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 January 31, 2011
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 000-29278
KMG CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
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Texas
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75-2640529 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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9555 West Sam Houston Parkway South, Suite 600 |
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Houston, Texas
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77099 |
(Address of principal executive offices)
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(Zip Code) |
(713) 600-3800
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of March 10, 2011, there were 11,313,991 shares of the registrants common stock
outstanding.
PART I FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except for share and per share data)
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January 31, |
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July 31, |
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2011 |
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2010 |
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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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$ |
4,456 |
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$ |
4,728 |
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Accounts receivable: |
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Trade, net of allowances of $260 at January 31, 2011 and at July 31, 2010 |
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30,240 |
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30,214 |
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Other |
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3,366 |
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2,864 |
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Inventories, net |
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39,896 |
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39,102 |
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Current deferred tax assets |
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798 |
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672 |
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Prepaid expenses and other current assets |
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718 |
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1,882 |
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Total current assets |
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79,474 |
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79,462 |
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PROPERTY, PLANT AND EQUIPMENT, net |
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69,980 |
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68,645 |
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DEFERRED TAX ASSETS |
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873 |
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606 |
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GOODWILL |
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3,778 |
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3,778 |
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INTANGIBLE ASSETS, net |
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19,948 |
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20,534 |
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RESTRICTED CASH |
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189 |
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OTHER ASSETS, net |
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3,010 |
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2,807 |
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TOTAL ASSETS |
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$ |
177,063 |
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$ |
176,021 |
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LIABILITIES & STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
22,653 |
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$ |
20,899 |
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Accrued liabilities |
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5,102 |
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7,147 |
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Current deferred tax liabilities |
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28 |
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28 |
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Current portion of long-term debt |
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8,000 |
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8,000 |
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Total current liabilities |
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35,783 |
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36,074 |
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LONG-TERM DEBT, net of current portion |
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44,333 |
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51,333 |
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DEFERRED TAX LIABILITIES |
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3,497 |
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2,644 |
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OTHER LONG-TERM LIABILITIES |
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1,239 |
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1,192 |
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Total liabilities |
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84,852 |
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91,243 |
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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, $.01 par value, 40,000,000 shares authorized, 11,309,336
shares issued and outstanding at January 31, 2011 and 11,229,487 shares
issued and outstanding at July 31, 2010 |
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113 |
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112 |
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Additional paid-in capital |
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25,081 |
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24,319 |
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Accumulated other comprehensive loss |
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(2,154 |
) |
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(3,335 |
) |
Retained earnings |
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69,171 |
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63,682 |
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Total stockholders equity |
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92,211 |
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84,778 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
177,063 |
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$ |
176,021 |
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See notes to condensed consolidated financial statements.
3
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands except for per share data)
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Three Months Ended |
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Six Months Ended |
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January 31, |
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January 31, |
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2011 |
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2010 |
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2011 |
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2010 |
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NET SALES |
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$ |
64,936 |
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$ |
45,134 |
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$ |
127,040 |
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$ |
94,548 |
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COST OF SALES |
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46,670 |
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28,422 |
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91,406 |
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59,445 |
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Gross Profit |
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18,266 |
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16,712 |
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35,634 |
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35,103 |
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DISTRIBUTION EXPENSES |
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7,351 |
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4,356 |
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13,723 |
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9,377 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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6,109 |
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5,432 |
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11,545 |
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10,852 |
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Operating income |
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4,806 |
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6,924 |
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10,366 |
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14,874 |
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OTHER INCOME (EXPENSE): |
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Interest income |
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1 |
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1 |
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2 |
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Interest expense |
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(599 |
) |
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(535 |
) |
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(1,194 |
) |
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(1,092 |
) |
Other, net |
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(241 |
) |
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(71 |
) |
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(190 |
) |
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(99 |
) |
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Total other expense, net |
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(840 |
) |
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(605 |
) |
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(1,383 |
) |
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(1,189 |
) |
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INCOME FROM
CONTINUING OPERATIONS BEFORE INCOME TAXES |
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3,966 |
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6,319 |
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8,983 |
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13,685 |
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Provision for income taxes |
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(1,506 |
) |
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(2,356 |
) |
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(3,007 |
) |
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(5,102 |
) |
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INCOME FROM CONTINUING OPERATIONS |
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2,460 |
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3,963 |
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5,976 |
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8,583 |
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DISCONTINUED OPERATIONS |
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Loss from discontinued operations, before income taxes |
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(47 |
) |
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(47 |
) |
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Income tax benefit |
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11 |
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11 |
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Loss from discontinued operations |
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(36 |
) |
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(36 |
) |
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NET INCOME |
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$ |
2,424 |
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$ |
3,963 |
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$ |
5,940 |
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$ |
8,583 |
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EARNINGS PER SHARE: |
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Basic |
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Income from continuing operations |
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$ |
0.21 |
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$ |
0.36 |
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$ |
0.53 |
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$ |
0.77 |
|
Loss from discontinued operations |
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Net income |
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$ |
0.21 |
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$ |
0.36 |
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|
$ |
0.53 |
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$ |
0.77 |
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Diluted |
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Income from continuing operations |
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$ |
0.21 |
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$ |
0.35 |
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$ |
0.52 |
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$ |
0.75 |
|
Loss from discontinued operations |
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Net income |
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$ |
0.21 |
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$ |
0.35 |
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$ |
0.52 |
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$ |
0.75 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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|
11,308 |
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|
|
11,162 |
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|
11,303 |
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|
11,153 |
|
Diluted |
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|
11,495 |
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|
11,420 |
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|
11,477 |
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|
11,397 |
|
See notes to condensed consolidated financial statements.
4
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
|
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Six Months Ended |
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|
January 31, |
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|
2011 |
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|
2010 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
|
$ |
5,940 |
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|
$ |
8,583 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
|
|
3,846 |
|
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|
2,817 |
|
Amortization of loan costs included in interest expense |
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|
54 |
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|
44 |
|
Stock-based compensation expense |
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|
374 |
|
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|
212 |
|
Bad debt expense |
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|
171 |
|
Inventory valuation adjustment |
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|
30 |
|
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|
(59 |
) |
Loss on disposal of property |
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|
113 |
|
|
|
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|
Deferred income tax expense |
|
|
442 |
|
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|
589 |
|
Tax benefit from stock-based awards |
|
|
(196 |
) |
|
|
(81 |
) |
Changes in operating assets and liabilities |
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Accounts receivable trade |
|
|
247 |
|
|
|
(584 |
) |
Accounts receivable other |
|
|
(434 |
) |
|
|
(236 |
) |
Inventories |
|
|
(632 |
) |
|
|
(2,030 |
) |
Prepaid expenses and other current assets |
|
|
939 |
|
|
|
1,015 |
|
Accounts payable |
|
|
1,641 |
|
|
|
(2,277 |
) |
Accrued liabilities |
|
|
(1,933 |
) |
|
|
(2,948 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
10,431 |
|
|
|
5,216 |
|
|
|
|
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|
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|
CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(4,009 |
) |
|
|
(500 |
) |
Proceeds from sale of property |
|
|
59 |
|
|
|
|
|
Change in restricted cash |
|
|
189 |
|
|
|
110 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,761 |
) |
|
|
(390 |
) |
|
|
|
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|
|
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|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Payments under revolver credit agreement |
|
|
(3,000 |
) |
|
|
|
|
Principal payments on borrowings on term loan |
|
|
(4,000 |
) |
|
|
(2,958 |
) |
Proceeds from exercise of stock options |
|
|
200 |
|
|
|
138 |
|
Tax benefit from stock-based awards |
|
|
196 |
|
|
|
81 |
|
Payment of dividends |
|
|
(452 |
) |
|
|
(445 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(7,056 |
) |
|
|
(3,184 |
) |
|
|
|
|
|
|
|
|
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|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
114 |
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(272 |
) |
|
|
1,580 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
4,728 |
|
|
|
7,174 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
4,456 |
|
|
$ |
8,754 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,188 |
|
|
$ |
1,060 |
|
Cash paid for income taxes |
|
$ |
2,479 |
|
|
$ |
7,183 |
|
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) Basis of Presentation. The (a) consolidated balance sheet as of July 31, 2010, which has
been derived from audited consolidated financial statements, and (b) the unaudited condensed
consolidated financial statements included herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for interim reporting. As permitted under
those requirements, certain footnotes or other financial information that are normally required by
generally accepted accounting principles in the United States of America (GAAP) have been
condensed or omitted. The Company believes that the disclosures made are adequate to make the
information not misleading and in the opinion of management reflect all adjustments, including
those of a normal recurring nature, that are necessary for a fair presentation of financial
position and results of operations for the interim periods presented. The results of operations for
the interim periods are not necessarily indicative of results of operations to be expected for the
full year. The unaudited condensed 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, 2010.
These condensed 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.
During the second quarter of fiscal year 2011, the
Company changed its estimate of the useful lives of certain equipment purchased in the General
Chemical acquisition. This change had the effect of decreasing
depreciation expense by $411,000, and the effect of increasing income
from continuing operations by $411,000, increasing net income by $255,000 and increasing basic and
diluted earnings per share by $0.02 for each of the three and six month periods ended January 31,
2011.
(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 included products similar to the products of the Companys then existing electronic
chemicals business. The purpose of the acquisition was to expand the Companys manufacturing
capability 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 at their Bay Point facility, using the
equipment at the facility which was purchased by the Company. The Company paid $26.8 million in
cash for the acquisition 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
acquisition accounting for the fair value of the assets recognized in the consolidated balance
sheets at the acquisition date (in thousands):
|
|
|
|
|
Consideration: |
|
|
|
|
Cash |
|
$ |
26,784 |
|
|
|
|
|
Fair value of identifiable assets acquired: |
|
|
|
|
Inventory, net of allowance |
|
$ |
7,604 |
|
Property, plant and equipment |
|
|
17,706 |
|
Intangible assets: |
|
|
|
|
Value of product qualifications |
|
|
1,300 |
|
Non-compete agreement |
|
|
150 |
|
|
|
|
|
Total intangible assets |
|
|
1,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
24 |
|
Total identifiable assets acquired |
|
$ |
26,784 |
|
|
|
|
|
The following table sets forth pro forma results for the three and six months ended January
31, 2010 had the acquisition occurred as of the beginning of fiscal year 2009. The 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 date indicated.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
January 31, 2010 |
|
|
January 31, 2010 |
|
|
|
(Unaudited) |
|
|
|
(in thousands, except per share data) |
|
Revenues |
|
$ |
55,374 |
|
|
$ |
115,571 |
|
Operating income |
|
|
7,601 |
|
|
|
16,103 |
|
Net income |
|
|
4,364 |
|
|
|
9,298 |
|
Earnings per share basic |
|
$ |
0.39 |
|
|
$ |
0.83 |
|
6
The Company is consolidating manufacturing for its U.S.-based electronic chemicals at its
Pueblo, CO and Hollister, CA facilities. As a result it is not practicable to determine the revenue
and earnings attributable to the acquired business included in the Companys consolidated
statements of income for the reporting period.
Depreciation included in the pro forma financial information is approximately $230,000 per
month.
(3) Recent Accounting Standards. The Company has considered all recently issued accounting
standards updates and SEC rules and interpretive releases, and believes that only the following
item could have a material impact on the Companys consolidated financial statements.
In December 2010, the Financial Accounting Standards Board issued new accounting guidance for
the disclosure of supplementary pro forma information for business combinations. The guidance
clarifies the acquisition date that should be used for reporting the pro forma financial
information disclosures when comparative financial statements are presented and specifies that the
entity should disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The guidance also expands the supplemental pro forma
disclosure requirements to include a description of the nature and amount of material, non
recurring pro forma adjustments directly attributable to the business combination included in the
reported pro forma information. The new guidance is effective prospectively for business
combinations with an acquisition date on or after the beginning of the first annual reporting
period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not
expect the new guidance to have a material impact on its consolidated financial statements.
(4) Earnings Per Share. Basic earnings per share have been computed by dividing net income by
the weighted average shares outstanding. Diluted earnings per share have been computed by dividing
net income by the weighted average shares outstanding plus potentially dilutive common shares. The
following table presents information necessary to calculate basic and diluted earnings per share
for periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
2,460 |
|
|
$ |
3,963 |
|
|
$ |
5,976 |
|
|
$ |
8,583 |
|
Loss from discontinued operations |
|
|
(36 |
) |
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,424 |
|
|
$ |
3,963 |
|
|
$ |
5,940 |
|
|
$ |
8,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic |
|
|
11,308 |
|
|
|
11,162 |
|
|
|
11,303 |
|
|
|
11,153 |
|
Dilutive effect of options and stock awards |
|
|
187 |
|
|
|
258 |
|
|
|
174 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-diluted |
|
|
11,495 |
|
|
|
11,420 |
|
|
|
11,477 |
|
|
|
11,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.21 |
|
|
$ |
0.36 |
|
|
$ |
0.53 |
|
|
$ |
0.77 |
|
Basic earnings per share on loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.21 |
|
|
$ |
0.36 |
|
|
$ |
0.53 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations |
|
$ |
0.21 |
|
|
$ |
0.35 |
|
|
$ |
0.52 |
|
|
$ |
0.75 |
|
Diluted earnings per share on loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.21 |
|
|
$ |
0.35 |
|
|
$ |
0.52 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
approximately 1,500 shares and less than 1,000 shares of potentially dilutive securities not
included in the computation of diluted earnings per share for three and six month periods ended
January 31, 2011, respectively. There were no potentially dilutive securities not included in the
computation of diluted earnings per share for the periods ended January 31, 2010.
7
(5) Inventories. Inventories are summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
Raw materials and supplies |
|
$ |
9,947 |
|
|
$ |
8,578 |
|
Finished products |
|
|
30,332 |
|
|
|
30,942 |
|
Less reserve for inventory obsolescence |
|
|
(383 |
) |
|
|
(418 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
39,896 |
|
|
$ |
39,102 |
|
|
|
|
|
|
|
|
(6) Property, Plant and Equipment. Property, plant and equipment and related accumulated
depreciation and amortization are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
Land |
|
$ |
9,780 |
|
|
$ |
9,428 |
|
Buildings & improvements |
|
|
34,851 |
|
|
|
34,399 |
|
Equipment |
|
|
41,138 |
|
|
|
40,195 |
|
Leasehold improvements |
|
|
132 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
85,901 |
|
|
|
84,154 |
|
Less accumulated depreciation and amortization |
|
|
(21,252 |
) |
|
|
(18,054 |
) |
|
|
|
|
|
|
|
|
|
|
64,649 |
|
|
|
66,100 |
|
Construction-in-progress |
|
|
5,331 |
|
|
|
2,545 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
69,980 |
|
|
$ |
68,645 |
|
|
|
|
|
|
|
|
(7) Stock-Based Compensation. The Company has stock-based incentive plans which are described
in more detail in note 11 to the consolidated financial statements in the Companys Annual Report
on Form 10-K for fiscal year 2010. The Company recognized stock-based compensation costs of
approximately $193,000 and $126,000, respectively, for the three months ended January 31, 2011 and
2010, and approximately $374,000 and $212,000 for the six months ended January 31, 2011 and 2010,
respectively, which are recorded as selling, general and administrative expenses in the
consolidated statements of income.
As of January 31, 2011, the unrecognized compensation costs related to stock-based awards was
approximately $1.6 million, including $28,000 related to non-vested stock options expected to be
recognized over a weighted-average period of 1.7 years and $1.6 million related to unvested
performance and time-based stock awards expected to be recognized over a weighted-average period of
1.6 years.
A summary of stock option and stock activity is presented below.
Stock Options
A summary of activity associated with the six months ended January 31, 2011 is presented
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
Outstanding on August 1, 2010 |
|
|
272,000 |
|
|
$ |
3.98 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(50,000 |
) |
|
|
4.00 |
|
Forfeited/Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on January 31, 2011 |
|
|
222,000 |
|
|
|
3.98 |
|
|
|
|
|
|
|
|
|
8
The following table summarizes information about stock options outstanding at January 31, 2011
based on fully vested (currently exercisable) stock option awards and stock options awards expected
to vest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Options |
|
|
Exercise Price |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Outstanding |
|
|
per Share |
|
|
Term (years) |
|
|
(in thousands) (1) |
|
Fully vested and currently exercisable |
|
|
159,500 |
|
|
$ |
3.84 |
|
|
|
5.4 |
|
|
$ |
2,104 |
|
Expected to vest |
|
|
62,500 |
|
|
|
4.34 |
|
|
|
11.6 |
|
|
|
793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding stock options |
|
|
222,000 |
|
|
|
3.98 |
|
|
|
7.1 |
|
|
$ |
2,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value is computed based on the closing price of the Companys stock
on January 31, 2011. |
No options were granted in the first six months of fiscal years 2011 or 2010.
The total intrinsic value of options exercised during the six months ended January 31, 2011
and 2010 was approximately $546,000 and $282,000, respectively.
Performance Shares
On August 1, 2010, there were 197,249 non-vested performance shares outstanding which
reflected the maximum number of shares under the awards. During the six months ended January 31,
2011, there were no awards vested and there were 103,298 performance-based stock awards granted. The
fair value of the award was measured on the grant date of December 7, 2010 using the Companys
closing stock price of $15.65. Stock-based compensation expense on the award will be recognized on
a straight line basis over the requisite service period beginning on the date of grant through the end
of the measurement period ending July 31, 2013, based on the number of shares expected to vest at
the end of the measurement period. As of January 31, 2011, the non-vested performance-based stock
awards consisted of Series 1 and Series 2 awards granted to certain executives in fiscal years
2011, 2010 and 2009, are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
Price |
|
|
3-Year |
|
|
Expected |
|
|
|
|
|
|
Series |
|
|
Award |
|
|
(Fair Value) |
|
|
Measurement |
|
|
Percentage of |
|
|
Shares Expected |
|
Date of Grant |
|
Award |
|
|
(Shares) |
|
|
on Grant Date |
|
|
Period Ending |
|
|
Vesting |
|
|
to Vest |
|
Fiscal Year 2011 Award
12/7/2010 |
|
Series 1 |
|
|
61,980 |
|
|
$ |
15.65 |
|
|
|
07/31/2013 |
|
|
|
36.25 |
% |
|
|
22,468 |
|
12/7/2010 |
|
Series 2 |
|
|
41,318 |
|
|
$ |
15.65 |
|
|
|
07/31/2013 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2010 Award
3/17/2010 |
|
Series 1 |
|
|
63,605 |
|
|
$ |
15.55 |
|
|
|
07/31/2012 |
|
|
|
47.50 |
% |
|
|
30,212 |
|
3/17/2010 |
|
Series 2 |
|
|
42,402 |
|
|
$ |
15.55 |
|
|
|
07/31/2012 |
|
|
|
100.00 |
% |
|
|
42,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2009 Award
12/02/2008 |
|
Series 1 |
|
|
54,745 |
|
|
$ |
3.19 |
|
|
|
07/31/2011 |
|
|
|
52.50 |
% |
|
|
28,741 |
|
12/02/2008 |
|
Series 2 |
|
|
36,497 |
|
|
$ |
3.19 |
|
|
|
07/31/2011 |
|
|
|
20.00 |
% |
|
|
7,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
300,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 measured quarterly using the
Companys budget, actual results and long term projections. For the fiscal year 2011, 2010 and 2009
awards the expected percentage of vesting is based on performance through January 31, 2011 and
reflects the percentage of shares projected to vest for the respective awards at the end of their
measurement periods.
Series 2: Vesting for 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 measured quarterly using the Companys budget, actual
results and long-term projections. For the fiscal year 2011, 2010 and 2009 awards the expected
percentage of vesting is based on performance through January 31, 2011 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 August 1, 2010
and January 31, 2011 was $12.33 and $12.17, respectively.
Time Based Shares
A summary of activity for time-based stock awards for the six months ended January 31, 2011 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Non-vested on August 1, 2010 |
|
|
24,070 |
|
|
$ |
12.66 |
|
Granted |
|
|
25,977 |
|
|
|
16.95 |
|
Vested (1) |
|
|
(10,631 |
) |
|
|
13.42 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested on January 31, 2011 |
|
|
39,416 |
|
|
|
14.46 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the six month period ended January 31, 2011 there were 12,698 shares vested. The
number of shares presented here includes an adjustment of 2,067 shares which do not represent
shares that vested during the six months ended January 31, 2011. The adjustment was related to
the fiscal year 2010 non-employee director stock grant and reflects the difference between the
number of shares reported as granted and the number of shares vested over the twelve month
service period of the award ended November 30, 2010. The number of shares granted was
calculated based on the aggregate monetary value of the award divided by the Companys
closing stock price on the respective date of grant. The number of shares vested at the end of each of
the three month service periods over the twelve month service period
ending November 30, 2010
was based on the Companys
closing stock price at the end of each of the three month periods. |
During the six months ended January 31, 2011, a grant was made to non-employee directors under
time-based awards whereby 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, 2011. 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 price as of the last trading day of each three month service period ending in
February, May, August and November. The aggregate grant-date fair value of $350,000 for the award
will be recognized on a straight-line basis over the requisite service period beginning January 24,
2011.
The Company also granted 5,769 time-based shares to certain employees during the six months
ended January 31, 2011 which vest on July 31, 2013. The fair value of the award of $90,285 was
measured on the date of grant on December 7, 2010, using the Companys closing stock price of
$15.65, and will be recognized on a straight line basis over the requisite service period from
December 7, 2010 through July 31, 2013.
The total fair value of shares vested during the six months ended January 31, 2011 and 2010
was approximately $175,000 and $99,000, respectively.
There
were 21,944 time-based shares granted during the six months ended January 31, 2010.
10
(8) Intangible Assets. Intangible assets are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2011 |
|
|
|
Original |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
Intangible assets subject to amortization: (range of useful life): |
|
|
|
|
|
|
|
|
|
|
|
|
Creosote supply contract (10 years) |
|
$ |
4,000 |
|
|
$ |
(3,822 |
) |
|
$ |
178 |
|
Animal health trademarks (4-5 years) |
|
|
364 |
|
|
|
(363 |
) |
|
|
1 |
|
Animal health product registrations and other related assets (5-20 years) |
|
|
6,165 |
|
|
|
(1,837 |
) |
|
|
4,328 |
|
Electronic chemicals-related contracts (3-8 years) |
|
|
1,164 |
|
|
|
(995 |
) |
|
|
169 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
|
117 |
|
|
|
(32 |
) |
|
|
85 |
|
Electronic chemicalsvalue of product qualifications (5 years) |
|
|
1,300 |
|
|
|
(217 |
) |
|
|
1,083 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization |
|
$ |
13,110 |
|
|
$ |
(7,266 |
) |
|
|
5,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Creosote product registrations |
|
|
|
|
|
|
|
|
|
|
5,339 |
|
Penta product registrations |
|
|
|
|
|
|
|
|
|
|
8,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
14,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
$ |
19,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010 |
|
|
|
Original |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
Intangible assets subject to amortization: (range of useful life): |
|
|
|
|
|
|
|
|
|
|
|
|
Creosote supply contract (10 years) |
|
$ |
4,000 |
|
|
$ |
(3,689 |
) |
|
$ |
311 |
|
Animal health trademarks (4-5 years) |
|
|
364 |
|
|
|
(359 |
) |
|
|
5 |
|
Animal health product registrations and other related assets (5-20 years) |
|
|
6,165 |
|
|
|
(1,667 |
) |
|
|
4,498 |
|
Electronic chemicals-related contracts (3-8 years) |
|
|
1,164 |
|
|
|
(844 |
) |
|
|
320 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
|
117 |
|
|
|
(26 |
) |
|
|
91 |
|
Electronic chemicals-value of product qualifications (5 years) |
|
|
1,300 |
|
|
|
(95 |
) |
|
|
1,205 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization |
|
$ |
13,110 |
|
|
$ |
(6,680 |
) |
|
|
6,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Creosote product registrations |
|
|
|
|
|
|
|
|
|
|
5,339 |
|
Penta product registrations |
|
|
|
|
|
|
|
|
|
|
8,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
14,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
$ |
20,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization are amortized over their estimated useful lives.
Amortization expense was approximately $282,000 and $244,000 for the three month periods ended
January 31, 2011 and 2010 respectively, and was approximately $586,000 and $487,000 for the first
six months of fiscal years 2010 and 2011, respectively.
(9) Dividends. Dividends of approximately $226,000 ($0.02 per share) and $223,000 ($0.02 per
share) were declared and paid in the second quarter of fiscal years 2011 and 2010, respectively.
Dividends of approximately $452,000 ($0.04 per share) and $445,000 ($0.04 per share) were declared
and paid in the first six months of fiscal years 2011 and 2010, respectively.
(10) Comprehensive Income. The Companys other comprehensive income 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 periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income |
|
$ |
2,424 |
|
|
$ |
3,963 |
|
|
$ |
5,940 |
|
|
$ |
8,583 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency translation gain (loss) |
|
|
(297 |
) |
|
|
(1,372 |
) |
|
|
1,181 |
|
|
|
(346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
2,127 |
|
|
$ |
2,591 |
|
|
$ |
7,121 |
|
|
$ |
8,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
(11) Segment Information. The Company operates four reportable segments organized around its
three product lines: electronic chemicals, industrial wood treating chemicals and animal health
products.
The Company previously had five reportable segments, Electronic Chemicals North America,
Electronic Chemicals International, penta, creosote and animal health. During the fourth quarter
of fiscal year 2010 the Company re-evaluated the criteria used to determine operating segments, and
concluded that its electronic chemicals product line met the criteria of a single operating
segment. As a result, the composition of the Companys reportable segments was revised to reflect a
change from five to four reportable segments, electronic chemicals, penta, creosote and animal
health. Prior year information has been reclassified to conform to the current period presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands) |
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals |
|
$ |
36,001 |
|
|
$ |
22,894 |
|
|
$ |
72,794 |
|
|
$ |
45,905 |
|
Penta |
|
|
5,275 |
|
|
|
5,107 |
|
|
|
11,746 |
|
|
|
11,050 |
|
Creosote |
|
|
20,532 |
|
|
|
14,670 |
|
|
|
38,221 |
|
|
|
34,197 |
|
Animal Health |
|
|
3,128 |
|
|
|
2,463 |
|
|
|
4,279 |
|
|
|
3,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
64,936 |
|
|
$ |
45,134 |
|
|
$ |
127,040 |
|
|
$ |
94,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals |
|
$ |
1,117 |
|
|
$ |
958 |
|
|
$ |
2,873 |
|
|
$ |
1,854 |
|
Penta |
|
|
147 |
|
|
|
154 |
|
|
|
292 |
|
|
|
309 |
|
Creosote |
|
|
73 |
|
|
|
69 |
|
|
|
146 |
|
|
|
139 |
|
Animal Health |
|
|
193 |
|
|
|
191 |
|
|
|
385 |
|
|
|
383 |
|
Other general corporate |
|
|
76 |
|
|
|
66 |
|
|
|
150 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization |
|
$ |
1,606 |
|
|
$ |
1,438 |
|
|
$ |
3,846 |
|
|
$ |
2,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) from operations (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals |
|
$ |
1,331 |
|
|
$ |
2,499 |
|
|
$ |
4,356 |
|
|
$ |
3,401 |
|
Penta |
|
|
1,568 |
|
|
|
1,446 |
|
|
|
3,629 |
|
|
|
3,821 |
|
Creosote |
|
|
2,804 |
|
|
|
4,070 |
|
|
|
4,572 |
|
|
|
10,390 |
|
Animal Health |
|
|
144 |
|
|
|
87 |
|
|
|
(253 |
) |
|
|
(283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income from operations |
|
$ |
5,847 |
|
|
$ |
8,102 |
|
|
$ |
12,304 |
|
|
$ |
17,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
Electronic Chemicals |
|
$ |
112,455 |
|
|
$ |
109,367 |
|
Penta |
|
|
22,968 |
|
|
|
20,094 |
|
Creosote |
|
|
16,053 |
|
|
|
21,731 |
|
Animal Health |
|
|
15,483 |
|
|
|
15,950 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
$ |
166,959 |
|
|
$ |
167,142 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Segment income (loss) from operations includes certain allocated corporate overhead expenses.
During the first quarter of fiscal year 2011, the Company changed the method it uses to
allocate those costs to its reportable segments which is based on segment net sales.
As a result prior year amounts have been reclassified to reflect the current year method.
Corporate overhead expenses allocated to segment income (loss) for the three and six months
ended January 31, 2011 and 2010 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals |
|
$ |
952 |
|
|
$ |
884 |
|
|
$ |
1,884 |
|
|
$ |
1,788 |
|
Penta |
|
|
218 |
|
|
|
180 |
|
|
|
387 |
|
|
|
364 |
|
Creosote |
|
|
622 |
|
|
|
498 |
|
|
|
1,188 |
|
|
|
1,008 |
|
Animal Health |
|
|
137 |
|
|
|
84 |
|
|
|
249 |
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate overhead expense allocation |
|
$ |
1,929 |
|
|
$ |
1,646 |
|
|
$ |
3,708 |
|
|
$ |
3,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
A reconciliation of total segment information to consolidated amounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
$ |
166,959 |
|
|
$ |
167,142 |
|
Total assets for discontinued operations (1) |
|
|
689 |
|
|
|
739 |
|
Cash and cash equivalents |
|
|
4,299 |
|
|
|
3,073 |
|
Prepaid and other current assets |
|
|
2,000 |
|
|
|
2,174 |
|
Other |
|
|
3,116 |
|
|
|
2,893 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
177,063 |
|
|
$ |
176,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
64,936 |
|
|
$ |
45,134 |
|
|
$ |
127,040 |
|
|
$ |
94,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
64,936 |
|
|
$ |
45,134 |
|
|
$ |
127,040 |
|
|
$ |
94,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income from operations (2) |
|
$ |
5,847 |
|
|
$ |
8,102 |
|
|
$ |
12,304 |
|
|
$ |
17,329 |
|
Other corporate expense (2) |
|
|
(1,041 |
) |
|
|
(1,178 |
) |
|
|
(1,938 |
) |
|
|
(2,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,806 |
|
|
|
6,924 |
|
|
|
10,366 |
|
|
|
14,874 |
|
Interest income |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Interest expense |
|
|
(599 |
) |
|
|
(535 |
) |
|
|
(1,194 |
) |
|
|
(1,092 |
) |
Other income (expense), net |
|
|
(241 |
) |
|
|
(71 |
) |
|
|
(190 |
) |
|
|
(99 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations before income taxes |
|
$ |
3,966 |
|
|
$ |
6,319 |
|
|
$ |
8,983 |
|
|
$ |
13,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects long-term deferred tax assets related to discontinued operations as of January 31,
2011 and July 31, 2010. |
|
(2) |
|
Other corporate expense represents those expenses associated with the companys operation as
a public entity and includes costs such as board compensation, audit expense and fees related
to the listing of our stock. During the first six months of fiscal year 2011, the Company
changed the method it uses to allocate certain corporate overhead costs to its reportable
segments, and accordingly prior year amounts have been reclassified to reflect the current
year method. |
(12) Long-Term Obligations. The Companys debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2011 |
|
|
2010 |
|
Senior Secured Debt: |
|
|
|
|
|
|
|
|
Note Purchase Agreement, maturing on December 31, 2014, interest rate of 7.43% |
|
$ |
20,000 |
|
|
$ |
20,000 |
|
Secured Debt: |
|
|
|
|
|
|
|
|
Term Loan Facility, maturing on December 31, 2012, variable interest rates
based on LIBOR plus 2.00% (2.26% at January 31, 2011) |
|
|
15,333 |
|
|
|
19,333 |
|
Revolving Loan Facility, maturing on December 31, 2012, variable interest
rates based on LIBOR plus 2.00% (2.26% at January 31, 2011) |
|
|
17,000 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
Total debt |
|
|
52,333 |
|
|
|
59,333 |
|
Current portion of long-term debt |
|
|
(8,000 |
) |
|
|
(8,000 |
) |
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
44,333 |
|
|
$ |
51,333 |
|
|
|
|
|
|
|
|
13
To finance the acquisition of the electronic chemicals business in December
2007, the Company entered into a 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 Company amended those facilities in March 2010 to increase the amount that may be
borrowed under the revolving loan facility to $50 million. The facility was entered into with
Wachovia Bank, National Association, a subsidiary of Wells Fargo & 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 December 31, 2012. The revolving loan and the term loan
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 |
% |
As of February 28, 2011, advances under the revolving loan and the term loan bear interest at
2.26% per year (LIBOR plus 2.00%). For the first 24 months of the term facility, principal payments
were $458,333, per month and then beginning January 2010 principal payments became $666,667 per
month for the balance of the term prior to maturity.
The purchase of the electronic chemicals assets from General Chemical on March 29, 2010 was
funded with available cash and borrowings under the revolving loan. At January 31, 2011, the amount
outstanding on the revolving loan was $17.0 million and the amount outstanding on the term loan was
$15.3 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
December 31, 2014, and bear interest at 7.43% per annum. Principal is payable at maturity. At
January 31, 2011, $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 maintain a ratio of funded debt to EBITDA of 3.0 to 1.0. 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, we use a pro forma EBITDA. On January 31, 2011, the Company was in
compliance with all of its debt covenants.
(13) Income Taxes. Income tax expense for the interim periods was computed using the effective
tax rate estimated to be applicable for the full fiscal year. The effective tax rate for first six
months of fiscal year 2011 was 33.5%, which included the effect of an adjustment recognized during
the first quarter of $410,000 for the reversal of a portion of the valuation allowance related to a
foreign subsidiary.
(14) 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
six months ended January 31, 2011, there were no sales reported in discontinued operations, and the
Company reported a net loss from discontinued operations of $36,000 from the dismantling of related
equipment which began in the second quarter. No amounts were recorded for the three and six months
ended January 31, 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 treating 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 include biotech feed additives, farm and ranch hygiene products and pesticide products
used on cattle, other livestock and poultry to protect the animals from flies and other pests.
Results of Operations
Three Month and Six Month Periods Ended January 31, 2011 compared with Three and Six Month Periods
Ended January 31, 2010
Segment Data
Segment data is presented for our four reportable segments for the three and six month periods
ended January 31, 2011 and 2010. The segment data should be read in conjunction with our condensed
consolidated financial statements and related notes thereto included elsewhere in this report. We
previously had five reportable segments, Electronic Chemicals-North America, Electronic
Chemicals-International, and segments for penta, creosote and animal health. During the fourth
quarter of fiscal year 2010 we re-evaluated the criteria used to determine operating segments, and
we concluded that our electronic chemicals product line met the criteria of a single operating
segment. As a result our reportable segments were revised to reflect a change from five to four
reportable segments, electronic chemicals, penta, creosote and animal health. Prior year
information has been reclassified to conform to the current period presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands) |
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals |
|
$ |
36,001 |
|
|
$ |
22,894 |
|
|
$ |
72,794 |
|
|
$ |
45,905 |
|
Penta |
|
|
5,275 |
|
|
|
5,107 |
|
|
|
11,746 |
|
|
|
11,050 |
|
Creosote |
|
|
20,532 |
|
|
|
14,670 |
|
|
|
38,221 |
|
|
|
34,197 |
|
Animal Health |
|
|
3,128 |
|
|
|
2,463 |
|
|
|
4,279 |
|
|
|
3,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
64,936 |
|
|
$ |
45,134 |
|
|
$ |
127,040 |
|
|
$ |
94,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Net sales increased $19.8 million, or 43.9%, to $64.9 million in the second quarter of fiscal
year 2011 as compared with $45.1 million for the same period of the prior year. For the six month
comparison, net sales increased $32.5 million, or 34.4%, to $127.0 million in fiscal year 2011 from
$94.5 million in fiscal year 2010.
In the second quarter of fiscal year 2011, the electronic chemicals segment had net sales of
$36.0 million, an increase of $13.1 million, or 57.3%, as compared to $22.9 million for the prior
year period. For the six month comparison, net sales in the electronic chemicals segment increased
$26.9 million, or 58.6%, to $72.8 million in fiscal year 2011 from $45.9 million in fiscal year
2010. We had increased sales from our March 2010 acquisition of General Chemicals electronic
chemicals business, and demand recovered in the segment from the effect of the economic downturn in
the semiconductor industry.
Net sales of penta products increased $168,000, or 3.3%, to $5.3 million in the second quarter
of fiscal year 2011 as compared to $5.1 million for the prior year period. For the six month
comparison, net sales in the penta segment increased $696,000, or 6.3%, to $11.7 million in fiscal
year 2011 from $11.1 million in fiscal year 2010. The increases in sales for both the three and six
month periods were due to higher volume. We benefited from an incremental improvement in purchases
of treated poles by utility companies.
Creosote net sales also increased in the second quarter of fiscal year 2011, as compared with
the prior year period, by $5.9 million, or 40.0%, to $20.5 million. For the six month comparison,
net sales in the creosote segment increased $4.0 million, or 11.8%, to $38.2 million in fiscal year
2011 from $34.2 million in fiscal year 2010. For the three and six month periods the increase was
due to higher volumes offset in part by lower average prices. Demand by railroads for crossties
treated with creosote eased in 2010 from the high levels of previous years, but now appears to be
rebounding as the United States comes out of the recession. Crosstie purchases appear to be moving
back toward about 18 million ties for the United States market. However, average pricing for creosote for both the quarter and the six month period declined
because of a shift in product mix and renegotiated pricing following consolidation of our wood
treating customer base. We anticipate that pricing will remain relatively flat through fiscal
year 2011, but we believe that creosote sales volume will increase in the second half of the fiscal
year as rail tie production rates more closely approximate tie purchases.
15
Net sales of animal health pesticides increased by $665,000, or 27.0%, to $3.1 million in the
second quarter of fiscal year 2011 as compared with $2.5 million in the prior year period. For the
six month comparison, net sales in the animal health segment increased $883,000, or 26.0%, to $4.3
million in fiscal year 2011 from $3.4 million in fiscal year 2010. The increase was primarily
driven by improvement in demand for pest control in the United States in the feed animal sector.
However, we have seen a significant increase in orders for ear tag products in Australia, and
because we are continuing to add registered products in South America, we see increased animal
health sales in that region. Although we are working to have EPA re-establish appropriate
tolerances, pending a successful conclusion of that effort, sales of our Rabon products in the U.S.
may be adversely affected. Sales of our Rabon products in the U.S. constituted approximately 2% of
our fiscal year 2010 consolidated net sales. 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
pesticides segment is seasonal and weighted to the third and fourth quarters of our fiscal year.
Revenues from products subject to significant seasonal variations represented 5.0% of our fiscal
year 2010 revenues.
Gross Profit
Gross profit increased by $1.6 million, or 9.3%, to $18.3 million in the second quarter of
fiscal year 2011 from $16.7 million in the same quarter the prior year. For the six month
comparison, gross profit increased $531,000, or 1.5%, to $35.6 million in fiscal year 2011 from
$35.1 million in fiscal year 2010. Gross profit as a percentage of sales decreased to 28.1% in the
second quarter of fiscal year 2011 from 37.0% in the second quarter of fiscal year 2010, and
decreased to 28.0% for the first six months of fiscal year 2011 from 37.1% for the prior fiscal
year.
The increase in aggregate gross profit for both the three and six month periods came from
improved sales in our electronic chemicals segment, as discussed above. As a percentage of sales,
however, profit margins in our electronic chemicals segment was down for the second quarter and for
the full six months of fiscal year 2011 as compared to the prior year. In our electronic chemicals
segment margins were impacted in both the second quarter and the six months period by duplicative
costs associated with the integration of our March 2010
acquisition of General Chemicals business, and by rising raw
material costs. In connection with the integration, we are shifting operations to our Hollister,
CA and Pueblo, CO facilities, but we have continued to incur expense for contract manufacturing in
Dallas, TX and Bay Point, CA. We expect that duplication will be eliminated by the end of the
fiscal year as we complete the transition to Hollister and Pueblo. We
implemented a global price increase to take effect during the third
fiscal quarter to address our increased raw material costs. In our creosote segment, we
have experienced increased costs this fiscal year as compared to the prior year, and a lower
average price. At the end of fiscal year 2010 we entered into a long-term contract to sell creosote
to our largest customer following its acquisition of another of our large customers. Although this
arrangement has had the effect of increasing creosote volume substantially, margins have declined
from the unusually high levels experienced in fiscal year 2010 to what we believe is a more normal
level.
Other companies may include certain of the costs that we record in cost of sales as
distribution expenses or selling, general and administrative expenses, and may include certain of
the costs that we record in distribution expenses or 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.
Distribution Expenses
Distribution expenses are presented as a line item separate from our selling, general and
administrative expenses in the consolidated statements of income. Prior year information has been
reclassified to conform to this presentation.
Distribution expenses increased $3.0 million, or 68.8%, to $7.4 million in the second quarter
of fiscal year 2011 as compared with $4.4 million in the prior year period. For the six month
comparison, distribution expense increased $4.3 million, or 46.3%, to $13.7 million in fiscal year
2011 from $9.4 million in fiscal year 2010. Distribution expenses were approximately 11.3% and
10.8% of net sales for the second quarter and for the first six months of fiscal year 2011,
respectively, and 9.7% and 9.9% for the comparable prior year periods.
16
We
recognized an increase in distribution expense in our electronic
chemicals segment of approximately $2.7 million and $3.8 million for the three and six
months ended January 31, 2011, respectively, as compared to the same prior year periods. The increase was primarily due to
increased expense on greater volume from the General Chemical acquisition for storage, handling and freight of about $2.4 million and $3.5 million for
the three and six month periods, respectively, as compared to the prior year periods. For electronic chemicals, distribution expense was 17.4% of net sales in the second quarter and 15.9% for the six month period in fiscal
year 2011, as compared to 15.6% and 16.9%, respectively, for the comparable periods in the prior
year. The increase in distribution expense as a percent of sales was due to higher diesel fuel
costs, the impact of our integration effort and additional freight incurred to meet shortage
conditions arising from unscheduled plant outages at two suppliers in the United States. Those
suppliers have now resumed production. Our two wood preservatives segments and our animal health
segments had an aggregate increase of approximately $300,000 and $500,000 in distribution expenses
in the second quarter and first six months of fiscal year 2011, respectively, mainly because of
higher freight costs, storage and steaming costs for creosote storage
and higher, volume related railcar cleaning
expenses. With increased creosote throughput and milder temperatures, we expect storage and
steaming costs will decline in the second half of the fiscal year.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses were $6.1 million in the second quarter of
fiscal year 2011 and $5.4 million in the same quarter of fiscal year 2010. Those expenses were 9.4%
of sales in the second quarter of fiscal year 2011 and 12.0% of sales in the second quarter of the
prior year. For the six month comparison, selling, general and administrative expense increased
$693,000, or 6.4%, to $11.5 million in fiscal year 2011 from $10.9 million in fiscal year 2010.
Selling, general and administrative expenses associated with our electronic chemicals segment
increased approximately $710,000, to $3.1 million, in the second quarter of fiscal year 2011 as
compared to $2.4 million for the second quarter of fiscal year 2010, and increased $1.1 million, to
$6.0 million, for the six month period as compared to the same prior year period. The increases in
both the three and six month periods were primarily related to higher employee costs of
approximately $300,000 and $500,000, respectively. The three and six month periods included
integration costs of approximately $61,000 and $237,000, respectively, in connection with the
electronic chemicals business we acquired from General Chemical in March 2010. We also recognized
modest increases in other professional services for both the three and six month periods. Selling,
general and administrative expenses related to each of our other segments were relatively flat.
Other corporate expense decreased by approximately $137,000 and $517,000 for the three and six
month periods, respectively, as compared to the prior year periods. Other corporate expense
represents those expenses associated with our operation as a public entity and includes costs such
as board compensation, audit expense and fees related to the listing of our stock. See Note 11 to
the condensed consolidated financial statements.
Interest Expense
Interest expense was $599,000 in the second quarter and $1.2 million in the first six months
of fiscal year 2011 as compared with $535,000 and $1.1 million in the comparable periods of fiscal
year 2010. The increase was due to an increase in our revolving loan facility balance to
finance the acquisition of the electronic chemicals business of General Chemical in March 2010.
Income Taxes
Our
effective tax rate was 38.1% and 33.5% in the second quarter and the first six months,
respectively, of fiscal years 2011, and 37.3% for each of the prior year periods. The current six
month period income tax expense was net of a discrete period adjustment of $410,000 recognized in
the first quarter of fiscal year 2011 reflecting the reversal of a portion of the valuation
allowance related to a foreign subsidiary.
17
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $10.4 million for the first six months of fiscal
year 2011 as compared to $5.2 million for the comparable period in 2010. Net income adjusted for
depreciation and amortization increased cash to $9.8 million in the first six months of fiscal year
2011. Changes in operating assets and liabilities included an increase of $1.6 million in accounts
payable and a decrease in prepaid expenses and other current assets of approximately $939,000, both
of which had a favorable impact on cash. The increase in accounts payable was primarily related to
our recently acquired electronic chemicals business and the timing of creosote purchases. Prepaid
expense and other current assets decreased as a result of a reduction in prepaid insurance. Cash
was unfavorably impacted by a decrease in accrued liabilities of $1.9 million and an increase in inventories
of $632,000. Accrued liabilities decreased mainly as a result of a reduction in our employee bonus accrual. The net increase in inventories was due to increased inventories in our
electronic chemicals segment mostly offset by reduced inventories in our creosote segment.
Net cash used in investing activities in the first six months of fiscal 2011 was $3.8 million
as compared with $390,000 in the prior year period. We made additions to property, plant and
equipment of $4.0 million during the first six months of fiscal year 2011 as compared to $500,000
in the same period of fiscal year 2010. In the first six months of fiscal year 2011 we spent
approximately $1.3 million in connection with our ongoing expansion project at our Hollister, CA
facility. We additionally made approximately $1.7 million of capital expenditures at our Pueblo, CO
facility for equipment purchases and upgrades, some of which are in connection with our ongoing
consolidation of our United States based electronic chemicals manufacturing. We also made expenditures of
$411,000 for equipment at our Milan, Italy facility. The remaining capital expenditures were for
normal equipment and system upgrades and purchases across our different locations. The expenditures
in the prior year period were primarily in our electronic chemicals segment.
Net cash used in financing activities was $7.1 million in the first six months of fiscal year
2011 as compared to $3.2 million in the comparable prior year period. In the first six months of
fiscal year 2011, we made principal payments of $4.0 million on the term loan indebtedness we
incurred when we purchased the electronic chemicals business in December 2007. We additionally made
payments of $3.0 million on our revolving credit line in the six month period which reflects
amounts borrowed to fund our March 2010 acquisition. In the first six months of fiscal year 2010,
we made principal payments of $3.0 million on the term loan indebtedness.
We paid dividends of $452,000 and $445,000 in the first six months of fiscal years 2011 and
2010, respectively. On February 24, 2011, we announced an increase in our quarterly dividend rate
to $0.025 per share from $0.020 per share, a 25% increase. 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, and the increase in the quarterly dividend reflects that analysis.
Working Capital
We have a revolving line of credit under an amended and restated credit agreement. At January
31, 2011, we had $17.0 million outstanding under that revolving facility, and our net borrowing
base availability was $18.2 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 December 2007, we entered
into a credit agreement and a note purchase agreement with Wachovia Bank,
National Association, a subsidiary of Wells Fargo & Co., Bank of America, N.A., The Prudential
Insurance Company of America, and Pruco Life Insurance Company. The new credit facility included a
revolving loan facility of $35.0 million and a term loan facility of $35.0 million. We amended
those facilities in March 2010 to increase the amount that may be borrowed under the revolving loan
facility to $50.0 million. Advances under the revolving loan and the term loan mature December 31,
2012. They each bear interest at varying rate of LIBOR plus a margin based on our funded debt to
EBITDA, as described below.
|
|
|
|
|
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 |
% |
As of February 28, 2011, advances bear interest at 2.26% per year (LIBOR plus 2.00%). For the first
24 months of the term facility, principal payments were $458,333 per month, and then beginning
January 2010 principal payments became $666,667 per month for the balance of the term prior to
maturity. The purchase of the electronic chemicals assets from General Chemical on March 29, 2010
was funded with available cash and borrowings under the revolving loan. At January 31, 2011, $17.0
million was outstanding on the revolving facility and $15.3 million was outstanding on the term
loan.
18
The financing for the acquisition of the electronic chemicals business in fiscal year 2008
included a $20.0 million note purchase agreement with the Prudential Insurance
Company of America. Advances under the note purchase agreement mature December 31, 2014, and bear
interest at 7.43% per annum. Principal is payable at maturity. At January 31, 2011, $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 that we must maintain a fixed charge coverage ratio of 1.5 to 1.0, and a ratio of funded
debt to EBITDA of 3.0 to 1.0. We are also obligated to 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. On January 31, 2011, we were in compliance with all of our debt covenants.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, such as financing or unconsolidated variable
interest entities.
Recent Accounting Standards
We have considered all recently issued accounting standards updates and SEC rules and
interpretive releases, and believe that only the following item could have a material impact on our
consolidated financial statements.
In December 2010, the Financial Accounting Standards Board issued new accounting guidance for
the disclosure of supplementary pro forma information for business combinations. The guidance
clarifies the acquisition date that should be used for reporting the pro forma financial
information disclosures when comparative financial statements are presented and specifies that the
entity should disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The guidance also expands the supplemental pro forma
disclosure requirements to include a description of the nature and amount of material, non
recurring pro forma adjustments directly attributable to the business combination included in the
reported pro forma information. The new guidance is effective prospectively for business
combinations with an acquisition date on or after the beginning of the first annual reporting
period beginning on or after December 15, 2010. Early adoption is permitted. We do not expect the
new guidance to have a material impact on its consolidated financial statements.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. The preparation of these condensed
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 condensed 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, 2010.
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.
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Some of the key factors which could cause our future financial results and performance to vary
from those expected include:
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the loss of primary customers; |
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our ability to implement productivity improvements, cost reduction initiatives or
facilities expansions; |
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market developments affecting, and other changes in, the demand for our products and the
introduction of new competing products; |
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availability or increases in the price of our primary raw materials or active
ingredients; |
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the timing of planned capital expenditures; |
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our ability to identify, develop or acquire, and market additional product lines and
businesses necessary to implement our business strategy and our ability to finance such
acquisitions and development; |
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the condition of the capital markets generally, which will be affected by interest rates,
foreign currency fluctuations and general economic conditions; |
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cost and other effects of legal and administrative proceedings, settlements,
investigations and claims, including environmental liabilities which may not be covered by
indemnity or insurance; |
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the effects of weather, earthquakes, other natural disasters and terrorist attacks; |
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the ability to obtain registration and re-registration of our products under applicable
law; |
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the political and economic climate in the foreign or domestic jurisdictions in which we
conduct business; and |
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other United States or foreign regulatory or legislative developments which affect the
demand for our products generally or increase the environmental compliance cost for our
products or impose liabilities on the manufacturers and distributors of such products. |
The information contained in this report, including the information set forth under the
heading Risk Factors, identifies additional factors that could cause our results or performance
to differ materially from those we express in our forward-looking statements. Although we believe
that the assumptions underlying our forward-looking statements are reasonable, any of these
assumptions and, therefore, the forward-looking statements based on these assumptions, could
themselves prove to be inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements which are included in this report and the exhibits and other documents
incorporated herein by reference, our inclusion of this information is not a representation by us
or any other person that our objectives and plans will be achieved.
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ITEM 3. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
We are exposed to certain market risks in the ordinary course of our business, arising
primarily from changes in interest rates and to a lesser extent foreign currency exchange rate
fluctuations. Generally we do not utilize derivative financial instruments or hedging transactions
to manage that risk.
Interest Rate Sensitivity
As of January 31, 2011 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 January 31, 2011 our variable rate debt consisted of a credit facility with an interest
rate of LIBOR plus 2.00%, maturing on December 31, 2012. On January 31, 2011, we had $17.0 million
borrowed on our $50.0 million revolving credit line under that facility, and $15.3 million borrowed
on a term loan under that same facility. Principal payments on the term loan were $458,333 per
month for the first two years of the term facility and now are $666,667 per month for the remaining
term of the facility.
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Based on the outstanding balance of the term loan and the LIBOR rate as of January 31, 2011, a
1.0% change in the interest rate would result in a change of approximately $225,000 in interest
expense for the next twelve months.
Foreign Currency Exchange Rate Sensitivity
We are exposed to fluctuations in foreign currency exchange rates from the international
operations of our electronic chemicals segment. Those international operations are centered in
Europe and use the Euro as their functional currency, rather 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 into our reporting
currency. Currency translation gains and losses have no impact on the consolidated statements of
income and are recorded as other comprehensive income (loss) within stockholders equity in our
consolidated balance sheets. Assets and liabilities have been translated using exchange rates in
effect at the balance sheet dates. Revenues and expenses have been translated using the average
exchange rates during the period.
During the six months ended January 31, 2011, we recognized foreign currency translation gains
of $1.2 million as other comprehensive income in the consolidated balance sheets. At January 31,
2011, the cumulative foreign currency translation loss reflected in accumulated other comprehensive
loss was $2.2 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.
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ITEM 4. |
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CONTROLS AND PROCEDURES |
The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934. This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commission. Our management,
including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this report. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this
report.
There were no changes to our internal control over financial reporting during the quarterly
period covered by this Report on Form 10-Q that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
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ITEM 1. |
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LEGAL PROCEEDINGS |
The trustee in the bankruptcy proceeding of one of our customers, In re Spansion, Inc. et al,
has filed an action against us seeking the return of $538,000 in
payments allegedly made by the bankrupt to
us in the ninety (90) days prior to the filing of the bankruptcy petition. The bankruptcy
commenced on December 1, 2009. The action against us alleges a right to recovery of the payments
as a preference and under several other legal theories. The action is styled as In re Spansion,
Inc., et al. and Pirinate Consulting Group LLC, Claims Agent for the Chapter 11 Estate of Spansion,
Inc., et al. vs. KMG Electronic Chemicals, Inc., and it was filed
February 25, 2011 in the United
States Bankruptcy Court, District of Delaware (Bk.
No. 09-10690-KJC; Adv. Proc. No. 11-51094-KJC). Previously, we had filed a
claim for unpaid invoices in the bankruptcy in the amount of
approximately $483,000. 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 previously reported that litigation 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 case
was consolidated in the Superior Court with other plaintiffs cases as Thompson et al vs Meredith
et al. The plaintiffs are persons living near the wood treating facility of one of our customers.
The plaintiffs complain that 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 treating chemicals
to the facility. In fiscal year 2010, the court granted our motion for summary judgment and
dismissed us from the case, but the plaintiffs have appealed. 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.
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We 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. 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 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 on the case.
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 previously reported that a lawsuit was filed against our subsidiary, KMG de Mexico,
relating to 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.
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, 2010.
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ITEM 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
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ITEM 3. |
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DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
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ITEM 4. |
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REMOVED AND RESERVED |
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ITEM 5. |
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OTHER INFORMATION |
The Nominating and Corporate Governance Committee will consider recommendations for directors
made by shareholders for fiscal year 2012, 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, 2011.
The financial statements are filed as part of this report in Part 1, Item 1. The following
documents are filed as exhibits. Documents marked with an asterisk (*) are management contracts or
compensatory plans, and portions of documents marked with a dagger () have been granted
confidential treatment.
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31.1 |
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Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer. |
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31.2 |
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Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer. |
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32.1 |
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Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer. |
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32.2 |
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Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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KMG Chemicals, Inc. |
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By:
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/s/ J. Neal Butler
J. Neal Butler
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Date: March 11, 2011 |
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President and Chief Executive Officer |
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By:
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/s/ John V. Sobchak
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Date: March 11, 2011 |
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John V. Sobchak |
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Vice President and Chief Financial Officer |
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