CMC MATERIALS, INC.
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as disclosures included elsewhere in this Report
on Form 10-Q, include "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 ("the Act"). The Act provides a
safe harbor for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Report on Form 10-Q are forward-looking and address a variety of
subjects including, for example, the proposed Entegris Transaction, including
expected timing, completion and effects of the proposed transaction; expected
savings from our strategic cost optimization program ("Future Forward"); future
sales and operating results; growth or contraction, and trends in the industries
and markets in which the Company participates, such as the semiconductor, and
oil and gas industries; the acquisition of, investment in, or collaboration with
other entities, and the expected benefits and synergies of such transactions;
divestment or disposition, or cessation of investment in certain of the
Company's businesses; new product introductions; development of new products,
technologies and markets; product performance; the financial conditions of the
Company's customers; the competitive landscape that relates to the Company's
business; the Company's supply chain; natural disasters; various economic or
political factors and international or national events, including related to
global public health crises such as the COVID-19 pandemic ("Pandemic"), and the
enactment of trade sanctions, tariffs, or other similar matters; the generation,
protection and acquisition of intellectual property, and litigation related to
such intellectual property or third party intellectual property; environmental,
health and safety laws and regulations, and related compliance and costs of
compliance; the operation of facilities by the Company; the Company's
management; foreign exchange fluctuation; the Company's current or future tax
rate, including the effects of changes to tax laws in the jurisdictions in which
the Company operates; cybersecurity threats and vulnerabilities; and, financing
facilities and related debt, pay off or payment of principal and interest, and
compliance with covenants and other terms, uses and investment of the Company's
cash balance, including dividends and share repurchases, which may be suspended,
terminated or modified at any time for any reason by the Company, based on a
variety of factors. Statements that are not historical facts, including
statements about CMC's beliefs, plans and expectations, are forward-looking
statements. Such statements are based on current expectations of CMC's
management and are subject to a number of factors and uncertainties, which could
cause actual results to differ materially from those described in the
forward-looking statements. For information about factors that could cause
actual results to differ materially from those described in the forward-looking
statements, please refer to CMC's filings with the SEC , including the risk
factors contained in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2021 and this Report on Form 10-Q. Except as required by law, CMC
undertakes no obligation to update forward-looking statements made by it to
reflect new information, subsequent events or circumstances. The section
entitled "Risk Factors" describes some, but not all, the factors that could
cause these differences.
The following discussion and analysis should be read in conjunction with our
Annual Report on Form 10-K for the fiscal year ended September 30, 2021 ,
including the Consolidated Financial Statements and related notes thereto.
RECENT EVENTS
During the first quarter of fiscal 2022, the Company initiated the Future
Forward program to enhance operational efficiencies. The Company recorded
employee severance expense of $2,979 for the three months ended December 31,
2021 . Additional Future Forward initiatives may be implemented during fiscal
2022 that may result in additional expense or charges.
On December 14, 2021 , the Company entered into an agreement and plan of merger
("Merger Agreement") with Entegris, Inc. ("Entegris") and Yosemite Merger Sub,
Inc. , a wholly owned subsidiary of Entegris ("Merger Sub") under which Entegris
will acquire the Company in a cash and stock transaction. The Merger Agreement
provides that (1) Merger Sub will merge with and into the Company (the
"Merger"), with the Company surviving the Merger as a wholly owned subsidiary of
Entegris, and (2) at the effective time of the Merger, each issued and
outstanding share of CMC common stock (other than (i) shares of CMC common stock
owned by the Company, Entegris or any of their respective subsidiaries
immediately prior to the effective time of the Merger and (ii) shares of CMC
common stock as to which dissenters' rights have been properly perfected) will
be converted into the right to receive $133 in cash and 0.4506 shares of
Entegris common stock, plus cash in lieu of any fractional shares (the "Entegris
Transaction"). The Entegris Transaction is subject to the satisfaction of
certain customary closing conditions, including, among others, receipt of
certain regulatory approvals and approval by the Company's stockholders. The
Merger Agreement contains certain termination rights for both the Company and
Entegris. If the Merger Agreement is terminated under certain specified
circumstances, including the termination by Entegris in the event of a change of
recommendation by our board of directors or the termination by the Company to
enter into an agreement in connection with a "superior proposal" (as defined in
the Merger Agreement) we will be required to pay Entegris a termination fee of
$187 million .
See the section titled "Risk Factors-Risks Relating to the Entegris Transaction"
for more information regarding the risks associated with the Entegris
Transaction.
17--------------------------------------------------------------------------------
INDEX
The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is filed as Exhibit 2.1 of our Current Report on Form 8-K filed onDecember 16, 2021 . FIRST QUARTER OF FISCAL 2022 OVERVIEW While the Pandemic continues to cause global macroeconomic uncertainty worldwide and in the countries and locations in which we and our customers and suppliers operate, our business in our fiscal first quarter of 2022 showed continued resiliency overall. In our Electronic Materials business segment, which represents more than 80% of our revenue, we experienced growth from each of our businesses over the prior year driven by customer technology advancement and increased demand for our products. Our Performance Materials business segment experienced a decrease in revenue over the prior year due to the previously announced exit of the wood treatment business, which continues to proceed as planned and is expected to be completed by the end of the second quarter of fiscal 2022. Throughout the Pandemic, our primary focus has been and continues to be on the health and well-being of our employees and the ongoing operation of our facilities worldwide according to our business continuity plans, which we refine on an ongoing basis. To date, we have not seen a significant impact from the Pandemic on our ability to manufacture and deliver products to our customers, but we have experienced a rise in certain raw material costs and broad constraints in the global supply chain, including in logistics, and higher freight and logistics costs. We've seen improvement recently in some of the industries we serve that have been negatively impacted by the Pandemic, primarily the pipeline industry. Depending on industry recovery, we expect to drive growth in our PIM business. The extent to which the Pandemic may further impact our business, operations, results of operations and financial condition going forward is uncertain and difficult to estimate, and depends on numerous evolving and potentially unknown factors. KEY FINANCIAL RESULTS Our consolidated results of operations are as follows: (Dollars in thousands) Three Months Ended December 31, 2021 2020 Revenue$ 317,046 $ 287,863 Net income$ 27,428 $ 31,530 Adjusted EBITDA$ 91,887 $ 91,556 Adjusted EBITDA Margin 29.0 % 31.8 % Our first quarter of 2022 consolidated revenue benefited from stronger demand for our Electronic Materials products, global price increases, and the addition of the materials technologies business, which represents the acquisition of ITS. Consolidated net income declined in the current year primarily due to the wood treatment impairment charge and Entegris Transaction-related expenses, partially offset by higher gross profit as a result of increased revenue. Adjusted EBITDA margin decreased primarily due to higher manufacturing, raw material, freight and logistics costs. 18
--------------------------------------------------------------------------------
INDEX
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the changes in
balances on the Consolidated Statement of Income:
(Dollars in thousands) Three Months Ended December 31,
2021 2020 $ Change % Change
Revenue $ 317,046 $ 287,863 $ 29,183 10.1 %
Cost of sales 191,210 164,959 26,251 15.9 %
Gross profit 125,836 122,904 2,932 2.4 %
Operating expenses:
Research, development and technical 13,328 12,428 900 7.2 %
Selling, general and administrative 56,483 55,920 563 1.0 %
Impairment charges 9,435 7,347 2,088 28.4 %
Entegris Transaction-related expenses 6,050 - 6,050
Total operating expenses 85,296 75,695 9,601 12.7 %
Operating income 40,540 47,209 (6,669) (14.1 %)
Interest expense, net 9,743 9,585 158 1.6 %
Other (expense) income, net (152) 1,452 (1,604) (110.5 %)
Income before income taxes 30,645 39,076 (8,431) (21.6 %)
Provision for income taxes 3,217 7,546 (4,329) (57.4 %)
Net income $ 27,428 $ 31,530 $ (4,102) (13.0 %)
Most of CMC's foreign operations maintain their accounting records in their
local currencies. As a result, period to period comparability of results of
operations is affected by fluctuations in exchange rates. The impact on
comparability is not material in any given period.
REVENUE
The increase in Revenue was driven by 13.0% growth in the Electronic Materials
segment due to increased demand for our products, global price increases, and
the addition of the materials technologies business, which represents the
acquisition of ITS. Consolidated revenue was impacted by lower revenue from the
Performance Materials segment, driven by the exit of the wood treatment
business.
COST OF SALES
The increase in Cost of Sales was primarily due to increases in revenue and
higher manufacturing, raw material, freight and logistics costs.
GROSS MARGIN
Our gross margin was 39.7% for the three months ended December 31, 2021 ,
compared to 42.7% for the three months ended December 31, 2020 . The decrease was
primarily due to higher manufacturing, raw material, freight and logistics costs
across both segments. This was partially offset by global price increases that
the Company began implementing during the first quarter of fiscal 2022.
SELLING, GENERAL AND ADMINISTRATIVE
The increase in Selling, general and administrative expenses was primarily due
to $2.0 million of Future Forward-related expenses, as well as a $1.7 million
increase in staffing related expenses and a $0.9 million increase in IT
expenses. This was partially offset by a $2.7 million decrease in professional
fees and a $2.1 million decrease in acquisition and integration related
expenses.
IMPAIRMENT CHARGES
The Impairment charge in the first quarter of fiscal 2022 related to the
remaining goodwill balance of the wood treatment business. See Notes 7 and 8 of
"Notes to the Consolidated Financial Statements" of this Report on Form 10-Q for
more information.
19--------------------------------------------------------------------------------
INDEX
ENTEGRIS TRANSACTION-RELATED EXPENSES
These expenses, which were incurred in the first quarter of fiscal 2022, relate
to the Entegris Transaction. See Note 2 of "Notes to the Consolidated Financial
Statements" of this Report on Form 10-Q for more information.
PROVISION FOR INCOME TAXES
The effective income tax rate for the first quarter of fiscal 2022 was 10.5%,
compared to 19.3% in the same quarter last year. The change in our effective tax
rate is primarily due to a higher tax benefit related to share-based
compensation driven by increased stock option exercise activity during the first
quarter of fiscal 2022 and a lower unfavorable impact from the non-deductible
goodwill impairment charges related to wood treatment.
SEGMENT ANALYSIS
The segment data should be read in conjunction with our unaudited Consolidated
Financial Statements and related notes included in Part 1, Item 1 of this Report
on Form 10-Q.
(Dollars in thousands) Three Months Ended December 31,
2021 2020 $ Change % Change
Segment Revenue:
Electronic Materials $ 267,651 $ 236,798 $ 30,853 13.0 %
Performance Materials 49,395 51,065 (1,670) (3.3 %)
Total Revenue $ 317,046 $ 287,863 $ 29,183 10.1 %
Adjusted EBITDA:
Electronic Materials $ 88,082 $ 80,756 $ 7,326 9.1 %
Performance Materials 15,001 22,975 (7,974) (34.7 %)
Unallocated corporate expenses (11,196) (12,175) 979 8.0 %
Consolidated adjusted EBITDA $ 91,887 $ 91,556 $ 331 0.4 %
Adjusted EBITDA margin:
Electronic Materials 32.9 % 34.1 % -120 bpts
Performance Materials 30.4 % 45.0 % -1,460 bpts
ELECTRONIC MATERIALS
The increase in revenue was driven by growth across all segment businesses. CMP
slurries increased 8.5% compared to the first fiscal quarter of 2021 driven by
customer technology advancement and increased demand for the Company's products.
CMP pads increased 8.9% over the prior year due to increased demand and new
position wins. Electronic chemicals increased 13.9% compared to the same quarter
last year driven by increased customer demand, particularly in Europe , and new
position wins.
The increase in adjusted EBITDA was primarily driven by the revenue growth
across all segment businesses and global price increases, which began to be
implemented during the quarter. These increases were partially offset by higher
manufacturing, raw material, freight and logistics costs. The decrease in
adjusted EBITDA margin was primarily driven by higher manufacturing, raw
material, freight and logistics costs.
PERFORMANCE MATERIALS
The decrease in revenue was primarily driven by the exit of the wood treatment
business, which is expected to be completed by the end of the second fiscal
quarter of 2022. Lower revenue from the wood treatment business more than offset
the 2.8% increase in PIM revenue from the continued stabilization and recovery
from factors related to the Pandemic.
The decrease in adjusted EBITDA was primarily driven by the exit of the wood
treatment business and higher raw material costs in the PIM business. The
decrease in adjusted EBITDA margin was primarily driven by raw material cost
increases in the PIM business.
20--------------------------------------------------------------------------------
INDEX
USE OF CERTAIN GAAP AND NON-GAAP FINANCIAL INFORMATION We provide certain non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin, in addition to reported GAAP results because we believe that analysis of our financial performance is enhanced by an understanding of these non-GAAP financial measures. We exclude certain items from earnings when presenting adjusted EBITDA because we believe they will be incurred infrequently and/or are otherwise not indicative of the Company's regular, ongoing operating performance. Accordingly, we believe that they aid in evaluating the underlying operational performance of our business, and facilitate comparisons between periods. In addition, adjusted EBITDA is used as one of the performance goals of our fiscal 2022 STIP. A similar adjusted EBITDA calculation is also used by our lenders for a key debt compliance ratio. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of revenue. Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, adjusted for certain items that affect comparability from period to period. These adjustments include items related to acquisitions, such as acquisition and integration-related expenses, impairment charges, costs of restructuring and related adjustments related to the wood treatment business, costs related to the Pandemic net of grants received, Future Forward-related expenses, and Entegris Transaction-related expenses. The non-GAAP financial measures provided are a supplement to, and not a substitute for, the Company's financial results presented in accordance withU.S. GAAP. Management strongly encourages investors to review the Company's Consolidated Financial Statements in their entirety and to not rely on any single financial measure. A reconciliation table of GAAP to non-GAAP financial measures is below. Adjusted EBITDA for the Electronic Materials and Performance Materials segments is presented in conformity with Accounting Standards Codification Topic 280, Segment Reporting. This measure is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For these reasons, this measure is excluded from the definition of non-GAAP financial measures under SEC Regulation G and Item 10(e) of Regulation S-K. RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA Three Months Ended December 31, (In thousands) 2021 2020 Net income $ 27,428$ 31,530 Interest expense, net 9,743 9,585 Income taxes 3,217 7,546 Depreciation and amortization 32,702 31,891 EBITDA 73,090 80,552 Impairment charges 9,435 7,347 Entegris Transaction-related expenses 6,050 - Future Forward-related expenses 2,979 - Acquisition and integration-related expenses 307 2,369
Net costs related to restructuring of the wood treatment business
26 26
Costs related to the Pandemic, net of grants received - 1,262
Adjusted EBITDA $ 91,887 $ 91,556
Three Months Ended December 31,
(In thousands) 2021 2020
Adjusted EBITDA:
Electronic Materials $ 88,082 $ 80,756
Performance Materials 15,001 22,975
Unallocated corporate expenses (11,196) (12,175)
Consolidated adjusted EBITDA $ 91,887 $ 91,556
21--------------------------------------------------------------------------------
INDEX
LIQUIDITY AND CAPITAL RESOURCES As ofDecember 31, 2021 , we had$200.0 million of cash and cash equivalents compared with$186.0 million as ofSeptember 30, 2021 . OnDecember 31, 2021 ,$163.3 million of cash and cash equivalents was held in foreign subsidiaries. Our total liquidity as ofDecember 31, 2021 was$550.0 million compared to$536.0 million as ofSeptember 30, 2021 (including$350.0 million of borrowing availability under our revolving credit facility ("Revolving Credit Facility") in both periods, which includes our letter of credit sub-facility). The increase in liquidity reflects the cash flow provided by operations, partially offset by cash used for the payment of dividends, capital expenditures, and repurchases of our common stock. Total debt, consisting of principal outstanding on our Senior Secured Term Loan Facility ("Term Loan Facility"), amounted to$914.4 million ($925.7 million in aggregate principal amount less$11.3 million of debt issuance costs) as ofDecember 31, 2021 and$916.3 million ($928.4 million in aggregate principal amount less$12.0 million of debt issuance costs) as ofSeptember 30, 2021 . During the three months endedDecember 31, 2021 there were no borrowings under our Revolving Credit Facility and no balance was outstanding as ofDecember 31, 2021 . The Revolving Credit Facility requires that the Company maintain a maximum first lien secured net leverage ratio, as defined in the credit agreement as amended ("Amended Credit Agreement"), of 4.00 to 1.00 as of the last day of each fiscal quarter. As ofDecember 31, 2021 , our maximum first lien secured net leverage ratio was 1.82 to 1.00. Additionally, the Amended Credit Agreement contains certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, asset sales and acquisitions, pay dividends and make other restricted payments and enter into transactions with affiliates. We believe we are in compliance with these covenants as ofDecember 31, 2021 and we expect to remain in compliance with our debt covenants in the future. Under the Merger Agreement, we are prohibited from incurring any indebtedness or issuing or selling any debt securities or rights to acquire debt securities, subject to certain exceptions. If the Merger Agreement is terminated under certain specified circumstances as described above in this Report on Form 10-Q, we will be required to pay Entegris a termination fee of$187 million . During the first quarter of fiscal 2022, we repurchased 79 thousand shares under our share repurchase program. To date, we have funded share repurchases under our share repurchase program from our available cash on hand. The Merger Agreement limits our ability to repurchase shares of our common stock, subject to certain exceptions. Our Board of Directors authorized the initiation of our quarterly cash dividend program inJanuary 2016 , and since that time has increased the dividend to its current level of$0.46 per share. The terms of the Merger Agreement limit the Company's ability to declare and pay future quarterly cash dividends, except the Company may declare and pay one quarterly dividend of$0.46 per share with a declaration date inMarch 2022 . In addition, in the event the Entegris Transaction has not closed byDecember 14, 2022 , the Company may declare quarterly cash dividends in an amount not to exceed$0.46 per share, in a manner consistent with the Company's past practices. We believe that cash on hand, cash available from future operations, and available borrowing capacity under our Amended Credit Agreement will be sufficient to fund our operations, expected capital expenditures, and dividend payments for at least the next twelve months. OPERATING ACTIVITIES We generated$45.2 million in cash flows from operating activities in the first three months of fiscal 2022, compared to$54.0 million in the first three months of fiscal 2021. The decrease was driven by$13.6 million of changes in operating assets and liabilities, partially offset by a$4.7 million increase in Net income adjusted for non-cash reconciling items. INVESTING ACTIVITIES In the first three months of fiscal 2022, net cash used in investing activities was$13.2 million , compared to$11.6 million in the first three months of fiscal 2021. The was primarily driven by an increase in capital expenditures of$1.3 million . FINANCING ACTIVITIES In the first three months of fiscal 2022, cash flows used in financing activities were$17.0 million , compared to$25.4 million in the first three months of fiscal 2021. This was primarily driven by an increase in proceeds from the issuance of stock, related to higher stock option exercises during the first three months of fiscal 2022. CONTRACTUAL OBLIGATIONS There have been no material changes to the Company's significant contractual obligations during fiscal 2022, except as discussed below. 22
--------------------------------------------------------------------------------
INDEX
We have been operating under a multi-year supply agreement for the purchase of certain raw materials, which runs throughDecember 2022 . As ofDecember 31, 2021 , purchase obligations include an aggregate amount of$11.0 million of contractual commitments related to this agreement. In addition, we have a purchase commitment of$11.5 million throughDecember 2022 for non-water based carrier fluid. Refer to Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 for additional information regarding our contractual obligations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS We discuss our critical accounting estimates and effects of recent accounting pronouncements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . See Note 1 of "Notes to the Consolidated Financial Statements" of this Report on Form 10-Q for updates.
© Edgar Online, source
