Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2009
or
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o |
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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: 000-29278
KMG CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
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Texas
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75-2640529 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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9555 West Sam Houston Parkway South, Suite 600 |
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Houston, Texas
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77099 |
(Address of principal executive offices)
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(Zip Code) |
(713) 600-3800
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of December 8, 2009, there were 11,147,675 shares of the registrants common stock outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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ITEM
1. |
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FINANCIAL STATEMENTS
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KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share and per share data)
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October 31, |
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July 31, |
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2009 |
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2009 |
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(unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
11,994 |
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$ |
7,174 |
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Accounts receivable: |
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Trade, net of allowances of $765 and $595 at October 31, 2009 and
July 31, 2009, respectively |
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22,523 |
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21,206 |
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Other |
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2,188 |
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1,896 |
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Inventories, net |
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28,857 |
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28,163 |
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Current
deferred tax assets |
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698 |
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698 |
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Prepaid expenses and other current assets |
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964 |
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1,638 |
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Total current assets |
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67,224 |
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60,775 |
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PROPERTY, PLANT AND EQUIPMENT, net |
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54,701 |
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54,834 |
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DEFERRED TAX
ASSETS |
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937 |
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923 |
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GOODWILL |
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3,778 |
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3,778 |
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INTANGIBLE ASSETS, net |
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19,906 |
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20,149 |
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RESTRICTED CASH |
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215 |
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313 |
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OTHER ASSETS, net |
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2,746 |
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2,736 |
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TOTAL ASSETS |
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$ |
149,507 |
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$ |
143,508 |
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LIABILITIES & STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
18,337 |
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$ |
16,606 |
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Accrued liabilities |
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6,897 |
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7,151 |
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Current
deferred tax liabilities |
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342 |
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328 |
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Current portion of long-term debt |
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7,593 |
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6,966 |
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Total current liabilities |
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33,169 |
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31,051 |
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LONG-TERM DEBT, net of current portion |
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37,323 |
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39,326 |
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DEFERRED TAX
LIABILITIES |
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1,200 |
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874 |
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OTHER LONG-TERM LIABILITIES |
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1,290 |
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1,280 |
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Total liabilities |
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72,982 |
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72,531 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY |
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Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued |
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Common stock, $.01 par value, 40,000,000 shares authorized, 11,147,675
shares issued and outstanding at October 31, 2009 and 11,101,345 shares
issued and outstanding at July 31, 2009 |
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111 |
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111 |
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Additional paid-in capital |
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23,207 |
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23,084 |
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Accumulated other comprehensive loss |
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(438 |
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(1,464 |
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Retained earnings |
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53,645 |
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49,246 |
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Total stockholders equity |
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76,525 |
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70,977 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
149,507 |
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$ |
143,508 |
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See notes to consolidated financial statements.
1
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands except for per share data)
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Three Months Ended |
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October 31, |
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2009 |
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2008 |
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NET SALES |
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$ |
49,414 |
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$ |
52,233 |
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COST OF SALES |
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31,023 |
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36,703 |
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Gross Profit |
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18,391 |
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15,530 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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10,441 |
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12,005 |
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Operating income |
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7,950 |
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3,525 |
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OTHER INCOME (EXPENSE): |
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Interest income |
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1 |
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2 |
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Interest expense |
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(557 |
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(879 |
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Other, net |
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(28 |
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(33 |
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Total other expense, net |
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(584 |
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(910 |
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INCOME BEFORE INCOME TAXES |
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7,366 |
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2,615 |
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Provision for income taxes |
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(2,746 |
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(999 |
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NET INCOME |
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$ |
4,620 |
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$ |
1,616 |
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EARNINGS PER SHARE: |
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Basic |
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$ |
0.41 |
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$ |
0.15 |
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Diluted |
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$ |
0.41 |
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$ |
0.14 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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11,144 |
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11,068 |
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Diluted |
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11,375 |
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11,223 |
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See notes to consolidated financial statements.
2
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
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Three Months Ended |
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October 31, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
4,620 |
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$ |
1,616 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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1,379 |
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1,778 |
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Amortization of loan costs included in interest expense |
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22 |
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22 |
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Stock-based compensation |
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86 |
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110 |
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Bad debt expense |
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170 |
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Inventory valuation adjustment |
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(77 |
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Deferred rental income |
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(21 |
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Deferred income tax expense (benefit) |
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317 |
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(200 |
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Tax (benefit) deficiency from stock-based awards |
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(37 |
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5 |
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Changes in operating assets and liabilities, net of effects of acquisition: |
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Accounts receivable trade |
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(1,309 |
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(267 |
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Accounts receivable other |
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(215 |
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(510 |
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Inventories |
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(517 |
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(6,586 |
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Prepaid expenses and other current assets |
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493 |
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520 |
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Accounts payable |
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1,645 |
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11,815 |
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Accrued liabilities |
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(151 |
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1,657 |
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Net cash provided by operating activities |
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6,426 |
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9,939 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Additions to property, plant and equipment |
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(239 |
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(1,088 |
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Cash used in connection with the electronic chemicals acquisition |
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(2,935 |
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Change in restricted cash |
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111 |
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Net cash used in investing activities |
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(128 |
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(4,023 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net borrowings under revolver credit agreement |
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776 |
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Principal payments on borrowings on term loan |
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(1,375 |
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(5,375 |
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Proceeds from exercise of stock options |
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119 |
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Tax benefit (deficiency) from stock-based awards |
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37 |
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(5 |
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Payment of dividends |
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(222 |
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(221 |
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Net cash used in financing activities |
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(1,560 |
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(4,706 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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82 |
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(498 |
) |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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4,820 |
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712 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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7,174 |
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2,605 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
11,994 |
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$ |
3,317 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for interest |
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$ |
536 |
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$ |
904 |
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Cash paid during the period for income taxes |
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$ |
271 |
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$ |
110 |
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See notes to consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) Basis
of Presentation.
The (a) consolidated balance sheet as of July 31, 2009, which has
been derived from audited consolidated financial statements, and (b) the unaudited consolidated
financial statements included herein have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission for interim reporting. As permitted under those
requirements, certain footnotes or other financial information that are normally required by
generally accepted accounting principles in the United States of America (GAAP) have been
condensed or omitted. The Company believes that the disclosures made are adequate to make the
information not misleading and in the opinion of management reflect all adjustments, including
those of a normal recurring nature, that are necessary for a fair presentation of financial
position and results of operations for the interim periods presented. The results of operations for
the interim periods are not necessarily indicative of results of operations to be expected for the
full year. The unaudited consolidated financial statements included herein should be read in
conjunction with the consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended July 31, 2009.
These consolidated financial statements are prepared using certain estimates by management and
include the accounts of KMG Chemicals, Inc. and its subsidiaries (collectively, the Company). All
significant intercompany balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the prior period consolidated financial statements to conform to the
current period presentation.
The Company evaluates events and transactions that occur after the balance sheet date but
before the financial statements are issued. The Company evaluated such events and transactions
through December 9, 2009 when the financial statements were filed electronically with the
Securities and Exchange Commission.
(2) Recent Accounting Standards.
In June 2009, the Financial Accounting Standards Board (FASB) issued its Accounting
Standards Codification (Codification) which establishes the source of authoritative accounting
principles generally accepted in the United States of America (GAAP) to be applied by
nongovernmental entities. The Codification was created by combining the various sources of
then-existing non-Securities and Exchange Commission (SEC) accounting and reporting standards.
Rules and interpretive releases of the SEC under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. This guidance, which is effective for financial
statements issued for interim and annual periods ending after September 15, 2009, supersedes all
then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become non-authoritative. The Company
adopted this guidance on August 1, 2009, which did not have a material impact on its consolidated
financial statements.
In November 2008, the FASB issued new accounting guidance for intangible assets acquired in a
business combination or asset acquisition that an entity does not intend to actively use but
intends to hold as defensive intangible assets to prevent others from obtaining access to them,
referred to as defensive intangible assets. Historically, these assets have been typically
allocated little or no value. Under this guidance defensive intangible assets are required to be
accounted for as a separate identifiable asset recognized at fair value with an assigned useful
life. The effective date of this guidance is for fiscal years beginning on or after
December 15, 2008. The Company adopted this guidance on August 1, 2009, which did not have a
material impact on its financial statements, and will apply the requirements prospectively to
intangible assets acquired after the adoption date.
In April 2008, the FASB issued new accounting guidance for the determination of the useful
life of intangible assets. This guidance amends the factors an entity should consider when
developing renewal or extension assumptions for determining the useful life of recognized
intangible assets. The guidance is intended to improve the consistency between the useful life of
recognized intangible assets and the period of expected cash flows used to measure the fair value
of assets accounted for under guidance specific to business combinations and other GAAP. The
guidance also requires expanded disclosure related to an entitys intangible assets. The guidance
is effective for fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years, and shall be applied prospectively to intangible assets recognized as of, and
subsequent to, the effective date. The Company adopted this guidance on August 1, 2009, which did
not have a material impact on its consolidated financial statements. It is the Companys policy to
expense costs as incurred in connection with the renewal or extension of its intangible assets.
4
In December 2007, the FASB issued new accounting guidance which establishes revised principles
and requirements for the recognition and measurement of assets and liabilities in a business
combination. This new guidance requires (i) recognition of the fair values of acquired assets and
assumed liabilities at the acquisition date, (ii) contingent consideration to be recorded at
acquisition date at fair value, (iii) transaction costs to be expensed as incurred, (iv)
pre-acquisition contingencies to be accounted for at acquisition date at fair value and (v) costs
of a plan to exit an activity or terminate or relocate employees to be accounted for as
post-combination costs. The FASB issued additional guidance in February 2009 which amended certain
provisions related to the accounting for contingencies in a business combination. The guidance
under these new issuances is effective for fiscal years beginning on or after December 15, 2008.
The Company adopted the new guidance on August 1, 2009, which did not have a material impact on its
consolidated financial statements, and will apply the requirements prospectively to business
combinations that occur after the date of adoption.
In September 2006, the FASB issued new accounting guidance for the accounting of fair value
measurements which defines fair value, establishes a framework for measuring fair value in GAAP and
expands disclosure about fair value measurements. In February 2008, the FASB issued additional
guidance which deferred the effective date of certain items under the September 2006 guidance
including nonfinancial assets and liabilities that are recognized or disclosed at fair value in the
financial statement on a non-recurring basis until fiscal years beginning after November 15, 2008.
The Company adopted the provisions of this new guidance for financial assets and liabilities and
nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) effective August 1, 2008, which did not have an
material impact on its consolidated financial statements. The Company elected to apply the deferral
for nonfinancial assets and liabilities recognized or disclosed on a non-recurring basis, including
its goodwill, indefinite-lived intangibles and non-financial assets measured at fair value for
annual impairment assessment, and adopted this guidance on August 1, 2009 which did not have a
material impact on its consolidated financial statements.
(3) Earnings Per Share.
Basic earnings per share have been computed by dividing net income by
the weighted average shares outstanding. Diluted earnings per share have been computed by dividing
net income by the weighted average shares outstanding plus potentially dilutive common shares. The
following table presents information necessary to calculate basic and diluted earnings per share
for periods indicated:
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Three Months Ended |
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October 31, |
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2009 |
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2008 |
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(Amounts in thousands, except per share data) |
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Net income |
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$ |
4,620 |
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$ |
1,616 |
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Weighted average shares outstanding |
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11,144 |
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11,068 |
|
Dilutive effect of options/warrants and stock awards |
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231 |
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155 |
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Weighted average shares outstanding, as adjusted |
|
|
11,375 |
|
|
|
11,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.41 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.41 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
Outstanding stock based awards are not included in the computation of diluted earnings per
share under the treasury stock method, if including them would be anti-dilutive. There were no
potentially dilutive securities not included in the computation of diluted earnings per share for
the periods ended October 31, 2009 and 2008.
(4) Inventories.
Inventories are summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
July 31, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
$ |
5,503 |
|
|
$ |
5,865 |
|
Finished products |
|
|
23,735 |
|
|
|
22,693 |
|
Less reserve for inventory obsolescence |
|
|
(381 |
) |
|
|
(395 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
28,857 |
|
|
$ |
28,163 |
|
|
|
|
|
|
|
|
5
(5) Property, Plant and Equipment.
Property, plant and equipment and related accumulated depreciation and amortization are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
July 31, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
9,297 |
|
|
$ |
8,946 |
|
Buildings & improvements |
|
|
30,859 |
|
|
|
30,546 |
|
Equipment |
|
|
26,912 |
|
|
|
26,679 |
|
Leasehold improvements |
|
|
132 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
67,200 |
|
|
|
66,324 |
|
Less accumulated depreciation and amortization |
|
|
(13,786 |
) |
|
|
(12,605 |
) |
|
|
|
|
|
|
|
|
|
|
53,414 |
|
|
|
53,719 |
|
Construction-in-progress |
|
|
1,287 |
|
|
|
1,115 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
54,701 |
|
|
$ |
54,834 |
|
|
|
|
|
|
|
|
(6) Stock-Based Compensation.
The Company has stock-based incentive plans which are described
in more detail in note 12 to the consolidated financial statements in the Companys Annual Report
on Form 10-K for fiscal year 2009. The Company recognized stock-based compensation costs of $86,103
and $109,782, respectively, for the three months ended October 31, 2009 and 2008, which are
recorded as selling, general and administrative expenses in the consolidated statements of income.
As of October 31, 2009, the unrecognized compensation costs related to stock-based awards was
approximately $282,000, including $54,000 related to outstanding unvested stock options expected to
be recognized over a weighted-average period of 2.1 years and $228,000 related to unvested
performance and time-based stock awards expected to be recognized over a weighted-average period of
1.4 years.
A summary of stock option and stock activity is presented below.
Stock Options
Employee Options. As of October 31, 2009, there were 339,500 options outstanding, consisting
of employee and non-employee director awards, of which 259,500 options were exercisable. During the
three months ended October 31, 2009, there were no options exercised and no options were granted.
Non-Employee Options. In connection with an acquisition of certain penta assets in fiscal year
2003, the Company granted an affiliate of the seller an option to acquire 175,000 shares of the
Companys common stock at an exercise price of $2.50 per share. The option was exercisable for five
years. The option was exercised for the last remaining 25,000 shares in the first quarter of fiscal
year 2009.
6
Performance Shares
During the three months ended October 31, 2009, there were no performance-based stock awards
vested or granted.
As of October 31, 2009, the outstanding performance-based stock awards consisted of Series 1
and Series 2 awards granted to certain executives in fiscal years 2009 and 2008, are summarized
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
Stock Price |
|
3-Year |
|
|
Expected |
|
|
|
|
|
|
|
Series |
|
|
Award |
|
|
(Fair Value) |
|
Measurement |
|
|
Percentage of |
|
|
Shares Expected |
|
Date of Grant |
|
|
Award |
|
|
(Shares) |
|
|
on Grant Date |
|
Period Ending |
|
|
Vesting |
|
|
to Vest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/02/2008 |
|
|
Series 1 |
|
|
54,745 |
|
|
$ |
3.19 |
|
|
|
07/31/2011 |
|
|
|
68.75 |
% |
|
|
37,637 |
|
12/02/2008 |
|
|
Series 2 |
|
|
36,497 |
|
|
$ |
3.19 |
|
|
|
07/31/2011 |
|
|
|
20.0 |
% |
|
|
7,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/03/2008 |
|
|
Series 1 |
|
|
23,220 |
|
|
$ |
16.76 |
|
|
|
07/31/2010 |
|
|
|
52.5 |
% |
|
|
12,191 |
|
03/03/2008 |
|
|
Series 2 |
|
|
15,480 |
|
|
$ |
16.76 |
|
|
|
07/31/2010 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
129,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 1: Vesting for the 2009 and 2008 Series 1 awards are subject to a performance
requirement composed of certain revenue growth objectives and average annual return on invested
capital or equity objectives measured across a three year period. These objectives are estimated
quarterly using the Companys budget, actual results and long term projections. Based on
performance through October 31, 2009, 68.75% and 52.5% of the outstanding awards are projected to
vest for the 2009 and 2008 Series 1 awards, respectively, at the end of their measurement periods.
Series 2: Vesting of the 2009 and 2008 Series 2 awards are subject to performance requirements
pertaining to the growth rate in the Companys basic earnings per share over a three year period.
The achievement of performance requirements is estimated quarterly using the Companys budget,
actual results and long-term projections. Based on performance through October 31, 2009, 20.0% and
0% of the outstanding awards are projected to vest for the 2009 and 2008 Series 2 awards,
respectively at the end of their measurement periods.
Time Based Shares
During the three months ended October 31, 2009, there were 11,350 shares that vested and no
shares were granted under time-based awards. There were awards for 20,609 time-based shares
outstanding as of October 31, 2009.
7
(7) Intangible Assets.
Intangible assets are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Original |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
Intangible assets subject to amortization: (range of useful life): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote supply contract (10 years) |
|
$ |
4,000 |
|
|
$ |
(3,489 |
) |
|
$ |
511 |
|
Other creosote related assets (5 years) |
|
|
131 |
|
|
|
(131 |
) |
|
|
|
|
Penta supply contract and other related assets (3-5 years) |
|
|
7,288 |
|
|
|
(7,278 |
) |
|
|
10 |
|
Animal health trademarks (4-5 years) |
|
|
364 |
|
|
|
(351 |
) |
|
|
13 |
|
Animal health product registrations and other related assets (5-20 years) |
|
|
6,165 |
|
|
|
(1,413 |
) |
|
|
4,752 |
|
Electronic chemicals-related contracts (3-5 years) |
|
|
1,014 |
|
|
|
(597 |
) |
|
|
417 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
|
117 |
|
|
|
(18 |
) |
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization |
|
$ |
19,079 |
|
|
$ |
(13,277 |
) |
|
|
5,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote product registrations and other creosote related assets |
|
|
|
|
|
|
|
|
|
|
5,339 |
|
Penta product registrations |
|
|
|
|
|
|
|
|
|
|
8,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
14,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
$ |
19,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
|
|
Original |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
Intangible assets subject to amortization: (range of useful life): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote supply contract (10 years) |
|
$ |
4,000 |
|
|
$ |
(3,422 |
) |
|
$ |
578 |
|
Other creosote related assets (5 years) |
|
|
131 |
|
|
|
(129 |
) |
|
|
2 |
|
Penta supply contract and other related assets (3-5 years) |
|
|
7,288 |
|
|
|
(7,273 |
) |
|
|
15 |
|
Animal health trademarks (4-5 years) |
|
|
364 |
|
|
|
(349 |
) |
|
|
15 |
|
Animal health product registrations and other related assets (5-20 years) |
|
|
6,165 |
|
|
|
(1,328 |
) |
|
|
4,837 |
|
Electronic chemicals-related contracts (3-5 years) |
|
|
1,014 |
|
|
|
(516 |
) |
|
|
498 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
|
117 |
|
|
|
(17 |
) |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization |
|
$ |
19,079 |
|
|
$ |
(13,034 |
) |
|
|
6,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote product registrations and other creosote related assets |
|
|
|
|
|
|
|
|
|
|
5,339 |
|
Penta product registrations |
|
|
|
|
|
|
|
|
|
|
8,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
14,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
$ |
20,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization are amortized over their estimated useful lives.
Amortization expense was $243,000 and $728,000 for the three month periods ended October 31, 2009
and 2008 respectively.
(8) Dividends.
Dividends of $222,000 ($0.02 per share) and $221,000 ($0.02 per share) were
declared and paid in the first quarter of fiscal years 2010 and 2009, respectively.
8
(9) Comprehensive Income (Loss).
The Companys other comprehensive income (loss) includes
foreign currency translation gains and losses which are recognized as accumulated other
comprehensive income (loss) in the consolidated balance sheets. The following table summarizes
total comprehensive income (loss) for the applicable periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Net income |
|
$ |
4,620 |
|
|
$ |
1,616 |
|
Other comprehensive gain (loss): |
|
|
|
|
|
|
|
|
Net foreign currency translation gain (loss) |
|
|
1,026 |
|
|
|
(4,234 |
) |
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
5,646 |
|
|
$ |
(2,618 |
) |
|
|
|
|
|
|
|
(10) Segment Information.
The Company operates five reportable segments organized around its
three product lines: wood preserving chemicals, animal health pesticides and electronic chemicals.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Amounts in thousands) |
|
Sales |
|
|
|
|
|
|
|
|
Electronic Chemicals North America (1) |
|
$ |
18,079 |
|
|
$ |
21,230 |
|
Electronic Chemicals International (2) |
|
|
4,932 |
|
|
|
4,964 |
|
Penta |
|
|
5,943 |
|
|
|
7,127 |
|
Creosote |
|
|
19,527 |
|
|
|
17,531 |
|
Animal Health |
|
|
933 |
|
|
|
1,381 |
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
49,414 |
|
|
$ |
52,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
695 |
|
|
$ |
626 |
|
Electronic Chemicals International |
|
|
201 |
|
|
|
194 |
|
Penta |
|
|
155 |
|
|
|
637 |
|
Creosote |
|
|
70 |
|
|
|
74 |
|
Animal Health |
|
|
192 |
|
|
|
189 |
|
Other general corporate |
|
|
66 |
|
|
|
58 |
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization |
|
$ |
1,379 |
|
|
$ |
1,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) from operations (3) |
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
1,330 |
|
|
$ |
1,558 |
|
Electronic Chemicals International |
|
|
148 |
|
|
|
(32 |
) |
Penta |
|
|
2,477 |
|
|
|
1,734 |
|
Creosote |
|
|
6,726 |
|
|
|
2,294 |
|
Animal Health |
|
|
(423 |
) |
|
|
(208 |
) |
|
|
|
|
|
|
|
Total segment income from operations |
|
$ |
10,258 |
|
|
$ |
5,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
July 31, |
|
|
|
2009 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
48,749 |
|
|
$ |
49,610 |
|
Electronic Chemicals International |
|
|
28,208 |
|
|
|
26,258 |
|
Penta |
|
|
20,530 |
|
|
|
20,169 |
|
Creosote |
|
|
20,010 |
|
|
|
18,894 |
|
Animal Health |
|
|
16,319 |
|
|
|
17,157 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
$ |
133,816 |
|
|
$ |
132,088 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of intersegment transactions of $39,000 and $91,000 for the three month periods ended
October 31, 2009 and 2008, respectively, which were eliminated in consolidated sales. |
|
(2) |
|
Net of intersegment transactions of $345,000 and $234,000 for the three month periods ended
October 31, 2009 and 2008, respectively, which were eliminated in consolidated sales. |
|
(3) |
|
Certain reclassification of prior year amounts have been made to conform to current year
presentation. |
9
A reconciliation of total segment information to consolidated amounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
July 31, |
|
|
|
2009 |
|
|
2009 |
|
|
|
(Amounts in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
$ |
133,816 |
|
|
$ |
132,088 |
|
Total assets for discontinued operations (1) |
|
|
808 |
|
|
|
856 |
|
Cash and cash equivalents |
|
|
11,145 |
|
|
|
6,613 |
|
Prepaid and other current assets |
|
|
855 |
|
|
|
1,070 |
|
Other |
|
|
2,883 |
|
|
|
2,881 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
149,507 |
|
|
$ |
143,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Sales: |
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
49,414 |
|
|
$ |
52,233 |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
49,414 |
|
|
$ |
52,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income from operations: |
|
|
|
|
|
|
|
|
Total segment income from operations (2) |
|
$ |
10,258 |
|
|
$ |
5,346 |
|
Other corporate expense (2) |
|
|
(2,308 |
) |
|
|
(1,821 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
7,950 |
|
|
|
3,525 |
|
Interest income |
|
|
1 |
|
|
|
2 |
|
Interest expense |
|
|
(557 |
) |
|
|
(879 |
) |
Other expense, net |
|
|
(28 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
7,366 |
|
|
$ |
2,615 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $808,000 and $830,000 as of October 31, 2009 and July 31, 2009,
respectively, of long-term deferred tax assets related to discontinued operations. |
|
(2) |
|
Certain reclassifications of prior year amounts have been made to conform to current
year presentation. |
Other corporate expenses as disclosed in the table above represent those expenses that could
not be directly identified with a particular business segment. Those expenses include almost all
expenses associated with the Companys Houston headquarters, such as executives and other
employees, outside legal and accounting services, board compensation, expenses associated with
being a publicly traded entity, audit expense and fees related to the listing of our stock.
(11) Long-Term Obligations.
The Companys debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
July 31, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Senior Secured Debt: |
|
|
|
|
|
|
|
|
Note Purchase Agreement, maturing on December 31, 2014, interest rate of 7.43% |
|
$ |
20,000 |
|
|
$ |
20,000 |
|
Secured Debt: |
|
|
|
|
|
|
|
|
Term Loan Facility, maturing on December 31, 2012, variable interest rates
based on LIBOR plus 2.0% (2.24% at October 31, 2009) |
|
|
24,916 |
|
|
|
26,292 |
|
Revolving Loan Facility, maturing on December 31, 2012, variable interest
rates based on LIBOR plus 2.0% (2.24% at October 31, 2009) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
44,916 |
|
|
|
46,292 |
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
(7,593 |
) |
|
|
(6,966 |
) |
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
37,323 |
|
|
$ |
39,326 |
|
|
|
|
|
|
|
|
10
To finance the acquisition of the electronic chemicals business, the Company entered into an
amended and restated credit agreement and a note purchase agreement. The new credit agreement
replaced and refinanced the Companys existing credit agreement with Wachovia Bank, National
Association, a subsidiary of Wells Fargo & Co. The credit facility included a revolving loan
facility of $35.0 million and a term loan facility of $35.0 million. The amended and restated
facility was entered into with Wachovia Bank, National Association, Bank of America, N.A., The
Prudential Insurance Company of America, and Pruco Life Insurance Company. Advances under the
revolving loan and the term loan mature on December 31, 2012. They each bear interest at varying
rate of LIBOR plus a margin based on our funded debt to earnings before interest, taxes,
depreciation and amortization (EBITDA).
|
|
|
|
|
Ratio of Funded Debt to EBITDA |
|
Margin |
|
Equal to or greater than 3.0 to 1.0 |
|
|
2.75 |
% |
Equal to or greater than 2.5 to 1.0, but less than 3.0 to 1.0 |
|
|
2.50 |
% |
Equal to or greater than 2.0 to 1.0, but less than 2.5 to 1.0 |
|
|
2.25 |
% |
Equal to or greater than 1.5 to 1.0, but less than 2.0 to 1.0 |
|
|
2.00 |
% |
Less than 1.5 to 1.0 |
|
|
1.75 |
% |
Currently, advances bear interest at LIBOR plus 2.0%. The new facility refinanced $7.4 million
of indebtedness then outstanding under the Companys existing term loan facility with Wachovia
Bank. For the first 24 months of the term facility, principal payments are $458,333 per month and
then are $666,667 per month for the balance of the term prior to maturity. At October 31, 2009,
there was no amount outstanding on the revolving facility, and the amount outstanding on the term
loan was $24.9 million.
The Company also entered into a $20.0 million note purchase agreement with the Prudential
Insurance Company of America. Advances under the note purchase agreement mature on
December 31, 2014, and bear interest at 7.43% per annum. Principal is payable at maturity. At
October 31, 2009, $20.0 million was outstanding under the note purchase agreement.
Loans under the amended and restated credit facility and the note purchase agreement are
secured by the Companys assets, including inventory, accounts receivable, equipment, intangible
assets, and real property. The credit facility and the note purchase agreement have restrictive
covenants, including that the Company must maintain a fixed charge coverage ratio of 1.5 to 1.0,
and a ratio of funded debt to EBITDA as amended effective
January 30, 2009, of 3.5 to 1.0 through January 31, 2009, 3.25 to 1.0 from
February 1, 2009 through April 30, 2009 and 3.0 to 1.0 thereafter. The Company is
also obligated to maintain a debt to capitalization ratio of not more than 50% until
April 30, 2010, and 45% thereafter. For purposes of calculating these financial covenant ratios,
the Company uses a pro forma EBITDA, but adds back extraordinary or non-recurring expense or loss
as may be approved by our lenders. On October 31, 2009, the Company was in compliance with all of
its debt covenants.
The Companys purchase of certain pentachlorophenol assets from Basic Chemical Company in
fiscal 2006 was financed in part by a $10.0 million loan from the seller. The indebtedness was
payable in five equal annual installments of $2.0 million plus interest at 4% per annum. That
indebtedness was paid in full on October 30, 2008.
11
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
We manufacture, formulate and distribute specialty chemicals globally. We operate businesses
engaged in electronic chemicals, industrial wood preservation chemicals and animal health
pesticides. Our electronic chemicals are used in the manufacturing of semiconductors. Our wood
preserving chemicals, pentachlorophenol (penta) and creosote, are used by our industrial
customers primarily to extend the useful life of utility poles and railroad crossties. Our animal
health pesticides are used on cattle, other livestock and poultry to protect the animals from flies
and other pests.
Results of Operations
Three Month Period Ended October 31, 2009 compared with Three Month Period Ended October 31, 2008
Segment Data
Segment data is presented for our five reportable segments for the three month periods ended
October 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Amounts in thousands) |
|
Sales |
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
18,079 |
|
|
$ |
21,230 |
|
Electronic Chemicals International |
|
|
4,932 |
|
|
|
4,964 |
|
Penta |
|
|
5,943 |
|
|
|
7,127 |
|
Creosote |
|
|
19,527 |
|
|
|
17,531 |
|
Animal Health |
|
|
933 |
|
|
|
1,381 |
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
49,414 |
|
|
$ |
52,233 |
|
|
|
|
|
|
|
|
The segment data should be read with our consolidated financial statements and related notes
thereto included elsewhere in this report.
Net Sales
Net sales decreased $2.8 million, or 5.4%, to $49.4 million in the first quarter of fiscal
year 2010 as compared with $52.2 million for the same period of the prior year.
In the first quarter of fiscal year 2010, the electronic chemicals North America segment had
net sales of $18.1 million, a decrease of $3.2 million, or 14.8%, as compared to the prior year
period. The international segment had net sales of $4.9 million in the first quarter of fiscal year
2010, flat as compared with the prior year period. We realized lower net sales in the electronic
chemicals North America segment for the three months ended October 31, 2009 as compared to the
prior year period as demand softened in the segment beginning in the second quarter of fiscal year
2009 from the effect of the economic downturn in the semiconductor industry. Although we have seen
some improvement in both electronic chemical segments, we remain cautious about market conditions
for fiscal year 2010.
Net sales of penta products decreased $1.2 million, or 16.6%, to $5.9 million in the first
quarter of fiscal year 2010 as compared to the prior year period. The decrease in sales for the
three month period was due to lower volume. The first quarter of fiscal year 2009 was an especially
strong quarter for penta sales, so the comparison with this fiscal year shows a particularly marked
decline. Compared with the average quarterly penta sales in fiscal year 2009, penta sales in the
first quarter of fiscal year 2010 were down about 9.1%.
Creosote net sales increased in the first quarter of fiscal year 2010, as compared with the
prior year period, by $2.0 million, or 11.4%, to $19.5 million. Higher prices were partially offset
by a volume decline in the first quarter as compared with the prior year period. As compared with
the average for creosote sales over the entire fiscal year 2009, however, sales volumes in the
first quarter were flat as demand by railroads for crossties treated with creosote held steady near
the top of the historical range, despite the current economic uncertainty. Railroads generally
react to lessened rail traffic by slowing maintenance programs, but we continue to believe that
sales will be relatively stable, though somewhat reduced, in fiscal year 2010.
12
Net sales of animal health pesticides decreased by $448,000, or 32.4%, to $933,000 in the
first quarter of fiscal year 2010 as compared with the prior year period. Seasonal usage of animal
health pesticides is dependent on varying seasonal patterns, weather conditions and weather-related
pressure from pests, as well as customer marketing programs and requirements. Although energy
prices have dropped significantly from recent highs, our farm and livestock customers continue to
be impacted by the effect of high costs for feed, fuel, and fertilizer. Our revenue from the animal
health pesticides segment is seasonal and weighted to the third and fourth quarters. Revenues from
products subject to significant seasonal variations represented less than 6.0% of our fiscal year
2009 revenues.
Gross Profit
Gross profit increased by $2.9 million, or 18.4%, to $18.4 million in the first quarter of
fiscal year 2010 from $15.5 million in the same quarter the prior year. Gross profit as a
percentage of sales increased to 37.2% in the first quarter of fiscal year 2010 from 29.7% in the
first quarter of fiscal year 2009. The improved gross profit was primarily due to improved pricing
and lower input costs in our wood preservative segments. Gross profit margins in the first quarter
of fiscal year 2009 were depressed by the rapid increase in commodity prices that comprised our
input costs, resulting in a more marked improvement in margins in fiscal year 2010.
Gross profits in our wood preservatives segment increased for the three months ended
October 31, 2009, while gross profits in our animal health and electronic chemicals segments
decreased. The increase in our creosote segment resulted from a higher average sales price driven
by a shift in our product mix due to a temporary shortage of domestically produced creosote, as
well as pricing action previously taken in response to our increased cost for creosotes. The
increase in our penta segment was due to a reduction in the cost of the chlorine and solvent raw
materials used to produce our penta products, offset in part by lower sales volumes. The decline
in gross profit in the animal health segment was due primarily to lower revenues. For our
electronic chemicals segments, the decrease in gross profits resulted from lower revenues.
Other companies may include certain of the costs that we record in cost of sales as selling,
general and administrative expenses, and may include certain of the costs that we record in
selling, general and administrative expenses as a component of cost of sales, resulting in a lack
of comparability between our gross profit and that reported by other companies.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses decreased $1.6 million in the first quarter of
fiscal year 2010 to $10.4 million, or 21.1% of net sales, from $12.0 million, or 23.0% of net
sales, for the same quarter of the prior fiscal year.
Selling, general and administrative expenses associated with our two electronic chemicals
segments decreased approximately $1.6 million, to $6.0 million, in the first quarter of fiscal year
2010 as compared to $7.6 million for the first quarter of fiscal year 2009. We acquired our
electronic chemicals business in December 2007. We incurred substantial transitional services
expense with the seller of that business until the end of September 2008, as well as incurring fees
to consultants assisting in the integration of the business. The transitional services expense we
incurred with the seller in the first two months of fiscal year 2009 came while we built and
staffed our post-transition infrastructure. We believe that the redundant systems added
approximately $600,000 in additional expense in the first quarter of fiscal year 2009.
Additionally, non-recurring fees to consultants assisting in the transition were approximately
$434,000 for the first quarter of fiscal year 2009.
Additionally, distribution expenses in our two electronic chemicals segments, which are
included as a sales expense, decreased by approximately $980,000 to $4.2 million in the current
period as compared to $5.2 million in the same period a year ago. Approximately one-half of this
decrease was attributable to lower sales volumes with the balance of the decrease due to improved
efficiencies in our electronic chemicals business supply chain. Distribution expenses for the
electronic chemicals business represented approximately 18.1% of aggregate net sales of these
segments in the first quarter of fiscal year 2010 versus 19.7% in the first quarter of fiscal year
2009.
Outside of electronic chemicals, amortization expenses were lower by approximately $480,000 in
the first quarter of fiscal year 2010 as compared with the prior year period, because certain penta
segment assets that we acquired in an earlier acquisition were fully amortized by January 2009.
Distribution expenses for our wood preservative chemicals and animal health segments, which
represented approximately 3.2% of the aggregate net sales of those segments in the first quarter of
fiscal year 2010, were flat in the current period as compared to the same period a year ago.
Other corporate expenses increased by approximately $487,000 in the current period as compared
to the first quarter of fiscal year 2009 due primarily to an increase in other professional
services.
13
Interest Expense
Interest expense was $557,000 in the first quarter of fiscal year 2010 as compared with
$879,000, in the same period of fiscal year 2009. The decrease was due to principal reductions on
the indebtedness we incurred to fund the acquisition of the electronic chemicals business in fiscal
year 2008 and the acquisition of certain penta assets in fiscal year 2005.
Income Taxes
Our effective tax rate was 37.3% and 38.2% in the first quarter of
fiscal years 2010 and 2009, respectively.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $6.4 million and $9.9 million for the first
three months of fiscal year 2010 and 2009, respectively. Net income adjusted for depreciation and
amortization increased cash to $6.0 million in the first three months of fiscal year 2010. Changes
in operating assets and liabilities included an increase of $1.6 million in accounts payable and a
decrease of $493,000 in prepaid expenses and other current assets, each of which had a favorable
impact on cash. The increase in accounts payable was primarily related to timing differences, while
the decrease in prepaid expenses and other current assets was due to the amortization of prepaid
insurance. Cash was unfavorably impacted by an increase in accounts receivable of $1.5 million
mainly due to increased sales during the current period.
Net cash used in investing activities in the first three months of fiscal 2010 was $128,000 as
compared with $4.0 million in the prior year period. We made additions to property, plant and
equipment of $239,000 during the first quarter of fiscal year 2010 as compared to $1.1 million in
the first quarter of fiscal year 2009. In the first quarter of fiscal year 2009, we incurred
$900,000 for purchases of software and shipping containers for our electronic chemicals business.
In the first quarter of fiscal year 2009, we also spent $2.9 million to purchase additional
inventory and accounts receivable pertaining to our electronic chemicals business in Israel, in
connection with the acquisition of that business.
In the first three months of fiscal year 2010, we made principal payments of $1.4 million on
the term loan indebtedness we incurred when we purchased the electronic chemicals business. We paid
dividends of $222,000 and $221,000 in the first three months of fiscal years 2010 and 2009,
respectively. It is our policy to pay dividends from available cash after taking into consideration
our profitability, capital requirements, financial condition, growth, business opportunities and
other factors which our board of directors may deem relevant.
Working Capital
We have a revolving line of credit under an amended and restated credit agreement. At
October 31, 2009, we had no amount outstanding under that revolving facility, and our net borrowing
base availability was $25.4 million. Management believes that our current credit facility, combined
with cash flows from operations, will adequately provide for our working capital needs for current
operations for the next twelve months.
14
Long Term Obligations
To finance the acquisition of the electronic chemicals business, we entered into an amended
and restated credit agreement and a note purchase agreement. The new credit agreement replaced and
refinanced our existing credit agreement with Wachovia Bank, National Association, a subsidiary of
Wells Fargo Company. The new credit facility included a revolving loan facility of $35.0 million
and a term loan facility of $35.0 million. The amended and restated facility was entered into with
Wachovia Bank, National Association, Bank of America, N.A., The Prudential Insurance Company of
America, and Pruco Life Insurance Company. Advances under the revolving loan and the term loan
mature on December 31, 2012. They each bear interest at varying rate of LIBOR plus a margin based
on our funded debt to EBITDA.
|
|
|
|
|
Ratio of Funded Debt to EBITDA |
|
Margin |
|
Equal to or greater than 3.0 to 1.0 |
|
|
2.75 |
% |
Equal to or greater than 2.5 to 1.0, but less than 3.0 to 1.0 |
|
|
2.50 |
% |
Equal to or greater than 2.0 to 1.0, but less than 2.5 to 1.0 |
|
|
2.25 |
% |
Equal to or greater than 1.5 to 1.0, but less than 2.0 to 1.0 |
|
|
2.00 |
% |
Less than 1.5 to 1.0 |
|
|
1.75 |
% |
Currently, advances bear interest at LIBOR plus 2.0%, but reducing to 1.75% plus LIBOR on
first quarter 2010 results. Through December 31, 2009 principal payments on the term loan will be
$458,333 per month, and will then become $666,667 per month for the balance of the term prior to
maturity. At October 31, 2009, we had no amount outstanding on the revolving facility, and the
amount outstanding on the term loan was $24.9 million.
We also entered into a $20.0 million note purchase agreement with the Prudential Insurance
Company of America. Advances under the note purchase agreement mature on December 31, 2014, and
bear interest at 7.43% per annum. Principal is payable at maturity. At October 31, 2009,
$20.0 million was outstanding under the note purchase agreement.
Loans under the amended and restated credit facility and the note purchase agreement are
secured by our assets, including inventory, accounts receivable, equipment, intangible assets, and
real property. The credit facility and the note purchase agreement have restrictive covenants,
including maintaining a fixed charge coverage ratio of 1.5 to 1.0, and a ratio of funded debt to
EBITDA, as amended effective January 30, 2009, of 3.5 to 1.0 through January 31, 2009, 3.25 to 1.0
from February 1, 2009 through April 30, 2009, and 3.0 to 1.0 thereafter. We must also maintain a
debt to capitalization ratio of not more than 50% until April 30, 2010, and 45% thereafter. For
purposes of calculating these financial covenant ratios, we use a pro forma EBITDA, but add back
extraordinary or non-recurring expense or loss as may be approved by our lenders. On October 31,
2009, we were in compliance with all our debt covenants.
Our purchase of certain penta assets from Basic Chemical Company in fiscal year 2006 was
financed in part by a $10.0 million loan from the seller. The indebtedness was payable in five
equal annual installments of $2.0 million plus interest at 4% per annum. That indebtedness was paid
in full on October 30, 2008.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, such as financing or unconsolidated variable
interest entities.
Recent Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued its Accounting
Standards Codification (Codification) which establishes the source of authoritative accounting
principles generally accepted in the United States of America (GAAP) to be applied by
nongovernmental entities. The Codification was created by combining the various sources of
then-existing non-Securities and Exchange Commission (SEC) accounting and reporting standards.
Rules and interpretive releases of the SEC under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. This guidance, which is effective for financial
statements issued for interim and annual periods ending after September 15, 2009, supersedes all
then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become non-authoritative. The Company
adopted this guidance on August 1, 2009, which did not have a material impact on its consolidated
financial statements.
15
In November 2008, the FASB issued new accounting guidance for intangible assets acquired in a
business combination or asset acquisition that an entity does not intend to actively use but
intends to hold as defensive intangible assets to prevent others from obtaining access to them,
referred to as defensive intangible assets. Historically, these assets have been typically
allocated little or no
value. Under this guidance defensive intangible assets are required to be accounted for as a
separate identifiable asset recognized at fair value with an assigned useful life. The effective
date of this guidance is for fiscal years beginning on or after December 15, 2008. The Company
adopted this guidance on August 1, 2009, which did not have a material impact on its financial
statements, and will apply the requirements prospectively to intangible assets acquired after the
adoption date.
In April 2008, the FASB issued new accounting guidance for the determination of the useful
life of intangible assets. This guidance amends the factors an entity should consider when
developing renewal or extension assumptions for determining the useful life of recognized
intangible assets. The guidance is intended to improve the consistency between the useful life of
recognized intangible assets and the period of expected cash flows used to measure the fair value
of assets accounted for under guidance specific to business combinations and other GAAP. The
guidance also requires expanded disclosure related to an entitys intangible assets. The guidance
is effective for fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years, and shall be applied prospectively to intangible assets recognized as of, and
subsequent to, the effective date. The Company adopted this guidance on August 1, 2009, which did
not have a material impact on its consolidated financial statements. It is the Companys policy to
expense costs as incurred in connection with the renewal or extension of its intangible assets.
In December 2007, the FASB issued new accounting guidance which establishes revised principles
and requirements for the recognition and measurement of assets and liabilities in a business
combination. This new guidance requires (i) recognition of the fair values of acquired assets and
assumed liabilities at the acquisition date, (ii) contingent consideration to be recorded at
acquisition date at fair value, (iii) transaction costs to be expensed as incurred, (iv)
pre-acquisition contingencies to be accounted for at acquisition date at fair value and (v) costs
of a plan to exit an activity or terminate or relocate employees to be accounted for as
post-combination costs. The FASB issued additional guidance in February 2009 which amended certain
provisions related to the accounting for contingencies in a business combination. The guidance
under these new issuances is effective for fiscal years beginning on or after December 15, 2008.
The Company adopted the new guidance on August 1, 2009, which did not have a material impact on its
consolidated financial statements, and will apply the requirements prospectively to business
combinations that occur after the date of adoption.
In September 2006, the FASB issued new accounting guidance for the accounting of fair value
measurements which defines fair value, establishes a framework for measuring fair value in GAAP and
expands disclosure about fair value measurements. In February 2008, the FASB issued additional
guidance which deferred the effective date of certain items under the September 2006 guidance
including nonfinancial assets and liabilities that are recognized or disclosed at fair value in the
financial statement on a non-recurring basis until fiscal years beginning after November 15, 2008.
The Company adopted the provisions of this new guidance for financial assets and liabilities and
nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) effective August 1, 2008, which did not have an
material impact on its consolidated financial statements. The Company elected to apply the deferral
for nonfinancial assets and liabilities recognized or disclosed on a non-recurring basis, including
its goodwill, indefinite-lived intangibles and non-financial assets measured at fair value for
annual impairment assessment, and adopted this guidance on August 1, 2009 which did not have a
material impact on its consolidated financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of these consolidated financial
statements requires the use of estimates, judgments, and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the periods presented. There were no significant
changes in our critical accounting policies as described in our Annual Report on Form 10-K for the
fiscal year ended July 31, 2009.
Disclosure Regarding Forward Looking Statements
We are including the following discussion to inform our existing and potential security
holders generally of some of the risks and uncertainties that can affect us and to take advantage
of the safe harbor protection for forward-looking statements that applicable federal securities
law affords. From time to time, our management or persons acting on our behalf make forward-looking
statements to inform existing and potential security holders about our company. These
forward-looking statements include information about possible or assumed future results of our
operations. All statements, other than statements of historical facts, included or incorporated by
reference in this report that address activities, events or developments that we expect or
anticipate may occur in the future, including such things as future capital expenditures, business
strategy, competitive strengths, goals, growth of our business and operations, plans and references
to future successes may be considered forward-looking statements. Also, when we use words such as
anticipate, believe, estimate, intend, plan, project, forecast, may, should,
budget, goal, expect, probably or similar expressions, we are making forward-looking
statements. Many risks and uncertainties may impact the matters addressed in these forward-looking
statements. Our forward-looking statements speak only as of the date made and we will not update
forward-looking statements unless the securities laws require us to do so.
16
Some of the key factors which could cause our future financial results and performance to vary
from those expected include:
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the loss of primary customers; |
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our ability to implement productivity improvements, cost reduction initiatives or facilities expansions; |
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market developments affecting, and other changes in, the demand for our products and the introduction of new
competing products; |
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availability or increases in the price of our primary raw materials or active ingredients; |
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the timing of planned capital expenditures; |
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our ability to identify, develop or acquire, and market additional product lines and businesses necessary to
implement our business strategy and our ability to finance such acquisitions and development; |
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the condition of the capital markets generally, which will be affected by interest rates, foreign currency
fluctuations and general economic conditions; |
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cost and other effects of legal and administrative proceedings, settlements, investigations and claims,
including environmental liabilities which may not be covered by indemnity or insurance; |
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the ability to obtain registration and re-registration of our products under applicable law; |
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the political and economic climate in the foreign or domestic jurisdictions in which we conduct business; and |
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other United States or foreign regulatory or legislative developments which affect the demand for our
products generally or increase the environmental compliance cost for our products or impose liabilities on
the manufacturers and distributors of such products. |
The information contained in this report, including the information set forth under the
heading Risk Factors, identifies additional factors that could cause our results or performance
to differ materially from those we express in our forward-looking statements. Although we believe
that the assumptions underlying our forward-looking statements are reasonable, any of these
assumptions and, therefore, the forward-looking statements based on these assumptions, could
themselves prove to be inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements which are included in this report and the exhibits and other documents
incorporated herein by reference, our inclusion of this information is not a representation by us
or any other person that our objectives and plans will be achieved.
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ITEM 3. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
We are exposed to certain market risks in the ordinary course of our business, arising
primarily from changes in interest rates and to a lesser extent foreign currency exchange rate
fluctuations. Generally we do not utilize derivative financial instruments or hedging transactions
to manage that risk.
Interest Rate Sensitivity
As of October 31, 2009 our fixed rate debt consisted of $20.0 million of term notes with an
interest rate of 7.43%, maturing on December 31, 2014.
As of October 31, 2009 our variable rate debt consisted of a credit facility with an interest
rate of LIBOR plus 2.0%, maturing on December 31, 2012. On October 31, 2009, we had no amount
borrowed on our $35.0 million revolving credit line under that facility, and $24.9 million borrowed
on a term loan under that same facility. Principal payments on the term loan are $458,333 per month
until December 31, 2009 and $666,667 per month for the remaining term of the facility.
Based on the outstanding balance of the term loan and LIBOR rate as of October 31, 2009, a
1.0% change in the LIBOR interest rate would result in a change of approximately $214,000 in
interest expense for the next twelve months.
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Foreign Currency Exchange Rate Sensitivity
We are exposed to fluctuations in foreign currency exchange rates from our electronic
chemicals international segment. This segment uses a different functional currency than the
U.S. Dollar which is our consolidated reporting currency. Currency translation gains and losses
result from the process of translating the segments financial statements from its functional
currency (Euros) into our reporting currency. Currency translation gains and losses have no impact
on the consolidated statements of income and are recorded as accumulated other comprehensive income
(loss) within stockholders equity in our consolidated balance sheets. Assets and liabilities have
been translated using exchange rates in effect at the balance sheet dates. Revenues and expenses
have been translated using the average exchange rates during the period.
During the three months ended October 31, 2009, we recognized foreign currency translation
gains of $1.0 million as accumulated other comprehensive income in the consolidated balance sheets.
The gains reflect the strengthening of the U.S. Dollar against the Euro over the first three months
of fiscal year 2010. At October 31, 2009, the cumulative foreign currency translation loss
reflected in accumulated other comprehensive loss was $438,000.
Additionally we have limited exposure to certain transactions denominated in a currency other
than the functional currency in our Italy operations. Accordingly, we recognize exchange gains or
losses in our consolidated statement of operations from these transactions. We believe the impact
of changes in foreign currency exchange rates does not have a material effect on our results of
operations or cash flows.
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ITEM 4. |
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CONTROLS AND PROCEDURES |
The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934. This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commission. Our management,
including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this report. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this
report.
There were no changes to our internal control over financial
reporting during the quarterly period covered by this Report on
Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
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ITEM 1. |
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LEGAL PROCEEDINGS |
We have previously reported that a lawsuit was filed in 2007 against us in Superior Court,
Fulton County, Georgia (Atlanta) styled John Bailey, et al vs. Cleveland G. Meredith et al. The
plaintiffs are persons living near the wood treating facility of one of our customers. The
plaintiffs complain that air emissions from the wood treating facility have caused harm to their
property and person, and claim that we are also responsible because we sold wood preservative
chemicals to the facility. Given the inherent uncertainties of litigation, the ultimate outcome
cannot be predicted at this time, nor can the amount of any potential loss be reasonably estimated.
We have discontinued the operation of our agricultural herbicide product line, referred to as
MSMA, but in connection with that product line we were a member of the MSMA task force. As
previously reported, an entity related to the MSMA task force, Arsonate Herbicide Products,
Limited) (AHP), was sued by Albaugh, Inc. in 2007 claiming that AHP overbilled it for certain
task force expenses. Although Albaugh Inc. had agreed to reimburse AHP for certain task force
expenses for MSMA studies and registration support costs, it now claims that it was overbilled for
many years by at least $900,000. The case was tried in October 2009 in the U.S. District Court for
the So. District of Iowa, and styled as Albaugh, Inc. vs. Arsonate Herbicide Products, Limited. The
court is scheduled to hear final oral arguments on December 10, 2009. The ultimate outcome cannot
be predicted at this time, nor can the amount of any potential loss be reasonably estimated.
We have previously reported that a lawsuit was filed against our subsidiary, KMG de Mexico,
respecting the title to the land on which our facility in Matamoros is located. The plaintiffs
claim that their title to the land was superior to the person from whom our subsidiary bought the
land. The lawsuit was initially filed in 1998 Matamoros, Mexico under Adolfo Cazares Rosas, et al
vs. KMG de Mexico and Guillermo Villarreal. The plaintiffs are seeking to have our purchase
overturned and to recover the land or its value. In January 2008, the case was sent by the appeals
court back to the lower court to obtain additional factual information, and in 2009 the plaintiffs
were required to re-file the case. The ultimate outcome of this litigation cannot be determined at
this time, nor can the amount of any potential loss be reasonably estimated.
18
We are periodically a party to other legal proceedings and claims that arise in the ordinary
course of business. We do not believe that the outcome of any of those matters will have a material
adverse effect on our business, financial condition and operating results.
There have been no material changes to the risk factors contained in our Annual Report on
Form 10-K for the fiscal year ended July 31, 2009.
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ITEM 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
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ITEM 3. |
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DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
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ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders in the first quarter of fiscal year
2010. However, our annual shareholders meeting was held on December 8, 2009. At that meeting, the
shareholders voted to elect all the nominees to our board of directors as follows:
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Votes |
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Nominees |
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Votes For |
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Against |
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Abstentions |
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David L. Hatcher |
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10,019,618 |
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84,471 |
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107,473 |
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J. Neal Butler |
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10,020,724 |
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83,365 |
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107,473 |
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Gerald G. Ermentrout |
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10,084,959 |
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19,130 |
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107,473 |
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Christopher T. Fraser |
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10,100,144 |
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3,945 |
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107,473 |
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George W. Gilman |
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10,020,724 |
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83,365 |
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107,473 |
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Fred C. Leonard, III |
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10,003,713 |
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100,376 |
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107,473 |
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Charles L. Mears |
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10,016,300 |
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87,789 |
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107,473 |
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Stephen A. Thorington |
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10,104,089 |
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0 |
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107,473 |
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Richard L. Urbanowski |
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10,086,301 |
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17,788 |
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107,473 |
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The foregoing persons compose our full board of directors. The shareholders also voted to
approve and ratify the Companys 2009 Long-Term Incentive Plan.
The vote was 6,093,597 for, 2,060,482 against and 25,807 abstentions. They also voted to approve the appointment of UHY LLP as our independent registered
public accounting firm for fiscal year 2010. The vote was 10,183,220
for, 12,752 against and 15,590 abstentions.
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ITEM 5. |
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OTHER INFORMATION |
The Nominating and Corporate Governance Committee will consider recommendations for directors
made by shareholders for fiscal year 2011, if such recommendations are received in writing,
addressed to the chair of the committee, Mr. Urbanowski, in care of the Company, at 9555 W. Sam
Houston Parkway S., Suite 600, Houston, Texas 77099 by July 2, 2010.
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The financial statements are filed as part of this report in Item 1. The
following documents are filed as exhibits. Documents marked with an asterisk
(*) are management contracts or compensatory plans, and portions of documents
marked with a dagger () have been granted confidential treatment.
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31.1 |
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Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer. |
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31.2 |
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Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer. |
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32.1 |
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Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer. |
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32.2 |
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Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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KMG Chemicals, Inc. |
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By:
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/s/ J. Neal Butler
J. Neal Butler
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Date: December 9, 2009 |
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President and Chief Executive Officer |
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By:
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/s/ John V. Sobchak
John V. Sobchak
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Date: December 9, 2009 |
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Vice President and Chief Financial Officer |
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21