KMG Reports Second Quarter 2018 Financial Results

FORT WORTH, Texas, March 08, 2018 (GLOBE NEWSWIRE) -- KMG (NYSE:KMG), a global provider of specialty chemicals and performance materials, today announced financial results for the fiscal 2018 second quarter ended January 31, 2018.

2018 Second Quarter Financial Highlights

  • Sales increased 44% from the second quarter of last year to a record $113.9 million.
  • GAAP diluted earnings per share increased 200% to $1.59 from $0.53 per diluted share in the second quarter of fiscal 2017.
  • Adjusted diluted earnings per share1 were a record $1.04 compared to $0.57 per share reported in the second quarter of last year. Among other items, adjusted EPS exclude an $11.0 million benefit from recent U.S. tax reform.
  • GAAP net income increased to a record $25.3 million, compared to $6.5 million in the second quarter of last year.
  • Adjusted EBITDA2 was a record $29.4 million, up 124% from $13.1 million in the second quarter of fiscal 2017.

“KMG’s record second quarter results reflect broad-based growth across our businesses, significant contributions from recent acquisitions and our disciplined focus on execution,” said Chris Fraser, KMG chairman and CEO. “Supported by our continued strong financial performance and reduction in leverage from our recent equity offering, we successfully repriced our outstanding debt during the second quarter, generating substantial interest expense savings.”

Mr. Fraser continued, “Second quarter sales in our electronic chemicals segment increased 6% year-over-year to a record $73.9 million, driven by growth in each of our major geographic regions. Segment operating income and margins also reached record levels in the second quarter, reflecting a favorable product mix and gains in operational efficiency.

“Our performance materials segment generated record sales and operating income in the second quarter, fueled by contributions from Flowchem and Sealweld, as well as growth in our industrial lubricants and wood treating chemicals businesses. Addressing key growth opportunities in the pipeline and energy markets, our pipeline performance business benefited from growing demand for our value-added products and services that enhance pipeline integrity and safety, as well as optimize pipeline throughput and performance. Our wood treating chemicals business also performed well, aided in part by the need to replace storm-damaged utility poles.”

Mr. Fraser concluded, “Considering our solid financial performance in the first half of fiscal 2018, as well as our expectations for continued growth in the second half of the year, we are increasing our fiscal 2018 sales forecast to $445-455 million, from $435-450 million previously, and increasing our fiscal 2018 adjusted EBITDA guidance to $114-118 million, from $110-115 million.”

Consolidated results

Second quarter
Dollars in thousands, except EPS
Fiscal 2018 Fiscal 2017
As ReportedAdjustedAs ReportedAdjusted
(GAAP)(non-GAAP)3(GAAP)(non-GAAP)4
Net sales$113,851 $113,851 $79,071 $79,071
Operating income 21,730 25,635 9,040 9,857
Operating margin 19.1% 22.5% 11.4% 12.5%
Net income 25,337 16,618 6,486 7,017
Diluted earnings per share$1.59 $1.04 $ 0.53 $0.57


Six months ended January 31
Dollars in thousands, except EPS
Fiscal 2018 YTD Fiscal 2017 YTD
As ReportedAdjustedAs ReportedAdjusted
(GAAP)(non-GAAP)5(GAAP)(non-GAAP)6
Net sales$224,515 $224,515 $155,566 $155,566
Operating income 41,810 49,126 17,720 18,670
Operating margin 18.6% 21.9% 11.4% 12.0%
Net income 31,187 27,746 12,227 12,844
Diluted earnings per share$ 2.18 $ 1.94 $ 1.00 $ 1.05

Business segment results

Electronic ChemicalsSecond QuarterSecond Quarter First HalfFirst Half
Dollars in thousandsFiscal 2018Fiscal 2017Fiscal 2018Fiscal 2017
As ReportedAs ReportedAs ReportedAs Reported
(GAAP)(GAAP)(GAAP)(GAAP)
Net sales$73,924 $69,766 $147,732 $136,688
Operating income 12,730 9,583 23,988 17,644
Operating margin 17.2% 13.7% 16.2% 12.9%

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

  • Sales of $73.9 million, up 6% from the second quarter of fiscal 2017. Sales grew in each geographic region.
  • Operating income of $12.7 million, up 32.8% from $9.6 million in the same period of fiscal 2017. Operating income increased due to higher sales, product mix and operational efficiencies. Operating margin improved to 17.2% compared to 13.7% in the prior-year period.
  • Adjusted EBITDA7 of $15.0 million compared to $12.2 million last year.

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

Performance MaterialsSecond QuarterSecond Quarter First HalfFirst Half
Dollars in thousandsFiscal 2018Fiscal 2017Fiscal 2018Fiscal 2017
As ReportedAs ReportedAs ReportedAs Reported
(GAAP)(GAAP)(GAAP)(GAAP)
Net sales$39,927 $9,305 $76,783 $18,878
Operating income 12,810 3,023 24,394 6,704
Operating margin 32.1% 32.5% 31.8% 35.5%

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

  • Sales of $39.9 million versus $9.3 million in the same period a year ago. Sales growth reflected contributions from Flowchem and Sealweld, as well as product volume growth in both industrial lubricants and wood treating chemicals.
  • Operating income of $12.8 million compared to $3.0 million last year. The increase in operating income reflected contributions from Flowchem and Sealweld, as well as product volume growth in both industrial lubricants and wood treating chemicals. Segment operating margins were 32.1%, compared to 32.5% in the second quarter of 2017, primarily due to higher depreciation and amortization expense related to the acquisitions of Flowchem and Sealweld.
  • Adjusted EBITDA8 of $17.1 million versus $3.2 million last year.

Fiscal 2018 Outlook

  • Sales: We increase our fiscal 2018 consolidated net sales forecast to $445-455 million, from our prior guidance of $435-450 million.
  • Adjusted EBITDA: We increase our adjusted EBITDA forecast to $114-118 million, from our prior guidance of $110-115 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, compared to our prior estimate of approximately $6.5 million.
  • Depreciation and Amortization: Depreciation and amortization expense is forecast to be approximately $31 million.
  • Capital Expenditures: Capital expenditures are forecast to be approximately $29 million, in line with our prior estimate, and include a portion of our planned capital investment in Singapore.

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: Thursday March 8, 2018
Time: 5:00 p.m. ET
Dial in: 844-316-8066 or 703-736-7353
Conference ID: 1178959

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 March 8, 2018. To access the call, dial 855-859-2056 (domestic) or 404-537-3406 (international) using conference ID 1178959.

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.

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
January 31, January 31,
2018 2017 2018 2017
Net sales $113,851 $79,071 $224,515 $ 155,566
Cost of sales 64,597 47,869 128,780 94,681
Gross profit 49,254 31,202 95,735 60,885
Distribution expenses 8,680 9,770 18,122 18,872
Selling, general and administrative expenses 14,999 11,867 28,338 23,233
Amortization of intangible assets 3,885 525 7,396 1,060
Restructuring charges (40) 69
Operating income 21,730 9,040 41,810 17,720
Other (expense) income
Interest expense, net (5,086) (172) (13,180) (349)
Loss on the extinguishment of debt (1,916) (6,091)
Derivative fair value gain 3,024 3,873
Other, net (596) (285) (777) (55)
Total other (expense) income, net (4,574) (457) (16,175) (404)
Income before income taxes 17,156 8,583 25,635 17,316
Provision for income taxes 8,181 (2,097) 5,552 (5,089)
Net income$25,337 $6,486 $31,187 $12,227
Earnings per share:
Net income per common share basic $1.64 $0.55 $2.24 $1.03
Net income per common share diluted $1.59 $0.53 $2.18 $1.00
Weighted average shares outstanding:
Basic 15,495 11,882 13,923 11,881
Diluted 15,903 12,293 14,285 12,203


KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts)
January 31, July 31,
2018 2017
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 21,966 $ 20,708
Accounts receivable
Trade, net of allowances of $237 at January 31, 2018 and $263 at July 31, 2017 54,339

51,168
Other 4,721 6,168
Inventories, net 49,534 46,482
Prepaid expenses and other 7,751 8,617
Total current assets 138,311 133,143
Property, plant and equipment, net 108,954 105,435
Goodwill 230,214 224,391
Intangible assets, net 307,528 320,401
Other assets, net 11,176 9,061
Total assets$796,183 $792,431
Liabilities & stockholders’ equity
Current liabilities
Accounts payable$ 32,496 $ 29,570
Accrued liabilities 10,686 12,456
Employee incentive accrual 3,679 7,713
Current portion of long-term debt 3,167
Total current liabilities 46,861 52,906
Long-term debt 337,048 523,102
Deferred tax liabilities 22,852 37,944
Other long-term liabilities 5,350 4,763
Total liabilities 412,111 618,715
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, 15,503,290 shares issued and outstanding at January 31, 2018 and 11,889,649 shares issued and outstanding at July 31, 2017



155




119
Additional paid-in capital 218,001 42,535
Accumulated other comprehensive loss (5,222) (9,712)
Retained earnings 171,138 140,774
Total stockholders’ equity 384,072 173,716
Total liabilities and stockholders’ equity$ 796,183 $ 792,431


KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
January, 31
2018 2017
Cash flows from operating activities
Net income $31,187 $12,227
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 14,695 7,048
Loss on extinguishment of debt 6,091
Stock-based compensation expense 3,593 3,087
Amortization of debt discounts and financing costs
included in interest expense
828
Debt repricing transaction costs 602
Deferred income tax expense (11,780) (821)
Derivative fair value gain (3,873)
Other (77) 53
Changes in operating assets and liabilities
Accounts receivable — trade (2,041) (2,585)
Accounts receivable — other 1,554 1,846
Inventories (2,272) 1,002
Other current and noncurrent assets 442 (302)
Accounts payable 2,579 951
Accrued liabilities and other (5,293) (3,083)
Net cash provided by operating activities 36,235 19,423
Cash flows from investing activities
Additions to property, plant and equipment (9,030) (5,310)
Other investing activities (1,262)
Proceeds − insurance claim 250
Net cash used in investing activities (10,292) (5,060)
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 (11,800)
Principal payments on borrowings on term loan (196,000)
Debt repricing transaction costs (602)
Payment of dividends (822) (709)
Cash payments related to tax withholdings from stock-based awards (3,729) (277)
Net cash provided by (used in) financing activities (25,484) 4,214
Effect of exchange rate changes on cash 799 (418)
Net increase in cash, cash equivalents and restricted cash 1,258 18,159
Cash, cash equivalents and restricted cash at beginning of period 20,708 13,428
Cash, cash equivalents and restricted cash at end of period $21,966 $31,587

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)
Second Quarter
Fiscal 2018
Second Quarter
Fiscal 2017
Consolidated GAAP net income$25,337 $ 6,486
Add back:
Interest expense, net 5,086 172
Income taxes (8,181) 2,097
Depreciation & amortization 7,586 3,496
Loss on the extinguishment of debt 1,916
Derivative fair value gain (3,024)
Debt repricing transaction costs 602
Acquisition & integration expenses 119 501
Corporate relocation expense 316
Restructuring charges, excluding accelerated depreciation (40)
Consolidated adjusted EBITDA$29,401 $13,068




(in thousands)
Six Months Ended
Jan. 31, 2018
Six Months Ended
Jan. 31, 2017
Consolidated GAAP net income$31,187 $12,227
Add back:
Interest expense, net 13,180 349
Income taxes (5,552) 5,089
Depreciation & amortization 14,695 7,048
Loss on the extinguishment of debt 6,091
Derivative fair value gain (3,873)
Debt repricing transaction costs 602
Acquisition & integration expenses 530 584
Corporate relocation expense 366
Restructuring charges, excluding accelerated depreciation 69
Consolidated adjusted EBITDA$56,929 $25,663

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.

Second Quarter Fiscal 2018Electronic
Performance
(in thousands)Chemicals
Materials
Corporate
Total
Operating Income (Loss)$12,730 $12,810 $(3,810)$21,730
Other income (expense) (434) (23) (139) (596)
Depreciation and amortization 2,760 4,287 539 7,586
Acquisition & integration expenses 36 83 119
Debt repricing costs 602 602
Restructuring charges (40) (40)
Adjusted EBITDA 15,016 17,110 (2,725) 29,401
Corporate allocation 3,150 1,982 (5,132)
Adjusted EBITDA excl. corporate allocation$18,166 $19,092 $(7,857)$29,401


Six Months Ended January 31, 2018Electronic
Performance

(in thousands)Chemicals
Materials
Corporate
Total
Operating Income (Loss)$23,988 $24,394$(6,572)$41,810
Other income (expense) (583) 55 (249) (777)
Depreciation and amortization 5,554 8,168 973 14,695
Acquisition & integration expenses 97 433 530
Debt repricing transaction costs 602 602
Restructuring charges 69 69
Adjusted EBITDA 29,028 32,714 (4,813) 56,929
Corporate allocation 6,069 3,929 (9,998)
Adjusted EBITDA excl. corporate allocation$35,097 $36,643$(14,811)$56,929


Second Quarter Fiscal 2017Electronic
Performance
(in thousands)Chemicals
Materials
Corporate
Total
Operating Income (Loss)$9,583 $3,023 $(3,566)$9,040
Other income (expense) (148) (75) (62) (285)
Depreciation and amortization 2,793 285 418 3,496
Acquisition & integration expenses 501 501
Corporate relocation expense 316 316
Adjusted EBITDA 12,228 3,233 (2,393) 13,068
Corporate allocation 3,329 842 (4,171)
Adjusted EBITDA excl. corporate allocation$15,557 $4,075 $(6,564)$13,068


Six Months Ended January 31, 2017Electronic Performance
(in thousands)ChemicalsMaterials
Corporate
Total
Operating Income (Loss)$17,644$6,704 $(6,628)$17,720
Other income (expense) 163 (99) (119) (55)
Depreciation and amortization 5,645 572 831 7,048
Acquisition & integration expenses 584 584
Corporate relocation expense 366 366
Adjusted EBITDA 23,452 7,177 (4,966) 25,663
Corporate allocation 6,658 1,684 (8,342)
Adjusted EBITDA excl. corporate allocation$30,110$8,861 $(13,308)$25,663

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

Three Months Ended
January 31,
2018 2017
Net income$25,337 $6,486
Items impacting pre-tax income:
Impact of the Tax Cuts and Jobs Act (11,005)
Acquisition & integration expenses 119 501
Corporate relocation expense 316
Restructuring charges (40)
Derivative fair value gain (3,024)
Amortization of Flowchem intangible assets 3,224
Loss on the extinguishment of debt 1,916
Debt repricing transaction costs 602
Amortization of debt discounts and financing costs 335
Income taxes* (846) (286)
Adjusted net income$16,618 $7,017
Adjusted diluted earnings per share$ 1.04 $0.57
Weighted average diluted shares outstanding 15,903 12,293
* For the three months ended January 31, 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 enactment of the Tax Cuts and Jobs Act in December 2017. For the three months ended January 31, 2017, represents the aggregate tax-effect assuming a 35% tax rate of items impacting pre-tax income.
Six Months Ended
January 31,
2018 2017
Net income$31,187 $12,227
Items impacting pre-tax income:
Impact of the Tax Cuts and Jobs Act (11,005)
Acquisition & integration expenses 530 584
Corporate relocation expense 366
Restructuring charges 69
Derivative fair value gain (3,873)
Amortization of Flowchem intangible assets 6,115
Loss on the extinguishment of debt 6,091
Debt repricing transaction costs 602
Amortization of debt discounts and financing costs 828
Income taxes* (2,798) (332)
Adjusted net income**$27,746 $12,845
Adjusted diluted earnings per share **$1.94 $ 1.05
Weighted average diluted shares outstanding 14,285 12,203
* For the six months ended January 31, 2018, represents the aggregate tax-effect assuming a 27% tax rate of the items impacting pre-tax income, which is the estimated blended statutory tax rate for fiscal year 2018. For the six months ended January 31, 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 six months ended January 31, 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

Second Quarter Fiscal 2018KMG Chemicals, Inc.
Dollars in thousands, except EPS
Operating Net Diluted Earnings
Income Margin Income Per Share
GAAP measure$21,730 19.1% $25,337 $1.59
Amortization of Flowchem intangible assets 3,224 2.8% 2,354 0.15
Debt repricing transaction costs 602 0.5% 439 0.03
Acquisition & integration expenses 119 0.1% 87 0.01
Restructuring charges (40) (0.0%) (30) (0.01)
Impact of the Tax Cuts and Jobs Act (11,005) (0.69)
Derivative fair value gain (2,208) (0.14)
Loss on the extinguishment of debt 1,399 0.09
Amortization of debt discounts and financing costs 245 0.01
Non-GAAP measure$25,635 22.5% $16,618 $1.04


Six Months Ended January 31, 2018KMG Chemicals, Inc.
Dollars in thousands, except EPS
Operating Net Diluted Earnings
Income Margin Income Per Share
GAAP measure$41,810 18.6% $31,187 $2.18
Amortization of Flowchem intangible assets 6,115 2.7% 4,464 0.31
Debt repricing transaction costs 602 0.3% 439 0.03
Acquisition & integration expenses 530 0.2% 387 0.03
Restructuring charges 69 0.1% 51 0.01
Impact of the Tax Cuts and Jobs Act (11,005) (0.77)
Loss on the extinguishment of debt 4,446 0.31
Derivative fair value gain (2,827) (0.20)
Amortization of debt discounts and financing costs 604 0.04
Non-GAAP measure $49,126 21.9% $27,746 $1.94


Second Quarter Fiscal 2017KMG Chemicals, Inc.
Dollars in thousands, except EPS
Operating Net Diluted Earnings
Income Margin Income Per Share
GAAP measure$ 9,040 11.5% $6,486 $ 0.53
Acquisition & integration expenses 501 0.6% 326 0.02
Corporate relocation expense 316 0.4% 205 0.02
Non-GAAP measure$ 9,857 12.5% $7,017 $0.57


Six Months Ended January 31, 2017 KMG Chemicals, Inc.
Dollars in thousands, except EPS
Operating Net Diluted Earnings
Income Margin Income Per Share
GAAP measure$ 17,720 11.4% $12,227 $1.00
Acquisition & integration expenses 584 0.4% 380 0.03
Corporate relocation expense 366 0.2% 238 0.02
Non-GAAP measure$ 18,670 12.0% $12,845 $1.05



KMG Investor Relations Eric Glover, 817-761-6006 eglover@kmgchemicals.com

Source:KMG Chemicals, Inc.