MRO Magazine

KMG Reports Third Quarter 2016 Financial Results


June 9, 2016
By Business Wire News

FORT WORTH, Texas

KMG (NYSE: KMG), a global provider of specialty chemicals, today announced financial results for the fiscal 2016 third quarter ended April 30, 2016.

2016 Third Quarter Financial Highlights

  • GAAP diluted earnings per share was $0.53 vs. $0.18 per share in the third quarter of fiscal 2015.
  • Adjusted EBITDA1 increased to $11.2 million compared to $9.1 million in last year’s third quarter.
  • Adjusted diluted earnings per share2 was $0.41 vs. $0.35 per share reported in the third quarter of last year.
  • Long-term debt balance at quarter end was $41.8 million, down from $47 million in the second quarter of fiscal 2016. During the quarter, the company used cash generated from operations to reduce debt by $8 million, and drew $2.8 million on its revolving credit facility to acquire Nagase FineChem.

Chris Fraser, KMG chairman and chief executive officer, said, “We are pleased with our third quarter results, which included 23% growth in adjusted EBITDA and 17% growth in adjusted diluted earnings per share compared to the prior year period. In addition, we generated $15.3 million in cash from operations in the third quarter, increasing our year-to-date cash flow from operations to $29.4 million − more than triple the level from the same period last year. Our strong financial performance reflects our continued focus on execution and driving operational efficiencies.”

Mr. Fraser continued, “Operating income and margins in our electronic chemicals segment improved 23% year-over-year, benefiting from lower distribution costs and continuing manufacturing efficiency. In April, we advanced our growth strategy in the Electronic Chemicals segment with the acquisition of Nagase FineChem (NFC), a Singapore-based manufacturer of electronic chemicals. This acquisition, coupled with our planned capital investment in Singapore, significantly expands our growth opportunity in Asia. With our enhanced capability in this important region, we can better serve our global customers and elevate our presence in the world’s leading region for semiconductor production.

“Our other chemicals segment reported a 25% improvement in operating income compared to the prior year period, aided by favorable raw materials costs and the contribution from the industrial lubricants business. We continue to identify and evaluate opportunities that would complement our industrial lubricants business and provide new paths for growth.”

Consolidated results

Third quarter

Dollars in thousands, except EPS

 Fiscal 2016  Fiscal 2015
Adjusted  As ReportedAdjusted  As Reported

(non-GAAP)3

(GAAP)

(non-GAAP)4

(GAAP)
Net sales $ 75,168 $ 75,168 $ 73,964 $ 73,964
Operating income 8,032 7,029 6,299 4,761
Operating margin 10.7 % 9.4 % 8.5 % 6.4 %
Net income 4,944 6,362 4,099 2,135
Diluted earnings per share $ 0.41 $ 0.53 $ 0.35 $ 0.18
 

Business segment results

Electronic Chemicals    

Third quarter

Fiscal 2016Fiscal 2015
Dollars in thousandsAs ReportedAs Reported
(GAAP)(GAAP)
Net sales $ 66,637 $ 66,388
Operating income 8,183 6,644
Operating margin 12.3 % 10.0 %
 

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

  • Sales of $66.6 million vs. $66.4 million in the same period a year ago. Foreign currency translation reduced sales by $400,000 as compared to the prior year period. Sales increased in North America, which more than offset the negative foreign currency impact.
  • GAAP operating income of $8.2 million vs. $6.6 million in the same period of fiscal 2015. Operating income and margin improved primarily due to operating efficiencies and lower distribution costs.
  • EBITDA5 of $10.7 million, compared to $9.4 million last year.

Other Chemicals

As of May 1, 2015, the Other Chemicals segment includes the pentachlorophenol (“penta”) business and the industrial lubricants business.

Third quarter

   
Dollars in thousandsFiscal 2016Fiscal 2015
As ReportedAs Reported
(GAAP)(GAAP)
Net sales $ 8,531 $ 7,566
Operating income 2,853 2,276
Operating margin 33.4 % 30.1 %
 

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

  • Sales of $8.5 million versus $7.6 million in the same period a year ago. The increase in sales was due to the contribution from the industrial lubricants business, partially offset by lower penta sales.
  • Operating income of $2.9 million, or 33.4% of sales, compared to $2.3 million, or 30.1% of sales, last year. The increase in operating income and margin was due to lower raw material costs and the contribution from the industrial lubricants business.
  • EBITDA6 of $3.2 million, up from $2.3 million last year.

Fiscal 2016 Outlook

  • Sales: Fiscal 2016 consolidated net sales are forecast to be approximately $300 million, unchanged from our prior guidance. This forecast includes a projected negative foreign currency impact of approximately $6 million. In our Electronic Chemicals segment, we expect sales to be up slightly compared to the prior year, excluding the effect of foreign currency translation. In our Other Chemicals segment, we expect sales to decrease compared to the prior year due to the divestiture of the creosote business, partially offset by the contribution from the industrial lubricants business.
  • Adjusted EBITDA: Based on our strong third quarter results and our expectation for continued year-over-year EBITDA growth in both our Electronic Chemicals and Other Chemicals segments in the fourth quarter, we forecast adjusted EBITDA will be at the upper end of our prior guidance range of $43-45 million. Our fiscal 2016 adjusted EBITDA forecast includes approximately $5 million in stock-based compensation expense and a negative foreign currency impact of approximately $600,000.
  • Depreciation and Amortization: Depreciation and amortization expense is forecast to be approximately $14 million, excluding restructuring- and realignment-related depreciation, and is unchanged from our prior forecast.
  • Capital Expenditures: Capital expenditures are forecast to be less than
    $15 million, compared to our prior forecast of approximately $15 million.

Conference call
Date: Thursday, June 9, 2016
Time: 5:00 p.m. ET
Dial in:877-789-6981 or 541-797-2420
Participant passcode: 15841847

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 9, 2016. To access the call, dial 855-859-2056 (domestic) or 404-537-3406 (international) using participant passcode 15841847.

About KMG

KMG Chemicals, Inc., through its subsidiaries, produces and distributes specialty chemicals to select markets. The Company grows by acquiring and optimizing stable chemical product lines and businesses with established production processes. 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 Tables 1 and 1A for reconciliation.
2 Non-U.S. GAAP measure. See Table 2 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 1 and 1A for reconciliation.
6 Non-U.S. GAAP measure. See Tables 1 and 1A for reconciliation.

   
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
 
Three Months EndedNine Months Ended
April 30,April 30,
2016  20152016  2015
Net sales $ 75,168 $ 73,964 $ 222,677 $ 244,505
Cost of sales   46,010     47,149     136,026     161,544  
Gross profit   29,158     26,815     86,651     82,961  
 
Distribution expenses 9,177 11,700 28,125 37,721
Selling, general and administrative expenses 12,575 9,257 36,512 28,164
Restructuring charges 377 27 1,398 900
Realignment charges       1,070     130     5,429  
Operating income   7,029     4,761     20,486     10,747  
Other income (expense)
  Interest expense, net (201 ) (111 ) (605 ) (1,098 )
Gain on purchase of NFC 2,069 2,069
Gain (loss) on sale of creosote distribution business, net (234 ) 5,448
Other non-operating expense (1,250 ) (1,250 )
Other, net   (375 )   (339 )   (243 )   (498 )
Total other income (expense), net   1,493     (1,934 )   1,221     2,602  
 
Income before income taxes 8,522 2,827 21,707 13,349
Provision for income taxes   (2,160 )   (692 )   (6,775 )   (4,539 )
Net income $ 6,362   $ 2,135   $ 14,932   $ 8,810  
Earnings per share:
Net income per common share basic $ 0.54 $ 0.18 $ 1.27 $ 0.75
Net income per common share diluted $ 0.53 $ 0.18 $ 1.25 $ 0.75
 
Weighted average shares outstanding:
Basic 11,729 11,680 11,714 11,669
Diluted 11,990 11,819 11,923 11,758
 
 
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts)
 
April 30,July 31,
20162015
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 10,546 $ 7,517
Accounts receivable

Trade, net of allowances of $154 at April 30, 2016 and $144 at July 31, 2015

33,952

36,887

Other 6,242 3,668
Inventories, net 39,345 42,082
Current deferred tax assets 2,953
Prepaid expenses and other   3,151     3,738  
Total current assets   93,236     96,845  
 
Property, plant and equipment, net 85,582 80,589
Deferred tax assets 707 131
Goodwill 22,403 22,408
Intangible assets, net 35,062 36,560
Restricted cash 1,000 1,000
Other assets, net   4,843     4,826  
Total assets $ 242,833   $ 242,359  
 
Liabilities & stockholders’ equity
Current liabilities
Accounts payable $ 28,789 $ 35,980
Accrued liabilities 11,571 9,602
Employee incentive accrual   4,714     4,852  
Total current liabilities 45,074 50,434
 
Long-term debt 41,800 53,000
Deferred tax liabilities 10,188 13,075
Other long-term liabilities   4,628     2,429  
Total liabilities   101,690     118,938  
 
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, 11,735,793 shares issued and outstanding at April 30, 2016 and 11,690,439 shares issued and outstanding at July 31, 2015

 

117

 

117

Additional paid-in capital 35,349 31,676
Accumulated other comprehensive loss (9,497 ) (9,667 )
Retained earnings   115,174     101,295  
Total stockholders’ equity   141,143     123,421  
Total liabilities and stockholders’ equity $ 242,833   $ 242,359  
 
 
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Nine Months Ended
April 30,  
2016  2015  
Cash flows from operating activities
Net income $ 14,932 $ 8,810
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 10,606 9,951
Non-cash restructuring & realignment charges 295 5,640
Amortization of loan costs 125 111
Stock-based compensation expense 3,659 1,970
Allowance for excess and obsolete inventory 173 760
Gain on sale of creosote distribution business (5,448 )
Gain on purchase of NFC (2,069 )
Deferred income tax expense (benefit)

(219

)

(4,374 )
Other 28 (10 )
Changes in operating assets and liabilities
Accounts receivable — trade 5,022 95
Accounts receivable — other (2,515 ) (1,756 )
Inventories 2,798 965
Other current and noncurrent assets 541 (1,386 )
Accounts payable (7,257 ) (4,897 )
Accrued liabilities and other

3,234

  (2,219 )
Net cash provided by operating activities 29,353 8,212
 
Cash flows from investing activities
Additions to property, plant and equipment (11,377 ) (10,751 )
Purchase of NFC, net of cash acquired (2,572 )
Disposals of property, plant and equipment 2,561
Proceeds from sale of creosote product distribution business   14,899  
Net cash (used in) provided by investing activities (13,949 ) 6,709
 
Cash flows from financing activities
Net payments under revolving credit agreement (41,100 )
Principal payments on term loan (20,000 )
Borrowings under new credit facility 2,800 59,100
Payments under new credit facility (14,000 ) (23,000 )
Tax benefit from stock-based awards 38 10
Payment of dividends (1,053 ) (1,050 )
Net cash used in financing activities (12,215 ) (26,040 )
 
Effect of exchange rate changes on cash (160 ) (1,293 )
 
Net increase (decrease) in cash and cash equivalents 3,029 (12,412 )
 
Cash and cash equivalents at beginning of period   7,517   19,252  
Cash and cash equivalents at end of period $ 10,546 $ 6,840  
 

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 EBITDA
(In thousands)
 
Third QuarterNine Months Ended
Fiscal 2016April 30, 2016
Consolidated GAAP net income $ 6,362 $ 14,932
Add back (deduct):
Income taxes 2,160 6,775
Gain on purchase of NFC (2,069 ) (2,069 )
Interest expense 201 605
Depreciation and amortization*   3,772     10,901  
Consolidated EBITDA $ 10,426   $ 31,144  
*Includes depreciation related to restructuring and realignment included in non-cash restructuring and realignment charges on the statement of cash flows.
 
Third QuarterNine Months Ended
Fiscal 2015April 30, 2015
Consolidated GAAP net income $ 2,135 $ 8,810
Add back (deduct):
Income taxes 692 4,539
Other non-operating expense 1,250 1,250
Loss (gain) on sale of creosote distribution business 234 (5,448 )
Interest expense 111 1,098
Depreciation and amortization*   3,894     15,591  
Consolidated EBITDA $ 8,316   $ 25,840  
*Includes depreciation related to restructuring and realignment included in non-cash restructuring and realignment charges on the statement of cash flows.
 
       

Table 1A

RECONCILIATION OF OPERATING INCOME TO EBITDA AND ADJUSTED EBITDA
(In thousands)
 

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 2016

ElectronicOther
ChemicalsChemicalsCorporateTotal
Operating Income (Loss)$8,183$2,853($4,007)$7,029
Other income (expense) (401 ) 17 9 (375 )
Depreciation and amortization   2,896     285   591     3,772  
EBITDA10,6783,155(3,407)10,426
 
Acquisition & integration expenses 233 233
Restructuring charges* 187 187
Corporate relocation expense         393     393  
Adjusted EBITDA10,6783,155(2,594)11,239
Corporate allocation   2,818     992   (3,810 )    
Adjusted EBITDA excl. corporate allocation$13,496  $4,147  ($6,404)$11,239  
* Excludes depreciation
 
 

Nine Months Ended April 30, 2016

ElectronicOther
Chemicals  Chemicals  Corporate  Total
Operating Income (Loss)$23,927$9,421($12,862)$20,486
Other income (expense) (75 ) (75 ) (93 ) (243 )
Depreciation and amortization   8,660       868     1,373       10,901  
EBITDA32,51210,214(11,582)31,144
 
Acquisition & integration expenses 233 233
Restructuring & realignment charges* 1,233 1,233
Corporate relocation expense             1,122       1,122  
Adjusted EBITDA32,51210,214(8,994)33,732
Corporate allocation   7,779       2,573     (10,352 )      
Adjusted EBITDA excl. corporate allocation$40,291    $12,787    ($19,346)  $33,732  
* Excludes depreciation
 
 

Third Quarter Fiscal 2015

ElectronicWood Treating
Chemicals  Chemicals  Corporate  Total
 
Operating Income (Loss)$6,644$2,276($4,159)$4,761
Other income (expense) (193 ) (37 ) (109 ) (339 )
Depreciation and amortization   2,983       93     818       3,894  
EBITDA9,4342,332(3,450)8,316
 
Acquisition & integration expenses 441 441
Restructuring & realignment charges*             388       388  
Adjusted EBITDA9,4342,332(2,621)9,145
Corporate allocation   1,802       597     (2,399 )      
Adjusted EBITDA excl. corporate allocation$11,236    $2,929    ($5,020)  $9,145  
* Excludes depreciation
 
 

Nine Months Ended April 30, 2015

ElectronicWood Treating
Chemicals  Chemicals  Corporate  Total
 
Operating Income (Loss)$16,335$6,456($12,044)$10,747
Other income (expense) (76 ) (90 ) (332 ) (498 )
Depreciation and amortization   9,311       286     5,994       15,591  
EBITDA25,5706,652(6,382)25,840
 
Acquisition & integration expenses 441 441
Restructuring & realignment charges*             689       689  
Adjusted EBITDA25,5706,652(5,252)26,970
Corporate allocation   7,192       2,704     (9,896 )      
Adjusted EBITDA excl. corporate allocation$32,762    $9,356    ($15,148)  $26,970  
* Excludes depreciation
 
         

Table 2

RECONCILIATION OF NET INCOME TO ADJUSTED NET INCOME AND ADJUSTED DILUTED EARNINGS PER SHARE
(in thousands)
Three Months EndedNine Months Ended
April 30,April 30,
 2016      2015        2016      2015  
Net income $ 6,362 $ 2,135 $ 14,932 $ 8,810
Items impacting pre-tax income:
Restructuring & realignment charges 377 1,097 1,528 6,329
Acquisition & integration expenses 233 441 233 441
Corporate relocation expense 393 1,122
Gain on purchase of NFC (2,069 ) (2,069 )
Loss (gain) on sale of creosote business 234 (5,448 )
Environmental site cleanup reserve 1,250 1,250
Income taxes*   (352 )     (1,058 )       (1,010 )     (900 )
Adjusted net income $ 4,944 $ 4,099 $ 14,736 $ 10,482
Adjusted diluted earnings per share $ 0.41 $ 0.35 $ 1.24 $ 0.89
Weighted average diluted shares outstanding 11,990 11,819 11,923 11,758
 
*Represents the aggregate tax-effect of the items impacting pre-tax income, except for the gain on the purchase of NFC, which is not a recognized gain for tax purposes.
 
       

Table 2A

Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
 

Third Quarter Fiscal 2016

Dollars in thousands, except EPSKMG Chemicals, Inc.
OperatingNetDiluted Earnings
IncomeMarginIncomePer Share
GAAP measure $ 7,029 9.4 % $ 6,362 $ 0.53
Acquisition & integration expenses 233 0.3 % 151 0.01
Restructuring charges 377 0.5 % 245 0.02
Gain on purchase of NFC 0.0 % (2,069 ) (0.17 )
Corporate relocation expense   393 0.5 %   255     0.02  
Non-GAAP measure $ 8,032 10.7 % $ 4,944   $ 0.41  
 

Nine Months Ended April 30, 2016

Dollars in thousands, except EPSKMG Chemicals, Inc.
OperatingNetDiluted Earnings
IncomeMarginIncomePer Share
GAAP measure $ 20,486 9.2 % $ 14,932 $ 1.25
Acquisition & integration expenses 233 0.1 % 151 0.01
Restructuring & realignment charges 1,528 0.7 % 993 0.09
Gain on purchase of NFC 0.0 % (2,069 ) (0.17 )
Corporate relocation expense   1,122 0.5 %   729     0.06  
Non-GAAP measure $ 23,369 10.5 % $ 14,736   $ 1.24  
 
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
 

Third Quarter Fiscal 2015

Dollars in thousands, except EPSKMG Chemicals, Inc.
OperatingNetDiluted Earnings
IncomeMarginIncomePer Share
GAAP measure $ 4,761 6.4 % $ 2,135 $ 0.18
Restructuring & realignment charges 1,097 1.5 % 713 0.06
Acquisition & integration expenses 441 0.6 % 287 0.03
Loss on sale of creosote business 0.0 % 152 0.01
Environmental site cleanup reserve   0.0 %   812     0.07  
Non-GAAP measure $ 6,299 8.5 % $ 4,099   $ 0.35  
 

Nine Months Ended April 30, 2015

Dollars in thousands, except EPSKMG Chemicals, Inc.
OperatingNetDiluted Earnings
IncomeMarginIncomePer Share
GAAP measure $ 10,747 4.4 % $ 8,810 $ 0.75
Restructuring & realignment charges 6,329 2.6 % 4,114 0.35
Acquisition & integration expenses 441 0.2 % 287 0.02
Gain on sale of creosote business 0.0 % (3,541 ) (0.30 )
Environmental site cleanup reserve   0.0 %   812     0.07  
Non-GAAP measure $ 17,517 7.2 % $ 10,482   $ 0.89  

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