KMG Reports Third Quarter 2014 Financial Results

KMG Chemicals, Inc. (NYSE: KMG), a global provider of specialty chemicals to select markets, today announced financial results for the fiscal 2014 third quarter ended April 30, 2014.

2014 Third Quarter Financial Review
  • Net sales were $84.4 million, an increase of 40.9% from last year’s third quarter. The sales increase reflected the addition of the Ultra Pure Chemicals (UPC) business, acquired in May 2013.
  • Adjusted EBITDA1 was $7.6 million, compared to $6.3 million last year. Third quarter fiscal 2014 adjusted EBITDA excludes $1.4 million of restructuring charges and integration expenses.
  • Adjusted diluted EPS2, which excludes restructuring charges and integration expenses, was $0.20, as compared to $0.25 in last year’s third quarter.
  • GAAP earnings per share was $0.11 vs. EPS of $0.25 reported in the same period a year ago.

Chris Fraser, KMG chairman and chief executive officer, said, “In our third quarter we continued to make progress on the integration of the UPC business and strategic manufacturing realignment of our global Electronic Chemicals operations. Most notably, we ceased manufacturing at the Fremont, California facility and successfully shifted production to our other North American locations. Meanwhile, the consolidation of our European operations remains on schedule and we are working closely with our customers on the necessary product qualifications and approvals as we transition production to alternate sites in Europe. We continue to expect these initiatives will generate enduring operating efficiencies and will strengthen our position as the world’s leading supplier of high purity process chemicals to the global semiconductor industry.

Mr. Fraser continued, “Although our Electronic Chemicals sales were somewhat lower than we expected in the third quarter, I am pleased with the improvement in the profitability of our Wood Treating Chemicals segment relative to the second quarter. While our creosote business continues to face challenging market dynamics, we are responding by lowering our supply chain costs and continually looking to reduce operating expenses. As a result, our adjusted earnings per share improved to $0.20, from $0.12 in the second quarter.”
   

Third Quarter Results

Dollars in thousands, except EPS
Fiscal 2014     Fiscal 2013
(unaudited)        
Adjusted As Reported Adjusted As Reported
(non-GAAP) (GAAP) (non-GAAP) (GAAP)
 
Net Sales $ 84,437 $ 84,437 $ 59,929 $ 59,929
Operating Income 4,333 2,914 4,435 4,355
Operating Margin 5.1 % 3.5 % 7.4 % 7.3 %
Net Income 2,388 1,226 2,917 2,865
Diluted EPS $ 0.20 $ 0.11 $ 0.25 $ 0.25
 
   
Electronic Chemicals

Third Quarter Results
Dollars in thousands Fiscal 2014     Fiscal 2013
Adjusted     As Reported As Reported
(non-GAAP) (GAAP) (GAAP)
 
Net Sales $ 61,542 $ 61,542 $ 36,333
Operating Income 3,429 3,175 2,978
Operating Margin 5.6 % 5.2 % 8.2 %
 

For the third fiscal quarter, the Electronic Chemicals segment reported:
  • Sales of $61.5 million, up from $36.3 million in the same period a year ago. The increase in sales reflected the addition of the UPC business. Electronic Chemicals sales represented 73% of consolidated second quarter sales.
  • Adjusted EBITDA3 of $6.5 million, compared to $4.7 million last year.
  • Depreciation and amortization expense of $3.2 million, compared to $1.7 million last year.
  • Adjusted operating income4 of $3.4 million vs. $3.0 million in the same period of fiscal 2013. Fiscal 2014 third quarter adjusted operating income excludes $254,000 of integration expenses. Electronic Chemicals segment adjusted operating income also excludes restructuring expenses, which are included under corporate operating income (loss).
  • GAAP operating margin of 5.2% vs. 8.2% in the previous year. Excluding the impact of integration expenses, adjusted operating margin was 5.6%. The difference from the prior year was primarily due to increased depreciation and amortization expenses.
       
Wood Treating Chemicals

Third Quarter Results
Dollars in thousands Fiscal 2014 Fiscal 2013
As Reported As Reported
(GAAP) (GAAP)
 
Net Sales $ 22,851 $ 23,525
Operating Income 2,092 2,546
Operating Margin 9.2 % 10.8 %
 

For the third fiscal quarter, the Wood Treating Chemicals segment reported:
  • Sales of $22.9 million, down 2.9% from $23.5 million in the same period a year ago. Sales declined primarily due to lower penta sales volume, partially offset by an increase in sales to the rail tie treating market. Wood Treating Chemicals sales represented 27% of consolidated third quarter sales.
  • EBITDA5 of $2.2 million, down from $2.7 million last year.
  • Operating income of $2.1 million, or 9.2% of sales, compared to $2.5 million, or 10.8% of sales, last year. The decrease in operating income was due to lower sales and a less favorable product mix.

Outlook
  • Fiscal 2014 consolidated net sales are forecast to approximate $350 million, benefiting from the acquisition of the UPC business.
  • Fiscal 2014 depreciation and amortization expense is forecast at less than $15 million. In addition to this amount, the company expects to incur approximately $3 million in non-cash restructuring charges, representing accelerated depreciation expense related to the closure of the Fremont facility and cessation of manufacturing operations in Milan.
  • Excluding non-cash accelerated depreciation expense, cumulative restructuring charges in fiscal 2014 and fiscal 2015 are forecast to total $7-9 million. Starting in fiscal 2015, benefits to operating income resulting from the restructuring of $6-8 million on an annualized basis are forecast. In addition, incremental capital expenditures of approximately $2 million are expected to be incurred to accomplish these plans.

Conference call

Date: Friday, June 6, 2014Time: 10:00 am EDTDial in: 877-546-5019 or 857-244-7551Participant passcode: 84116909

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 2:00 p.m. EDT on June 6, 2014. To access the call, dial 888-286-8010 or 617-801-6888 using participant passcode 95516291.

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. Its current operations are focused on the electronic and industrial wood treatment chemical 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 1 for reconciliation.

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

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

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

5 Non-U.S. GAAP measure. See Table 1 for reconciliation.
   
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except for per share amounts)
   
Three Months Ended
April 30,
2014 2013
 
 
Net sales $ 84,437 $ 59,929
Cost of sales   59,672     43,596  
Gross profit   24,765     16,333  
 
Distribution expenses 11,975 6,399
Selling, general and administrative expenses 8,815 5,579
Restructuring charges1   1,061  
Operating income 2,914 4,355
 
Other income (expense)
Interest expense, net (926 ) (388 )
Other, net   (105 )   (49 )
Total other expense, net   (1,031 )   (437 )
 
Income from continuing operations before income taxes 1,883 3,918
Provision for income taxes   (657 )   (1,026 )
Income from continuing operations   1,226     2,892  
 
Discontinued operations
Loss from discontinued operations, before income taxes (33 )
Income tax benefit   6  
Loss from discontinued operations (27 )
 
Net income $ 1,226   $ 2,865  
 
Earnings per share:
Basic
Income from continuing operations $ 0.11 $ 0.25
Loss from discontinued operations
Net income $ 0.11   $ 0.25  
 
Diluted
Income from continuing operations $ 0.11 $ 0.25
Loss from discontinued operations
Net income $ 0.11   $ 0.25  
 
Weighted average shares outstanding:
Basic 11,634 11,513
Diluted 11,673 11,580
 

1 Restructuring charges include $949,000 of accelerated depreciation expense related to the closure of the Fremont facility and cessation of manufacturing in Milan.
 
 
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts)
       
April 30, July 31,
2014 2013
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 19,402 $ 13,949
Accounts receivable
Trade, net of allowances of $211 at April 30, 2014 and $224 at July 31, 2013 40,651 41,935
Other 3,832 4,210
Inventories, net 46,636 53,387
Current deferred tax assets 631 1,400
Prepaid expenses and other   3,406   3,955  
Total current assets   114,558   118,836  
 
Property, plant and equipment, net 95,175 96,688
Deferred tax assets 991 1,069
Goodwill 11,110 10,929
Intangible assets, net 28,803 29,261
Restricted cash 1,000 1,000
Other assets, net   4,419   4,232  
Total assets $ 256,056 $ 262,015  
 
Liabilities & stockholders’ equity
Current liabilities
Accounts payable $ 32,052 $ 35,492
Accrued liabilities 16,540 10,351
Current maturities of long-term debt   20,000
Total current liabilities   68,592   45,843  
 
Long-term debt, net of current maturities 52,000 85,000
Deferred tax liabilities 10,683 11,462
Other long-term liabilities   2,666   2,470  
Total liabilities   133,941   144,775  
 
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, 11,635,636 shares issued and outstanding at April 30, 2014 and 11,522,321 shares issued and outstanding at July 31, 2013 116 115
Additional paid-in capital 28,492 26,689
Accumulated other comprehensive income (loss) 1,776 (2,504 )
Retained earnings   91,731   92,940  
Total stockholders’ equity   122,115   117,240  
Total liabilities and stockholders’ equity $ 256,056 $ 262,015  
 
 
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
       
Nine Months Ended
April 30,
2014 2013
Cash flows from operating activities
Net income (loss) $ (166 ) $ 8,625
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization 10,422 5,407
Non-cash restructuring charges 1,720 -
Amortization of loan costs included in interest expense 45 34
Stock-based compensation expense 1,777 455
Bad debt expense 89 78
Allowance for excess and obsolete inventory 33 (340 )
(Gain)/loss on disposal of property (14 ) 59
Loss on sale of animal health business - 57
Deferred income taxes 751 783
Tax benefit from stock-based awards (328 ) (569 )
Changes in operating assets and liabilities
Accounts receivable — trade 1,906 2,229
Accounts receivable — other 538 (3,339 )
Inventories 7,277 (3,268 )
Other current and non-current assets 389 (1,819 )
Accounts payable (3,916 ) 1,309
Accrued liabilities and other   5,383     (158 )
Net cash provided by operating activities   25,906     9,543  
 
Cash flows from investing activities
Additions to property, plant and equipment (7,133 ) (3,785 )
Disposals of property, plant and equipment   39     -  
Net cash used in investing activities   (7,094 )   (3,785 )
 
Cash flows from financing activities
Net payments under revolving credit agreement (13,000 ) (2,000 )
Proceeds from exercise of stock options - 70
Tax benefit from stock-based awards 328 569
Payment of dividends   (1,043 )   (1,032 )
Net cash used in financing activities   (13,715 )   (2,393 )
 
 
Effect of exchange rate changes of cash   356     100  
 
Net increase (decrease) in cash and cash equivalents 5,453 3,465
 
Cash and cash equivalents at beginning of period   13,949     1,633  
 
Cash and cash equivalents at end of period $ 19,402   $ 5,098  
 

Reconciliation of non-GAAP financial measures to 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. Excluding expenses related to the integration and restructuring of the UPC business and CEO transition expenses from current results will allow for more accurate comparisons of our operating performance. 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 OPERATING INCOME TO EBITDA AND ADJUSTED EBITDA
(In thousands)
               
Electronic Wood Treating
Three Months Ended April 30, 2014 Chemicals     Chemicals     Corporate     Total
 
Operating Income 3,175 2,092 (2,353 ) 2,914
Other income (expense) (81 ) 24 (48 ) (105 )
Depreciation and amortization 3,202       104       104       3,410  
EBITDA 6,296 2,220 (2,297 ) 6,219
 
Non-cash restructuring charges - - 949 949
Acquisition and integration expenses 254 - 104 358

Restructuring charges, excluding depreciation and amortization
-       -       112       112  
Adjusted EBITDA 6,550       2,220       (1,132 )     7,638  
 
 
Electronic Wood Treating
Nine Months Ended April 30, 2014 Chemicals     Chemicals     Corporate     Total
 
Operating Income 9,508 5,708 (10,850 ) 4,366
Other income (expense) (385 ) (7 ) (148 ) (540 )
Depreciation and amortization 9,794       300       328       10,422  
EBITDA 18,917 6,001 (10,670 ) 14,248
 
Non-cash restructuring charges - - 1,720 1,720
Acquisition and integration expenses 914 - 104 1,018
CEO Transition costs - - 1,280 1,280

Restructuring charges, excluding depreciation and amortization
-       -       3,372       3,372  
Adjusted EBITDA 19,831       6,001       (4,194 )     21,638  

 

 
Electronic Wood Treating
Three Months Ended April 30, 2013 Chemicals     Chemicals     Corporate     Total
 
Operating Income 2,978 2,546 (1,169 ) 4,355
Other income (expense) (38 ) 11 (22 ) (49 )
Depreciation and amortization 1,665       102       136       1,903  
EBITDA 4,605 2,659 (1,055 ) 6,209
 
Acquisition and integration expenses 80       -       -       80  
Adjusted EBITDA 4,685       2,659       (1,055 )     6,289  
 
 
Electronic Wood Treating
Nine Months Ended April 30, 2013 Chemicals     Chemicals     Corporate     Total
 
Operating Income 10,479 8,132 (3,956 ) 14,655
Other income (expense) (134 ) 40 (80 ) (175 )
Depreciation and amortization 4,754       314       339       5,407  
EBITDA 15,099 8,486 (3,697 ) 19,887
 
Acquisition and integration expenses 1,400       -       -       1,400  
Adjusted EBITDA 16,499       8,486       (3,697 )     21,287  
 
 
Table 2
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
               

Third Quarter Fiscal 2014

Dollars in thousands, except EPS
KMG Chemicals, Inc.
Diluted
Operating Net Earnings

Income

Margin

Income

Per Share
Non-GAAP measure $ 4,333 5.1 % $ 2,388 $ 0.20
Restructuring charges (1,061 ) (1.2 %) (691 ) ($0.06 )
Restructuring income tax expense - 0.0 % (238 ) ($0.02 )
Acquisition & integration expenses   (358 ) (0.4 %)   (233 )   ($0.01 )
GAAP measure $ 2,914   3.5 % $ 1,226   $ 0.11  
 
 
 
Electronic Chemicals Wood Treating Chemicals
Operating Operating

Income

Margin

Income

Margin
Non-GAAP measure $ 3,429 5.6 % $ 2,092 9.2 %
Integration expenses   (254 ) (0.4 %)   -     0.0 %
GAAP measure $ 3,175   5.2 % $ 2,092     9.2 %
 
 
 
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures

 

Third Quarter Fiscal 2013

Dollars in thousands, except EPS
KMG Chemicals, Inc.
Diluted
Operating Net Earnings

Income

Margin

Income

Per Share
Non-GAAP measure $ 4,435 7.4 % $ 2,917 $ 0.25
Acquisition expenses   (80 ) (0.1 %)   (52 )   -  
GAAP measure $ 4,355   7.3 % $ 2,865   $ 0.25  
 
 
 
Electronic Chemicals Wood Treating Chemicals
Operating Operating

Income

Margin

Income

Margin
Non-GAAP measure $ 2,978 8.2 % $ 2,546 10.8 %
Integration expenses   -   0.0 %   -     0.0 %
GAAP measure $ 2,978   8.2 % $ 2,546     10.8 %
 

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