Versum Materials Reports Fiscal Second Quarter 2019 Financial Results

Fiscal Second Quarter 2019 Financial Highlights

  • Sales of $326 million, Net Income of $50 million, or diluted EPS of
    $0.46
  • Adjusted EBITDA of $110 million, or Adjusted EBITDA Margin of 34%
  • Adjusted Net Income of $62 million, or diluted EPS of $0.57
  • Entered definitive merger agreement with Merck KGaA

The results in this press release include Non-GAAP financial
measures. Refer to the section entitled “Non-GAAP Financial Measures.”

TEMPE, Ariz.–(BUSINESS WIRE)–Versum Materials, Inc. (NYSE: VSM), a leading specialty materials
and equipment supplier to the semiconductor industry, today reported
results for the fiscal second quarter ended March 31, 2019.

Sales were $326.2 million, compared to $340.7 million in the prior year
quarter. Net income was $50.4 million, or $0.46 per diluted share,
compared to $0.56 per diluted share in the prior year, primarily due to
softer revenue, transaction related expenses and higher taxes. Adjusted
Net Income was $62.4 million, or $0.57 per diluted share, compared to
$0.59 in the prior year. Adjusted EBITDA was $110.1 million, flat versus
prior year, with favorable costs offsetting the revenue softness.

Guillermo Novo, Versum Materials’ President and Chief Executive Officer
said, “I am extremely proud of our team for delivering solid adjusted
EBITDA results in a moderating demand and investment environment. Our
results demonstrate the resiliency of our business portfolio and our
commitment to operating discipline. During the quarter, we continued to
advance our technology positions for new nodes and executed on our
capital projects, both which we believe will accelerate our growth in
Fiscal 2020.”

On April 12, 2019, Versum Materials announced entry into a definitive
merger agreement with Merck KGaA. The business combination is expected
to create a leading electronic materials player focused on the
semiconductor and display industries. The combined companies and their
customers and employees will benefit from increased scale, product
portfolio, innovation and services depth, globally.

Mr. Novo added, “We are all very excited about joining Merck KGaA, a
company with a long history of commitment to technology and innovation.
Like all of us at Versum, they share our belief in the exciting future
of the semiconductor industry. We look forward to combining our
technology and infrastructure capabilities to offer a greater depth and
breadth of materials technologies to our customers. We expect to play an
even more critical role in our industry.”

No Fiscal Year 2019 Outlook or Earnings Conference Call

In light of the announced transaction with Merck KGaA, Versum Materials
will not provide or update annual financial guidance and will not hold a
conference call to review quarterly earnings results. The parties
continue to work toward closing in the second half of 2019 and the
transaction is subject to the approval of Versum stockholders at a
Versum special meeting, regulatory clearances and the satisfaction of
other customary closing conditions.

     

Table 1: Fiscal Second Quarter Fiscal Year 2019 Financial
Highlights

 
Three Months Ended March 31,
2019       2018       % Change
(In millions, except percentages and per share data)
Sales $ 326.2 $ 340.7 (4 )%
Operating Income(A) 82.6 89.6 (8 )%
Net Income 50.4 61.6 (18 )%
Net Income Margin 15.5 % 18.1 % -260 bps
Diluted Earnings Per Share 0.46 0.56 (18 )%
Adjusted Net Income 62.4 64.7 (4 )%
Adjusted Net Income Margin 19.1 % 19.0 % 10 bps
Adjusted Diluted Earnings Per Share 0.57 0.59 (3 )%
Adjusted EBITDA(A) 110.1 110.1 %
Adjusted EBITDA Margin 33.8 % 32.3 % 150 bps
 
Year to Date Cash Flows from Operations 73.3 56.5 30 %
Year to Date Capital Expenditures 45.0 65.1 (31 )%
       

(A) – The fiscal second quarter ended March 31, 2018 amounts have
been recast to reflect the retrospective application of the
company’s change in classification of the non-service components
of net periodic pension cost.

Business Segment Results

Materials

Sales were $216.5 million, compared to $218.9 million in the prior year
as volume growth in the Materials segment was offset by negative
price/mix and currency impacts. Overall performance for the quarter was
impacted by softer demand in foundry and inventory management by memory
customers. We made further progress on the introduction of new
technologies for both new and legacy nodes, including ION‐X dopant gas
customer qualifications and strategic Process of Record (POR) wins in
aminosilane and cobalt precursors. We continued to advance our capital
projects, including starting slurry production in Korea and advancing
the qualification of new Hometown NF3 production.

Operating income was $65.4 million, compared to $71.7 million in the
prior year. Segment Adjusted EBITDA was $78.2 million, compared to $83.3
million in the prior year due primarily to negative price/mix and
increased manufacturing costs related to the start-up of capital
investments.

Delivery Systems & Services (DS&S)

Delivery Systems posted another strong quarter with sales of $109.1
million, driven by the diversity of equipment, installation projects and
services portfolio. This compared to $121.1 million in the prior year,
impacted by softer demand and project timing.

Operating income was $34.9 million, compared to $32.9 million in the
prior year. Segment Adjusted EBITDA was $35.6 million, compared to $33.3
million in the prior year, as favorable product mix, installation
project completions and disciplined cost management more than offset
softer equipment demand.

Table 2: Segment Sales

  Three Months Ended March 31,
  2019       2018     % Change
(In millions, except percentages)
Materials $ 216.5 $ 218.9 (1 )%
DS&S 109.1 121.1 (10 )%
Corporate   0.6     0.7   (14 )%
Total Versum Materials Sales $ 326.2   $ 340.7   (4 )%
 

Table 3: Segment Operating Income to Segment Adjusted EBITDA

 
Three Months Ended March 31,
  2019     2018   % Change
(In millions, except percentages)
Materials
Operating income(A) $ 65.4 $ 71.7 (9 )%
Add: Depreciation and amortization   12.8     11.6   10 %
Segment Adjusted EBITDA(A) $ 78.2   $ 83.3   (6 )%
Segment Adjusted EBITDA Margin(B) 36 % 38 %
DS&S
Operating income $ 34.9 $ 32.9 6 %
Add: Depreciation and amortization   0.7     0.4   75 %
Segment Adjusted EBITDA $ 35.6   $ 33.3   7 %
Segment Adjusted EBITDA Margin(B) 33 % 27 %
Corporate
Operating loss(A) $ (3.9 ) $ (6.8 ) (43 )%
Add: Depreciation and amortization   0.2     0.3   (33 )%
Segment Adjusted EBITDA(A) $ (3.7 ) $ (6.5 ) (43 )%
 

(A) The fiscal second quarter ended March 31, 2018 amounts have
been recast to reflect the retrospective application of the
company’s change in classification of the non-service components
of net periodic pension cost.

 

(B) Segment Adjusted EBITDA margin is calculated by dividing
Segment Adjusted EBITDA by sales.

 

Table 4: Reconciliation of Segment Operating Income to Total
Versum Materials Operating Income

 
Three Months Ended March 31,
  2019     2018   % Change
(In millions, except percentages)
Materials(A) $ 65.4 $ 71.7 (9 )%
DS&S 34.9 32.9 6 %
Corporate(A)   (3.9 )   (6.8 ) (43 )%
Total Segment Operating Income(A) 96.4 97.8 (1 )%
Less: Business separation, restructuring and cost reduction actions   13.8     8.2   68 %
Total Versum Materials Operating Income(A) $ 82.6   $ 89.6   (8 )%
 

(A) – The fiscal second quarter ended March 31, 2018 amounts have
been recast to reflect the retrospective application of the
company’s change in classification of the non-service components
of net periodic pension cost.

About Versum Materials

Versum Materials, Inc. (NYSE: VSM) is a leading global specialty
materials company providing high-purity chemicals and gases, delivery
systems, services and materials expertise to meet the evolving needs of
the global semiconductor and display industries. Derived from the Latin
word for “toward,” the name “Versum” communicates the company’s deep
commitment to helping customers move toward the future by collaborating,
innovating and creating cutting-edge solutions.

A global leader in technology, quality, safety and reliability, Versum
Materials is one of the world’s leading suppliers of next-generation CMP
slurries, ultra-thin dielectric and metal film precursors, formulated
cleans and etching products, and delivery equipment that has
revolutionized the semiconductor industry. Versum reported fiscal year
2018 annual sales of about US $1.4 billion, has approximately 2,300
employees and operates fifteen manufacturing and seven research and
development facilities in Asia and North America. It is headquartered in
Tempe, Arizona. Versum Materials had operated for more than three
decades as a division of Air Products and Chemicals, Inc. (NYSE: APD).

For additional information, please visit http://www.versummaterials.com.

Non-GAAP Financial Measures

This earnings press release includes “non-GAAP financial measures,”
including Adjusted Net Income, Adjusted Net Income Margin, Adjusted
Diluted Earnings Per Share, Adjusted EBITDA, Segment Adjusted EBITDA,
Adjusted EBITDA margin, and Segment Adjusted EBITDA margin. Adjusted Net
Income is net income excluding certain disclosed items which we do not
believe to be indicative of underlying business trends, including
business separation, restructuring and cost reduction actions, net of
tax, the write-off of financing costs, net of tax, and the impact of the
Tax Act. Adjusted Diluted Earnings Per Share uses Adjusted Net Income
but otherwise uses the same calculation used in arriving at diluted
earnings per share, the most directly comparable GAAP financial measure.
Adjusted EBITDA is net income excluding certain disclosed items which we
do not believe to be indicative of underlying business trends, including
interest expense, the write-off of financing costs, non-service
components of net periodic pension cost, income tax provision,
depreciation and amortization expense, non-controlling interests, and
business separation, restructuring and cost reduction actions. Segment
Adjusted EBITDA is segment operating income excluding segment
depreciation and amortization expense. Adjusted Net Income Margin,
Adjusted EBITDA margin and Segment Adjusted EBITDA margin are calculated
by dividing Adjusted Net Income, Adjusted EBITDA and Segment Adjusted
EBITDA, respectively, by sales. In the accompanying tables, Versum
Materials has provided reconciliations of net income to Adjusted EBITDA
(see Appendix Table A-1), net income to Adjusted Net Income (see
Appendix Table A-2), diluted EPS to Adjusted Diluted EPS (see Appendix
A-3) and of segment operating income (loss) to Segment Adjusted EBITDA
by Quarter (see Appendix Table A-5), in each case the most directly
comparable GAAP financial measure. We encourage investors to read these
reconciliations.

The presentation of these non-GAAP financial measures is intended to
enhance the usefulness of financial information by providing measures
which management uses internally to evaluate our operating performance.
We use non-GAAP measures to assess our operating performance by
excluding certain disclosed items that we believe are not representative
of our underlying business. Management may use these non-GAAP measures
to evaluate our performance period over period and relative to
competitors in our industry, to analyze underlying trends in our
business and to establish operational budgets and forecasts or for
incentive compensation purposes. We use Adjusted EBITDA to calculate
performance-based cash bonuses. We use Segment Adjusted EBITDA as the
primary measure to evaluate the ongoing performance of our business
segments.

We believe non-GAAP financial measures provide security analysts,
investors and other interested parties with meaningful information to
understand our underlying operating results and to analyze financial and
business trends; enables better comparison to peer companies; and allows
us to provide a long-term strategic view of the business going forward.
These non-GAAP financial measures should not be viewed in isolation, are
not a substitute for GAAP measures, and have limitations which include
but are not limited to the following: (a) Adjusted Net Income and
Adjusted EBITDA exclude expenses related to business separation,
restructuring and cost reduction actions and the write-off of financing
costs, each of which we do not consider to be representative of our
underlying business operations, however, these disclosed items represent
costs to Versum Materials; (b) Adjusted EBITDA is not intended to be a
measure of cash available for management’s discretionary use, as it does
not consider certain cash requirements such as interest payments, tax
payments and debt service requirements; (c) though not business
operating costs, interest expense and income tax provision represent
ongoing costs of Versum Materials; (d) depreciation and amortization
charges represent the wear and tear or reduction in value of the plant,
equipment, and intangible assets which permit us to manufacture and
market our products; and (e) other companies may define non-GAAP
measures differently than we do, limiting their usefulness as
comparative measures. A reader may find any one or all of these items
important in evaluating our performance. Management compensates for the
limitations of using non-GAAP financial measures by using them only to
supplement our GAAP results to provide a more complete understanding of
the factors and trends affecting our business. In evaluating these
non-GAAP financial measures, the reader should be aware that we may
incur expenses similar to those eliminated in this presentation in the
future.

A reconciliation of net income to Adjusted EBITDA as forecasted for 2019
is not provided. Versum Materials does not forecast net income as it
cannot, without unreasonable effort, estimate or predict with certainty
various components of net income. These components include restructuring
and other income or charges to be incurred in 2019 as well as the
related tax impacts of these items. Additionally, discrete tax items
could drive variability in our forecasted effective tax rate. All of
these components could significantly impact net income. Further, in the
future, other items with similar characteristics to those currently
included in Adjusted EBITDA that have a similar impact on comparability
of periods, and which are not known at this time, may exist and impact
Adjusted EBITDA.

Forward-Looking Information

This press release contains “forward-looking statements” within the
meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be
identified by references to future periods and include statements about
our financial outlook or guidance; statements about our expectations or
predictions of future financial or business performance or conditions;
statements about our anticipated growth, profitability and margins; our
ability to compete successfully as a leading materials supplier to the
semiconductor industry and obtain next generation node opportunities;
and other matters. The words “believe,” “expect,” “anticipate,”
“estimate,” “continue,” “could,” “intend,” “may,” “plan,” “potential,”
“predict,” “seek,” “should,” “forecast,” “guidance,” “outlook,”
“opportunity” and similar expressions, among others, generally identify
forward-looking statements, which are based on management’s reasonable
expectations and assumptions as of the date the statements were made.
These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including
without limitation the following: Merck KGaA’s ability to successfully
complete the proposed acquisition of Versum or realize the anticipated
benefits of the proposed transaction in the expected time-frames or at
all; Merck KGaA’s ability to successfully integrate Versum’s operations
into those of Merck KGaA; such integration may be more difficult,
time-consuming or costly than expected; the failure to obtain Versum’s
stockholders’ approval of the proposed transaction; the failure of any
of the conditions to the proposed transaction to be satisfied; revenues
following the proposed transaction may be lower than expected; operating
costs, customer loss and business disruption (including, without
limitation, difficulties in maintaining relationships with employees,
customers, clients or suppliers) may be greater than expected following
the proposed transaction; the retention of certain key employees at
Versum; risks associated with the disruption of management’s attention
from ongoing business operations due to the proposed transaction; the
outcome of any legal proceedings related to the proposed transaction;
the impact of the proposed transaction on Versum’s credit rating; the
parties’ ability to meet expectations regarding the timing and
completion of the proposed transaction; delays in obtaining any
approvals required for the proposed transaction or an inability to
obtain them on the terms proposed or on the anticipated schedule; the
impact of indebtedness incurred by Merck KGaA in connection with the
proposed transaction; the effects of the business combination of Versum
and Merck KGaA, including the combined company’s future financial
condition, operating results, strategy and plans; events beyond our
control such as acts of terrorism; product supply versus demand
imbalances in the semiconductor industry or in certain geographic
markets may decrease the demand for our goods and services; our
concentrated customer base; the dependence of our DS&S segment upon the
capital expenditure cycles of our customers; our ability to continue
technological innovation and successfully introduce new products to meet
the evolving needs of our customers; our ability to protect and enforce
our intellectual property rights and to avoid violating any third party
intellectual property or technology rights; unexpected interruption of
or shortages in our raw material supply; inability of sole source,
limited source or qualified suppliers to deliver to us in a timely
manner or at all; hazards associated with specialty chemical
manufacturing, such as fires, explosions and accidents, could disrupt
operations; increased competition and new product development by our
competitors, changing customer needs and price increases in materials
and components; operational, political and legal risks of our
international operations; increased costs due to trade wars and the
implementation of tariffs; the impact of changes in tax laws; the impact
of changes in environmental and health and safety regulations,
anticorruption enforcement, sanctions, import/export controls, tax and
other legislation and regulations in the U.S. and other jurisdictions in
which Versum Materials and its affiliates operate; our available cash
and access to additional capital may be limited by substantial leverage
and debt service obligations; possible liability for contamination,
personal injury or third party impacts if hazardous materials are
released into the environment; cyber security threats may compromise our
data or disrupt our information technology applications or services;
fluctuation of currency exchange rates; costs and outcomes of litigation
or regulatory investigations; the timing, impact, and other
uncertainties of future acquisitions or divestitures; and other risks,
uncertainties and factors discussed in the company’s Form 10-Qs, Form
10-K and in the company’s other filings with the U.S. Securities and
Exchange Commission available at www.sec.gov
or in materials incorporated therein by reference or in Merck KGaA’s
public reports which are available on the Merck KGaA, Darmstadt,
Germany, website at www.emdgroup.com.
Any forward-looking statement in this press release speaks only as of
the date on which it is made. The company assumes no obligation to
update or revise any forward-looking statements.

         

Versum Materials, Inc.

CONSOLIDATED INCOME STATEMENTS

(Unaudited)

 
Three Months Ended March 31, Six Months Ended March 31,
2019   2018   % Change 2019   2018   % Change
(In millions, except per share data and percentages)
Sales $ 326.2 $ 340.7 (4 )% $ 665.7 $ 671.5 (1 )%
Cost of sales (A),(B) 189.8 195.8 (3 )% 385.9 387.0 %
Selling and administrative (B) 32.6 36.5 (11 )% 68.1 71.8 (5 )%
Research and development 11.1 11.1 % 24.0 23.8 1 %
Business separation, restructuring and cost reduction actions 13.8 8.2 68 % 14.9 10.0 49 %
Other (income) expense, net (3.7 ) (0.5 ) NM (5.6 )   NM
Operating Income (B) 82.6 89.6 (8 )% 178.4 178.9 %
Interest expense 13.2 11.9 11 % 26.0 23.2 12 %
Write-off of financing costs NM 2.1 NM
Non-service components of net periodic pension cost(B) 0.2   0.2   % 0.4   0.4   %
Income Before Taxes 69.2 77.5 (11 )% 152.0 153.2 (1 )%
Income tax provision (A) 18.1   14.2   27 % 37.8   69.2   (45 )%
Net Income 51.1 63.3 (19 )% 114.2 84.0 36 %
Less: Net Income Attributable to Non-Controlling Interests 0.7   1.7   (59 )% 2.7   3.7   (27 )%
Net Income Attributable to Versum $ 50.4   $ 61.6   (18 )% $ 111.5   $ 80.3   39 %
Net income attributable to Versum per common share:
Basic $ 0.46   $ 0.57   (19 )% $ 1.02   $ 0.74   38 %
Diluted $ 0.46   $ 0.56   (18 )% $ 1.01   $ 0.73   38 %
Shares used in computing per common share amounts:
Basic 109.1 108.9 % 109.1 108.9 %
Diluted 110.0 109.7 % 109.9 109.8 %
  (A) – The fiscal year to date ended March 31, 2018 amounts have been
recast to reflect the retrospective application of the company’s
election to change its inventory valuation method of accounting for
its U.S. inventories from the LIFO method to the FIFO method, which
resulted in a decrease in Cost of sales of $0.2 million for the
fiscal year to date ended March 31, 2018 and an increase in the
Income tax provision of $0.1 million for the fiscal year to date
ended March 31, 2018.
 
(B) – The fiscal second quarter and year to date ended March 31,
2018 amounts have been recast to reflect the retrospective
application of the company’s change in classification of the
non-service components of net periodic pension cost. This resulted
in a decrease in Cost of sales of $0.1 million and $0.3 million for
the fiscal second quarter and year to date ended March 31, 2018,
respectively, a decrease in Selling and administrative of $0.1
million for the fiscal second quarter and year to date ended March
31, 2018, an increase to Operating Income of $0.2 million and $0.4
million for the fiscal second quarter and year to date ended March
31, 2018, respectively, and an increase to non-service components of
net periodic pension costs of $0.2 million and $0.4 million for the
fiscal second quarter and year to date ended March 31, 2018,
respectively.
         

Versum Materials, Inc.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31, 2019

September 30,
2018

(In millions)

Assets

Current Assets
Cash and cash items $ 390.8 $ 399.8
Short-term investment 11.4
Trade receivables, net 188.1 184.4
Inventories 203.1 177.1
Contracts in progress, less progress billings 32.0 20.3
Prepaid expenses 21.1 13.6
Other current assets 19.3   17.9  
Total Current Assets 865.8   813.1  
Plant and equipment, net 422.3 405.1
Goodwill 182.5 183.0
Intangible assets, net 60.7 63.5
Other non-current assets 35.9   40.6  
Total Non-Current Assets 701.4   692.2  
Total Assets $ 1,567.2   $ 1,505.3  

Liabilities and Stockholders’ Deficit

Current Liabilities
Payables and accrued liabilities $ 122.8 $ 138.6
Accrued income taxes 35.4 43.3
Short-term borrowings 0.3
Current portion of long-term debt 5.8   5.8  
Total Current Liabilities 164.3   187.7  
Long-term debt 972.2 974.2
Noncurrent income tax payable 32.3 37.3
Deferred tax liabilities 38.9 41.3
Other non-current liabilities 53.6   52.4  
Total Non-Current Liabilities 1,097.0   1,105.2  
Total Liabilities 1,261.3   1,292.9  
Stockholders’ Equity
Common stock 109.2 109.0
Capital in excess of par 8.7 6.1
Retained earnings 175.5 81.6
Accumulated other comprehensive income (loss) (23.8 ) (18.2 )
Total Versum’s Stockholders’ Equity 269.6 178.5
Non-Controlling Interests 36.3   33.9  
Total Stockholders’ Equity 305.9   212.4  
Total Liabilities and Stockholders’ Equity $ 1,567.2   $ 1,505.3  

Contacts

Investor Inquiries:
Soohwan Kim, CFA, (602)-282-0957
[email protected]

Media Inquiries:
Tiffany Elle, (480)-282-6475
[email protected]

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