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INDEX
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-30205
CMC Materials, Inc.
(Exact name of registrant as specified in its charter)
Delaware36-4324765
(State of Incorporation)(I.R.S. Employer Identification No.)
870 North Commons Drive60504
Aurora, Illinois
(Zip Code)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (630) 375-6631
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareCCMPNASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesNo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YesNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YesNo
As of April 29, 2022, the Company had 28,610,976 shares of Common Stock, par value $0.001 per share, outstanding.


INDEX
CMC MATERIALS, INC.
FORM 10-Q
INDEX
Page
Consolidated Statements of Changes in Stockholders’ Equity

2

INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CMC MATERIALS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited and in thousands, except per share amounts)
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Revenue$324,127 $290,528 $641,173 $578,391 
Cost of sales195,904 166,782 387,114 331,741 
Gross profit128,223 123,746 254,059 246,650 
Operating expenses:
Research, development and technical12,337 12,925 25,665 25,353 
Selling, general and administrative47,111 58,538 103,594 114,458 
Impairment charges— 208,221 9,435 215,568 
Entegris Transaction-related expenses12,243 — 18,293 — 
Total operating expenses71,691 279,684 156,987 355,379 
Operating income (loss)56,532 (155,938)97,072 (108,729)
Interest expense, net9,537 9,495 19,280 19,080 
Other (expense) income, net(1,445)(484)(1,597)968 
Income (loss) before income taxes45,550 (165,917)76,195 (126,841)
Provision for (benefit from) income taxes10,979 (16,109)14,196 (8,563)
Net income (loss)$34,571 $(149,808)$61,999 $(118,278)
Basic earnings (loss) per share$1.21 $(5.13)$2.17 $(4.06)
Diluted earnings (loss) per share$1.19 $(5.13)$2.14 $(4.06)
Weighted average basic shares outstanding28,609 29,210 28,526 29,164 
Weighted average diluted shares outstanding28,999 29,210 28,909 29,164 
The accompanying notes are an integral part of these Consolidated Financial Statements.
3

INDEX
CMC MATERIALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Net income (loss)$34,571 $(149,808)$61,999 $(118,278)
Other comprehensive income:
Foreign currency translation adjustment(11,112)(13,763)(13,741)7,780 
Income tax (expense) benefit(305)(52)(268)30 
Total foreign currency translation adjustment, net of tax(11,417)(13,815)(14,009)7,810 
Unrealized gain on cash flow hedges:
Change in fair value26,508 19,361 31,979 12,912 
Reclassification adjustment into earnings3,578 3,595 7,155 6,969 
Income tax expense(6,869)(5,140)(8,935)(4,451)
Total unrealized gain on cash flow hedges, net of tax23,217 17,816 30,199 15,430 
Other comprehensive income, net of tax11,800 4,001 16,190 23,240 
Comprehensive income (loss)$46,371 $(145,807)$78,189 $(95,038)
The accompanying notes are an integral part of these Consolidated Financial Statements.
4

INDEX
CMC MATERIALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except per share amount)
March 31, 2022September 30, 2021
ASSETS
Current assets:
Cash and cash equivalents$237,685 $185,979 
Accounts receivable, less allowance for credit losses of $460 at March 31, 2022 and $527 at September 30, 2021
169,345 150,099 
Inventories184,730 173,464 
Prepaid expenses and other current assets35,460 25,439 
Total current assets627,220 534,981 
Property, plant and equipment, net346,344 354,771 
Goodwill564,279 576,902 
Other intangible assets, net584,657 625,434 
Deferred income taxes6,256 6,813 
Other long-term assets71,850 51,984 
Total assets$2,200,606 $2,150,885 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$55,540 $52,748 
Current portion of long-term debt10,650 13,313 
Accrued expenses and other current liabilities132,738 139,797 
Total current liabilities198,928 205,858 
Long-term debt, net of current portion899,153 903,031 
Deferred income taxes74,016 74,930 
Other long-term liabilities84,428 88,129 
Total liabilities1,256,525 1,271,948 
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common Stock Authorized: 200,000 shares, $0.001 par value; Issued: 40,512 shares at March 31, 2022, and 40,221 shares at September 30, 2021
41 40 
Capital in excess of par value of common stock1,080,599 1,052,869 
Retained earnings467,515 431,968 
Accumulated other comprehensive income20,981 4,791 
Treasury stock at cost, 11,900 shares at March 31, 2022, and 11,795 shares at September 30, 2021
(625,055)(610,731)
Total stockholders’ equity944,081 878,937 
Total liabilities and stockholders’ equity$2,200,606 $2,150,885 
The accompanying notes are an integral part of these Consolidated Financial Statements.
5

INDEX
CMC MATERIALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and amounts in thousands)
Six Months Ended March 31,
20222021
Cash flows from operating activities:
Net income (loss)$61,999 $(118,278)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization65,464 64,180 
Share-based compensation expense10,897 11,170 
Deferred income tax benefit(9,546)(32,771)
Impairment charges9,435 215,568 
Amortization of terminated interest rate swap contract5,572 3,715 
Amortization of debt issuance costs1,699 1,549 
Accretion on Asset Retirement Obligations300 293 
Non-cash foreign exchange loss (gain)284 (1,392)
Loss on disposal of assets21 560 
Other(608)(1,933)
Changes in operating assets and liabilities:
Accounts receivable(21,454)(12,352)
Inventories(12,752)(1,423)
Prepaid expenses and other assets(1,645)(16,137)
Accounts payable6,097 5,261 
Accrued expenses and other liabilities(5,556)5,498 
Net cash provided by operating activities110,207 123,508 
Cash flows from investing activities:
Additions to property, plant and equipment(23,310)(21,119)
Proceeds from the sale of assets10 363 
Net cash used in investing activities(23,300)(20,756)
Cash flows from financing activities:
Dividends paid(26,524)(26,115)
Proceeds from issuance of stock16,834 10,279 
Repurchases of common stock under Share Repurchase Program(10,600)(10,002)
Repayment of long-term debt(7,987)(5,325)
Repurchases of common stock withheld for taxes(3,724)(5,436)
Other financing activities(264)(72)
Net cash used in financing activities(32,265)(36,671)
Effect of exchange rate changes on cash(2,936)1,401 
Increase in cash and cash equivalents51,706 67,482 
Cash and cash equivalents at beginning of period185,979 257,354 
Cash and cash equivalents at end of period$237,685 $324,836 
Supplemental Cash Flow Information:
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of the period$2,177 $4,180 
Cash paid during the period for lease liabilities3,730 4,079 
Right of use asset obtained in exchange for lease liabilities294 2,761 
The accompanying notes are an integral part of these Consolidated Financial Statements.
6

INDEX
CMC MATERIALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited and in thousands, except per share amount)
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Shares$Shares$Shares$Shares$
Common Stock:
Beginning balance40,466 $40 40,092 $40 40,221 $40 39,914 $40 
Issuance of common stock under stock plans46 95 — 291 273 — 
Ending balance40,512 41 40,187 40 40,512 41 40,187 40 
Capital in Excess of Par:
Beginning balance1,072,076 1,030,677 1,052,869 1,019,803 
Share-based compensation expense4,894 5,319 10,897 11,170 
Exercise of stock options3,629 5,256 13,122 6,693 
Issuance of common stock under Employee Stock Purchase Plan— — 3,711 3,371 
Issuance of restricted stock under Deposit Share Program— — — 215 
Ending balance1,080,599 1,041,252 1,080,599 1,041,252 
Retained Earnings:
Beginning balance446,193 572,441 431,968 553,718 
Net income (loss)34,571 (149,808)61,999 (118,278)
Dividends(13,249)(13,650)(26,452)(26,457)
Ending balance467,515 408,983 467,515 408,983 
Accumulated Other Comprehensive Income (Loss):
Beginning balance9,181 5,135 4,791 (14,104)
Foreign currency translation adjustment(11,417)(13,815)(14,009)7,810 
Cash flow hedges23,217 17,816 30,199 15,430 
Ending balance20,981 9,136 20,981 9,136 
Treasury Stock:
Beginning balance11,898 (624,670)10,931 (499,565)11,795 (610,731)10,834 (485,144)
Repurchases of common stock under Share Repurchase Program— — (801)79 (10,600)67 (10,002)
Repurchases of common stock - other(385)(216)26 (3,724)37 (5,436)
Ending balance11,900 (625,055)10,938 (500,582)11,900 (625,055)10,938 (500,582)
Total Equity$944,081 $958,829 $944,081 $958,829 
Dividends per share of common stock$0.46 $0.46 $0.92 $0.90 
The accompanying notes are an integral part of these Consolidated Financial Statements.
7

INDEX
CMC MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except per share amounts)
1. BACKGROUND AND BASIS OF PRESENTATION
CMC Materials, Inc. (“CMC”, “the Company”, “us”, “we”, or “our”) is a leading global supplier of consumable materials, primarily to semiconductor manufacturers. 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. On April 1, 2021 (“Acquisition Date”), the Company completed the acquisition of 100% of International Test Solutions, LLC (“ITS”) (“Acquisition”), which has expanded the Company’s portfolio of critical enabling solutions in the semiconductor manufacturing process. The Consolidated Financial Statements included in this Report on Form 10-Q include the financial results of ITS from the Acquisition Date. The Acquisition would not have materially affected the Company’s results of operations or financial position for the prior periods presented.
We operate our business within two reportable segments: Electronic Materials and Performance Materials. The Electronic Materials segment consists of our chemical mechanical planarization (“CMP”) slurries, CMP pads, electronic chemicals, and materials technologies businesses. The Performance Materials segment consists of our pipeline and industrial materials (“PIM”), wood treatment, and QED Technologies International, Inc. (“QED”) businesses.
The unaudited Consolidated Financial Statements have been prepared by CMC pursuant to the rules of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. In the opinion of management, these unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of CMC’s financial position, cash flows, and results of operations for the periods presented. The results may not be indicative of the results that may be expected for the fiscal year ending September 30, 2022. This Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
The Consolidated Financial Statements include the accounts of CMC and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated.
In the Consolidated Statements of Income (Loss) of this Report on Form 10-Q, the presentation for Interest income has been changed for the three and six months ended March 31, 2021 to conform to the current presentation. The amounts for the three and six months ended March 31, 2021 related to Interest income are now presented under “Interest expense, net.”
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from these estimates under different assumptions or conditions.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
ASU No. 2019-12 “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes, was issued to simplify Topic 740 through improving consistency and removing certain exceptions to general principles. The Company adopted this standard effective October 1, 2021, which did not have a material impact on our results of operations or financial condition.
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED
ASU No. 2020-04 “Reference Rate Reform” (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provides optional guidance for accounting for contracts, hedging relationships, and other transactions affected by the reference rate reform, if certain criteria are met. The provisions of this standard are available for election through December 31, 2022. We are currently evaluating the impact of the reference rate reform on our contracts and the resulting impact of adopting this standard on our financial statements.
8

2. MERGER AGREEMENT
On December 14, 2021, the Company entered into an agreement and plan of merger (“Merger Agreement”) with Entegris, Inc. (“Entegris”) and Yosemite Merger Sub, Inc., a wholly owned subsidiary of Entegris (“Merger Sub”) under which Entegris will acquire the Company in a cash and stock transaction. The Merger Agreement provides that (1) Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Entegris, and (2) at the effective time of the Merger, each issued and outstanding share of CMC common stock (other than (i) shares of CMC common stock owned by the Company, Entegris or any of their respective subsidiaries immediately prior to the effective time of the Merger and (ii) shares of CMC common stock as to which dissenters’ rights have been properly perfected) will be converted into the right to receive $133 in cash and 0.4506 shares of Entegris common stock, plus cash in lieu of any fractional shares (the “Entegris Transaction”). The Merger Agreement was approved by our stockholders at a special meeting held on March 3, 2022.
The Entegris Transaction, which is currently expected to close in the second half of calendar 2022, is subject to the satisfaction of certain customary closing conditions, including, among others, receipt of certain regulatory approvals. The Merger Agreement contains certain termination rights for both CMC and Entegris.
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company disaggregates revenue by product area and segment as it best depicts the nature and amount of the Company’s revenue. See Note 16 of this Report on Form 10-Q for more information.
The following table provides information about contract liability balances:
Consolidated Balance Sheet LocationMarch 31, 2022September 30, 2021
Contract liabilities (current)Accrued expenses and other current liabilities$10,254 $8,883 
Contract liabilities (noncurrent)Other long-term liabilities3,981 1,788 
4. SEVERANCE AND EXIT COSTS
During the first quarter of fiscal 2022, the Company initiated a strategic cost optimization program (“Future Forward”) designed to implement structural changes to enhance operational efficiencies. Future Forward includes targeted position eliminations and other actions to reduce expenses.
As a result of the Future Forward program, the Company recorded the following expenses, which were not allocated to either of the Company’s two reportable segments:
Consolidated Statement of Income (Loss) Location
Three Months Ended March 31, 2022Six Months Ended March 31, 2022
Employee severance expenses:
Cost of sales$$971 
Selling, general and administrative43 2,053 
Total$45 $3,024 
As of March 31, 2022, liabilities related to Future Forward were classified as current and presented within Accrued expenses and other current liabilities within the Consolidated Balance Sheets. Liability activity for Future Forward for the six months ended March 31, 2022 is as follows:
Balance at September 30, 2021
$— 
Charge to earnings3,024 
Cash paid(2,516)
Balance at March 31, 2022
$508 
Additional Future Forward initiatives may be implemented during fiscal 2022 that may result in additional expense or charges.
9

5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to record certain assets and liabilities at fair value. The valuation methods used for determining the fair value of these financial instruments by hierarchy are as follows:
Level 1
Cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active markets.
Other long-term investments represent the fair value of investments under our supplemental employee retirement plan (“SERP”). The fair value of the investments is determined through quoted market prices within actively traded markets.
Level 2
Derivative financial instruments include foreign exchange contracts and an interest rate swap contract. The fair value of our derivative instruments is estimated using standard valuation models and market-based observable inputs over the contractual term, including one-month London Inter-bank Offered Rate (“LIBOR”) based yield curves for the interest rate swap, and forward rates and/or the Overnight Index Swap curve for forward foreign exchange contracts, among others.
Level 3No Level 3 financial instruments
The following table presents financial instruments, other than debt, that we measure at fair value on a recurring basis. See Note 11 of this Report on Form 10-Q for a discussion of our debt. In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified it based on the lowest level input that is significant to the determination of the fair value. 
Level 1Level 2Level 3Total Fair Value
March 31, 2022September 30, 2021March 31, 2022September 30, 2021March 31, 2022September 30, 2021March 31, 2022September 30, 2021
Assets:
Cash and cash equivalents$237,685 $185,979 $— $— $— $— $237,685 $185,979 
Other long-term investments1,541 1,439 — — — — 1,541 1,439 
Derivative financial instruments— — 43,027 12,335 — — 43,027 12,335 
Total assets$239,226 $187,418 $43,027 $12,335 $— $— $282,253 $199,753 
Liabilities:
Derivative financial instruments— — 489 3,383 — — 489 3,383 
Total liabilities$— $— $489 $3,383 $— $— $489 $3,383 
6. INVENTORIES
Inventories consisted of the following:
March 31, 2022September 30, 2021
Raw materials$72,092 $67,969 
Work in process18,705 17,358 
Finished goods93,933 88,137 
Total$184,730 $173,464 
10

7. GOODWILL
Goodwill activity for each of the Company’s reportable segments for the six months ended March 31, 2022 is as follows:
Electronic MaterialsPerformance MaterialsTotal
Balance at September 30, 2021, net of accumulated impairment of $227,126
$444,233 $132,669 $576,902 
Foreign currency translation impact(3,393)205 (3,188)
Impairment (See Note 8)
— (9,435)(9,435)
Balance at March 31, 2022, net of accumulated impairment of $236,561
$440,840 $123,439 $564,279 
The Company recorded non-cash, pre-tax goodwill impairment charges of $9,435 for the six months ended March 31, 2022 and $6,671 and $10,752 for the three and six months ended March 31, 2021, respectively, due to the previously announced planned closure of the wood treatment business, which the Company completed during the second quarter of fiscal 2022, included in the Performance Materials segment. See Note 8 of this Report on Form 10-Q for a discussion of the wood treatment impairments.
During the second quarter of fiscal 2021, the Company recorded a non-cash, pre-tax goodwill impairment charge of $201,550 related to the PIM reporting unit, included in the Performance Materials segment, due to adverse impacts of the COVID-19 Pandemic (“Pandemic”) and higher raw material cost. The goodwill impairment charge and related tax benefit of $23,539 are presented within Impairment charges and the Provision for (benefit from) income taxes, respectively, in the Consolidated Statements of Income (Loss) for the three and six months ended March 31, 2021.
We continue to monitor the industries in which we operate and our businesses’ performance for indicators of potential impairment. We perform an impairment assessment of goodwill and other intangible assets at the reporting unit level annually, or more frequently if circumstances indicate that the carrying value may not be recoverable. As previously disclosed, the estimated fair value of the PIM reporting unit was determined to exceed the carrying value by approximately 5% as of the most recent annual assessment date, July 1, 2021. Potential future impairments could be material to the Company’s Consolidated Balance Sheets and to the Consolidated Statements of Income (Loss), but we do not expect them to affect the Company’s reported Net cash provided by operating activities.
8. WOOD TREATMENT
As a result of our previously announced planned closure of the Company's wood treatment business, the Matamoros, Mexico and the Tuscaloosa, Alabama facilities ceased production during the first and second quarters of fiscal 2022, respectively, and the remaining inventory was sold to customers during the second quarter of fiscal 2022. The exit of the wood treatment business did not meet the criteria to be classified as a discontinued operation in the Company’s financial statements.
During the first quarter of fiscal 2022, the Company recorded a non-cash, pre-tax goodwill impairment charge of $9,435, resulting in no remaining carrying value of goodwill or long-lived assets for the wood treatment business. The Company recorded long-lived asset and goodwill impairment charges of $6,671 and $14,018 for the three and six months ended March 31, 2021, respectively.
The impairment charges, included in the Performance Materials segment, are presented within Impairment charges in the Consolidated Statements of Income (Loss) for the six months ended March 31, 2022 and the three and six months ended March 31, 2021. The goodwill impairment charge is not tax deductible, therefore there is no related tax benefit for the six months ended March 31, 2022 or the three and six months ended March 31, 2021.
9. OTHER LONG-TERM ASSETS
March 31, 2022September 30, 2021
Interest rate swap (See Note 12)
$36,902 $12,335 
Right of use assets25,738 29,302 
Prepaid unamortized debt issuance cost - revolver2,151 2,201 
SERP investments1,541 1,439 
Vendor contract assets732 1,329 
Other long-term assets4,786 5,378 
Total$71,850 $51,984 
11

10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
March 31, 2022September 30, 2021
Accrued compensation$34,501 $47,360 
Income taxes payable15,585 16,836 
Dividends payable13,755 13,827 
Asset retirement obligation (current)12,163 11,933 
Entegris Transaction-related liabilities11,593 — 
Contract liabilities (current)10,254 8,883 
Taxes, other than income taxes7,577 6,620 
Current portion of operating lease liability7,328 7,646 
Current portion of terminated swap liability (See Note 12)
5,855 5,855 
Goods and services received, not yet invoiced4,859 3,866 
Accrued interest197 1,846 
Interest rate swap liability (See Note 12)
— 2,995 
Other9,071 12,130 
Total$132,738 $139,797 
11. DEBT
March 31, 2022September 30, 2021
Senior Secured Term Loan Facility, one-month LIBOR plus 2.00%
$920,388 $928,375 
Less: Unamortized debt issuance costs(10,585)(12,031)
Total debt909,803 916,344 
Less: Current maturities and short-term debt(10,650)(13,313)
Total long-term debt excluding current maturities$899,153 $903,031 
The Company’s credit agreement as amended (“Amended Credit Agreement”) includes a Senior Secured Term Loan Facility (“Term Loan Facility”) and a revolving credit facility (“Revolving Credit Facility”). As of March 31, 2022, there were no borrowings outstanding under the Revolving Credit Facility and our available credit was $350,000, which includes our letter of credit sub-facility.
At March 31, 2022 and September 30, 2021, the fair value of the Term Loan Facility, using level 2 inputs, approximated its carrying value as the loan bears a floating market rate of interest.
As of March 31, 2022, scheduled principal repayments of the Term Loan Facility were:
Fiscal YearPrincipal Repayments
Remainder of 2022$5,326 
202310,650 
202410,650 
202510,650 
2026883,112 
Total$920,388 
12. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates.  We enter into certain derivative transactions to mitigate the volatility associated with these exposures. 
12

CASH FLOW HEDGES - INTEREST RATE SWAP CONTRACT
During the first quarter of fiscal 2021, the Company entered into a new interest rate swap agreement to extend the duration of its existing swap arrangement and to take advantage of lower interest rates. At that time, the then existing interest rate swap, which was in a loss position of $35.3 million, was terminated, and the hedging relationship was de-designated. The liability for the terminated interest rate swap is not measured at fair value. The current and long-term portion of the liability for the terminated swap are recorded in Accrued expenses and other current liabilities and Other long-term liabilities, respectively, on the Consolidated Balance Sheet and will be paid over the remaining term of the new swap. The loss amount for the terminated swap is included in Accumulated other comprehensive income and will be amortized on a straight-lined basis into interest expense through January 31, 2024, the remaining term of the original swap.
The new interest rate swap is a floating-to-fixed interest rate swap contract to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt. The notional amount is scheduled to decrease quarterly and will expire on January 29, 2027. The new interest rate swap was designated as a cash flow hedge based on certain quantitative and qualitative assessments and we have determined that the hedge is highly effective and qualifies for hedge accounting.
FOREIGN CURRENCY CONTRACTS NOT DESIGNATED AS HEDGES
We enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. These foreign exchange contracts do not qualify for hedge accounting.
The notional amounts of our derivative instruments are as follows:
March 31, 2022September 30, 2021
Derivatives designated as hedging instruments:
Interest rate swap contract - new agreement$552,015 $555,210 
Derivatives not designated as hedging instruments:
Foreign exchange contracts to purchase U.S. dollars$4,250 $4,225 
Foreign exchange contracts to sell U.S. dollars29,290 23,235 
The fair values of our derivative instruments included in the Consolidated Balance Sheets are as follows:
Derivative AssetsDerivative Liabilities
Consolidated Balance Sheet LocationMarch 31, 2022September 30, 2021March 31, 2022September 30, 2021
Derivatives designated as hedging instruments:
Interest rate swap contractPrepaid expenses and other current assets$6,001 $— $— $— 
Other long-term assets36,902 12,335 — — 
Accrued expenses and other current liabilities— — — 2,995 
Derivatives not designated as hedging instruments:
Foreign exchange contractsPrepaid expenses and other current assets$124 $— $— $— 
Accrued expenses and other current liabilities— — 489 388 
13

The following table summarizes the effects of our derivative instruments on our Consolidated Statements of Income (Loss):
Loss Recognized in Statement of Income (Loss)
Consolidated Statement of Income (Loss) LocationThree Months Ended March 31,Six Months Ended March 31,
2022202120222021
Derivatives designated as hedging instruments:
Interest rate swap contractInterest expense, net$(792)$(809)$(1,583)$(3,254)
Terminated interest rate swap contractInterest expense, net(2,786)(2,786)(5,572)(3,715)
Derivatives not designated as hedging instruments:
Foreign exchange contractsOther (expense) income, net$(673)$(759)$(1,385)$(637)
The following table summarizes the effects of our derivative instruments on Accumulated other comprehensive income:
Gain Recognized in Other Comprehensive Income
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Derivatives designated as hedging instruments:
Interest rate swap contract$26,508 $19,361 $31,979 $12,912 
We expect approximately $5,143 to be reclassified from Accumulated other comprehensive income into Interest expense, net during the next twelve months related to our interest rate swap based on projected rates of the LIBOR forward curve as of March 31, 2022. This amount includes the amortization of the loss associated with the terminated swap contract.
13. COMMITMENTS AND CONTINGENCIES
In connection with the acquisition of KMG, through our subsidiary KMG-Bernuth, Inc. (“KMG-Bernuth”), as of November 15, 2018, we assumed a contingency related to the Star Lake Canal Superfund Site near Beaumont, Texas (“Star Lake”). In 2014, prior to the acquisition of KMG, the United States Environmental Protection Agency (“EPA”) had notified KMG-Bernuth that the EPA considered it to be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, in connection with Star Lake. Although KMG-Bernuth has not conceded liability with respect to Star Lake, and has asserted to the EPA and other parties its defenses to any liability, KMG-Bernuth and seven other cooperating parties entered into an agreement with the EPA in September 2016 to complete a remedial design of the remediation actions for the site and recorded a reserve at that time. During the fourth quarter of fiscal 2021, an additional reserve for the anticipated remedial action phase, which will be performed under a separate future agreement, was established for $2,508. As of March 31, 2022, the reserve related to Star Lake was $2,711.
Separately, in fiscal 2019, a fire, which involved non-hazardous waste materials and caused no injuries, occurred at a warehouse at the KMG-Bernuth wood treatment facility in Tuscaloosa, Alabama. Although we believe we have completed cleanup efforts related to the fire incident, there are potential other related costs that cannot be reasonably estimated as of this time due to the nature of federally-regulated requirements for the products produced there. During the second quarter of fiscal 2022, the Company received a settlement of $3,500 related to the fire incident, and we continue to work with our insurance carriers on possible recovery of losses and costs related to it. At this point we cannot reasonably estimate whether we will receive any additional insurance recoveries, or if so, the amount of such recoveries.
PURCHASE OBLIGATIONS
We have $6,818 of contractual commitments through December 2022 under an abrasive particle supply agreement and a contractual commitment of $4,478 to purchase non-water based carrier fluid.
14

14. INCOME TAXES
The Company recorded income tax expense of $10,979 and $14,196 for the three and six months ended March 31, 2022, respectively, compared to income tax benefits of $16,109 and $8,563 for the three and six months ended March 31, 2021, respectively. The Company’s effective income tax rate was 24.1% and 18.6% for the three and six months ended March 31, 2022, respectively, compared to 9.7% and 6.8% for the three and six months ended March 31, 2021, respectively. The changes in our effective tax rate for the three and six months ended March 31, 2022 compared to the prior year were primarily attributable to a lower unfavorable impact from the goodwill impairment charges related to PIM and wood treatment and a higher tax benefit related to share-based compensation.
15. EARNINGS (LOSS) PER SHARE
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Numerator:
Net income (loss) available to common shares$34,571 $(149,808)$61,999 $(118,278)
Denominator:
Weighted average common shares28,609 29,210 28,526 29,164 
Weighted average effect of dilutive securities390 — 383 — 
Diluted weighted average common shares28,999 29,210 28,909 29,164 
Earnings (loss) per share:
Basic$1.21 $(5.13)$2.17 $(4.06)
Diluted$1.19 $(5.13)$2.14 $(4.06)
For the three and six months ended March 31, 2021, no dilutive shares were calculated, as dilutive potential common shares in a net loss situation would be anti-dilutive.
Shares excluded from the calculation of Diluted earnings per share as their inclusion would have been anti-dilutive under the treasury stock method are as follows:
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Outstanding stock options427
16. SEGMENT REPORTING
We identify our segments based on our management structure and the financial information used by our chief executive officer, who is our chief operating decision maker, to assess segment performance and allocate resources among our operating units. We have the following two reportable segments:
ELECTRONIC MATERIALS
Electronic Materials includes products and solutions for the semiconductor industry and consists of our CMP slurries, CMP pads, electronic chemicals, and materials technologies businesses.
PERFORMANCE MATERIALS
Performance Materials consists of our PIM, wood treatment, and QED businesses.
15

Our chief operating decision maker evaluates segment performance based upon revenue and segment adjusted EBITDA.  Segment adjusted EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, adjusted for certain items that affect comparability from period to period. These adjustments include impairment charges, Entegris Transaction-related expenses, Future Forward-related expenses, acquisition and integration-related expenses, net costs related to restructuring of the wood treatment business, costs related to the Pandemic, net of grants received, and costs related to the KMG-Bernuth warehouse fire, net of recoveries. We exclude these items from earnings when presenting adjusted EBITDA because we believe they are not indicative of a segment’s regular, ongoing operating performance. Adjusted EBITDA is also a performance metric for our fiscal 2022 Short-Term Incentive Program (“STIP”). Our chief operating decision maker does not use assets by segment to evaluate performance or allocate resources, and therefore, we do not disclose assets by segment.
The two segments operate independently and serve different markets and customers, as a result there are no sales between segments. Revenue from external customers by segment are as follows:
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Electronic Materials:
CMP slurries$146,540 $140,194 $292,681 $274,915 
Electronic chemicals95,111 80,098 186,250 160,104 
CMP pads26,815 22,255 50,854 44,326 
Materials technologies6,045 — 12,377 — 
Total Electronic Materials274,511 242,547 542,162 479,345 
Performance Materials:
PIM30,394 25,987 57,029 51,894 
Wood treatment10,907 15,546 25,865 32,869 
QED8,315 6,448 16,117 14,283 
Total Performance Materials49,616 47,981 99,011 99,046 
Total$324,127 $290,528 $641,173 $578,391 
Capital expenditures by segment are as follows:
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Electronic Materials$6,229 $6,258 $13,365 $11,692 
Performance Materials419 957 2,029 2,267 
Corporate3,289 2,500 5,083 5,975 
Total$9,938 $9,715 $20,478 $19,934 
16

Adjusted EBITDA by segment is as follows:
Three Months Ended March 31,Six Months Ended March 31,
2022202120222021
Net income (loss)$34,571 $(149,808)$61,999 $(118,278)
Interest expense, net9,537 9,495 19,280 19,080 
Provision for (benefit from) income taxes10,979 (16,109)14,196 (8,563)
Depreciation and amortization32,762 32,289 65,464 64,180 
EBITDA87,849 (124,133)160,939 (43,581)
Entegris Transaction-related expenses12,243 — 18,293 — 
Impairment charges— 208,221 9,435 215,568 
Future Forward-related expenses45 — 3,024 — 
Net costs related to restructuring of the wood treatment business219 46 245 72 
Costs related to the Pandemic, net of grants received— (421)— 841 
Acquisition and integration-related expenses(540)2,167 (233)4,536 
Costs related to KMG-Bernuth warehouse fire, net of recoveries(3,500)(1,076)(3,500)(1,076)
Consolidated adjusted EBITDA$96,316 $84,804 $188,203 $176,360 
Segment adjusted EBITDA:
Electronic Materials$93,957 $81,315 $182,039 $162,071 
Performance Materials13,901 18,750 28,902 41,725 
Unallocated corporate expenses(11,542)(15,261)(22,738)(27,436)
Consolidated adjusted EBITDA$96,316 $84,804 $188,203 $176,360 
The unallocated portions of corporate functions, including finance, legal, human resources, information technology, and corporate development, are not directly attributable to a reportable segment.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures included elsewhere in this Report on Form 10-Q, include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“the Act”). The Act provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this Report on Form 10-Q are forward-looking and address a variety of subjects including, for example, the proposed Entegris Transaction, including expected timing, completion and effects of the proposed transaction; expected savings from our strategic cost optimization program (“Future Forward”); future sales and operating results; growth or contraction, and trends in the industries and markets in which the Company participates, such as the semiconductor, and oil and gas industries; the acquisition of, investment in, or collaboration with other entities, and the expected benefits and synergies of such transactions; divestment or disposition, or cessation of investment in certain of the Company’s businesses; new product introductions; development of new products, technologies and markets; product performance; the financial conditions of the Company’s customers; the competitive landscape that relates to the Company’s business; the Company’s supply chain; natural disasters; various economic or political factors and international or national events, including related to global public health crises such as the COVID-19 pandemic (“Pandemic”), the ongoing conflict between the Russian Federation and Ukraine and sanctions imposed in connection therewith, and the enactment of trade sanctions, tariffs, or other similar matters; the generation, protection and acquisition of intellectual property, and litigation related to such intellectual property or third party intellectual property; environmental, health and safety laws and regulations, and related compliance and costs of compliance; the operation of facilities by the Company; the Company’s management; foreign exchange fluctuation; the Company’s current or future tax rate, including the effects of changes to tax laws in the jurisdictions in which the Company operates; cybersecurity threats and vulnerabilities; and, financing facilities and related debt, pay off or payment of principal and interest, and compliance with covenants and other terms, uses and investment of the Company's cash balance. Statements that are not historical facts, including statements about CMC’s beliefs, plans and expectations, are forward-looking statements. Such statements are based on current expectations of CMC’s management and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. For information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to CMC’s filings with the SEC, including the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 and this Report on Form 10-Q. Except as required by law, CMC undertakes no obligation to update forward-looking statements made by it to reflect new information, subsequent events or circumstances. The section entitled “Risk Factors” describes some, but not all, the factors that could cause these differences.
The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, including the Consolidated Financial Statements and related notes thereto.
RECENT EVENTS
During the second quarter of fiscal 2022, the Company continued its Future Forward cost optimization program to enhance operational efficiencies. The Company recorded employee severance expense of $3.0 million for the six months ended March 31, 2022. Additional Future Forward initiatives may be implemented during fiscal 2022 that may result in additional expense or charges.
At a special meeting of the Company’s stockholders held on March 3, 2022, our stockholders approved the agreement and plan of merger (“Merger Agreement”) with Entegris, Inc. (“Entegris”) and Yosemite Merger Sub, Inc., a wholly owned subsidiary of Entegris (“Merger Sub”) under which Entegris will acquire the Company in a cash and stock transaction, which the Company had entered into on December 14, 2021. The Merger Agreement provides that (1) Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Entegris, and (2) at the effective time of the Merger, each issued and outstanding share of CMC common stock (other than (i) shares of CMC common stock owned by the Company, Entegris or any of their respective subsidiaries immediately prior to the effective time of the Merger and (ii) shares of CMC common stock as to which dissenters’ rights have been properly perfected) will be converted into the right to receive $133 in cash and 0.4506 shares of Entegris common stock, plus cash in lieu of any fractional shares (the “Entegris Transaction”).
The Entegris Transaction is subject to the satisfaction of certain customary closing conditions, including, among others, receipt of certain regulatory approvals. The Merger Agreement contains certain termination rights for both the Company and Entegris.
See the section titled “Risk Factors—Risks Relating to the Entegris Transaction” for more information regarding the risks associated with the Entegris Transaction.
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The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is filed as Exhibit 2.1 of our Current Report on Form 8-K filed on December 16, 2021.
SECOND QUARTER OF FISCAL 2022 OVERVIEW
While global macroeconomic uncertainty continues worldwide and in the countries and locations in which we and our customers and suppliers operate, our business in our fiscal second quarter of 2022 showed continued resiliency overall. In our Electronic Materials business segment, which represents more than 80% of our revenue, we experienced growth in each of our businesses over the prior year driven by customer technology advancement and increased demand for our products. Our Performance Materials business segment experienced an increase in revenue over the prior year, despite the decline in revenue in the wood treatment business related to the completion of final sales to customers in the second quarter of fiscal 2022 as planned due to the previously announced exit of this business. Our PIM business achieved its highest revenue quarter since the second quarter of fiscal year 2020 as the business recovers from the impacts of the Pandemic and benefits from the ramp of domestic and international demand.
To date, we have not seen a significant impact from the global macroeconomic uncertainty on our ability to manufacture and deliver products to our customers, but we have continued to experience a rise in certain raw material costs and broad constraints in the global supply chain, including in logistics, and higher freight and logistics costs.
KEY FINANCIAL RESULTS
Our consolidated results of operations are as follows:
(Dollars in thousands)Three Months Ended March 31,
20222021
Revenue$324,127 $290,528 
Net income (loss)34,571 (149,808)
Adjusted EBITDA96,316 84,804 
Adjusted EBITDA Margin29.7 %29.2 %
Our second quarter of fiscal 2022 consolidated revenue benefited from 13.2% growth in the company’s Electronic Materials segment and 3.4% growth in the Performance Materials segment with stronger demand across all our Electronic Materials businesses and PIM and QED products, global price increases, and the addition of the materials technologies business, which represents the acquisition of ITS. Consolidated net income increased driven by the absence of the fiscal 2021 impairment charges recorded for the wood treatment and PIM businesses. Adjusted EBITDA margin increased primarily due to higher revenue and lower operating expenses.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the changes in balances on the Consolidated Statement of Income (Loss):
(Dollars in thousands)Three Months Ended March 31,Six Months Ended March 31,
20222021$ Change% Change20222021$ Change% Change
Revenue$324,127 $290,528 $33,599 11.6 %$641,173 $578,391 $62,782 10.9 %
Cost of sales195,904 166,782 29,122 17.5 %387,114 331,741 55,373 16.7 %
Gross profit128,223 123,746 4,477 3.6 %254,059 246,650 7,409 3.0 %
Operating expenses:
Research, development and technical12,337 12,925 (588)(4.5 %)25,665 25,353 312 1.2 %
Selling, general and administrative47,111 58,538 (11,427)(19.5 %)103,594 114,458 (10,864)(9.5 %)
Impairment charges— 208,221 (208,221)(100.0 %)9,435 215,568 (206,133)(95.6 %)
Entegris Transaction-related expenses12,243 — 12,243 N/M18,293 — 18,293 N/M
Total operating expenses71,691 279,684 (207,993)(74.4 %)156,987 355,379 (198,392)(55.8 %)
Operating income (loss)56,532 (155,938)212,470 136.3 %97,072 (108,729)205,801 189.3 %
Interest expense, net9,537 9,495 42 0.4 %19,280 19,080 200 1.0 %
Other (expense) income, net(1,445)(484)(961)(198.6 %)(1,597)968 (2,565)(265.0 %)
Income (loss) before income taxes45,550 (165,917)211,467 127.5 %76,195 (126,841)203,036 160.1 %
Provision for (benefit from) income taxes10,979 (16,109)27,088 168.2 %14,196 (8,563)22,759 265.8 %
Net income (loss)$34,571 $(149,808)$184,379 123.1 %$61,999 $(118,278)$180,277 152.4 %
Most of CMC’s foreign operations maintain their accounting records in their local currencies. As a result, period to period comparability of results of operations is affected by fluctuations in exchange rates. The impact on comparability is not material in any given period.
REVENUE
The increases in Revenue for the three and six months ended March 31, 2022 compared to the three and six months ended March 31, 2021 were primarily driven by 13.2% and 13.1% growth in the Electronic Materials segment, respectively, due to increased demand for our products, global price increases, and the addition of the materials technologies business. Consolidated revenue also increased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to increased demand for PIM and QED products, partially offset by the exit of the wood treatment business.
COST OF SALES
The increases in Cost of Sales for the three and six months ended March 31, 2022 compared to the three and six months ended March 31, 2021 were primarily due to increases in sales volume and higher manufacturing, raw material, freight and logistics costs.
GROSS MARGIN
Our gross margin was 39.6% for both the three and six months ended March 31, 2022 compared to 42.6% for both the three and six months ended March 31, 2021. The decrease was primarily due to higher manufacturing, raw material, freight and logistics costs across both segments, partially offset by global price increases.
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SELLING, GENERAL AND ADMINISTRATIVE
The decrease in Selling, general and administrative expenses for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to a $4.2 million decrease in professional fees, a $3.5 million settlement related to the 2019 KMG-Bernuth warehouse fire, a $2.7 million decrease in acquisition and integration related expenses and a $1.4 million decrease in Short-Term Incentive Program (“STIP”) expense.
The decrease in Selling, general and administrative expenses for the six months ended March 31, 2022 compared to the six months ended March 31, 2021 was primarily due to a $6.9 million decrease in professional fees, a $4.8 million decrease in acquisition and integration related expenses and a $3.5 million settlement related to the 2019 KMG-Bernuth warehouse fire. These decreases were partially offset by $2.1 million of Future Forward-related expenses and a $1.8 million increase in IT expenses.
IMPAIRMENT CHARGES
The Impairment charge for the six months ended March 31, 2022 related to the remaining goodwill balance of the wood treatment business. Impairment charges for the three and six months ended March 31, 2021 related to the impairment of goodwill for the PIM reporting unit, as well as the impairment of long-lived assets and goodwill for the wood treatment business as a result of the planned closure of the wood treatment facilities. See Notes 7 and 8 of “Notes to the Consolidated Financial Statements” of this Report on Form 10-Q for more information.
ENTEGRIS TRANSACTION-RELATED EXPENSES
These expenses, which were incurred during the three and six months ended March 31, 2022, relate to the Entegris Transaction. See Note 2 of “Notes to the Consolidated Financial Statements” of this Report on Form 10-Q for more information regarding the Entegris Transaction.
PROVISION FOR INCOME TAXES
The effective income tax rate for the three and six months ended March 31, 2022 was 24.1% and 18.6%, respectively, compared to 9.7% and 6.8% for the three and six months ended March 31, 2021, respectively. The changes in our effective tax rate for the three and six months ended March 31, 2022 compared to the prior year was primarily attributable to a lower unfavorable impact from the goodwill impairment charges related to PIM and wood treatment and a higher tax benefit related to share-based compensation.
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SEGMENT ANALYSIS
The segment data should be read in conjunction with our unaudited Consolidated Financial Statements and related notes included in Part 1, Item 1 of this Report on Form 10-Q.
(Dollars in thousands)Three Months Ended March 31,Six Months Ended March 31,
20222021$ Change% Change20222021$ Change% Change
Segment Revenue:
Electronic Materials$274,511 $242,547 $31,964 13.2 %$542,162 $479,345 $62,817 13.1 %
Performance Materials49,616 47,981 1,635 3.4 %99,011 99,046 (35)— %
Total Revenue$324,127 $290,528 $33,599 11.6 %$641,173 $578,391 $62,782 10.9 %
Adjusted EBITDA:
Electronic Materials$93,957 $81,315 $12,642 15.5 %$182,039 $162,071 $19,968 12.3 %
Performance Materials13,901 18,750 (4,849)(25.9 %)28,902 41,725 (12,823)(30.7 %)
Unallocated corporate expenses(11,542)(15,261)3,719 24.4 %(22,738)(27,436)4,698 17.1 %
Consolidated adjusted EBITDA$96,316 $84,804 $11,512 13.6 %$188,203 $176,360 $11,843 6.7 %
Adjusted EBITDA margin:
Electronic Materials34.2 %33.5 %70 bpts33.6 %33.8 %-20 bpts
Performance Materials28.0 %39.1 %-1,110 bpts29.2 %42.1 %-1,290 bpts
ELECTRONIC MATERIALS
The increases in revenue for the three and six months ended March 31, 2022 compared to the three and six months ended March 31, 2021 were driven by growth across all segment businesses and the addition of the materials technologies business. CMP slurries increased 4.5% and 6.5%, respectively, driven by customer technology advancement and increased demand for the Company’s products. CMP pads increased 20.5% and 14.7%, respectively, due to increased demand and new position wins. Electronic chemicals increased 18.7% and 16.3%, respectively, driven by price increases, increased customer demand, and new position wins.
The increases in adjusted EBITDA for the three and six months ended March 31, 2022 compared to the three and six months ended March 31, 2021 were primarily driven by the revenue growth across all segment businesses, partially offset by higher manufacturing, raw material, freight and logistics costs.
The increase in adjusted EBITDA margin for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily driven by revenue growth across all segment businesses. The decrease in adjusted EBITDA margin for the six months ended March 31, 2022 compared to the six months ended March 31, 2021 was primarily driven by higher manufacturing, raw material, freight and logistics costs.
PERFORMANCE MATERIALS
The increase in revenue for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily driven by 17.0% and 29.0% increases in PIM and QED revenue, respectively, due to increased demand for these products. The increases were partially offset by the exit of the wood treatment business, which was completed during the second fiscal quarter of 2022.
Revenue for the six months ended March 31, 2022 was essentially flat compared to the six months ended March 31, 2021, as increased demand for PIM and QED products was offset by the exit of the wood treatment business.
The decreases in adjusted EBITDA and adjusted EBITDA margin for the three and six months ended March 31, 2022 compared to the three and six months ended March 31, 2021 were primarily driven by the exit of the wood treatment business and higher raw material costs in the PIM business.
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USE OF CERTAIN GAAP AND NON-GAAP FINANCIAL INFORMATION
We provide certain non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin, in addition to reported GAAP results because we believe that analysis of our financial performance is enhanced by an understanding of these non-GAAP financial measures. We exclude certain items from earnings when presenting adjusted EBITDA because we believe they will be incurred infrequently and/or are otherwise not indicative of the Company’s regular, ongoing operating performance. Accordingly, we believe that they aid in evaluating the underlying operational performance of our business, and facilitate comparisons between periods. In addition, adjusted EBITDA is used as one of the performance goals of our fiscal 2022 STIP. A similar adjusted EBITDA calculation is also used by our lenders for a key debt compliance ratio.
Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of revenue. Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, adjusted for certain items that affect comparability from period to period. These adjustments include impairment charges, Entegris Transaction-related expenses, Future Forward-related expenses, acquisition and integration-related expenses, net costs related to restructuring of the wood treatment business, costs related to the Pandemic, net of grants received, and costs related to the KMG-Bernuth warehouse fire, net of recoveries.
The non-GAAP financial measures provided are a supplement to, and not a substitute for, the Company’s financial results presented in accordance with U.S. GAAP. Management strongly encourages investors to review the Company’s Consolidated Financial Statements in their entirety and to not rely on any single financial measure. A reconciliation table of GAAP to non-GAAP financial measures is below.
Adjusted EBITDA for the Electronic Materials and Performance Materials segments is presented in conformity with Accounting Standards Codification Topic 280, Segment Reporting. This measure is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For these reasons, this measure is excluded from the definition of non-GAAP financial measures under SEC Regulation G and Item 10(e) of Regulation S-K.
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
Three Months Ended March 31,Six Months Ended March 31,
(In thousands)2022202120222021
Net income (loss)$34,571 $(149,808)$61,999 $(118,278)
Interest expense, net9,537 9,495 19,280 19,080 
Provision for (benefit from) income taxes10,979 (16,109)14,196 (8,563)
Depreciation and amortization32,762 32,289 65,464 64,180 
EBITDA87,849 (124,133)160,939 (43,581)
Entegris Transaction-related expenses12,243 — 18,293 — 
Impairment charges— 208,221 9,435 215,568 
Future Forward-related expenses45 — 3,024 — 
Net costs related to restructuring of the wood treatment business219 46 245 72 
Costs related to the Pandemic, net of grants received— (421)— 841 
Acquisition and integration-related expenses(540)2,167 (233)4,536 
Costs related to KMG-Bernuth warehouse fire, net of recoveries(3,500)(1,076)(3,500)(1,076)
Adjusted EBITDA$96,316 $84,804 $188,203 $176,360 
Three Months Ended March 31,Six Months Ended March 31,
(In thousands)2022202120222021
Adjusted EBITDA:
Electronic Materials$93,957 $81,315 $182,039 $162,071 
Performance Materials13,901 18,750 28,902 41,725 
Unallocated corporate expenses(11,542)(15,261)(22,738)(27,436)
Consolidated adjusted EBITDA$96,316 $84,804 $188,203 $176,360 
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2022, we had $237.7 million of cash and cash equivalents compared with $186.0 million as of September 30, 2021. On March 31, 2022, $155.0 million of cash and cash equivalents was held in foreign subsidiaries. Our total liquidity as of March 31, 2022 was $587.7 million compared to $536.0 million as of September 30, 2021 (including $350.0 million of borrowing availability under our revolving credit facility (“Revolving Credit Facility”) in both periods, which includes our letter of credit sub-facility). The increase in liquidity reflects the cash flow provided by operations, partially offset by cash used for the payment of dividends, capital expenditures, and repurchases of our common stock.
Total debt, consisting of principal outstanding on our Senior Secured Term Loan Facility (“Term Loan Facility”), amounted to $909.8 million ($920.4 million in aggregate principal amount less $10.6 million of debt issuance costs) as of March 31, 2022 and $916.3 million ($928.4 million in aggregate principal amount less $12.0 million of debt issuance costs) as of September 30, 2021. During the three months ended March 31, 2022 there were no borrowings under our Revolving Credit Facility and no balance was outstanding as of March 31, 2022.
The Revolving Credit Facility requires that the Company maintain a maximum first lien secured net leverage ratio, as defined in the credit agreement as amended (“Amended Credit Agreement”), of 4.00 to 1.00 as of the last day of each fiscal quarter. As of March 31, 2022, our maximum first lien secured net leverage ratio was 1.70 to 1.00. Additionally, the Amended Credit Agreement contains certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, asset sales and acquisitions, pay dividends and make other restricted payments and enter into transactions with affiliates. We believe we are in compliance with these covenants as of March 31, 2022 and we expect to remain in compliance with our debt covenants in the future.
Under the Merger Agreement, we are prohibited from incurring any additional indebtedness or issuing or selling any debt securities or rights to acquire debt securities, subject to certain exceptions.
The Merger Agreement limits our ability to repurchase shares of our common stock, subject to certain exceptions. As a result, we did not repurchase any shares under our share repurchase program during the second quarter of fiscal 2022.
Our Board of Directors authorized the initiation of our quarterly cash dividend program in January 2016, and since that time has increased the dividend to its current level of $0.46 per share. The terms of the Merger Agreement limit the Company’s ability to declare and pay future quarterly cash dividends, except the Company may declare quarterly cash dividends in an amount not to exceed $0.46 per share, in a manner consistent with the Company's past practices, in the event the Entegris Transaction has not closed by December 14, 2022.
We believe that cash on hand, cash available from future operations, and available borrowing capacity under our Amended Credit Agreement will be sufficient to fund our operations, expected capital expenditures, and dividend payments for at least the next twelve months.
OPERATING ACTIVITIES
We generated $110.2 million in cash flows from operating activities in the first six months of fiscal 2022, compared to $123.5 million in the first six months of fiscal 2021. The decrease was driven by $16.1 million of changes in operating assets and liabilities, partially offset by a $2.8 million increase in Net income adjusted for non-cash reconciling items.
INVESTING ACTIVITIES
In the first six months of fiscal 2022, net cash used in investing activities was $23.3 million, compared to $20.8 million in the first six months of fiscal 2021. This was primarily driven by an increase in capital expenditures of $2.2 million.
FINANCING ACTIVITIES
In the first six months of fiscal 2022, cash flows used in financing activities were $32.3 million, compared to $36.7 million in the first six months of fiscal 2021. This was primarily driven by an increase in proceeds from the issuance of stock, related to higher stock option exercises during the first six months of fiscal 2022, partially offset by an increase in repayment of long-term debt.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the Company’s significant contractual obligations during fiscal 2022, except as discussed below.
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We have been operating under a multi-year supply agreement for the purchase of certain raw materials, which runs through December 2022. As of March 31, 2022, purchase obligations include an aggregate amount of $6.8 million of contractual commitments related to this agreement. In addition, we have a purchase commitment of $4.5 million through December 2022 for non-water based carrier fluid.
Refer to Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 for additional information regarding our contractual obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
We discuss our critical accounting estimates and effects of recent accounting pronouncements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. See Note 1 of “Notes to the Consolidated Financial Statements” of this Report on Form 10-Q for updates.
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes from the “Quantitative and Qualitative Disclosures about Market Risk” disclosed in Part II Item 7A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), as of March 31, 2022.  Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective to provide that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in our internal control over financial reporting that has occurred during the period covered by this Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Because of inherent limitations, our disclosure controls or our internal control over financial reporting may not prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We periodically become a party to legal proceedings, arbitrations, regulatory proceedings, inquiries and investigations (“contingencies”) arising in the ordinary course of our business operations. The ultimate resolution of these contingencies is subject to significant uncertainty, and should we fail to prevail in any of them or should several of them be resolved against us in the same reporting period, these matters could, individually or in the aggregate, be material to our Consolidated Financial Statements. One of these contingencies, related to Star Lake Canal, which we assumed in connection with the acquisition of KMG, is discussed in Note 13 of “Notes to the Consolidated Financial Statements” included in Item 1 of Part I of this Report on Form 10-Q. The ultimate outcome of these matters, however, cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in our Consolidated Financial Statements.
We also may face other governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with Star Lake Canal or other past and present operations. We accrue for environmental liabilities when a determination can be made that they are probable and reasonably estimable. Other than as described herein, we are not involved in any legal proceedings that we believe could have a material impact on our consolidated financial position, results of operations or cash flows. The information set forth in Item 1A. Risk Factors, and Note 13 of “Notes to the Consolidated Financial Statements” included in Item 1 of Part I of this Report on Form 10-Q, is incorporated herein by reference.
ITEM 1A. RISK FACTORS
RISKS RELATING TO THE ENTEGRIS TRANSACTION
BECAUSE THE EXCHANGE RATIO IS FIXED AND WILL NOT BE ADJUSTED IN THE EVENT OF ANY CHANGE IN EITHER ENTEGRIS’ OR OUR STOCK PRICE, THE VALUE OF THE SHARES OF ENTEGRIS FOLLOWING THE CLOSING IS UNCERTAIN.
Upon completion of the Entegris Transaction, each share of CMC common stock outstanding immediately before the Entegris Transaction will be converted into and become exchangeable for $133 in cash and 0.4506 shares of Entegris common stock. This exchange ratio is fixed in the Merger Agreement and will not be adjusted for changes in the market price of either Entegris common stock or CMC common stock. The market prices of Entegris common stock and CMC common stock have fluctuated before and after the date of the announcement of the Merger Agreement and will continue to fluctuate.
Because part of the value of the merger consideration will depend on the market price of Entegris common stock at the time the Entegris Transaction is completed, CMC stockholders will not know or be able to determine the market value of the merger consideration they would receive upon completion of the Entegris Transaction.
Stock price changes may result from a variety of factors, including, among others, changes in CMC’s or Entegris’ respective businesses, operations and prospects, reductions or changes in U.S. and foreign government spending or budgetary policies, market assessments of the likelihood that the Entegris Transaction will be completed, interest rates, general market, industry, geopolitical and economic conditions and other factors generally affecting the respective prices of CMC’s or Entegris’ common stock, federal, state and local legislation, governmental regulation and legal developments in the industry segments in which CMC or Entegris operate, and the timing of the Entegris Transaction and receipt of required regulatory approvals.
Many of these factors are beyond CMC’s control, and CMC is not permitted to terminate the Merger Agreement solely due to a decline in the market price of Entegris common stock.
THE ENTEGRIS TRANSACTION MAY NOT BE COMPLETED WITHIN THE EXPECTED TIMEFRAME, OR AT ALL, AND FAILURE TO COMPLETE IT COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITIONS, AND THE MARKET PRICE OF OUR COMMON STOCK
There can be no assurance that the Entegris Transaction will be completed in the expected timeframe, or at all. The Merger Agreement contains a number of conditions that must be satisfied or waived prior to the completion of the Entegris Transaction, including (i) the receipt of all consents, approvals or authorizations of, declarations or filings under other applicable competition laws and foreign investment laws; (ii) the absence of certain legal impediments preventing the completion of the Merger; (iii) the authorization for listing of Entegris common stock to be issued in connection with the merger on the NASDAQ and (iv) the accuracy of the representations and warranties of the parties and the compliance by the parties with their respective covenants in the Merger Agreement.
There can be no assurance that all required consents and approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, if all required consents and approvals are obtained and all closing conditions
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are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such consents and approvals or that the Entegris Transaction will be completed in a timely manner or at all. Many of the conditions to completion of the Entegris Transaction are not within either our or Entegris’ control, and we cannot predict when or if these conditions will be satisfied (or waived, as applicable). Even if regulatory approval is obtained, it is possible conditions will be imposed that could result in a material delay in, or the abandonment of, the Entegris Transaction or otherwise have an adverse effect on us.
If the Entegris Transaction is not completed within the expected timeframe or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Entegris Transaction will be completed. In addition, some costs related to the Entegris Transaction must be paid whether or not the Entegris Transaction is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, as well as the diversion of management and resources towards the Entegris Transaction, for which we will have received little or no benefit if completion of the Entegris Transaction does not occur. We may also experience negative reactions from our investors, employees, customers, suppliers, vendors, strategic partners or others that deal with us.
THE ANNOUNCEMENT AND PENDENCY OF THE ENTEGRIS TRANSACTION COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, AND THE MARKET PRICE OF OUR COMMON STOCK
The announcement and pendency of the Entegris Transaction could cause disruptions in and create uncertainty surrounding our business, which could have an adverse effect on our business, results of operations, financial condition and the market price of our common stock. These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the Entegris Transaction: (i) the effect of restrictions placed on us and our subsidiaries’ ability to operate our businesses under the Merger Agreement, including our ability to pursue alternatives to the proposed transaction as further described below; (ii) the risk of disruption resulting from the proposed transaction, including the diversion of our management’s attention from ongoing business operations; (iii) the effect of the announcement of the proposed transaction on our ability to retain and hire employees; (iv) the effect of the announcement of the proposed transaction on our business relationships, operating results and businesses generally; (v) the occurrence of any event giving rise to the right of a party to terminate the Merger Agreement; and (vi) the effect of any legal proceedings that may be instituted against us related to the Entegris Transaction as further described below.
THE MERGER AGREEMENT CONTAINS PROVISIONS THAT COULD DISCOURAGE OR DETER A POTENTIAL COMPETING ACQUIRER THAT MIGHT BE WILLING TO PAY MORE TO EFFECT A BUSINESS COMBINATION WITH US
Unless and until the Merger Agreement is terminated in accordance with its terms, subject to certain specified exceptions, we are not permitted to solicit, seek, initiate or knowingly facilitate or knowingly encourage any inquiries regarding, or the making of, or any submission or announcement of a proposal or offer that constitutes, or would reasonably be expected to lead to, any acquisition proposal or engage in, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any other person any non-public information in connection with or for the purpose of encouraging or facilitating, any acquisition proposal or any inquiry or proposal that could reasonably be expected to lead to an acquisition proposal.
These provisions could discourage a potential competing acquirer from considering or proposing an acquisition or merger, even if it were prepared to pay consideration with a higher value than that implied by the merger consideration.
CMC WILL INCUR SIGNIFICANT TRANSACTION-RELATED AND INTEGRATION COSTS IN CONNECTION WITH THE ENTEGRIS TRANSACTION
We have incurred and expect to incur a number of non-recurring costs associated with combining our operations with that of Entegris, as well as transaction fees and other costs related to the Entegris Transaction. These costs and expenses include fees paid to financial, legal and accounting advisors, facilities and systems consolidation costs, severance and other potential employment-related costs, including retention and severance payments that may be made to certain CMC employees, filing fees, printing expenses and other related charges. Some of these costs are payable by us regardless of whether the Entegris Transaction is completed.
The combined company will also incur integration costs in connection with the merger. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the merger and the integration of the two companies’ businesses. Although we expect that the elimination of duplicative costs, strategic benefits, additional income as well as the realization of other efficiencies related to the integration of the businesses may offset incremental transaction-related and integration costs over time, any net benefit may not be achieved in the near term or at all. Many of these costs will be borne by us even if the merger is not completed. While we have assumed that certain expenses would be incurred in connection with the Entegris Transaction and the other transactions contemplated by the Merger Agreement, there are many factors beyond our control that could affect the total amount or the timing of the integration and implementation expenses.
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LITIGATION RELATING TO THE ENTEGRIS TRANSACTION HAS BEEN FILED AGAINST US AND OUR BOARD OF DIRECTORS, AND ADDITIONAL LITIGATION MAY BE FILED AGAINST US AND OUR BOARD OF DIRECTORS IN THE FUTURE, WHICH COULD PREVENT OR DELAY THE COMPLETION OF THE ENTEGRIS TRANSACTION OR RESULT IN THE PAYMENT OF DAMAGES
Litigation relating to the Entegris Transaction has been filed against us and our board of directors, and though we believe we have mooted all claims that were filed it is possible that additional litigation by our stockholders may be filed against us and our board of directors in the future. The outcome of any litigation is uncertain and any such lawsuits could prevent or delay the completion of the Entegris Transaction and may be costly and distracting to our management.
RISKS RELATING TO OUR BUSINESS, STRATEGY AND OPERATIONS
OUR BUSINESS AND RESULTS OF OPERATIONS MAY CONTINUE TO BE ADVERSELY AFFECTED BY THE ONGOING CORONAVIRUS (COVID-19) PANDEMIC AND RELATED ADVERSE IMPACT TO WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS
The global impact of the Pandemic, which has created significant volatility, uncertainty and economic disruption across the world and in the countries and locations in which we and our customers and suppliers operate, continues in varying degrees and locations, especially in places experiencing low vaccination rates and/or the spread of variants of the COVID-19 virus. Overall, our Electronic Materials segment has remained generally stable throughout the Pandemic, and strengthened through fiscal 2020 and 2021 and into our first and second quarters of fiscal 2022, with increased demand conditions from the prior year in each of our Electronic Materials businesses, despite the ongoing nature of the Pandemic. With respect to our Performance Materials segment, while the Pandemic has had a significant adverse impact on our Performance Materials’ PIM business, which first appeared during the second half of our fiscal 2020 and continued through our first quarter of fiscal 2022, as the demand for drag reducing agents (“DRAs”) declined significantly due to the ongoing dislocation in the energy sector caused by the Pandemic, demand for our PIM products strengthened significantly in our second quarter of fiscal 2022. Despite the improvement in demand conditions to date in fiscal 2022 year over year and sequentially, recovery has been lower than anticipated, and certain factors such as inflationary costs related to raw materials continue to adversely affect the PIM reporting unit. The extent to which the ongoing Pandemic may further impact our business, operations, results of operations and financial condition is uncertain and difficult to estimate, and depends on numerous evolving factors that we may not be able to accurately predict, which may include: an ongoing adverse global economic environment with respect to inflationary pressures and supply chain dislocations that could further reduce demand and/or pricing for our products and services; Disruptions to our supply chain in connection with the sourcing of or pricing for materials, equipment and logistics or other services and support necessary to our business as a longer term result of the Pandemic and efforts to contain the spread of the Pandemic; Adverse impacts on our business and those of our customers resulting from renewed actions taken by governments, businesses, or the general public in an effort to limit exposure to and spread of such infectious diseases, such as renewed travel restrictions, quarantines, and business shutdowns or slowdowns; Negative impacts to our operations, including reductions in production levels, research and development (“R&D”) activities, and qualification activities with our customers; and, deterioration of worldwide credit and financial markets that could limit our ability to obtain external financing to fund our operations and capital expenditures, result in losses on our holdings of cash and investments due to failures of financial institutions and other parties, and result in losses on our accounts receivables due to credit defaults or our customers’ inability to pay. These effects, alone or taken together, could have a material adverse effect on our business, results of operations, legal exposure, or financial condition. A further sustained or prolonged outbreak or return of the Pandemic in the places in which we do business, such as that seen in the spread of variants of the COVID-19 virus through our first and second quarters of fiscal 2022, could exacerbate the adverse impact of such measures on our Company.
DEMAND FOR OUR PRODUCTS FLUCTUATES AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY WORLDWIDE ECONOMIC, INDUSTRY AND OTHER CONDITIONS
Our business is affected by economic and industry conditions, such as those still being adversely affected by the Pandemic, and the majority of our revenue derives from our Electronic Materials segment, which is primarily dependent upon semiconductor industry demand. With respect to our Electronic Materials segment, historically, semiconductor industry demand has fluctuated due to economic and industry cycles and seasonal shifts in demand, which can affect our business, causing demand for our electronic materials products to fluctuate. For example, prior to the Pandemic, the relatively soft demand conditions in the semiconductor industry that had commenced in our second fiscal quarter of 2019 and continued into our first fiscal quarter of 2020 had begun to ameliorate in the beginning of the second fiscal quarter of 2020. While our Electronic Materials segment experienced relatively stable conditions during the second half of fiscal 2020 and strengthened through fiscal 2021 and our first and second quarters of fiscal 2022, uncertainty remains as to our fiscal 2022 demand conditions for the semiconductor industry given the continued impact of the Pandemic, albeit ameliorating, and related macroeconomic and geopolitical challenges such as those occasioned by Russia’s invasion of Ukraine and the resulting ongoing conflict, including inflationary pressures, supply chain and logistics challenges, as well as related including supply constraints at some of our customers serving certain areas, such as the automotive and industrial sectors. Furthermore, competitive dynamics within the semiconductor industry may impact our
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business. Our limited visibility to future customer orders makes it difficult for us to predict industry trends, especially during unusual adverse circumstances, such as the Pandemic and related macroeconomic and geopolitical factors. If the global economy or the semiconductor industry does not continue to improve or weakens again, whether in general or as a result of the Pandemic or other specific factors, such as macroeconomic factors, or unpredictable events such as natural disasters, geopolitical conditions such as those related to Russia’s invasion of Ukraine and the ongoing conflict, and international trade tensions, civil unrest, or additional global health crises, we could experience material adverse impacts on our results of operations and financial condition. Some additional factors that may affect demand for our electronic materials products include: demand trends for different types of electronic devices such as logic versus memory integrated circuit (“IC”) devices, or digital versus analog IC devices; the various technology nodes at which those products are manufactured; customers' efficiencies in the use of CMP consumables and/or high-purity process chemicals (“electronic chemicals”); customers’ device architectures and specific manufacturing processes; the short order to delivery time for our products; quarter-to-quarter changes in customer order patterns; market share and competitive gains and losses; and pricing changes by us and our competitors.
As to our Performance Materials segment, although demand for our PIM products increased in the first and second quarters of fiscal 2022, our PIM business may be further impacted by changes in the oil and gas industries, such as the ongoing significant dislocation in these industries caused by the Pandemic and supply chain related challenges. Expectations about future prices and price volatility in the sector, which affect our customers’ activity levels, are important in determining future spending levels for customers of our PIM products and services. The ongoing volatility in worldwide oil and natural gas prices and markets are an example of historical volatility in this sector, and such volatility is likely to continue in the future. As is currently the case, prices for oil and natural gas are subject to wide fluctuations in response to relatively minor or major changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include, but are not limited to, decreases or increases in supplies from U.S. shale production or other oil production, geopolitical conditions, including armed conflict such as Russia’s invasion of Ukraine and international trade tensions, sovereign debt crises, the domestic and foreign supply of oil and natural gas, the level of consumer demand due to economic growth or contraction such as seen related to the Pandemic, and related factors in countries such as China, weather conditions, domestic and foreign governmental regulations and taxes, the price and availability of alternative fuels, the health of international economic and credit markets, the ability of the members of the Organization of the Petroleum Exporting Countries and other state-controlled oil companies to agree upon and maintain oil price and production controls, and general economic conditions, such as those currently seen arising from the Pandemic.
Further, adverse global economic, industry and other conditions could have other negative effects on our Company. For instance, we could experience negative impacts on cash flows due to the inability of our customers to pay their obligations to us, or our production processes and profitability could be harmed if our suppliers significantly raise their prices, or cannot fulfill their obligations, to us. As a result of these or other conditions, and as experienced in the second quarter of our fiscal year 2021 with the impairment charge we took in our PIM business unit, further described in Note 9 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, we also might have to further reduce the carrying value of goodwill and other intangible assets, which could harm our financial position and results of operations.
WE HAVE A CONCENTRATED PRODUCT RANGE WITHIN EACH OF OUR SEGMENTS AND OUR PRODUCTS MAY BECOME OBSOLETE, OR TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN THE CONSUMPTION OF OUR PRODUCTS
Although our product offerings have expanded over the past several years, including as a result of the acquisitions of KMG and ITS, our business remains substantially dependent on products in our Electronic Materials segment, such as CMP slurries, pads and electronic chemicals, and materials technologies, which account for the majority of our revenue. The product offerings in our Performance Materials segment are similarly concentrated. As such, our business would suffer if these products became obsolete or if consumption of these products decreased. Our success depends on our ability to keep pace with technological changes and advances in the industries in which we operate, particularly the semiconductor industry, to adapt, improve and customize our products in response to evolving customer needs and industry trends, and to differentiate our products from those of our competitors. Since its inception, the semiconductor industry, which is the largest industry in which we operate, has experienced technological changes and advances in the design, manufacture, performance and application of IC devices. Our customers continually pursue lower cost of ownership and higher quality and performance of materials consumed in their manufacturing processes, including products in our Electronic Materials business segment, as a means to reduce costs, increase the yield in their manufacturing facilities, and achieve desired performance of the IC devices they produce. We expect these technological changes, and this drive toward lower costs, higher quality and performance and higher yields, will continue in the future. Potential technology developments in the semiconductor industry, as well as our customers' efforts to reduce consumption of CMP consumables, including through use of smaller quantities, could render our products less important to the IC device manufacturing process.
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A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE OF THESE CUSTOMERS OR BUSINESS FROM THEM
Our customer base is concentrated among a limited number of large customers in each of our segments. Currently, our principal business supplies electronic materials primarily to the semiconductor industry. The semiconductor industry has been consolidating as the larger semiconductor manufacturers have generally grown faster than the smaller ones, through business gains, mergers and acquisitions, and strategic alliances. Industry analysts predict that this trend will continue, which means the semiconductor industry will continue to be comprised of fewer and larger participants in the future if their prediction is correct. In addition, our customer base in our PIM business is also somewhat concentrated, with large entities predominant, and outside of the U.S., these entities frequently are state-owned or sponsored, and limited in number per country. One or more of these principal customers could stop buying products from us or could substantially reduce the quantity of products purchased from us. Our principal customers in both our segments also hold considerable purchasing power, which can impact the pricing and terms of sale of our products. Any deferral or significant reduction in the quantity or price of products sold to these principal customers, an inability to raise prices to address cost pressures or otherwise, or a weakening of the financial condition of or failure to perform contractual obligations by one of these principal customers, could significantly harm our business, financial condition and results of operations.
ANY PROBLEM OR DISRUPTION IN OUR SUPPLY CHAIN, INCLUDING SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS, OR IN OUR ABILITY TO MANUFACTURE OR DELIVER OUR PRODUCTS TO OUR CUSTOMERS, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
We depend on our supply chain to enable us to meet the demands of our customers. Our supply chain includes the raw materials we use to manufacture our products, our production operations and the means by which we deliver our products to our customers. Our business could be adversely affected by any problem or interruption in the supply of the key raw materials we use in our products, including raw materials that do not meet the stringent quality and consistency requirements of our customers, any problem or interruption that may occur during production or delivery of our products, such as weather-related problems, natural disasters, logistics challenges, global public health crises such as the ongoing Pandemic, geopolitical issues such as those related to Russia’s invasion of Ukraine and the ongoing conflict, trade or labor-related issues, civil unrest, or any difficulty in producing sufficient quantities of our products to meet growing demand from our customers. In particular, natural disasters and severe weather conditions have the potential to adversely affect our operations, damage facilities and increase our costs, and those conditions may also have an indirect effect on our operations by disrupting services provided by service companies or suppliers with whom we have a business relationship. Additionally, some of our full-time employees are represented by labor unions, works councils or comparable organizations, particularly in Europe. An extended work stoppage, slowdown or other action by our employees could significantly disrupt our business. As our current agreements with labor unions and works councils expire, we cannot provide assurance that new agreements will be reached at the end of each period without union action, or that a new agreement will be reached on terms satisfactory to us. Future labor contracts may be on terms that result in higher labor costs to us, which also could adversely affect our results of operations. As experienced in the second half of our fiscal 2021 and ongoing through the first half of our fiscal 2022, our supply chain may also be negatively impacted by unanticipated price increases due to factors such as inflation or to supply restrictions beyond the control of our Company or our raw materials suppliers, such as those related to or arising from the Pandemic.
We believe it would be difficult to promptly secure alternative sources of key raw materials in the event one of our suppliers becomes unable to supply us with sufficient quantities of raw materials that meet the quality and technical specifications required by us and our customers, or the costs of such raw materials increase in an untenable manner. Requalifying and/or transferring our sourcing to a new supplier would likely result in manufacturing delays and additional costs. In addition, new contract terms, forced production or manufacturing changes, contractual amendments to existing agreements with, or non-performance by, our suppliers, including any significant financial distress our suppliers may suffer, could adversely affect us. Also, if we change the supplier or type of key raw materials we use to make our products, in particular our electronic materials products, or are required to purchase them from a different manufacturer or manufacturing facility or otherwise modify our products, in certain circumstances our customers might have to requalify our products for their manufacturing processes and products. The requalification process could take a significant amount of time and expense to complete and could occupy technical resources of our customers that might otherwise be used to evaluate our new products, thus delaying potential revenue growth, or motivate our customers to consider purchasing products from our competitors, possibly interrupting or reducing our sales of products to these customers, especially sales of our electronic materials products to our semiconductor industry customers, but also with respect to our PIM products to our pipeline and adjacent industry customers. In addition, government authorities in the foreign countries in which we operate may require or incentivize the use of local suppliers that are our competitors, which could adversely impact our business, including our results of operations.
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OUR BUSINESS COULD BE ADVERSELY IMPACTED IF WE ARE NOT SUCCESSFUL IN ACHIEVING TARGETED SAVINGS AND EFFICIENCIES FROM COST REDUCTION INITIATIVES
To mitigate cost challenges and improve our business and financial performance, we have initiated an enterprise-wide cost optimization program, called “Future Forward,” designed to reduce expenses and enhance operational efficiencies. The Future Forward Program has and may include position eliminations, location rationalization, and reductions in outside services and discretionary spending, as well as other actions to reduce costs. We may not realize anticipated cost savings or other benefits from such initiatives, whether at all or according to timetables we have established. If we are unable to realize the anticipated benefits, our ability to fund other initiatives may be adversely affected, and failure to implement these initiatives in accordance with our plans could adversely affect our business.
OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR COMPETITORS DEVELOP COMPETITIVE PRODUCTS, OFFER BETTER PRICING, SERVICE OR OTHER TERMS, OR OBTAIN OR ASSERT CERTAIN INTELLECTUAL PROPERTY RIGHTS
Competition from other electronic materials or performance materials providers or any new entrants could seriously harm our business and results of operations, and this competition could continue to increase. Competition has and will likely continue to impact the prices we are able to charge for our products, as well as our overall business. In addition, our competitors could have, obtain or assert intellectual property rights that could affect or restrict our ability to market our existing products and/or to innovate and develop new products, thus increasing our costs of doing business, could attempt to introduce products similar to ours following the expiration of our patents, or could attempt to introduce products that do not fall within the scope of our intellectual property rights.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS
We currently have operations and a large customer base outside the U.S. Approximately 68% of our revenue was generated by sales to customers outside the U.S. for the fiscal year ended September 30, 2021. We may encounter risks in doing business in certain countries other than the U.S., including, but not limited to, adverse changes in economic and political conditions, both in foreign locations and in the U.S. with respect to non-U.S. operations of U.S. businesses like ours, geopolitical issues such as those related to Russia’s invasion of Ukraine and the ongoing conflict, trade tensions, global health crises such as the ongoing Pandemic, civil unrest, fluctuation in exchange rates, changes in international trade requirements and sanctions and/or tariffs that affect our business and that of our customers and suppliers, compliance with a variety of foreign laws and regulations and related audits and investigations, as well as difficulty in enforcing business and customer contracts and agreements, including protection of intellectual property rights. We also may encounter risks that we may not be able to repatriate additional earnings from our operations outside the U.S., derive anticipated tax benefits of these operations or recover the investments made in them, whether due to regulatory or policy changes in the U.S. or in the countries outside of the U.S. in which we do business, or other factors.
In particular, China continues to be an important market for the semiconductor industry, and an area of continued potential growth for us. As business between China and the rest of the world has continued to grow, there is risk that geopolitical, political, diplomatic and national security factors, changes in U.S. and foreign laws and regulations, the imposition of trade restrictions, tariffs and taxes, and global public health crises such as the Pandemic could adversely affect business for companies like ours. This is due in significant part to the complex relationships among China, the U.S., and other countries, especially those in the Asia Pacific region, such as Taiwan, which also is important to our Company with respect to our customers as well as our operations, which could have a material adverse impact on our business. In addition, there are risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business, or, provide incentives to government-backed local customers to buy from local suppliers rather than companies like ours, all of which could adversely impact our business, including our results of operations. Also, as seen in the past several years, there are risks that the U.S. government may impose additional export restrictions on technology and products that companies that operate in the semiconductor industry supply to or use in China, which could adversely impact our business and our results of operations.
In addition, we have operations and customers located in the United Kingdom, which exited the European Union (“EU”). As the transitional provisions under which the United Kingdom and the EU had agreed to operate expired at the end of December 2020, and the parties are still in the process of implementing new trade agreements, the related impacts on our business remain unclear.
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LEGAL, COMPLIANCE AND REGULATORY RISKS
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL LAWS AND REGULATIONS AND MAY INCUR COSTS THAT HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION AS A RESULT OF VIOLATIONS OF OR LIABILITIES UNDER THEM
Like other companies involved in environmentally sensitive businesses, our operations and properties are subject to extensive and stringent federal, state, local and foreign Environmental, Health and Safety (“EHS”) laws and regulations, including those concerning, among other things:
the marketing, sale, use and registration of our chemical products, such as pentachlorophenol (“penta”), which is part of the wood treatment business in our Performance Materials segment;
the treatment, storage and disposal of wastes;
the investigation and remediation of contaminated media including but not limited to soil and groundwater;
the discharge of effluents into waterways;
the emission of substances into the air; and
other matters relating to environmental protection and various health and safety matters.
The United States EPA and other federal and state agencies in the U.S., as well as comparable agencies in other countries where we have facilities or sell our products, have the authority to promulgate regulations that could have a material adverse impact on our operations. These EHS laws and regulations may require permits for certain types of operations, require the installation of expensive pollution control equipment, place restrictions upon operations or impose substantial liability for pollution and other EHS concerns resulting from our operations. Compliance with EHS laws and regulations has resulted in ongoing costs for us and could restrict our ability to modify or expand our facilities, continue production, require us to install costly emission control equipment, or incur significant other expenses, including environmental compliance costs. We continue to manage environmental compliance activities at certain sites, such as at KMG-Bernuth’s Tuscaloosa, Alabama facility as described in Note 19 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 and in Note 13 of Part 1 of this Report on Form 10-Q. We have incurred, and expect to continue to incur, significant costs to comply with EHS laws or to address liabilities for contamination resulting from past or present operations. Federal, state and foreign governmental authorities may seek fines and penalties, as well as injunctive relief, for violation of EHS laws and regulations, and could, among other things, impose liability on us to cleanup or to respond to potential damages to the environment or natural resources resulting from a release of pesticides, hazardous materials or other chemicals into the environment. We maintain insurance coverage for sudden and accidental environmental pollution or damages. We do not believe that insurance coverage for environmental pollution or damage that occurs over time is available at a reasonable cost. Also, we do not believe that insurance coverage for the full potential liability that could be caused by sudden and accidental pollution incidents is available at a reasonable cost. Accordingly, we may be subject to an uninsured or under-insured loss in such cases; the KMG-Bernuth warehouse fire, as described in Note 13 of Part 1 of this Report on Form 10-Q, may be such an instance.
The distribution, sale and use of our products is subject to prior governmental approvals and thereafter ongoing governmental regulation: Our products are subject to laws administered by federal, state and foreign governments, including regulations requiring registration, approval and labeling. The labeling requirements restrict the use and type of application for our products. More stringent restrictions could make our products less desirable which would adversely affect our sales and profitability. All venues where our penta products are used also require registration prior to marketing or use.
Governmental regulatory authorities have required, and may require in the future, that certain scientific testing and data production be provided on our products. Under the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”), the EPA requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement significantly increases our Operating expenses, and we expect those expenses will continue in the future while we operate the wood treatment business. Because scientific analyses are constantly improving, we cannot determine with certainty whether or not new or additional tests may be required by regulatory authorities. While good laboratory practice standards specify the minimum protocols and procedures that must be followed in order to ensure the quality and integrity of data related to these tests submitted to the EPA, there can be no assurance that the EPA will not request certain tests or studies be repeated. In addition, more stringent legislation or requirements may be imposed in the future and proposed amendments to the Toxic Substances Control Act could result in increased regulatory controls , additional testing of chemicals we manufacture and could increase the costs of compliance for our operations. We can provide no assurance that the cost of such compliance will not adversely affect our profitability. Our products could also be subject to other future regulatory action that may result in restricting or completely banning their use which could have an adverse effect on our performance and results of operations.
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1. The Registration, Evaluation and Authorization of Chemicals (“REACH”) legislation may affect our ability to manufacture and sell certain products in the EU: REACH requires chemical manufacturers and importers in the EU to prove the safety of their products. We were required to pre-register certain products and file comprehensive reports, including testing data, on each chemical substance, and perform chemical safety assessments. Additionally, substances of high concern are subject to an authorization process. Authorization may result in restrictions on certain uses of products or even prohibitions on the manufacture or importation of products. The full registration requirements of REACH have been phased in over several years, and we have incurred additional expense to cause the registration of our products under these regulations. REACH may also affect our ability to import, manufacture and sell certain products in the EU. In addition, other countries and regions of the world already have or may adopt legislation similar to REACH that affect our business, affect our ability to import, manufacture or sell certain products in these jurisdictions, and have required or will require us to incur increased costs.
2. The classification of penta as a Persistent Organic Pollutant (“POP”) under the Stockholm Convention adversely affected our ability to manufacture or sell our penta products and completed our exit of this business in the second quarter of fiscal 2022. We took a restructuring charge in our fourth fiscal quarter of 2019, and asset impairment charges in each the fourth quarter of fiscal 2019, the fourth quarter of fiscal 2020, each of our quarters of fiscal 2021, and the first quarter of fiscal 2022, related to the decisions to close our wood treatment facilities and to exit the wood treatment business, as described further in Note 8 of Part 1 of this Report on Form 10-Q and in Note 10 of “Notes to the Consolidated Financial Statements” included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. No assurance can be given that we will not incur significant expenditures in connection with completing closure of the wood treatment facilities.
3. Our use of hazardous materials exposes us to potential liabilities: Our manufacturing and distribution of chemical products, such as our electronic chemicals, involves the controlled use of hazardous materials. Our operations, therefore, are subject to various associated risks, including chemical spills, discharges or releases of toxic or hazardous substances or gases, fires, mechanical failure, storage facility leaks and similar events. Our suppliers are subject to similar risks that may adversely impact the availability of raw materials. While we adapt our manufacturing and distribution processes to the environmental control standards of regulatory authorities, we cannot completely eliminate the risk of accidental contamination or injury from hazardous or regulated materials, including injury of our employees, individuals who handle our products or goods treated with our products, or others who claim to have been exposed to our products, nor can we completely eliminate the unanticipated interruption or suspension of operations at our facilities due to such events. We may be held liable for significant damages or fines in the event of contamination or injury, and such assessed damages or fines could have an adverse effect on our financial performance and results of operations.
CURRENT OR FUTURE CLIMATE CHANGE REGULATIONS COULD RESULT IN INCREASED OPERATING COSTS AND REDUCED DEMAND FOR OUR PRODUCTS
The U.S. has rejoined the Paris Climate Accord but to date, has not ratified the Kyoto Protocol. The Clean Air Act has been interpreted to regulate greenhouse gas (“GHG”) emissions and the EPA is using its existing regulatory authority to develop regulations requiring reduction in GHG emissions from various categories of sources, such as when a permit is required due to emissions of other pollutants. Because of the lack of any comprehensive legislation program addressing GHGs, a number of U.S. federal laws related to GHG emissions have been considered by the U.S. Congress from time to time and various state, local and regional regulations and initiatives have been enacted or are being considered related to GHGs.
Member States of the EU each have an overall cap on emissions, which are approved by the European Commission, and implement the EU Emissions Trading Directive as a commitment to the Kyoto Protocol. GHG emissions are regulated by Member States through the EU Emission Trading System and the EU Effort Sharing Decision/Regulation depending upon the industry sector. Organizations apply to the Member State for an allowance of GHG emissions. These allowances are tradable so as to enable companies that manage to reduce their GHG emissions to sell their excess allowances to companies that are not reaching their emissions objectives. Failure to purchase sufficient allowances will require the purchase of allowances at a current market price.
Any laws or regulations that may be adopted to restrict or reduce emissions of GHGs could cause an increase to our raw material costs, require us to incur increased operating costs, and have an adverse effect on demand for our products and our financial performance and results for our business.
In addition to GHG and climate change regulatory developments and legislation, we are continuing to evaluate and assess the potential impact on our business of the ongoing transition worldwide to a low carbon, resilient economy as well as physical effects resulting from climate change.
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OUR PRODUCTS MAY BE RENDERED OBSOLETE OR LESS ATTRACTIVE BY CHANGES IN INDUSTRY REQUIREMENTS OR BY SUPPLY-CHAIN DRIVEN PRESSURES TO SHIFT TO ENVIRONMENTALLY PREFERABLE ALTERNATIVES
Changes in regulatory, legislative and industry requirements, or changes driven by supply-chain pressures, may shift current customers away from products using penta, products containing hazardous materials, or certain of our other products and toward alternative products that are believed to have fewer environmental effects. The EPA, foreign and state regulators, local governments, private environmental advocacy organizations, investors and investor advisory firms, and a number of large industrial companies have proposed or adopted policies designed to decrease the use of a variety of chemicals, including penta and others included in certain of our products, such as those containing hazardous materials, or to counteract the growth of certain industries such as those in which customers served by our PIM products operate. Our ability to anticipate changes in regulatory, legislative, investor, and industry requirements, or changes driven by supply-chain pressures, may affect our ability to remain competitive. Further, we may not be able to comply with changed or new regulatory or industrial standards that may be necessary for us to remain competitive.
We cannot provide assurance that the EPA, foreign and state regulators or local governments will not restrict the uses of certain of our products, like penta, or ban the use of one or more of these products or the raw materials in them. Similarly, companies who use our products may voluntarily decide to reduce significantly or cease the use of our products. As a result, our products may become obsolete or less attractive to our customers.
GENERAL COMMERCIAL, OPERATIONAL, FINANCIAL AND REGULATORY RISKS
BECAUSE WE RELY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY OBTAIN OR PROTECT IT COULD SIGNIFICANTLY HARM OUR BUSINESS
Protection of intellectual property is particularly important in the semiconductor industry, which is the primary industry in which we participate, because we develop complex technical formulas and processes for products that are proprietary in nature and differentiate our products from those of our competitors. Our intellectual property is important to our success and ability to compete. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as employee and third-party nondisclosure and assignment agreements. In addition, we protect our product differentiation through various other means, such as proprietary supply arrangements for certain raw materials, and use of certain manufacturing technologies. Due to our international operations, we pursue protection in different jurisdictions, which may provide varying degrees of protection, and we cannot provide assurance that we can obtain adequate protection in each such jurisdiction. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason, including through the patent prosecution process or in the event of litigation related to such intellectual property, which we pursue when necessary to protect our rights against others who are found to be misusing our intellectual property, could seriously harm our business. In addition, certain types of intellectual property, such as patents, expire after a certain period of time, and products protected by our patents then lose such protection, so we refresh our intellectual property portfolio on an ongoing basis through continued innovation, and failure to do so could adversely affect our business. Also, the costs of obtaining or protecting our intellectual property could negatively affect our operating results.
OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER
We utilize and rely upon a global workforce. If we fail to attract and retain the necessary managerial, technical and customer support personnel, our business and our ability to maintain existing and obtain new customers, develop new products and provide acceptable levels of customer service could suffer. We compete worldwide with other participants in the industries in which we conduct business for qualified personnel, particularly those with significant experience in the semiconductor and pipeline industries. The loss of services of key employees, or our inability to obtain or maintain visas or other travel or residency documents on their behalf with respect to our business needs, could harm our business and results of operations.
CERTAIN CRITICAL INFORMATION SYSTEMS COULD BE SUSCEPTIBLE TO CYBERSECURITY AND OTHER THREATS OR VULNERABILITIES
We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include, but are not limited to, telecommunications, the Internet, our corporate intranet, various computer hardware and software applications, production control systems, enterprise resource planning systems, network communications, and email. These information systems may be owned and maintained by us, our outsourced providers, or third parties such as vendors, contractors, and Cloud providers. All these information systems are subject to disruption, breach or failure from various sources including, but not limited to, attacks, degradation, and failures resulting from potential sources, including viruses, malware, denial of service, ransomware, destructive or inadequate code, power failures, and physical damage. Confidential and/or sensitive information stored on these information systems, or transmitted to or from Cloud storage, could be intentionally or unintentionally compromised, lost, and/or stolen. While we have implemented security procedures and virus protection software, intrusion
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prevention systems, access control, and emergency recovery processes to mitigate risks like these with respect to information systems that are under our control, they are not fail-safe and may be subject to breaches or failures. Further, we cannot assure that third parties upon whom we rely for various IT services will maintain sufficient vigilance and controls over their systems. Our inability to use or access these information systems at critical points in time, or unauthorized releases of personal or confidential information, could unfavorably impact the timely and efficient operation of our business, including our results of operations, and our reputation, as well as our relationships with our employees or other individuals whose information may have been affected by such cybersecurity incidents.
In addition, regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. Privacy security laws and regulations, including the United Kingdom’s Data Protection Act 2018 and the EU General Data Protection Regulation 2016, and similar laws in countries such as Korea and Taiwan, among others, pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulations could result in significant penalties that could adversely affect our business and results of operations.
OUR EXISTING CREDIT AGREEMENT COULD RESTRICT, AND THE MERGER AGREEMENT RESTRICTS, OUR BUSINESS ACTIVITIES
Our Amended Credit Agreement contains financial and other covenants that may restrict our business activities or our ability to execute our strategic objectives, and our failure to comply with these covenants could result in a default under it. The Merger Agreement places additional restrictions on our business activities and on our ability to raise capital and/or incur debt.
THE MARKET PRICE FOR OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
The market price of our common stock has fluctuated and could continue to fluctuate significantly as a result of factors such as: the Entegris Transaction, economic, geopolitical (i.e., Russia’s invasion of Ukraine), global public health (i.e., the Pandemic), political and stock market conditions generally and specifically as they may impact participants in the semiconductor and related industries; and/or participants in oil and gas related industries; changes in financial estimates and recommendations by securities analysts who follow our stock; earnings and other announcements, and changes in market evaluations, by securities analysts, investors, market participants or others, of or related to, us or participants in the semiconductor and related industries; changes in business, trade or regulatory conditions affecting us or participants in the semiconductor and related industries; announcements or implementation by us, our competitors, or our customers of technological innovations, new products or different business strategies; changes in our capital deployment strategy, issuances of shares of our capital stock or entering into a business combination or other strategic transaction; and trading volume of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any shares under our share repurchase program during the second quarter of fiscal 2022. Refer to Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Liquidity and Capital Resources,” of this Report on Form 10-Q for more information regarding our share repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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ITEM 6. EXHIBITS
The exhibit numbers in the following list correspond to the number assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
Exhibit No.
 Description
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Interim Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document - The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase
104Cover Page Interactive Data File - The Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CMC MATERIALS, INC.
[Registrant]
Date: May 5, 2022By:/s/ JEANETTE A. PRESS
Jeanette A. Press
Interim Chief Financial Officer and Principal Accounting Officer
[Principal Financial Officer]

37

Exhibit 31.1
CERTIFICATION
I, David H. Li, Chief Executive Officer of CMC Materials, Inc., certify that: 
1.I have reviewed this quarterly report on Form 10-Q of CMC Materials, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 5, 2022/s/ DAVID H. LI
David H. Li
Chief Executive Officer



Exhibit 31.2
CERTIFICATION
I, Jeanette A. Press, Interim Chief Financial Officer and Principal Accounting Officer of CMC Materials, Inc., certify that:
1.I have reviewed this quarterly report on Form 10-Q of CMC Materials, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 5, 2022/s/ JEANETTE A. PRESS
Jeanette A. Press
Interim Chief Financial Officer and Principal Accounting Officer


Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CMC Materials, Inc. (the "Company") on Form 10-Q for the fiscal quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
May 5, 2022/s/ DAVID H. LI
David H. Li
Chief Executive Officer
May 5, 2022/s/ JEANETTE A. PRESS
Jeanette A. Press
Interim Chief Financial Officer and Principal Accounting Officer