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 April 30, 2010
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
(State or other jurisdiction of incorporation or organization)
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75-2640529
(I.R.S. Employer Identification No.) |
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9555 West Sam Houston Parkway South, Suite 600
Houston, Texas
(Address of principal executive offices)
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77099
(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
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
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 June 8, 2010, there were 11,229,487 shares of the registrants common stock outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KMG
CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in thousands except for share and per share data)
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April 30, |
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July 31, |
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2010 |
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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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$ |
4,099 |
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$ |
7,174 |
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Accounts receivable: |
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Trade, net of allowances of $477 and $595 at April 30, 2010 and July 31, 2009, respectively |
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26,458 |
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21,206 |
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Other |
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2,012 |
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1,896 |
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Inventories, net |
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35,362 |
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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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2,168 |
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1,638 |
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Total current assets |
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70,797 |
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60,775 |
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PROPERTY, PLANT AND EQUIPMENT, net |
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69,132 |
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54,834 |
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DEFERRED TAX ASSETS |
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906 |
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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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20,851 |
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20,149 |
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RESTRICTED CASH |
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193 |
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313 |
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OTHER ASSETS, net |
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2,861 |
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2,736 |
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TOTAL ASSETS |
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$ |
168,518 |
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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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$ |
16,872 |
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$ |
16,606 |
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Accrued liabilities |
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5,365 |
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7,151 |
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Current deferred tax liabilities |
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311 |
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328 |
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Current portion of long-term debt |
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8,000 |
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6,966 |
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Total current liabilities |
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30,548 |
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31,051 |
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LONG-TERM DEBT, net of current portion |
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53,333 |
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39,326 |
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DEFERRED TAX LIABILITIES |
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1,688 |
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874 |
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OTHER LONG-TERM LIABILITIES |
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1,224 |
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1,280 |
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Total liabilities |
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86,793 |
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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, $.01 par value, 40,000,000 shares authorized, 11,224,293 shares issued and
outstanding at April 30, 2010 and 11,101,345 shares issued and outstanding at July 31, 2009 |
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112 |
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111 |
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Additional paid-in capital |
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24,001 |
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23,084 |
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Accumulated other comprehensive loss |
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(2,890 |
) |
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(1,464 |
) |
Retained earnings |
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60,502 |
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49,246 |
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Total stockholders equity |
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81,725 |
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70,977 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
168,518 |
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$ |
143,508 |
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See notes to consolidated financial statements.
2
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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Nine Months Ended |
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April 30, |
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April 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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NET SALES |
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$ |
51,614 |
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$ |
45,869 |
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$ |
146,162 |
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$ |
142,309 |
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COST OF SALES |
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35,658 |
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30,519 |
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95,103 |
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97,693 |
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Gross Profit |
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15,956 |
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15,350 |
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51,059 |
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44,616 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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10,124 |
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9,910 |
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30,353 |
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33,144 |
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Operating income |
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5,832 |
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5,440 |
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20,706 |
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11,472 |
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OTHER INCOME (EXPENSE): |
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Interest income |
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3 |
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1 |
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5 |
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7 |
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Interest expense |
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(542 |
) |
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(732 |
) |
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(1,634 |
) |
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(2,396 |
) |
Other, net |
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(69 |
) |
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(15 |
) |
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(168 |
) |
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(295 |
) |
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Total other expense, net |
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(608 |
) |
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(746 |
) |
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(1,797 |
) |
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(2,684 |
) |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
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5,224 |
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4,694 |
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18,909 |
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8,788 |
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Provision for income taxes |
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(1,882 |
) |
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(1,902 |
) |
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(6,984 |
) |
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(3,473 |
) |
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INCOME FROM CONTINUING OPERATIONS |
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3,342 |
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2,792 |
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11,925 |
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5,315 |
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DISCONTINUED OPERATIONS |
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Loss from discontinued operations, before income taxes |
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(15 |
) |
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(22 |
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Income tax benefit |
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5 |
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8 |
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Loss from discontinued operations |
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(10 |
) |
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(14 |
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NET INCOME |
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$ |
3,342 |
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$ |
2,782 |
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$ |
11,925 |
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$ |
5,301 |
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EARNINGS PER SHARE: |
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Basic |
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Income from continuing operations |
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$ |
0.30 |
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$ |
0.25 |
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$ |
1.07 |
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$ |
0.48 |
|
Loss from discontinued operations |
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Net income |
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$ |
0.30 |
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|
$ |
0.25 |
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$ |
1.07 |
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$ |
0.48 |
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Diluted |
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Income from continuing operations |
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$ |
0.29 |
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$ |
0.25 |
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$ |
1.05 |
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$ |
0.47 |
|
Loss from discontinued operations |
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Net income |
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$ |
0.29 |
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$ |
0.25 |
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$ |
1.05 |
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$ |
0.47 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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11,198 |
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11,090 |
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11,168 |
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11,080 |
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Diluted |
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11,436 |
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|
11,208 |
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11,410 |
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|
11,217 |
|
See notes to consolidated financial statements.
3
KMG
CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
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Nine Months Ended |
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April 30, |
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|
2010 |
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|
2009 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
11,925 |
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$ |
5,301 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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4,442 |
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|
4,704 |
|
Amortization of loan costs included in interest expense |
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66 |
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66 |
|
Impairment on assets of discontinued operations |
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15 |
|
Stock-based compensation expense |
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|
450 |
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|
416 |
|
Bad debt expense |
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166 |
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134 |
|
Inventory valuation adjustment |
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(4 |
) |
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|
364 |
|
Deferred rental income |
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(48 |
) |
Deferred income tax expense (benefit) |
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|
806 |
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|
(693 |
) |
Tax benefit from stock-based awards |
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(331 |
) |
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(37 |
) |
Changes in operating assets and liabilities, net of effects of acquisition: |
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Accounts receivable trade |
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(5,648 |
) |
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|
10,706 |
|
Accounts receivable other |
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(225 |
) |
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|
(857 |
) |
Inventories |
|
|
202 |
|
|
|
(4,234 |
) |
Prepaid expenses and other current assets |
|
|
(728 |
) |
|
|
(815 |
) |
Accounts payable |
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|
376 |
|
|
|
(7,056 |
) |
Accrued liabilities |
|
|
(1,329 |
) |
|
|
1,062 |
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|
Net cash provided by operating activities |
|
|
10,168 |
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|
9,028 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
Additions to property, plant and equipment |
|
|
(1,233 |
) |
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|
(2,442 |
) |
Cash used in connection with the electronic chemicals acquisition |
|
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|
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|
(3,257 |
) |
Cash used in connection with General Chemical acquisition |
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|
(26,744 |
) |
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|
Change in restricted cash |
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|
109 |
|
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|
Net cash used in investing activities |
|
|
(27,868 |
) |
|
|
(5,699 |
) |
|
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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|
Net borrowings under revolver credit agreement |
|
|
20,000 |
|
|
|
4,777 |
|
Principal payments on borrowings on term loan |
|
|
(4,958 |
) |
|
|
(8,125 |
) |
Proceeds from exercise of stock options and warrants |
|
|
138 |
|
|
|
119 |
|
Tax benefit from stock-based awards |
|
|
331 |
|
|
|
37 |
|
Payment of dividends |
|
|
(669 |
) |
|
|
(665 |
) |
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|
Net cash (used in) provided by financing activities |
|
|
14,842 |
|
|
|
(3,857 |
) |
|
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|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
(217 |
) |
|
|
(262 |
) |
|
|
|
|
|
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|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(3,075 |
) |
|
|
(790 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
7,174 |
|
|
|
2,605 |
|
|
|
|
|
|
|
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|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
4,099 |
|
|
$ |
1,815 |
|
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|
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|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,550 |
|
|
$ |
2,360 |
|
Cash paid for income taxes |
|
$ |
7,633 |
|
|
$ |
917 |
|
See notes to consolidated financial statements.
4
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 (SEC) 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. Management 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 has evaluated all events and transactions occurring after the balance sheet date but before the financial
statements were issued, and has included the appropriate disclosures
in this Report.
(2) Acquisition.
On March 29, 2010, the Company acquired certain assets of the electronic
chemicals business of General Chemical Performance Products, LLC (General Chemical). The acquired
business includes products similar to the products of the Companys existing electronic chemicals
business. The purpose of the acquisition was to expand the Companys product line and increase
market share.
The purchase included inventory, a 48,000 square foot manufacturing facility in Hollister,
California and certain equipment at General Chemicals Bay Point, California facility. The Company
additionally entered into a manufacturing agreement with General Chemical under which they will
continue to manufacture certain acid products for us at their Bay Point facility, using the
equipment at the facility which was purchased by the Company. The Company paid $26.7 million in
cash which was financed with available cash and borrowings under the Companys revolving credit
facility.
The following table summarizes the consideration paid for the acquired assets and the
preliminary acquisition accounting for the fair value of the assets recognized at the acquisition
date (in thousands):
|
|
|
|
|
Consideration: |
|
|
|
|
|
Cash |
|
$ |
26,744 |
|
|
|
|
|
|
Fair value of identifiable assets acquired: |
|
|
|
|
|
|
|
|
|
Inventory, net of allowance |
|
$ |
7,604 |
|
Property, plant and equipment |
|
|
17,690 |
|
Intangible assets: |
|
|
|
|
Value of
product qualifications |
|
|
1,300 |
|
Non-compete agreement |
|
|
150 |
|
|
|
|
|
Total intangible assets |
|
|
1,450 |
|
|
|
|
|
Total identifiable assets acquired |
|
$ |
26,744 |
|
|
|
|
|
5
Acquisition-related costs (included in selling, general and administrative expenses in the
Companys Consolidated Statements of Income for the three and
nine months ended April 30, 2010, in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
April 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25 |
|
|
$ |
341 |
|
|
|
|
|
|
|
|
The Company expects to realize efficiencies by combining its electronic chemicals business with the
operations of the business acquired from General Chemical, including efficiencies in manufacturing,
purchasing, warehousing and distribution, customer service and sales, as well as all finance and
accounting functions. In the one month in the third quarter of fiscal year 2010 that the Company owned
the new business, we had $4.2 million of revenue from it. The operating expenses associated with those sales were included with the overall operating
expenses of the Electronic Chemicals-North American segment, and it is not practicable to determine
expenses associated solely with the acquired business. Additionally, the Company has begun the
process of moving production of certain products to and from the newly acquired manufacturing
sites, consolidating purchasing for all facilities and optimizing the supply chain logistics to
customers. Considering the commonality of product lines and customer list with the newly acquired
business, it will not be practicable in future reported quarters to determine the revenue solely
attributable to the acquired business.
The following table sets forth pro forma results had the acquisition occurred as of the
beginning of the periods presented (in thousands, except per share data). The unaudited pro forma
financial information is not necessarily indicative of what our consolidated results of operations
would have been had we completed the acquisition as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
58,810 |
|
|
$ |
55,404 |
|
|
$ |
174,381 |
|
|
$ |
180,295 |
|
Operating income |
|
|
6,241 |
|
|
|
5,003 |
|
|
|
22,642 |
|
|
|
12,475 |
|
Net income |
|
|
3,617 |
|
|
|
2,478 |
|
|
|
13,105 |
|
|
|
5,747 |
|
Earnings per share Basic |
|
$ |
0.32 |
|
|
$ |
0.22 |
|
|
$ |
1.17 |
|
|
$ |
0.52 |
|
Depreciation included in the pro forma financial information is approximately $198,000 per month
for the nine months ended April 30, 2009, and $180,000 per month for each of the other periods.
(3) Recent
Accounting Standards. The Company has considered all recently issued Financial
Accounting Standards Board (FASB) accounting standards updates and SEC rules and interpretative
releases, and believes that only the following could have a material impact on the Companys
consolidated financial statements.
In June 2009, the FASB issued its Accounting Standards Codification (Codification) which
establishes the source of authoritative GAAP to be applied by nongovernmental entities. The
Codification was created by combining the various sources of then-existing non-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.
6
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.
(4) Earnings
Per Share. Basic earnings per share is computed by dividing net income by the
weighted average shares outstanding. Diluted earnings per share is 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 the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Amounts in thousands, except per share data) |
|
|
Income from continuing operations |
|
$ |
3,342 |
|
|
$ |
2,792 |
|
|
$ |
11,925 |
|
|
$ |
5,315 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,342 |
|
|
$ |
2,782 |
|
|
$ |
11,925 |
|
|
$ |
5,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Basic |
|
|
11,198 |
|
|
|
11,090 |
|
|
|
11,168 |
|
|
|
11,080 |
|
Dilutive effect of options, warrants and stock awards |
|
|
238 |
|
|
|
118 |
|
|
|
242 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Diluted |
|
|
11,436 |
|
|
|
11,208 |
|
|
|
11,410 |
|
|
|
11,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.30 |
|
|
$ |
0.25 |
|
|
$ |
1.07 |
|
|
$ |
0.48 |
|
Basic earnings per share on loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.30 |
|
|
$ |
0.25 |
|
|
$ |
1.07 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations |
|
$ |
0.29 |
|
|
$ |
0.25 |
|
|
$ |
1.05 |
|
|
$ |
0.47 |
|
Diluted earnings per share on loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.29 |
|
|
$ |
0.25 |
|
|
$ |
1.05 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 less
than 1,000 shares of potentially dilutive securities not included in the computation of diluted
earnings per share for the three and nine month periods ended April 30, 2010,
respectively. For the three months ended April 30, 2009 there were
78,347 potentially dilutive securities not included in the computation of diluted
earnings per share, and for the nine months ended April 30, 2009
there was an average of 56,400 potentially dilutive securities not
included.
7
(5) Inventories.
Inventories are summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
Raw materials and supplies |
|
$ |
8,741 |
|
|
$ |
5,865 |
|
Finished products |
|
|
27,089 |
|
|
|
22,693 |
|
Less reserve for inventory obsolescence |
|
|
(468 |
) |
|
|
(395 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
35,362 |
|
|
$ |
28,163 |
|
|
|
|
|
|
|
|
(6) Property,
Plant and Equipment. Property, plant and equipment and related accumulated
depreciation and amortization are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
9,580 |
|
|
$ |
8,946 |
|
Buildings and improvements |
|
|
33,985 |
|
|
|
30,546 |
|
Equipment |
|
|
40,176 |
|
|
|
26,679 |
|
Leasehold improvements |
|
|
132 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
83,873 |
|
|
|
66,324 |
|
Less accumulated depreciation and amortization |
|
|
(16,144 |
) |
|
|
(12,605 |
) |
|
|
|
|
|
|
|
|
|
|
67,729 |
|
|
|
53,719 |
|
Construction-in-progress |
|
|
1,403 |
|
|
|
1,115 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
69,132 |
|
|
$ |
54,834 |
|
|
|
|
|
|
|
|
(7) 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
approximately $238,000 and $180,000, respectively, for the three months ended April 30, 2010 and
2009, and approximately $450,000 and $416,000, respectively, for the nine months ended
April 30, 2010 and 2009 which are recorded as selling, general and administrative expenses in the
consolidated statements of income.
As of April 30, 2010, the unrecognized compensation costs related to outstanding stock-based
awards was approximately $2.0 million, including approximately $42,000 related to outstanding
unvested stock options expected to be recognized over a weighted-average period of approximately
two years and $2.0 million related to unvested performance and time-based stock awards expected to
be recognized over a weighted-average period of approximately two years.
A summary of stock option and stock activity is presented below.
Stock Options and Warrants
A summary of activity for the nine months ended April 30, 2010 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Outstanding on July 31, 2009 |
|
|
339,500 |
|
|
$ |
3.97 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised (1) |
|
|
(67,500 |
) |
|
|
3.92 |
|
Forfeited/Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on April 30, 2010 |
|
|
272,000 |
|
|
|
3.98 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes options to purchase 40,000 shares of the Companys stock which were exercised as a
net settlement. The net settlement resulted in the issuance of 33,482 shares of the Companys stock
and reflects the gross number of options available for exercise reduced by the number of options
equaling the aggregate exercise price which were surrendered to the Company in consideration of the
exercise price. There was no cash received by the Company on the net settlement. |
8
The following table summarizes information about stock options outstanding at
April 30, 2010 based on fully vested (currently exercisable) stock option awards and stock options
awards expected to vest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Options |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(in thousands) (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested and currently exercisable |
|
|
207,000 |
|
|
$ |
3.88 |
|
|
|
5.1 |
|
|
$ |
3,014 |
|
Expected to vest |
|
|
65,000 |
|
|
|
4.31 |
|
|
|
12.2 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding stock options |
|
|
272,000 |
|
|
|
3.98 |
|
|
|
6.8 |
|
|
$ |
3,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value is computed based on the closing price of the Companys stock
on April 30, 2010. |
No options were granted in the first nine months of fiscal years 2010.
The total intrinsic value of options/warrants exercised in the first nine months of fiscal
years 2010 and 2009 was approximately $934,000 and $119,000, respectively.
Performance Shares
During the nine months ended April 30, 2010, there were no performance-based stock awards
vested and there were 106,007 performance-based stock awards granted to certain executives as
Series 1 and Series 2 awards. The fair value of the award was measured on the date of grant on
March 17, 2010 using the Companys closing stock price of $15.55. Stock-based compensation on the
award will be recognized on a straight-line basis over the requisite service period of 28.5 months,
beginning on the date of grant, based on the number of shares projected to vest at the end of the
measurement period ending July 31, 2012, as set forth in the table below.
As of April 30, 2010, the outstanding performance-based stock awards granted to certain
executives in fiscal years 2010, 2009 and 2008, are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
3-Year |
|
|
Expected |
|
|
|
|
|
|
Series |
|
|
Award |
|
|
Grant-Date Fair |
|
Measurement |
|
|
Percentage of |
|
|
Shares Expected |
|
Date of Grant |
|
Award |
|
|
(Shares) |
|
|
Value |
|
Period Ending |
|
|
Vesting(1)(2) |
|
|
to Vest |
|
|
2010 Award |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/17/2010 |
|
Series 1 |
|
|
63,605 |
|
|
$ |
15.55 |
|
|
|
07/31/2012 |
|
|
|
100 |
% |
|
|
63,605 |
|
03/17/2010 |
|
Series 2 |
|
|
42,402 |
|
|
$ |
15.55 |
|
|
|
07/31/2012 |
|
|
|
100 |
% |
|
|
42,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,007 |
|
2009 Award |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/02/2008 |
|
Series 1 |
|
|
54,745 |
|
|
$ |
3.19 |
|
|
|
07/31/2011 |
|
|
|
55 |
% |
|
|
30,110 |
|
12/02/2008 |
|
Series 2 |
|
|
36,497 |
|
|
$ |
3.19 |
|
|
|
07/31/2011 |
|
|
|
20 |
% |
|
|
7,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,409 |
|
2008 Award |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
235,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Series 1: Vesting for the 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. The expected percentage of
vesting is based on performance through April 30, 2010 and reflects the percentage of shares
projected to vest for the respective awards at the end of their measurement periods. |
|
(2) |
|
Series 2: Vesting of the 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. The expected percentage of vesting is based on
performance through April 30, 2010 and reflects the percentage of shares projected to vest for the
respective awards at the end of their measurement periods. |
9
The weighted-average grant-date fair value of performance awards outstanding at the beginning
and end of the nine months ended April 30, 2010 was $6.09 per share and $12.67 per share,
respectively.
Time Based Shares
During the nine months ended April 30, 2010, there were 7,029 time-based stock awards granted
to certain employees which vest on August 1, 2012. The fair value of the award of $109,300 was
measured on the date of grant on March 17, 2010, using the Companys closing stock price of $15.55,
and will be recognized on a straight-line basis over the 28.5 month requisite service period
beginning on the date of grant.
The Company also granted time-based stock awards to its non-employee directors during the nine
months ended April 30, 2010. Each non-employee director will be issued shares having a value of
$50,000 for service as a director for the twelve-month period ending November 30, 2010. Each
non-employee director shall be issued shares in quarterly installments for service as a director in
the preceding three months in an amount equal in value to $12,500 valued on the closing price of
the Companys stock as of the last trading day of each three month service period ending in
February, May, August and November. The issuance of shares will be prorated for any non-employee
director starting or ending service during the annual period, based on the number of months during
such period that the non-employee director served as a director, with any day of service during a
month being counted as service for the month. The aggregate grant-date fair value of the award was
$391,667, which includes awards of $350,000 for seven non-employee directors, with a grant date
of December 8, 2009, and $41,667 for one non-employee director with a grant date of
February 22, 2010. Stock-based compensation for non-employee director awards is recognized on a
straight-line basis over the respective requisite service period between the grant date and
November 30, 2010.
A summary of activity for time-based stock awards for the nine months ended April 30, 2010 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding on July 31, 2009 |
|
|
31,959 |
|
|
$ |
6.61 |
|
Granted (1) |
|
|
32,091 |
|
|
|
15.61 |
|
Vested |
|
|
(26,986 |
) |
|
|
7.08 |
|
Forfeited |
|
|
(2,351 |
) |
|
|
15.95 |
|
|
|
|
|
|
|
|
|
Outstanding on April 30, 2010 |
|
|
34,713 |
|
|
|
13.93 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the fiscal year 2010 non-employee director awards calculated based on the aggregate
value of the award of $391,667 divided by the Companys closing stock price on the respective
date of grant. The number of shares reflected here does not represent the number of shares
expected to vest, since the shares vested will be determined on the last trading day at the
end of each three-month service period beginning December 1, 2009. |
The total fair value of shares vested during the nine months ended April 30, 2010 and 2009 was
approximately $191,000 and $96,000, respectively.
There were 11,410 time based awards granted during the nine months
ended April 30, 2009 with a weighted-average grant date fair value of
$3.19.
10
(8) Intangible Assets.
Intangible assets are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010 |
|
|
|
Original |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization: (range of useful life): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote supply contract (10 years) |
|
$ |
4,000 |
|
|
$ |
(3,622 |
) |
|
$ |
378 |
|
Other creosote related assets (5 years) |
|
|
131 |
|
|
|
(131 |
) |
|
|
|
|
Penta supply contract and other related assets (3-5 years) |
|
|
7,288 |
|
|
|
(7,286 |
) |
|
|
2 |
|
Animal health trademarks (4-5 years) |
|
|
364 |
|
|
|
(356 |
) |
|
|
8 |
|
Animal health product registrations and other related assets (5-20 years) |
|
|
6,165 |
|
|
|
(1,583 |
) |
|
|
4,582 |
|
Electronic chemicals-related contracts (3-8 years) |
|
|
1,164 |
|
|
|
(762 |
) |
|
|
402 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
|
117 |
|
|
|
(24 |
) |
|
|
93 |
|
Electronic
chemicals-value of product qualifications (5 years) |
|
|
1,300 |
|
|
|
(18 |
) |
|
|
1,282 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization |
|
$ |
20,529 |
|
|
$ |
(13,782 |
) |
|
|
6,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
$ |
20,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 approximately $261,000 and $249,000 for the three month periods ended
April 30, 2010 and 2009, respectively, and approximately $748,000 and $1.5 million for the nine
month periods ended April 30, 2010 and 2009, respectively.
(9) Dividends. Dividends of approximately $224,000 ($0.02 per share) and $222,000 ($0.02 per
share) were declared and paid in the third quarter of fiscal years 2010 and 2009, respectively.
Dividends of approximately $669,000 ($.04 per share) and $665,000 ($0.04 per share) were declared
and paid in the first nine months of fiscal years 2010 and 2009, respectively.
11
(10) 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 for the applicable periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
3,342 |
|
|
$ |
2,782 |
|
|
$ |
11,925 |
|
|
$ |
5,301 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency translation (loss) gain |
|
|
(1,080 |
) |
|
|
737 |
|
|
|
(1,426 |
) |
|
|
(3,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
2,262 |
|
|
$ |
3,519 |
|
|
$ |
10,499 |
|
|
$ |
1,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11) Segment Information. The Company operates five reportable segments organized around its
three product lines: electronic chemicals, wood preserving chemicals, animal health products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Amounts in thousands) |
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals North America (1) |
|
$ |
24,755 |
|
|
$ |
14,284 |
|
|
$ |
61,199 |
|
|
$ |
53,027 |
|
Electronic Chemicals International (2) |
|
|
4,817 |
|
|
|
2,960 |
|
|
|
14,278 |
|
|
|
12,028 |
|
Penta |
|
|
5,734 |
|
|
|
6,914 |
|
|
|
16,784 |
|
|
|
19,883 |
|
Creosote |
|
|
13,022 |
|
|
|
18,211 |
|
|
|
47,219 |
|
|
|
50,249 |
|
Animal Health |
|
|
3,286 |
|
|
|
3,500 |
|
|
|
6,682 |
|
|
|
7,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
51,614 |
|
|
$ |
45,869 |
|
|
$ |
146,162 |
|
|
$ |
142,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
940 |
|
|
$ |
656 |
|
|
$ |
2,383 |
|
|
$ |
1,920 |
|
Electronic Chemicals International |
|
|
213 |
|
|
|
178 |
|
|
|
624 |
|
|
|
562 |
|
Penta |
|
|
149 |
|
|
|
155 |
|
|
|
458 |
|
|
|
1,249 |
|
Creosote |
|
|
67 |
|
|
|
75 |
|
|
|
206 |
|
|
|
224 |
|
Animal Health |
|
|
190 |
|
|
|
191 |
|
|
|
573 |
|
|
|
570 |
|
Other general corporate |
|
|
66 |
|
|
|
61 |
|
|
|
198 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization |
|
$ |
1,625 |
|
|
$ |
1,316 |
|
|
$ |
4,442 |
|
|
$ |
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) from operations (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
3,005 |
|
|
$ |
382 |
|
|
$ |
6,929 |
|
|
$ |
3,132 |
|
Electronic Chemicals International |
|
|
(57 |
) |
|
|
(1,031 |
) |
|
|
534 |
|
|
|
(787 |
) |
Penta |
|
|
1,755 |
|
|
|
2,842 |
|
|
|
5,790 |
|
|
|
6,029 |
|
Creosote |
|
|
3,031 |
|
|
|
4,686 |
|
|
|
14,237 |
|
|
|
8,854 |
|
Animal Health |
|
|
281 |
|
|
|
185 |
|
|
|
(9 |
) |
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income from operations |
|
$ |
8,015 |
|
|
$ |
7,064 |
|
|
$ |
27,481 |
|
|
$ |
16,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Electronic Chemicals North America (4) |
|
$ |
77,405 |
|
|
$ |
49,610 |
|
Electronic Chemicals International |
|
|
27,321 |
|
|
|
26,258 |
|
Penta |
|
|
19,805 |
|
|
|
20,169 |
|
Creosote |
|
|
17,171 |
|
|
|
18,894 |
|
Animal Health |
|
|
18,172 |
|
|
|
17,157 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
$ |
159,874 |
|
|
$ |
132,088 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of intersegment transactions of $3,000 and $22,000 for the three and nine month periods
ended April 30, 2010, respectively, and $255,000 and $154,000 for the three and nine month
periods ended April 30, 2009, respectively, which were eliminated in consolidated sales. |
|
(2) |
|
Net of intersegment transactions of $239,000 and $844,000 for the three and nine month
periods ended April 30, 2010, respectively, and $458,000 and $819,000 for the three and nine
month periods ended April 30, 2009, respectively, which were eliminated in consolidated sales. |
|
(3) |
|
Certain reclassifications of prior year amounts have been made to conform to current year
presentation. |
|
(4) |
|
Includes $26.7 million of assets acquired on March 29, 2010 in connection with the General
Chemical acquisition. See note 2. |
12
A reconciliation of total segment information to consolidated amounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Amounts in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
$ |
159,874 |
|
|
$ |
132,088 |
|
Total assets for discontinued operations (1) |
|
|
760 |
|
|
|
856 |
|
Cash and cash equivalents |
|
|
2,739 |
|
|
|
6,613 |
|
Prepaid and other current assets |
|
|
2,145 |
|
|
|
1,070 |
|
Other |
|
|
3,000 |
|
|
|
2,881 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
168,518 |
|
|
$ |
143,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
51,614 |
|
|
$ |
45,869 |
|
|
$ |
146,162 |
|
|
$ |
142,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
51,614 |
|
|
$ |
45,869 |
|
|
$ |
146,162 |
|
|
$ |
142,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income from operations (2) |
|
$ |
8,015 |
|
|
$ |
7,064 |
|
|
$ |
27,481 |
|
|
$ |
16,875 |
|
Other corporate expense (2) |
|
|
(2,183 |
) |
|
|
(1,624 |
) |
|
|
(6,775 |
) |
|
|
(5,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5,832 |
|
|
|
5,440 |
|
|
|
20,706 |
|
|
|
11,472 |
|
Interest income |
|
|
3 |
|
|
|
1 |
|
|
|
5 |
|
|
|
7 |
|
Interest expense |
|
|
(542 |
) |
|
|
(732 |
) |
|
|
(1,634 |
) |
|
|
(2,396 |
) |
Other expense, net |
|
|
(69 |
) |
|
|
(15 |
) |
|
|
(168 |
) |
|
|
(295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
$ |
5,224 |
|
|
$ |
4,694 |
|
|
$ |
18,909 |
|
|
$ |
8,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $760,000 and $830,000 as of April 30, 2010 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 acquisition
transaction costs and 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.
(12) Long-Term
Obligations. The Companys debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
July 31, |
|
|
|
2010 |
|
|
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 1.75% (2.02% at April 30, 2010) |
|
|
21,333 |
|
|
|
26,292 |
|
Revolving Loan Facility, maturing on December 31, 2012, variable interest
rates based on LIBOR plus 1.75% (2.00% at April 30, 2010) |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
61,333 |
|
|
|
46,292 |
|
Current portion of long-term debt |
|
|
(8,000 |
) |
|
|
(6,966 |
) |
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
53,333 |
|
|
$ |
39,326 |
|
|
|
|
|
|
|
|
13
To finance the acquisition of the electronic chemicals business in fiscal year 2008, the
Company entered into an amended and restated credit agreement and a note purchase agreement. 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 (a subsidiary of Wells Fargo and Co.), 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. The Company amended those facilities in March 2010 to
increase the amount that may be borrowed under the revolving loan facility to $50.0 million. The
revolving loan and term loan facilities 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 on the revolving facility and the term loan facility bear interest at 2.1%
per annum (LIBOR plus 1.75%). For the first 24 months of the term facility, principal payments were
$458,333 per month and then beginning in January 2010 principal payments are $666,667 per month for
the balance of the term prior to maturity.
The purchase of electronic chemicals assets from General Chemical on March 29, 2010 was funded
with available cash and borrowings under the revolving facility.
At April 30, 2010, there was $20.0 million outstanding on the revolving facility, and the
amount outstanding on the term loan was $21.3 million.
In
fiscal year 2008, 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
April 30, 2010, $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%. 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 April 30, 2010, 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.
(13) Discontinued
Operations. In fiscal year 2008 the Company discontinued operations of its
herbicide product line that had comprised the agricultural chemical segment. During the three and
nine months ended April 30, 2009, there were no sales reported in discontinued operations, and the
Company reported a net loss from discontinued operations of $10,000 and $14,000, respectively. No
amounts were recorded for the three and nine months ended April 30, 2010.
14
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
products. 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 products are used on cattle, other livestock and poultry to protect the animals from flies
and other pests.
On March 29, 2010, we completed the acquisition of certain assets of the electronic chemicals
business of General Chemical Performance Products, LLC (General Chemical). The acquisition
included chemical manufacturing equipment and a facility at Hollister, CA and certain equipment at
Pittsburg, CA (Bay Point) for a total cash purchase price of $26.7 million. The
purchase included
inventory of $7.6 million. The assets comprised the high purity process
chemicals business of
General Chemical, a leading supplier of high purity wet process chemicals to the semiconductor
industry.
The acquisition increases our share of the wet process chemicals market in the United States
and expands our presence in Asian markets. We expect to achieve greater operational efficiencies
from the acquisition, and have added certain strategic processes and products we did not previously
have the capability to produce at our other facilities.
After completion of the integration of the acquisition, we expect to eventually achieve an
improvement of approximately two percentage points in the operating margin
for our Electronic Chemicals-North American segment.
Results of Operations
Three and Nine Month Periods Ending April 30, 2010 compared with Three and Nine Month Periods
Ending April 30, 2009
Segment Data
Segment data is presented for our five reportable segments for the three and nine month
periods ended April 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Amounts in thousands) |
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
24,755 |
|
|
$ |
14,284 |
|
|
$ |
61,199 |
|
|
$ |
53,027 |
|
Electronic Chemicals International |
|
|
4,817 |
|
|
|
2,960 |
|
|
|
14,278 |
|
|
|
12,028 |
|
Penta |
|
|
5,734 |
|
|
|
6,914 |
|
|
|
16,784 |
|
|
|
19,883 |
|
Creosote |
|
|
13,022 |
|
|
|
18,211 |
|
|
|
47,219 |
|
|
|
50,249 |
|
Animal Health |
|
|
3,286 |
|
|
|
3,500 |
|
|
|
6,682 |
|
|
|
7,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
51,614 |
|
|
$ |
45,869 |
|
|
$ |
146,162 |
|
|
$ |
142,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The segment data should be read with our consolidated financial statements and related notes
thereto included elsewhere in this report.
Net Sales
Net sales increased $5.7 million, or 12.5%, to $51.6 million in the third quarter of fiscal
year 2010 as compared with $45.9 million for the same period of the prior year. For the first nine
months of fiscal year 2010, net sales increased $3.9 million, an increase of 2.7%, to
$146.2 million from $142.3 million for the same period in the prior fiscal year. Sales of
electronic chemicals in North America and internationally improved in the third quarter and the
first nine months of fiscal year 2010 compared with the same periods in fiscal year 2009, as
electronic chemical sales have recovered from the downturn they experienced beginning in the second
quarter of fiscal year 2009. However, improved net sales in electronic chemicals was offset by a
decline in sales in both of our wood treating chemical segments in the third quarter and the first
nine months of fiscal year 2010 as compared with the fiscal year 2009 periods.
15
In the third quarter of fiscal year 2010, the electronic chemicals North America segment had
net sales of $24.8 million, an increase of $10.5 million, or 73.3%, as compared to the prior year
period. For the first nine months of fiscal year 2010, electronic chemical sales in North America
were up as compared to fiscal year 2009 by $8.2 million, or 15.4%, to $61.2 million from
$53.0 million. Both
the three and nine month periods of fiscal year 2010 included $4.2 million of net sales
related to the recently acquired General Chemicals business reflecting one month of sales. Our
electronic chemicals international segment had net sales of $4.8 million in the third quarter of
fiscal year 2010 as compared to $2.9 million for the prior year, an improvement of $1.9 million, or
62.7%. The segment improved $2.3 million for the full nine months in fiscal year 2010 over the
prior year to $14.3 million from $12.0 million, an 18.7% improvement. In the world-wide economic
downturn, demand softened in both of our electronic chemicals segments beginning in the second
quarter of fiscal year 2009.
We have seen substantial improvement in both electronic chemical
segments in fiscal year 2010.
Net sales of penta products decreased $1.2 million, or 17.1%, to $5.7 million in the third
quarter of fiscal year 2010 as compared to net sales of $6.9 million in the prior year period. In
the first nine months of fiscal year 2010, penta sales declined to $16.8 million from $19.9
million, a decrease of $3.1 million, or 15.6%. The decrease in sales for the quarter and for the
nine month period was from lower volume as we have seen a lessening of utility pole treating in
response to overall economic conditions. Additionally, the first quarter of fiscal year 2009 was an
especially strong quarter for penta sales, so the comparison for the nine month period shows a
particularly marked decline. We do not anticipate a further
significant decrease from those levels
through the end of the calendar year.
Creosote net sales decreased in the third quarter of fiscal year 2010, as compared with the
prior year period, by $5.2 million, or 28.5%, to $13.0 million from $18.2 million. In the first
nine months of fiscal year 2010, creosote net sales declined by $3.0 million, or 6.0%, to
$47.2 million from $50.2 million in fiscal year 2009.
Creosote volume for the three and nine month periods ended April 30, 2010
declined approximately 32% and 23%,
respectively, in each of those periods as compared with the prior year period.
We have seen a decrease in demand by
railroads for crossties treated with creosote from the top of the historical range where it had
been for several years. Railroads generally react to lessened traffic by slowing maintenance
programs. We are currently negotiating a long term supply agreement with a large creosote customer
who purchased a portion of its 2010 needs from outside of the
United States, but we expect to see a continuation of the effect of
those purchases in the fourth quarter. We expect creosote
sales volume in the fourth quarter to increase marginally from third quarter levels.
Net sales of animal health products decreased by $214,000, or 6.1%, to $3.3 million in the
third quarter of fiscal year 2010 as compared with $3.5 million in the prior year period.
For the first nine months of fiscal
year 2010, net sales of animal health products were down $440,000, or 6.2%, to $6.7 million from
$7.1 million in the prior year.
We incurred approximately $221,000 of third party distributor fees in the third quarter of
fiscal year 2010, which are accounted for as a reduction in net sales. As a result, sales in the
third quarter and first nine months of the current fiscal year compared to the same periods of fiscal year 2009 were
relatively flat and lower by $219,000, respectively.
The 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. Our revenue from the animal health products segment
is seasonal and weighted to the third and fourth fiscal 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 $606,000, or 3.9%, to $16.0 million in the third quarter of fiscal
year 2010 from $15.4 million in the same quarter the prior year. Gross profit increased by
$6.4 million, or 14.4%, to $51.1 million in the first nine months of fiscal year 2010 from
$44.6 million in the same period of the prior year. Gross profit as a percentage of sales decreased
to 30.9% in the third quarter of fiscal year 2010 from 33.5% in fiscal year 2009, but increased to
34.9% for the full nine months of fiscal year 2010 from 31.4% in the prior year period. For the
third quarter, gross profit improved on increased sales in both of our electronic chemicals
segments by $3.5 million as compared to the same period a year ago. This was offset in part by a
decrease in both of our wood treating segments which realized declines in net sales for the period.
For the nine month period we realized higher gross profits in our electronic chemicals and creosote
segment, mainly on improved sales in our electronic chemicals segments and a shift in
sales to a higher margin product for creosote during the second quarter of fiscal year 2010. It is
also worth noting that gross profit margins in the first half 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.
A manufacturing agreement was entered into with General Chemical in connection with
our acquisition of their electronic chemicals business on March 29, 2010. That agreement requires
KMG to pay all of the direct costs of manufacturing associated with the production of electronic
chemicals at General Chemicals Bay Point, CA facility in addition to a monthly fee set initially at $117,000, which we
incurred for one month in the third quarter. The monthly fee is expected to reduce to approximately
$42,000 near the beginning of calendar year 2011.
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.
16
Selling, General and Administrative Expenses
Selling, general, and administrative expenses increased $214,000 in the third quarter of
fiscal year 2010 to $10.1 million, or 19.6% of net sales, from $9.9 million, or 21.6% of net sales,
for the same quarter of the prior fiscal year. Selling, general, and administrative expenses
decreased $2.8 million in the first nine months of fiscal year 2010 to $30.4 million, or 20.8% of
net sales, from $33.1 million, or 23.3% of net sales, for the same period of the prior fiscal year.
Selling, general and administrative expenses associated with our two electronic chemicals
segments of $6.1 million in the third quarter of fiscal year 2010 was flat as compared to $6.2
million for the third quarter of fiscal year 2009, and decreased $2.7 million, to $17.6 million, in
the first nine months of fiscal year 2010 compared to $20.3 million in the first nine months of
fiscal year 2009.
We acquired our electronic chemicals business in December 2007 and 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. These transition and integration costs totaled
approximately $1.0 million and were incurred predominantly in
the first quarter of fiscal year 2009.
Additionally, distribution expenses in our two electronic chemicals segments, which are
included in selling, general and administrative expenses, were flat for the third quarter of fiscal
year 2010 at $4.0 million as compared to $4.0 million for the same period a year ago, and decreased
by approximately $2.0 million, to $11.7 million for the first nine months of fiscal year 2010 as
compared to $13.7 million in the same period a year ago. The reduction in distribution expenses for
the nine months ended April 30, 2010 as compared to the same prior year periods was due to lower
storage, handling, packaging and freight costs of approximately $2.3 million resulting from
improved efficiencies in our electronic chemicals business supply chain. Distribution expenses as a
percentage of aggregate net sales for our electronic chemicals segments for the nine months ended
April 30, 2010 and 2009 was approximately 15.5% and 21.1%, respectively.
Outside of electronic chemicals, selling, general and administrative
expenses related to our wood treating and animal health segments decreased by
$282,000 for the third quarter of fiscal year 2010 as compared to the same period for the prior
year and decreased by $1.4 million for the nine month period ended April 30, 2010 as compared to
the same period a year ago. The nine-month period ended April 30, 2010 included lower amortization
expenses of approximately $795,000 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.
Because of operational efficiencies initiated in fiscal year 2009 and savings realized from using a
third party for distribution of certain animal health products, our animal health segment incurred
lesser costs of approximately $600,000 for the nine month period compared to the prior year.
Distribution expenses for our wood preservative chemicals and animal health segments, which
represented approximately 3.5% and 2.9% of the aggregate net sales of those segments in the nine
months ended April 30, 2010 and 2009, respectively, were $783,000 and $2.5 million for the
three and nine months ended April 30, 2010, respectively, and $610,000 and $2.2 million for the
three and nine months ended April 30, 2009, respectively.
Other corporate expenses for the third quarter of fiscal year 2010 increased by $559,000
compared to the same period in fiscal year 2009, and increased by $1.4 million in the nine months
ended April 30, 2010 compared to the same period in fiscal year 2009. The increase was due
primarily to an increase in other professional services and employee related costs. In the third
quarter and first nine months of fiscal year 2010, we incurred
expense of $126,000, and $441,000,
respectively, related to our acquisition and integration of certain electronic chemicals assets
from General Chemical.
Interest Expense
Interest expense was $542,000 in the third quarter of fiscal year 2010 as compared with
$732,000, in the same period of fiscal year 2009. Interest expense was $1.6 million and
$2.4 million for the nine month period ended April 30, 2010 and 2009, respectively. 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.
Income Taxes
Our effective tax rate was 36.0% and 40.5% in the third quarter of fiscal years 2010 and 2009,
respectively, and 36.9% and 39.5% in the first nine months of fiscal years 2010 and 2009,
respectively. The lower effective tax rate for the fiscal year 2010 came
primarily from a reduction in a previously recorded valuation allowance.
17
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $10.2 million for the first nine months of
fiscal year 2010 and net cash provided by operating activities was $9.0 million for the first nine
months of fiscal year 2009. Net income adjusted for depreciation and amortization increased cash to
$16.4 million in the first nine months of fiscal year 2010. Cash was unfavorably impacted by an
increase of $5.6 million in accounts receivable primarily in our electronic chemicals North America
segment.
Net cash used in investing activities in the first nine months of fiscal 2010 was $27.9 as
compared with $5.7 million in the prior year period. We made additions to property, plant and
equipment of $1.2 million during the first nine months of fiscal year 2010 primarily for the
purchase of shipping containers in our electronic chemicals segments as compared to $2.4 million in
the first nine months of fiscal year 2009 which included $1.4 million for purchases of software and
shipping containers for our electronic chemicals business and $496,000 for the purchase of
additional land adjacent to our facility in Matamoros. In the first nine months of fiscal year
2010, we used $26.7 million to complete the purchase of the General Chemical assets which included
$17.7 million for additions to property, plant and equipment and
$7.6 million of inventory. We also spent $2.9 million in the
first nine months of fiscal year 2009 to purchase additional inventory and accounts receivable in
Israel pertaining to our acquisition of the electronic chemicals business.
In the first nine months of fiscal year 2010, we made principal payments of $5.0 million on
the term loan indebtedness we incurred when we purchased the electronic chemicals business from Air
Products. We had net borrowings under our revolving credit facility of $20.0 million that was used
to finance the General Chemical asset acquisition during the third quarter of fiscal year 2010. In
the first nine months of fiscal year 2009, we made principal payments of $8.1 million on our
indebtedness which included $4.1 million related to debt incurred when we purchased the electronic
chemicals business from Air Products, and $4.0 million of principal outstanding on seller-financed
indebtedness incurred when we purchased certain penta assets in fiscal year 2006. We had $4.8
million of net borrowings on the revolver during the nine months ended April 30, 2009. We paid
dividends of $669,000 and $665,000 in the first nine 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
April 30, 2010, we had $20.0 million outstanding under that revolving facility, and our net
borrowing base availability was $11.5 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.
Long Term Obligations
To finance the acquisition of the electronic chemicals business in fiscal year 2008, we
entered into an amended and restated credit agreement and a note purchase agreement. 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. (subsidiary of Wells Fargo and Company), 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. We amended these facilities in March 2010 to
increase the amount that may be borrowed under our revolving loan facility to $50.0 million. The
revolving loan and term loan facilities each bear interest at varying rate of LIBOR plus a margin
based on our funded debt to EBITDA.
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|
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|
|
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 |
% |
18
Currently, advances on the revolving facility and the term loan facility bear interest at 2.1%
per annum (LIBOR plus 1.75%). Through December 31, 2009 principal payments on the term loan were
$458,333 per month, and then beginning in January 2010 principal payments became $666,667 per month
for the balance of the term prior to maturity. The purchase of electronic chemicals assets from
General Chemical on March 29, 2010 was funded with available cash and borrowings under the
revolving facility. At April 30, 2010, we had $20.0 million borrowed on the revolving facility, and
the amount outstanding on the term loan was $21.3 million.
We also have 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 April 30, 2010, $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%. 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 April 30, 2010, 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.
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.
19
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 GAAP. 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.
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; |
20
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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.
ITEM 3. 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 April 30, 2010 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 April 30, 2010 our variable rate debt consisted of a credit facility with an interest
rate of LIBOR plus 1.75%, maturing on December 31, 2012. On April 30, 2010, we had $20.0 million
borrowed on our $50.0 million revolving credit line under that facility, and $21.3 million borrowed
on a term loan under that same facility. Principal payments on the term loan were $458,333 per
month until December 31, 2009 and they are $666,667 per month for the remaining term of the
facility.
Based on the outstanding balances of the term loan and revolving credit line, LIBOR rate as of
April 30, 2010, and incorporating anticipated principal payments
for the next twelve months, a 1.0%
change in the interest rate would result in a change of approximately $340,000 in interest expense
for the next twelve months.
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 or
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.
21
During the three and nine months ended April 30, 2010, we recognized foreign currency
translation losses of approximately $1.1 million and $1.4 million, respectively, as accumulated
other comprehensive loss in the consolidated balance sheets. At April 30, 2010, the cumulative
foreign currency translation loss reflected in accumulated other comprehensive loss was
approximately $2.9 million.
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.
ITEM 4. 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 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
ITEM 1. 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. The court granted our motion for summary judgment and dismissed us from
the case, but the plaintiffs have appealed that ruling. 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 has not yet rendered a ruling in the case. 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 April 20, 2009 the
plaintiffs were required to re-file the case in the First Civil Court in Matamoros, Tamaulipas,
Mexico as Adolfo Cazares, Luis Escudero and Juan Cue vs. KMG de Mexico and Guillermo Villarreal.
The ultimate outcome of this litigation cannot be determined at this time, nor can the amount of
any potential loss be reasonably estimated.
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.
22
ITEM 1A. RISK FACTORS
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. 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.
ITEM 6. EXHIBITS
The financial statements are filed as part of this report in Item 1. The following documents
are filed as exhibits. Documents (if any) 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 |
|
Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer. |
23
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 |
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Date: June 9, 2010 |
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J. Neal Butler
President and Chief Executive Officer |
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By:
|
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/s/ John V. Sobchak |
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Date: June 9, 2010 |
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John V. Sobchak
Vice President and Chief Financial Officer |
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24