65)  (935)
Changes in operating assets and liabilities        
Accounts receivable — trade  (7,664)  (3,172)
Accounts receivable — other  (50)  2,253 
Inventories  (7,238)  606 
Other current and noncurrent assets  (715)  (1,062)
Accounts payable  8,194   (1,282)
Accrued liabilities and other  (3,349)  (1,444)
Net cash provided by operating activities  57,755   27,337 
         
Cash flows from investing activities        
Additions to property, plant and equipment  (15,527)  (8,586)
Purchase of Sealweld, net of cash acquired  (585)  (16,584)
Other investing activities  (577)   
Proceeds − insurance claim     1,247 
Net cash used in investing activities  (16,689)  (23,923)
         
Cash flows from financing activities        
Proceeds from sale of common stock, net of issuance costs  175,669    
Borrowings under credit facility     17,000 
Payments under credit facility     (18,800)
Principal payments on borrowings on term loan  (210,000)   
Debt repricing transaction costs  (607)   
Payment of dividends  (1,288)  (1,066)
Cash payments related to tax withholdings from stock-based awards  (3,729)  (277)
Net cash used in financing activities  (39,955)  (3,143)
         
Effect of exchange rate changes on cash  (1)  398 
Net increase in cash, cash equivalents and restricted cash  1,110   669 
         
Cash, cash equivalents and restricted cash at beginning of period  20,708   13,428 
Cash, cash equivalents and restricted cash at end of period $21,818  $14,097 

Reconciliation of GAAP financial measures to non-GAAP financial measures
KMG provides non-GAAP financial information to complement reported GAAP results. KMG believes that analysis of our financial performance would be enhanced by an understanding of the factors underlying that performance and our judgments about the likelihood that particular factors will repeat. We define adjusted EBITDA as earnings from operations before interest, taxes, depreciation, amortization, acquisition and integration expenses, restructuring and realignment charges and other relevant items.

KMG intends to continue to provide certain non-GAAP financial information and the appropriate reconciliation to GAAP in its financial results. As required by SEC rules, the tables below present a reconciliation of our presented non-GAAP measures to the most directly comparable GAAP measures. These non-GAAP measures should be viewed as a supplement to, and not a substitute for, U.S. GAAP measures of performance.

Table 1
RECONCILIATION OF CONSOLIDATED GAAP NET INCOME TO CONSOLIDATED ADJUSTED EBITDA

 

(in thousands)
Third Quarter
Fiscal 2018
Third Quarter
Fiscal 2017
Consolidated GAAP net income$15,645 $  6,067
Add back:  
Interest expense, net 4,153  301
Income taxes  5,043  3,143
Depreciation & amortization 7,664  3,817
Loss on the extinguishment of debt 277  
Derivative fair value gain (1,365) 
Debt repricing transaction costs 5  
Acquisition & integration expenses 48  562
Corporate relocation expense   2
Restructuring charges, excluding accelerated depreciation   70
Consolidated adjusted EBITDA$31,470 $13,962
 


 

(in thousands)
Nine Months Ended
April 30, 2018
Nine Months Ended
April 30, 2017
Consolidated GAAP net income$46,832 $18,293
Add back:  
Interest expense, net 17,333  650
Income taxes (509) 8,232
Depreciation & amortization 22,359  10,864
Loss on the extinguishment of debt 6,368  
Derivative fair value gain (5,238) 
Debt repricing transaction costs 607  
Acquisition & integration expenses 578  1,145
Corporate relocation expense   369
Restructuring charges, excluding accelerated depreciation 69  70
Consolidated adjusted EBITDA$88,399 $39,623
 

Table 1A
RECONCILIATION OF OPERATING INCOME TO ADJUSTED EBITDA
Note that we do not allocate certain financial statement line items below operating income to our segments; as such, the reconciliations below only reflect the reconciliation of our operating income by segment to our non-GAAP measures.

Third Quarter Fiscal 2018Electronic Performance    
(in thousands)ChemicalsMaterialsCorporateTotal
Operating Income (Loss)$10,889 $16,041 ($2,977)$23,953 
Other income (expense) (33) (96) (71) (200)
Depreciation and amortization 2,864  4,250  550  7,664 
Acquisition & integration expenses   28  20  48 
Debt repricing costs     5  5 
Restructuring charges        
Adjusted EBITDA  13,720  20,223  (2,473) 31,470 
Corporate allocation 3,034  1,964  (4,999)  
Adjusted EBITDA excl. corporate allocation$16,754 $22,188 ($7,472)$31,470 
     


Nine Months Ended April 30, 2018Electronic Performance    
(in thousands)ChemicalsMaterialsCorporateTotal
Operating Income (Loss)$34,877 $40,435 ($9,549)$65,763 
Other income (expense) (616) (41) (320) (977)
Depreciation and amortization 8,418  12,418  1,523  22,359 
Acquisition & integration expenses   125  453  578 
Debt repricing transaction costs     607  607 
Restructuring charges 69      69 
Adjusted EBITDA  42,748  52,937  (7,286) 88,399 
Corporate allocation 9,103  5,893  (14,997)  
Adjusted EBITDA excl. corporate allocation$51,851 $58,831 ($22,283)$88,399 
 


Third Quarter Fiscal 2017Electronic Performance  
(in thousands)ChemicalsMaterialsCorporateTotal
Operating Income (Loss)$8,509$4,224($3,366)$9,367
Other income (expense) 99 33 12  144
Depreciation and amortization 2,857 549 411  3,817
Acquisition & integration expenses   562  562
Restructuring charges   70  70
Corporate relocation expense   2  2
Adjusted EBITDA  11,465 4,806 (2,309) 13,962
Corporate allocation 3,329 842 (4,171) 
Adjusted EBITDA excl. corporate allocation$14,794$5,648($6,480)$13,962
     


Nine Months Ended April 30, 2017Electronic Performance    
(in thousands)ChemicalsMaterialsCorporateTotal
Operating Income (Loss)$26,153 $10,927($9,993)$27,087
Other income (expense) (88) 66 110  88
Depreciation and amortization 8,502  1,121 1,241  10,864
Acquisition & integration expenses    1,145  1,145
Restructuring charges    70  70
Corporate relocation expense    369  369
Adjusted EBITDA  34,567  12,114 (7,058) 39,623
Corporate allocation 9,987  2,527 (12,514) 
Adjusted EBITDA excl. corporate allocation$44,554 $14,641($19,572)$39,623

Table 2
RECONCILIATION OF NET INCOME TO ADJUSTED NET INCOME AND ADJUSTED DILUTED EARNINGS PER SHARE
(in thousands)

 Three Months Ended
 April 30,
  2018   2017 
Net income$15,645  $6,067 
Items impacting pre-tax income:   
Impact of the Tax Cuts and Jobs Act     
Acquisition & integration expenses 48   562 
Corporate relocation expense    2 
Restructuring charges    70 
Derivative fair value gain (1,365)   
Amortization of Flowchem intangible assets 3,224    
Loss on the extinguishment of debt 277    
Debt repricing transaction costs 5    
Amortization of debt discounts and financing costs 296    
Income taxes * (671)  (222)
Adjusted net income **$17,459  $6,479 
Adjusted diluted earnings per share **$  1.10  $0.53 
Weighted average diluted shares outstanding   15,905   12,303 
 


 

 
 Nine Months Ended 
 April 30, 
  2018   2017 
Net income$46,832  $18,293 
Items impacting pre-tax income:    
Impact of the Tax Cuts and Jobs Act (11,005)   
Acquisition & integration expenses 578     1,145 
Corporate relocation expense      369 
Restructuring charges 69     70 
Derivative fair value gain (5,238)   
Amortization of Flowchem intangible assets 9,339    
Loss on the extinguishment of debt 6,368    
Debt repricing transaction costs 607    
Amortization of debt discounts and financing costs 1,124    
Income taxes * (3,469)    (554) 
Adjusted net income **$45,205  $19,323 
Adjusted diluted earnings per share **$3.05  $ 1.58 
Weighted average diluted shares outstanding 14,814   12,236 
 

* For the three and nine months ended April 30, 2018, represents the aggregate tax-effect assuming a 27% tax rate of the items impacting pre-tax income, which is our estimated U.S. statutory federal tax rate for fiscal year 2018 following the Tax Act in December 2017. For the three and nine months ended April 30, 2017, represents the aggregate tax-effect assuming a 35% tax rate of items impacting pre-tax income.
** Adjusted net income and adjusted diluted earnings per share for the first quarter of fiscal 2018, which are included in the nine months ended April 30, 2018, have been adjusted to reflect the assumed 27% tax rate for fiscal year 2018.
 

Table 2A
RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES

Third Quarter Fiscal 2018KMG Chemicals, Inc.
Dollars in thousands, except EPS 
   Operating Net Diluted Earnings
Income Margin Income Per Share
GAAP measure$23,953 20.2% $15,645  $0.98 
Amortization of Flowchem intangible assets 3,224 2.7%  2,354   0.15 
Acquisition & integration expenses 48 0.1%  35   0.01 
Debt repricing transaction costs 5 0.0%  4   0.00 
Derivative fair value gain     (996)  (0.06)
Amortization of debt discounts and financing costs     216   0.01 
Loss on the extinguishment of debt     202   0.01 
Non-GAAP measure$27,230 23.0% $17,459  $1.10 


Nine Months Ended April 30, 2018KMG Chemicals, Inc.
Dollars in thousands, except EPS 
   Operating Net Diluted Earnings
Income Margin Income Per Share
GAAP measure$65,763 19.2% $46,832  $3.16 
Amortization of Flowchem intangible assets 9,339 2.7%  6,817   0.46 
Acquisition & integration expenses 578 0.2%  422   0.03 
Restructuring charges 69 0.0%  50   0.00 
Impact of the Tax Cuts and Jobs Act     (11,005)  (0.74)
Loss on the extinguishment of debt     4,649   0.31 
Derivative fair value gain     (3,824)  (0.26)
Amortization of debt discounts and financing costs     821   0.06 
Debt repricing transaction costs     443   0.03 
Non-GAAP measure$75,749 22.1% $45,205  $3.05 


Third Quarter Fiscal 2017KMG Chemicals, Inc.
Dollars in thousands, except EPS 
   Operating Net Diluted Earnings
Income Margin Income Per Share
GAAP measure$ 9,367 11.5% $6,067 $0.49
Acquisition & integration expenses   562 0.7%  365   0.03
Restructuring & realignment charges 70 0.1%  46 0.01
Corporate relocation expense   2 0.0%  1   0.00
Non-GAAP measure$10,001 12.3% $6,479 $0.53


Nine Months Ended April 30, 2017 KMG Chemicals, Inc.
Dollars in thousands, except EPS 
   Operating Net Diluted Earnings
Income Margin Income Per Share
GAAP measure$ 27,087 11.4% $18,293 $1.50
Acquisition & integration expenses 1,145 0.5%  744 0.06
Restructuring & realignment charges 70 0.0%  46 0.00
Corporate relocation expense 369 0.2%  240 0.02
Non-GAAP measure$ 28,671 12.1% $19,323 $1.58


 


            

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