Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On November 15, 2018 (the “Closing Date”), Cabot Microelectronics Corporation, a Delaware corporation (the “Company”, or “Cabot Microelectronics”), completed its acquisition of KMG Chemicals, Inc., a Texas corporation (“KMG”). Pursuant to the merger agreement, Cobalt Merger Sub Corporation, a Texas corporation and wholly owned subsidiary of the Company, merged with and into KMG, with KMG becoming a direct, wholly owned subsidiary of the Company (the “Merger”).
The following unaudited pro forma condensed combined financial information has been prepared giving the effects of the Merger and the related financing transactions. It sets forth:
· | Historical consolidated financial information of Cabot Microelectronics as of and for the year ended September 30, 2018, derived from Cabot Microelectronics’ audited consolidated financial statements; |
· | Historical consolidated financial information of KMG as of and for the year ended July 31, 2018, derived from KMG’s audited consolidated financial statements; |
· | Pro forma adjustments to give effect to Cabot Microelectronics’ acquisition of KMG on Cabot Microelectronics’ consolidated balance sheet as of September 30, 2018, as if the Merger closed on September 30, 2018; and |
· | Pro forma adjustments to give effect to Cabot Microelectronics’ acquisition of KMG on Cabot Microelectronics’ consolidated statements of income for the year ended September 30, 2018, as if the Merger closed on October 1, 2017. |
Cabot Microelectronics and KMG have different fiscal years. Cabot Microelectronics’ fiscal year ends on September 30, whereas KMG’s fiscal year ends on July 31. The unaudited pro forma condensed combined balance sheet and statements of income have been prepared utilizing period ends that differ by less than 93 days, as permitted by Rule 11-02 Regulation S-X.
The historical condensed consolidated financial information in the unaudited pro forma condensed combined financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the Merger, (2) factually supportable and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results of Cabot Microelectronics and KMG.
This unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only and is based on assumptions and estimates considered appropriate by Cabot Microelectronics’ management; however, it is not necessarily indicative of what Cabot Microelectronics’ consolidated financial condition or results of operations actually would have been assuming the transactions had been consummated as of the dates indicated, nor does it purport to represent Cabot Microelectronics’ consolidated financial position or results of operations for future periods. This unaudited pro forma condensed combined financial information does not consider any impacts of potential revenue enhancements, anticipated cost savings and expense efficiencies or other synergies that may be achieved in the acquisitions or any strategies that management may consider in order to continue to efficiently manage Cabot Microelectronics’ operations. Future results may vary significantly from the results reflected due to various factors, including those discussed in in Part I, Item 1A entitled "Risk Factors" of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
This pro forma condensed combined financial information should be read in conjunction with:
· | Cabot Microelectronics’ audited consolidated financial statements and the related notes thereto as of and for the year ended September 30, 2018 included in Cabot Microelectronics’ Annual Report on Form 10-K for the fiscal year ended September 30, 2018; |
· | KMG’s audited consolidated financial statements and the related notes thereto as of and for the year ended July 31, 2018 included in Exhibit 99.1 of this Form 8-K/A; and |
· | The accompanying notes to the unaudited pro forma condensed combined financial information. |
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The unaudited pro forma condensed combined financial information is prepared using the purchase method of accounting, as defined by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations (“ASC 805”), with Cabot Microelectronics treated as the acquirer, and Article 11 of Regulation S-X, as defined by the SEC. The following unaudited pro forma condensed combined financial information primarily gives effect to:
· | Application of the acquisition method of accounting in connection with the Merger; |
· | Adjustments to reflect financing arrangements entered into in connection with the Merger; and |
· | Transaction costs incurred in connection with the Merger. |
The allocation of the purchase price used in the unaudited pro forma condensed combined financial information is based on preliminary valuation derived from the tangible assets and liabilities and intangible assets of KMG as of the close of the Merger. These preliminary results are based on information available at the time of this filing and are subject to change when the final purchase price allocation is complete. Cabot Microelectronics believes that the information provides a reasonable basis for estimating the preliminary fair values of assets acquired and liabilities assumed, but certain items may be subject to change. Cabot Microelectronics expects to finalize the purchase price allocation as soon as practicable, but not later than one-year from the acquisition date of November 15, 2018.
The unaudited pro forma condensed combined financial information has been compiled in a manner consistent with the accounting policies adopted by Cabot Microelectronics. Certain reclassifications have been made to conform the presentation of KMG’s financial information to that of Cabot Microelectronics.
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CABOT MICROELECTRONICS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2018
(in thousands)
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2018
(in thousands)
Historical | |||||||||||||||||||||||||||||||||
Cabot Microelectronics | KMG | ||||||||||||||||||||||||||||||||
As of September 30, 2018 | As of July 31, 2018 | Presentation Reclassification | Notes | Pro Forma Adjustments for Acquisition | Notes | Pro Forma Adjustments for Financing | Notes | Combined Pro Forma | |||||||||||||||||||||||||
ASSETS: | |||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 352,921 | $ | 24,436 | $ | — | $ | (1,251,029 | ) | 4 | a | $ | 1,043,592 | 5 | a | $ | 169,920 | ||||||||||||||||
Accounts receivable, net of allowances | 75,886 | 61,895 | — | 137,781 | |||||||||||||||||||||||||||||
Other receivables | — | 9,943 | (9,943 | ) | 3 | c | — | — | |||||||||||||||||||||||||
Inventories | 71,926 | 54,218 | 14,864 | 4 | b | 141,008 | |||||||||||||||||||||||||||
Prepaid expenses and other current assets | 22,048 | 4,807 | 9,943 | 3 | c | – | 859 | 5 | b | 37,657 | |||||||||||||||||||||||
Total current assets | 522,781 | 155,299 | — | (1,236,165 | ) | 1,044,451 | 486,366 | ||||||||||||||||||||||||||
Property, plant and equipment, net | 111,403 | 117,101 | 29,567 | 4 | c | 258,071 | |||||||||||||||||||||||||||
Goodwill | 101,083 | 233,204 | 372,186 | 4 | d | 706,473 | |||||||||||||||||||||||||||
Other intangible assets, net | 35,202 | 300,457 | 544,343 | 4 | e | 880,002 | |||||||||||||||||||||||||||
Deferred income taxes | 5,840 | — | 714 | 3 | d | – | 6,554 | ||||||||||||||||||||||||||
Other long-term assets | 4,664 | 12,373 | (714 | ) | 3 | d | (6,663 | ) | 4 | f | 9,660 | ||||||||||||||||||||||
Total assets | $ | 780,973 | $ | 818,434 | $ | — | $ | (296,732 | ) | $ | 1,044,451 | $ | 2,347,126 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | |||||||||||||||||||||||||||||||||
Current Liabilities: | |||||||||||||||||||||||||||||||||
Accounts payable | $ | 18,171 | $ | 39,005 | $ | — | $ | 57,176 | |||||||||||||||||||||||||
Current portion of long-term debt | — | — | — | 7,623 | 5 | c | 7,623 | ||||||||||||||||||||||||||
Accrued expenses, income taxes payable and other current liabilities | 82,983 | 12,524 | 7,726 | 3 | e | 1,750 | 4 | g | 104,983 | ||||||||||||||||||||||||
Employee incentive accrual | — | 7,726 | (7,726 | ) | 3 | e | — | — | |||||||||||||||||||||||||
Total current liabilities | 101,154 | 59,255 | — | 1,750 | 7,623 | 169,782 | |||||||||||||||||||||||||||
Long-term debt, net | — | 306,119 | (306,119 | ) | 4 | h | 1,036,828 | 5 | d | 1,036,828 | |||||||||||||||||||||||
Deferred income taxes | 81 | 32,129 | 138,255 | 4 | i | 170,465 | |||||||||||||||||||||||||||
Other long-term liabilities | 13,046 | 4,864 | — | 17,910 | |||||||||||||||||||||||||||||
Total liabilities | 114,281 | 402,367 | — | (166,114 | ) | 1,044,451 | 1,394,985 | ||||||||||||||||||||||||||
Stockholders’ equity: | |||||||||||||||||||||||||||||||||
Common stock | 36 | 155 | (152 | ) | 4 | j | 39 | ||||||||||||||||||||||||||
Capital in excess of par value of common stock | 622,498 | 222,371 | 108,675 | 4 | j | 953,544 | |||||||||||||||||||||||||||
Retained earnings | 471,673 | 203,862 | (249,462 | ) | 4 | j | 426,073 | ||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) | 4,539 | (10,321 | ) | 10,321 | 4 | j | 4,539 | ||||||||||||||||||||||||||
Treasury Stock | (432,054 | ) | — | — | (432,054 | ) | |||||||||||||||||||||||||||
Total stockholders’ equity | 666,692 | 416,067 | — | (130,618 | ) | — | 952,141 | ||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 780,973 | $ | 818,434 | $ | — | $ | (296,732 | ) | $ | 1,044,451 | $ | 2,347,126 |
See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Information”
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CABOT MICROELECTRONICS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 2018
(in thousands, except per share amounts)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 2018
(in thousands, except per share amounts)
Historical | |||||||||||||||||||||||||||||||||
Cabot Microelectronics | KMG Chemicals | ||||||||||||||||||||||||||||||||
Year Ended September 30, 2018 | Year Ended July 31, 2018 | Pro Forma Adjustments for Reclassification | Notes | Pro Forma Adjustments for Acquisition | Notes | Pro Forma Adjustments for Financing | Notes | Pro Forma Combined | |||||||||||||||||||||||||
Revenue | $ | 590,123 | $ | 465,556 | — | — | $ | 1,055,679 | |||||||||||||||||||||||||
Cost of goods sold | 276,018 | 267,895 | 36,439 | 3 | a | 13,480 | 4 | k | — | 593,832 | |||||||||||||||||||||||
Gross profit | 314,105 | 197,661 | (36,439 | ) | (13,480 | ) | — | 461,847 | |||||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||||
Distribution expenses | — | 36,439 | (36,439 | ) | 3 | a | — | — | — | ||||||||||||||||||||||||
Research, development and technical | 51,950 | — | — | — | 51,950 | ||||||||||||||||||||||||||||
Selling, general and administrative expenses | — | 57,900 | (57,900 | ) | 3 | b | — | — | — | ||||||||||||||||||||||||
Selling and marketing | 25,044 | — | 9,924 | 3 | b | 51,939 | 4 | l | — | 86,907 | |||||||||||||||||||||||
General and administrative | 76,993 | — | 47,976 | 3 | b | (3,717 | ) | 4 | m | — | 121,252 | ||||||||||||||||||||||
Amortization of intangible assets | — | 15,123 | (15,123 | ) | 4 | n | — | — | |||||||||||||||||||||||||
Restructuring charges | — | 74 | — | — | 74 | ||||||||||||||||||||||||||||
Total operating expenses | 153,987 | 109,536 | (36,439 | ) | 33,099 | — | 260,183 | ||||||||||||||||||||||||||
Operating income | 160,118 | 88,125 | — | (46,579 | ) | — | 201,664 | ||||||||||||||||||||||||||
Interest expense | 2,905 | 21,529 | — | 33,302 | 5 | e | 57,736 | ||||||||||||||||||||||||||
Loss on the extinguishment of debt | — | (6,710 | ) | — | 6,710 | 5 | f | — | |||||||||||||||||||||||||
Derivative fair value gain | — | 5,576 | — | (5,576 | ) | 5 | g | — | |||||||||||||||||||||||||
Other income (expense), net | 4,498 | (1,063 | ) | — | — | 3,435 | |||||||||||||||||||||||||||
Income before income taxes | 161,711 | 64,399 | — | (46,579 | ) | (32,168 | ) | 147,363 | |||||||||||||||||||||||||
Provision for income tax expense (benefit) | 51,668 | (442 | ) | (12,809 | ) | 4 | o | (8,846 | ) | 5 | h | 29,571 | |||||||||||||||||||||
Net income | $ | 110,043 | $ | 64,841 | — | (33,770 | ) | (23,322 | ) | $ | 117,792 | ||||||||||||||||||||||
Basic earnings per share | $ | 4.31 | $ | 4.41 | $ | 4.09 | |||||||||||||||||||||||||||
Weighted average basic shares outstanding | 25,518 | 14,708 | 28,755 | ||||||||||||||||||||||||||||||
Diluted earnings per share | $ | 4.19 | $ | 4.29 | $ | 3.99 | |||||||||||||||||||||||||||
Weighted average diluted shares outstanding | 26,243 | 15,111 | 29,480 |
See accompanying “Notes to Unaudited Pro Forma Condensed Combined Financial Information”
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Unless otherwise indicated, all dollar amounts and share amounts included within the Notes to Unaudited Pro Forma Condensed Combined Financial Information are presented in thousands, except for per share data.
On November 15, 2018, Cabot Microelectronics Corporation completed its acquisition of KMG. Pursuant to the merger agreement, Merger Sub merged with and into KMG, with KMG becoming a direct, wholly owned subsidiary of the Company. At the close of the merger, each outstanding share of KMG common stock, par value $0.01 per share, and certain unvested KMG equity awards were automatically converted into the right to receive, without interest, $55.65 in cash and 0.2000 shares of common stock of Cabot Microelectronics, par value $0.001 per share.
Cabot Microelectronics paid $1,205,404 for the aggregate cash portion of the consideration (including repayment of debt), and the remainder of the purchase price was funded with the issuance of Cabot Microelectronics common stock. Cabot Microelectronics has obtained a $1,065,000 term loan to partially fund the cash portion of the consideration and utilized cash on hand for the remainder of the cash portion of the consideration. Additionally, Cabot Microelectronics secured a $200,000 revolving credit facility that will provide additional borrowing capacity, if needed. As of the date of this filing, the revolving credit facility remains undrawn.
The unaudited pro forma condensed combined financial information and related notes were derived from the historical consolidated financial statements of Cabot Microelectronics and KMG. The unaudited pro forma condensed combined financial information was prepared as a business combination using the acquisition method of accounting pursuant to ASC 805, with Cabot Microelectronics treated as the accounting acquirer. As a result, Cabot Microelectronics will record the business combination in its financial statements and will apply the acquisition method to account for the assets acquired and liabilities assumed of KMG. The acquisition method requires the recording of identifiable assets acquired and liabilities assumed at their fair values on the acquisition date and the recording of goodwill for the excess of the purchase price over the aggregate fair value of the identifiable assets acquired and liabilities assumed. Additionally, the accompanying unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of SEC Regulation S-X.
The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of what Cabot Microelectronics’ financial position or results of operations would have been had the KMG acquisition been consummated on the dates indicated, nor is it necessarily indicative of what Cabot Microelectronics’ financial position or results of operations will be in future periods. The historical financial information has been adjusted to give effect to the pro forma events that are directly attributable to the acquisition, factually supportable and, with respect to the unaudited pro forma condensed combined statements of income, expected to have a continuing impact on the combined results of operations. Additionally, the unaudited pro forma condensed combined statements of income do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities.
5
To prepare the unaudited pro forma condensed combined financial information, Cabot Microelectronics adjusted KMG’s assets and liabilities to their estimated fair values based on valuation procedures performed. As of the date of this filing, Cabot Microelectronics believes that the valuation procedures provide a reasonable basis for estimating the preliminary fair values of assets acquired and liabilities assumed, but certain items may be subject to change. Accordingly, the final acquisition accounting adjustments may be materially different from the unaudited pro forma adjustments.
The unaudited pro forma condensed combined financial information, and accompanying notes thereto, should be read in conjunction with the historical consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2018 for Cabot Microelectronics and Exhibit 99.1 of this Form 8-K/A for KMG.
Accounting periods presented
Cabot Microelectronics and KMG have different fiscal years. Cabot Microelectronics’ fiscal year ends on September 30, whereas KMG’s fiscal year ends on July 31. The unaudited pro forma condensed combined balance sheet and statements of income have been prepared utilizing period ends that differ by less than 93 days, as permitted by Rule 11-02 of Regulation S-X.
The unaudited pro forma condensed combined balance sheet as of September 30, 2018 has been prepared as if the Merger, the borrowings used to finance the Merger and the issuance of Cabot Microelectronics common stock to KMG shareholders occurred on September 30, 2018 and combines Cabot Microelectronics’ balance sheet as of September 30, 2018 with KMG’s balance sheet as of July 31, 2018. The unaudited pro forma condensed combined statement of income for the year ended September 30, 2018 has been prepared as if the Merger, the borrowings used to finance the Merger, and the issuance of Cabot Microelectronics common stock to KMG shareholders occurred on October 1, 2017 and combine the historical results of Cabot Microelectronics for the year ended September 30, 2018 and the historical results of KMG for the year ended July 31, 2018.
NOTE 2: Consideration Transferred and Preliminary Fair Value of Net Assets Acquired
The unaudited pro forma condensed combined balance sheet has been adjusted to reflect the preliminary fair values of the KMG identifiable assets acquired and liabilities assumed. The excess of the purchase price over these fair values is recorded to goodwill. The unaudited pro forma purchase price allocation was based on data that was available as of the date of this filing. The Company is currently conducting additional valuation procedures and any increases or decreases in the fair value of assets acquired or liabilities assumed will result in adjustments to the balance sheet and/or statements of income until the purchase price allocation is finalized. Such adjustments may be material.
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The preliminary allocation of total consideration transferred, as if the Merger occurred on September 30, 2018, was as follows:
Assets acquired and liabilities assumed at fair value: | Amount | |||
Cash | $ | 22,660 | ||
Net working capital (excluding Inventory) | 17,390 | |||
Inventory | 69,082 | |||
Fixed assets | 146,668 | |||
Other assets/liabilities | (169,538 | ) | ||
Intangible assets | 844,800 | |||
Goodwill | 605,390 | |||
Total consideration transferred | $ | 1,536,452 |
The following table summarizes the consideration transferred as a result of the Merger:
Note | Amount | ||||||
Cash consideration paid for KMG outstanding common stock | 2. | a | $ | 877,200 | |||
Cash consideration paid for KMG outstanding equity awards | 2. | b | 23,556 | ||||
Total cash consideration paid for KMG outstanding common stock and equity awards | 900,756 | ||||||
Cash provided to payoff KMG debt | 2. | c | 304,648 | ||||
Total cash consideration paid | 1,205,404 | ||||||
Fair value of Cabot Microelectronics common stock issued for KMG outstanding common stock | 2. | d | 322,393 | ||||
Fair value of Cabot Microelectronics common stock issued for KMG outstanding equity awards | 2.d, 2. | e | 8,655 | ||||
Total consideration transferred | $ | 1,536,452 |
a. | Cash consideration paid for each outstanding share of KMG common stock in the Merger was computed as follows: |
Outstanding shares of KMG common stock (as of November 15, 2018) | 15,763 | |||
Cash consideration paid per KMG common share | $ | 55.65 | ||
Cash consideration paid to KMG shareholders | 877,186 | |||
Cash consideration paid in lieu of fractional shares | 14 | |||
Cash consideration paid to KMG shareholders (including fractional shares) | $ | 877,200 |
b. | Cash consideration paid for KMG outstanding equity awards to the extent they were paid in cash under the merger agreement was computed as follows: |
Share equivalent of KMG equity awards settled in cash, per the merger agreement | 423 | |||
Cash consideration paid per KMG common share | $ | 55.65 | ||
Cash consideration paid to holders of KMG equity awards | 23,554 | |||
Cash consideration paid in lieu of fractional shares | 2 | |||
Cash consideration paid to holders of KMG equity awards (including fractional shares) | $ | 23,556 |
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c. | As part of the Merger, Cabot Microelectronics provided funds to KMG at closing, which KMG used to pay off its outstanding debt balance. As of the balance sheet date presented, KMG's outstanding debt balance was $312,000. KMG continued to service its outstanding debt obligations and make payments of principal and interest up to the closing date, which reduced the outstanding principal and interest paid at closing. Accordingly, the cash paid by Cabot Microelectronics at closing to satisfy KMG's outstanding debt obligations was $304,648. |
d. | The fair value of Cabot Microelectronics’ common stock issued for KMG’s outstanding common stock (and equity awards entitled to merger consideration) in the Merger was computed as follows: |
Outstanding shares of KMG common stock (as of November 15, 2018) | 15,763 | |||
Exchange ratio (1) | 0.2 | |||
Shares of Cabot Microelectronics common stock issued for KMG outstanding common stock | 3,153 | |||
Less fractional shares | 1 | |||
Shares of Cabot Microelectronics common stock issued for KMG outstanding common stock | 3,152 | |||
Price per share of Cabot Microelectronics common stock (2) | $ | 102.27 | ||
Fair value of Cabot Microelectronics common stock issued for KMG outstanding common stock | $ | 322,393 | ||
Share equivalent of KMG equity awards entitled to merger consideration | 423 | |||
Exchange ratio (1) | 0.2 | |||
Shares of Cabot Microelectronics common stock issued for KMG outstanding equity awards | 85 | |||
Price per share of Cabot Microelectronics common stock (2) | $ | 102.27 | ||
Fair value of Cabot Microelectronics common stock issued for KMG outstanding equity awards | 8,655 | |||
Fair value of Cabot Microelectronics common stock issued for KMG outstanding common stock and equity awards | $ | 331,048 |
(1) | The exchange ratio is equal to 0.2000 per the merger agreement. |
(2) | Stock price used in the calculation of fair value of equity securities issued as part of the purchase consideration was based on the closing price of Cabot Microelectronics common stock on November 15, 2018, the Closing Date, in accordance with ASC 805. |
e. | Under the merger agreement, vesting of equity awards granted by KMG on or before the date of the merger agreement accelerated upon the closing of the Merger, and those equity award holders received the same acquisition consideration as KMG common stockholders. |
Certain reclassifications have been recorded in the unaudited pro forma condensed combined balance sheet and income statement to conform KMG’s financial statement presentation to Cabot Microelectronics’ presentation. KMG has historically presented certain financial statement line items with different captions than Cabot Microelectronics; however, they represent similar transactions. These include: Net sales; Cost of sales; Interest expense, net and Other, net on the statement of income and Trade, net of allowances; Inventories, net; Other assets, net; Accrued expenses, income taxes payable and other current liabilities; Deferred tax liabilities and Additional paid-in capital on the balance sheet. Cabot Microelectronics has not provided a reclassification adjustment for these items as they represent the same financial statement line item as presented historically by Cabot Microelectronics.
8
The following items are presented as reclassifications in the unaudited pro forma condensed combined financial information for purposes of conforming KMG’s classification of certain assets, liabilities, income and expenses to Cabot Microelectronics’ classification for the combined presentation:
Statements of income
a. | $36,439 of historical KMG Distribution expenses has been reclassified to cost of goods sold for the year ended September 30, 2018. Under U.S. GAAP, the presentation of these costs is a policy election. |
b. | $9,924 of $57,900 of historical KMG Selling, general and administrative expense has been reclassified to Selling and marketing, and the remaining $47,976 has been reclassified to General and administrative expense for the year ended September 30, 2018. |
Balance sheet
c. | $9,943 of historical KMG Other receivables has been reclassified to Prepaid expenses and other current assets. |
d. | $714 of historical KMG Other long-term assets has been reclassified to Deferred income taxes as an asset. |
e. | $7,726 of historical KMG Employee incentive accruals has been reclassified to Accrued expenses, income taxes payable and other current liabilities. |
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined balance sheet:
a. | Cash and cash equivalents |
Cash consideration paid for KMG outstanding common stock and equity awards (Note 2) | $ | 900,756 | ||
Repayment of KMG debt | 312,000 | |||
Proceeds from termination of KMG’s interest rate swap | (5,308 | ) | ||
Retention, severance and bonus payments made to KMG personnel | 16,450 | |||
Combined transaction costs incurred by Cabot Microelectronics and KMG in connection with the Merger | 27,131 | |||
Pro forma adjustment, Cash and cash equivalents | $ | 1,251,029 |
b. | Inventories |
The $14,864 pro forma adjustment to Inventories represents the preliminary adjustment to mark-up the carrying value of KMG’s inventory to its preliminary estimated fair value. This adjustment has not been included in the statement of income as an adjustment to cost of goods sold due to the fact that the mark-up is considered as a one-time adjustment and has no ongoing impact on the statements of income of the combined company.
c. | Property, plant and equipment, net |
The $29,567 pro forma adjustment to Property, plant and equipment, net represents the preliminary adjustment to adjust the carrying value of KMG’s fixed assets to its preliminary estimated fair value. The estimated fair value is expected to be depreciated over the estimated useful lives of the assets, generally on a straight-line basis.
The additional depreciation expense results from the step up of the carrying value of KMG’s fixed assets to their estimated fair value. Among KMG’s fixed assets, the useful life ranges from 4 to 10 years for machinery and equipment, and from 10 to 31 years for building and improvements. The weighted average useful life is 6.8 years for all the acquired fixed assets. The fair values and useful lives are preliminary and subject to change once Cabot Microelectronics has sufficient information as to the specific types, nature, age, condition and location of KMG’s fixed assets. An increase or decrease of 10 percent in fair values would increase or decrease the depreciation expense by approximately $2,168 per annum.
d. | Goodwill |
The adjustment reflects a net increase in goodwill of $372,186 consisting of the addition of $605,390 of new goodwill resulting from the Merger, offset by the elimination of $233,204 of historical KMG goodwill. The $605,390 of merger-related goodwill is based on the preliminary estimates and information summarized in Note 2.
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e. | Other intangible assets, net |
The net pro forma adjustment of $544,343 reflects the elimination of $300,457 of historical KMG intangible assets, offset by a preliminary fair value estimate of $844,800 in identifiable intangible assets acquired. The fair value of intangible assets is preliminary and is determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The final fair value determinations for identifiable intangible assets may differ from the preliminary determination, and such differences could be material.
Intangible assets | Estimated Fair Value | Estimated Useful Life | |||
EPA product registration rights – Performance Materials | $ | 2,300 | 15 years | ||
Trade name – Electronic Chemicals | 2,000 | 1 year | |||
Trade name – Performance Materials | 5,000 | 15 years | |||
Trade name – Performance Materials | 46,000 | Indefinite life | |||
Technology and know-how – Electronic Chemicals | 30,000 | 9 years | |||
Technology and know-how – Performance Materials | 55,500 | 9-11 years | |||
Customer relationships – Electronic Chemicals | 280,000 | 19 years | |||
Customer relationships – Performance Materials | 424,000 | 15–20 years | |||
Total identifiable intangible assets | 844,800 | ||||
Historical KMG intangible assets | (300,457 | ) | |||
Pro forma adjustment | $ | 544,343 |
Pro forma amortization of acquired intangible assets was $60,580 for the year ended September 30, 2018. The amortization of the acquired intangible assets has been prepared to reflect the Merger as if it occurred on October 1, 2017. For the purposes of the unaudited pro forma condensed combined financial information, the amortization of acquired intangible assets has been assumed to be on a straight-line basis, except for customer relationships. The amortization of customer relationships is based on an accelerated method, which reflects the pattern in which the economic benefits are consumed. Cabot Microelectronics is currently in the process of performing the detailed valuation work necessary to finalize the required estimated fair values, estimated lives, and pattern of expected economic benefit associated with the acquired intangible assets. Finalization of the acquisition accounting may result in material changes in the fair value of these intangible assets and/or the associated amortization expense. An increase or decrease of 10 percent in fair values would increase or decrease the amortization expense by approximately $6,058 per annum.
The following table shows the amortization of the pro forma balance of the acquired intangible assets for the fiscal years 2019 through 2023, which has been prepared as if the Merger occurred on October 1, 2017:
2019 | 2020 | 2021 | 2022 | 2023 | ||||||||||||||||
Total Amortization | $ | 80,808 | $ | 80,119 | $ | 72,708 | $ | 65,941 | $ | 59,056 |
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f. Other long-term assets
The $6,663 adjustment to Other long-term assets includes the termination of KMG’s interest rate swaps, valued at $5,576 as of July 31, 2018, and the write-off of remaining prepaid debt issuance costs of $1,087, both driven by the termination of KMG’s credit facility in connection with the Merger.
g. | Accrued expenses, income taxes payable and other current liabilities |
Retention, severance and bonus payments to be made to KMG personnel, net of tax | $ | 6,237 | ||
Tax benefit resulting from the combined transaction costs incurred by Cabot Microelectronics and KMG in connection with the Merger and tax effect of the fees associated with terminating KMG’s interest rate swap (1) | (4,487 | ) | ||
Pro forma adjustment, Accrued expenses, income taxes payable and other current liabilities | $ | 1,750 |
(1) The tax benefit that results from combined transaction costs is calculated only on the costs that are expected to be tax deductible.
h. | Long-term debt, net |
Elimination of KMG historical debt, as of July 31, 2018 | $ | (312,000 | ) | |
Elimination of KMG unamortized issuance costs | 5,881 | |||
Pro forma adjustment, Long-term debt, net | $ | (306,119 | ) |
i. | Deferred income taxes |
The pro forma adjustment of $138,255 in deferred tax liabilities is due to recording the estimated tax impact of pro forma adjustments, which reflects the temporary difference between the preliminary fair value in the purchase price allocation and the carryover tax bases for certain identifiable assets acquired in the Merger, and the reversal of the deferred tax assets related to the vesting of KMG’s restricted stock units. The pro forma adjustments were tax effected at the applicable blended statutory tax rate of 24% as of September 30, 3018, which reflects the estimated tax rates expected to be in effect when the deferred taxes are reversed in the future. Adjustments to established deferred tax assets and liabilities due to refined determination of statutory rates as well as the changes in the estimates of the fair values of assets acquired and liabilities assumed occur in conjunction with the finalization of the acquisition accounting, and these changes in estimates could be material.
j. | Stockholders’ equity |
Adjustments to Stockholders’ equity include the following:
Common stock | APIC | Retained earnings | Accumulated other comprehensive loss | |||||||||||||
Fair value of Cabot Microelectronics common stock issued for KMG common stock | $ | 3 | $ | 331,046 | $ | — | $ | — | ||||||||
Elimination of KMG historical stockholders’ equity | (155 | ) | (222,371 | ) | (203,862 | ) | 10,321 | |||||||||
Early termination penalty on interest rate swap, net of tax | — | — | (194 | ) | — | |||||||||||
Effect of pro forma acquisition related transaction costs and KMG employee payments, including retention, severance and bonus payments | — | — | (45,406 | ) | — | |||||||||||
$ | (152 | ) | $ | 108,675 | $ | (249,462 | ) | $ | 10,321 |
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Adjustments to Unaudited Pro Forma Condensed Combined Statements of Income
k. | Cost of goods sold |
Year Ended September 30, 2018 | ||||
Amortization of acquired intangible assets | $ | 8,641 | ||
Depreciation of fixed assets fair value adjustment | 4,839 | |||
Pro forma adjustment, Cost of goods sold | $ | 13,480 |
l. | Selling and marketing |
Pro forma adjustment reflects the amortization of acquired intangible assets of $51,939 for the year ended September 30, 2018.
m. | General and administrative |
Year Ended September 30, 2018 | ||||
Depreciation of fixed assets fair value adjustment | $ | 1,136 | ||
Elimination of transaction cost incurred by Cabot Microelectronics as a result of its acquisition of KMG | (3,861 | ) | ||
Elimination of transaction costs incurred by KMG as a result of Cabot Microelectronics’ acquisition of KMG | (992 | ) | ||
Pro forma adjustment, General and administrative | $ | (3,717 | ) |
n. | Amortization of intangible assets |
Pro forma adjustment reflects the elimination of KMG’s historical intangible asset amortization of $15,123 for the year ended July 31, 2018.
o. Income tax expense
The pro forma adjustments of $12,809 represent the income tax effect for unaudited pro forma condensed combined statement of income adjustments related to the Merger using the applicable U.S. statutory tax rates 27.5% for the year ended September 30, 2018. Because the adjustments contained in this unaudited pro forma condensed combined financial information are based on estimates, the effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-acquisition activities and impact due to the Tax Cuts and Jobs Act in the United States (the "Tax Act").
p. Basic and diluted weighted average number of shares outstanding
Pro forma adjustments to basic and diluted weighted average number of shares outstanding reflects a total of 3,237 shares of Cabot Microelectronics common stock issued for KMG outstanding common stock and equity awards entitled to merger consideration. These 3,237 shares were added to Cabot Microelectronics’ historical basic shares as if they had been issued on October 1, 2017. See Note 2 for additional discussion.
Year Ended September 30, 2018 | ||||
Pro forma Net Income attributable to Cabot Microelectronics common shareholders | $ | 117,671 | ||
Pro forma basic weighted average number of shares outstanding | 28,755 | |||
Pro forma Net Income per basic share attributable to Cabot Microelectronics common shareholders | $ | 4.09 | ||
Pro forma Net Income attributable to Cabot Microelectronics common shareholders | $ | 117,671 | ||
Pro forma diluted weighted average number of shares outstanding | 29,480 | |||
Pro forma Net Income per diluted share attributable to Cabot Microelectronics common shareholders | $ | 3.99 |
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Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
Cabot Microelectronics financed the cash portion of the Merger using cash on hand and through debt issuances. The Company has entered into a credit facility agreement, including a long-term loan in the amount of $1,065,000 with a maturity of seven years, and a revolver in the amount of $200,000 with a maturity of five years, which has not been drawn as of the date of this filing. Cabot Microelectronics paid approximately $21,408 in debt issuance costs. The unaudited pro forma condensed combined financial information reflects an interest at the 30-day LIBOR rate plus 225 basis points for these new borrowings.
a. | Cash and cash equivalents |
Net pro forma adjustment of $1,043,592 reflects the proceeds from issuance of debt in the amount of $1,065,000, less payment of debt issuance costs of $21,408.
b. | Prepaid expenses and other current assets |
Pro forma adjustment of $859 reflects the unamortized debt issuance costs related to the new revolver of $859.
c. | Current portion of long-term debt, net |
Cabot Microelectronics proceeds from issuance of debt | $ | 1,065,000 | ||
Debt amortization in first year | 1 | % | ||
Pro forma adjustment for financing, Current portion of long-term debt | $ | 10,650 | ||
Less debt issuance cost, current portion | (3,027 | ) | ||
Pro forma adjustment for financing, Current portion of long-term debt, net | $ | 7,623 |
d. | Long-term debt, net |
Long term portion of debt issuance | $ | 1,054,350 | ||
Less debt issuance cost, long term | (17,522 | ) | ||
Pro forma adjustment for financing, Long-term debt, net | $ | 1,036,828 |
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Adjustments to Unaudited Pro Forma Condensed Combined Statements of Income
e. | The following adjustments to interest expense reflect the financing debt issuance as well as the payoff of KMG debt and termination of the related interest rate swap at the time of closing. As a result of financing activities, on the terms below, the unaudited pro forma condensed combined financial statements result in an (i) increase in interest expense of $51,247 for the year ended September 30, 2018, reflecting interest expense related to the new financing referenced below, (ii) increase to interest expense reflecting amortization of deferred financing cost and commitment fees of $3,785 for the year ended September 30, 2018, associated with debt issuance and replacement facility, (iii) the elimination of $21,529 of interest and amortization related to KMG debt for the year ended September 30, 2018. The following tables show the assumed interest expense, interest rates and terms of the debt issuance and replacement credit facility obtained by Cabot Microelectronics based on the terms of the merger financing at the prevailing rates at the date of filing: |
For the Year Ended September 30, 2018 | ||||||||||||||||||||
New Financing | Borrowings | Interest Expense | Commitment Fee on Undrawn Portion | Deferred Cost Amortization | Total Increase to Interest Expense | |||||||||||||||
Revolving Credit Facility | $ | — | $ | — | $ | 586 | $ | 172 | $ | 758 | ||||||||||
Term Loan B | 1,065,000 | 51,247 | — | 3,027 | 54,274 | |||||||||||||||
$ | 1,065,000 | $ | 51,247 | $ | 586 | $ | 3,199 | $ | 55,032 | |||||||||||
Eliminate KMG Interest Expense | $ | (21,529 | ) | |||||||||||||||||
Eliminate Non-use fee on existing Cabot Microelectronics credit facility | (201 | ) | ||||||||||||||||||
Net change in Interest expense, net | $ | 33,302 |
The interest expense is calculated using the 30-day LIBOR plus 225 basis points. For the purposes of the unaudited pro forma condensed combined financial information, an estimated interest rate of 4.8% has been assumed for purposes of calculating the interest expense disclosed in the table above. If LIBOR were to increase or decrease by 0.125%, interest expense would increase or decrease by $1,326 for the twelve months ended September 30, 2018, respectively.
f. | Loss on the extinguishment of debt |
The pro forma adjustment of $6,710 reflects the elimination of KMG’s loss on the extinguishment of debt for the twelve months ended September 30, 2018.
g. | Derivative fair value gain |
The pro forma adjustment of $5,576 reflects the elimination of KMG’s derivative fair value gain for the year ended September 30, 2018.
h. | Income tax expense |
The pro forma adjustment of $8,846 represents the income tax effect for unaudited pro forma condensed combined statement of income adjustments related to the Merger using the applicable U.S. statutory tax rate of 27.5% for the year ended September 30, 2018. Because the adjustments contained in this unaudited pro forma condensed combined financial information are based on estimates, the effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-acquisition activities and impact due to the Tax Act.
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