News Column

KMG Reports Third Quarter 2014 Financial Results

June 6, 2014

HOUSTON--(BUSINESS WIRE)-- 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)        
    AdjustedAs ReportedAdjustedAs 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 thousandsFiscal 2014     Fiscal 2013
    Adjusted     As ReportedAs 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 thousandsFiscal 2014Fiscal 2013
    As ReportedAs 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, 2014

    Time: 10:00 am EDT

    Dial in:877-546-5019 or 857-244-7551

    Participant 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,
    20142013
     
     
    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,
    20142013
    (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,
    20142013
    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)
                   
    ElectronicWood Treating
    Three Months Ended April 30, 2014Chemicals     Chemicals     Corporate     Total
     
    Operating Income3,1752,092(2,353)2,914
    Other income (expense) (81 ) 24 (48 ) (105 )
    Depreciation and amortization 3,202       104       104       3,410  
    EBITDA6,2962,220(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 EBITDA6,550       2,220       (1,132)     7,638  
     
     
    ElectronicWood Treating
    Nine Months Ended April 30, 2014Chemicals     Chemicals     Corporate     Total
     
    Operating Income9,5085,708(10,850)4,366
    Other income (expense) (385 ) (7 ) (148 ) (540 )
    Depreciation and amortization 9,794       300       328       10,422  
    EBITDA18,9176,001(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 EBITDA19,831       6,001       (4,194)     21,638  

     

     

    ElectronicWood Treating
    Three Months Ended April 30, 2013Chemicals     Chemicals     Corporate     Total
     
    Operating Income2,9782,546(1,169)4,355
    Other income (expense) (38 ) 11 (22 ) (49 )
    Depreciation and amortization 1,665       102       136       1,903  
    EBITDA4,6052,659(1,055)6,209
     
    Acquisition and integration expenses 80       -       -       80  
    Adjusted EBITDA4,685       2,659       (1,055)     6,289  
     
     
    ElectronicWood Treating
    Nine Months Ended April 30, 2013Chemicals     Chemicals     Corporate     Total
     
    Operating Income10,4798,132(3,956)14,655
    Other income (expense) (134 ) 40 (80 ) (175 )
    Depreciation and amortization 4,754       314       339       5,407  
    EBITDA15,0998,486(3,697)19,887
     
    Acquisition and integration expenses 1,400       -       -       1,400  
    Adjusted EBITDA16,499       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
    OperatingNetEarnings

    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 ChemicalsWood Treating Chemicals
    OperatingOperating

    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
    OperatingNetEarnings

    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 ChemicalsWood Treating Chemicals
    OperatingOperating

    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 %
     





    KMG Chemicals, Inc.

    Eric Glover, 713-600-3865

    Investor Relations Manager

    eglover@kmgchemicals.com

    Source: KMG Chemicals, Inc.


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