Business Segments

Electronic Chemicals.Chemicals. Our electronic chemicals business sells high purity and ultra purity wet process chemicals primarily to the semiconductor industry. TheseOur electronic chemicals business accounted for 82.9% of our net sales in fiscal year 2015, 71.8% of our net sales in fiscal year 2014, and 63.0% in fiscal year 2013.

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Our electronic chemicals are used to clean and etch silicon wafers in the production of semiconductors. The electronic chemicals business was acquired initially in December 2007 from Air Products and Chemicals, Inc. (“Air Products”), and expanded with our purchases in March 2010 and in May 2013 of similar businesses from General Chemical Performance Products LLP (“General Chemical”) and OM Group, Inc. (“OM Group”), respectively. Our products include sulfuric, phosphoric, and nitric and hydrofluoric acids, ammonium hydroxide, hydrogen peroxide, isopropyl alcohol, other specialty organic solvents and various blends of chemicals. We operate our electronic chemicals business through KMG EC in North America and through KMG Italia, S.r.l. (“KMG Italia”) and KMG Electronic Chemicals Luxembourg Holdings S.a.r.l. (“KMG Lux”) (and its subsidiaries) in Europe and Asia and have facilities in the United States, the United Kingdom, France, Italy and Singapore. Our customers rely on us to provide products with very low levels of contaminants and particles, in some cases at less than 100 parts per trillion levels. We purchase the needed chemicals from various suppliers, and in some cases we purify those chemicals further. We are responsible for product purity levels, for analytical testing, blending and packaging, and for distribution to our customers. Our products are sold in bulk and in containers, including bottles, drums and totes. This purification and distribution process is largely accomplished at our facilities in the United States, Europe and Singapore. With the purchase of the electronic

Other Chemicals. Our other chemicals segment includes our wood treating chemicals business from OM Group, we now manage theand our industrial valve lubricants and sealants business. Our other chemicals usagesegment constituted about 17.1% of semiconductor customers at their sitesour net sales in Singapore, a service known as Total Chemical Management. Our electronic chemicals business accounted for 71.8%fiscal year 2015, 28.2% of our net sales in fiscal year 2014, 63.0% of our net salesand 37.0% in fiscal year 2013, and 58.5% in fiscal year 2012.2013.

Wood Treating Chemicals.WeIn our wood treating chemicals business, we supply penta and creosote to industrial customers who use these productsthis preservative to pressure treat wood products, primarily utility poles and railroad crosstiescross-arms, to extend their useful life.life by protecting against insect damage and decay. Our penta products include solid blocks and concentrated solutions. Penta is used primarily to treat utility poles, protecting them from insect damage and decay. We estimate that approximately two million treated utility poles are purchased each year by electric utility companies in the United States and that approximately 45% of those utility poles are treated with penta. We manufacture solid penta blocks at our facility in Matamoros, Mexico.Mexico through KMG de Mexico (“KMEX”), a Mexican corporation which is a wholly owned subsidiary of KMG Bernuth. We sell solid penta to our customers, or dissolve it to make concentrated solutions of penta atwhich are sold to customers from our Matamoros, Mexico and Tuscaloosa, Alabama facilities. We sell penta products in the United States, Canada and in Canada. TheMexico. We also sell hydrochloric acid, we produce aswhich is a byproduct of penta production is primarily sold in Mexico for use in the steel and oil well service industries. Creosote is aOn January 16, 2015, we sold our creosote distribution business, part of our wood preservative usedtreating chemicals business, to treat utility polesKoppers Inc. pursuant to an asset purchase agreement.

In our industrial valve lubricants and railroad crossties. Creosote is produced bysealants business, we manufacture and distribute industrial sealants, lubricants and related equipment, primarily to the distillation of coal tar, a by-product of the transformation of coal into coke. In the last five years, production of wood crosstiesoil and gas storage, pipeline and gas distribution markets, through one facility in North America has averaged 21.5 million ties annually. Almost all wood crossties are treated with creosote. We believe that about 10% of utility poles are treated with creosote annually. We sell creosote to wood treaters throughout the United States. Our wood treating chemicals constituted about 28.2%industrial valve lubricants and sealants enable optimal valve operation and help prevent costly downtime at oil and gas storage facilities and pipelines. In addition, they provide important safety benefits and prevent fugitive valve emissions. The industrial valve lubricants and sealants business was acquired on May 1, 2015 through the acquisition of our net sales in fiscal year 2014, 37.0%Valves Incorporated of our net sales in fiscal year 2013,Texas, a privately held Texas corporation, pursuant to the terms of an agreement and 41.5% in fiscal year 2012.plan of merger.

Suppliers

In our electronic chemicals segment we rely on a variety of suppliers for our raw materials, some of which we purchase on open account and others which we purchase under supply contracts. The number of suppliers is often limited, particularly as to the specific grade of raw material required by us to supply high purity and ultra purity products to our customers.

In our other chemicals segment, our wood treating chemical segments, wechemicals and lubricants depend on outside suppliers for all of the raw materials needed to produce our penta products, and are subject to fluctuations in the price of those materials. The principal raw materials used for our penta products are chlorine, phenol and co-solvent for our penta products and castor oil and fumed silica for our lubricants, each of which we purchase from a limited number of suppliers. We purchase almost all of the creosote we sell from three suppliers, Koppers, Lone Star and Rütgers. Our creosote supply agreement with Koppers provides that we purchase an agreed minimum volume of creosote in each calendar year at a fluctuating, formula-based price.

No assurance can be given that the loss of a supplier would not have a material adverse effect on our financial position or results of operations.

Customers

We sell our products to approximately 700 customers.2,500 customers, almost 2,000 of which are customers of our industrial lubricants and sealants business. One of our electronic chemicals customers, Intel Corporation, and one of our wood treating chemicals customers, Stella Jones Corporation, accounted for 10% or more of our revenues in fiscal years 2015. Intel, along with one of our wood treating chemicals customers, Stella Jones Corporation, prior to the sale of our creosote distribution business, accounted for 10% or more of our revenues in fiscal years 2014 2013 and 2012.2013. No other customer accounted for 10% or more of our revenue in fiscal years 2015, 2014 2013 or 2012.2013. The loss of the Intel business would have a material adverse effect on sales of our electronic chemicals business.

On October 24, 2014 we were notified by Stella-Jones that effective immediately it was terminating the agreement we have to supply it with creosote. Stella-Jones claims it is entitled to repudiate the contract, because it believes that we will be unable to supply the contract volume in the future. However, we have informed Stella-Jones that that we will be able to supply the required quantity and that Stella-Jones has no right to terminate the agreement. We will pursue all options to have Stella-Jones live up to their contractual obligation and to reach an acceptable resolution, but no assurance can be given that such a resolution will be reached or that the termination of the agreement will not have a material adverse effect on the operations and financial performance of our wood treating chemicals business.businesses, respectively.

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Marketing

We sell to our electronic chemicals customers through a combination of strategic account managers and other sales personnel organized by geographic region. Our wood treatingother chemicals are sold in the United States, Canada and CanadaMexico through an internal sales force.force, distributors and independent agents, and sold internationally through distributors and agents.

Geographical Information

Sales made to customers in the United States were 60.2%57.2% of total revenues in fiscal year 2015, 60.2% in 2014 and 76.0% in 2013 and 84.0% in 2012.2013. Sales made outside of the United States were primarily electronic chemicals sold in Europe, Israel and Singapore. As of the end of fiscal year 2014,2015, our property, plant and equipment were allocated, based on net book value, 53.8%56.3% in the United States and 46.2%43.7% elsewhere.

Competition

There are only a few firms competing with us in the sale of our electronic and wood treating chemical products. In our industrial valve lubricants and sealants business, we compete with many other firms. We compete by selling our products at competitive prices and maintaining a strong commitment to product quality and customer service.service and training.

In electronic chemicals in North America, we believe that we have the largesta significant market share, and our principal competitors include Honeywell, Kanto Corporation and Avantor (formerly Mallinckrodt Baker). Internationally, we compete in Europe primarily with BASF, Technic and Honeywell, and in Asia with BASF, Kanto Corporation and others. We believe our market share in Europe is comparable to our competitors, and we do not participate materially in the market in Asia outside of Singapore.

In our electronic chemicals business, our customers demand that each of their suppliers and each product used to make their semiconductors go through a rigorous qualification process. Once a customer has qualified one or more suppliers and their products for one of its fabrication facilities, there is often reluctance to switch to suppliers who are not qualified.

The principal wood preserving chemicals for industrial usersapplications are penta, creosote and chromated copper arsenate, or CCA. We supply customers in the United States industrial users with both penta, and creosote, but not creosote or CCA. We are the only manufacturer of penta based preservatives in North America. Penta is used primarily to treat electric, telephone and other utility poles, to protect them from insect damage and decay.decay, extending their useful life by many years. We estimate that approximately two million treated utility poles are purchased each year by utility companies in the United States. Of that amount, we estimate approximately 45% are treated with penta and that about 10% are treated with creosote.penta. The remaining poles are treated primarily with CCA. We provide the wood treating industry in the United States with a significant portion of its annual consumption of creosote that is not produced for internal use by Koppers and other creosote distillers. Important competitors are Rütgers, Lone Star, and Coopers Creek.or CCA.

Our wood treating chemicals must be registered prior to sale under United States law. See “Environmental and Safety Matters—Licenses, Permits and Product Registrations.” As a condition to registration, any company wishing to manufacture and sell these products must provide substantial scientific research and testing data regarding the chemistry and toxicology of the products to the U.S. Environmental Protection Agency (“EPA”). This data must be generated by the applicant, or the applicant must purchase access to the information from other data providers. We believe that the cost of satisfying the data submission requirement serves as an impediment to the entry of new competitors, particularly those with lesser financial resources. While we have no reason to believe that the product registration requirement will be materially modified, we cannot give any assurances as to the effect of such a discontinuation or modification on our competitive position.

In our industrial lubricants business, competitors include about twenty-five other businesses that serve the oil and gas storage, pipeline and gas distribution markets, none of which have a dominant market position. Our principal competitors include Flowserve Corporation and JetLube, Inc.

Employees

As of the end of fiscal year 2014,2015, we had a total of 733657 full-time employees. We employed 624514 employees in our electronic chemicals segment, 6596 employees in wood treatingour other chemicals segment, and 4447 employees in administration and corporate. Approximately 18.3%19.3% of our employees are represented by labor unions, workers councils or comparable organization,organizations, particularly in Mexico and Europe.

Environmental and Safety Matters

Our operations are subject to extensive federal, state and local laws, regulations and ordinances in the United States and abroad relating to the protection of the environment and human health and to safety, including those pertaining to chemical manufacture and distribution, waste generation, storage and disposal, discharges to waterways, and air emissions and various other health and safety matters. Governmental authorities have the power to enforce compliance with their regulations, and violators may be subject to civil,

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criminal and administrative penalties, injunctions or both. We devote significant financial resources to ensure compliance and we believe that we are in substantial compliance with all the applicable laws and regulations.environmental laws.

We anticipate that the regulation of our business operations under federal, state and local environmental laws in the United States and abroad will increase and become more stringent over time. We cannot estimate the impact of increased and more stringent regulation on our operations, future capital expenditure requirements or the cost of compliance.

United States Regulation.Regulation. Statutory programs relating to protection of the environment and human health and to safety in the United States include, among others, the following.

CERCLA.CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, also known as “CERCLA” and “Superfund”, and comparable state laws generally impose joint and several liability for costs of investigation and remediation and for natural resource damages, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release into the environment of specified substances, including under CERCLA those designated as “hazardous substances.” These persons include the present and certain former owners or operators of the site where the release occurred and those that disposed or arranged for the disposal of the hazardous substance at the site. These liabilities can arise in association with the properties where operations were conducted, as well as disposal facilities where wastes were sent. Many states have adopted comparable or more stringent state statutes. In the course of our operations, we generated materials that fall within CERCLA’s definition of hazardous substances. We may be the owner or operator of sites on which hazardous substances have been released and may have generated hazardous substances that have been transported to or otherwise released upon offsite facilities. We may be responsible under CERCLA for all or part of the costs to clean up facilities at which such substances have been released by previous owners or operators, facilities which we previously owned or operations at which such substances were released, and offsite facilities to which our wastes were transported and for associated damages to natural resources.

Resource Conservation and Recovery Act.Act. The federal Resource Conservation and Recovery Act, as amended (“RCRA”) and comparable state laws regulate the treatment, storage, disposal, remediation and transportation of wastes, specifically under RCRA those designated as “hazardous wastes.” The EPA and various state agencies have limited the disposal options for these wastes and impose numerous regulations upon the treatment, storage, disposal, remediation and transportation of them. Our operations generate wastes that are subject to RCRA and comparable state statutes. Furthermore, wastes generated by our operations that are currently exempt from treatment as hazardous wastes may be designated in the future as hazardous wastes under RCRA or other applicable statutes and, therefore, may be subject to more rigorous and costly treatment, storage and disposal requirements. Governmental agencies (and in the case of civil suits, private parties in certain circumstances) can bring actions for failure to comply with RCRA requirements, seeking administrative, civil, or criminal penalties and injunctive relief, to compel us to abate a solid or hazardous waste situation that presents an imminent or substantial endangerment to health or the environment.

Clean Water Act.Act. The federal Clean Water Act imposes restrictions and strict controls regarding the discharge of wastes and fill materials into waters of the United States. Under the Clean Water Act, and comparable state laws, the government (and in the case of civil suits, private parties in certain circumstances) can bring actions for failure to comply with Clean Water Act requirements and enforce compliance through civil, criminal and administrative penalties for unauthorized discharges of hazardous substances and of other pollutants. In the event of an unauthorized discharge of wastes, we may be liable for penalties and subject to injunctive relief.

Clean Air Act. The federal Clean Air Act (CAA), as amended and comparable state and local laws restrict the emission of air pollutants from many sources and also impose various monitoring and reporting requirements. These laws may require us to obtain pre-approval for the construction or modification of certain projects or facilities expected to produce or significantly increase air emissions, obtain and strictly comply with air permit requirements or utilize specific equipment or technologies to control emissions. Governmental agencies (and in the case of civil suits, private parties in certain circumstances) can bring actions for failure to strictly comply with air pollution regulations or permits and generally enforce compliance through administrative, civil or criminal enforcement actions, resulting in fines, injunctive relief (which could include requiring us to forego construction, modification or operation of sources of air pollutants) and imprisonment. While weWe may be required to incur certain capital expenditures for air pollution control equipment or other air emissions-related issues, we do not believe that such requirements will have a material adverse effect on our operations.issues.

Greenhouse Gas Regulation. More stringent laws and regulations relating to climate change and greenhouse gases (GHGs) may be adopted in the future and could cause us to incur material expenses in complying with them. The EPA has begun to regulate GHGs as pollutants under the CAA. The EPA adopted rules to permit GHG emissions from stationary sources under the Prevention of Significant Deterioration and Title V permitting programs including the “Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule,” requiring that the largest sources first obtain permits for GHG emissions. The United States Supreme Court, however, ruled that the EPA did not have the authority to require permits for GHG emissions and also did not have the authority to adopt that rule. The Court did hold that if a source required a permit under the program because of other pollutants, the EPA had the authority to require that the source demonstrate that it would use the best available control technology to minimize GHG emissions that exceeded a minimal amount.

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Because of the lack of any comprehensive legislation program addressing GHGs, the EPA is using its existing regulatory authority to promulgate regulations requiring reduction in GHG emissions from various categories of sources, starting with fossil fuel-fired power plants. There is a great deal of uncertainty as to how and when additional federal regulation of GHGs might take place. Some members of Congress have expressed the intention to promote legislation to curb the EPA’s authority to regulate GHGs. In addition to federal regulation, a number of states, individually and regionally, and localities also are considering implementing or have implemented GHG regulatory programs. These regional and state initiatives may result in so–called cap–and–trade programs, under which overall GHG emissions are limited and GHG emission “allowances” are then allocated and sold to and between persons subject to the program. These and possibly other regulatory requirements could result in our incurring material expenses to comply, for example by being required to purchase or to surrender allowances for GHGs resulting from other operations or otherwise being required to control or reduce emissions.

Occupational Safety.Safety. Our operations are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act (OSHA) and its regulations. The OSHA hazard communication standard, the EPA’s community right-to-know regulations and similar state programs may require us to organize and/or disclose information about hazardous materials used or produced in our operations. We believe that we are in substantial compliance with these applicable requirements.

Foreign Regulation.Regulation. We are subject to various laws, regulations and ordinances to protect the environment, human health and safety promulgated by the governmental authorities in Mexico, Europe, Singapore, and in other countries where we do business. Each country has laws and regulations concerning waste treatment, storage and disposal, discharges to waterways, air emissions and workplace safety and worker health. Their respective regulatory authorities are given broad authority to enforce compliance with environmental, health and safety laws and regulations, and can require that operations be suspended pending completion of required remedial action.

Licenses, Permits and Product Registrations.Registrations. Certain licenses, permits and product registrations are required for our products and operations in the United States, Mexico, Europe, Singapore, and in other countries where we do business. The licenses, permits and product registrations are subject to revocation, modification and renewal by governmental authorities. In the United States in particular, producers and distributors of chemicals such as penta and creosote are subject to registration and notification requirements under federal law (including under the Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) and the Toxic Substances Control Act, and comparable state law) in order to sell those products in the United States. Compliance with these laws has had, and in the future will continue to have, a material effect on our business, financial condition and results of operations. Under FIFRA, the law’s registration system requires an ongoing submission to the EPA of substantial scientific research and testing data regarding the chemistry and toxicology of pesticide products by manufacturers.

Available Information

We make available free of charge on our Internet web sitewww.kmgchemicals.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and amendments to such filings, as soon as reasonably practicable after each are electronically filed with, or furnished to, the United States Securities and Exchange Commission (“SEC”). Information about our members of the Board of Directors, standing committee charters, and our Code of Business Conduct are also available, free of charge, through our website.

The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, available atwww.sec.gov. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street NE., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our stock trades under the ticker symbol “KMG” on the New York Stock Exchange. Except for portions of our proxy statement to be filed with the SEC, no information from either the SEC’s website or our website is incorporated herein by reference.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included in this report. We believe the risks and uncertainties described below are the most significant we face. The occurrence of any of the following risks could materially harm our business, financial condition or results of operations. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

The industries in which we operate are competitive. This competition may affect our market share or prevent us from raising prices at the same pace as our costs increase, making it difficult for us to maintain existing business and win new business.

We operate in competitive markets. Certain of our competitors have substantially greater financial and technical resources than we do. Additionally, new competitors may enter our markets. We may be required to reduce prices if our competitors reduce prices, or

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as a result of any other downward pressure on prices for our products and services, which could have an adverse effect on us. In wood preservation chemicals, a former supplier of creosote began competing against us in fiscal year 2014. That has had an adverse effect on our market share and on pricing for that product. In electronic chemicals, we compete with several very large, international companies. Our customers have regularly requested price decreases and maintaining or raising prices has been difficult over the past several years and will likely continue to be so in the near future. Competition in electronic chemicals is based on a number of factors, including price, freight economics, product quality and technical support. If we are unable to compete successfully, our financial condition and results of operations could be adversely affected.

If pentachlorophenol is listed as a Persistent Organic Pollutant under the Stockholm Convention, our ability to manufacture or sell our penta products may be adversely affected.

In October 2012, the United Nations Persistent Organic Pollutant Review Committee recommended continuing the process to consider classifying penta as a persistent organic pollutant (“POP”), and in October 2013 the committee confirmed that decision and concluded that the nature of penta and the chemicals to which it degrades satisfy the definition of a POP. The POP Review Committee comprises representatives from countries that have ratified the treaty known as the Stockholm Convention, which include Canada and Mexico but not the United States. The recent determination is the latest step toward classifying penta as a POP, and restricting or prohibiting uses of penta in countries that have approved the treaty. The full Conference of the Parties of the Stockholm Convention must approve the listing, and if approved, a decision must be made on whether to merely restrict the uses of penta or prohibit its use entirely. The next meeting of the POP Review Committee will be in late October 2014, and will consider a risk analysis of the uses of penta, including the impact of economic and social aspects on any decision. If the POP Review Committee reaches a conclusion at its October 2014 meeting, its decision will then be submitted to the Conference of the Parties for consideration in 2015. We will incur substantial expenses for testing and other regulatory costs to participate and respond to this process. Although the United States is not bound by the determination of the Conference of the Parties, because it did not adopt the Stockholm Convention treaty, Canada and Mexico are governed by the treaty. Although the POP review is a multi-year process, no assurance can be given that the ultimate action of the Conference of the Parties will not have a material adverse effect on our financial condition and results of operation.

We will continue to experience a reduced demand for our wood treating chemicals, if the recent trend toward treating railroad crossties with a borate treatment continues, or if the demand for the wood products on which our chemicals are used decreases, and our business, results of operations, cash flow and financial condition may be adversely affected.

The principal consumers of our wood treating chemicals are industrial wood treating companies who use our products to protect railroad crossties and wood utility poles from insect damage and decay. In the last several years, the larger Class 1 railroads began specifying that wooden crossties be treated with a borate solution in addition to being treated with creosote. This has had the effect of reducing the amount of creosote used per railroad crosstie. We believe this practice will continue, and even expand in the near term. Any such expansion will adversely affect the volume of creosote that we sell and may have a material adverse effect on our business, financial condition and results of operations. In addition, our wood treating products are sold into relatively stable markets. However, demand for treated wood generally increases or decreases with the financial strength and maintenance budgets of railroads and electric utilities, and demand can vary with damage levels suffered from severe storms. A significant decline in either wood crosstie or utility pole sales could have a material adverse effect on our business, financial condition and results of operations.

The industries that we compete in are subject to economic downturns.

An economic downturn in the electronic industry as a whole or other events (e.g., labor disruptions) resulting in significantly reduced production at the manufacturing plants of our customers, could have a material adverse impact on the results of our electronic chemicals segment. Similarly, an economic downturn affecting utilities or major railroadsthe oil and gas industry could have a material adverse effect on demand forin our wood treating chemicals.other chemicals segment.

A significant portion of our revenue and operating income are concentrated in a small number of customers.

We derive a significant portion of our revenues and operating income in our electronic chemicals and wood treatingother chemicals segments from sales of products to a small number of customers. As a result, the loss of Intel, Stella or another significant customer, or a material reduction of demand from any of those customers, could adversely affect our revenues and operating income.

We will continue to pursue new acquisitions or joint ventures, and any such transaction could result in operating or management problems that adversely affect operating results. We remain subject to the ongoing risks of successfully integrating and managing the acquisitions and joint ventures that are completed. In particular, we are now integrating our latest electronic chemicals business acquisition from OM Group, and no assurance can be given that the integration will achieve successfully the advantages sought in the acquisition.

The acquisitions we make expose us to the risk of integrating that acquisition. An integration effort impacts various areas of our business, including our management, production facilities, information systems, accounting and financial reporting, and customer service. Disruption to any of these areas could materially harm our financial condition or results of operations.

In our electronic chemicals segment, we continue to integrateare nearing the completion of our integration of the UPC subsidiaries acquired from OM Group at the end of May 2013. The size and complexity of that effort ishas been substantial, particularly because of the number of facilities involved, the broad geography of the electronic chemicals footprint, and the detailed coordination required to meet the needs of our customers. We believe that a successful integration will allowallows us to achieve important advantages for our business and financial results, particularly from product sourcing and supply chain optimization. We currently anticipate that thisThis integration effort will be completed in fiscal year 2015,is largely complete, and we believe it will generate a substantial improvement in segment operating income. No assurance can be given, however, that the effort will not take longer or be more costly than currently believed, and no assurance can be given that the advantages sought in the integration will be obtained.

We expect to continue to pursue new acquisitions or joint ventures, a pursuit which could consume substantial time and resources. The successful implementation of our operating strategy in current and future acquisitions and joint ventures may require substantial attention from our management team, which could divert management attention from existing businesses. The businesses acquired, or the joint ventures entered into, may not generate the cash flow and earnings, or yield the other benefits anticipated at the time of their acquisition or formation. The risks inherent in any such strategy could have an adverse impact on our results of operation or financial condition.

We are dependent on a limited number of suppliers for certain key raw materials, the loss of any one of which could have a material adverse effect on our financial condition and results of operations.

We depend on a limited number of suppliers for certain key raw materials needed by our businesses, such as sulfuric, hydrofluoric and nitric acids and creosote.acids. Those suppliers are subject to a variety of operational and commercial constraints that can adversely impact our supply. If we were to lose suppliers for key raw materials, we might have difficulty securing a replacement supplier at reasonable cost, and no assurance can be given that such loss would not have a material adverse effect on our financial condition and results of operations.

The classification of pentachlorophenol as a Persistent Organic Pollutant under the Stockholm Convention may adversely affect our ability to manufacture or sell our penta products.

The Conference of the Parties (“COP”), comprising representatives from countries that have ratified the treaty known as the Stockholm Convention, met in May 2015 and considered the classification of penta as a persistent organic pollutant (“POP”). The COP accepted the recommendation of the United Nations Persistent Organic Pollutant Review Committee that the use of penta should be banned except that its use for the treatment of utility poles and cross‑arms could continue for an extended period of six to eleven years. We supply penta to industrial customers who use it primarily to treat utility poles and cross-arms. The United States is not

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bound by the determination of the COP because it did not adopt the Stockholm Convention treaty. Canada and Mexico are governed by the treaty. No assurance can be given that the ultimate action of the COP will not have a material adverse effect on our financial condition and results of operation.

If the demand for the wood products on which our chemicals are used decreases, and our business, results of operations, cash flow and financial condition may be adversely affected.

Our wood treating products are sold into relatively stable markets. However, demand for treated wood generally increases or decreases with the financial strength and maintenance budgets of electric utilities, and demand can vary with damage levels suffered from severe storms. A significant decline in utility pole sales could have a material adverse effect on our business, financial condition and results of operations.

The implementation of a new enterprise resource planning system could cause a financial statement error not to be detected, and could take longer and be more costly than anticipated.

We are in the process of implementing a new enterprise resource planning (“ERP”) system to replace our current system. This is a complex process, and the new system will result in changes to our internal controls over financial reporting, including disclosure controls and procedures. The possibility exists that the migration to a new ERP system could adversely affect the effectiveness of our internal controls over financial reporting. Furthermore, no assurance can be given that the effort will not take longer or be more costly than currently believed.

If we are unable to identify, fund and execute new acquisitions, we will not be able to execute a key element of our business strategy.

Our strategy is to grow primarily by acquiring additional businesses and product lines. We cannot give any assurance that we will be able to identify, acquire or profitably manage additional businesses and product lines, or successfully integrate any acquired business or product line without substantial expenses, delays or other operational or financial difficulties. Financing for acquisitions may not be available, or may be available only at a cost or on terms and conditions that are unacceptable to us. Further, acquisitions may involve a number of special risks or effects, including diversion of management’s attention, failure to retain key acquired personnel, unanticipated events or circumstances, legal liabilities, impairment of acquired intangible assets and other one-time or ongoing acquisition-related expenses. Some or all of these special risks or effects could have a material adverse effect on our financial and operating results. In addition, we cannot assure you that acquired businesses or product lines, if any, will achieve anticipated revenues and earnings.

The consideration we pay in connection with an acquisition also may affect our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash or obtain debt or equity financing. To the extent that we issue shares of our capital stock or other rights to purchase shares of our common stock as consideration for an acquisition or in connection with the financing of an acquisition, including options or other rights, our existing common shareholders may be diluted, and our earnings per share may decrease.

We may experience increased costs and production delays if suppliers fail to deliver materials or if prices increase for raw materials and other goods and services that we purchase from third parties.

We purchase raw materials for our electronic chemicals business from a number of domestic and foreign suppliers. Although we believe that the raw materials we require in our electronic chemicals business will be available in sufficient supply on a competitive basis for the foreseeable future, continued increases in the cost of raw materials, including energy and other inputs used to make our products, could affect future sales volumes, prices and margins for our products. If a supplier should cease to deliver goods or services to us, we would in most cases find other sources. However, such a disruption could result in added cost and manufacturing delays. In addition, political instability, war, terrorism and other disruptions to international transit routes could adversely impact our ability to obtain key raw materials in a timely fashion, or at all.

Increases in the price of our primary raw materials may decrease our profitability and adversely affect our liquidity, cash flow, financial condition and results of operations.

The prices we pay for raw materials in our businesses may increase significantly, and we may not always be able to pass those increases through to our customers fully and timely. In the future, we may be unable to pass on increases in our raw material costs, and raw material price increases may erode the profitability of our products by reducing our gross profit. Price increases for raw materials may also increase our working capital needs, which could adversely affect our liquidity and cash flow. For these reasons, we cannot assure you that raw material cost increases in our businesses would not have a material adverse effect on our financial condition and results of operations.

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Our ability to make payments on our debt will be contingent on our future operating performance, which will depend on a number of factors that are outside of our control.

Our ability to make principal and interest payments on our debt is contingent on our future operating performance, which will depend on a number of factors, many of which are outside of our control. The degree to which we are leveraged could have other important negative consequences, including the following:

If we are unable to make scheduled debt payments or comply with the other provisions of our debt instruments, our lenders may be permitted under certain circumstances to accelerate the maturity of the indebtedness owed to them and exercise other remedies provided for in those instruments and under applicable law.

Restrictions in our debt agreements could limit our growth and our ability to respond to changing conditions.

Our debt agreements contain a number of covenants which affect our ability to take certain actions and restrict our ability to incur additional debt. These include covenants that prohibit certain acquisitions that are not approved by our lenders. In addition, our debt agreements require us to maintain certain financial ratios and satisfy certain financial condition tests, which may require us to take action to reduce our debt or take some other action to comply with them.

These restrictions could limit our ability to obtain future financings, make needed capital expenditures, withstand a future downturn in our business or the economy in general or otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of the limitations that these restrictive covenants impose on us.

A breach of any of these covenants would result in a default under the applicable debt agreement. A default, if not waived, could result in acceleration of the debt outstanding under the agreement and in a default with respect to and accelerationcertain of the debt outstanding under our other debt agreements. The accelerated debt would become immediately due and payable. If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us.

We are subject to extensive environmental laws and regulations and may incur costs that have a material adverse effect on our financial condition as a result of violations of or liabilities under environmental laws and regulations.

Like other companies involved in environmentally sensitive businesses, our operations and properties are subject to extensive and stringent federal, state, local and foreign environmental laws and regulations, including those concerning, among other things:

The EPA and other federal and state agencies in the United States, as well as comparable agencies in Mexico, Italy and in other countries where we have facilities or sell our products, have the authority to promulgate regulations that could have a material adverse impact on our operations. These environmental laws and regulations may require permits for certain types of operations, require the installation of

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expensive pollution control equipment, place restrictions upon operations or impose substantial liability for pollution resulting from our operations. We expend substantial funds to minimize the discharge of hazardous materials in the environment and to comply with governmental regulations relating to protection of the environment. Compliance with environmental and health and safety laws and regulations has resulted in ongoing costs for us, and could restrict our ability to modify or expand our facilities or continue production, or require us to install costly pollution control equipment or incur significant expenses, including remediation costs. We have incurred, and expect to continue to incur, significant costs to comply with environmental and health and safety laws.laws or to address liabilities for contaminated facilities. Federal, state and foreign governmental authorities may seek fines and penalties, as well as injunctive relief, for violation of the various laws and governmental regulations, and could, among other things, impose liability on us for cleaning up the damage resulting from a release of pesticides, hazardous materials or other chemicals into the environment.

If our products are not re-registered by the EPA or are re-registered subject to new restrictions, our ability to sell our products may be curtailed or significantly limited.

Our creosote and penta product registrations are under continuous review by the EPA under FIFRA. We have submitted and will submit a wide range of scientific data to support our U.S. registrations. To satisfy the registration review, we are required to demonstrate, among other things, that our products will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. In September 2008, the EPA announced that it had determined that creosote and penta werewas eligible for re-registration, but the EPA proposed new restrictions on the use of those productspenta that have required our customers to incur substantial additional costs and to revise certain operating procedures. The EPA also required that creosote and penta registrants provide additional research and testing data respecting certain potential risks to human health or the environment as a further condition to continued re-registration. The cancer risk profile of penta was recently reviewed under the National Toxicology Program, and the EPA will reconsider its risk assessment of penta and may subject penta to a greater degree of regulatory or commercial scrutiny. We cannot tell you when or if the EPA will issue a final decision concluding that the conditions of re-registration for our creosote and penta products have been satisfied, and that all additional testing requirements have been satisfied. Even though EPA concluded that our wood treating chemicals were eligible for re-registration in 2008, our products will beare subject to further review and data submission requirements, and we cannot assure you that our products will not be subject to use or labeling restrictions that may have an adverse effect on our financial position and results of operations. The failure of our current or future-acquired products to be re-registered or to satisfy the registration review by the EPA, or the imposition of new use, labeling or other restrictions in connection with re-registration could have a material adverse effect on our financial condition and results of operations.

Our use of hazardous materials exposes us to potential liabilities.

Our manufacturing and distribution of chemical products involves the controlled use of hazardous materials. Our operations, therefore, are subject to various associated risks, including chemical spills, discharges or releases of toxic or hazardous substances or gases, fires, mechanical failure, storage facility leaks and similar events. Our suppliers are subject to similar risks that may adversely impact the availability of raw materials. While we adapt our manufacturing and distribution processes to the environmental control standards of regulatory authorities, we cannot completely eliminate the risk of accidental contamination or injury from hazardous or regulated materials, including injury of our employees, individuals who handle our products or goods treated with our products, or others who claim to have been exposed to our products, nor can we completely eliminate the unanticipated interruption or suspension of operations at our facilities due to such events. We may be held liable for significant damages or fines in the event of contamination or injury, and such assessed damages or fines could have a material adverse effect on our financial performance and results of operations.

The distribution and sale of our products is subject to prior governmental approvals and thereafter ongoing governmental regulation.

Our products are subject to laws administered by federal, state and foreign governments, including regulations requiring registration, approval and labeling of our products. The labeling requirements restrict the use and type of application for our products. More stringent restrictions could make our products less desirable which would adversely affect our sales and profitability. All states where our products are used also require registration before they can be marketed or used in that state.

Governmental regulatory authorities have required, and may require in the future, that certain scientific testing and data production be provided on our products. Under FIFRA, the federal government requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement significantly increases our operating expenses, and we expect those expenses will continue in the future. Because scientific analyses are constantly improving, we cannot determine with certainty whether or not new or additional tests may be required by regulatory authorities. While Good Laboratory Practice standards specify the minimum practices and procedures that must be followed in order to ensure the quality and integrity of data related to these tests submitted to the EPA, there can be no assurance that the EPA will not request certain tests or studies be repeated. In addition, more stringent legislation or requirements may be imposed in the future. We can provide no assurance that our resources will be adequate to meet the costs of regulatory compliance or that the cost of such compliance will not adversely affect our profitability.

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The Registration Evaluation and Authorization of Chemicals (“REACH”) legislation may affect our ability to manufacture and sell certain products in the European Union.

REACH, which was effective on June 1, 2007, requires chemical manufacturers and importers in the European Union to prove the safety of their products. As a result, we were required to pre-register certain products and file comprehensive reports, including testing data, on each chemical substance, and perform chemical safety assessments. Additionally, substances of high concern are subject to an authorization process. Authorization may result in restrictions on certain uses of products or even prohibitions on the manufacture or importation of products. The full registration requirements of REACH will be phased in over several years. We will incur additional expense to cause the registration of our products under these regulations. REACH may also affect our ability to manufacture and sell certain products in the European Union.

Our products may be rendered obsolete or less attractive by changes in industry requirements or by supply-chain driven pressures to shift to environmentally preferable alternatives.

Changes in regulatory, legislative and industry requirements, or changes driven by supply-chain pressures, may shift current customers away from products using penta creosote or certain of our other products and toward alternative products that are believed to have fewer environmental effects. The EPA, foreign and state regulators, local governments, private environmental advocacy organizations and a number of large industrial companies have proposed or adopted policies designed to decrease the use of a variety of chemicals, including penta creosote and others included in certain of our products. Our ability to anticipate changes in regulatory, legislative, and industry requirements, or changes driven by supply-chain pressures, will be a significant factor in our ability to remain competitive. Further, we may not be able to comply with changed or new regulatory or industrial standards that may be necessary for us to remain competitive.

We cannot assure you that the EPA, foreign and state regulators and local governments will not restrict the uses of penta creosote or certain of our other products or ban the use of one or more of these products, or that the companies who use our products may decide to reduce significantly or cease the use of our products voluntarily. As a result, our products may become obsolete or less attractive to our customers.

Volatility of oil and natural gas prices can adversely affect demand for our products and services.

Volatility in oil and natural gas prices may impact our customers’ activity levels and spending for our products and services.  Expectations about future prices and price volatility are important for determining future spending levels for customers of our industrial valve lubricants and sealants products.

Historically, world-wide oil and natural gas prices and markets have been volatile, and may continue to be volatile in the future. In particular, the prices of oil and natural gas were highly volatile in 2014 and 2015 and declined dramatically. Prices for oil and natural gas are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include, but are not limited to, increases in supplies from US shale production, international political conditions, including recent uprisings and political unrest in the Middle East and Africa, the European sovereign debt crisis, the domestic and foreign supply of oil and natural gas, the level of consumer demand due to slowing economic growth in China and continued weak economic growth in Europe, weather conditions, domestic and foreign governmental regulations and taxes, the price and availability of alternative fuels, the health of international economic and credit markets, the ability of the members of the Organization of Petroleum Exporting Countries and other state-controlled oil companies to agree upon and maintain oil price and production controls, and general economic conditions.

Lower oil and natural gas prices generally lead to decreased spending by customers of our industrial valve lubricants and sealants. While higher oil and natural gas prices generally lead to increased spending by our customers in that business, sustained high energy prices can be an impediment to economic growth and to other segments of our business as described below, and can therefore negatively impact spending by some of our customers. Our customers also take into account the volatility of energy prices and other risk factors by requiring higher returns for individual projects if there is higher perceived risk. Any of these factors could affect the demand for oil and natural gas for our customers in the industrial lubricants and sealants business and could have a material adverse effect on our results of operations.

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The profitability of our electronic chemicals and some of our other chemicals could also be adversely affected by high petroleum prices.

The profitability of our business depends, to a degree, upon the price of petroleum products, both as a component of transportation costs for delivery of products to our customers and as a raw material used to make our products, including penta solutions. High petroleum prices also affect the businesses of our customers. Our penta customers dissolve our product in petroleum based materials to make a treating solution for utility poles. Unfavorable changes in petroleum prices or in other business and economic conditions affecting our customers could reduce purchases of our products, and impose practical limits on our pricing. Any of these factors could lower our profit margins, and have a material adverse effect on our results of operations. We are unable to predict what the price of crude oil and petroleum-based products will be in the future. We may be unable to pass along to our customers the increased costs that result from higher petroleum prices.

We may be unable to identify liabilities associated with the properties and businesses that may be acquired or obtain protection from sellers against them.

The acquisition of properties and businesses requires assessment of a number of factors, including physical condition and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. The assessments made result from a due diligence review of the subject properties and businesses, but such a review may not reveal all existing or potential problems. We may not be able to obtain comprehensive contractual indemnities from the seller for liabilities that it created or that were created by any predecessor of the seller. We may be required to assume the risk of the physical or environmental condition of the properties and businesses in addition to the risk that the properties and businesses may not perform in accordance with expectations.

We are dependent upon many critical systems and processes, many of which are dependent upon hardware that is concentrated in a limited number of locations. If a catastrophe or cyber security event were to occur at one or more of those locations or with our data, it could have a material adverse effect on our business.

Our business is dependent on certain critical systems, which support various aspects of our operations, from our computer network to our billing and customer service systems. The hardware supporting a large number of such systems is housed in a small number of locations. If one or more of these locations were to be subject to fire, natural disaster, terrorism, power loss, or other catastrophe, it could have a material adverse effect on our business. While we believe that we maintain reasonable disaster recovery programs, there can be no assurance that, despite these efforts, any disaster recovery, security and service continuity protection measures we may have or may take in the future will be sufficient.

In addition, we may be susceptible to acts of aggression on our critical operating system. “Cyber security”Cyber security events such as computer viruses, electronic break-ins or other similar disruptive technological problems could also adversely affect our operations. Should such an event occur in the future, our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our computer systems and could affect our financial and operating results, causing disruptions in operations, damage of reputation, litigation, increased costs, or inaccurate information reported by our manufacturing facilities.

Weather may adversely impact our ability to conduct business.

Much of the creosote we sell is supplied from Europe, and we import that product through a terminal in New Orleans, Louisiana. Our penta facility in Matamoros, Mexico, and several suppliers of raw materials for our electronic chemicals business are also located on or near the Gulf of Mexico. Thus, we are dependent on terminals and facilities located in coastal areas for a substantial portion of certain of the raw materials and creosote we use, the penta we make and for our electronic chemicals products. These terminals and facilities are vulnerable to hurricanes, rising water and other adverse weather conditions that have the potential to cause substantial damage and to interrupt operations. For example, in 2005 Hurricane Katrina temporarily closed oura terminal in New Orleans, Louisiana temporarilythat we used for creosote distribution (a business we have since divested) and forced us to locate an interim substitute terminal. There can be no assurance that adverse weather conditions will not affect our importation of creosote or the availability of penta and certain other raw materials in the future, the occurrence of which could have a material adverse effect on our financial condition and results of operations. More generally, severe weather conditions have the potential to adversely affect our operations, damage facilities and increase our costs, and those conditions may also have an indirect effect on our financing and operations by disrupting services provided by service companies or suppliers with whom we have a business relationship. We may not be able to recover through insurance some or any of the damages, losses or costs that may result from potential physical effects of climate.

Our business success depends significantly on the reliability and sufficiency of our manufacturing facilities.

Our revenues depend significantly on the continued operation of our manufacturing facilities. The operation of our facilities involves risks, including the breakdown, failure, or substandard operation or performance of equipment, power outages, explosions, fires, earthquakes, other natural disasters, terrorism and other unscheduled downtime. The occurrence of material operational problems, the loss or shutdown of our facilities over an extended period of time due to these or other events could have a material adverse effect on our financial performance and operating results.

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Our business is subject to many operational risks for which we may not be adequately insured.

We cannot assure you that we will not incur losses beyond the limits of, or outside the coverage of, our insurance policies. From time to time, various types of insurance for companies in the chemical industry have not been available on commercially acceptable terms or, in some cases, have been unavailable. In addition, we cannot assure you that in the future we will be able to maintain existing coverage or that our insurance premiums will not increase substantially.

We maintain limited insurance coverage for sudden and accidental environmental damages. We do not believe that insurance coverage for environmental damages that occur over time is available at a reasonable cost. Also, we do not believe that insurance coverage for the full potential liability that could be caused by sudden and accidental incidences is available at a reasonable cost. Accordingly, we may be subject to an uninsured or under-insured loss in such cases.

Our business may be adversely affected by cyclical and seasonal effects.

In general, the chemical industry is cyclical and demand for our wood treating products and lubricants is somewhat seasonal, withseasonal. There is greater demand for our wood treating chemicals in the summer than in the winter because of the effects of weather on timber harvest.harvest, and the pipeline customers of our lubricants business tend to prefer doing maintenance on their systems from the spring through the fall seasons. Our electronic chemical products are often used to produce semiconductors for industries and applications that are cyclical in nature, as well as subject to customer marketing programs and requirements. There can be no assurance that our business, resources and margins will not be adversely affected by seasonal or cyclical effects.

We depend on our senior management team and the loss of any member could adversely affect our operations.

Our success is dependent on the management and leadership skills of our senior management team, including Christopher T. Fraser, our President and Chief Executive Officer, Malinda G. Passmore, our Chief Financial Officer, Ernest C. Kremling, our Vice President of Operations, Andrew Lau, our Vice President of Electronic Chemicals, Michael A. Hoffman, our Vice President and General Manager of Wood Treating Chemicals, Jason Councill, our Vice President and General Manager of Industrial Valve Lubricants and Sealants, Christopher W. Gonser, our Vice President of Human Resources, and Roger C. Jackson, our General Counsel. While we have succession plans for key positions, the loss of any member of our senior management team or an inability to attract, retain and maintain additional qualified personnel could prevent us from implementing our business strategy. We cannot assure you that we will be able to retain our existing senior management personnel or attract additional qualified personnel when needed.

If we are unable to successfully negotiate with the labor unions representing our employees, we may experience a material work stoppage.

About 18.3%19.3% of our full-time employees are represented by labor unions, workers councils or comparable organizations, particularly in Mexico and Europe. As our current agreements expire, we cannot assure you that new agreements will be reached at the end of each period without union action, or that a new agreement will be reached on terms satisfactory to us. An extended work stoppage, slowdown or other action by our employees could significantly disrupt our business. Future labor contracts may be on terms that result in higher labor costs to us, which also could adversely affect our results of operations.

Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of our foreign currency-denominated sales and earnings, and generally leads us to raise international pricing, potentially reducing demand for our products. Margins on sales of our products in foreign countries and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, we may decide not to raise local prices to fully offset the dollar’s strengthening, or at all, which would adversely affect the U.S. dollar value of our foreign currency denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to our foreign currency-denominated sales and earnings, could cause us to reduce international pricing. Additionally, strengthening of foreign currencies may also increase our cost of product components denominated in those currencies, thus adversely affecting gross margins.

Additionally, because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies affect our net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies. We do not use derivative financial instruments to reduce our net exposure to currency exchange rate fluctuations. We cannot assure you that fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies or the currencies of large developing countries, would not materially affect our financial results.

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We are subject to narcotics gang disruption in Mexico and to possible risk of terrorist attacks, each of which could adversely affect our business.

Our penta manufacturing facility is located in Matamoros, Mexico, an area where there has been violent crime involving narcotics gang warfare. Our penta operations could be disrupted or otherwise affected by narcotics gang activities in the Mexico border area where our facility is located. We are not insured against terrorist or narcotics gang attacks, and there can be no assurance that losses that could result from an attack on our facilities or personnel, railcars or tank trucks would not have a material adverse effect on our business, results of operations and financial condition. Since September 11, 2001, there has been concern that chemical manufacturing facilities and railcars carrying hazardous chemicals may be at an increased risk of terrorist attacks. Federal, state and local governments have begun a regulatory process that could lead to new regulations impacting the security of chemical industry facilities and the transportation of hazardous chemicals. Our business could be adversely impacted if a terrorist incident were to occur at any chemical facility or while a railcar or tank truck was transporting chemicals.

We are subject to risks inherent in foreign operations, including changes in social, political and economic conditions.

We have facilities in the United States, Mexico, Europe and Singapore, and generate a significant portion of our sales in foreign countries. Like other companies with foreign operations and sales, we are exposed to market risks relating to fluctuations in foreign currency exchange rates. At this time, the Euro and the Great Britain Pound are the functional currencies of our operations in Europe. We are also exposed to risks associated with changes in the laws and policies governing foreign investments in Mexico, Europe and Asia, and to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment. While such changes in laws, regulations and conditions have not had a material adverse effect on our business or financial condition, we cannot assure you as to the future effect of any such changes.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

As of July 31, 2014,2015, we own or lease the following properties.

Although we have sold our animal health products business, we lease our Elwood, Kansas facility to an unrelated party that manufactures animal health products. The tenant has an option to purchase the facility. We believe that all of these properties are adequately insured, in good condition and suitable for their anticipated future use. We believe that if the leases for our offices and facilities in Houston, Malaysia and France are not renewed or are terminated, we can obtain other suitable facilities. If our warehouses and facilities in Singapore and the United Kingdom, respectively, were not renewed or terminated, no assurance can be given that we could obtain suitable substitutes without incurring substantial expense. We believe, however, that we will be able to renew our leases on acceptable terms and conditions at the end of their respective terms.

In August 2015 we entered into a lease for corporate offices in Fort Worth, Texas. We intend to relocate our corporate offices from Houston to Fort Worth in December 2015. The new offices consist of 27,778 square feet of space, and the lease extends to December 2028.

We also have long-term bulk tank storage agreements with commercial terminal facilities where we store creosote for distribution, and have several storage agreements with commercial warehouses from which we distribute our electronic chemicals. Our bulk storage terminals are on the Mississippi River near New Orleans at Avondale, Louisiana and near Savannah, Georgia. We are in the process of exiting the Savannah facility. The terminals are used primarily for creosote imported by us. If our tank storage agreements are not renewed or are terminated, we believe we can obtain other suitable facilities.

ITEM 3. LEGAL PROCEEDINGS

The information set forth in Note 8 to the consolidated financial statements included in Item 8 of Part II of this report is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUES PURCHASERISSUER PURCHASES OF EQUITY SECURITIES

Our common stock, par value $.01 per share, is traded on The New York Stock Exchange (trading symbol KMG). As of October 24, 2014,November 23, 2015, there were 11,659,00111,715,586 shares of common stock issued and outstanding held by approximately 436430 shareholders of record, and more than 300 round lot holders. The following table represents the high and low sale prices for our common stock as reported by the New York Stock Exchange for fiscal year 20142015 and fiscal year 2013.2014. The table also shows quarterly dividends we declared and paid during fiscal years 20132015 and 2012.2014.

We intend to pay out a reasonable share of cash from operations as dividends, consistent on average with the payout record of past years. We declared and paid a dividend in the first quarter of fiscal year 20152016 of $0.03 per share, or approximately $349,000.$350,000. The current quarterly dividend rate represents an annualized dividend of $0.12 per share. The future payment of dividends, however, will be within the discretion of the Board of Directors and depends on our profitability, capital requirements, financial condition, growth, business opportunities and other factors which our Board of Directors may deem relevant. We repurchased no shares in fiscal years 20142015 or 2013.2014.

Our 2009 Long-Term Incentive Plan was submitted to the shareholders and approved at our annual meeting of shareholders on December 8, 2009. Our 2004 Long-Term Incentive Plan was adopted and approved by the shareholders in 2004. Our 1996 Stock Option Plan was adopted and approved by its shareholders in 1996. The 1996 Stock Option Plan terminated by expiration of its original term as of July 31, 2007, and no options were outstanding under the plan at July 31, 2014.

The following information respecting our outstanding options, warrants and rights is provided as of July 31, 2014:2015:

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ITEM 6. SELECTED FINANCIAL DATA

The following table shows selected historical consolidated financial data for the five fiscal years ended July 31, 2014.2015. The consolidated statements of income and cash flow data for each of the three fiscal years ended July 31, 2014,2015, and the balance sheet data as of July 31, 20142015 and 2013,2014, have been derived from our audited consolidated financial statements included elsewhere in this report. The consolidated statements of income and cash flow data for the fiscal years ended July 31, 20112012 and 2010,2011, and the balance sheet data as of July 31, 2013, 2012 2011 and 20102011 have been derived from our previously issued audited consolidated financial statements. The data should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data” section of this report and our consolidated financial statements and the related notes and other financial information included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the section entitled “Risk Factors” and elsewhere in this report.

Introduction

We manufacture, formulate and globally distribute specialty chemicals. We operate specialty chemical businesses selling electronic chemicals, and industrial wood treating chemicals.chemicals and industrial valve lubricants and sealants. Our electronic chemicals are sold to the semiconductor industry where they are used primarily to clean and etch silicon wafers in the production of semiconductors. Our wood treating chemicals, based on penta, and creosote, are used by industrial customers primarily to extend the useful life of utility poles and railroad crossties.cross-arms. Our valve lubricants and sealants enable optimal valve operation and help prevent costly downtime at oil and gas storage facilities and pipelines. In addition, our lubricants and sealants provide important safety benefits along with preventing fugitive valve emissions.

In fiscal year 2014,2015, approximately 71.8%82.9% of our revenues were from our electronic chemicals segment, and 28.2%17.1% were from our other chemicals segment, which includes our wood treating chemicals and our industrial wood preservation chemicals.valve lubricants and sealants.

Our results of operations are impacted by various competitive and other factors including:

Acquisition of Valves Incorporation of Texas

Acquisition of Ultra Pure Chemicals Business

On May 31, 2013, we completed our acquisition of the ultra pure chemicals (“UPC”) business subsidiaries of OM Group, with facilities located in the United States, the United Kingdom, France and Singapore. The final purchase price for the acquisition was $63.2 million. The subsidiaries sell high purity and ultra purity, wet process chemicals to the semiconductor industry. See Note 2 to the consolidated financial statements included in this report.

Sale of Creosote Distribution Business

On January 16, 2015, we sold our creosote distribution business, part of our previous wood treating chemicals segment, to Koppers Inc. pursuant to an asset purchase agreement. Creosote is a wood preservative used to treat utility poles and railroad crossties. The transaction closed concurrently with the signing of the asset purchase agreement. Assets that were sold in the transaction included our EPA registrations for creosote, creosote inventory, railcar and tank terminal leases and various customer agreements. The sale price for the assets was approximately $14.9 million. The gain on the sale was $5.4 million.

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Sale of Elwood Facility

We had retained the real estate and building of our facility in Elwood, Kansas when we sold our animal health business in 2012 and had been leasing the facility to a third party since that time. The tenant, Ritepack, Inc., exercised its option to purchase the facility. The sale price was $2.5 million, payable in cash on the closing date. The sale of the facility closed on February 26, 2015. We recognized a loss on the sale of approximately $29,000.

Restructuring and Realignment of Operations

In October 2013, we announced that, as part of a global restructuring of our electronic chemicals operations, we would close our Fremont, California manufacturing site acquired in the UPC acquisition, and shift production primarily to our Hollister, California and Pueblo, Colorado facilities. We ceased production at the Fremont facility, and completed site decommissioning by the end of fiscal year 2014. In November 2013, we announced that we would close a facility in Milan, Italy, and shift some production to our facilities in France and the United Kingdom. We will continue to operate a warehouse facility in Milan. We have begunare decommissioning certain manufacturing equipment in Milan, and are transitioning products from there to other sites in Europe. Our global restructuring remains on schedule.That effort will be completed in calendar year 2015.

Total costs related to restructuring incurred for fiscal year 20142015 was $3.9$1.3 million, and an additional $2.4including $0.9 million related to accelerated depreciation. We estimate that restructuringRestructuring charges, exclusive ofincluding accelerated depreciation, will range between $7.0have been $7.6 million and $9.0 million cumulatively overin the aggregate in fiscal years 2014 and 2015 and that accelerated2014. Accelerated depreciation with respect to the Fremont and Milan facilities will bewas approximately $4.0$3.3 million over those two fiscal years. See Note 14 to the financial statements included in this report.

On October 13, 2014, we announced a realignment of our hydrofluoric acid business. We will not renewbusiness, and subsequently exited the toll manufacturing agreement withfacility operated for us by Chemtrade Logistics (“Chemtrade”) under which it produces hydrofluoric acid for us at itsin Bay Point, California facility (the tolling agreement had formerly been with General Chemical). We will instead obtain our requirements for hydrofluoric acid products under supply agreements with other producers. We acquired certain manufacturing equipment at the Bay Point facility in our purchase of the electronic chemicals business of General Chemical in March 2010.California. Under the toll manufacturing agreement with Chemtrade, we are to pay or reimburse Chemtrade for certain costs associated with the cessation of operations at Bay Point, including certain employee costs and the decommissioning, dismantling and removal of our manufacturing equipment at the site. Operations are expected to cease by March 2015. We estimate that we will incur realignment charges of $2.5-$4.0 million for decontamination, decommissioning and dismantling, and $2.5-$2.8 million for accelerated depreciation. Additionally, we are obligated to pay certain employee costs that we are unable to estimate at this time. In fiscal year 2014, we established an asset retirement obligation of $3.7 million for decontamination, decommissioning and dismantling at Bay Point andPoint. Operations ceased in the third quarter of fiscal year 2015. In fiscal year 2015, we incurred realignment charges of $4.8 million for accelerated depreciation. Additionally, we incurred certain employee costs of $0.8 million. In fiscal year 2014 we recorded accelerated depreciation expense of $1.0$1.8 million against that obligation,our assets and the Company recognized $0.8 million of accelerated depreciation.retirement obligation. In addition, we have recognized an impairment charge of $2.7 million in fiscal year 2014 with respect to certain manufacturing equipment at Bay Point that is unrelated to hydrofluoric acid production. We have held certain assets at Bay Point for redeployment to other facilities. Although some of those assets have been redeployed, management has now determined to dispose of the remaining assets, and we have recognized the impairment loss.were no longer in service. See Note 1514 to the financial statements included in this report.

Sale of the Animal Health Business

On March 1, 2012, we sold our animal health business to Bayer Healthcare, LLC for a purchase price of approximately $10.2 million, including $1.0 million held in escrow. The escrowed amount is being held pending final acceptance by EPA of certain studies being performed on tetrachlorvinphos. We retained the real estate and building at our facility in Elwood, Kansas, but that facility has since been leased through February 28, 2015 to another manufacturer in the animal health business who took over operations there, including the hiring of our employees. The tenant has an option to purchase the facility.

Results of Operations

Segment Data

Segment data is presented for our two reportable segments for the three fiscal years ended July 31, 2015, 2014 2013 and 2012.2013. The segment data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The information presented for the other chemicals segment for fiscal years 2014 and 2013 represents information that was previously reported in our wood treating chemicals operations. Following the sale of our creosote distribution business in January 2015 and the acquisition of our industrial valve lubricants and sealants business on May 1, 2015, our wood treating chemicals operations were combined with the newly acquired industrial valve lubricants and sealants business to form the other chemicals segment, as discussed in Note 13 to our consolidated financial statements.  

Segment Sales

In fiscal year 2015, net sales in the electronic chemicals segment were $265.6 million, an increase of $11.8 million, or 4.6% over net sales of $253.8 million in fiscal year 2014. In fiscal year 2014, net sales fromin the electronic chemicals were $253.8 million, an increase ofsegment increased $88.0 million, or 53.1%, over net sales of $165.8 million in fiscal year 2013. In fiscal year 2013,2015, the increase in net sales from the prior year came primarily from increased sales volume and pricing in North America and Asia, offset to a degree by weaker sales in Europe, primarily due to the electronic chemicals segment increased $6.3 million, or 4.0%, over net sales of $159.5 million instronger U.S. dollar. In fiscal year 2012. In both fiscals year 2014, and 2013, the increase in net sales from the prior year came primarily from the acquisition of the UPC business subsidiaries of OM Group on May 31, 2013.

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Net sales of wood treatingother chemicals decreased by $44.7 million, or 44.9%, to $54.8 million in fiscal year 2015 from $99.5 million in fiscal year 2014. Net sales of other chemicals in fiscal year 2014 increased by $2.3 million, or 2.4%, to $99.5 million in fiscal year 2014 from $97.2 million in fiscal year 2013. NetThe decrease in other chemicals net sales of wood treating chemicals in fiscal year 2013 decreased2015 was due to lower creosote sales. Creosote sales ceased upon the divestiture of the creosote business in January 2015. The lower creosote sales were partially offset by $15.8 million, or 14.0%, from $113.0 millionsales in fiscal year 2012.the industrial valve lubricants and sealants business acquired in May 2015. The increase in fiscal year 2014 in wood treating productsother chemicals net sales came mostly from an increase in penta block sales to customers, offset by lower creosote volume. The decrease in fiscal year 2013 in wood treating products net sales came from a reduction in creosote demand as customers pre-treated railroad ties with a borate solution, resulting in a reduced amount of creosote used in each tie.

Segment Income from Operations

Income from operations of the electronic chemicals segment was $21.8 million in fiscal year 2015, as compared to $14.1 million in fiscal year 2014 as compared toand $14.0 million in fiscal year 2013 and $13.4 million in fiscal year 2012.2013. Income from operations of electronic chemicals increased by $100,000$7.7 million, or 54.6%, in fiscal year 2015 as compared to the prior year period, and increased by $0.1 million, or 0.01%, in fiscal year 2014 as compared to the prior year period, and increased by $600,000, or 4.5%, inperiod.

The fiscal year 2013 as compared2015 improvement in income from operations in electronic chemicals was primarily due to the prior year period.

increased sales in North America and Asia, partially offset by weaker sales in Europe. The fiscal year 2014 improvement in income from operations in electronic chemicals was primarily due to the effect of theour acquisition of the UPC business net of integration expense of approximately $1.2 million and additional depreciation and amortization of $5.4 million. Integration expenses in fiscal yearyears 2015 and 2014 were primarily for consulting, professional services and travel expenses, including first yearSarbanes-Oxley implementation and testing at the acquired UPC subsidiaries. In fiscal year 2013, income from operations in electronic chemicals was burdened by approximately $577,000 for acquisition and integration expenses, primarily for consulting services and travel expenses, benefited by approximately $900,000 from the acquisition of the UPC business.

Depreciation expense for the electronic chemicals segment for fiscal year 20142015 includes accelerated depreciation of assets of $261,000 at our Fremont, California facility, $0.8$4.8 million at the Bay Point, California facility, and $2.1$0.9 million at our Milan, Italy facility, as well asincluding accelerated depreciation related to asset retirement obligations at Bay Point of $1.0 million.Point. We ceased operations at Fremont in fiscal year 2014, and have announced that we will exitexited from our toll manufacturing arrangement and ceaseceased operations at the Bay Point facility in Marchthe third fiscal quarter of 2015. We have also announced that we will closeclosed a portion of our Milan facility. These decisions resulted in a reassessment of the useful lives of certain equipment at each facility and in accelerated depreciation. In addition, we recognized an impairment loss in fiscal year 2014 of $2.7 million on certainlong-lived assets at the Bay Point facility that are no longer in service and management has concluded will be disposed of.

In fiscal year 2014,2015, income from operations of the wood treatingother chemicals segment was $8.4$8.7 million as compared to $8.4 million in fiscal year 2014 and $10.5 million in fiscal year 2013 and $15.6 million in fiscal year 2012.2013. Income from operations for the wood treatingother chemicals segment increased by $0.3 million, or 3.6%, in fiscal year 2015 and decreased by $2.1 million, or 20.0%, in fiscal year 2014 and decreased by $5.1 million, or 32.7%, in fiscal year 2013 as compared to the respective prior year period.

Income from operations of the other chemicals segment improved in fiscal year 2015 over the prior year because of the acquisition of our industrial valve lubricants and sealants business and due to improved sales of penta products and lower raw material costs. In fiscal year 2014, creosote and penta volume improved approximately 3.6% and 9.4%, respectively, but operating income in wood treatingother chemicals was down due to lower pricing of the hydrochloric acid that is a byproduct of penta production, higher raw material costs for penta and creosote and lower creosote pricing. In fiscal year 2013, income from operations in the wood treating segment suffered from a 16.3% decline in creosote sales volume, primarily because of the move by many customers to pre-treat railroad crossties with borate as a way to extend the service life of such crossties. The treatment of railroad ties with a combination of borates and creosote results in a reduced amount of creosote used to treat each crosstie.

Net Sales and Gross Profit

Net Sales and Gross Profit for Fiscal Year 2015 vs. Fiscal Year 2014

Net sales decreased $32.9 million, or 9.3% in fiscal year 2015 to $320.5 million from $353.4 million in fiscal year 2014. Net sales for fiscal year 2015 decreased compared to the prior year period primarily because creosote sales ceased upon the divestiture of the creosote business in January 2015. The decrease was partially offset by increased sales in the electronic chemicals segment and the acquisition of the industrial valve lubricants and sealants business acquired in May 2015.

Gross profits increased by $6.0 million, or 5.8%, to $109.5 million compared to $103.5 million in fiscal year 2014. The increase in gross profit was the result of increased sales in our electronic chemicals business and the acquisition of our industrial valve lubricants and sealants business. Gross profit as a percent of sales increased in fiscal 2015 to 34.2% from 29.3% in fiscal 2014. The improvements in gross profits as a percentage of sales in fiscal year 2015 as compared to 2014 was due to the sale of our creosote distribution business, which included products with lower profit margins. In addition, gross profit margins increased in electronic chemicals due to synergies realized from our manufacturing consolidation in North America.

Because other companies may include certain of the costs that we record in cost of sales in 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 cost of sales, our gross profit may not be comparable to that reported by other companies.

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Net Sales and Gross Profit for Fiscal Year 2014 vs. Fiscal Year 2013

Net sales increased $90.1 million, or 34.2% in fiscal year 2014 to $353.4 million from $263.3 million in fiscal year 2013. Net sales for fiscal year 2014 increased over the prior year period primarily because of the UPC acquisition. That acquisition has allowed us to expand our global presence, and expand our ability to serve a broader spectrum of our semiconductor customers’ requirements.

Gross profits increased by $27.0 million, or 35.3%, to $103.5 million compared to $76.5 million in fiscal year 2013. The increase in gross profit was the result of sales attributable to the UPC acquisition. Gross profit as a percent of sales increased in fiscal 2014 to 29.3% from 29.0% in fiscal 2013.

Because other companies may include certain of the costs that we record in cost of sales in 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 cost of sales, our gross profit may not be comparable to that reported by other companies.

Net Sales and Gross Profit for Fiscal Year 2013 vs. Fiscal Year 2012

Net sales decreased $9.4 million, or 3.4% in fiscal year 2013 to $263.3 million from $272.7 million in fiscal year 2012. Despite an increase of $6.3 million in net sales from our electronic chemicals segment, net sales were down in the aggregate because of weak demand in North America beginning in the second quarter for electronic chemicals and a decline of approximately $15.8 million in net sales from our wood treating chemicals segment.

Gross profits decreased by $595,000, or 0.8%, to $76.5 million compared to $77.1 million in fiscal year 2012. The decrease in gross profit was the result of the decline in revenue offset by a small increase in the average gross profit margin. Gross profit as a percent of sales increased in fiscal 2013 to 29.0% from 28.3% in fiscal 2012. The small improvement was due to a shift in the weighted average composition of revenues.

Distribution and Selling, General and Administrative Expenses

Distribution and Selling, General and Administrative Expenses for Fiscal Year 2015 vs. Fiscal Year 2014

Distribution expenses decreased to approximately $48.5 million in fiscal year 2015 from $50.3 million in fiscal year 2014, a decrease of $1.8 million, or 2.9%. Distribution expense is heavily concentrated in our electronic chemicals business. The electronic chemicals segment incurred approximately 94%, 89% and 82% of our distribution expense in fiscal years 2015, 2014 and 2013, respectively. Distribution expense decreased in fiscal year 2015, despite greater volume shipments in North America, because of lower volume shipments in the segment in Europe, improved cost control in Asia and the sale of the creosote business. Distribution expense was 15.1% of consolidated net sales in fiscal year 2015 and 14.2% in fiscal year 2014. The increase in distribution expense as a percent of net sales in fiscal year 2015 was predominantly due to increased deliveries of inventory to expand a customer’s safety stock in local third party warehouses and the sale of the creosote business, which had relatively low distribution expenses.

Selling, general and administrative expenses decreased to $37.5 million in fiscal year 2015 from $38.4 million in fiscal year 2014, a decrease of $0.9 million, or 2.3%. As a percentage of net sales, those expenses were 11.7% and 10.9% in fiscal years 2015 and 2014, respectively. The decrease in fiscal year 2015 over the prior year was primarily because we incurred $1.3 million of CEO transition costs in the first quarter of fiscal year 2014. Stock-based compensation expenses increased by $1.6 million during fiscal year 2015 as compared to 2014 (excluding $1.0 million related to CEO transition costs incurred in fiscal year 2014), but the increase was largely offset by lower professional service fees.

Distribution and Selling, General and Administrative Expenses for Fiscal Year 2014 vs. Fiscal Year 2013

Distribution expenses increased to approximately $50.3 million in fiscal year 2014 from $30.3 million in fiscal year 2013, an increase of about $20.0 million, or 66.0%. Distribution expense is heavily concentrated in our electronic chemicals business. The electronic chemicals segment incurred approximately 89%,89 and 82% and 79% of our distribution expense in fiscal years 2014 2013 and 2012,2013, respectively. The increase in distribution expense in fiscal year 2014 reflected a greater volume of shipments from UPC-related sales. Distribution expense was 14.2% of consolidated net sales in fiscal year 2014 and 11.5% in fiscal year 2013. The increase in distribution expense as a percent of net sales in fiscal year 2014 was predominantly due to the effect of our Total Chemical Management personnel costs included in distribution expense from the Singapore UPC business acquired from OM Group.in May 2013.

Selling, general and administrative expenses increased to $38.4 million in fiscal year 2014 from $29.0 million in fiscal year 2013, an increase of $9.4 million, or 32.4%. As a percentage of net sales, those expenses were 10.9% and 11.0% in fiscal years 2014 and 2013, respectively. The increase in fiscal year 2014 over the prior year was primarily because of the OM GroupUPC acquisition in May 2013 and employee-related costs, including stock-based compensation, and professional services.

Distribution and Selling, General and Administrative for Fiscal Year 2013 vs. Fiscal Year 2012

Distribution expenses increased to approximately $30.3 million in fiscal year 2013 from $26.8 million in fiscal year 2012, an increase of about $3.5 million, or 13.2%. The increase in distribution expense was due solely to the acquired electronic chemicals business. Distribution expense as a percent of sales historically has been significantly higher for a newly acquired electronic chemicals business as compared with the current electronic chemicals business. Distribution expense was 11.5% of net sales in fiscal year 2013 and 9.8% in fiscal year 2012. The increase in distribution expense as a percent of net sales in fiscal year 2013 was predominantly due to distribution expense in the UPC business acquired from OM Group.

Selling, general and administrative expenses increased to $29.0 million in fiscal year 2013 from $24.9 million in fiscal year 2012, an increase of $4.1 million, or 16.6%. As a percentage of net sales, those expenses were 11.0% and 9.1% in fiscal years 2013 and 2012, respectively. The increase in fiscal year 2013 over the prior year was primarily because of transaction related expenses for our UPC acquisition of $2.1 million, for our integration of that acquisition of $577,000 and for expenses associated with the departure of our former President and CEO, J. Neal Butler of $1.5 million.

Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share

In fiscal year 2014 adjustedAdjusted EBITDA which excludes the effect of acquisition-related restructuring, the realignment of the hydrofluoric acid business, integration and CEO transition expenses,expenses. In fiscal year 2015, adjusted EBIDTA was $30.6$37.1 million, an increase of $1.2$6.5 million, or 4%21.2%, as compared to $29.4$30.6 million in fiscal year 2013.2014. The improvement in fiscal 20142015 adjusted EBITDA reflects operational synergiesincreased sales of electronic chemicals in North America and commercial benefits related toAsia and the UPC acquisition and subsequent rationalization of our North American electronic chemicals assets,industrial valve lubricants and sealants business, partially offset by reduced margins related to our creosote productweaker sales in our wood treating chemicals segment.Europe, and by approximately $1.6 million greater expense for stock based compensation.

In fiscal year 20142015 adjusted earnings per share was $0.81,$1.21, compared to $1.11$0.81 in fiscal year 2013.2014. The decreaseincrease in fiscal 2014year 2015 in adjusted earnings per share primarily reflects increased depreciationsales in our electronic chemicals segment and amortization expenses primarily due to the UPC acquisition of our industrial valve lubricants and higher corporate expenses including costs incurred for audit and other professional services.sealants business, partially offset by weakness in Europe.

We providenon-GAAP financial information to complement reported GAAP results with adjusted EBITDA, adjusted net income and adjusted diluted earnings per share. We believe that analysis of our financial performance is enhanced by an understanding of thesenon-GAAP financial measures. We believe that they aid in evaluating the underlying operational performance of our business, and facilitate comparisons between periods. Non-GAAP financial information, such as adjusted EBITDA, is used

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externally by users of our consolidated financial statements, such as analysts and investors. A similar calculation of adjusted EBITDA is utilized internally for executives’ compensation and by our lenders for a key debt compliance ratio.

We define adjusted EBITDA as earnings from continuing operations before interest, taxes, depreciation, amortization, acquisition and integration expenses, restructuring and realignment charges and other nonrecurringdesignated items. Adjusted EBITDA is a primary measurement of cash flows from operations and a measure of our ability to invest in our operations and provide shareholder returns. Adjusted EBITDA is not intended to represent U.S.United States GAAP definitions of cash flow from operations or net income income/(loss). Adjusted net income adjusts net income for acquisition and integration expenses, restructuring and realignment charges and other nonrecurringdesignated items, while diluted adjusted earnings per share is adjusted net income divided by diluted shares outstanding.

Adjusted EBITDA, adjusted net income and diluted adjusted earnings per share should be viewed as supplements to, and not substitutes for, U.S.United States GAAP measures of performance.

The table below provides a reconciliation of operating income to adjusted EBITDA.

The table below provides a reconciliation of net income/(loss) to adjusted net income and diluted adjusted earnings per share.

Interest Expense

Interest expense was $1.4 million in fiscal year 2015, $2.9 million in fiscal year 2014, and $1.8 million in fiscal year 2013, and $2.1 million in fiscal year 2012. We increased borrowings under our revolving credit facility to complete the OM Group acquisition in May 2013. In fiscal year 2014,2015, we paid $25.0$30.5 million towards our revolving loan facility, borrowed $23.5 million on our revolving loan facility for the acquisition of our industrial valve lubricants and sealants business, and reduced the debt from $85.0$60.0 million at the beginning of the fiscal year to $60.0$53.0 million at July 31, 2014.2015.

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Income Taxes

We had income tax expense from continuing operations of $6.7 million, $1.3 million $5.7 million and $8.8$5.7 million in fiscal years 2015, 2014 2013 and 2012,2013, respectively. Our effective tax rate was 35.7% in fiscal 2015, 471.4% in fiscal 2014 and 37.6% in fiscal year 2013 and 37.9% in2013. For fiscal year 2012. In general, differences2015, the difference between thesethe effective tax ratesrate and the United States statutory rate of 35.0% areis primarily due to statutory rates in ourstate income taxes, adjustments of foreign jurisdictions,operations, valuation allowances recorded against our current and prior year period operating losses for our Italian subsidiary as a result of restructuring of those operations, and a deemed dividend related to a Mexico receivable, offset by the tax benefitbenefits from adjustmentstax credits available to us and effects of foreign operations.currency fluctuations in the U.S. dollar and the revaluation of certain transactions.

Discontinued Operations

Discontinued operations reflected a loss before income taxes of $203,000 and $711,000 for fiscal years 2013 and 2012, respectively.year 2013.

In fiscal year 2008, we discontinued operations of our herbicide product line that had comprised the agricultural chemical segment. We incurred costs of $121,000 and $599,000 in the fiscal years ended July 31,year 2013 and 2012, respectively, for dismantling the herbicide facility and for medical and other expenses associated with an accident that occurred in fiscal year 2012 while the facility was being dismantled.

On March 1, 2012, we sold the business that had comprised our animal health segment to Bayer Healthcare LLC. For the fiscal years ended July 31,year 2013, and 2012, $82,000 and $112,000 was reported as a loss from discontinued operations before income taxes. In fiscal year 2013 the loss included $57,000 for a post-closing inventory adjustment that was recognized as loss on sale of the business in the first fiscal quarter, and in fiscal year 2012 the loss included the gain on sale of approximately $90,000.quarter.

Liquidity and Capital Resources

Our principal requirements for capital funds are for our day-to-day operations, manufacturing and integration activities, and to satisfy our contractual obligations, including for the payment of interest on our indebtedness.

Capital expenditures for fiscal year 2015 were approximately $13.8 million. Currently we plan to spend a total of approximately $15.0 million of capital expenses during fiscal year 2016. Capital expenses in fiscal year 2015 were primarily for ERP system implementation in the United States, UPC integration costs and asset investments to support increased electronic chemicals volumes, and normal maintenance and improvements of our facilities. For fiscal year 2016, we expect to continue expending capital for ERP system implementation, including for our Val-Tex subsidiary, and for several production expansions, and normal maintenance and improvements.

We expect to fund our 2016 capital budget predominantly with cash flows from operations, supplemented by borrowings under our credit facility. As of July 31, 2015, our cash and cash equivalents totaled $7.5 million. Cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes.

We believe that our existing cash and cash equivalents, cash flows from our operating activities and available borrowing amounts under our credit facility, will be sufficient to meet our anticipated cash needs for the next twelve months. Our future capital requirements will depend on many factors including our growth rate, the expansion of our sales and marketing activities, the introduction of new and enhanced products, the expansion of our manufacturing capacity and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, if at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

Cash Flows

Net cash provided by operating activities was $17.6 million in fiscal year 2015, $40.4 million in fiscal year 2014 and $20.3 million in fiscal year 2013 and $25.2 million in2013.

In fiscal year 2012.2015, operating cash flows were favorably impacted by higher sales in our electronic chemicals business resulting in adjusted EBITDA of $37.1 million. However, we made restructuring and realignment payments of $5.3 million and paid $11.2 million more for income taxes during the year ended July 31, 2015 (including taxes relating to the sale of the creosote business). In addition, there was a decrease in accounts payable and accrued liabilities of $6.6 million, primarily due to the sale of the creosote distribution business and payments for professional fees that were accrued at prior year end. Additionally, the decrease in our cash conversion cycle made in the prior year was not repeated.

In fiscal year 2014, operating cash flows increased significantly due to improvements in KMG’s cash conversion cycle. Trade accounts receivable decreased $2.1 million primarily in our electronic chemicals business in North America, and inventories decreased $7.9 million primarily in wood treatingother chemicals due to lower creosote volumes. Accrued liabilities increased by $7.8 million in part due to restructuring and realignment accruals. Overall, fiscal year 2014 cash flows increased due to the UPC acquisition.

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In fiscal year 2013, operating cash flows were favorably impacted by a $5.3 million increase in accounts payable, primarily from the timing of creosote inventory purchases and by a $1.8 million decrease in trade accounts receivable. Trade accounts receivable decreased because of lower electronic chemical sales in the fourth quarter of fiscal year 2013 as compared to the same period in the prior year. Operating cash flow was unfavorably impacted by an increase in accounts receivable-other of $2.6 million, primarily from payments of estimated income taxes for the current period.

In fiscal year 2012,2015, cash flows from operatingused in investing activities were favorably impacted by a decreasewas $18.3 million, compared to cash used in accounts receivableinvesting activities of $6.8$9.3 million primarily due to lower sales of creosote during the fourth quarter ofin fiscal year 2012 as compared to2014. We paid $21.9 million for the prior year fourth fiscal quarter, and to a lesser extent because of the sale of the animal health business and currency translation adjustmentsacquisition of our Italian subsidiary’s accounts receivable balance on lower currency exchange rates. Cash flows were also favorably impactedindustrial valve lubricants and sealants business, which was partially offset by an increase in accrued liabilities and a decrease in other receivables of $1.9$14.9 million and $2.2 million, respectively. The increase in accrued liabilities was mainly due to a higher employee incentive accrual of approximately $1.1 million, while the decrease in other receivables included a reduction in income taxes receivable applied to the current period tax payments. Cash flows from operating activities were unfavorably impacted by a decrease in our trade accounts payable and an increase in inventories of $2.8 million and $5.5 million, respectively. The decrease in accounts payable was due primarily to the timing of payments on our creosote purchases and lower freight accruals, while the increase in inventories was attributable to our creosote inventories due to the combination of higher quantities, higher average cost and material in transit at the end of the current year. We also had higher inventories in our electronic chemicals segment due to increased raw material purchases at the end of fiscal year 2012. All results reported were net of the sale of our animal healthcreosote business and $2.6 million from the sale of our Elwood, Kansas facility. In addition, we spent $13.8 million for the additions to property, plant and equipment, of which reduced$10.0 million was for electronic chemicals and $3.3 million related to our working capital requirements.global project to implement a comprehensive financial/enterprise management software solution with SAP.  

In fiscal year 2014, cash used in investing activities was $9.3 million, compared to cash used in investing activities of $68.1 million in fiscal year 2013. The fiscal year 2014 investing activities were for the additions to property, plant and equipment, of which $7.0 million was for electronic chemicals and $2.0 million related to our global project to implement a comprehensive financial/enterprise management software solution with SAP.

In fiscal year 2013, cash used in investing activities was $68.1 million compared to cash provided by investing activities of $4.0 million in fiscal year 2012. In fiscal year 2013, $62.6 million was used to acquire the UPC business of the OM Group, which was net of cash acquired, and $5.5 million was invested in property, plant and equipment, about $4.2 million of which was invested in our legacy electronic chemicals business. The rest of the capital expenditure was primarily for various equipment and additions across our other facilities.

Net cash provided by investing activities was $4.0 million in fiscal year 2012. In fiscal year 2012, we made $5.2 million of additions to property, plant and equipment, approximately $4.3 million of which2015, net cash used in financing activities was for electronic chemicals production and distribution equipment. The remainder$9.1 million. Including the refinancing of our additionsdebt, we paid down $30.5 million on our revolving credit facility and borrowed $23.5 million on our revolving credit facility to property was capital expenditures for normal equipment and system upgrades and purchases at our different locations. We received $10.2 million of proceeds forfinance the saleacquisition of our animal health business during fiscal year 2012.industrial valve lubricants and sealants business.

In fiscal year 2014, $25 million of net cash was used in financing activities was $26.1 million, out of which $25.0 million was used to pay down debt on our revolving credit facility.

In fiscal year 2013, net cash fromprovided by financing activities was $60.0 million including $61.0 million of net borrowings on our revolving credit facility to finance the purchase of the UPC business.

In fiscal year 2012, net cash used in financing activities was $29.3 million. We reduced our revolving facility by $13.9 million and paid $11.3 million to pay off our term loan.

We paid dividends of $1.4 million in each of fiscal years 2015, 2014 and 2013, and paid dividends of $1.2 million in fiscal year 2012.2013.

Working Capital

WeOn October 9, 2014, we refinanced and amended theour revolving loan facility and entered into a new credit facility. At July 31, 2015, we had in place at July 31, 2014 with our New Credit Facility, but as of July 31, 2014 we had $40.0$53.0 million outstanding under a then existingour revolving line of credit of $110.0$150.0 million. The maximum borrowing capacity under thatthe revolving loan was $46.6$94.2 million, after giving effect to a reduction of $3.4$2.8 million for unused letters of credit. The amount available under that revolving facility at July 31, 20142015 was limited, however, to approximately $35.0$76.8 million, because of a loan covenant restriction respecting funded debt to pro-forma earnings before interest, taxes and depreciation.

On October 9, 2014, we refinanced our revolving loan facility and entered into the New Credit Facility. The initial advance under the new credit agreement was used to repay in full the $20.0 million outstanding indebtedness under our note purchase agreement with The Prudential Insurance Company of America and Pruco Life Insurance Company, and to pay the $38.0 million then outstanding on our existing revolving loan facility. Management believes that our New Credit Facility, combined with cash flows from operations, will adequately provide for our working capital needs for current operations for the next twelve months.23

Long Term Obligations

Our long-term debt and current maturities as of July 31, 20142015 and July 31, 20132014 consisted of the following (in thousands):

In December 2007, we entered into an amended and restated credit agreement and a note purchase agreement, which was subsequently amended. Advances under the revolving loan, as amended, bore interest at 2.155% and 1.69% as of July 31, 2014 and 2013, respectively.2014. The amount outstanding on the revolving loan facility was $40.0 million at July 31, 2014. The note purchase agreement was for $20.0 million. Advances under the note purchase agreement bore interest at 7.43% per annum. At July 31, 2014, $20.0 million was outstanding under the note purchase agreement.

We refinanced our then existing revolving loan facility and entered into the NewSecond Amended and Restated Credit FacilityAgreement on October 9, 2014. The New2014 (the “Second Restated Credit Facility isFacility”) with Wells Fargo Bank, National Association, Bank of America, N.A., HSBC Bank USA, National Association, and JPMorgan Chase Bank, N.A. The initial advance under the NewSecond Restated Credit Facility was used to repay in full the $20.0 million outstanding indebtedness under our note purchase agreement with The Prudential Insurance Company of America and Pruco Life Insurance Company, and to pay the $38.0 million then outstanding on our existing revolving loan facility.

The NewSecond Restated Credit Facility provides for a revolving loan up to $150 million, including an accordion feature that allows for an additional revolving loan increase of up to $100 million with approval from our lenders. The amount available under the NewSecond Restated Credit Facility at October 9, 2014July 31, 2015 was limited, however, to approximately $44.2$76.8 million, because of a loan covenant restriction respecting funded debt to EBITDA. The maturity date for the NewSecond Restated Credit Facility is October 9, 2019.

The revolving loan under the NewSecond Restated Credit Facility bears interest at varying rate of LIBOR plus a margin based on funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as described in the table.

Advances under the revolving loan bore interest at 1.189% as of July 31, 2015. We also incur an unused commitment fee on the unused amount of commitments under the revolving loan facility from 0.30% to 0.15% based on ratio of funded debt to EBITDA.

Advances under the NewSecond Restated Credit Facility are secured by our assets, including stock in subsidiaries, inventory, accounts receivable, equipment, intangible assets, and real property. The NewSecond Restated Credit Facility has restrictive covenants, including requirements that we must maintain a fixed charge coverage ratio of 1.5 to 1.0, a ratio of funded debt to EBITDA (as adjusted for non-cash and unusual, non-recurring, and certain acquisition and integration costs) of 3.25 to 1.0 (with a step-up to 3.5 to 1.0 during an acquisition period with lender consent) and a current ratio of at least 1.5 to 1.0. As of July 31, 2015, we were in compliance with all covenants of the Second Restated Credit Facility.

After considering24

Attributable only to the NewSecond Restated Credit Facility, at July 31, 2014,2015, principal payments due under our long-term debt agreements as of July 31, 2014 for the fiscal years ended July 312015 were as follows (in thousands):

Environmental Expenditures

Our capital expenditures and operating expenses for environmental matters, excluding testing, data submission and other costs associated with our product task force participation, were approximately $2.5 million in fiscal year 2015, $2.7 million in fiscal year 2014 and $1.3 million in fiscal year 2013 and $2.2 million in fiscal year 2012.2013.

We expensed approximately $667,000$977,000 for testing, data submission and other costs associated with our participation in product task forces in fiscal year 2014,2015, and approximately $522,000$667,000 and $802,000$522,000 in fiscal years 20132014 and 2012,2013, respectively. We estimate that we will continue to incur additional testing, data submission and other costs of approximately $586,000$1.2 million in fiscal year 2015.2016. Since environmental laws have traditionally become increasingly stringent, costs and expenses relating to environmental control and compliance may increase in the future. While we do not believe that the incremental cost of compliance with existing or future environmental laws and regulations will have a material adverse effect on our business, financial condition or results of operations, we cannot assure that costs of compliance will not exceed current estimates.

Contractual Obligations

Our obligations to make future payments under contracts as of July 31, 20142015 are summarized in the following table (in thousands):

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Outlook for Fiscal Year 20152016

Our electronic chemicals business is closely tied to global semiconductor production. In calendar 2014,year 2015, the global semiconductor market has benefited from relative strengthis expected to show growth of approximately 3%, aided by gains in the mobile, industrialdata center, automotive and automotivesmartphone markets, whilepartially offset by softness in the personal computer market has shown signs of stabilization in Western Europe and North America.market. According to industry forecasts, the global semiconductor market is anticipated to grow approximately 6% in calendar 2014, followed by more moderate growth ofless than 3% in calendar 2015.2016, benefiting from relative strength in the automotive and wireless communications markets.

Within our wood treatingOur other chemicals segment weis comprised of our penta business and a lubricants, sealants and related equipment business. We expect solid marketcontinued strong demand for utility poles treated with penta, as utilities in the Western United States continue upgradingupgrade their distribution infrastructure and as poles nearother pole purchasers throughout North America continue their normal pole maintenance and replacement programs.

We believe that we will experience steady demand for our lubricants, sealants and related equipment, which are used primarily for the endmaintenance and service of their service life are regularly replaced.existing energy-related infrastructure. However, the railroad crosstie marketprospect for continued low energy prices is likely to remain challenged by increased competition for the hardwood timbers used for crossties. In addition, Class I railroads continuelimit drilling and well services while also slowing pipeline infrastructure development, limiting near-term sales growth opportunities in lubricants.

Overall, fiscal 2016 consolidated net sales are forecast to specify that wood crossties be treated with borates, thus reducing the amount of creosote usedapproximately $300 million, compared to treat each crosstie. These factors are likely to contribute to excess creosote supply and exert downward pressure on prices$320.5 million in fiscal 2015.

Overall, we project consolidated net The projected decline reflects lower sales in fiscal year 2015 will be essentially flat as compared to fiscal year 2014, with the likelihood of moderate sales growth in our electronic chemicals business being offset by weakness in our wood treatingother chemicals segment due to continued challengesthe divestiture of the creosote distribution business, partially offset by moderate growth in the rail tie market.electronic chemicals segment and a full year contribution from our lubricants business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, such as financing or unconsolidated variable interest entities, other than operating leases.

Recent Accounting Standards

We have considered all recently issued accounting standards updates and SEC rules and interpretive releases, and none of them are expected to have a material impact on our financial statements. See Note 1 to the financial statements included in this report.

Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting principles that we believe are the most important to aid in fully understanding our financial results are the following:

Revenue Recognition —Our chemical products are sold in the open market and revenue is recognized when risk of loss and title to the products transfers to customers. In general, risk of loss transfers upon shipment to customers. We also recognize service revenue in connection with technical support services and chemicals delivery and handling at customer facilities. Revenue is recognized as those services are provided.

Allowance for Doubtful Accounts —We record an allowance for doubtful accounts to reduce accounts receivable where we believe accounts receivable may not be collected. A provision for bad debt expense recorded to selling, general and administrative expenses increases the allowance. Accounts receivable that are written off decrease the allowance. The amount of bad debt expense recorded each period and the resulting adequacy of the allowance at the end of each period are determined using a customer-by-customer analyses of accounts receivable balances each period and subjective assessments of future bad debt exposure. Historically, write offs of accounts receivable balances have been insignificant. The allowance was $272,000$144,000 and $224,000$272,000 at July 31, 2015 and 2014, and 2013, respectively.

Goodwill — Goodwill —The carryingrepresents the excess of the purchase price paid for acquired businesses over the allocated fair value of the related net assets after impairments, if applicable.

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We evaluate goodwill is reviewed at leastfor impairment annually, and if this review indicateswhen an event occurs or circumstances change to suggest that it willthe carrying amount may not be recoverable,recoverable. We have goodwill of $14.5 million and $7.9 million associated with our carrying valueother chemicals and electronic chemicals segments, respectively, as of July 31, 2015. As part of the goodwill will be adjustedimpairment analysis, current accounting standards give us the option to fair value. Based on anfirst perform a qualitative assessment of qualitative factorsto determine whether it was determined that there were no events or circumstances that would lead us to a determination that is more likely than not that the fair value of the applicablea reporting unit wasis less than its carrying amount, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the currently prescribed two-step impairment test is unnecessary. In developing a qualitative assessment to meet the “more-likely-than-not” threshold, each reporting unit with goodwill on its balance sheet is assessed separately and different relevant events and circumstances are evaluated for each unit. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the prescribed two-step impairment test is performed. Current accounting standards also give us the option to bypass the qualitative assessment for any reporting unit in any period, and proceed directly to performing the first step of the two-step goodwill impairment test. We conduct our annual impairment test as of July 31,of each year. In 2013, 2014 and 2013. Accordingly,2015, our goodwill impairment tests indicated that the fair value of each of our reporting units is greater than its carrying amount. In conjunction with the sale of our creosote distribution business on January 16, 2015, we determinedwrote off goodwill in the amount of approximately $662,000 that aswas previously a part of July 31, 2014 and 2013, goodwill was not impaired. We perform a similar assessment for intangible assets with indefinite lives. Based on that assessment, we determined that there was no impairment of these intangible assets during fiscal years 2014, 2013 and 2012.the wood treating chemicals reporting unit.

Impairment of Long-Lived Assets —Long-lived assets, including property, plant and equipment, and intangible assets, with defined lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or its disposition. The measurement of an impairment loss for long-lived assets, where management expects to hold and use the asset, are based on the asset’s estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value. In conjunction with its decision to cease operations at its Bay Point, California facility, in fiscal year 2015, the Companywe recognized an impairment loss in fiscal year 2014 of $2.7 million on certainlong-lived assets at that facility.

Asset Retirement Obligations — We measure asset retirement obligations based upon the applicable accounting guidance, using certain assumptions including estimates for decommissioning, dismantling and disposal costs. In the event that operational or regulatory issues vary from our estimates, we could incur additional significant charges to income and increases in cash expenditures related to those costs. Certain conditional asset retirement obligations related to facilities have not been recorded in the consolidated financial statements due to uncertainties surrounding the ultimate settlement date and estimate of fair value related to a legal obligation to perform an asset retirement activity. When a reasonable estimate of the ultimate settlement can be made, an asset retirement obligation is recorded and such amounts may be material to the consolidated financial statements in the period in which they are recorded. In conjunction with itsour decision to exit the Bay Point facility, in fiscal year 2014 the Companywe recognized $3.7 million in asset retirement obligations related to the estimated decommissioning, decontamination, and dismantling costs. See Note 1514 to the consolidated financial statements included in item 8 of Part II of this report.

Income Taxes —Deferred We follow the liability method of accounting for income taxes and liabilities are determined using the asset and liability method in accordance with current accounting principles generally accepted instandards regarding the United Statesaccounting for income taxes. Under this method, deferred income taxes are recorded based upon the differences between the financial reporting and tax bases of America. We have deferred tax assets thatand liabilities and are reviewed periodically for recoverability. These assets are evaluated bymeasured using estimates of future taxable income streams. Valuations related to tax accruals and assets could be impacted by changes to tax codes, changes in the statutoryenacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled.

When our future taxableearnings from foreign subsidiaries are considered to be indefinitely reinvested, no provision for United States income levels. Withtaxes is made for these earnings. If any of the consolidationsubsidiaries have a distribution of our European manufacturing facilities,earnings in the form of dividends or otherwise, we would be subject to both United States income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.

We record a valuation allowance in the reporting period when management believes that it is more likely than not that our subsidiary in Italyany deferred tax asset created will not generate a sufficient profitbe realized. Management will continue to evaluate the appropriateness of the valuation allowance in the near future to recover restructuring charges. based upon our operating results.

The impactcalculation of our tax liabilities involves assessing the uncertainties regarding the application of complex tax regulations. We recognize liabilities for tax expenses based on our Italian subsidiary’sestimate of whether, and the extent to which, additional taxes will be due. If we determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit when the determination is made. We record an additional charge in our provision was approximately $1.7 million, and was recordedfor taxes in the second quarter of fiscal year 2014.period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

Our subsidiary in Italy is currently under examination for the period ended July 31, 2009 respecting certain registration tax assessments. See Note 8 to the financial statements included in this report.

Inventory—Inventory— Inventories are valued at the lower of cost or market. For certain products, cost is generally determined using the first-in, first-out (“FIFO”) method. For certain other products we utilize a weighted-average cost. We record inventory obsolescence as a reduction in inventory when considered unsellable. We review inventories periodically to ensure the valuation of these assets is recorded at the lower of cost or market and to record an obsolescence reserve when inventory is considered unsellable. During the fiscal years ended July 31, 20142015 and 2013,2014, we recognized inventory valuation (gain)/loss of $634,000$941,000 and $(355,000),$634,000, respectively. As of July 31, 20142015 and 2013,2014, we had $290,000$481,000 and $180,000,$290,000, respectively, of reserves for inventory obsolescence.

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Disclosure Regarding Forward Looking Statements

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as future capital expenditures, business strategy, competitive strengths, goals, growth of our business and operations, plans and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” “forecast,” “may,” “should,” “budget,” “goal,” “expect,” “probably” or similar expressions, we are making forward-looking statements. Many risks and uncertainties may impact the matters addressed in these forward-looking statements. Our forward-looking statements speak only as of the date made and we will not update forward-looking statements unless the securities laws require us to do so.

Some of the key factors which could cause our future financial results and performance to vary from those expected include:

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

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other documents incorporated herein by reference, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. Currently, we do not utilize derivative financial instruments or hedging transactions to manage that risk.

Interest Rate Sensitivity

As of July 31, 2014, our2015, we had no fixed rate debt consisted of $20.0 million of term notes with an interest rate of 7.4%, maturing on December 31, 2014.debt.

Our variable rate debt as of July 31, 20142015 consisted of a revolving loan advanced under the credit facility we had in place at that timeSecond Restated Credit Facility with an interest rate of 2.155% (2.0%1.190% (1.0% plus LIBOR), maturing on April 30, 2018.October 9, 2019. On July 31, 2014,2015, we had $40.0$53.0 million borrowed on the revolving loan under that facility. On October 9, 2014 we refinanced our revolving credit facility. Currently advances bear interest at LIBOR plus 1.125%1.0%.

Based on the outstanding balance of our variable rate debt under the Second Restated Credit Facility at July 31, 2014 and our applicable interest rate on the New Credit Facility,2015, a 1.0% change in the interest rate as of July 31, 20142015 would result in an additional charge of approximately $400,000 in annual interest expense. Taking into account the refinancing of our term note with Prudential, a 1.0% change in the interest rate as of July 31, 2014 would result in an additional charge of approximately $600,000$500,000 in annual interest expense.

Foreign Currency Exchange Rate Sensitivity

We are exposed to fluctuations in foreign currency exchange rates from international operations in the electronic chemicals segment. Our international operations in Europe and Singapore use different functional currencies, including the Euro, Great Britain Pound and Singapore Dollar. The U.S. Dollardollar is our consolidated reporting currency. Currency translation gains and losses result from the process of translating those operations from the functional currency into our reporting currency. Currency translation gains and losses have no impact on the consolidated statements of income and are recorded as accumulated other comprehensive income or loss within stockholders’ equity in our consolidated balance sheets. Assets and liabilities have been translated using exchange rates in effect at the balance sheet dates. Revenues and expenses have been translated using the average exchange rates during the period.

We recognized a foreign currency translation loss of $10.2 million in fiscal year 2015, and gains of $3.1 million and $1.8 million in fiscal years 2014 and 2013, respectively, and a loss of $3.1 million in fiscal year 2012, each of which were included in accumulated other comprehensive income/(loss) in the consolidated balance sheets. At July 31, 2014,2015, the cumulative foreign currency translation gainloss reflected in accumulated other comprehensive income/(loss) was $645,000.$9.5 million.

Additionally we have limited exposure to certain transactions denominated in a currency other than the functional currency in our European and Singapore operations. Accordingly, we recognize exchange gains or losses in our consolidated statement of income from these transactions. Foreign currency exchange lossesgains during fiscal year 20142015 were $484,000.$62,000.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements