Document

EX-99.1 2 ccmp-20191118xex991.htm EXHIBIT 99.1 Document

EXHIBIT 99.1

PRESS RELEASE

Cabot Microelectronics Corporation Reports Record Revenue for Fourth Quarter and Full Fiscal Year 2019

Fourth Fiscal Quarter

•Record Revenue of $278.6 Million, $121.9 Million, or 77.8% Higher Than Last Year; Pro Forma Revenue was Essentially Flat Compared with Last Year¹

•Net Loss of $20.2 Million, $68.5 Million Lower Than Last Year; Adjusted Pro Forma Net Income of $49.8 Million, $1.1 Million, or 2.2% Lower Than Last Year¹

•Reported Net Loss Includes a Non-Cash Impairment Charge of $67.4 Million², or $50.3 Million After Tax, Associated with Management’s Decision to Cease Future Investments in KMG-Bernuth Wood Treatment Business

•Loss Per Share of $0.70, $2.54 Lower Than Last Year; Adjusted Pro Forma Diluted Earnings Per Share of $1.68, $0.05, or 2.9% Lower Than Last Year¹

•Adjusted Pro Forma EBITDA of $85.3 Million, $1.4 Million, or 1.6% Lower Than Last Year¹; Adjusted Pro Forma EBITDA of 30.6% of Revenue, 50 Basis Points Lower Than Last Year

Full Fiscal Year 2019

•Record Revenue of $1,037.7 Million, $447.6 Million, or 75.8% Higher Than Last Year; Pro Forma Revenue of $1,099.7 Million was $36.1 Million, or 3.4% Higher Than Last Year¹

•Net Income of $39.2 Million, $70.8 Million, or 64.4% Lower Than Last Year; Adjusted Pro Forma Net Income of $198.4 Million, $17.0 Million, or 9.4% Higher Than Last Year¹

•Diluted Earnings Per Share of $1.35, $2.84, or 67.8% Lower Than Last Year; Adjusted Pro Forma Diluted Earnings Per Share of $6.72, $0.57, or 9.3% Higher Than Last Year¹

•Adjusted EBITDA of $333.4 Million; Adjusted Pro Forma EBITDA of $345.4 Million, $34.4 Million, or 11.0% Higher Than Last Year¹; Adjusted Pro Forma EBITDA of 31.4% of Revenue, 220 Basis Points Higher Than Last Year

•Expecting Full Year Fiscal 2020 Adjusted EBITDA Between $350 Million and $380 Million

AURORA, IL, November 17, 2019 – Cabot Microelectronics Corporation (Nasdaq: CCMP), a leading global supplier of consumable materials to semiconductor manufacturers and pipeline companies, today reported financial results for its fourth quarter and full fiscal year 2019, which ended September 30, 2019.

Key Highlights

The company delivered record revenue of $278.6 million in the fourth fiscal quarter, essentially flat compared with the pro forma revenue in the same quarter last year. The year-over-year revenue growth in CMP pads, electronic chemicals and pipeline performance products offset lower CMP slurries revenue due to semiconductor industry softness. Adjusted pro forma EBITDA was $85.3 million, or 30.6% of revenue, in the quarter. Full year revenue was a record $1,037.7 million, $447.6 million, or 75.8% higher than last year primarily due to the company’s acquisition of KMG Chemicals, Inc. (“KMG”), and growth of its CMP pads business. The company generated $177.1 million in cash flow from operations during the year, and had $188.5 million of cash on hand and $941.8 million in total debt as of September 30, 2019. The company has made a decision to focus its future capital investments on high-growth businesses complementary to its core, and to cease future investments in the KMG-Bernuth wood treatment business; thus, it recorded a non-cash impairment charge of $67.4 million², or $50.3 million after-tax.

“We are proud of another year of record results for our company,” said David Li, President and CEO of Cabot Microelectronics Corporation. “We completed the largest acquisition in our history, which broadened our product portfolio and geographic reach, and nearly doubled our size. With some signs of stabilization in the semiconductor industry and continued robust demand for our pipeline performance products, we look forward to another year of strong performance in fiscal 2020, and remain optimistic about the bright future for our company with continued growth expectations for our revenue and profitability.”

¹ Adjusted pro forma results, including adjusted pro forma gross margin, adjusted pro forma net income, adjusted pro forma EBITDA and adjusted pro forma diluted EPS, are considered as non-GAAP financial measures by the U.S. Securities and Exchange Commission (SEC). These adjusted pro forma results are presented as if the company’s acquisition of KMG Chemicals, Inc. (“KMG”) had been consummated on October 1, 2017, and exclude the impact of non-recurring acquisition and integration related costs, acquisition-related amortization expenses, the effect of the enactment of the Tax Cuts and Jobs Act in December 2017 in the United States (“tax act”) and the newly issued final regulations related to the tax act, the effect of asset impairment and restructuring charges related to the company’s wood treatment business (recorded in fourth quarter of fiscal 2019), and certain costs related to a warehouse fire at KMG-Bernuth in Tuscaloosa, Alabama (recorded in third and fourth quarters of fiscal 2019). See “Use of Certain GAAP and Non-GAAP Adjusted Pro Forma Financial Information” below for more information about these measures. In addition, reconciliations of these non-GAAP measures to their most comparable GAAP measures and reconciliations of selected pro forma financial information to adjusted pro forma financial information are included in the financial statements portion of this press release.

²Asset impairment charge for the KMG-Bernuth wood treatment business is preliminary and subject to finalization of impairment analysis and control procedures.

Key Financial Information for Fourth Quarter of Fiscal 2019

•Revenue was $278.6 million, which is $121.9 million, or 77.8% higher than the revenue reported in the same quarter last year. Pro forma revenue was essentially flat compared to the same quarter last year as revenue growth in CMP pads, electronic chemicals and pipeline performance products offset lower CMP slurries revenue. Electronic chemicals revenue benefited from growth in advanced logic while CMP pads continued to gain traction with customers. CMP slurries revenue declined due to soft semiconductor industry demand, primarily from memory customers.

•Net loss for the quarter was $20.2 million, which is $68.5 million lower than in the same quarter last year. Excluding the impact of acquisition-related amortization and integration expenses, additional cleanup costs related to a wood treatment business warehouse fire in Tuscaloosa, Alabama, which occurred in the third quarter of fiscal 2019, and the asset impairment and restructuring charges related to the wood treatment business, adjusted pro forma net income was $49.8 million, which is $1.1 million, or 2.2%, lower than in the prior year.

•Loss per share was $0.70 this quarter, which is $2.54 lower than in the fourth quarter of fiscal 2018. Adjusted pro forma EPS was $1.68, which is $0.05, or 2.9%, lower than in the same quarter last year.

•Adjusted pro forma EBITDA was $85.3 million, which is $1.4 million, or 1.6%, lower than in the same quarter last year, primarily due to lower gross margin, which was partially offset by lower selling, general and administrative expenses. Adjusted pro forma EBITDA margin for the quarter was 30.6%, compared to 31.1% in the same quarter last year.

Electronic Materials – Revenue was $217.5 million, which is $8.0 million, or 3.6%, lower than pro forma revenue in the same quarter last year. CMP pads and electronic chemicals delivered results that were 1.8% and 1.5% higher, respectively, than in the same quarter last year. CMP slurries revenue declined 7.7% from last year’s quarter, primarily due to softer industry conditions and lower demand from memory customers. The Electronic Materials segment adjusted EBITDA was $74.3 million, or 34.2% of revenue.

Performance Materials – Revenue was $61.2 million for the quarter, which is $7.8 million, or 14.7%, higher than pro forma revenue in the prior year’s quarter. The increase was driven by higher revenue from pipeline performance products, which was partially offset by a decline in QED revenue. The Performance Materials segment adjusted EBITDA was $28.2 million, or 46.1% of revenue.

Asset Impairment Charge

During the quarter, the company made a decision to further focus its future capital investments on high-growth core businesses such as pipeline performance products, CMP slurries and pads and electronic chemicals. As a result, it has decided to cease future investment in the wood treatment business and not construct a new production facility to replace operations in Matamoros, Mexico and Tuscaloosa, Alabama. The company is considering various options regarding this business. This decision has triggered a non-cash impairment charge of $67.4

million, or $50.3 million after tax, that negatively impacted fourth fiscal quarter and full year reported results; this amount is preliminary and subject to finalization of procedures.

Key Financial Information for Full Fiscal Year 2019

•Revenue was $1,037.7 million, which is $447.6 million, or 75.8% higher than the revenue reported in fiscal year 2018. Pro forma revenue of $1099.7 million was $36.1 million, or 3.4%, higher compared to last year. Results benefited from revenue growth in CMP pads and pipeline performance products, but were offset by lower CMP slurries revenue. CMP slurries revenue declined due to soft semiconductor industry demand, primarily from memory and foundry customers.

•Net income was $39.2 million, which is $70.8 million, or 64.4% lower than in fiscal year 2018. Excluding the impact of acquisition-related amortization and integration expenses, an adjustment related to newly issued final regulations for the tax act, additional cleanup costs related to the wood treatment business warehouse fire in Tuscaloosa, Alabama, and the asset impairment and restructuring charges related to the wood treatment business, adjusted pro forma net income was $198.4 million, which is $17.0 million, or 9.4%, higher than in the prior year.

•Diluted EPS was $1.35, which is $2.84, or 67.8% lower than in fiscal year 2018. Adjusted pro forma EPS was $6.72, which is $0.57, or 9.3%, higher than last year.

•Adjusted pro forma EBITDA was $345.4 million, which is $34.4 million, or 11.0% higher than in fiscal year 2018, primarily due to lower selling, general and administrative expenses. Adjusted pro forma EBITDA margin was 31.4%.

Guidance for First Quarter and Full Fiscal Year 2020

For the first quarter of fiscal 2020, the company currently expects total revenue to be approximately flat compared to the company’s revenue for the fourth quarter of fiscal 2019. Electronic Materials revenue is expected to be approximately flat sequentially and Performance Materials revenue is expected to be approximately flat to up low single digits sequentially.

The company currently expects full fiscal year 2020 adjusted EBITDA to be between $350 million and $380 million. Additional current expectations are provided on slide 10 in the related slide presentation.

RELATED SLIDE PRESENTATION

A slide presentation related to this press release will be available at ir.cabotcmp.com in the Quarterly Results section of the Investor Relations center at approximately the same time that this press release is issued.

CONFERENCE CALL

Cabot Microelectronics Corporation’s quarterly earnings conference call will be held at 10:00 a.m. Eastern Time (9:00 a.m. Central Time) on Monday, November 18. The conference call will be available via live webcast and replay from the company’s website, www.cabotcmp.com, or by phone at (844) 825-4410. Callers outside the U.S. may dial (973) 638-3236. The conference code for the call is 1096337. A transcript of the formal comments made during the conference call will also be available in the Investor Relations section of the company’s website.

ABOUT CABOT MICROELECTRONICS CORPORATION

Cabot Microelectronics Corporation, headquartered in Aurora, Illinois, is a leading global supplier of consumable materials to semiconductor manufacturers and pipeline companies. The company’s products play a critical role in the production of advanced semiconductor devices, helping to enable the manufacture of smaller, faster and more complex devices by its customers. Cabot Microelectronics Corporation is also a leading provider of performance materials to pipeline operators. The company's mission is to create value by delivering high-performing and innovative solutions that solve its customers’ challenges. The company has approximately 1,900 employees globally. For more information about Cabot Microelectronics Corporation, visit www.cabotcmp.com, or contact Colleen Mumford, Vice President, Communications and Marketing, at 630-499-2600.

USE OF CERTAIN GAAP AND NON-GAAP ADJUSTED PRO FORMA FINANCIAL INFORMATION

The company presented the following measures considered as non-GAAP by the SEC: adjusted pro forma EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted pro forma EBITDA margin, adjusted pro forma net income and adjusted pro forma diluted earnings per share. These adjusted pro forma results are presented as if the company’s acquisition of KMG Chemicals, Inc. (“KMG”), had been consummated on October 1, 2017 and exclude the impact of non-recurring acquisition and integration related costs, acquisition related amortization expenses, the adjustments related to the effect of the enactment of the Tax Cuts and Jobs Act in December 2017 in the United States (“tax act”) and the newly issued final regulations related to the tax act, the effect of asset impairment and restructuring charges related to the company’s wood treatment business, and certain costs related to a warehouse fire at KMG-Bernuth in Tuscaloosa, Alabama. The non-GAAP adjusted pro forma financial information provided in this press release is a supplement to, and not a substitute for, the company’s financial results presented in accordance with U.S. GAAP. These non-GAAP adjusted pro forma financial measures are provided to enhance the investor's understanding about the company's ongoing operations. Specifically, the company believes the impact of the adjustments related to the effect of the enactment of the Tax Cuts and Jobs Act in December 2017 in the United States (“tax act”) and the newly issued final regulations related to the tax act, KMG acquisition and integration-related expenses, the effect of asset impairment and restructuring charges related to the company’s wood treatment business, certain costs related to a warehouse fire at KMG-Bernuth in Tuscaloosa, Alabama, and acquisition-related amortization expenses are not indicative of its core operating results, and thus presents these certain metrics excluding these effects. The presentation of non-GAAP adjusted pro forma financial information is not meant to be considered in isolation or as a substitute for results prepared and presented in accordance with U.S. GAAP. Reconciliations of non-GAAP measures to their most comparable GAAP measures and reconciliations of pro forma financial information to adjusted pro forma financial information are included in the financial statements portion of this press release.

The company has not quantitatively reconciled its guidance for adjusted EBITDA to its most comparable GAAP measure because the company does not provide specific guidance for the various reconciling items as certain items that impact this measure have not occurred, are out of the company’s control, or cannot be reasonably predicted. Accordingly, a reconciliation to the nearest GAAP financial metric is not available without unreasonable effort. Please note that the unavailable reconciling items could significantly impact the company’s results.

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 the SEC Regulation G and Item 10(e) of Regulation S-K.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements, which address a variety of subjects including, for example, future sales and operating results; growth or contraction, and trends in the industry and markets in which the Company participates; the acquisition of, investment in, or collaboration with other entities, including the Company’s acquisition of KMG Chemicals, Inc. (“KMG”), and the expected benefits and synergies of such acquisition; 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; competitive landscape; the Company's supply chain; natural disasters; various economic or political factors and international or national events, including related to 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; the operation of facilities by Cabot Microelectronics; the Company's management; foreign exchange fluctuation; the Company's current or future tax rate, including the effects of the Tax Cuts and Jobs Act in the United States (“tax act”); cybersecurity threats; financing facilities and related debt, pay off or payment of principal and interest, and compliance with covenants and other terms; and, 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 Cabot Microelectronics’ beliefs, plans and expectations, are forward-looking statements. Such statements are based on current expectations of Cabot Microelectronics’ 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 Cabot Microelectronics’ filings with the Securities and Exchange Commission (“SEC”), including the risk factors contained in Cabot Microelectronics’ Annual Report on Form 10-K for the fiscal year ended September 30, 2018 and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. Except as required by law, Cabot Microelectronics undertakes no obligation to update forward-looking statements made by it to reflect new information, subsequent events or circumstances.

Contact:

Colleen Mumford

Corporate Relations Director

Cabot Microelectronics Corporation

(630) 499-2600

CABOT MICROELECTRONICS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited and amounts in thousands, except per share amounts)


	Quarter Ended										Year Ended
	September 30, 2019		June 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Revenue	$	278,645	$	271,882	$	156,729	$	1,037,696	$	590,123

Cost of sales	165,535		156,492		72,383		595,043		276,018

Gross profit	113,110		115,390		84,346		442,653		314,105

Operating expenses:

Research, development & technical	12,698		12,191		13,372		51,707		51,950

Selling, general & administrative	50,663		50,959		26,986		213,078		102,037

Asset impairment charges	67,372		—		—		67,372		—

Total operating expenses	130,733		63,150		40,358		332,157		153,987

Operating income (loss)	(17,623)		52,240		43,988		110,496		160,118

Interest expense	12,703		12,757		102		45,681		2,905

Interest income	342		417		1,161		2,346		4,409

Other income (expense), net	(1,158)		(472)		(24)		(4,055)		89

Income (loss) before income taxes	(31,142)		39,428		45,023		63,106		161,711

Provision for income taxes (benefit)	(10,899)		20,550		(3,195)		23,891		51,668

Net income (loss)	$	(20,243)	$	18,878	$	48,218	$	39,215	$	110,043


Basic earnings (loss) per share	$	(0.70)	$	0.65	$	1.89	$	1.37	$	4.31

Weighted average basic shares outstanding	29,084		29,064		25,520		28,571		25,518

Diluted earnings (loss) per share	$	(0.70)	$	0.64	$	1.84	$	1.35	$	4.19

Weighted average diluted shares outstanding	29,084		29,568		26,213		29,094		26,243

CABOT MICROELECTRONICS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited and amounts in thousands)


	September 30, 2019		September 30, 2018
ASSETS:

Current assets:
Cash and cash equivalents	$	188,495	$	352,921
Accounts receivable, net	146,113		75,886
Inventories, net	145,278		71,926
Other current assets	28,670		22,048
Total current assets	508,556		522,781

Property, plant and equipment, net	276,818		111,403
Other long-term assets	1,476,392		146,789
Total assets	$	2,261,766	$	780,973


LIABILITIES AND STOCKHOLDERS' EQUITY:

Current liabilities:
Accounts payable	$	54,529	$	18,171
Current portion of long-term debt	13,313		—
Accrued expenses, income taxes payable and other current liabilities	103,618		82,983
Total current liabilities	171,460		101,154

Long-term debt, net of current portion	928,463		—
Other long-term liabilities	181,466		13,127
Total liabilities	1,281,389		114,281

Stockholders' equity	980,377		666,692
Total liabilities and stockholders' equity	$	2,261,766	$	780,973

CABOT MICROELECTRONICS CORPORATION

Reconciliation of GAAP Net income to Non-GAAP Adjusted EBITDA

(Unaudited and amounts in thousands, except per share and percentage amounts)


	Three Months Ended									Twelve Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Net income (loss)	$	(20,243)		$	48,218		$	39,215		$	110,043
Interest expense	12,703			102			45,681			2,905
Interest income	(342)			(1,161)			(2,346)			(4,409)
Income taxes (benefit)	(10,899)			(3,195)			23,891			51,668
Depreciation & amortization	28,116			6,349			98,592			25,876
EBITDA*	$	9,335		$	50,313		$	205,033		$	186,083
Acquisition and integration-related expenses	1,601			3,861			34,709			3,861
Charge for fair value write-up of acquired inventory sold	—			—			14,869			—
Costs related to KMG-Bernuth fire	5,455			—			9,905			—
Costs related to restructuring of wood treatment business	1,530			—			1,530			—
Charges related to asset impairment of wood treatment business	67,372			—			67,372			—
Adjusted EBITDA**	$	85,293		$	54,174		$	333,418		$	189,944
Adjusted EBITDA margin	30.6		%	34.6		%	32.1		%	32.2		%

* EBITDA represents earnings before interest, taxes, depreciation and amortization.

** Adjusted EBITDA is calculated by excluding items from EBITDA that are believed to be infrequent or not indicative of the company's continuing operating performance.

SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following Unaudited Pro Forma Condensed Combined Financial Information is presented to illustrate the estimated effects of the company’s acquisition of KMG (the “Acquisition”), which was consummated on November 15, 2018 (the “Acquisition Date”), based on the historical results of operations of Cabot Microelectronics and KMG. The following Unaudited Pro Forma Condensed Combined Statements of Income for the three and twelve months ended September 30, 2019 and September 30, 2018 are based on the historical financial statements of Cabot Microelectronics and KMG after giving effect to the Acquisition, and the assumptions and adjustments described in the accompanying notes to these Unaudited Pro Forma Condensed Combined Statements of Income.Unaudited Pro Forma Condensed Combined Financial Information is presented to illustrate the estimated effects of the company’s acquisition of KMG (the “Acquisition”), which was consummated on November 15, 2018 (the “Acquisition Date”), based on the historical results of operations of Cabot Microelectronics and KMG. See Note 1, Background and Basis of Presentation, and Note 4, Business Combination, to the consolidated financial statements for additional information on the Acquisition. The following Unaudited Pro Forma Condensed Combined Statements of Income for the three and nine months ended June 30, 2019 and 2018 are based on the historical financial statements of Cabot Microelectronics and KMG after giving effect to the Acquisition, and the assumptions and adjustments described in the accompanying notes to these Unaudited Pro Forma Condensed Combined Statements of Income.

The historical Cabot Microelectronics Consolidated Statements of Income for the three and twelve months ended September 30, 2019 and September 30, 2018 were derived from the consolidated financial statements included elsewhere in this release. The historical KMG Consolidated Statements of Income for the twelve months ended September 30, 2019, as well as the historical KMG Consolidated Statements of Income for the three and twelve months ended September 30, 2018 includes information derived from KMG’s books and records. Prior to the Acquisition, KMG was on a July 31st fiscal year end reporting cycle. These pro forma financials include actual KMG’s pre-acquisition results with the months aligned to Cabot Microelectronics’ fiscal periods, and therefore, they do not align with consolidated financial statements included in KMG’s Quarterly or Annual Reports on Form 10-Q or 10-K.

The Unaudited Pro Forma Condensed Combined Statements of Income are presented as if the Acquisition had been consummated on October 1, 2017, the first business day of our 2018 fiscal year, and combine the historical results of Cabot Microelectronics and KMG, which is consistent with internal management reporting, after primarily giving effect to the following assumptions and adjustments:

• Application of the acquisition method of accounting;

• Elimination of transaction costs incurred in connection with the Acquisition;

• Adjustments to reflect the new financing arrangements entered into and legacy financing arrangements retired in connection with the Acquisition;

• The exchange of 0.2000 share(s) of Cabot Microelectronics common stock for each share of KMG common stock; and

• Conformance of accounting policies.

The Unaudited Pro Forma Condensed Combined Financial Information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized estimated fair values at the Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. This allocation was initially completed as of November 15, 2018. The allocation may be adjusted for up to one-year post closing.

The Unaudited Pro Forma Condensed Combined financial information has been prepared on the basis of SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying Unaudited Pro Forma Condensed Combined Statements of Income do not reflect any additional anticipated synergies, operating efficiencies, cost savings, or any integration costs that may result from the Acquisition.

The historical consolidated financial information has been adjusted in the accompanying Unaudited Pro Forma Condensed Combined Statements of Income to give effect to unaudited pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of the combined company. As a result, under SEC Regulation S-X Article 11, certain non-recurring expenses such as deal costs and compensation expenses related to severance or accelerated stock compensation and certain non-cash costs related to the fair value step-up of inventory are eliminated from pro forma results in the periods presented. Certain recurring historical KMG expenses related to depreciation, amortization, financing costs and costs of sales have been adjusted as if the Acquisition had occurred on October 1, 2017.

The Unaudited Pro Forma Condensed Combined Financial Information, including the related notes included herein, should be read in conjunction with Cabot Microelectronics’ Current Report on Form 8-K/A filed on January 30, 2019, as well as our consolidated financial statements included in this release and the historical consolidated financial statements and related notes of Cabot Microelectronics and KMG, which are available to the public at the SEC’s website at www.sec.gov.

CABOT MICROELECTRONICS CORPORATION

Unaudited Pro Forma Condensed Combined Statement of Income

For the Three and Twelve Months Ended September 30, 2019 and September 30, 2018

(in thousands, except per share data)


	Three Months Ended						Twelve Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018

Revenue	$	278,645	$	278,869	$	1,099,674	$	1,063,563
Cost of sales	165,757		154,989		623,303		598,049
Gross profit	112,888		123,880		476,371		465,514
Operating expenses:
Research, development and technical	12,698		13,372		51,707		51,950
Selling, general and administrative expenses	55,322		49,560		221,758		204,875
Asset impairment charges	51,186		—		51,186		—
Total operating expenses	119,206		62,932		324,651		256,825
Operating income (loss)	(6,318)		60,948		151,720		208,689
Interest expense	12,844		13,251		53,743		51,804
Interest income	342		1,234		2,397		4,493
Other income (expense), net	(1,158)		(184)		(4,313)		(1,073)
Income (loss) before income taxes	(19,978)		48,747		96,061		160,305
Provision for income taxes (benefit)	(7,885)		(4,200)		26,388		33,925
Net income (loss)	$	(12,093)	$	52,947	$	69,673	$	126,380
Basic earnings (loss) per share	$	(0.42)	$	1.84	$	2.40	$	4.40
Weighted average basic shares outstanding	29,084		28,757		28,979		28,755
Diluted earnings (loss) per share	$	(0.42)	$	1.80	$	2.36	$	4.29
Weighted average diluted shares outstanding	29,084		29,450		29,502		29,480

CABOT MICROELECTRONICS CORPORATION

Unaudited Pro Forma Condensed Combined Statement of Income

For the Three Months Ended September 30, 2019

(in thousands, except per share data)


	Cabot Microelectronics
	Three Months Ended September 30, 2019		Pro Forma Adjustments (1)		Pro Forma Combined

Revenue	$	278,645	$	—	$	278,645
Cost of sales	165,535		222		165,757
Gross profit	113,110		(222)		112,888
Operating expenses:
Research, development and technical	12,698		—		12,698
Selling, general and administrative expenses	50,663		4,659		55,322
Asset impairment charges	67,372		(16,186)		51,186
Total operating expenses	130,733		(11,527)		119,206
Operating income (loss)	(17,623)		11,305		(6,318)
Interest expense	12,703		141		12,844
Interest income	342				342
Other income (expense), net	(1,158)		—		(1,158)
Income (loss) before income taxes	(31,142)		11,164		(19,978)
Provision for income taxes (benefit)	(10,899)		3,014		(7,885)
Net income (loss)	$	(20,243)	$	8,150	$	(12,093)

Basic earnings (loss) per share	$	(0.70)			$	(0.42)

Weighted average basic shares outstanding	29,084				29,084

Diluted earnings (loss) per share	$	(0.70)			$	(0.42)

Weighted average diluted shares outstanding	29,084				29,084

¹ Pro forma adjustments are related to non-recurring items directly attributable to the transaction as well as recurring differences related to amortization or financing costs that were included as if the companies were combined as of October 1, 2017.

CABOT MICROELECTRONICS CORPORATION

Unaudited Pro Forma Condensed Combined Statement of Income

For the Year Ended September 30, 2019

(in thousands, except per share data)


	Cabot Microelectronics (1)		KMG Chemicals (2)
	Year Ended September 30, 2019		October 1, 2018 to November 14, 2018		Presentation Reclassification (3)		Pro Forma Adjustments (4)		Pro Forma Combined

Revenue	$	1,037,696	$	61,978	$	—	$	—	$	1,099,674
Cost of sales	595,043		36,534		4,741		(13,015)		623,303
Gross profit	442,653		25,444		(4,741)		13,015		476,371
Operating expenses:
Distribution expenses	—		4,741		(4,741)		—		—
Research, development and technical	51,707		—		—		—		51,707
Selling, general and administrative expenses	213,078		40,504		—		(31,824)		221,758
Amortization of intangibles	—		1,943		—		(1,943)		—
Asset impairment charges	67,372		—		—		(16,186)		51,186
Total operating expenses	332,157		47,188		(4,741)		(49,953)		324,651
Operating income (loss)	110,496		(21,744)		—		62,968		151,720
Interest expense	45,681		8,537		—		(475)		53,743
Interest income	2,346		51		—		—		2,397
Derivative fair value gain	—		567		—		(567)		—
Other income (expense), net	(4,055)		(258)		—		—		(4,313)
Income (loss) before income taxes	63,106		(29,921)		—		62,876		96,061
Provision for income taxes (benefit)	23,891		(3,722)		—		6,219		26,388
Net income (loss)	$	39,215	$	(26,199)	$	—	$	56,657	$	69,673

Basic earnings per share	$	1.37	$	—					$	2.40

Weighted average basic shares outstanding	28,571		—						28,979

Diluted earnings per share	$	1.35	$	—					$	2.36

Weighted average diluted shares outstanding	29,094		—						29,502

¹Includes heritage Cabot Microelectronics from October 1, 2018 to June 30, 2019 and heritage KMG from November 15, 2018 to June 30, 2019. On November 15, 2018, the Acquisition was completed and actual combined company results are included.

² Heritage KMG results that occurred prior to the Acquisition on November 15, 2018.

³ Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot Microelectronics’ accounting policies.

⁴ Certain pro forma adjustments related to depreciation, amortization, financing costs and costs of sales have been made for the October 1, 2018 to September 30, 2019 period assuming that the Acquisition occurred on October 1, 2017. Additionally, nonrecurring pro forma adjustments have been made for deal costs, compensation expenses related to severance or accelerated stock compensation, and the fair value step-up of inventory directly attributable throughout the twelve-month period.

CABOT MICROELECTRONICS CORPORATION

Unaudited Pro Forma Condensed Combined Statement of Income

For the Three Months Ended September 30, 2018

(in thousands, except per share data)


	Cabot Microelectronics		KMG Chemicals (1)
	Three Months Ended September 30, 2018		Three Months Ended September 30, 2018		Presentation Reclassification (2)		Pro Forma Adjustments (3)		Pro Forma Combined

Revenue	$	156,729	$	122,140	$	—	$	—	$	278,869
Cost of sales	72,383		70,335		8,956		3,315		154,989
Gross profit	84,346		51,805		(8,956)		(3,315)		123,880
Operating expenses:
Distribution expenses	—		8,956		(8,956)		—		—
Research, development and technical	13,372		—		—		—		13,372
Selling, general and administrative expenses	26,986		18,740				3,834		49,560
Amortization of intangibles	—		3,854		—		(3,854)		—
Total operating expenses	40,358		31,550		(8,956)		(20)		62,932
Operating income	43,988		20,255		—		(3,295)		60,948
Interest expense	102		4,166		—		8,983		13,251
Interest income	1,161		73		—		—		1,234
Loss on the extinguishment of debt	—		355		—		(355)		—
Derivative fair value gain	—		353		—		(353)		—
Other income (expense), net	(24)		(160)		—		—		(184)
Income before income taxes	45,023		16,000		—		(12,276)		48,747
Provision for income taxes (benefit)	(3,195)		3,662		—		(4,667)		(4,200)
Net income	$	48,218	$	12,338	$	—	$	(7,609)	$	52,947
Basic earnings per share	$	1.89	$	0.80					$	1.84
Weighted average basic shares outstanding	25,520		15,506						28,757
Diluted earnings per share	$	1.84	$	0.77					$	1.80
Weighted average diluted shares outstanding	26,213		15,992						29,450

¹ Shares outstanding for KMG are calculated from the KMG fiscal year FY2018 10K ended July 31, 2018 and the nine month ended April 30, 2018. They are intended for illustrative purposes only and do not impact pro forma EPS calculations at right. Three months ended September 30, 2018 KMG share calculations were not available.

² Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot

Microelectronics’ accounting policies.

³ Pro forma adjustments are related to non-recurring items directly attributable to the transaction as well as recurring differences related to depreciation, amortization, compensation or financing costs that were included as if the companies were combined as of October 1, 2017.

CABOT MICROELECTRONICS CORPORATION

Unaudited Pro Forma Condensed Combined Statement of Income

For the Year Ended September 30, 2018

(in thousands, except per share data)


	Cabot Microelectronics		KMG Chemicals (1)
	Year Ended September 30, 2018		Year Ended September 30, 2018		Presentation Reclassification (2)		Pro Forma Adjustments (3)		Pro Forma Combined

Revenue	$	590,123	$	473,440	$	—	$	—	$	1,063,563
Cost of sales	276,018		272,517		35,939		13,575		598,049
Gross profit	314,105		200,923		(35,939)		(13,575)		465,514
Operating expenses:
Distribution expenses	—		35,939		(35,939)		—		—
Research, development and technical	51,950		—		—		—		51,950
Selling, general and administrative expenses	102,037		62,563				40,275		204,875
Amortization of intangibles	—		14,690		—		(14,690)		—
Total operating expenses	153,987		113,192		(35,939)		25,585		256,825
Operating income	160,118		87,731		—		(39,160)		208,689
Interest expense	2,905		18,899		—		30,000		51,804
Interest income	4,409		84		—		—		4,493
Loss on the extinguishment of debt	—		6,858		—		(6,858)		—
Derivative fair value gain	—		5,685		—		(5,685)		—
Other income (expense), net	89		(1,162)		—		—		(1,073)
Income before income taxes	161,711		66,581		—		(67,987)		160,305
Provision for income taxes	51,668		57		—		(17,800)		33,925
Net income	$	110,043	$	66,524	$	—	$	(50,187)	$	126,380
Basic earnings per share	$	4.31	$	4.52					$	4.40
Weighted average basic shares outstanding	25,518		14,708						28,755
Diluted earnings per share	$	4.19	$	4.40					$	4.29
Weighted average diluted shares outstanding	26,243		15,111						29,480

¹ Shares outstanding for KMG are calculated from the KMG fiscal year FY2018 10K ended July 31, 2018. They are intended for illustrative purposes only and do not impact pro forma EPS calculations at right. Twelve months ended September 30, 2018 KMG share calculations were not available.

² Represents the reclassification of KMG distribution expenses from operating expenses to cost of sales, in order to conform with Cabot

Microelectronics’ accounting policies.

CABOT MICROELECTRONICS CORPORATION

Summary of Pro Forma Adjustments

(in thousands, except per share data)


	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Year Ended September 30, 2019		Year Ended September 30, 2018
Impact to cost of sales:
Depreciation and amortization, net(a)	$	222	$	3,315	$	1,855	$	13,575
Inventory step-up(b)	—		—		(14,870)		—
Impact to cost of sales	$	222	$	3,315	$	(13,015)	$	13,575

Impact to operating expense:
Depreciation and amortization step up(a)	6,004		12,183		30,689		48,806
Asset impairment true up(c)	(16,186)		—		(16,186)		—
Compensation expense(d)	(740)		66		(38,099)		263
Deal costs(e)	(605)		(8,415)		(24,414)		(8,794)
Historical KMG amortization in other operating expenses removal(a)	—		(3,854)		(1,943)		(14,690)
Impact to operating expense	$	(11,527)	$	(20)	$	(49,953)	$	25,585

Impact to other expense:
Loss on the extinguishment of debt(f)
Derivative fair value gain(f)	—		(355)		—		(6,858)
Impact to other expense	—		353		(567)		5,685
	$	—	$	(2)	$	(567)	$	(1,173)
Impact to interest, net:
Interest expense(g)
Impact to interest	141		8,983		(475)		30,000
	$	141	$	8,983	$	(475)	$	30,000

Adjustments included in the accompanying Unaudited Pro Forma Condensed Combined Statements of Income are as follows:

a.Depreciation and amortization expense are adjusted by removing depreciation and amortization associated with legacy KMG assets and assigning a pro forma expense based on the fair value of the assets on the date of the Acquisition. For periods after the date of the Acquisition, there is no pro forma adjustment for Depreciation and actual booked depreciation is reflected on a straight-line basis. Depreciation costs are allocated to costs of sales and selling, general and administrative expenses based on historical KMG allocations. Amortization costs are allocated to costs of sales or selling, general and administrative expense based on the use of the asset, where applicable.

b.Cost of sales is impacted by increased inventory balance caused by the non-cash impact of the step up to fair value of the inventory. The incremental costs of sales driven by the inventory step-up during the period have been removed.

c.During the three months ended September 30, 2019, an impairment charge in the amount of $67.4 million was incurred related to the Wood Treatment business, which was acquired from KMG. While still within the one-year remeasurement period after the Acquisition Date, it was determined that the facts and circumstances that triggered the impairment were not known, or could have been reasonably known, at the time of the transaction. Further, it was determined that the impairment charge was not directly attributable to the transaction and therefore, would not be wholly removed for purposes of pro forma reporting. Since the impairment charge taken for September 2019 reported results was based on the actual Acquisition Date while the pro forma financials are based upon an October 1, 2017 acquisition date, the pro forma adjustment of $16.2 million to reduce the impairment charge to $51.2 million for pro forma results is required. This adjustment reflects the difference between amortization and depreciation expense recognized post-acquisition from the earlier pro forma acquisition date vs. the amortization and depreciation expense recognized in reported results from the actual Acquisition Date. The impairment adjustment is tax effected at 25.3%, which considers the taxing jurisdictions where the impaired assets are held (United States and Mexico) and the period for which the impairment is deemed to have occurred (the three months ended September 30, 2019).

d.Directly attributable and non-recurring compensation expense related to non-recurring retention expenses and stock award vesting directly attributable to the Acquisition are removed for pro forma purposes. For KMG stock awards that were replaced by Cabot stock awards in connection with the Acquisition, the vesting for on-going service expenses are added as a pro forma adjustment.

e.The elimination of non-recurring deal costs incurred in connection with the Acquisition.

f.As a result of the Acquisition, there were non-recurring costs incurred by KMG as a result of retiring old debt. The costs associated with retiring the old debt facility and other financial instruments are removed for pro forma purposes. These instruments were retired as a result of the Acquisition and are not included in the pro forma results, which are presented as if the Acquisition had occurred on October 1, 2017.

g.Changes in interest expense as a result of financing associated with the Acquisition. The adjustments remove legacy KMG interest costs, including unused revolver fees and adds the costs associated with the new financing facilities as if the Acquisition occurred on October 1, 2017. The calculation of interest expense considers the changing LIBOR rate and uses monthly period end averages from October 1, 2017 to September 30, 2019.

We calculated the income tax effect of the pro forma adjustments using a 21.4% and 23.4% tax rate, which represent the weighted average statutory tax rate for the years ended September 30, 2019 and September 30, 2018, respectively.

Additionally, for the 2018 periods presented, we calculated the unaudited pro forma weighted average number of basic shares outstanding by adding the Cabot Microelectronics weighted average number of basic shares outstanding from the share amounts disclosed in the historical Quarterly and Annual reports on Form 10-Q and 10-K to the amount of shares issued in connection with the Acquisition, as if the shares were held for the entire period.

We calculated the unaudited pro forma weighted average number of diluted shares outstanding by adding the number of shares issued in the Acquisition to the amount disclosed in the historical Cabot Microelectronics Quarterly and Annual Reports on Form 10-Q and 10-K.

The basic and diluted EPS calculation takes pro forma net income divided by the applicable number of shares outstanding.

Quarter over quarter and year over year numbers may not always roll forward when comparing to prior period Pro Forma reported results. Variances can be attributed to: changes in purchase price allocation values and useful lives, differences in the allocation between cost of sales and selling, general and administrative expenses, tax rate assumptions and interest rate calculations.

Reconciliation of Pro Forma and Non-GAAP Adjusted Pro Forma Information

The company reports its financial results in accordance with U.S. GAAP. However, management believes that certain non-GAAP financial measures that reflect the way that management evaluates the business may provide investors with additional information regarding the company’s results, trends and ongoing performance on a comparable basis. We refer to these measures “Adjusted Pro Forma”, which begin with Pro Forma results that are prepared in accordance with SEC Regulation S-X Article 11 and are included above. These results are then adjusted for the following additional items:

•Removal of amortization of acquisition related intangibles, since management believes that these costs are not indicative of the company’s core operating performance.

•Removal of the difference between reported GAAP interest expense and Article 11 pro forma interest expense, which is prepared as if the acquisition occurred on October 1, 2017. This adjustment is made for periods when Cabot Microelectronics owned KMG for the full reporting period.

•Removal of integration expenses, as they are non-recurring in nature.

•Adjustment for U.S. Tax Reform, which represents a significant non-recurring item affecting comparability among periods.

•Removal of certain costs related to a warehouse fire at KMG-Bernuth.

•Removal of certain costs related to the restructuring of wood treatment business.

•Removal of charges related to asset impairment of wood treatment business.

Reconciliations for these items are provided in the tables below.


CABOT MICROELECTRONICS CORPORATION
Unaudited Reconciliation of Certain Pro Forma Financial Measures to Certain Non-GAAP Adjusted Pro Forma Financial Measures
(Unaudited and amounts in thousands, except per share and percentage amounts)

Unaudited Reconciliation of Pro Forma Net Income to Non-GAAP Adjusted Pro Forma Net Income

	Three Months Ended						Twelve Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Pro forma net income (loss)	$	(12,093)	$	52,947	$	69,673	$	126,380
Adjustments (net of tax):
Amortization of acquisition related intangibles	17,997		12,137		70,913		48,921
Integration expenses	201		199		1,913		199
Costs related to KMG-Bernuth warehouse fire	4,235		—		7,683		—
Costs related to restructuring of wood treatment business	1,075		—		1,075		—
Charges related to asset impairment of wood treatment business	38,215		—		38,215		—
Interest expense	111		—		—		—
U. S tax reform	36		(14,403)		8,905		5,852
Adjusted pro forma net income	$	49,777	$	50,880	$	198,377	$	181,352


Unaudited Reconciliation of Pro Forma Revenue to Non-GAAP Adjusted Pro Forma Gross Profit/ Gross Margin

	Three Months Ended													Twelve Months Ended
	September 30, 2019						September 30, 2018						September 30, 2019					September 30, 2018
Pro forma revenue	$	278,645			$	278,869			$	1,099,674				$	1,063,563
Cost of sales	165,757				154,989				623,303					598,049
Gross profit/margin	112,888		40.5	%	123,880		44.4	%	476,371		43.3	%		465,514		43.8	%
Adjustments:
Amortization of acquisition related intangibles	3,470		1.2	%	3,470		1.3	%	13,879		1.3	%		13,806		1.3	%
Costs related to KMG-Bernuth warehouse fire	5,294		1.9	%	—		—	%	9,494		0.9	%		—		—	%
Costs related to restructuring of wood treatment business	1,530		0.6	%	—		—	%	1,530		0.1	%		—		—	%
Adjusted pro forma gross profit/gross margin	$	123,182	44.2	%	$	127,350	45.7	%	$	501,274	45.6	%		$	479,320	45.1	%


Unaudited Reconciliation of Pro Forma Diluted Earnings (Loss) Per Share to Non-GAAP Adjusted Pro Forma Diluted Earnings Per Share

	Three Months Ended							Twelve Months Ended
	September 30, 2019				September 30, 2018			September 30, 2019		September 30, 2018
Pro forma diluted earnings (loss) per share	$	(0.42)	$	1.80		$	2.36	$	4.29
Adjustments (net of tax):
Amortization of acquisition related intangibles	0.62		0.41			2.40		1.65
Integration expenses	0.01		0.01			0.06		0.01
Costs related to KMG-Bernuth warehouse fire	0.15		—			0.26		—
Costs related to restructuring of wood treatment business	0.04		—			0.04		—
Charges related to asset impairment of wood treatment business	1.31		—			1.30		—
Interest expense	—		—			—		—
U. S tax reform	—		(0.49)			0.30		0.20
Adjustment to weighted average diluted shares outstanding*	(0.03)		—			—		—
Adjusted pro forma diluted earnings per share	$	1.68	$	1.73		$	6.72	$	6.15

*This line represents the effect of anti-dilution vs. dilution of potentially dilutive securities (exercise of stock options and vesting of restricted stock units), accounting for the net loss for pro forma results vs. the net gain for adjusted pro forma results.


Unaudited Reconciliation of Pro Forma Revenue to Non-GAAP Adjusted Pro Forma EBITDA/ EBITDA Margin

	Three Months Ended															Twelve Months Ended
	September 30, 2019						September 30, 2018						September 30, 2019					September 30, 2018
Pro forma net income (loss)	$	(12,093)			$	52,947			$	69,673				$	126,380
Interest expense	12,844				13,251				53,743					51,804
Interest income	(342)				(1,234)				(2,397)					(4,493)
Depreciation and amortization	34,342				25,678				132,942					103,191
Provision for income taxes (benefit)	(7,885)				(4,200)				26,388					33,925
Pro forma EBITDA **/ EBITDA margin	26,866		9.6	%	86,442		31.0	%	280,349		25.5	%		310,807		29.2	%
Adjustments (pre-tax):
Integration expenses	256		0.1	%	260		0.1	%	2,465		0.2	%		260		—	%
Costs related to KMG-Bernuth warehouse fire	5,455		2.0	%	—		—	%	9,905		0.9	%		—		—	%
Costs related to restructuring of wood treatment business	1,530		0.5	%	—		—	%	1,530		0.1	%		—		—	%
Charges related to asset impairment of wood treatment business	51,186		18.4	%	—		—	%	51,186		4.7	%		—		—	%
Adjusted pro forma EBITDA ***/ EBITDA margin	$	85,293	30.6	%	$	86,702	31.1	%	$	345,435	31.4	%		$	311,067	29.2	%

** Pro forma EBITDA represents pro forma earnings before interest, taxes, depreciation and amortization.

*** Adjusted pro forma EBITDA is calculated by excluding items from pro forma EBITDA that are believed to be infrequent or not indicative.