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"), the
ongoing conflict between the Russian Federation and Ukraine and sanctions
imposed in connection therewith, 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.
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
RECENT EVENTS
During the second quarter of fiscal 2022, the Company continued its Future Forward cost optimization program to enhance operational efficiencies. The Company recorded employee severance expense of$3.0 million for the six months endedMarch 31, 2022 . Additional Future Forward initiatives may be implemented during fiscal 2022 that may result in additional expense or charges. At a special meeting of the Company's stockholders held onMarch 3, 2022 , our stockholders approved the agreement and plan of merger ("Merger Agreement") with Entegris, Inc. ("Entegris") andYosemite Merger Sub, Inc. , a wholly owned subsidiary of Entegris ("Merger Sub") under which Entegris will acquire the Company in a cash and stock transaction, which the Company had entered into onDecember 14, 2021 . 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. The Merger Agreement contains certain termination rights for both the Company and Entegris.
See the section titled "Risk Factors-Risks Relating to the Entegris Transaction" for more information regarding the risks associated with the Entegris Transaction.
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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 .
SECOND QUARTER OF FISCAL 2022 OVERVIEW
While global macroeconomic uncertainty continues worldwide and in the countries and locations in which we and our customers and suppliers operate, our business in our fiscal second quarter of 2022 showed continued resiliency overall. In our Electronic Materials business segment, which represents more than 80% of our revenue, we experienced growth in 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 an increase in revenue over the prior year, despite the decline in revenue in the wood treatment business related to the completion of final sales to customers in the second quarter of fiscal 2022 as planned due to the previously announced exit of this business. Our PIM business achieved its highest revenue quarter since the second quarter of fiscal year 2020 as the business recovers from the impacts of the Pandemic and benefits from the ramp of domestic and international demand. To date, we have not seen a significant impact from the global macroeconomic uncertainty on our ability to manufacture and deliver products to our customers, but we have continued to experience a rise in certain raw material costs and broad constraints in the global supply chain, including in logistics, and higher freight and logistics costs. KEY FINANCIAL RESULTS
Our consolidated results of operations are as follows:
(Dollars in thousands) Three Months Ended March 31,
2022 2021
Revenue $ 324,127 $ 290,528
Net income (loss) 34,571 (149,808)
Adjusted EBITDA 96,316 84,804
Adjusted EBITDA Margin 29.7 % 29.2 %
Our second quarter of fiscal 2022 consolidated revenue benefited from 13.2%
growth in the company's Electronic Materials segment and 3.4% growth in the
Performance Materials segment with stronger demand across all our Electronic
Materials businesses and PIM and QED products, global price increases, and the
addition of the materials technologies business, which represents the
acquisition of ITS. Consolidated net income increased driven by the absence of
the fiscal 2021 impairment charges recorded for the wood treatment and PIM
businesses. Adjusted EBITDA margin increased primarily due to higher revenue and
lower operating expenses.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the changes in balances on the Consolidated Statement of Income (Loss):
(Dollars in thousands) Three Months Ended March 31, Six Months Ended March 31,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue $ 324,127 $ 290,528 $ 33,599 11.6 % $ 641,173 $ 578,391 $ 62,782 10.9 %
Cost of sales 195,904 166,782 29,122 17.5 % 387,114 331,741 55,373 16.7 %
Gross profit 128,223 123,746 4,477 3.6 % 254,059 246,650 7,409 3.0 %
Operating expenses:
Research, development and
technical 12,337 12,925 (588) (4.5 %) 25,665 25,353 312 1.2 %
Selling, general and
administrative 47,111 58,538 (11,427) (19.5 %) 103,594 114,458 (10,864) (9.5 %)
Impairment charges - 208,221 (208,221) (100.0 %) 9,435 215,568 (206,133) (95.6 %)
Entegris Transaction-related
expenses 12,243 - 12,243 N/M 18,293 - 18,293 N/M
Total operating expenses 71,691 279,684 (207,993) (74.4 %) 156,987 355,379 (198,392) (55.8 %)
Operating income (loss) 56,532 (155,938) 212,470 136.3 % 97,072 (108,729) 205,801 189.3 %
Interest expense, net 9,537 9,495 42 0.4 % 19,280 19,080 200 1.0 %
Other (expense) income, net (1,445) (484) (961) (198.6 %) (1,597) 968 (2,565) (265.0 %)
Income (loss) before income
taxes 45,550 (165,917) 211,467 127.5 % 76,195 (126,841) 203,036 160.1 %
Provision for (benefit from)
income taxes 10,979 (16,109) 27,088 168.2 % 14,196 (8,563) 22,759 265.8 %
Net income (loss) $ 34,571 $ (149,808) $ 184,379 123.1 % $ 61,999 $ (118,278) $ 180,277 152.4 %
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 increases in Revenue for the three and six months endedMarch 31, 2022 compared to the three and six months endedMarch 31, 2021 were primarily driven by 13.2% and 13.1% growth in the Electronic Materials segment, respectively, due to increased demand for our products, global price increases, and the addition of the materials technologies business. Consolidated revenue also increased for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 due to increased demand for PIM and QED products, partially offset by the exit of the wood treatment business.
COST OF SALES
The increases in Cost of Sales for the three and six months endedMarch 31, 2022 compared to the three and six months endedMarch 31, 2021 were primarily due to increases in sales volume and higher manufacturing, raw material, freight and logistics costs. GROSS MARGIN Our gross margin was 39.6% for both the three and six months endedMarch 31, 2022 compared to 42.6% for both the three and six months endedMarch 31, 2021 . The decrease was primarily due to higher manufacturing, raw material, freight and logistics costs across both segments, partially offset by global price increases. 20
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SELLING, GENERAL AND ADMINISTRATIVE
The decrease in Selling, general and administrative expenses for the three
months ended
The decrease in Selling, general and administrative expenses for the six months endedMarch 31, 2022 compared to the six months endedMarch 31, 2021 was primarily due to a$6.9 million decrease in professional fees, a$4.8 million decrease in acquisition and integration related expenses and a$3.5 million settlement related to the 2019KMG-Bernuth warehouse fire. These decreases were partially offset by$2.1 million of Future Forward-related expenses and a$1.8 million increase in IT expenses.
IMPAIRMENT CHARGES
The Impairment charge for the six months endedMarch 31, 2022 related to the remaining goodwill balance of the wood treatment business. Impairment charges for the three and six months endedMarch 31, 2021 related to the impairment of goodwill for the PIM reporting unit, as well as the impairment of long-lived assets and goodwill for the wood treatment business as a result of the planned closure of the wood treatment facilities. See Notes 7 and 8 of "Notes to the Consolidated Financial Statements" of this Report on Form 10-Q for more information.
ENTEGRIS TRANSACTION-RELATED EXPENSES
These expenses, which were incurred during the three and six months ended
PROVISION FOR INCOME TAXES
The effective income tax rate for the three and six months endedMarch 31, 2022 was 24.1% and 18.6%, respectively, compared to 9.7% and 6.8% for the three and six months endedMarch 31, 2021 , respectively. The changes in our effective tax rate for the three and six months endedMarch 31, 2022 compared to the prior year was primarily attributable to a lower unfavorable impact from the goodwill impairment charges related to PIM and wood treatment and a higher tax benefit related to share-based compensation. 21
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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 March 31, Six Months Ended March 31,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Segment Revenue:
Electronic Materials $ 274,511 $ 242,547 $ 31,964 13.2 % $ 542,162 $ 479,345 $ 62,817 13.1 %
Performance Materials 49,616 47,981 1,635 3.4 % 99,011 99,046 (35) - %
Total Revenue $ 324,127 $ 290,528 $ 33,599 11.6 % $ 641,173 $ 578,391 $ 62,782 10.9 %
Adjusted EBITDA:
Electronic Materials $ 93,957 $ 81,315 $ 12,642 15.5 % $ 182,039 $ 162,071 $ 19,968 12.3 %
Performance Materials 13,901 18,750 (4,849) (25.9 %) 28,902 41,725 (12,823) (30.7 %)
Unallocated corporate
expenses (11,542) (15,261) 3,719 24.4 % (22,738) (27,436) 4,698 17.1 %
Consolidated adjusted
EBITDA $ 96,316 $ 84,804 $ 11,512 13.6 % $ 188,203 $ 176,360 $ 11,843 6.7 %
Adjusted EBITDA
margin:
Electronic Materials 34.2 % 33.5 % 70 bpts 33.6 % 33.8 % -20 bpts
Performance Materials 28.0 % 39.1 % -1,110 bpts 29.2 % 42.1 % -1,290 bpts
ELECTRONIC MATERIALS
The increases in revenue for the three and six months ended March 31, 2022
compared to the three and six months ended March 31, 2021 were driven by growth
across all segment businesses and the addition of the materials technologies
business. CMP slurries increased 4.5% and 6.5%, respectively, driven by customer
technology advancement and increased demand for the Company's products. CMP pads
increased 20.5% and 14.7%, respectively, due to increased demand and new
position wins. Electronic chemicals increased 18.7% and 16.3%, respectively,
driven by price increases, increased customer demand, and new position wins.
The increases in adjusted EBITDA for the three and six months ended March 31,
2022 compared to the three and six months ended March 31, 2021 were primarily
driven by the revenue growth across all segment businesses, partially offset by
higher manufacturing, raw material, freight and logistics costs.
The increase in adjusted EBITDA margin for the three months ended March 31, 2022
compared to the three months ended March 31, 2021 was primarily driven by
revenue growth across all segment businesses. The decrease in adjusted EBITDA
margin for the six months ended March 31, 2022 compared to the six months ended
March 31, 2021 was primarily driven by higher manufacturing, raw material,
freight and logistics costs.
PERFORMANCE MATERIALS
The increase in revenue for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was primarily driven by 17.0% and 29.0% increases in PIM and QED revenue, respectively, due to increased demand for these products. The increases were partially offset by the exit of the wood treatment business, which was completed during the second fiscal quarter of 2022.
Revenue for the six months ended
The decreases in adjusted EBITDA and adjusted EBITDA margin for the three and six months endedMarch 31, 2022 compared to the three and six months endedMarch 31, 2021 were primarily driven by the exit of the wood treatment business and higher raw material costs in the PIM business. 22
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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 impairment charges, Entegris Transaction-related expenses, Future Forward-related expenses, acquisition and integration-related expenses, net costs related to restructuring of the wood treatment business, costs related to the Pandemic, net of grants received, and costs related to theKMG-Bernuth warehouse fire, net of recoveries. 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 March 31, Six Months Ended March 31,
(In thousands) 2022 2021 2022 2021
Net income (loss) $ 34,571 $ (149,808) $ 61,999 $ (118,278)
Interest expense, net 9,537 9,495 19,280 19,080
Provision for (benefit from) income taxes 10,979 (16,109) 14,196 (8,563)
Depreciation and amortization 32,762 32,289 65,464 64,180
EBITDA 87,849 (124,133) 160,939 (43,581)
Entegris Transaction-related expenses 12,243 - 18,293 -
Impairment charges - 208,221 9,435 215,568
Future Forward-related expenses 45 - 3,024 -
Net costs related to restructuring of the wood treatment business
219 46 245 72
Costs related to the Pandemic, net of grants received - (421) - 841
Acquisition and integration-related expenses (540) 2,167 (233) 4,536
Costs related to KMG-Bernuth warehouse fire, net of
recoveries (3,500) (1,076) (3,500) (1,076)
Adjusted EBITDA $ 96,316 $ 84,804 $ 188,203 $ 176,360
Three Months Ended March 31, Six Months Ended March 31,
(In thousands) 2022 2021 2022 2021
Adjusted EBITDA:
Electronic Materials $ 93,957 $ 81,315 $ 182,039 $ 162,071
Performance Materials 13,901 18,750 28,902 41,725
Unallocated corporate expenses (11,542) (15,261) (22,738) (27,436)
Consolidated adjusted EBITDA $ 96,316 $
84,804
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LIQUIDITY AND CAPITAL RESOURCES
As ofMarch 31, 2022 , we had$237.7 million of cash and cash equivalents compared with$186.0 million as ofSeptember 30, 2021 . OnMarch 31, 2022 ,$155.0 million of cash and cash equivalents was held in foreign subsidiaries. Our total liquidity as ofMarch 31, 2022 was$587.7 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$909.8 million ($920.4 million in aggregate principal amount less$10.6 million of debt issuance costs) as ofMarch 31, 2022 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 endedMarch 31, 2022 there were no borrowings under our Revolving Credit Facility and no balance was outstanding as ofMarch 31, 2022 . 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 ofMarch 31, 2022 , our maximum first lien secured net leverage ratio was 1.70 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 ofMarch 31, 2022 and we expect to remain in compliance with our debt covenants in the future.
Under the Merger Agreement, we are prohibited from incurring any additional indebtedness or issuing or selling any debt securities or rights to acquire debt securities, subject to certain exceptions.
The Merger Agreement limits our ability to repurchase shares of our common stock, subject to certain exceptions. As a result, we did not repurchase any shares under our share repurchase program during the second quarter of fiscal 2022. 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 quarterly cash dividends in an amount not to exceed$0.46 per share, in a manner consistent with the Company's past practices, in the event the Entegris Transaction has not closed byDecember 14, 2022 .
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$110.2 million in cash flows from operating activities in the first six months of fiscal 2022, compared to$123.5 million in the first six months of fiscal 2021. The decrease was driven by$16.1 million of changes in operating assets and liabilities, partially offset by a$2.8 million increase in Net income adjusted for non-cash reconciling items.
INVESTING ACTIVITIES
In the first six months of fiscal 2022, net cash used in investing activities was$23.3 million , compared to$20.8 million in the first six months of fiscal 2021. This was primarily driven by an increase in capital expenditures of$2.2 million . FINANCING ACTIVITIES In the first six months of fiscal 2022, cash flows used in financing activities were$32.3 million , compared to$36.7 million in the first six 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 six months of fiscal 2022, partially offset by an increase in repayment of long-term debt.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the Company's significant contractual obligations during fiscal 2022, except as discussed below.
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We have been operating under a multi-year supply agreement for the purchase of certain raw materials, which runs throughDecember 2022 . As ofMarch 31, 2022 , purchase obligations include an aggregate amount of$6.8 million of contractual commitments related to this agreement. In addition, we have a purchase commitment of$4.5 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.
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